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Syntel (NASDAQ:SYNT)

Q1 2012 Earnings Call

April 19, 2012 10:00 am ET

Executives

Zaineb Bokhari - Head of Investor Relations

Bharat Desai - Co-Founder and Executive Chairman

Prashant Ranade - Chief Executive Officer, President and Director

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

Rakesh Khanna - Chief Operating Officer

Analysts

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

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

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

Brian Kinstlinger - Sidoti & Company, LLC

Elizabeth Colley

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Puneet Jain - JP Morgan Chase & Co, Research Division

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

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

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

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Syntel's First Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, April 19, 2012. I will now turn the call over to Zaineb Bokhari, Syntel's Head of Investor Relations.

Zaineb Bokhari

Thank you, and good morning, everyone. Syntel's first 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 CEO and President; Arvind Godbole, Syntel's 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'll now turn the call over to Syntel's Chairman, Bharat Desai. Bharat?

Bharat Desai

Thank you, Zaineb. Good morning, everybody, and thank you for joining us today. We're pleased with our overall performance this quarter as growth in revenues of 17% from the prior year reflects the relative stability in the business environment and healthy demand for IT services.

Customers continue to look to us as a trusted partner as they navigate through market conditions. We're seeing this in our building pipeline, and it's coming through in the conversations that we have with our customers. Our deep engagement with our customers and our responsiveness and preparedness to help them with their business needs definitely set us apart from the pack. We expect outsourcing to continue to garner a rising share of IT budgets. Our customers are looking for innovative solutions to their business challenges, and we at Syntel continue to invest in building industry expertise, in the heavy-lifting technology skills, as well as the market-leading offerings in cloud, mobility and analytics.

Our DNA of innovation and our focus on helping our customers win in the marketplace will help Syntel outpace market growth in the current year and over the long term. Our commitment to the long-term success of our customers will ultimately drive our long-term success as a company.

I would now like to turn the call over to Prashant Ranade, Syntel's Chief Executive Officer and President, to provide further details. Prashant?

Prashant Ranade

Thank you, Bharat, and welcome, everyone. Syntel's first quarter revenues were $170.7 million, rising 17% year-over-year and declining 1% sequentially. We saw revenue growth across many of our verticals on a year-over-year basis, with health care and retail showing some of the strongest growth. We continue to strengthen some of our largest relationships and saw growth among clients 6 through 20 continue to outpace the company overall. On both a sequential and year-over-year basis, Arvind will provide further details on our revenue performance in his prepared remarks.

First quarter gross margins narrowed 27 basis points as compared to fourth quarter, coming in at 41.8%. The Indian rupee appreciations during the quarter impacted reported gross margins, as well as operating margins, and Arvind will elaborate on this later. We continued to add to our employee roles and maintain the focus on campus hiring. We grew net headcount by 175 in the first quarter, a rise of 1% sequentially and nearly 12% from a year ago. However, as a result of this, off-shore utilization for IT fell to 63% in Q1 from 64% in Q4 on a period-end basis, and to 63% from 67% on average. We expect these levels to improve in the coming quarters.

The company's SG&A expenses increased $2.3 million during Q1 as compared to a year ago, impacted by the appreciation in the rupee. On a sequential basis, the appreciation in rupee increased SG&A modestly, while currency-related balance sheet translations had a more significant impact. We are pleased with the level of operating expenses during the quarter as we maintain our cost discipline with a plan for further investments in the months to come.

As 2012 unfolds, we are keeping an eye on macroeconomic conditions and would still characterize the overall demand environment and new business pipeline for our services as stable and healthy. Client budgets have finalized in line with our expectations and we still hold the view that 2012 budgets are comparable to what we saw in the previous years. And as Bharat mentioned, offshoring will continue to garner a rising share as clients look to optimize their investment.

We continue to feel good about our business and the growth opportunities that lie ahead. We'll invest in our capabilities, build on our domain expertise and leverage our strengths to grow faster than the market in coming years and over the long term. The commitment our customers get from us will help us strengthen existing relationships and grow newer ones. We are seeing that with clients 6 through 20, and we expect to see that with some of our new clients we have signed in more recent quarters.

I want to conclude by thanking all employees of Syntel around the world for their continued dedication and hard work. I would now like to turn the call over to Arvind Godbole, Syntel's Chief Financial Officer, who will discuss Syntel's financial performance. Arvind?

Arvind S. Godbole

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

Syntel's first quarter revenue came in at $170.7 million, up 17% from the prior year period and down 1% sequentially. For the first quarter, Application Outsourcing accounted for 75% of revenue, KPO was 15%, e-Business represented 8% and TeamSourcing was 2%. From a vertical perspective, Financial Services contributed 55%, with Healthcare at 18%, Insurance, 13%; Retail, 4%; and Automotive, 4% and all other accounted for just over 5%. Vertical growth was led by Automotive and Insurance, which grew about 10% and 9%, respectively, on a sequential basis.

Syntel's customer concentration levels remain comparable to the previous quarter, although as Prashant noted, we saw growth in accounts outside our top 5 clients outpace the company overall. Our top 3 clients represented 52% of revenue, top 5 contributed 63%, and top 10 came in at 78%.

The fixed price component of our business was at 39% of the revenue for the quarter. With respect to Syntel's margin performance, our gross margin was 41.8% in the first quarter. This represented an increase versus 35% reported in the year-ago period and was marginally lower than 42.1% reported in the fourth quarter of 2011. Our direct cost were negatively impacted by 2.9% appreciation in the Indian rupee during the quarter, which lowered the gross margins by approximately 87 basis points. Aside from currency by business segment, gross margin for Application Outsourcing was 37.7%; KPO was 63.3%; e-Business was 38.9%; and TeamSourcing, 40.8%.

Moving down the income statement, our selling, general and administrative expenses were 15.8% in the first quarter of 2012 compared to 16.9% in the prior year period and 11.4% in the fourth quarter. On a dollar basis, SG&A was higher by $7.3 million sequentially. In fact, our SG&A from the balance sheet calculation adjustment this quarter was a $2 million loss as compared to the $4.6 million gain recorded in Q4 of 2011, resulting in a rise in SG&A of $6.6 million.

Appreciation in the Indian rupee added $0.7 [ph] million to SG&A. Aside from these factors, SG&A was only modestly higher quarter-over-quarter, reflecting excellent management and a continued focus on campus hiring. Other income during the quarter increased by $5.8 million from the prior quarter, coming in at $8.3 million. The company recorded $1 million gain on hedging versus $2.9 million loss in the fourth quarter. In addition, other income includes $1.1 million of interest income on income tax refunds received for earlier years.

Our tax refund the first quarter came in at 22.8% as compared to the 20.8% posted in Q4 of 2011. Net income for the first quarter was $40.7 million or $0.98 per diluted share compared to $25 million or $0.60 per diluted share in the prior year period and $44 million or $1.05 per diluted share in the previous quarter. The company's balance sheet at the end of the first quarter of 2012 remained extremely healthy. Our total cash and short-term investments on March 31, 2012, were at $334 million and DSO levels were at 59 days. Capital spending for the quarter was $4.5 million.

Syntel ended the first quarter with a total headcount of 19,659, of which 5,780 were assigned to KPO. The global headcount was 2,757 on-site and 15,661 offshore for a total of 18,418. Net additions to the global headcount were 175. Utilization levels at the end of the quarter were 95% on-site, 71% offshore and 75% globally. Our delivery mix at the quarter end was 19% on-site and 81% offshore. Voluntary attrition during the quarter was 15.1%, an improvement from the 16.4% reported last quarter. Syntel added 8 new customers in quarter 1, and 1 new Hunting License, which takes the total number of preferred partnerships to 110.

Looking forward, I would now like to provide you with the guidance for the year 2012. Based on our current visibility levels, Syntel expects the revenue to be in the range of $730 million to $755 million, and EPS to be in the range of $3.40 to $3.65 for the full year 2012. The company currently has 78% visibility to the low end of the revenue range, and our guidance is based on an exchange rate assumption of 51.80 rupees to the dollar. We expect net operating margins will be in the 19% to 21% range, and that our effective tax rate will be in the low 20s. CapEx for the year is expected to be in the range of $50 million to $55 million, including 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 Jason Kupferberg of Jefferies.

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

[indiscernible] correct here, because I know you changed the revenue guidance just slightly with an uptick there. It looked like you more or less rolled through the Q1 EPS beat into the new full-year EPS guidance, but I think I heard you say that operating margins are still going to be 19% to 21%? So I wanted to see if I missed a piece in there. Because if the revenues are barely changed, then operating margin guidance is not changed, I wanted to make sure I understand the leverage to EPS.

Zaineb Bokhari

So contributing to EPS, Jason, and we missed kind of the first part of your question, other income is also going to be a little bit higher this year. We now think it's going to be about $23 million to $25 million for the full year, so that's another component to add, contributing there.

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

Okay, but am I correct that operating margin guidance is unchanged for the year?

Zaineb Bokhari

Yes.

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

Okay. And your revenue guidance is just changed slightly? So I mean, I guess, what I'm saying is your operating margin in Q1 was well above that range, right? 26-ish percent, if I'm not mistaken?

Arvind S. Godbole

Yes, that's right.

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

So what -- I guess, what were the drivers there in Q1? And obviously the high operating margin was fueled by very high gross margin. Were there any one-time items or anything in there? Or what positively surprised you in Q1 on the margin front, because those numbers were great?

Prashant Ranade

No, there is no surprise in Q1 as compared to Q4. In fact, only item that is one-time or nonrecurring type is the interest income of $1.1 million, which we mentioned, which we received under tax -- income tax refunds received. Apart from that, I mean, we don't see any major change in the operating levels. Of course, the revenue will pick up as we move forward, which is -- will result in a higher EPS. But also, we have our usual costs, which are the increments which will be coming in the next quarter, and we expect the rupee to be at current level at 51.80. That's the basis on which we have guidance -- viewing the guidance currently.

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

Okay, that's helpful. And maybe you can just talk a little bit about what sort of wage hikes you expect for offshore in 2012? Obviously, some competitors out there have talked about some different strategies this year. What's Syntel's plan?

Prashant Ranade

Yes. In our guidance, we have baked in low double-digit increments for our employees, offshore employees, which will go into effect this month.

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

This month? Okay, okay, very helpful. And just finally, on pricing, have you seen flattish there in the guidance? Or has there been any incremental pricing pressure in any of the key verticals you serve, just given some of the ongoing volatility in the macro environment?

Zaineb Bokhari

Jason, in terms of pricing, what we're seeing right now is that things are fairly stable with a modest upward bias, and that's pretty consistent with what we said in the prior quarter as well.

Operator

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

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

Just a question here. We're hearing a lot of different things in the marketplace in terms of the environment and sort of what people are seeing. And so maybe you can help us understand some of the positives and negatives you've seen over the last 3 to 6 months, and sort of where Syntel might be positioned a little differently than other players? And why sort of -- your pipeline seems healthy and demand remains robust?

Zaineb Bokhari

So, Bhavan, thank you for the question. As far as the environment overall, we would still characterize demand for IT services as stable and healthy, and as Prashant mentioned, our budgets are finalized in line with what we were expecting. We think that the overall environment was fairly stable during the quarter, and we expect our business to follow the normal kind of seasonal patterns as we proceed through the year. We think that the things that differentiate us from the pack are the things that we've been talking about all along, which includes our really strong focus on customer service and being responsive to the needs of our clients. We definitely think that, that differentiates us from the pack. And then, just within the verticals that we serve, the offerings and the kind of deep domain expertise that we bring to bear also sets us apart. It's what our customers tell us that they appreciate about us the most.

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

Great. And then any commentary on sales cycles? And sort of -- are they sort of stable or do you see any improvement there?

Zaineb Bokhari

We haven't really seen a change there either. And as you know, across our different segments, the cycles are a little bit different, but we have not seen a change there.

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

And then one quick one if I can squeeze it in. The KPO margin ticked up quite nicely as you look at sort of the average through last year to this quarter, kind of in line with what you saw in Q4. Is that sort of something that you view as sustainable through the rest of the year?

Prashant Ranade

Our KPO margin from Q4 to Q1, as you said, it was only a slight drop based on rupee appreciation. KPO includes several clients in that segment. We are pleased to share with you that we added 2 clients in Q1. And our guidance that Arvind provided includes the KPO margin, and we do expect the impact of -- resized wages overall, but we believe we can manage that through our operational improvement focus.

Operator

Our next question comes from Joseph Foresi of Janney Montgomery Scott.

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

I just wanted to be sort of clear on the demand environment because revenues -- and they were up 17% in the first quarter, they did tick down sequentially. Was this just a slow start to the year as far as spending is concerned? Did you see any of that? And then again, just I know you talked about some seasonality, but should we expect the same pattern? Is it picking up now that we've gone through the first quarter? I'm just trying to reconcile those 2 with the raise in guidance.

Zaineb Bokhari

So Joe, thank you for your question. We think the year has started off actually on a strong note with the 17% -- almost 17.5% growth that we posted. If you compare that to what we had said in the February quarter, we were looking for full-year growth in the range of 12% to 17%. So as Prashant said, we think it positions us well to meet our goals for the full year. And I would not characterize things as a slow start necessarily, but probably more attributable to normal seasonal patterns that we see. So nothing to call out that would raise any kind of concern or imply that there's any kind of change happening beyond what we've seen typically.

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

Okay, that's very helpful. And then on the margins, I mean, the guidance would imply that they tick down as we go through the year. Can you just give us some idea of maybe what causes that decline? Is that just general hiring? Do you plan on accelerating hiring in the back half of the year? Or is it CapEx? Or maybe you can just give us some color as to why the range still remains sort of lower than what you exited the first quarter.

Zaineb Bokhari

So as you alluded to in your question, we definitely have a plan for investment within our company, and hiring is certainly part of that overall plan. And we both see hiring certainly in the back half of the year as well. So that certainly plays a role in the second quarter, as is typical. We do see increments go into effect for our offshore employees, as Prashant noted earlier. And then there will be some additional visa costs as well, so that will come to bear in Q2. So that's something to be aware of. But as the year progresses beyond that particular point, we would look for progressive improvement in the margins.

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

Okay. And then my last question, just looking at -- and I know you've talked about this in your initial remarks, could you just give us an update on the spending patterns in the healthcare and retail sectors and their relative strength? And maybe a little more color on accounts 6 through 20 and the initiatives there.

Prashant Ranade

As we shared with you, Joe, that our growth rate, which we are very pleased with, as expected for accounts 6 through 20 was higher than our average growth rate. And specifically for 2 sectors that you talked about, those represented substantial growth for us during last fiscal year. And based on what we are hearing from clients, as well as our pipeline, we remain positive on both those sectors. In healthcare, as we have shared with you earlier, we have invested in regulatory offerings related to ICD-10, and that was pushed out to 2014. But we still expect progressive clients, larger payers to be focused on using that additional time to get the work done. So we remain positive on both those sectors and continue to invest to take advantage of the opportunities that lie ahead.

Zaineb Bokhari

And just to add on there, Joe. In terms of what we saw in Q1, it's normal seasonal patterns, and nothing beyond that. Great growth opportunities for both those verticals.

Operator

Our next question comes from Brian Kinstlinger of Sidoti & Company.

Brian Kinstlinger - Sidoti & Company, LLC

I'm curious, the guidance that you had previously for the year was based on what foreign exchange rate?

Zaineb Bokhari

49.25.

Brian Kinstlinger - Sidoti & Company, LLC

So is it fair to say that since where we ended the quarter, and the significant weakness that happened since you reported last time, if that was the difference in what happened in the actual earnings results? Because there were no surprises, the only real surprise was that currency weakened from where we were when we were on the call last.

Arvind S. Godbole

No. Actually, there were other factors in seeing the better EPS for the full year. It does contribute. But as we know, nobody can predict where the rupee will be in the next 2 quarters. We continue to do the hedging, as in the past, but it is mainly coming from better visibility to the revenues, which we have seen based on the revised guidance and the Q1 number of revenue. We look forward to a much higher revenues in the balance 3 quarters, and that is supposed to give us a better EPS.

Brian Kinstlinger - Sidoti & Company, LLC

All right, I'm not looking backwards, but -- just I'm looking actually backwards this time, because the actual quarter we just ended, the upside to the quarter that seemed to be much higher and drive a lot of the upside in the earnings guidance, was that mainly driven by the difference in currency in -- that happened in February and March?

Prashant Ranade

No. Actually, as we shared with you, the rupee during the quarter appreciated, and Arvind, in his prepared remarks, has shared the impact both on a GM level, as well as other income level related to that. But rupee during the quarter actually appreciated.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. But then you're assuming a 3 point better than you did in your guidance before. What impact does that have year-over-year and to overall guidance, 3 more points of depreciation in the rupee?

Arvind S. Godbole

Well, this is based on the current rate of rupee that we highlight...

Brian Kinstlinger - Sidoti & Company, LLC

Right. Like the last guidance was at 49, right? And so now we're at almost 52. So that's a big difference, and so what did that contribute to the overall annual change in guidance?

Arvind S. Godbole

Yes. Actually, for the first quarter, the rupee average rate was 49.86.

Prashant Ranade

And so what happens is -- your question is very valid. What we tend to do is do the hedging that our -- Arvind and his team manages very well. And we look at upside opportunity on exchange rate to invest more in business based on the opportunities we see. At the same time, if it goes in a wrong direction, because nobody can really predict how the currency will move, and we are ensuring that by watching -- looking at timing of our investment, we are able to weather that fluctuation. But we do see stronger pipeline, that's why we have increased our revenue guidance. We see opportunities to continue to invest in various areas, which are meaningful to our clients and which we have identified.

Brian Kinstlinger - Sidoti & Company, LLC

In healthcare, you saw a pullback sequentially for the first time since the first quarter of 2009. It's still one of your strongest, and I expect it's going to be one of the strongest verticals for you. But what caused the pullback sequentially in revenues? And then do you expect to see a re-acceleration in 2Q or would it not be, maybe till 3Q?

Prashant Ranade

First of all, the Q1 was more timing of certain projects, nothing to be concerned about. As I said earlier, we expect healthcares to remain a strong contributor to our growth, to our success, not just in 2012 but beyond based on the investment that clients need to make and based on some of the regulatory changes that we expect. And only major change since our last call was pushout in ICD-9 to 10, but we still plan to go ahead and stay the course with our investments, and we believe that some of the larger payers will use that additional time to consider transformational changes in the area of analytics, fraud detection. And some of the payers will use the opportunity to improve connectivity with providers as well. So we don't look at, given that pushout, as causing any concerns related to our expectations, as well as plans for healthcare.

Brian Kinstlinger - Sidoti & Company, LLC

Right. Do you have any ICD-10 projects underway, that are actual in-remediation of coding? And from your comments, can I assume that you're on the payers' side much more than the provider's side?

Prashant Ranade

Yes. Our payer business, as we have shared with you, is larger than provider business. And we do currently have ICD-9, 10 projects, both for payers, as well as providers.

Brian Kinstlinger - Sidoti & Company, LLC

And on the salary increases, is that also -- do the KPO salaries increase as much or they increase slower, given the difference of maybe value-add or not?

Prashant Ranade

I think overall impact, including timing, is similar. We do look at different ways. It's like based on the employee requirement, the market conditions, it is structured differently in terms of how that increment is implemented. So there are differences, but overall impact will remain in the percentage range of low double digit, which I have shared with you.

Brian Kinstlinger - Sidoti & Company, LLC

And finally, on the CapEx side, are there any initiatives that you are going through right now that are set to come online and start running through the P&L? Anything that's major that make -- that causes a major step up in G&A?

Prashant Ranade

You're not seeing any very significant arising out of the CapEx.

Operator

Our next question comes from Mayank Tandon of Needham & Company.

Elizabeth Colley

This is Elizabeth Colley, I work with Mayank. Quick question. The economic challenges in the Eurozone, do you guys see a potential for increased demand for offshore outsourcing in that region for the rest of 2012?

Zaineb Bokhari

So it was a bit -- the macroeconomic conditions in Europe are challenging, as you noted. Our exposure to Europe at present is relatively small. It's south of 7% of the percentage of revenues. Over the long term, we still see opportunities in that geography and we think there is growth potential there. We are relatively small, but Europe also, as a geography, has lagged the U.S. in terms of outsourcing. So that's something that we think will work in our favor. And just in anticipation of that and looking out to the long term, we, as a company, are continuing to invest ahead of the demand that we see, and we are readying ourselves for a recovery.

Operator

Our next question comes from Edward Caso, Wells Fargo.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Just to ask the margin question one more time, given sort of the uncertainty a few months ago, did you sort of hold back on some of your investment spend rate in the first quarter that may have led to a slightly higher margin in Q1 than you had anticipated?

Zaineb Bokhari

Ed, I wouldn't characterize it as that. I mean, we have commented that we think the environment itself was favorable for our business. Fairly stable, and the demand future remains favorable in our view. So I wouldn't characterize us as holding back. That's not how we're running our business.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Okay. Can you talk a little bit about visas? Obviously, if they've been in the news of late, they'll probably get worse here as the Palmer case gets closer. Is that impacting your ability, one, to execute? And is it making your clients more sensitive possibly to moving forward on efforts?

Prashant Ranade

Good question, Ed. The first part, impacting our ability to execute, we are committed to ensuring that we deliver on the promise. So combination of our pipeline, as well as the current and known visa approval cycles, we actually stepped up the number of applications to ensure that we have visa-ready people and associates, people to be deployed to deliver on our promise. So that is first part of your question. As far as client concerns, clearly, today more so than let's say 12 months back, clients are asking questions about how we plan to address it and what I just shared with you are the areas we go over with them. We share specific data in terms of the number of visa-ready associates assigned to or available for their particular projects. So, yes, there are questions around it, but we are prepared and don't see that in any way hampering our ability to deliver on our promise.

Bharat Desai

Including, if I may add, Ed, exploring alternate strategies to ensure that we're delivering on the needs of our customers' businesses.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

So alternative strategy is now -- is that hiring in the U.S, or is that cloud? Or could you expand on that?

Bharat Desai

So it's a host of things. It's of course local hiring. It's higher offshore content. It's exploring proximity centers. It's -- and things like cloud mobility are opportunities for customers' business irrespective of the model.

Prashant Ranade

I just like to add, Ed, from a delivery perspective, the way we deal with that -- is by building intellectual property around domain accelerators and frameworks which enabled faster delivery to the end customer. So that's another way we mitigate that risk.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Last question. Your cash levels are building up here. In the past, you've done special dividends. Not that I'm a fan of that. But is there a thought to share repurchase to special dividend to increasing the regular dividend rate?

Bharat Desai

Our board does, every quarter, look at our cash position and the best use of that cash. So we will continue to do so and if we make any decisions, we'll obviously communicate those.

Operator

Our next question comes from Puneet Jain of JPMorgan.

Puneet Jain - JP Morgan Chase & Co, Research Division

Surprised by gross margins in the quarter given margins were essentially flat sequentially. Despite that you had on-site wage inflation, modest effects headwinds, and then utilization was also low. So what were the offset to all these headwinds in gross margins?

Prashant Ranade

It was actually better cost management and, of course, optimization exercise that we did, of course, not sacrificing the investment or the expenditures that are required to be spent.

Puneet Jain - JP Morgan Chase & Co, Research Division

And let me ask this. So did you increase on-site wages this year? And by how much?

Prashant Ranade

Yes. We did increase on-site wages in first quarter, January -- effective January. And it was low single digit.

Puneet Jain - JP Morgan Chase & Co, Research Division

Low single digit, okay. And from here on, should we expect -- and obviously, offshore wages will impact gross margins in Q2. Is there a way to size that, the magnitude of impact from offshore wage inflation on margins?

Zaineb Bokhari

So, Puneet, what we shared in terms of the -- any kind of sizing of that is the low double-digit comment that Arvind had made. And also, as you know, in Q2, when that comes into effect, there will be some pressure, cyclically speaking, within that quarter and we expect to see progressive improvement over the balance of the year.

Puneet Jain - JP Morgan Chase & Co, Research Division

Okay. And you mentioned that visa -- you are increasing the number of visa applications, remind us that visa costs hit in second quarter mostly?

Zaineb Bokhari

Yes, yes.

Puneet Jain - JP Morgan Chase & Co, Research Division

Okay. And how much that would be? Will that be materially higher than last year's?

Prashant Ranade

Yes. It will be slightly higher than -- as compared to last year.

Puneet Jain - JP Morgan Chase & Co, Research Division

Okay. And switching gears a little bit, obviously, the lower end of your revenue guidance is based on certain visibility numbers, which probably call for an increase. But can you explain what led you to increase that top end of the revenue guidance as well? Should we interpret that as a signal that maybe demand is better today than what it was 2 months ago?

Prashant Ranade

I think if you'll look at the relationship as to how we have guided of the range and low end of the visibility, it remains consistent with what we have done, coupled with what we are seeing in the marketplace, as well as our pipeline, as well as the budgets.

Puneet Jain - JP Morgan Chase & Co, Research Division

Okay. And last one from me. One of your larger peer talked about some of the regulation work being pushed out in financial sources, vertical. I know you talked about ICD-9 to 10 for healthcare. But did you also experience such delays in your BFS clients?

Zaineb Bokhari

So, Puneet, at a high level, this is not causing an impact on us. And we factored very little into our outlook because our guidance is based on visibility. However, with respect to financial services, however, we are preparing and investing for the future when these -- some of these changes do come down the pike. And Rakesh, do you want to elaborate on some of that?

Rakesh Khanna

Certainly. Puneet, we are -- we don't see a material change in demand in the risk and compliance area. And on the banking vertical, we continue to invest along the Dodd-Frank service offering. And to add to what Zaineb said, that, we believe, definitely is going to be something coming up in the future and we are gearing up very effectively to deal with that.

Puneet Jain - JP Morgan Chase & Co, Research Division

Okay. So you didn't assume too much of regulatory work in maybe the first half of the year in your initial guidance? Is -- does that what it mean?

Zaineb Bokhari

So we issue guidance for the full year, Puneet. And as of right now, we haven't seen an impact from those kind of crosscurrents that some of our peers may have.

Operator

Our next question comes from Manish Hemrajani of Oppenheimer.

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

You've seen some good growth in your top 6 through 20 customers. When you go down that list, how many do you think from that bucket could grow to be where your top 5 are at the moment? And over what time frame?

Prashant Ranade

See, as we have shared with you, we are very positive about our client list. They are leaders in their segment. They are large Fortune 1000 enterprises. So clearly in terms of available business, it represents a strong opportunity. And our method in terms of gaining share is no different than what we has made us successful in past: stay close to the clients, understand their needs, deliver on promise, come up with new service offerings that are meaningful to them, and through that, we expect to continue to grow our share in that 6 to 20 range. But because -- the last part of your question, because they are large enterprise clients, all of them represent a substantial opportunity in terms of revenues.

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

Okay. And then just digging a little bit deeper into the other income, are you assuming any hedging gains in the other income for the rest of the year given your expectation of the rupee?

Arvind S. Godbole

No. We do not factor any hedging gains or losses in the forecast.

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

Okay. And then what are your hedging levels currently and how far ahead are you hedged?

Arvind S. Godbole

Right now, we -- as of quarter end, we are $85 million hedged.

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

And you just hedge one quarter ahead? Is that right?

Arvind S. Godbole

Typically, we don't go beyond one quarter.

Operator

Our next question comes from Dave Koning of Baird.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

I know we've talked about this quite a bit on the rupee, but one way I guess to think of it is to go from 49.25 in your guidance up to 51.8. That suggests something like 200 basis points of operating margin roughly. And so by keeping your guidance intact at 19% to 21% on the margin line, does that imply that something else has gotten worse? Or should it actually go up with the rupee? I mean, I just want to make sure that there's not something that we might be missing that is incrementally hurting the business right now.

Arvind S. Godbole

Yes. I think the depreciation in the rupee will definitely help us to some extent. But apart from that, as we discussed already, we also have, in the balance 3 quarters, we also have increments coming up. We have visa costs. And as we continue to invest in more offerings and invest in resources, and also in our facilities, which are on track. So that is why there will be some drag on the margins as compared to Q1. But...

Prashant Ranade

And to add to what Arvind just said, we look at our ability as an organization to weather the fluctuations in certain ranges. So just like when rupee appreciates, we don't have considerable impact. We look at opportunity when it depreciates to invest in additional offerings, client-facing personnel, speeding up hiring, additional training because business excellence comes from people excellence. And there are many opportunities to take advantage of that. So that's how we look at it to remain consistent in building our capability to take advantage of the pipeline.

Arvind S. Godbole

I know our objective always has been just to insulate ourselves from the fluctuations -- wide fluctuations and that's how we look at it.

Operator

Our next question comes from Vincent Colicchio of Noble Financial.

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

Prashant, the e-Business segment was relatively weak. I know it's a very lumpy business. Should we see that pick up? Any comments would be helpful.

Prashant Ranade

Yes. See, e-Business, as we have shared with you, tends to have larger portion of development work. So over last 4, 5 quarters, as we have shared with you, we are happy to see the development portion as a percentage actually going down, and having mission-critical work and recurring revenues in that bucket. But having said that, the portion of development work of e-Business is higher than average. So it is more prone to quarter-to-quarter fluctuations. But overall, we don't see any issues because those are well-differentiated offerings that provide opportunities for us to improve the value that we are -- increase the value which we are able to provide to our clients.

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

Okay. And then on the KPO side, is there any color you could provide in terms of -- aside from your biggest client there, is there any increase in traction with some of your smaller clients?

Prashant Ranade

Right. As I have shared with you, we have added 2 clients to our KPO client list. So we are pleased with those additions. But as you know, in addition to the cycle times being longer, the time to -- it takes longer time to actually reach higher level of engagements. But clearly, not just potential incomes of revenues, the ability to have differentiated offerings built around the capability for these and other clients is useful. As far as our largest joint venture partner, our relationship remains strong and stable and we continue to explore opportunities to provide increased and enhanced value, and we'll stay the course on that.

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

And then one last question. I know on the acquisition side, you guys have gotten a little bit more serious about looking at something, a potential niche acquisition. Is there any update there in terms of pipeline or anything like that?

Prashant Ranade

Yes. As we have shared with you, we continue to evaluate areas that would help us provide either a capability or a presence advantage. We are not looking for acquisition just to change the scale. So it'll be niche purposeful application and we are pleased with our team that has been formed to evaluate the opportunities, and we continue to surface and discuss those opportunities with our board for possible decision on that. But again, actual event, there is no ETA on that. It is like falling in love. You cannot predict when it is going to happen, but we are pleased with the process we have in place, and I'm -- all of us are encouraged with the fact that it will yield the right expected results.

Operator

This concludes Syntel's first quarter earnings call. A replay of today's call will be available until April 26, 2012 by dialing (855) 859-2056 and entering the passcode, which is 72301028. Thank you.

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