Syntel's (SYNT) CEO Nitin Rakesh on Q1 2016 Results - Earnings Call Transcript

| About: Syntel, Inc. (SYNT)

Syntel, Inc. (NASDAQ:SYNT)

Q1 2016 Earnings Conference Call

April 21, 2016 10:00 AM ET

Executives

Zaineb Bokhari - Vice President, Finance

Bharat Desai - Chairman

Prashant Ranade - Executive Vice Chairman

Nitin Rakesh - President and Chief Executive Officer

Anil Agrawal - Acting Chief Financial Officer

Rakesh Khanna - Chief Operating Officer

Analysts

Edward Caso - Wells Fargo

Joseph Foresi - Cantor Fitzgerald

Frank Atkins - SunTrust

Anil Doradla - William Blair

Mayank Tandon - Needham

Jason Rodgers - Great Lakes Review

Dave Koning - Robert W. Baird

James Friedman - Susquehanna

Vincent Colicchio - Barrington Research

Brian Kinstlinger - Maxim Group

Puneet Jain - JPMorgan

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Syntel First Quarter 2016 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct the question and answer session. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, April 21, 2016.

I will now turn the call over to Zaineb Bokhari, Syntel’s Vice President of Finance.

Zaineb Bokhari

Thank you and good morning everybody. Syntel’s first quarter earnings release crossed Globe newswire 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, Executive Vice Chairman; Nitin Rakesh, Syntel’s CEO and President; Anil Agrawal, Syntel’s acting Chief Financial Officer; and Rakesh Khanna, Syntel’s Chief Operating 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 will 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. As we announced in our earnings press release, we saw some delays in decision making during the first as customers reviewed their transformation plans in the context of the global volatility we witness in the quarter.

With that said, Syntel [ph] continues to sales towards high value of discretionary initiatives. I feel good about Syntel's clear message and strategic focus of helping our customers businesses with their digital transformation journey.

Syntel was early emphasized the importance of modernization in conjunction with the enablement of digital applications and cloud infrastructure. Our approach combines innovation and pragmatism and leverages our pioneering investments and intellectual property in the areas of automation and artificial intelligence.

As our customers move further up the experience curve under digital journeys they are recognizing the importance of modernization that help address the disconnect disparity between legacy system and the cutting-edge technologies they need to serve for fast changing expectations of their customers.

Syntel has aligned these investments without customer's most interesting challenges and has built the right capabilities to support their most critical needs. The health of our pipelines underscores and endorses this view.

I'm confident that we will continue to see our business moment improve in the coming quarters as we help our customers to execute their plans and realize the benefit of taking a holistic approach to preparing their businesses for the demand of a digital economy.

I would now like to turn the call over to Nitin Rakesh, Syntel’s Chief Executive Officer and President to provide further details. Nitin?

Nitin Rakesh

Thank you, Bharat and welcome everyone. Syntel's first quarter revenue was $241.4 million, rising 9.4% year-over-year, but down 5.2% on a sequential basis. As Bharat mentioned we experienced some headwinds in our business during the first quarter and meet volatility in the global macro economy.

Due to this, we saw customer decisions cycles to run discretionary project extend impacting Q1 revenue growth. We also continue to experience weakness in our insurance segment during Q1 primarily concentrated in the personal line segment.

However, based on the health of our underline pipelines we're optimistic that growth in our insurance segment will start to show improvement sometime late in the year. Anil will expand on our Q1 metrics and 2016 outlook in his prepared remarks.

However, as we noted on our last earnings calls our 2016 outlook make some assumptions towards the impact from headwinds in the healthcare industry whether that comes from the uncertainty on the regulatory front, spending transactions on M&A or the potential impact of the election cycle in the U.S.

At the same time, we are investing across the healthcare sector to strengthen our position and take advantage of the secular growth opportunities we see. While the first quarter sequential growth was slower than [Indiscernible] there are many favorable developments across our business.

The allocation of budget continues to shift towards discretionary project as customer focus on enhancing their competitive positions. Our customers focus on digital transformation comes with an equally strong mandate for application modernization and the optimization of management of their mission critical systems.

This speaks to a clear need for business agility as company's grapo [ph] with the tremendous changes they are being assured in by the pervasiveness of technology in their operations. The challenges that customer face are borne out of a pressing needs to invest in cutting-edge solution and flexible architecture while maintaining the integrity and reliability of existing systems that power some of the most critical aspects of their business.

Syntel has devoted a great deal of time listening to our customers across multiple industries and this underlies our focus on our digital modernization solutions powered by SyntBots our recursive automation platform to address the operational and technology endpoints across these organizations.

Our thought leadership in this area is getting favorable attention across multiple channels and in every industry we serve. Our approach is resonating with customers who are increasingly viewing the need to strike the right balance between new and existing versus just looking at individual IT initiatives and isolation.

Our innovative solutions provide our clients with the holistic and flexible way to manage these competing priorities. Our approach in this area is challenging the equivalency, some make between size, incumbency and innovation, instead we are creating a more credible narrative that connects the capacities, our investment in intellectual property including a digital modernization and recursive automation platforms, our managed services offering and our understanding of the sense of urgency keenly felt by CXOs and senior decision makers.

Our solutions offer clear measurable benefits for the organizations and support the business flexibility they are ultimately seeking. We've been proactive in taking this message to the market and have had encouraging success with new and existing customers.

We recognize the strong need platform [ph] for digital modernization and have build strong offerings to capitalized on this through long-term managed services agreement that will open up many opportunities for us in the digital areas as well as position us a thought leader.

Given the long term managed services nature of these deals as we start converting them it will also increase the predictability of our business. The benefits of taking this approach are coming across in the buildup of strong pipelines and the positive market response through our modernization, automation and managed services offerings. I am excited about the long term future prospects. These offering are creating for Syntel

During Q1, we saw year-over-year growth across each business segment other than insurance. Growth was led by manufacturing and banking and financial services and healthcare and life sciences each posting double digit growth year over year.

Europe remained the strong contributor to Q1 growth rising 17.6% over the prior year. We are committed to building our presence in Europe and are opening up a new delivers location in Poland as we continue to position ourselves to take advantage of the numerous opportunities in regions.

The demand for digital services remained extremely strong in Q1. We estimate that digital project accounted for approximately 15.2% in Q1 compared to 15% in Q4 far outpacing overall company growth.

First quarter gross margin contracted 467 basis points to 37.2% from 41.8% in the fourth quarter. We continue to see an incremental shift in the mix between onsite versus offshore deliver during Q1, as compared to Q4 supported by continued customer interest in digital project.

In addition, offshore utilization for IT fell to 67% in Q1, from 70% in Q4 on a period end basis and to 67% in Q1 from 72% in the previous quarter on average. While our utilization rates dipped this quarter, we continue to expect that utilization will stay above historic trends over the course of the year.

Net headcount decreased by 41 employees on a sequential basis in the first quarter to 24,496 and by 38 employees from a year ago. We continue to hire across each of our geographic regions as we worked closely to align our organization with future needs and requirements of our customers.

However, as we noted on our past calls we expect the general pace of hiring to trail historic trends. Attrition, calculated on a current quarter annualized basis was at 22.3% in Q1, down from 25.8% in Q4. We expect attrition to remain above historic trends particularly since the pace of hiring will trail revenue growth.

However, we remain committed to managing and stabilizing this metric over time [Indiscernible] normal seasonality we see in the post-incremental cycle. Several quarters ago, we announced a global workforce strategy to support our region to become a global leader in digital modernization.

We've made steady progress on this strategy and our focus is now shifting from rebalancing to skill development. To this end we have embarked on an initiative call Syntel X.0 [ph], a people transformation journey where Syntel is marching towards a culture powered by agility, inspired leadership and powered people and a growth mindset is an extension of our strategy.

This key initiative rallies around value, enabling structures, building new edge people capabilities and a brand new performance management system that focuses on feedback and future potential of Syntellers, it stems from the recognition employees are critical for our future success

I want to conclude my comments by thanking the employees of Syntel for their efforts. We continue to invest for the future and I believe we have set a strong course for growth and profitability as we align our company with our customer's goals.

I will now turn the call over to Anil Agarwal, Syntel’s Acting Chief Financial Officer, who will discuss Syntel’s financial performance. Anil?

Anil Agrawal

Thanks Nitin and good morning everyone. After I conclude my comments, we will open the call for questions. Syntel's first quarter revenue came in at $241.4 million, up 9.4% from the prior year period and 5.12% lower than the prior quarter.

For the first quarter banking and financial services contributed 50.3% with Retail Logistics and Telecom at 16.4%, Healthcare and Life Sciences 15.9%, Insurance 12.7%, and Manufacturing 4.7%.

On a year-over-year basis, segment growth was led by Manufacturing, Banking and Financial Services and Healthcare and Life Sciences segments which grew 32.9%, 15.3% and 11.5%, respectively

Syntel’s customer concentration levels were as follows. Our top three clients represented 48.9% in the first quarter of 2016, up from 47.6% in the year ago quarter and down from 49.1% in the fourth quarter.

Accounts 4 to 30 represented 42.1% of revenue in the first quarter of 2016, down from 45.5% in the year ago quarter and 42.3% in the fourth quarter. The fixed price component of our business was at 41% of revenue for first quarter of 2016.

With respect to Syntel’s margin performance, our first quarter gross margin was 37.2% as compared to 35.7% reported in the year ago period and 41.8% in the fourth quarter of 2015. By segment, gross margin for Banking and Financial Services was 38.2% with Retail, Logistics and Telecom at 41.9%, Healthcare and Life Sciences at 35.4%, Insurance 34.6% and Manufacturing 28%.

During the first quarter the Indian rupee depreciated by 2.5% on average relative to the U.S dollar from the prior quarter. This raised gross margins by approximately 32 basis points.

Moving down the income statement, our selling, general and administrative expenses were 12.3% in the first quarter of 2016 compared to 16% in the prior year period and 11% in the fourth quarter.

On a dollar basis, SG&A was higher by $1.7 million sequentially. The depreciation in the average Rupee lowered SG&A by $0.6 million. The impact on Q1 SG&A from currency related balance sheet translation based on quarter end [ph] exchange rate was $0.3 million loss as compared to $1.8 million gain recorded in the fourth quarter.

Other income was $4.1 million during the first quarter as compared to $14 million in the fourth quarter, including a gain of approximately $0.7 million from mutual fund sales in the first quarter versus $8.4 million gain in the fourth quarter.

Our tax rate for the first quarter came in at 17.3% as compared to 19.7% posted in the fourth quarter. During the first quarter, we had a one-time reversal of approximately $3 million in tax provisions.

Net income for the first quarter was $53.1 million or $0.63 per diluted share as compared to $40 million or $0.48 per diluted share in the prior year period and $74.2 million or $0.88 per diluted share in the previous quarter. The company’s balance sheet at the end of the first quarter of 2016 remained healthy.

Our total cash and short-term investments on March 31 were $1.08 billion and the portion held in U.S. dollars stood at 73%. DSO levels were at 59 days. Capital spending for the quarter was approximately $3.4 million.

Syntel ended the first quarter with total headcount of 24,496 of which 7,600 were assigned to KPO. Our billable headcount was 4,811 onsite and 17,914 offshore for a total of 22,725. Our global headcount was lower up by 0.2% from the fourth quarter.

Utilization levels at the end of the quarter were 91% onsite, 74% offshore and 78% globally. Our delivery mix at quarter end was 25% onsite and 75% offshore. Voluntary attrition during the quarter was 22.3% as compared to 25.8% reported last quarter. Syntel added 6 new customers in the first quarter.

Looking forward, I would now like to provide you with guidance for 2016. Based on our current visibility levels, Syntel expects revenue to be in the range of $1.10 billion to $1.40 billion and EPS to be in the range of $2.55 to $2.80 for the full year of 2016.

The company currently has 78% visibility to the low end of the revenue range and our guidance is based on an assumption of an average exchange rate of INR66.5 to the dollar. In light of our revise assumption for a stronger average Indian rupee rate we now anticipate that operating margins would be in the 26% to 28% range.

Our effective tax rate will be in the low to mid 20% range for 2016 and CapEx is expected to be in the range of $25 million to $30 million excluding 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 the line of Edward Caso with Wells Fargo. Your line is open. Please go ahead.

Edward Caso

Hi. Good morning. Are you seeing any challenges from vendor consolidation in the last few months?

Nitin Rakesh

Good morning, Ed. This is Nitin. I don't think there's anything to call out on that front. I think as we talked about in our prepared remarks, I think our focus is to continue to provide customers with the combined capabilities of helping them lower operating cost, at the same time helping them undertake digital modernization.

So, I think from that perspective, I think we have very clearly differentiated well thought out and well articulated set of offering. So from our perspective I think we feel good about the position we are in, and starting to look at how we now start to convert the pipeline that we build up over the last few quarters.

Edward Caso

[Indiscernible] 4 to 30 still hasn't really taken off yet, now I'm just wondering if you were facing headwind as you're trying to penetrate deeper in to the sort of the next group of accounts, are they trying to consolidate vendors and start the headwind?

Nitin Rakesh

I think it’s great question. And I think what I would like to do is add some more color to the 4 to 30 segment especially on YoY basis. If you exclude the softness and the negative growth we've seen in the insurance segment 4 to 30 is a segment actually has grown faster than company, and I think that's kind of where we want to be. So for us now as we start looking at recovery in the insurance segment during the course of this year, I think we'll start to see some growth come back in the 4 to 30 segment as well.

And again I will reemphasize that we think that the digital modernization service offering will actually open up opportunities for us on both the digital areas as well as due to the long term managed services nature of the contracts that we are proposing we'll probably get a lot more predictability in our business as well as we go through that conversion.

Edward Caso

Another question is, with your headcount flat slight down, is that reflective of weak near term demand or is that in part reflective of rising automation take the people out of the solution part of your model? Thanks.

Nitin Rakesh

Yes. I think we’ve talked about that over the last few quarters as well. I think we’ve undertaken a conscious strategy, a combination of managed services powered by recursive automation but it’s definitely something that we are driving towards and we expect behavior of delinking of revenue growth to head down growth to continue to persist over the near to medium-term.

Edward Caso

Thank you.

Operator

Thank you. Our next question comes from the line of Jason Kupferberg with Jefferies. Your line is open. Please go ahead.

Amit Singh

Hi guys. This is Amit Singh for Jason. Just quickly on guidance for the full year. If I look at your first quarter revenue and then just taking average growth that you would need to meet the lower end of your guidance and I know you give your guidance on visibility. But you hardly need like a 3% average year-over-year growth for the rest of the quarters to meet that lower end. And then your commentary seems that this as a bench should improve as the year progresses, so just trying to tie both of these together. Why the year-over-year growth on average should be lower as per for your guidance later on in the year and while you are expecting things to improve?

Nitin Rakesh

Great spot, Amit. I think as you pointed out, we use fairly consistent methodology and I think at this point, we are looking at 78% visibility to the lower end. Having said that as you noted, we do expect to continue to make progress on conversion of our pipelines and as that visibility continues to improve, we look forward to coming back and updating you guys over the next couple of quarters. But given that we want to stay true to our consistency of forecasting, we decided to use that benchmark.

Amit Singh

Okay. Great. And then your onshore presence, which is now at 25% and continues to increase quarter-over-quarter, as you look at the businesses that you are going after and then the markets and the type of work you are going after, do you have some sort of a sense where that offshore, onshore mix would be, let’s say a year or two years from now?

Nitin Rakesh

It’s hard to predict. I think we will have to continue to work ahead of where we think customers need help and as the spending moves more and more into digital monetization initiatives, I think if we combine that with the fact that we are bundling what we call M3 powered by SyntBots automation. M3 stands for manage, migrate and modernize. I think we will be able to actually utilize some of that automation driven benefits for driving both higher offshore utilization leverage as well as add automation.

So, I think we did anticipate this, which is why we prepared for automation driven offerings so we are able to actually counter this. But it’s hard to kind of pin a number down and say what it might look like in the next two years. I think it suffices to say that we are prepared for the eventuality that customers will continue to need across geographies, which is earlier also adding a Poland location. And at the same time we will continue to look for, aggressively look for opportunities to automate as well as convert those into manage those as contracts so we can take the benefit.

Amit Singh

All right. Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Your line is open. Please go ahead.

Joseph Foresi

Hi. My first question is just around Insurance. Can you be a little bit more specific about which areas you are seeing the delays and is there any one or two specific clients that are pulling back and maybe what the reasons are there?

Nitin Rakesh

Sure, Joe. And I will give you a quick one and then I will have Rakesh add on a few things about what we are seeing in the sector. I think we called out the personal lines segment specifically and we’ve seen weakness in that over the last few quarters, primarily driven by combined ratios and I think it seems to be an industry wide phenomenon as well.

I think what we’ve also done, as we talked about is we’ve looked at opportunities to bundle some of our current service offerings and go back aggressively and proactively to customers. So, I think rather than waiting for the industry, the insurance industry recovery, what we are really doing is getting a lot more proactive with these opportunities and maybe Rakesh can add a little bit about where we are seeing opportunity.

Rakesh Khanna

Sure. So, Joe, just to add to what Nitin said, we are seeing so many activity in the Life and Annuities segment but really our platform solution using digital modernization helps and bring efficiencies in that marketplace. Another positive trade in Insurance what we are seeing is really extensive use of analytics. We see our IT using SyntBots, positioning us very strongly to really service, add value in commercial line and life and retirements. So these are the two additional trends to what Nitin just alluded to.

Joseph Foresi

Got it. And then I think you talked about earlier that IT spending you are seeing some initial delays in budgets and some of that was on the discretionary side. Can you help us reconcile that? I’m not sure that we -- we've heard that from maybe sporadically from some other vendors but not many of them and I’m wondering how does discretionary -- what type of discretionary spending is not being done versus digital, which sounds like it’s actually still going on fairly strong? I’m just trying to reconcile those two.

Nitin Rakesh

Sure. Yeah. Let me try to add a little more color and then I’d be happy to take further questions on that. So, I think if you look at the micro environment, one mega trend that is fairly obvious is that there is a significant amount of pressure on operating costs. And that’s driven by the fact that to continue to do spending on digital, most of our segments and most of our customers need to actually find those investment dollars. And I think that is giving -- in some cases, they are trying to reevaluate the ROI on existing projects.

In some cases, they are continuing to focus on projects that will actually have a much quicker impact on customer facing application as well. So, I think it’s the congruence of those two factors. And as I talked about the fact that we are now really focusing on digital modernization longer term managed services type deals. I think for our customers to actually transition to that model means that there is a certain decision cycle that they go through and we are leading into that.

Joseph Foresi

Okay. And then just lastly, the changing guidance on the topline and on the margins, could you remind us what’s the upper end of the margin guidance at this point? And then the changing guidance on the topline, is that taking into account what we saw in Insurance this quarter? I’m just wondering what’s build into the changing guidance on the topline and just if you could remind us what the upper end of the margin guidance is now?

Nitin Rakesh

Sure. I think on the gross margin we guided to 38% to 40% range and on the operating margin we said 26% to 28% range.

Joseph Foresi

Got it. Okay.

Nitin Rakesh

So that’s what -- I mean, we’ve kept the gross margin range same as what we guided in the last quarter. But the operating margin is down by 1%, given the currency change between 68% in Feb to 66.5% today. On the revenue range, I think as I alluded, we’ve used a fairly consistent metric of visibility. At this point that visibility is at 78%, which is one of the reasons why we’ve chosen to relook at the guidance. As that visibility improves and as we continue to convert the pipelines, as I said we will continue to update you on the guidance in the subsequent quarters.

Joseph Foresi

All right. But just to be clear, the 78% includes maybe an extended weakness in Insurance, the recovery of healthcare and discretionary delays. I just want to make sure --

Nitin Rakesh

Yeah. Includes everything we know of today. Yes.

Joseph Foresi

Okay. Great. Thank you.

Operator

Thank you. Our next question comes from the line of Frank Atkins with SunTrust. Your line is open. Please go ahead.

Frank Atkins

Thanks for taking my questions. Again, when talking a little bit about visibility here, any change relative to wherever you were last year at this time and what impact does increased automation have on that?

Nitin Rakesh

So, Frank, I think at this time of the year, as I said we are in the ballpark. We are typically in the high 70s from a visibility standpoint. And I don’t think automation has an impact on visibility per se. It definitely has an impact on how we are using it to bundle into our proposals and our propositions that we are making to customers. Specifically, I don’t think there is a direct correlation between visibility and automation. It is definitely a better correlation between our value proposition, as well as the nature of deals we are proposing through customers.

Frank Atkins

Sounds great. That’s helpful. And can you talk a little bit about how Europe is performing relative to the U.S. and are you seeing the Insurance weakness and the delays in both or is it mostly U.S. only?

Nitin Rakesh

I think Europe growth has been almost twice as fast as the company growth YoY basis. So clearly, we continue to see expansion of our market share in Europe. We added a center in Glasgow last year. We are now doubling down and adding another one in Poland to expand our footprint on the continent from a delivery capability, as well as having feet on the street in Continental Europe. So, I think we are very pleased by the progress we have seen in Europe and we will continue to find further opportunities to expand our market share. I think on Insurance, it’s hard to call out between the two locations but clearly the phenomena is more of a global phenomena.

Frank Atkins

Okay. And last one’s for me. Just any color on KPO growth and where that’s in?

Zaineb Bokhari

Yeah. Frank, so we shifted our segments a while back and we don’t report service lines by KPO separately. But I can tell you that there are broad applications within the KPO area for automation capabilities so that the underlying pipelines look fairly healthy.

Frank Atkins

All right. Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Anil Doradla with William Blair. Your line is open. Please go ahead.

Anil Doradla

Hey guys. Thanks for taking my question. Couple of questions. On the first part, you talked about Insurance softness, a lot of color, lot of questions but can you share any color on the competitive dynamics? Was there any share loss to these customers, or it was basically the customers pulling back on discretionary spending?

Nitin Rakesh

Anil, there is nothing specifically to call out on the share loss. I think we’ve always consistently viewed each of our customer segments as growth markets and I think we’ve demonstrated growth across -- as a broad cross section. Obviously, we are very focused on our top three and our 4 to 30 customers. But I think really nothing to call out on any share loss. If anything I think, if we continue to grow that segment faster than company, we will continue to gain share.

Anil Doradla

Very good. And as a follow-up, when I step back and look at the big picture, this will be two years of subpar growth with respect to the industry. So, when I look at it and I’m trying to kind of tie the knots on the bigger imperative of Syntel, how would you characterize it? Is it a company reinventing itself, is it a company that’s net-net losing share or -- I’m just trying to understand, are there some capabilities missing in your portfolio resulting in this prolong loss of -- prolong subpar growth with respect to the industry? How would you characterize kind of the big picture, what is going on Syntel today?

Nitin Rakesh

Again, fairly broad but great question. I think the way I would look at it is we continue to aspire to grow faster in the industry. We realize the underlying shift in customer demand patterns as well as their needs given the imperative of reducing operating costs and undertaking digital modernization and transformation. So, we invested ahead of the curve. I think we’ve had definitely some challenging quarters over the last couple of years. But we’ve also demonstrated good growth towards the middle of last year, which was a great value addition to our strategy. And I think the health of our pipelines continues to tell me that the journey that we undertook of really focusing on large managed services driven automation centric deals will actually continue to give us long-term mark-to-market share gains.

Anil Doradla

Okay. Thanks a lot, guys.

Operator

Thank you. Our next question comes from the line of Mayank Tandon with Needham. Your line is open. Please go ahead.

Mayank Tandon

Thank you. Good morning. Nitin, just going back to guidance first, I just want to make sure I understand the seasonality. Should we expect a similar pattern this year to what we’ve seen in the past years where we will see more of an uptick in 2Q and 3Q based on the current pipelines and then 4Q will be seasonally a little bit lighter because of the cassations and furloughs?

Zaineb Bokhari

So, I will take that, Mayank. I think our view is that given all the factors that we highlighted in the prepared comments, we do expect the calendar year to be more backend loaded than was typical, given the delays that we’ve seen some of the headwinds we called out for healthcare and our view that probably the starting of improved growth trends in Insurance is going to happen later in the year.

Mayank Tandon

Okay. I understand. And then going back to the earlier comments, Nitin, you made around healthcare, could you just give us a sense of the impact you are seeing this year if you have a sense currently in terms of this being election year, how much of that is a factor in terms of delaying spending around a regulatory projects, particularly on the healthcare side and also maybe if it’s having any impact on the financial services vertical as well?

Nitin Rakesh

Sure. I think the three factors that we called out in the healthcare segment, first and foremost obviously is the -- being an election year, there is a certain amount of uncertainty that is now linked to the second one, which is a regulatory change. So, we are expecting a little bit of pause as the noise around the longevity of the existing regulatory environment picks up. Also, I think we’ve talked about impeding large imminent on actions in the segment that tends to also shake things up a little bit in terms of decision making. And I think we are factoring a little bit of cautiousness on that count as well. Having said that, we still expect the segment to deliver growths this year and that’s the way we are looking at it for the remainder of the year.

Mayank Tandon

Okay. Any impact on the financial services verticals from this being an election year, any impact on the regulatory projects that you are doing in that vertical?

Nitin Rakesh

Not specifically. Again, I think we’ve had good growth in financial services. We continue to expect to build on that. I think the operating costs pressures are most pronounced in financial services, given the large global scale and large projects that most global banks have had. So, I think we see that as an opportunity to take back our managed services powered by automation offerings and actually become integral part of some of those discussions. Rakesh can add a couple others in financial services that we are seeing opportunity.

Rakesh Khanna

Yeah. Mayank, what we are seeing is in fact the M3 powered by SyntBots, we are really helping clients lower on their business costs, releasing funding for digital modernization. We are also seeing some early stages, working with banks using block chain in the transaction processing, especially on the payment side, which is really targeting the underlying plumbing in the banking systems. Few investments in the banking space in the data programs. So in fact, actually tied to regulatory requirements, we see increased spend in the data space really and requirements for enhanced analytics. So these are the trends that we are looking, that we are seeing out there.

Mayank Tandon

Thank you. And then one final question for me. I apologize if you already discussed this but I may have missed it. Did you give us a sense of what the wage pressures were both onsite and offshore and the timing of that and also in terms of the visa costs what are you factoring in for the year?

Zaineb Bokhari

So, Mayank, I will address that. So as the onsite, onshore increment fixed effect from the start of the year and this year it was in the low to mid single digits and that’s consistent with what we saw last year. We typically provide the offshore increment ranges in the subsequent quarter, quarter two. But as of right now, they look to be comparable to where historical trends have been high single to low double-digit area but we will provide that update in the subsequent call. As far as your question on visa immigration related expenses, again that specific update comes in Q2 but it’s essentially baked into the outlook that we shared on the annual plan that we shared with you.

Mayank Tandon

Sure. Great. Thank you.

Operator

Thank you. Our next question comes from the line of Jason Rodgers with Great Lakes Review. Your line is open. Please go ahead.

Jason Rodgers

Yes. Just had a question about the gross margin by segment. Seems that they are holding up relatively well on a year-over-year basis except for perhaps healthcare, which is off year-over-year and sequentially as well. Just wondered what the factors were impacting gross margin on the healthcare side, if you can, if those margins do improve?

Rakesh Khanna

Yeah. Thanks, Jason. The current margin includes one-time charges, which we have booked for healthcare and after that we expect the margins to revert back to normal.

Jason Rodgers

And what impact did that one-time charge have on the margin in the quarter?

Rakesh Khanna

That’s how good the value of our projects, which are going on and how we conduct our business and based on that the charges we booked.

Nitin Rakesh

So, Jason, we are not breaking out the nature of the charge but I think it’s fair to say it’s a one-time charge and we expect the margins to revert back to historic trends.

Jason Rodgers

Okay. And then just more broadly, I wondered if you can make a comment on the pricing environment, any changes there?

Nitin Rakesh

Sure. Pricing’s actually fairly stable. Even though there is pressure on operating costs side for most customer segments, again, I think our foresight in using managed services powered by automation capabilities have actually helped us counter some of that and in fact we are banking on that to help us with share gains. So, I think for us, pricing environment seems fairly stable.

Jason Rodgers

And then finally, wondered if you could give us the percentage of cash currently held in U.S. dollars? Thanks.

Nitin Rakesh

So, 73% of our balances are in U.S. dollars.

Jason Rodgers

Thank you.

Operator

Thank you. Our next question comes from the line of Dave Koning with Robert W. Baird. Your line is open. Please go ahead.

Dave Koning

Yeah. Hey guys. I guess on guidance, one thing I was just wondering, I know you mentioned about I guess 8% EPS reduction at the midpoint of guidance. In revenues, I think you took down about 2% at the midpoint of guidance. So, is that delta -- I mean, is that mostly just the rupee and so if we think about EPS the reduction is like 2% from revenue and the other 6% just simply from the rupee movements, or are there other parts of margins that are kind of causing that?

Rakesh Khanna

You are right. It is mainly led by the exchange in the rupee where we change out outlook from the exchange rate of 68 in Feb to 66.5 where we are guiding today.

Dave Koning

So does that imply that each 1% move in the rupee has about a 3% EPS impact like if we take that sensitivity out and if the rupee wouldn’t appreciate or depreciate either way, is that about the right sensitivity?

Nitin Rakesh

I think the math is a little more complicated on the SG&A side, especially which is why we talked about changing our operating margins. I think there is an interplay that comes in from dollar balances as well. So, I don’t think we can have a straight line correlation between the two.

Dave Koning

Okay. Okay. And just a couple others. Is interest income, I think was something around $4 million or so, is that the right number to kind of use going forward about $4 million per quarter since you have more U.S. dollar cash now?

Nitin Rakesh

Why is this interest income as in $4 million for the current quarter? As we alluded earlier, directionally, it will go lower as we increase our U.S. dollar balances.

Dave Koning

Okay. And is the main reason to just keep increasing the U.S. dollar balances just to protect basically the cash from depreciation and the rupee?

Nitin Rakesh

There are multiple factors to play here. Currency is one of those and cash requirements also play a role and we review this on quarterly basis and then based on our use of cash, we decide what to do.

Dave Koning

Okay. And finally the Amex growth was incredibly good in Q1, so obviously you are playing an integral role in some of the stuff there they are working on right now. But is that somewhat sustainable that higher growth, given kind of the project pipeline you’ve seen or how should we think of that?

Zaineb Bokhari

Okay. I think that it’s fair to point out that yes, we had great growth that’s a strategic relationship for us. The year ago comps were a bit favorable as well. Nonetheless, we are very pleased with the growth we’ve had this quarter. I think as far as sustainability of growth, we’ve always said that some of the accounts where we have our most significant penetration, those accounts. Well they should grow. Over time the growth rate will trail the average growth for the company and we are not moving away from that deal although in any given period there is opportunities that we are working on, identifying new ways we can work with these customers.

Dave Koning

Okay. Great. Thank you.

Operator

Thank you. Our next question comes from the line of James Friedman with Susquehanna. Your line is open. Please go ahead.

James Friedman

Hi. Yeah. Thank you. It’s James at Susquehanna. Most of my questions were answered but Nitin, I wanted to come back to your opening remarks about managed services. Do you have an estimate of what percentage of your revenues can translate to managed services structures over time? Can that eventually be the majority of the economics of your clients?

Nitin Rakesh

Jamie, again a great question. At this point, we are not breaking down the percent of revenue that is derived from managed services but I think at the appropriate time, we will start sharing some more color. It’s fair to say that directionally, we expect that number to continue to inch up. Right now it’s embedded within the 41% fixed price component that we talk about.

James Friedman

Yeah. Okay. That was actually my follow-up question as if extra time materials. I will just try one more. Now that Arvind’s retired, is there any change to the hedging philosophy of the company that is obviously so brilliant in many ways? But in terms of how you use hedges, will it be the same going forward as it has been in the past?

Rakesh Khanna

So on a stated hedging policy, even though is to protect our operating plan, we assessed to make a call on the currency. We’ve historically hedged our receivables on a short-term basis and we will continue to do so as we deem fixed.

James Friedman

Thank you. That’s very helpful answer. Appreciate it.

Operator

Thank you. Our next question comes from the line of Vincent Colicchio with Barrington Research. Your line is open. Please go ahead.

Vincent Colicchio

Yes. You talked for sometime about SyntBot being a significant differentiator. I’m curious is the gap for your expertise in the competition narrowed, what does that look like?

Nitin Rakesh

I think at this point, we continue to feel that we have a cutting-edge set of capabilities and we’ve continued to invest actually in building up those further. I think that’s Bharat alluded to some of those in his opening remarks. So, I think we have gone from automation, process automation to a number of other factors including community living and artificial intelligence. But I think we will continue to find ways to stay ahead of the curve because we believe that early mover advantage will actually help us sustained the offering and that’s become fairly appealing to us with our customers.

Vincent Colicchio

On the M&A side, I know you -- some quarters ago you talked about getting more interested on that side. At this point, what your thoughts on M&A and I'm curious if you would buy a company to boost your customer access?

Nitin Rakesh

Again, I think we continue to look at opportunities on a – pretty much on a quarterly basis. At this point there's nothing to call out and I think we remained interested in either expanding geographically or acquiring capability that can help us expand into our areas of interest.

Vincent Colicchio

Okay. My others questions were answered. Thank you.

Nitin Rakesh

Thank you.

Operator

Thank you. Our next question comes from the line of Brian Kinstlinger with Maxim Group. Your line is open. Please go ahead.

Brian Kinstlinger

Thank you. Syntel grew 60% in 2015 and guidance look something similar this year, plus or minus, so I guess I'm curious why utilization up 80% which we saw at some quarters last year is in the right target given the move to automation and a little bit more of limited growth that you posted recently?

Zaineb Bokhari

Yes. Brian, so if you look at how utilization trended from Q4 now, we saw a continuing trend of utilization dropping and some of that had to do with the longer decision cycles that we saw in Q1. I think as Nitin mentioned in his comment we're still expecting to see above trend utilization and you'll start to see that ramp up in areas.

Brian Kinstlinger

Okay. Most of the offshore companies are making acquisitions to transform your their businesses, some of the deals have been small, some of have been large, you know typically and I've covered this company for long time. The board evaluates every quarter. Maybe you can share with us the Board's finding and why they been reluctant to use cash to make acquisitions. Is there something that has led to the reluctant or they only focusing on organic growth. Just maybe so we can understand why the cash in the balance sheet and there hasn't been a good use of it?

Anil Agrawal

I'm happy to take that Brian. We have a team that has been actively looking at acquisitions and I'd say for a number of years now and we've come close a few times, but for whatever reason either the timing wasn't right or the opportunity was just not right. It hasn't happened. But out focus is to use acquisitions to extend reach and capability. And it would be a niche player and that's what our team continue to focus on.

Brian Kinstlinger

Okay. I guess the last question I have is of more big picture. You comment in guidance methodology, it sounds like there is market uncertainly growth profile of your large customer is different. So can you could talk about why methodology still hold and why you're still confident that revenue visibility today leads to the same kind of endpoints in revenue growth for the year that it did maybe five or ten or 15 years ago?

Nitin Rakesh

Brian, we've looked at – I know you've raised this in the past as well. We've looked at various options and combinations and we still feel that given the nature of our business as well as the fact that we continue to drive towards increased predictability of our revenues through managed services we still feel this is a best metric we continually use.

Brian Kinstlinger

Great. Thank you.

Operator

Thank you. And our next question comes from the line of Puneet Jain with JPMorgan. Your line is open. Please go ahead.

Puneet Jain

Hey. Thanks for taking my question. Following up on Mayank's question earlier, so you expect insurance to pickup in back half, but will other verticals like Healthcare, Financial Services also pickup in the second half or will they recover with normal seasonality in 2Q itself?

Zaineb Bokhari

Yes. I think we are not going to start putting our guidance in the context of individual industries and how they're going to trend from quarter to quarter. I think the comment I made earlier was that it’s going to be a backend loaded here certainly for our insurance we expect improvement late in calendar 2016.

There are some headwinds that we've highlighted on the call for Healthcare and we're watching them and how they will impact the business. And we've made certain assumptions based on what we know and what we still don't have a good grasp on yet but have incorporated into the full outlook.

Puneet Jain

Understood. Now, that's helpful. And then, Syntel has done like the great job in your chosen areas benefiting from their niche positioning in the industry. But given that you're almost like a $1 billion revenue company, do you think you need to move beyond your chosen verticals to expand the funnel size? And how should we think about margins as you invest in those new areas?

Nitin Rakesh

Sure Puneet. I think great question again. We've continue to look for adding both new segments and new geographies and I think both of those have actually played out well for us. We've shown that through growth in non-financial services segments I think Healthcare has been a great example of that. We've seen that happen with RLT as well. And I think off late we are also starting to see growth pickup in manufacturing especially over the last few quarters. So I think we'll continue to find near neighbour extensions as we have done over the last few years.

As I also mentioned earlier, I think we are very pleased with the geographic growth we are seeing in U.K. and Europe and we'll continue to kind of focus on there as well. So I think that's what I will think about it. We will continue to find new engines of growth both from verticals and geographies.

Puneet Jain

And margin implications from those investment?

Nitin Rakesh

I think again we've talked about the non-linearity that we are trying to build in through automation and we're taking a lot of that benefit and kind of reinvesting back in the business, which is why we've given a margin guidance that breaks it down by both gross margin and operating margin. So I think everything we think we're going to invest just bake into that.

Puneet Jain

That's great. Last one, are you seeing any pressure on price realizations and maintenance business like you said, as you increasingly leverage SyntBots, lower your delivery cost. Is competition or clients driving lower prices, price realizations in that business?

Nitin Rakesh

I think at this point we're not seeing that pressure. Clearly the capabilities we built on are helping counter some of that pressure, but for us I think it's fairly stable.

Puneet Jain

Understood. Thanks a lot.

Operator

That concludes the question and answer portion of today's call. I would like to turn the call back over to Mr. Nitin Rakesh for closing comments.

Nitin Rakesh

Thank you, operator. I want to close this call today by saying that I'm enthusiastic about the opportunities ahead for us in 2016 and beyond. We'll continue to enhance our prospects and build our pipelines on the strength of our digital modernization and recursive automation solutions.

We are leading the charge in these areas and presenting our customers with the innovative and credible approach for supporting their business and technology priorities. I look forward to updating you on our progress in the next quarterly call. Thank you.

Operator

This concludes Syntel's first quarter earnings call. A replay of today’s call will be available until April 28, 2016 by dialing 855-859-2056 and entering the passcode, which is 89695872. Thank you.

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