Syntel's (SYNT) CEO Nitin Rakesh on Q2 2016 Results - Earnings Call Transcript

| About: Syntel, Inc. (SYNT)

Syntel Inc. (NASDAQ:SYNT)

Q2 2016 Earnings Conference Call

July 21, 2016 10:00 AM ET

Executives

Zaineb Bokhari - Vice President, Finance

Bharat Desai - 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

Puneet Jain - JPMorgan

Vincent Colicchio - Barrington Research

Mayank Tandon - Needham

Jason Rodgers - Great Lakes Review

Dave Koning - Robert W. Baird

James Friedman - Susquehanna

Maggie Nolan - William Blair

Brian Kinstlinger - Maxim Group

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Syntel Second 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, July 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 Second 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. During the second quarter our customers continued to experience a business uncertainty arising from a softening global macroeconomic environment, challenging underlying business conditions as well as regulatory uncertainty. They have reacted by holding back on new initiatives, stretching out decision cycles, reexamining budgets and placing additional scrutiny on change initiatives. This uncertainty in our customers’ businesses is leading to increased volatility in our business.

Companies across all industries are feeling the burden of being strapped with the legacy high costs of running their business and are struggling to find the bandwidth and budgets to transform themselves to be future ready. Syntel’s unique take on digital modernization marries a disciplined approach to organizational transformation, with the exceptional efficiency and quality that’s achievable when this effort is powered by our robust automation platform SyntBots.

Our approach allows customers to de-risk their transformation journeys while supporting their need to broaden market reach and enhance their brands in today’s hyper competitive global economy. We have a clear strategy to help turn our customer’s aspirations into reality. We will continue to invest on our future with a strong conviction that this strategy will position Syntel on a strong growth trajectory as the headwinds we’re currently facing begin to ease.

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 second quarter revenue was $246 million, rising 2.6% year-over-year and 1.9% on a sequential basis. We continue to experience some variability in our quarterly revenue growth as we close the first half of the year. Some of this was expected and highlighted on our earlier calls. However, as the year progresses it is apparent to us that this uncertainty is rising and will persist over the balance of 2016.

While our pipelines are building at a fairly healthy pace and we continue to convert at a good clip, we’ve continued to see elevated scrutiny by customers resulting in delays in the pace at which new projects begin and ramp up. As a result we’re lowering our 2016 outlook, which we’re pegging to a higher level of visibility than is typical at this point in the year.

Many organizations have an overarching need modernize aging core systems and legacy applications that are hindering growth efforts and the flow of critical business information across the company. Our solutions for digital modernization powered by SyntBots, our recursive automation platform set us apart from the competition and are resonating with these organizations.

Despite the challenging environment, we remain focused on building an industry leading offering that is gathering strong interest and endorsement from both clients and prospects and positioning Syntel as a global leader in this area. Although, we did not see a material impact in Q2 from the recent geopolitical developments like Brexit, it has clearly introduced additional uncertainty.

There are still many unknown variables that make it difficult to fully assess the long-term impact of this development. We are in close contact with our customers and we believe we’re well positioned to serve them regardless of how this matter ultimately resolves itself. Despite this Europe remained an important contributor to Q2 growth rising 12.3% over the prior year.

We will continue to invest in the regions with new capabilities, delivery locations and a strong go-to-market effort and I look forward to updating you on our progress there. Anil will expand on our Q2 metrics and 2016 outlook in his prepared remarks.

On a year-over-year basis, we saw growth across each business segment other than Insurance. Growth was led by Manufacturing, Retail, Logistics and Telecom and Banking and Financial Services industry groups. Our Insurance segment grew on a sequential basis during Q2 as we converted some of the business pipelines that we had built over the last several quarters, particularly in the life and retirement and commercial sub segments.

We still think there is reason to be cautious about discretionary spending trends in the personal lines area as our customers work through the issues that are impacting their ability to invest in business transformation. We continue to anticipate improving growth trends for the overall segment later this year on the strength of our underlying pipelines.

There continues to be a noticeable pause in discretionary spending within the Healthcare industry arising from pending M&A and regulatory uncertainty related to the U.S. election cycle. We have no additional clarity on the progress of these transactions [ph]. In the mean time we continue to invest in offering for digital modernization as well as industry specific solutions that cut across sufficient lifecycle in areas like wellness, customer engagement and many others that will help us capitalize on the significant long-term opportunities in the industry.

Despite this headwind, our Healthcare segment grew on both a sequential and a year-over-year basis. This growth was aided by our robust offerings and by our diversification into other parts of the Healthcare segment including providers and Life Sciences. Demand for digital services remained strong during the quarter. We estimate that digital projects accounted for approximately 15.5% of revenue in Q2 compared to 15.2% in Q1.

Revenue from customers 4 to 30 increased 2.6% sequentially, faster than overall company growth aided by the improvement we saw in our Insurance, Retail, Logistics and Telecom and Healthcare segments. Second quarter gross margin contracted 20 basis points to 37% from 37.2% in the first quarter, reflecting the normal seasonal impact on gross margins from offshore vise increase visa cost.

The mix between onsite versus offshore delivery was fairly stable during Q2 as compared to Q1. However, given the continued customer interest in digital projects we’re still managing our business with the expectation that there could be additional modest shift in the mix in future periods. Offshore utilization for IT rose to 70.3% in Q2 from 66.5% in Q1on a period end basis and to 68.7% in Q2 from 66.9% in the previous quarter on average.

Net headcount decreased by 723 employees on a sequential basis in the second quarter to 23,773, but increased by 767 employees from a year ago. We continue to hire across each of our geographic regions as we work to closely align our organization with the future needs and requirements of our customers.

We still expect revenue growth to exceed the pace of headcount growth as we manage our business efficiently, drive towards high utilization and balance the mix of our service delivery both between onshore and offshore as well as utilize the leverage from managed services and automation.

Attrition, calculated on a current quarter analyzed basis was 23.2% in Q2, up from 22.3% in Q1. It is normal to see an uptick in attrition in the post increment period and since the pace of hiring will trail revenue growth, we still expect attrition to trend above historical levels. We’ve taken steps to manage this including the role out of a Syntel X.0 [ph] initiative our workforce transformation program which I highlighted on our last earnings call.

Our organization is focused on building the agile empowered workforce that will expand Syntel’s leadership in digital modernization. This important initiative is going to be critical in shaping our approach to developing the mindsets and skill sets of our employees.

I want to conclude my comments by thanking Syntel’s employees for their efforts. We are united in our mission of establishing Syntel as the global leader in digital modernization. The clear, proactive methods we’re taking to our customers and the comprehensive set of capabilities we have built are resonating and will pave the way for our long-term future growth.

I will now turn the call over to Anil Agrawal, 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 second quarter revenue came in at 246 million, up 2.6% from the prior year period and 1.9% higher than the prior quarter.

For the second quarter, Banking and Financial Services contributed 48.9% with Retail, Logistics and Telecom at 16.9%, Healthcare and Life Sciences 16.3%, Insurance 13.1%, and Manufacturing 4.8%.

On a year-over-year basis, segment growth was led by Manufacturing, Retail, Logistics and Telecom and Banking and Financial Services segments, which grew 19.2%, 4.7% and 3.9%, respectively.

Syntel’s customer concentration levels were as follows. Our top three clients represented 47.9% in the second quarter of 2016, up from 46.9% in the year ago quarter, but down from 48.9% in the first quarter.

Accounts 4 to 30 represented 42.3% of revenue in the second quarter of 2016, down from 45.2% in the year-ago quarter, but improving from 42.1% in the first quarter. The fixed price component of our business was at 43% of revenue for second quarter of 2016.

With respect to Syntel’s margin performance, our second quarter gross margin was 37% as compared to 38% reported in the year ago period and 37.2% in the first quarter of 2016.

By segment, gross margin for Banking and Financial Services was 36.5% with Retail, Logistics and Telecom at 38.7%, Healthcare and Life Sciences at 41.7%, Insurance 35.4% and Manufacturing 30.6%.

During the second quarter the Indian rupee appreciated by 0.93% on average relative to the U.S. dollar from the prior quarter. This lowered gross margins by approximately 15 basis points. Visa, immigrations and cost related to employee increments lowered second quarter margins by 287 basis points.

Moving down the income statement, our selling, general and administrative expenses were 7.4% in the second quarter of 2016 compared to 9.1% in the prior year period and 12.3% in the first quarter.

On a dollar basis SG&A was lower by 11.4 million sequentially. The impact on Q2 SG&A from currency related balance sheet translation based on quarter end exchange rates was a 9.6 million gain as compared to a 0.3 million loss recorded in the first quarter. The appreciation in the average rupee rate increased SG&A by 0.2 million.

Other income was 4.9 million during the second quarter as compared to 4.1 million in the first quarter including a gain of approximately 1.8 million from mutual fund sales in the second quarter versus a 0.7 million gain in the first quarter.

Our tax rate for the second quarter came in at 24.2% as compared to 17.3% posted in the first quarter. As a reminder in the first quarter, we had a onetime reversal of approximately 3 million in tax provisions, which lowered the reported tax rate.

Net income for the second quarter was 58.8 million or $0.70 per diluted share as compared to 60.6 million or $0.72 per diluted share in the prior year period and 53.1 million or $0.63 per diluted share in the previous quarter. The company’s balance sheet at the end of the second quarter of 2016 remained healthy.

Our total cash and short term investments on June 30 were 1.1 billion and the portion held in U.S. Dollars stood at 76%. DSO levels were at 60 days. Capital spending for the quarter was approximately 5.7 million.

Syntel ended the second quarter with a total head count of 23,773 of which 7660 were assigned to KPO. Our global head count was lowered by 3% from the first quarter. Our billable head count was 4,677 onsite and 17,365 offshore for a total of 22,042.

Utilization levels at the end of the quarter were 92.9% onsite, 76.5% offshore and 80% globally. Our delivery mix at quarter end was 75% onsite and 25% offshore. Voluntary attrition during the quarter was 23.2% as compared to 22.3% reported last quarter. Syntel added three new customers in the second quarter.

Looking forward I would now like to provide you with guidance for 2016. Based on our current visibility level, Syntel expects revenue to be in the range of 980 million to 1.10 billion and EPS to be in the range of $2.55 to $2.70 for the full year of 2016.

The company currently has 92% visibility to the low end of the revenue range and our guidance is based on an assumption of an average exchange rate of Rs.67 to the dollar. We continue to anticipate that operating margins will be in the 26% to 28% range. Our effective tax rates 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] And our first question comes from the line of Edward Caso with Wells Fargo. Your line is now open.

Edward Caso

Hi good morning, good evening. Could you give us an update on your efforts in the 4 to 30 category, if I did my math right you are down 4% year-on-year and anyway what - any success on that front? Are they being impacted more by this discretionary or are not? Thank you.

Nitin Rakesh

Sure Ed, I think we talked about it last quarter as well. So first and foremost we are quite pleased by the fact that on a sequential basis we are actually starting to show growth in that segment. That’s obviously by design and we continue to work towards making that segment a faster growth segment in the industry than the company, which is what happened this quarter. I think keep in mind we talked about - if you took insurance out as of last quarter, we had actually faster than company growth in that segment and I think we, as we normalize the growth in our insurance segment which I called for in my remarks, we do expect that 4 to 30 segment to be the growth engine that we needed to be.

Edward Caso

Could you talk a little bit about your attrition rate here in the low 20s, is that sort of why? Is some of that reflective of your retraining efforts as you shipped your offerings?

Zaineb Bokhari

I will take that. Certainly, Ed as we’ve talked about in the past, we’ve come through a period where we went through a workforce rebalancing strategy and now we are implementing much more of a focus on skills development. One thing to remember with respect to attrition is that the pace of hiring, our expectation is that for the foreseeable future it’s going to trail revenue growth and it will be slower than it’s been historically. So that’s also contributing to some of the attrition level that you’re seeing relative to historical.

Edward Caso

Great thank you.

Operator

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

Joseph Foresi

Hi. I know you mentioned and you have talked about in past calls the uncertainty among some of your clients. Just wondering how do you feel this quarter versus last quarter, did budget shifted all on you and some of the clients that you were talking about past couple of quarters, did things get worse or better? Just trying to get a sense of sort of what the latest update is on the uncertainty part of it.

Nitin Rakesh

Sure Joe. I think as Bharat called out in his remarks, I think there is a combination of two or three factors, clearly the global macro environment uncertain that got further muddied by the whole Brexit situation in Europe. It’s too soon to call whether what the long term implication of that will be for the - and what that might do for the remainder of this year. And the other thing also that does is the volatility that you expect coming out of an event that was unexpected by most of our clients as well as the financial market. It just makes us a lot more watchful of what we need to do especially in segments like banking and insurance. Having said that, we still have a pretty good healthy pipeline across all our segments, we are starting to see results of some of that in insurance and healthcare because we are still seeing good sequential growth there. So I think we remain optimistic about converting that pipeline and continuing to find growth. The decision cycles are still elongated, more elongated than we expected them to be in Q2 and that’s the reason why we are taking a high visibility metric to the lower end to about 92% as compared to what we would have done in - what we have done in the past years. And then the reason for that really is, is that volatility is making it harder to pin point and predict how this will play out.

Joseph Foresi

Got it and can we get an update more specifically on both the insurance and healthcare verticals, I know insurance had been slow, and healthcare obviously there were some M&A and some other things associated with that, but it sounded like the pipelines are getting a little bit better, maybe you could just update us on sort of the trajectory short term, long term for those businesses?

Nitin Rakesh

Sure, I think clearly I called that out in my script as well. So I think we are very pleased by the fact that we are seeing sequential growth in insurance. We do expect that to continue to improve for the remainder of the year as we see more and more of the pipeline conversion I talked about. I think the personal line sub segment is still seeing some challenges on discretionary spending which was primarily the reason for under performance over the last few quarters. But I think while that corrects itself and eventually spending comes back we continue to stay focused on using the pipeline conversion process to find growth. On Healthcare, I think despite the uncertainty both on regulatory approval process for the impending M&A’s as well as the electioneer, I think again I am pleased by the fact that both on a YOY basis and a sequential basis we are seeing growth. And I think that’s a result of broadening our efforts beyond the paired sub segment in to provider and life sciences. And I think we have continued to stay focused on those as well and broadening our offerings. And I would invite Rakesh, who is going to talk a little bit about the trends that are driving growth in these two.

Rakesh Khanna

Sure thanks Nitin. Joe, what we see there is like Nitin mentioned some softness in the discretionary spending on the personal lines, and really due to the elevated combined ratios, but our overall pipeline is very healthy. We see good demand in the commercial and life and retirement space for digital modernization using SyntBots. We see a very good positioning in that piece of the business. In Healthcare specifically, despite the uncertainty our focus around B2B moving to B2C and also the focus around end-to-end patient life care management is really positioning us strongly and we are seeing good investment in those areas.

Joseph Foresi

Okay and then the final question from me. Maybe you could update us on your outlook on the margin front, obviously excluding the currency translations or gains and the digital work that you are doing. Is that coming in at a lower margin profile? Do you think that that will impact margins over the long term? Thanks.

Anil Agrawal

So we have one of the strongest profiles in the industry for some time and we are managing our business smartly, in the changing business dynamics and digital margin we continue to believe that our key margin levers of automation, utilization and managing our operations efficiently, we will be taking care of that.

Joseph Foresi

Okay then the overall margins, has margin guidance changed or outlook changed? Thanks.

Anil Agrawal

The outlook remains same for what we guided last time. I think 40%.

Rakesh Khanna

Joe, the outlook for margin is the same yeah. We have kept our margin outlook unchanged clearly I think that’s the result of a couple of factors that Anil mentioned specifically using leverage for automation, in addition to that managing our operating metrics better.

Joseph Foresi

Thank you.

Operator

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

Frank Atkins

Thanks for taking my questions. I wanted to ask a little bit about the hiring and wage environment. What are you seeing there, what was the offshore wage increase and a little bit more color on the immigration cost, will be great?

Zaineb Bokhari

Yeah absolutely, so let me start by the offshore increment which did come through this quarter. And that ended up being in the high single digits on average. The other question you had asked was about visa and immigration. So what we typically do is combine that with the offshore increment impact in any given quarter. So for us this quarter it was about 287 basis points impact from the combination of those factors. The last question you asked was on the hiring environment. I think again in offshore locations there continues to be a wide availability of talent. We are certainly looking at ways to make sure that the supply chain that we have and the skill sets that we need for future customer requirements are well met through our local hiring, campus hiring programs and the training programs that we have in place.

Frank Atkins

Okay, great. And the next one is kind of - as you think about the business and the long-term top-line growth. What gives you confidence that the near-term period of uncertainty is temporary and what type of top-line growth do you think is a good way to look at this business?

Rakesh Khanna

Sure Frank, I think a great question. I think we are fairly committed to growing faster than industry. The reason we feel confident about the fact that we can return to growth higher than industry once the uncertainty ease up a little bit. This was primarily driven by two facts, one, I think our message and our set of offerings are resonating very well. They are turning out as being differentiated, innovative and driven by intellectual property and a number of our customers and prospects have validated that for us both in terms of confirmation by awarding business as well as by the growth of pipeline that we talked about earlier. So I think that’s clearly the focus, we continue to remain really focused on expanding the pipeline and converting it and that’s what gives us the confidence that we have the ability to continue to find growth across our industry.

Frank Atkins

Okay, great. And last one for me would be on the manufacturing side I know it’s a little bit of a smaller segment that you’re seeing some nice growth there. What are the margin goals on gross margins in that segment and what impact will this kind of growth in this vertical have on the business going forward?

Nitin Rakesh

I think Frank, you are absolutely right. We are happy with the growth we’re seeing in manufacturing over the last six quarters to seven quarters. Obviously that is a result of hard work and focus. And I think as they gain certain scale and kind of get to a certain size you’ll start to see margin improvement coming in primarily because of economies of scale and they also continue to adapt and adopt our automation offering to incorporate some of that in their operating leverage.

Frank Atkins

All right, great. Thank you very much.

Operator

Thank you. Our next question comes from line of Puneet Jain with JPMorgan. Your line is now open.

Puneet Jain

Hi, thanks for taking my question. So your guidance is almost at par with your growth rates in 2009 and industry obviously this year faces cyclical challenges, but some of them could also be viewed as secular specifically in or legacy maintenance area. So could you share your perspective on medium term growth for your end markets as mix shift continues towards more digital automation?

Nitin Rakesh

Great question, Puneet. I think you called it right and we called it right as well when we started to talk about incorporating IP led digital modernization solutions in our offerings and we obviously have been on that journey for the few quarters now. I think the traditional business that we’ve stayed focused on obviously has provided our customer with a fairly high degree of limitation in the way they have been able to connect with their customers and that’s where we see the opportunity. So while it might seem like that legacy or the run business has provided some headwind, we also view that as an opportunity to continue to provide modernization whether it’s legacy modernization or digital enablement of those applications as an opportunity area. And I think finding the right balance between how much can you help the customer and get competitive with reduction in operating expenses and plowing that back into modernization through release of funding is kind of journey that we’re on. And from that perspective I think the relevance of IT is actually only going up versus anything else. So we believe this will continue to be a fairly a strong secular growth industry and we’re committed to ensuring that we are positioned to take benefit of that.

Puneet Jain

And given like the cash we have on your balance sheet and this changing trends new direction, will you be open to do M&A more M&A to remix towards more IP, more digital faster?

Nitin Rakesh

Hey Puneet, again great question, so I think we’re going to look at M&A as a way to increase our reach, whether it’s geography or a capability that will help us accelerate growth.

Puneet Jain

Right and last one, and given much of your business is U.S. focused, so do you expect Brexit to hurt discretionary spend among U.S. financial services clients as well or the comments were more about European business?

Nitin Rakesh

I think Puneet, it’s hard to call how global or localized the impact will be because it’s impossible to determine the global reach of most of the large banking customers. So I think as I mentioned, we are very watchful of what that might mean for the entire banking insurance segment per se because those are fairly globalized businesses, and clearly I think as more clarity emerges on the plans by the newly elected UK government, I think we will be in a position to assess the impact better and also see there are any opportunities arising out of that that disentanglement as we call it. But from an overall basis, I think we are very pleased with the growth we are seeing in Europe, if anything we have actually continued to invest more and more of our time, effort and investment dollars in that region, all across from setting up sales and footprint on the continent in addition to the UK as well as setting up delivery centers and having leadership. So I think we are fairly committed to the region, we do believe in the longer term it will continue to be an engine of growth curve.

Puneet Jain

Understood, thank you.

Bharat Desai

This is Bharat. I just like to weigh-in on the questions with a little more color on Frank’s question and Puneet’s question about growth drivers growing forward. I think Nitin answered them well, I just like to add as I mentioned in my prepared remarks, the challenge most enterprise customers are facing today is the high legacy costs that they are scrapped with, and the dichotomy they have is that they really have to modernize their business to be future ready and to serve the needs of the future customers who will be millennials. And keeping this mind, we have created an offering to help them bring their run the business cost down using automation and help deploy the savings into transforming the business. So we think that this strategy will help us gain share where the business is currently being maintained through just body count, and we think that the future is about moving towards much more automation, reducing the effort and redeploying those savings into business modernization, and that investment, the responses we’ve got from customers and the quality of the pipeline is what gives us confidence and our ability to grow our business faster than the market.

Puneet Jain

Thank you.

Operator

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

Vincent Colicchio

Yes, thanks for taking my call. Curious if you could talk to how your sources of recurring revenue have trended say year over year. That would be helpful.

Nitin Rakesh

Sure. I can take that. I think again if you go back to our earnings calls over the last couple of quarters, we did talk about the fact that we are consciously using the leverage provided by managed services and automation and that by definition means that our ability to sign longer term contracts as we get into outcome based delivery will actually lead to a much higher predictability in the revenue over the medium to long term. So I think from that perspective we are still committed to expanding our book of business from managed services, which today fits within the fixed price component of the bucket and as we continue to expand that our repeat business and the annuity nature of those revenues will continue to aid us over the next few years.

Vincent Colicchio

So it seems like you don’t think the recent volatility relates to less recurring sources of revenue and the mix versus where you were historically, is that right?

Nitin Rakesh

I think that’s fair but keep in mind that when you have periods of uncertainty, volatility and expanded decision cycles, the first things that do get impacted is the discretionary spend. And there will always be an element of discretionary spend in the budget from our customers, and I think that’s what’s causing the recent volatility we talked about.

Vincent Colicchio

Okay. And then how did KPO trend in the quarter and what is the outlook in the second half?

Zaineb Bokhari

Yeah, so Vince we don’t really separate out KPO anymore. I will say though that similar to what we have seen the pipelines remain healthy, and clearly our automation capabilities do have broad applications for KPO. So we feel good about the outlook for that.

Vincent Colicchio

Okay and then you had talked about healthcare. It sounds like trajectory for the second half is flat to lower, will that be correct?

Nitin Rakesh

I think we talked about sequential growth in the healthcare segment. Even though there is uncertainty I don’t think we are calling out the segment to be flat or negative. I think if anything we continue to work towards seeing sequential growth in the segment.

Vincent Colicchio

Okay thanks for the clarity, that’s it for me. Thank you.

Operator

Thank you and our next question comes from the line of Mayank Tandon with Needham & Company. Your line is now open.

Mayank Tandon

Thank you. There seems to be a fair amount of variability in the margin profile across the verticals. Could you comment on, is that a function of mainly utilization changes or is there something else underlying within the vertical that causes that volatility from quarter-to-quarter?

Zaineb Bokhari

Yes, so Mayank I will comment on it and if Anil wants to add, that’s fine. So there are a couple of things that we did see quarter-over-quarter. If you recall last quarter within healthcare there was an impact with the gross margin because we did have a onetime item going through there. This quarter I think if you look Retail, Logistics and Telecom did see slightly lower gross margins and some of that is related to new work that we are starting for some customers. And clearly some of the impacts will vary across the industries from the factors that impact Q2 like visa and immigration. So I would include some of those upfront costs that we are seeing in Retail that Logistics and Telecom would include some of that in there as well.

Mayank Tandon

Okay that’s helpful. And then I wanted to just get a better grasp around pricing trends, what are you seeing on that front. And are you seeing any changes in terms of the model whereby some of your clients are moving more toward a transaction based pricing model or an outcome based pricing model that we’ve heard from some of your peers in the past?

Nitin Rakesh

Mayank, let me take that. I think pricing environment has been stable for us. Again the only thing that I will add there again is the fact that as we get into managed services, and we start to - continue to expand the adoption of tools like automation, we are clearly going to see move away from T&M or managed end-to-end contracts. So I think that I mean you can, we can call that managed outcomes but it’s really a combination of a number of things that’s going to a managed services contract. So we expect that to stay stable because we continue to use the leverage we have. And in fact if anything we believe we have differentiation in the way we price our services without taking an impact on our margins.

Mayank Tandon

Okay and one final question on the use of cash. I think you may have already answered this but I apologize in advance but just wanted to get a better sense of if you consider some of the uses of cash in terms of dividends or potential share repurchases given evaluation or acquisitions, how is the management looking at the potential uses for cash given your balances continue to grow?

Bharat Desai

Yeah, Mayank I’ll take that. Our Board does review that every quarter. And we get management’s recommendations on different initiatives they maybe planning, clearly capital expenditure is one use of cash as we have to build out the campuses that we have committed to. In addition to that we look at how we can drive faster growth to extending our reach either in new geographies or the new capabilities through a possible business combination, would largely be small to medium size. And then the Board also considers any options, any efficient options of returning that money to returning that money to shareholders from time to time. So those are broadly how we look at our business and our balance sheet.

Mayank Tandon

Great, thanks.

Operator

Thank you. And our next question comes from the line of Jason Rodgers with Great Lakes Review. Your line is now open.

Jason Rodgers

Yes. So I just wanted to follow-up on the cash question. Looking at M&A, do you foresee any deals getting done this year?

Bharat Desai

It’s hard for us to comment on that. We have looked at multiple opportunities this year, but whether we are going to close something this year or not, I can’t say definitively and actually cannot even make that statement.

Jason Rodgers

Okay. And then looking at the cash, the majority held in U.S. dollars now wanted to get your thoughts on any plans for repatriation?

Bharat Desai

Again that’s a Board discussion, if and when that decision is made, we will obviously make that announcement.

Jason Rodgers

Okay. Finally, as you move more clients to digital modernization and automation, is there a risk of cannibalizing your traditional business?

Nitin Rakesh

Yeah. I can take that. I think the way we are going about it really is continuing to bundle the whole managed services component of run the business with providing migrate managed and modernized solution together. So while we have to be watchful, we believe actually the combination of these two opportunities looking at modernization as well as run the business gives us a better advantage as compared to some of our peers. So we actually believe this is a differentiator for us.

Jason Rodgers

Thank you.

Operator

Thank you. And our next question comes from the line of Dave Koning with Robert W. Baird. Your line is open.

Dave Koning

Yeah. Hey guys, thank you. I guess a few questions. First of all, did you mention how big the gain within the SG&A expenses were, I just I don’t remember that?

Anil Agrawal

Yeah I did cover that. Gain on the account of balance sheet translation was $9.1 million for the quarter.

Dave Koning

Great, okay. And then I think you mentioned in the other income line, I think you said mutual fund gains of about $1.8 million in the quarter. Does that mean that we should I think you reported a total number of 4.9. Should we just take the 1.8 out and kind of think of that is kind of the more normalized ongoing amount of kind of other income?

Anil Agrawal

Yeah. I think that should be the right approach, yeah.

Dave Koning

Okay. And then -

Anil Agrawal

And I guess, but just bear in mind that as our dollar balance has increased, our yield is likely to be getting lower and so for the year we are guiding to a yield of about 2% on our funds.

Dave Koning

2%, okay, no that’s great. And then I guess from a more fundamental performance basis, your gross margin, if we look back to like the 2012-2013 period, your gross margin was about 44%, and now we are running more like I guess the first half of the year was 37% and then the rupees actually gotten better for you, and I just I can’t remember exactly why again the margins have - the gross margins have come down so much, maybe you can just give us the puts and takes on that again.

Zaineb Bokhari

Yeah, so Dave, is the - you’re asking about what happened in 2012 and 2013 and just as a refresher you saw some pretty sharp depreciations during both those years in the Indian Rupee and that certainly gave us the tailwind? Certainly year-to-date the movements in the rupee had been much more modest.

Dave Koning

And I guess - I’m more looking at the gross margin… Yeah.

Nitin Rakesh

Let me take that. I think there are two or three other factors that we have to keep in mind. I think and I called some of those out in my commentary. Firstly, I think we’ve seen a fairly big shift in the offshore leverage with over the last two years, which is driven by the digital projects and the Agile projects that are being run. That obviously has a big bearing on our overall profitability. While we believe that in the short run, we have to be prepared to run with these kinds of onsite, offshore issues, I think from a model perspective, we do believe that over the medium to long-term, we probably see some reversion to offshore leverage that where we think customers will find value again. So I think we have to live through this period of digital adoption and let it stabilize before we can see offshore leverage pick up again.

And obviously, I think we also want to keep in mind the fact that we have taken a fairly high degree of investment into our solution development capabilities. We started that process in about the timeframe you mentioned 2012, 2013, we’ve talked about that over the last few quarters, the whole platform development. The automation platform we talked about SyntBots, so obviously that has a - again we’ve taken the most student approach of expensing all of those investments and that obviously has a bearing on the profitability as well. But on the flip side, we expect that to give us operating leverage as we deploy managed services and use automation tool to find non-linearity in the business and that’s starting to play out in the relationship that you now see between our headcount growth and our revenue growth.

Rakesh Khanna

And Dave, I’ll just add, these are still industry leading margins and we feel very good about running a very efficient shaft, so, yeah.

Dave Koning

Yeah, great, yeah the margins are incredible no, yeah, no doubt. Thank you.

Operator

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

James Friedman

Hi, thank you. It’s Jamie. I want to ask about sort of the trends in the underlying top three clients, and which contemplated in the guidance I saw that the top three decelerated, which was consistent with what you had anticipated and said last quarter. So they went to 4.8% from 12.4% per se year-over-year growth, they declined a little sequentially, what do you see going forward with the top three?

Nitin Rakesh

Jamie, I think it’s hard to kind of guide you by customer segments, but I can only give you some color and commentary. First and foremost, I think these are strong long-term relationships and we are very, very happy with the performance we’ve had in these accounts, especially over the last three years or four years. These are at maturity relationships, so obviously we continue to expect to find growth albeit it may be lower than the overall company growth and we had a pretty good year last year with these relationships as well, so keep that in mind as the comps get a little tougher over the rest of the year.

James Friedman

Got it and then Nitin, just a follow-up with that, I don’t want to catch you off guard, but I don’t know if you saw but one of your top clients reported yesterday, and they did describe an increase actually in their technology budget in the second half, I don’t want to put you on the spot, but do you I guess do you see any of your top three clients accelerating in the second half, let me phrase it that way?

Nitin Rakesh

Jamie, again clearly, we do believe that spending in digital transformation and modernization projects will have to continue across the board, across all our customers, across all our industry segments and that’s the reason why where we have doubled on our investments in creating capabilities. When specifically that picks up, how that flows down to which segments of the business, it’s hard to call on a plan by plan basis. But again we have a fairly strong relationship with all our top customers and as long as we see expanded confidence in these decision making cycles, I think we will probably be able to benefit from that, but based on what we see today, albeit at a higher visibility to the lower end we are guiding you to where we are. Also keep in mind that our range is slightly broader than normal years, at this time of the year, which again is in line with the volatility aspect that we talked about, again even though we’re using a higher visibility metric to the lower end. So I think we will obviously expect and hope that if customers expand by the trend IT, we will gain but at this point in time, we are giving you data that we have.

James Friedman

Thank you so much. I appreciate it.

Operator

Thank you. And the next question comes from the line of Anil Doradla with William Blair. Your line is now open.

Maggie Nolan

Hi, this is Maggie Nolan in for Anil. I was hoping to come back to the financial services briefly from a more global perspective, what kind of trends are you seeing as companies are dealing with these cost pressures and increased regulation and what’s your outlook for that segment?

Nitin Rakesh

I’ll kick it off and then I will ask Rakesh to talk a little bit about the trends in the segment. I think overall we talked about the facts that we’re watchful of the segment given the fact that they’re the most exposed to global volatility whether it’s macroeconomic, Brexit, interested environment or general movements in global financial markets. So I think we continue to stay watchful and we’ll look closely to how these events unfold over the next quarter or two. And maybe Rakesh you can add some more.

Rakesh Khanna

Yeah, I’ll just add that what we’re seeing in the banking and financial segment, customers are investing in areas like real time payment, settlements, enhanced analytics and also in the digital modernization. So these are really the trends what we’re seeing.

Maggie Nolan

Okay, great. And then you gave digital as a percentage of revenue this quarter and I’m wondering it looks like sequentially that outgrew the overall company and I’m wondering how you expect that segment to trend over the course of the year, I know it’s the investment area in front of the medium-term outlook as well. Is this the metric that you’re going to be giving us going forward so we can kind of track that?

Nitin Rakesh

Sure, I think this point in time what we estimate as digital revenue is really a combination of SMAC and IOT and we are very happy that that has grown much faster than the overall company growth both on a sequential and YOY basis and we expect that to continue over the next few quarters as well. We’re also evaluating - what we don’t include in this is digital modernization, our legacy exit using some of the IPs that we have. So we’ll constantly evaluate and see how best to continue to define this segment and we’ll update you as we make any change.

Maggie Nolan

Okay, great. Thanks.

Operator

Thank you. And our next question comes from the line of Brian Kinstlinger with Maxim Group. Your line is now open.

Brian Kinstlinger

Great, thanks. I wanted to come back to cash, unfortunately it’s really the only question I have. We’ve heard for years, cash has been a board discussion and it’s evaluated every quarter. Can you share what reluctance has been from a board level to put the cash to work from an M&A perspective? And then given, there’s been sluggish growth for a couple of years, has the board’s attitude towards M&A change at all or is it still just as cautious as it has been in the past?

Bharat Desai

So I can’t unfortunately Brian, comment on either question.

Brian Kinstlinger

Okay.

Bharat Desai

Thank you for the question. These are board discussions not to be - not for public sharing.

Operator

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

Nitin Rakesh

Thank you, operator. I want to close the call today by expressing my strong conviction in the strategic vision we have laid out for Syntel. At every level our employees are helping customers adapt to the new demands of the digital transformation. ON this journey, Syntel is a trusted partner, helping customers enact change while extending the value of the existing assets. I look forward to updating you on our progress on the next quarterly call. Thank you.

Operator

This concludes Syntel's second quarter earnings call. A replay of today’s call will be available until July 28, 2016 by dialing 855-859-2056 and entering the pass code which is 48344679. Thank you.

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