Syntel's (SYNT) CEO Nitin Rakesh on Q3 2016 Results - Earnings Call Transcript

| About: Syntel, Inc. (SYNT)

Syntel, Inc (NASDAQ:SYNT)

Q3 2016 Earnings Conference Call

October 20, 2016 10:00 AM ET

Executives

Zaineb Bokhari - Vice President of Finance

Bharat Desai - Chairman

Prashant Ranade - Executive Vice Chairman

Nitin Rakesh - CEO and President

Anil Agrawal - Acting Chief Financial Officer

Rakesh Khanna - Chief Operating Officer

Analysts

James Friedman - Susquehanna Financial Group

Joseph Foresi - Cantor Fitzgerald

Amit Singh - Jefferies

Anil Doradla - William Blair

Frank Atkins - SunTrust

Puneet Jain - JPMorgan

Vincent Colicchio - Barrington

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Syntel Third Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer-session. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, October 20, 2016.

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

Zaineb Bokhari

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

On the call with us today, we have Bharat Desai Syntel’s Chairman; Prashant Ranade, Syntel's 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 third quarter, we continue to see growth challenges arising from three broad factors; soft global macroeconomic trends, industry specific headwinds and regulatory related uncertainty in key end markets. The combination of these forces has created considerable uncertainty for our customers, resulting in decision delays, slower ramps of some existing projects and increased scrutiny of discretionary spending plans.

While there is improvement in some parts of our business, our overall growth has been impacted by this. Our teams have maintained a strong focus on supporting our customers during this challenging time. With modernization and automation solutions to help manage the cost pressures many of them are facing. Companies in every industry are struggling to stay ahead of competitive in roads made by digital challengers that rule customers with personalized offerings and round the clock service. Swift adoption by consumers and the dramatic rise in alternatives has eroded brand loyalty to traditional organization.

Companies are struggling to broaden their presence across new channels, while the managing rising business complexity. Legacy systems significantly limit their agility that is critical for success in times of rapid technology and business shift. Increasingly, large organizations are realizing that not addressing modernization of these critical applications and compute infrastructure will create existential threat. In responding to the challenging needs of global corporations, the IT service is undergoing its own evolution. Automation is the next wave in the evolution of our industry as customers adapt to the demands of going digital.

Syntel was early to identify the importance of automation and invest in this area. Since then, we've significantly expanded the breadth and depth of our capability and are seeing broader adoption for SyntBots across Life Science. This momentum is being driven by the compelling benefits, our customers are realizing.

I am very optimistic about the opportunities this is opened for Syntel. As an indication of its confidence in Syntel's financial strength and careful consideration of the Company's long-term investment plan, our Board was very pleased to declare a $15 per share special dividend during the third quarter. This shareholder friendly decision marked a significant return of value to investors.

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

Nitin Rakesh

Thank you, Bharat and welcome everyone. Syntel's third quarter revenue was $241.3 million, down 4.9% year-over-year and 1.9% on a sequential basis. Market conditions were challenging during the third quarter. There remains a fair amount of uncertainty across global market and across some of our industry segments. As Bharat noted, we are still seeing longer than normal decision cycles on discretionary spending that has resulted in delayed project starts and slower than anticipated project ramps. While we have called out some of this before, conditions did not improve in Q3, normally a seasonally strong period for us.

Deals that we had expected to close in the second half of 2016 were pushed start further. Our teams are working to close this business and we have revised our full-year outlook until there is a greater clarity on the timing of these closures. At an industry level, we saw weaker discretionary spending in our banking and financial services segment as soft microeconomic trends and the lack of policy clarity in key markets created volatility in customer investment plans.

In Healthcare and Life Sciences discretionary spending remains muted due to pending M&A and regulatory uncertainty related to the U.S. election cycle. We remain focused on broadening our portfolio of industry specific solutions and offerings as we are awake the resolution of some of these headwinds. There were definitely some issues during the quarter as we saw further stabilization in our insurance segment including personal lines area.

Europe continued to outperform overall company growth both in the UK and increasingly on the continent. Finally, customer response to our digital modernization and automation solution remains positive and we are seeing that come across in our pipelines and conversions. Syntel remains focused on becoming a global leader in digital modernization powered by SyntBots, our recovery automation platform. We recognize there companies are struggling to stay competitive at digital technologies have become mainstream. While the most organizations have adopted frontend digital capabilities, the concurrent needs to maintain ageing legacy systems diverse resources and focus away from growth initiatives.

The ability of organizations to introduce these services and offerings will be severely compromised without a disciplined modernization strategy in hyper competitive marketplace. No industry will be immune as traditional barriers to entry and other advantages are disrupted by innovative new competitors with flexible business models that are unencumbered by the Two-Speed conundrum.

Syntel has invested in advance of this coming wave with robust solutions and a disciplined framework to help our customers, modernized critical applications and infrastructure elements. We commit ourselves to our customer success through managed services offerings and innovative self-funding proposals.

Finally to ensure strong execution of our strategic vision, we have optimized that organizational structure and works to empower and amplify the talents of our work global workforce. Anil will expand on our Q3 metrics and 2016 outlook in his prepared remarks. During the quarter, our Retail, Logistics and Telecom and Insurance segment grew on a sequential and year-over-year basis. In RLT, some of this growth came from the retail side as company seek to fully integrate omni-channel capabilities, boost workforce productivity and respond to consumer preferences for innovative fulfillment options.

Our insurance segment grew, as we began to see improvement in the personal lines areas in addition the trends we've seen in life and retirement and commercial areas. I make these early signs of stabilization; we continue to expect improving growth for the insurance segment over the remainder of this year. We estimate that revenue from digital project accounted for approximately 15.5% of revenue in Q3, comparable to what we saw in Q2 and 14.2% in the year ago quarter. Demand for digital services remains strong; however, the continuing challenging environment for the discretionary spending contributed to the trends we saw on a sequential basis.

Third quarter gross margin expanded 222 basis points to 39.2% from 37 % in the second quarter, reflecting lowered immigration and visa cost and an ongoing focus on driving efficiencies across our operations to the effective use of levers like utilization and automation across the service delivery. The mix between onsite versus offshore delivery remains fairly stable during Q3 as compared to Q2. However, there could be additional modest shift in mix in future period as discretionary spending starts to recover.

Offshore utilization for IT rose to 73.4% in Q3 from 70.3% in Q2 on repeated and basis and to 71.3% in Q3 from 68.7% in the previous quarter on average. Net headcount decreased by 718 employees on a sequential basis in the third quarter to 23,055. Hiring continues across each of our geographic regions as we work closely to 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 to high utilization and balance the mix of our service delivery between onshore and offshore locations. Attrition calculated on the quarter analyzed basis was 25.4% in Q3 up from 23.2% in Q2. It is normally to see an uptick in attrition in both increment periods and since the pace of hiring will trail revenue growth for the foreseeable future, we still expect attrition to trend above historic levels.

Our focus remains on rating our organization for the demands of the digital economy. Our workforce transformation initiatives Syntel X.0 will play critical role in the talent management and retention of our workforce as we empower employees to take an active role in their career development. Through this initiative, we are providing clear roadmap for career enhancements and empowerment to our employees, and strongly aligning incentives to learning and skill development. X.0 will help our employees to develop a solution mindset with the strong focus on technology value creation through IP. This will enhance employee engagement and make our workforce agile and help our customer to excel in the digital economy.

Finally, I am very pleased to announce that Syntel's Board of Directors has name Anil Agrawal as Chief Financial Officer and Chief Information Security Officer effective November 1st. Anil has built a strong track record over a 15-year tenure at Syntel, having previously served as Head of Corporate Financial Planning and Analytics and Head of Finance for the India Operation for a number of years. In his capacity as acting CFO, Anil also oversaw the payout of a recent special dividend.

I’ll now turn the call over the Anil, who will discuss Syntel's financial performance. Anil?

Anil Agrawal

Good morning everyone. I want to take this opportunity to thanks Syntel's Board of Directors, leadership team and my team for their support and confidence. I look forward to working closely with all of you to execute on our strategic plan and drive Syntel to greater heights of success. After I conclude my comments, we will open the call for questions.

Syntel's third quarter revenue came in at 241.3 million, down 4.9% from the prior year period and 1.9% lower than the prior quarter. For the third quarter, Banking and Financial Services contributed 48.1% with Retail, Logistics and Telecom at 17.2%, Healthcare and Life Sciences 16.4%, Insurance 13.7%, and Manufacturing 4.6%. On a year-over-year basis, segment growth was led by Retail, Logistics and Telecom and Insurance segments, which both grew approximately 1%.

Syntel’s customer concentration levels were as follows. Our top three clients represented 47.2% in the third quarter of 2016, down from 48.2% in the year ago quarter, and 47.9% in the second quarter.

Accounts 4 to 30 represented 42.9% of revenue in the third quarter of 2016, down from 43.3% in the year-ago quarter, but improving from 42.3% in the second quarter. The fixed price component of our business was at 43.4% of revenue for third quarter of 2016.

With respect to Syntel’s margin performance, our third quarter gross margin was 39.2% as compared to 42.4% reported in the year ago period and 37% in the second quarter of 2016.

By segment, gross margin for Banking and Financial Services was 39.2% with Retail, Logistics and Telecom at 41.2%, Healthcare and Life Sciences at 43.1%, Insurance 37.7% and Manufacturing 28.5%.

During the third quarter, the Indian rupee appreciated by 0.22% on average relative to the U.S. dollar from the prior quarter. This lowered gross margins by approximately 4 basis points.

Moving down the income statement, our selling, general and administrative expenses were 12.2% in the third quarter of 2016 compared to 6% in the prior year period and 7.4 % in the second quarter.

On a dollar basis, SG&A was higher by 11.3 million sequentially. The impact on Q3 SG&A from currency related balance sheet translation based on quarter end exchange rates was a 1.8 million gain as compared to a 9.6 million gain recorded in the second quarter. The appreciation in the average rupee rate increased SG&A by 0.05 million.

Other income was 4.2 million during the third quarter as compared to 4.9 million in the second quarter including a gain of approximately 3 million from mutual fund sales in the third quarter versus a 1.8 million gain in the second quarter.

Our tax rate for the third quarter came in at 413.5% as compared to 24.2% posted in the second quarter. During the third quarter, we recognized a onetime tax of approximately 271 million net off foreign tax credits upon the repatriation of 1.24 billion of cash held by Syntel's foreign subsidiaries.

Net loss for the third quarter was 217.2 million or $2.58 per diluted share as compared to net income of 77.7 million or $0.92 per diluted share in the prior year period, and net income of 58.8 million or $0.70 per diluted share in the previous quarter. The Company’s balance sheet at the end of the third quarter of 2016 remained healthy.

Our total cash and short-term investments on September 30th were 88.4 million and the portion held in U.S. Dollars stood at 58%. DSO levels were at 54 days. Capital spending for the quarter was approximately 6.2 million.

Syntel ended the third quarter with total headcount of 23,055 of which 7,612 were assigned to KPO. Our global headcount was lowered by 3% from the second quarter. Our billable headcount was 4,621 onsite and 16,684 offshore for a total of 21,305.

Utilization levels at the end of the quarter were 94.5% onsite, 78.9% offshore and 82.3% globally. Our delivery mix at quarter end was 25% onsite and 75% offshore. Voluntary attrition during the quarter was 25.4% as compared to 23.2% reported last quarter. Syntel added one new customer in the third 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 960 million to 970 billion and loss per share to be in the range of $0.65 to $075 for the full year of 2016.

The Company currently has 99% visibility to the low end of the revenue range and our guidance is based on an assumption for an average exchange rate of INR67 to the dollar. We anticipate that operating margins will be in the 26% to 27% range. Our effective tax rates excluding the onetime tax on repatriation will be in the low 20% range for 2016. And CapEx is expected to be in the range of 20 million to 25 million excluding land purchases.

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

Question-and-Answer Session

Operator

[Operator Instruction] And our first question comes from the line of James Friedman of Susquehanna Financial Group. Your line is now open.

James Friedman

My questions for Bharat, but before I do, Anil, congratulations on your promotion.

Anil Agrawal

Thanks Jamie.

James Friedman

Bharat, are you of the view shared by say, Tata, that current challenges that the industry is facing are cyclical or are you alone the opinion of Infosys that the challenges the Indian industry faces are more structural in nature?

Bharat Desai

I believe they are structural in nature. And as enterprises adopt the cloud; their needs for services will change. I do believe, if you take a checkpoint today and a checkpoint say five years out, the total spend on technology will actually go up as businesses become more dependent on technology. If you look at as an example, I quote Google, Facebook, Amazon, Apple; they spend significantly on technology. Enterprises will want to become like digital enterprises. The nature of what that spend constitute will evolve rapidly. So, that’s the structural change I am referring to.

James Friedman

Okay, that’s a great answer. Now, you have been doing as long as any of them, so I want to get your perspective. And then Bharat, if I just follow-up, in terms of implications where you're positioning and you've moved the business just over the last few years to accommodate that view. I was just wondering in terms of the implication for you say onsite offshore delivery, if you can give us some view about where you are in that journey that would be interesting?

Bharat Desai

Yes, great question. So, I think as customers are -- what I have observed over the last many simply the three decades is, when there is new service, the customer is more comfortable doing that right around their office, so that means onsite. But as that service scales, the reality of the cost structure implication of that scaling service hits them and that's when they start adopting offshore. And if you take a view, today, there are what somewhere between 2 million and 3 million people offshore delivering IT, different clients of IT services, at a very attractive price point. My view is that, that number will actually go up overtime. These people will just be doing very different things from what they are doing today.

James Friedman

Okay, thank you for the insight.

Bharat Desai

Yes, in the short to medium term, you might see a bump in onsite utilization, but long-term to me the trends are crystal clear.

James Friedman

Thank you.

Nitin Rakesh

But if I may just add one more point to that, both on the first part of the question and the second part, I think if you see directionally what we are really doing is, continue to invest significantly in building capabilities around automation and modernization. And those are actually very well aligned with both the structural implication as well as the short-term issues that the client are facing with when it comes to adoption of these new technologies, where we believe our automation driven methodologies can be fairly powerful both for run and build IT.

Operator

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

Joseph Foresi

I wanted to build on that question, if I could, if the changes are I guess more structural, do you feel like you're investing enough for those changes? Obviously, we've talked about digital, and then how you would keep the margin profile I guess stable given the fact that maybe your investment plans need to increase?

Bharat Desai

Correct. Listen. We have always invested where we think investments are needed and the margins come out where they do. So, and our margins reflect all the investments we've made in automation and capability building et cetera. So, our focus very much right now is on building capability and building business momentum that would help, our customers evolve, and we are comfortable while it's hard to predict what that might do to margins in the short to medium term. I think, long-term the benefits of automation and the benefits of attractive price structures from our global delivery capability will give us good margins. In addition, we also believe -- I also believe that automation will be a margin driver because we'll be able to use, deliver at a much more attractive price point when the services are being delivered today, at a significantly reduced cost, and therefore protect or even increase margin for those services.

Joseph Foresi

Okay, and then, is discretionary spending being cut or is it being repurpose for digital? And can you talk about your competitive advantage there? And just remind me, I know you've mentioned at a couple of times, what percentage of revenue do you get from digital?

Bharat Desai

So, Nitin will take that.

Nitin Rakesh

So, 15.5% for the current quarter compared to 14.2% over the previous year same quarter. So, I think, the discretionary spending is really got two parts. Part of it is going towards digital technology adoption and that includes customer facing, frontend technologies as well as the whole analytics and allied engagement layer. I think that part while is not that badly impacted, in sectors it is -- specifically, in sectors like Banking and Healthcare. Where the bigger knock has really happened is in the traditional app depth part of the discretionary spending, where I think the impairment to decision cycle as well as overall budgets are really under pressure, given what's going on in the global microenvironment or in the industry specific trends.

Joseph Foresi

Okay. And then perhaps should you talk about some of the segments that were I guess negatively impacted this quarter, how do you see those playing out as we move into to 2017 and it's sounds like there was a pullback and spending, are you expecting that spending to comeback or you just shifting resources. I just want to get a sense of how you look at that in those particular segments in '17?

Nitin Rakesh

I think, it's too early to say how that will play out in 2017 given that we are still kind of working through with our customers on how they think their budgets are planning out. But I can give you a little more color on three or four of our bigger sectors. So, I think we are pleased with the recovery we are starting to see in our insurance sector, and I think it's pretty evenly spread across the sub domain.

We do believe, we will continue to recover that slowly but surely, and we are cautiously optimistic towards that definitely in the short to medium term. I think on the RLT segment also seems to have held up nicely, and I think there is continued tailwind on some of those sub-segments of that business unit for us, specifically on the retail side as I called out in my remarks.

On Healthcare, I think we had some tough year-over-year comps in the current quarter because we did recover that business late half of 2015. Right now, what's going on is a combination of two things; one the regulatory uncertainty around Affordable Care Act linked to the U.S. election cycle as well as certain uncertainties around M&A, and enrollment season is still on. So, I think most players are waiting and watching to see how that plays out. I think, we think any clarity on that will probably only emerge at some point once these factors have been addressed.

And as we speak, we know that there are -- there is a legal battle going on, on the M&A side, and obviously the election cycle will probably conclude towards end of the year. So, I think it's a little harder to call on Healthcare, but I think these are the two or three main factors that are kind of impacted that. But we are fairly committed because we still think there is a long term opportunity in the Healthcare segment, and we will come to invest across the value change.

And finally on Banking, I think there has been a fairly significant headwinded involvement. It only got, I would say little more complicated with some of the trends out of Europe and UK. We have a good pipeline, we are continuing to focus on closing that pipeline through the remainder of this year, and hopefully that will help us in 2017 as well, because we are basically doing what we think is the right prudent thing to do in terms of conversions.

Joseph Foresi

Great thank you.

Bharat Desai

I just want to add in a little bit, you'd asked about both capacity creation and our competitive positioning. And we have a team that tracks closely in this plethora of different options available to customers -- what the options are that are gaining the most attraction from customers and what the most popular options are, and we're both executing projects on that as well as building capability in those areas. And we're delivering that to our current clients, and we are focused on expanding that both to our current clients and with new clients.

Operator

Thank you. And our next question comes from the line of Jason Kupferberg of Jefferies. Your line is now open.

Amit Singh

Hi guys. This is Amit Singh for Jason. Just wanted to talk about and talk a little bit about the near-term expectations for your fourth quarter, your full year guidance indicates that the fourth quarter revenues will be down around 7% year-over-year. And then as I look at your headcount, it was down around 3ish percent year-over-year this quarter. So, are you expecting as you look beyond, looking to next few quarter the things to get worse before they start getting better?

Nitin Rakesh

Sure, I can talk a little bit about the fourth quarter. I think, we've used the consistent metric of visibility, our committed revenue to the lower end of the guidance, and at this point it's at 99% which is where it shouldn’t be at this time of the year. So, to stay consistent with our guidance and methodology, we basically adjusted our guidance and given that the volatility and the uncertainty continues to be there in some of our sectors that I just talk about. We have also kept the guidance range slightly broader than what we normally keep at this time of the year to just account for that volatility.

I think it's fair to say that the best we can do is to continue to focus on rewarding some of the deals that we thought we should have close in the second half of the year, and as that happens, we'll obviously get better visibility as to where we find the lands of the year. And again as I said, it's little too early to call out what might happen in 2017. I think, as I said, our focus really is to continue to convert pipelines, and as we get more clarity on budgets and macroeconomic trends for 2017, we will provide more color on the next quarter earnings call.

Amit Singh

All right. Great. And then now with the special dividend you have some debt on your balance sheet, in the near-term sort of capital deployment, is that going to be primarily focused on reducing that debt or you remain open to, if an accretive M&A opportunity from the long?

Anil Agrawal

I think it's fair to say that we'll obviously continue to optimally manage our cash flow, but we are fairly open to looking at all opportunities for investment including the tuck-in M&As.

Operator

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

Anil Doradla

My question was around digital, so when you, I think you guys said it was about 15.5% flattish from last year quarter and above 14.2% last year. So, when I look at the quarter-over-quarter growth and year-over-year growth not very strong. So, I think, Bharat, the question that I have is, I understand certain industry-wide dynamics are changing, but when you look at even some of the traditional IT peers, the additional part of their business is growing very robust. So I'm trying to understand, why is your digital revenue is not growing say 15% to 20% to 25%?

Bharat Desai

Anil, fair question. I think I talked a little bit about that in my comments. So, it's clearly a combination of industry dynamics. I think our percentage of revenue from Banking and Healthcare put together roughly two third, which is probably where the most headwinded involvement is right now. Also, I think there is no standard definition of digital, and we've talked about SMAC plus IOT, but that doesn’t include a lot of the digital modernization work we do. So I think as we -- and again, every peer of our uses their own definition as well. So, I think as we kind of get a little more comfortable with digital modernization and the trends there. We may look at defining this to cover some of the other areas of focus that we have been investing it behind.

Anil Doradla

Good. And building up on that, so if there are certain capabilities perhaps that you are looking, should we expect some activity on the M&A front over the next six to nine months?

Bharat Desai

It's hard to put a timeline on it. I think, we updated on the last couple of call as well. We have been open. We have looked at multiple deals, and we have a very clear idea of what segments those have to be. So, as and when we actually find something that meets all our criteria, we will update you.

Operator

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

Frank Atkins

Thanks so much. I just wanted to ask one more on the special dividend, what throughout the Boards to time it as it did, any color you can give us on kind of why now question versus M&A or reinvestment?

Bharat Desai

Well, this is something as I mentioned in my prepared remarks. The Board deliberated on carefully before making this decision. And the things we know are that we have a well talk out strategy, and believe our long term prospects are strong. The Company has strong free cash flow. Our company has had a record of returning cash to shareholders on a regular basis. And considering all these factors, our Board of Directors decided that returning cash to shareholders will be appropriate step at this time, factoring with a long-term needs and investment plans.

Frank Atkins

Okay, thank you. I wanted to ask about pricing, are you seeing any changes in pricing especially in some of those sectors like VFS and hosting?

Nitin Rakesh

I think pricing fairly stable. I don’t think we've actually called out for that and specifically also I think we have talked about the facts that we are using our automation capability to counter some of the headwinds that some of peers have talked about. And I think as Bharat mentioned earlier, we do believe that we have the ability to use that for as an additional operating leverage. So I think we feel comfortable with the pricing situation, we will continue to find ways to as it expand penetration and operating leverage.

Frank Atkins

And last one from me, could you talk a little bit about attrition was up a little bit, are you -- what are you doing to attract and keep the right people?

Zaineb Bokhari

Yes, so Frank as Nitin noted in his prepared remark, we are very focused on building that workforce with the kind of skills that are going to be relevant to fulfill our customers' needs in the future. Our focus is to ready the organization for the demand of that digital economy. We have introduced a program that we call Syntel X.0, which is a workforce transformation initiatives that we think is going to play a critical role in the overall talent management and retention at our organization, and the goal is to really empower employees to take an active role in their career development. And on our side, we are providing some clear roadmaps for career enhancement and working to strongly enforce and align incentives to learning and skills developments.

Operator

Thank you. And our next question comes from the line of Puneet Jain of JPMorgan. Your line is now open.

Puneet Jain

For given growth is below peer this year, what drives the confidence that your services capabilities resonate with clients as much as it did few years ago, and that you don’t need to aggressively ramp-up investments just in terms of higher growth?

Nitin Rakesh

Puneet, great question. Again, I think two things I would say that give us the comfort. Firstly, I think the adoption of some of the services that we've talked about the investment areas around automation and digital modernization. I think we are very pleased by the adoption of that with our existing client as well as the fact that it's actually been a great door-opener for us in acquiring new customers through the year. I think as those services continue to get broader and deeper, we do believe that we will continue to actually and get back on the growth path we need to.

Secondly, I think we've talked about that as well I think while conversions slower than we anticipated, our pipeline is continued to be fairly encouraging when it comes to these services as well. And in many cases, I think it's been broadened out by the green shoots we talked about as well as the fact that in markets like Europe, we continue to use our capabilities to open doors.

Puneet Jain

Right, and fourth quarter implied operating margins appear to be in mid-20s, so first it's that the right math, and second if it is could you talk about what will hurt much since in that quarter? And how should we think about normal level of margins, about the company going forward?

Nitin Rakesh

So, Puneet for the third quarter, we had a onetime exchange gain of 1.8 million as I mentioned in my prepared remarks, so that has put the operating margins slightly up. Having said that our operating margin would be in the mid-20s and then that should be fairly is what you should assume.

Puneet Jain

Got it. I thought prior range was around high 20s on normalized basis, so is mid-20s the new expectation for margins?

Nitin Rakesh

It may mid to high, I would say.

Bharat Desai

I think, the key thing to note is that because of our change in dollar balances the variability from SG&A will actually be much lower and that's something that will get normalize as we go through the next few quarters. So, I think 26% to 27% range as a guidance we've given, and I think that's kind of is the phase of fair range based on current visibility for the fourth quarter. And as we get into the next year, we will provide on that in a range for 2017 as well.

Operator

Thank you. And our next question comes from the line of Vincent Colicchio of Barrington. Your line is now open.

Vincent Colicchio

Bharat, I am considering the structural shift, I am just curious, why you guys haven't been more aggressive on acquisition side, seeing Europe over digital services, are you not seeing reasonable valuations, just if you can give us -- help us more with your thought process?

Bharat Desai

So I think we have -- it's a good question. And we have been creating capability internally, first of all. We have evaluated several candidates that would have expanded our reach or added capability that we didn’t have and brought in the little bit of scale. It ended up not working out, but we continue to be focused on A; building the capability ourselves. And B; looking opportunistically to see if there is a way to ramp that up faster to a combination.

Vincent Colicchio

And just one other question from me, win rates, did they hold steady in the quarter?

Bharat Desai

I think it's fair to say that decision cycles were not what we expected them to be, and very long rated and some of the decisions got pushed out. But having said that, I think we are still focused. We do have healthy pipeline across many of our verticals, and we will continue to focus on conversion.

Vincent Colicchio

Operator

Thank you. And our next question comes from the line of Josh Seide of Maxim Group. Your line is now open.

Josh Seide

Firstly, do you expect further declines and headcount due to natural attrition this year, or to just for the new expected demand trends overall?

Zaineb Bokhari

So Josh, we don’t actually guide for headcount in any way. I think, we have made a longer term statement that we think that the pace of which headcount is going to grow is going to trail the pace of which revenue growth.

Josh Seide

And then with the industry growth flowing in Syntel seeing top line drop year-over-year, has management given any thoughts and meaningfully increasing the target utilization?

Zaineb Bokhari

On that measure, we are driving towards higher utilization and leveraging the capability that we have invested in around automation. I think what we have said and what you can expect is that utilization is going to remain above trend relative to what the historical patterns have been.

Operator

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

Nitin Rakesh

Thank you, operator. I want to close for this call by thanking Syntel's employees for their effort. We have a clear strategy and a common goal to establish Syntel as a global leader in digital modernization. Through ongoing investments in our people, capabilities and culture, we are positioned to leverage our core competency and retest the automation to realize this goal. I look forward to updating you on our progress on the next call. Thank you.

Operator

This concludes Syntel's third quarter earnings call. A replay of today’s call will be available until October 27, 2016 by dialing 855-859-2056 and entering the pass code which is 97795475. Thank you.

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