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Syntel (NASDAQ:SYNT)

Q2 2012 Earnings Call

July 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 principal Accounting Officer

Rakesh Khanna - Chief Operating Officer

Analysts

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

Puneet Jain - JP Morgan Chase & Co, Research Division

Brian Kinstlinger - Sidoti & Company, LLC

Rahul Bhangare

Mayank Tandon - Needham & Company, LLC, Research Division

Amit Singh - Jefferies & Company, Inc., Research Division

Gregory W. Halter - LJR Great Lakes Review

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

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

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Syntel Second Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, July 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 second 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 the call, 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. In an uncertain business environment, our team has executed very well and made solid progress on our strategic imperatives. The current environment, along with the microeconomic headwinds, presents us with opportunities to help clients drive efficiencies in their businesses. We're engaged in active dialogue with clients across a range of service offerings. While decision cycles have lengthened, I'm pleased with the size, quality and breadth of our pipeline. New technologies like cloud, mobility and analytics are top of mind for clients. We are engaged in active discussions in helping them leverage the power of these technologies to gain share and better serve their customers. We continue to invest in enhancing our capabilities to help evolve and grow our clients' businesses. Our value proposition continues to resonate well with clients as we help them respond to business demands. This creates a great opportunity to engage and partner closely with our clients. As we grow, our goal is to maintain our customer focus and innovation DNA and to help our clients win in the marketplace.

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 second quarter revenues were $179 million, rising 5% sequentially and 14% year-over-year. We saw revenue growth across our key verticals and services. Macroeconomic conditions introduced more uncertainty during the quarter. This impacted revenue growth as clients were incrementally more cautious than in prior periods. However, as Bharat noted, we see many opportunities for growth ahead. Because of the progression of revenue, we have reported year-to-date in our review of our backlog and pipeline, we have tightened the guidance range for our 2012 revenue outlook. Arvind will provide further details on our revenue performance in his prepared remarks.

Second quarter gross margin narrowed by 58 basis points as we -- as compared to the first quarter coming in at 41.3%, reflecting the impact of offshore wage increases and Visa costs as we had shared with you last quarter. The Indian rupee depreciation during the quarter benefited reported gross margins as well as operating margins. We continue to add to our employee roles and maintain the focus on campus hiring.

We grew net headcount by 401 in the second quarter a rise of 2% sequentially and 11% from 1 year ago. Offshore utilization for IP rose to 66% in Q2 from 63% in Q1 on a period-end basis and to 65% from 63% on average. We were able to achieve this while maintaining a focus on campus hiring. We'll continue with our campus hiring plans tied to demand expectations and realization. The company's SG&A expenses declined $8.9 million during Q2 as compared to 1 year ago impacted by the depreciation in rupee. On a sequential basis, the depreciation in rupee lowered SG&A modestly while currency-related balance sheet translations had more significant impact. We are pleased with the level of operating margin in the second quarter but would not consider this level as sustainable, given the volatility in the rupee and our plans for investments in our business over the balance of the year.

As 2012 unfolds, we see continued uncertainty in the global macro economy and while this has pushed out cycle times, it has also created new opportunities for us. Clients are mindful of how they invest their IT dollars with an eye on the value they derive from their investment. This plays to our strength, and we expect our addressable market continuing to outpace IT spending overall for foreseeable future. We continue to feel good about our business and our near-term as well as long-term prospects. We are confident in our ability to grow faster than the market and will invest in our capabilities to do so. I want to conclude by thanking the 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 second quarter revenue came in at $179 million, up 14% from the prior year period and 5% sequentially. For the second quarter, Applications Outsourcing accounted for 75% of the revenue, KPO was 15%, e-Business represented 8% and TeamSourcing was 2%. From a vertical perspective, Financial Services contributed 55%; with Health Care at 18%; Insurance, 14%; Retail, 4%; Automotive, 4%; and all of these accounted for the balance 5%. Vertical growth was led by insurance and retail, which grew about 12% and 8%, respectively on a sequential basis. Syntel's customer concentration levels remain comparable to the previous quarter. Our top 3 clients represented 52% of the revenue, top 5 contributed 64%, 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 41.3% in the second quarter. This represented an increase versus 36.2% reported in the year-ago period and was marginally lower than 41.8% reported in the first quarter of 2012. Our direct costs were favorably impacted by 10.6% depreciation in the Indian rupee based on the U.S. dollar during the quarter, which benefited gross margins by approximately 319 basis points. By business segment, gross margins for Applications Outsourcing was 38%; KPO was 60.6%; e-Business was 36%; and TeamSourcing, 39.7%.

Moving down the income statement, our Selling, General and Administrative expenses were 10.6% in the second quarter of 2012 compared to 17.7% in the prior year period and 15.8% in the first quarter. On a dollar basis, SG&A was lower by $8 million sequentially. The impact on SG&A from the balance sheet calculation adjustment this quarter was $5.3 million gain as compared to a $2 million loss recorded in quarter one of 2012. Appreciation of the rupee reduced SG&A by $2 million. Aside from these factors, SG&A was only modestly higher quarter-over-quarter, reflecting modest increases in underlying expenses of a continued focus on cost discipline.

Other income during the quarter declined by $5.8 million from the prior quarter, coming in at $2.5 million. The company recorded $4.4 million loss on hedging versus a $1 million gain in the first quarter. Our tax rate for the second quarter came in at 34.4% as compared to the 22.8% posted in Q1. Net income for the second quarter was $43.4 million or $1.04 per diluted share compared to $27.6 million or $0.66 per diluted share in the previous year and $40.7 million or $0.98 per diluted share in the previous quarter.

The company's balance sheet at the end of the second quarter of 2012 remains extremely healthy. Our total cash and short-term investments on June 30, 2012, were $354.9 million and DSO levels were down at 54 days. Capital spending for the quarter was $6.7 million. Syntel ended the second quarter with a total headcount of 20,060, out of which 6,006 were assigned to KPO. Our available headcount was 2,911 on-site and 15,894 offshore for a total of 18,805. Net additions to the global headcount were 401. Utilization levels at the end of the quarter were 95% on-site, 73% offshore and 77% globally. Our delivery mix at the quarter end was 19% on-site and 81% offshore. Voluntary attrition during the quarter was 17% versus 15.1% reported last quarter. Syntel added 4 new customers in quarter two, and one new Hunting License, which takes the total number of preferred partnerships to 111.

Looking forward, I would now like to provide you with the guidance for the year 2012. Based on our current visibility levels, Syntel expects revenue to be in the range of $730 million to $740 million, and EPS to be in the range of $3.90 to $4 for the full year 2012. The company currently has 91% visibility to the lower end of the revenue range and our guidance is based on an exchange rate assumption of roughly INR 55 to the U.S. dollar. We expect that operating margins will be in the 25% to 27% range, and that our effective tax rate will be in the low to mid-20s. CapEx for the year is expected to be in the range of $40 million to $50 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 the line of Joseph Foresi from Janney Montgomery Scott.

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

The first question here is just on the margin side of things. If you look back at 2009 when the economy slowed, I think we also got a positive impact from currency, but the utilization rate started to increase and really protected earnings. What is your approach to the margins, with the slowdown here in utilization? Maybe you could give us your thoughts on what you're expecting from a margin perspective for the full year?

Prashant Ranade

Yes, as we have said in our prepared remarks, we look at the current environment with the advantage of depreciating rupee as an opportunity to invest in our business. So for the rest of the year, we expect to run at or below our current utilization level as opposed to driving them further, which we acknowledge we do have opportunity to do and that will allow us to take advantage of any opportunities we see in the marketplace, and those investments will fall in multiple areas: people, which is mainly campus-based hiring; our new offerings; as well as our infrastructure.

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

Okay. And then just looking at the revenue, you brought it down on the top line, obviously knowing it, because of the delay in decision cycles. What were you expecting to come through that? It's potentially not coming through now, where are you seeing the softness on the margin and what would cause you to bring that down on the top line?

Zaineb Bokhari

Hi Joe, this is Zaineb. Our guidance is visibility based and this combined with our overall view with what's going on in the macro environment. Our review of our backlog and pipeline is what led us to tighten this revenue guidance range. If I look across our business, while it's not reflected in the q-over-q growth rate within financial services, we think clients are a little bit more cautious than they were earlier in the year within healthcare still a strong growth driver for us over the long term that we saw some uncertainty around policy finalization issues and which we think will clear up as of the year progresses. And so those were some of the headwinds that we saw. But we do typically, as the year progresses, tighten our overall range and that's what we did in this quarter as well.

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

Okay. Last question from my side. Any commentary you can give us on the competition for deals? Are you seeing any impact approaching any potential delays beyond what you might see, in other words could we expect, potential cancellations?

Zaineb Bokhari

So as we noted, Joe, the cycle times have expanded. We don't think these opportunities or the business has gone away, it's just been pushed out. And as far as the overall competitive environment, it's pretty comparable to what it has been. I wouldn't call it anything outrageous that we're seeing or unusual that we're seeing. As far as pricing is concerned, again, we would characterize the pricing environment as being fairly stable.

Operator

Our next question comes from the line of Puneet Jain from JPMorgan.

Puneet Jain - JP Morgan Chase & Co, Research Division

So going back -- following up on Joe's questions on revenue guidance. So the guidance implies 4% to 6% average sequential growth in the second half, and given your backlog and macro uncertainty, what drives the confidence that you'll not have to lower it again?

Prashant Ranade

Okay, so first of all, we don't do this as lowering, Puneet. We are very pleased with our performance. We had 5% sequential growth and we are -- we got our arms around things that we can control. So we feel good about the business. And as Zaineb mentioned, we begin with visibility-based guidance on lower end and tighten the range as year progresses. Now what it changed as you rightly pointed out from previous years, is Q2 and Q3 are typically stronger and Q4 historically has been flat, what we expect with somewhat back-end loaded budgets. Because as we shared with you in February, the budgets were finalized, and now with some delays, they're going to be back-end loaded. So we expect Q3 to be sequentially stronger like we have seen in past and Q4 to be stronger as well compared to historic trends. So that's what we expect. So that's what gives us confidence on the guidance range we have provided. But again, to close, we feel good about our business. We feel good about how we have executed as well as our 5% sequential growth, which is strong.

Zaineb Bokhari

And just to be -- Puneet, just to be very clear in terms of helping you guys model, et cetera, we've historically seen Q4 be flat with respect to Q3. So keying off Prashant's comments, we would expect sequential growth in Q4 over Q3.

Puneet Jain - JP Morgan Chase & Co, Research Division

Right, right. Now that's good color. And one of your larger peers talked about demand improving throughout the quarter, resulting in better demand environment in the month of June than overall second quarter. So did you also experience that and that probably is driving expectations of higher, better sequential growth in September than what it was in June?

Arvind S. Godbole

We can't comment on comments made by others, but it is fair to say that when we have sequential quarter-over-quarter growth, if you look at individual months, which we do not breakdown, it is sequentially, we see a growth pattern. So we did see that from April through June.

Puneet Jain - JP Morgan Chase & Co, Research Division

Okay, great. And last one from me, given our margins have been so volatile from largely due to FX, have you thought about revisiting your hedging strategy to reduce some of that volatility?

Arvind S. Godbole

No, we have been following consistent policy for hedging and we do the hedging whenever we feel appropriate. And we'll continue with the same policy, we do not see any reason to change the current policy. And currently, we now have the -- most of the third quarter at current rate or around that trend. We will not make any changes in policy.

Operator

And our next question comes from the line of Brian Kinstlinger from Sidoti & Company.

Brian Kinstlinger - Sidoti & Company, LLC

Arvind, I missed -- did you give operating margin guidance for the year?

Zaineb Bokhari

Sure, Brian, that was 25% to 27% for 2012.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. I guess one of the things I'm interested in is the answer you guys gave on utilization. I think what you said was offshore utilization was 66%. I think that was IT you were talking about. And so in light of revenue growth slowing a little bit, assuming next year doesn't get better, why would you think that it'd be appropriate to accelerate hiring, which is what I think you meant by utilization coming down?

Arvind S. Godbole

Yes, actually, keeping the utilization flat to potentially allowing it to go down was the comment I made, which was based on what we see in the marketplace. We do see opportunities around various specific offerings that we now come up with that Bharat alluded to in his prepared remarks and Rakesh can elaborate later. But the important part is being prepared to take advantage of the market conditions to be able to take advantage of it. That is the reason we feel the benefit of depreciation is what we -- the depreciated rupee rather is what we'll invest in and not allow utilization to go substantially higher because we do see opportunities in the marketplace.

Brian Kinstlinger - Sidoti & Company, LLC

And I get that, that there's opportunities. But isn't 34% of your staff being not utilized, give you flexibility for the next year to address whatever comes? Or 66% -- I mean, it seems low, given 12% to 14% revenue growth already. That's what I'm -- I guess that's why I'm curious.

Arvind S. Godbole

Yes, 66% includes that campus hiring that we have included, so that does have some gestation period in terms of the four-legged fully trained and billable, so it includes that. And as we shared with you in Q1 call, this year, our hiring is campus based. So that is the reason for that, Brian.

Bharat Desai

Okay. And it also factors in -- this is Bharat, the investments we're making in the various practices that we find exciting: Cloud; Mobility; Analytics. And the buildout of competencies creating IT in these areas that help our customers be more successful. So all that's baked into the utilization number.

Brian Kinstlinger - Sidoti & Company, LLC

Great. If I look at healthcare, last quarter was the first quarter -- 2 quarters ago, the March quarter is the first one, it didn't grow in awhile sequentially, and we reaccelerated here to grow again. I guess, take us to what's going on there. I think last quarter was just a couple of projects ended. Are you starting to see more demand for new projects on the regulatory side? Is it more -- just maybe take us through what you're seeing there, and you expect that to continue to reaccelerate?

Zaineb Bokhari

Brian...

Rakesh Khanna

Sorry, can I take that question, Zaineb?

Zaineb Bokhari

Sure, Rakesh, please go ahead.

Rakesh Khanna

Right. Yes, thank you. Brian, we are seeing a higher spend in the regulatory areas in our key verticals like banking, healthcare and insurance. And we're really gearing up by investing in the regulatory areas around ICD-10, Dodd-Frank and Solvency II. And like Bharat alluded earlier, we're also using this opportunity to invest ahead of time in agile and we've seen increased spend to more open systems like Java and Open Source, and we're building further intellectual property. And Syntel accelerators to help our customers realize faster time to market.

Brian Kinstlinger - Sidoti & Company, LLC

And so would you say that pipeline and healthcare is stronger than your other verticals?

Prashant Ranade

On the healthcare side, Brian, what we have seen is we do believe that it is not a question of if it is a question of when. Around Affordable Care Act, ICD-9 to 10, MLR ratios and star rating, there are several opportunities. And as we have shared with you over the last 6 to 7 quarters, we have been investing in this, we'll continue to invest in it. There are a couple of factors in reference to your question that has caused some slowdown related to push out of ICD-9 to 10 to 2014 as well as some uncertainty around legal as well as political issues surrounding Affordable Care Act. One has cleared itself, the legal one, and we expect the political issue to be cleared up in the next 6 to 8 months. So again, to sum it up, it is not a question of if, it is when. And we feel we are well prepared to take advantage of the growth potential in healthcare Life Sciences, and we have realized that over the last 6 quarters.

Brian Kinstlinger - Sidoti & Company, LLC

Great. The last question I have is GM has talked about bringing some of its offshore outsourcing back to the U.S., namely IT. Is this material to your business?

Prashant Ranade

No, we don't -- I mean, from time to time, each customer will have their strategy in terms of how they want to operate. But globalization is irreversible trend and we don't see that as something that will impact or change throughout the industry. So we see globalization and Global Delivery Model as a continuation of what we have seen with some anomalies, like you mentioned about GM, related to a specific client and specific strategy and specific needs.

Brian Kinstlinger - Sidoti & Company, LLC

Are they a top 10 customer? Sorry, Bharat, sorry.

Prashant Ranade

Is GM a top 10 customer? His question is.

Bharat Desai

We share the names of our top 2 customers, so I can't comment on that.

Prashant Ranade

What I was saying was we see outsourcing and globalization to be compelling mega trends and we continue to believe in that.

Operator

And our next question comes from the line of Bhavan Suri from William Blair & Company.

Rahul Bhangare

It's Rahul Bhangare I'm in for Bhavan. The 4 new questions you had mentioned, are any of those new KPO customers?

Prashant Ranade

In Q2, we did not have a new KPO customer.

Rahul Bhangare

Okay, and I also thought I heard you say that there was a margin -- sequential margin decline in the KPO business, do you know what was driving that?

Prashant Ranade

Yes, actually on the KPO, there are 2 areas. We did add employees so our utilization there, intentionally, we allowed it to drop to prepare for potential growth and we did have transition revenues of $1.8 million in our KPO business. And as you know from past, admission revenues have no margins, that portion of it. So that was predominantly the impact on KPO margins.

Rahul Bhangare

For those trends -- those revenues, the transition revenues related to the same project as last year when you recognized those transition revenues?

Prashant Ranade

No, these are typically the newer projects. And transition revenues, what happens is over a period of time, they go down when the work is transferred to offshore. And when it is transferred offshore, revenues do decline and margins do go up. Only difference from past to now is the amount of work that is done during transition time on-site is higher. That's the reason for that $1.8 million.

Rahul Bhangare

Okay. And then just switching gears to your newer service offerings, the Cloud, Mobility, et cetera, is there any way to quantify that maybe relatively as a percentage of current revenue and maybe talk about how fast that business is growing relative to the core business?

Prashant Ranade

Actually, Cloud, Mobility, Analytics, Open Source, Migration, all these areas, and I will, in a minute, request Rakesh to comment little more about these offerings. But in all 4 of these areas, the revenue today is not substantial. But what happens here is 2 things. Number one, it helps our clients in transforming themselves as they are looking at different business model and different ways to implement their IT architectures. And second area, which helps is these differentiated offerings allows us to improve the stickiness and client connect, which in turn allows us to win their recurring business, which is our objective.

Rakesh Khanna

For some, I'd just like to add to the previous question that some of these new areas of what happens is they are broken down into smaller milestones because there's a lot of innovation, a lot of change around mobility, around business intelligence, around analytics. And the trend is to break the delivery into smaller pieces, see the outcomes and then fund the next modules. And again, with our unique development methodology and agile, we believe we have a very strong calling card in the marketplace.

Operator

And our next question comes from the line of Mayank Tandon from Needham & Company.

Mayank Tandon - Needham & Company, LLC, Research Division

Just on the demand team, Prashant, could you talk about any impact from the upcoming elections on customers' hesitancy to maybe pull the trigger on any offshoring initiatives?

Prashant Ranade

I think, overall, it is more what we characterized in our prepared remarks of all 4 offers as uncertainty related. It is clarity around something. So as far as election itself is concerned, the impact is more on a regulatory side. The bigger impact is just macroeconomic uncertainty in Europe overhand which has caused the delay, as we shared with you, and the regulatory areas are the ones specific to health care, as I shared with you earlier, which will have clarity after the election.

Mayank Tandon - Needham & Company, LLC, Research Division

Got it. And obviously it's been out there for some time, but there seems to be concerns around getting enough visa, the rejection rates have gone up. Maybe just talk a little bit about your experience through the quarter as you try to bring on people on Visas?

Prashant Ranade

Yes, compared to last year when this issue was really at a different level than today, once we knew the rules of the game and what is required, our team has done a good job of ensuring that we have prepared ourselves and we feel that we have adequate number of Visa-ready associates to take advantage of our planned business as well as any upside potential that we see.

Mayank Tandon - Needham & Company, LLC, Research Division

Okay. And I guess this is maybe for Arvind, but could you please -- maybe you already did this, but quantify the impact of both the Visa cost and wage inflation on margins?

Zaineb Bokhari

So Mayank, the collective impact of our Visa--related costs and the increments on operating margins was approximately 460 basis points.

Mayank Tandon - Needham & Company, LLC, Research Division

Okay. And the currency impact you guys talked about. So we would not expect if the rupee where to stay where it is, we would not expect to see any incremental impact related to that balance sheet gain that you saw in 2Q? That's fair, right?

Prashant Ranade

That's correct.

Mayank Tandon - Needham & Company, LLC, Research Division

And the final question for me. I know you guys don't disclose specific pricing, but could you give us a sense of the breakdown of growth between volume growth and just maybe the percentage movement in pricing?

Arvind S. Godbole

Pricing, as we discussed in last quarter, is I would characterize it more as stable. So predominant portion of the growth has come from just the real growth as opposed to currency-related growth.

Operator

And our next question comes from the line of Jason Kupferberg from Jefferies.

Amit Singh - Jefferies & Company, Inc., Research Division

This is Amit Singh for Jason. Just a quick question regarding one thing that was already asked earlier. The last few quarters, you definitely benefited significantly from FX. Well, just trying to get a more sense of -- I mean, on your hedging strategies then you hedge to the next quarter completely hedged and I mean, considering the benefit that you've gotten the operating margin, is it safe to assume that if in the future the rupee were to turn the other way, we should see significant decline in margins? And just to add on that, is there a quantitative measure that we can use to get a sense of how margins get affected for every percentage change in the dollar-rupee exchange rate?

Arvind S. Godbole

Yes, to answer the last question first, every 1% change in the rupee versus dollar has a 14 to 15 point impact on the margin, operating margins. Second thing is that whether we will change the hedging strategy. No, as I mentioned, we will continue to follow what we have been doing. Third is if the rupee appreciates from this level, with a little impact, the gross margin and operating margin? Yes, it will, but it depends on how we hedge our positions and we can -- we always have an opportunity to protect us from the appreciation from this level. As far as Q3 is concerned, we already hedged most of the amount that we require for Q3, and we typically follow a policy of hedging not beyond 6 months. Does that answer all the questions?

Amit Singh - Jefferies & Company, Inc., Research Division

Yes, perfect. Just on the second thing, you guys have the long-term 20% top line growth vision. And now, I mean, industry NASSCOM has already -- NASSCOM is expecting the industry to grow at 11% to 14% and some of your peers have come out and said that, or sort of hinted that the industry might not grow at that level. So when we look at a couple of years out, do you still believe that you can achieve the 20% top line growth?

Zaineb Bokhari

So Amit, as you're referring to our 2020 vision, which is a framework that we look at ourselves over the long term, it refers to our ability to grow at or above market growth levels that are set by our software and services trade body. And looking at the people resources, the technology investments that we've made and plan to continue to make, we still feel that we should be able to grow in line with our 2020 vision at or above market growth rate.

Prashant Ranade

Let me clear your point. What is going to happen is with that 2020 vision, it is a framework we use to build our strategy and operating plans. So clearly, if the market is substantially higher than that, we would expect to go above the market rate. When market is lower than that, we expect to go over -- to be higher than the market rate, when it could be below 20%. But overall, we believe or based on what we shared in the prepared remarks, in the segment we are in, our position with the right clients, the right offering and right team, we are well positioned over the long term to take advantage of and execute on that 2020 vision.

Amit Singh - Jefferies & Company, Inc., Research Division

Perfect. And just one last question for me. Could you give a little more color on the growth outside of your top 5 clients? I mean, how did they grow versus the corporate average?

Zaineb Bokhari

So we did see some nice growth from some of our largest relationships. Certainly, our top 5 clients did grow very well for us. We also talk about another bucket, which is our 6 through 20 bucket and on a year-to-year basis, the growth there did outpace the company growth overall by a wide margin. On a q-over-q basis, it did not however, I would attribute that more to the top 5 relationships growing a bit faster.

Operator

And our next question comes from the line of Greg Halter from the Great Lakes Review.

Gregory W. Halter - LJR Great Lakes Review

I don't know if this number was provided, but your cash flow from operations, either 6 months or for the 3-month period?

Arvind S. Godbole

I didn't get the question. Can you repeat the question, please?

Gregory W. Halter - LJR Great Lakes Review

Sure. I was looking for the cash flow from operations figure, either for the 3-month or 6-month period.

Arvind S. Godbole

Okay, got it. For the quarter, the cash flow was $51.1 million, and lifting in CapEx was $6.7 million. Other investments, $24.4 million, and financing was minus $2.5 million, and exchange difference was $3 million. So net cash flow for the quarter is $20.5 million. Last quarter was $13.9 million, a comparable number.

Gregory W. Halter - LJR Great Lakes Review

Okay, great. And obviously, your cash continues to grow. I think it's up about $20 million sequentially. Just wonder if you could elaborate on cash uses and the rates that may be being earned on that cash, which I think is mostly held out of the country in India?

Prashant Ranade

Correct. Arvind will comment on the rates of -- at the investment rate and then I'll make a comment on the use of cash. Arvind?

Arvind S. Godbole

Yes. We earned 7.69% of the yield on the investments this quarter as compared to 7.02% last quarter, and trailing 12 months is 6.95% as of the end of this quarter.

Zaineb Bokhari

And then just on the split, it's approximately 90-10 with the majority of it overseas.

Bharat Desai

Yes. And as far as the use of cash is concerned, we deployed cash to build out our infrastructure for future growth and investments in our business. From time to time, our board also looks at our cash position and determines if we have excess cash. And in the past, when we've done that, we have returned it to shareholders. So our board does that every quarter.

Operator

And our next question comes from the line of Manish Hemrajani from Oppenheimer.

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

What was the level of the HR IT buildout of the quarter?

Zaineb Bokhari

The increments that we offer to our offshore employees on average was in the low double digits.

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

So it was double digits or so. And on the pricing side, are you seeing any pricing pressure or has that been very stable?

Arvind S. Godbole

Pricing has been stable, unlike in any environment, regardless of what kind of macroeconomic conditions you have. Every client will have some specific areas, but in general, pricing is stable today.

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

And then on the CapEx front, you talked about CapEx of about $50 million to $55 million for the year. This quarter, you were a bit below that run rate. So how should we expect that CapEx to be spread out over the rest of the year?

Zaineb Bokhari

So, Manish, we actually tightened that outlook as well. We talked about CapEx of $40 million to $50 million. And some of the things that we are looking forward to as we continue to invest in our business is we are bringing on additional peak capacity. You'll see that in Q4 and opening of Global Development Center that will also come online in Q4. So we've adjusted the range, but we definitely continue to invest in our business and our infrastructure.

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

And on healthcare, when would you expect to start seeing ICD-10 revenue start to flow through?

Prashant Ranade

Well, what we see with the push out of ICD-10 through 2014, it depends on a specific client. I mean, we do already have projects on the books that we are executing, not substantial revenue as I indicated. And typically, it depends on the client. More forward-looking client will look at this additional time to implement more transformational project to ensure they are better prepared, not only to just comply with the requirement, but to take advantage of it. Some small to medium-sized clients will look at either public cloud offerings and SaaS models to implement what they are doing and some will wait and see what happens typically in any industry. But I would say some of the progressive clients would look at this additional time to implement transformational projects so they are better prepared, not just to comply, but improve their business.

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

So would you expect to start to see revenue approaching from that this year?

Prashant Ranade

As I shared with you, we are already seeing revenues related to that. They are not significant and we haven't built in significant revenues in our guidance, but that opportunity in terms of doing POCs or smaller projects to ensure that they are not doing a big bang approach, but doing POC would allow them to be better prepared to implement these projects.

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

Got it. And one last one for me. We've been hearing a lot about contract signing declining with [indiscernible] seeing the strongest growth. Is that what you're seeing out there as well? And then how does that impact your Hunting License trend?

Prashant Ranade

Actually, a very good point. That is something that has been going on in the marketplace for the last several quarters as many analysts have pointed out. Anything that plays to our strength in terms of having the right size, it just opens up additional opportunities for us to participate when that size is smaller as opposed to a single project over $1 billion. So that trend, you're absolutely right, is actually happening. Multi-sourcing is another trend that advisors talk about. So combination of those 2 is clearly helping us and we ensure that we are in the best shape to take advantage of those opportunities.

Operator

And our next question comes from the line of Dave Koning from Baird.

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

I was wondering within the 2012 guidance, the $3.90 to $4, how much of that EPS is nonrecurring, assuming that the rupee just stays now at INR 55. So in other words, how much of the EPS this year would you not get next year if the rupee just stays at INR 55?

Prashant Ranade

Well, the current guidance is at INR 55. So if the rupee remains where it is at the guidance level, we will not get any benefit nor will be affected.

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

Right. I got that, but -- so in other words, all the EPS this year that you've gotten from gains and all that is sustainable? I just think there's a -- that seems like a reasonably large portion of EPS this year that you're getting that probably isn't sustainable into next year.

Arvind S. Godbole

Well, it depends on what the exchange rate is next year.

Prashant Ranade

Exchange rate and also what hedging we do and what rate will do to hedging. So that will depend. But we will not really like to comment on that sort of business. Directionally, it will not impact.

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

Okay. Well, because to me, it just seems like if we stay at INR 55, then margins can stay as high as they've been. It seems a little unsustainable, but I guess we can go with that. The second thing is if the top 3 client's clearly growing faster than the rest of the business, about 20%, is this something -- is there something within same street [ph] and AMEX that you feel like the growth rates there can continue to be pretty strong?

Zaineb Bokhari

Well, with respect to our largest relationships, we're very pleased with the growth this quarter and we believe that we are a valuable partner with our largest customers. Certainly, we strive to do that with our smaller customers as well. We said in the past that despite their size, we do see additional opportunity for growth within these relationships. And over the long term, it's possible that the long large numbers comes in to play, but we're certainly pleased with the growth that we saw this quarter.

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

I guess my point there has been that those financial clients have been growing quite fast, 20%. The rest of the financial business has actually been in decline mode the last 4 quarters on a year-over-year basis. Now I'm just wondering, it seems like there's something within those clients that are so much better than the rest of the financial business and maybe it is just the strength of those relationships.

Prashant Ranade

It's a combination of strength of those relationships as well as Zaineb mentioned earlier, our clients 6 through 20 on a year-over-year basis have actually grown at a higher percentage rate. And those are, in terms of opportunities, they are large enterprise clients. They're underpenetrated, and when they see the value we can provide, that is a substantial opportunity for us.

Operator

And our final question comes from the line of Richard Eskelsen from Wells Fargo Securities.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Just a quick one. You talked about regulatory impact in health care. I may have missed it, but did you make a comment on the financial services regulatory impact and what you're seeing there?

Prashant Ranade

We did, but I would request Rakesh to give you more color on a regulatory impact on the financial services side.

Rakesh Khanna

Thank you, Prashant. Definitely, we are seeing increased spend in the financial stage, mainly around the Dodd-Frank and the Basel II, Basel III areas. And in the payment space in Europe, specifically around SEPA, which is the Single European Payment Authority. So these are the 3 areas in the regulatory space where clearly in the banking and finance vertical we see headroom.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

And have regulatory efforts accelerated versus last quarter relatively similar or they declined any relative change?

Rakesh Khanna

It does -- okay, the sequel to attributed increased by quarter. But the 2 major on a year-on-year basis, we see definitely an increase on an annualized basis. There is more regulatory pressure on the financial customers and hence, there is more investment in that area. And the way we are gearing up is really -- we've had very strong practices on some of these areas and we are beefing it up to meet the increasing demand.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

And then just last thing, another take on the cash. In terms of your investments, how does M&A fit in and any comments you might have there?

Bharat Desai

Yes, Syntel has not been particularly acquisitive in its -- over its history. But today, we do see it as a very effective way of extending our reach in the marketplace. So that is one of the initiatives that our team has embarked on. Having said that, we expect those to be modest in size and in the areas where we don't have a presence currently.

Operator

And this concludes Syntel's Second Quarter Earnings Conference Call. A replay of today's call will be available until July 26, 2012 by dialing (855) 859-2056 and entering the passcode, which is 10983201. Thank you.

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