Syntel Management Discusses Q1 2013 Results - Earnings Call Transcript

| About: Syntel, Inc. (SYNT)

Syntel (NASDAQ:SYNT)

Q1 2013 Earnings Call

April 18, 2013 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

Nitin Rakesh - President of Americas-Business Development and Nearshoring Center

Rakesh Khanna - Chief Operating Officer

Analysts

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

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

Brian Kinstlinger - Sidoti & Company, LLC

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

Rahul Bhangare

Puneet Jain - JP Morgan Chase & Co, Research Division

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

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

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Syntel First Quarter 2013 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, April 18, 2013. 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; and Prashant Ranade, Syntel's CEO and President; Arvind Godbole, Syntel's Chief Financial Officer; Rakesh Khanna, Syntel's Chief Operating Officer; and Nitin Rakesh, President of Americas.

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. Thank you for joining us today. We are pleased with our overall performances this quarter in an evolving business environment. Customers expect more from their technology partners than ever before. They want proven capabilities and a demonstrable understanding of their business challenges. Our focus remains on providing a high level of innovation and services to our customers. This focus supported by our investments and industry expertise and understanding of their business helps us deliver compelling value to our customers.

From the time Syntel was founded in 1980, these values have been core to our business. Our customers, partners and even industry observers recognize this. We have garnered many accolades over the years in recognition of our relentless focus. I was very pleased recently when an article in one of the world's most prestigious business publications, the Harvard Business Review, cited Syntel as one of only 344 exceptional companies after a review of over 25,000 publicly listed companies. This list included some of the best known companies in the world, including another technology company that you may be familiar with, IBM. We are thrilled to have been included in this elite list and humbled by the company we keep. As we look to the future, we will continue to invest to support our growth and expand our capabilities. Our singular focus on listening and collaborating with our customers guides our long-term vision and definitely sets us apart from the pack. I'm very appreciative to our customers for their business and their confidence and belief in us. I'm equally appreciative of the tireless efforts of my colleagues around the world in support of our principles.

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. I want to begin my comments by expressing my sincere appreciation to our customers. The recognition that Bharat noted is the result of our focus on serving our customers, and we look forward to continuing to do just that.

Syntel's first quarter revenues were $189.1 million, rising 11% year-over-year. We saw revenue growth across many of our verticals on a year-over-year basis, with insurance and retail showing some of the strongest growth. We continue to strengthen our relationships across our customer base and did see some of our larger relationships deliver strong growth in the quarter. Arvind will provide further details on our revenue performance in his prepared remarks.

As expected, first quarter gross margin narrowed 406 basis points as compared to the fourth quarter of 2012 coming in at 41.1%, impacted by our higher billable headcount and the on-site increment, which took effect at the start of the year. Indian rupee's appreciation during the quarter also impacted reported gross margins, as well as operating margins modestly, as Arvind will elaborate later.

We grew net headcount by 772 in the first quarter, a rise of 3.6% sequentially and nearly 13% from a year ago. This was a combination of campus hires and experienced hires based on the requirements of our business. However, as a result of this, offshore utilization for IT fell to 62% in Q1 from 63% in Q4 on a period-end basis and to 51% [ph] from 56% [ph] on average. We expect utilization in 2013 to reflect quarterly hiring trends.

The company's SG&A expenses decreased by $1 million during Q1 as compared to a year ago, aided by the depreciation in the rupee and the impact of balance sheet translation adjustment. On a sequential basis, the rupee appreciated slightly but SG&A expenses decreased by $2.2 million, aided by a lower level of local tax provisions required in Q1 as compared to Q4 of 2012. We are pleased with the level of operating expenses during the quarter even as we increased our ranks and look forward to further investments to support our growth.

As 2013 unfolds, we are keeping an eye on macroeconomic conditions, but would still characterize the overall demand environment as improved from the previous 12-month period. We see the new business pipeline for our services as healthy and building. Client budgets have finalized in line with our expectations at levels that are comparable to slightly above what we saw in the previous year. We continue to feel good about our prospects and are investing in support of the opportunities we see. We will build on our domain expertise and leverage our strengths to deliver on our promise of innovation and service to our customers.

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. After my comments, we'll open the call to questions. Syntel's first quarter revenue came in at $189.1 million, up 11% from the prior year period and flat sequentially. For the first quarter, Applications Outsourcing accounted for 76% of revenue, KPO at 16%, e-Business represented 6% and TeamSourcing was 2%. From a vertical perspective, financial services contributed 54%, with health care at 16%; insurance, 15%; retail, 5%; automotive, 4%; and all others accounted for 6%. Vertical growth was led by insurance, which grew about 8% on a sequential basis.

Syntel's customer concentration levels remained comparable to the previous quarter. Our top 3 clients represented 52% of revenue, top 5 contributed 66% and top 10 came in at 79%. The fixed price component of our business was at 38% of revenue for the quarter.

With respect to Syntel's margin performance, our gross margin was 41.1% in the first quarter. This was lower than 41.8% reported in the year-ago period and 45.2% reported in the fourth quarter of 2012. Our direct costs were negatively impacted by higher billable headcount and compensation increases for on-site employees. The Indian rupee appreciated 1.23% during the quarter, which lowered gross margins by approximately 31 basis points. By business segment, gross margin for Applications Outsourcing was 36.7%; KPO was 63.5%; e-Business was 40.9%; and TeamSourcing, 35.9%.

Moving down the income statement, our selling, general and administrative expenses were 13.7% in the first quarter of 2013 compared to 15.8% in the year-ago period and 15% in the fourth quarter 2012. On a dollar basis, SG&A was lower by $2.2 million sequentially.

As Prashant mentioned, a lower global tax result taken in Q1 relative to Q4 of 2012 contributed to the sequential decline. The impact on SG&A from the balance sheet calculation adjustment this quarter was a $0.45 million loss as compared to $1.67 million gain recorded in Q4 of 2012, resulting in a rise in SG&A of $2.1 million. The appreciation in the Indian rupee also had a modest impact. Other income during the quarter increased by $1.7 million from the previous quarter coming in at $9 million. The company reported a $0.6 million gain on hedging versus a $0.9 million loss in the fourth quarter of 2012. Our tax rate for the first quarter came in at 23.8% as compared to 22% posted in Q4. The net income for the first quarter was $46.4 million or $1.11 per diluted share compared to $40.7 million or $0.98 per diluted share in the year-ago period and $49.9 million or $1.19 per diluted share in the previous quarter.

The company's balance sheet at the end of the first quarter 2013 remains extremely healthy. Our total cash and short-term investments on March 31 were $438 million and DSO levels were at 52 days. Capital spending for the quarter was $5.2 million. Syntel ended the first quarter with a total headcount of 22,179 of which 6,654 were assigned to KPO business. Our billable headcount was 3,237 on-site and 17,423 offshore for a total of 20,660. Net additions to the global headcount were 772 employees. Utilization levels at the end of the quarter were 95% on-site; 71% offshore; and 74% globally. Our diluted mix at year end was 20% on-site and 80% offshore. Voluntary attrition during the quarter was 12.4%, an improvement from the 15.6% [ph] reported last quarter. Syntel added 4 new customers in Q1.

Looking forward, I would now like to provide you with guidance for 2013 based on our current visibility levels. Syntel expects revenue to be in the range of $785 million to $815 million, and EPS to be in the range of $4.25 to $4.50 for the full year 2013. The company currently has 80% visibility to the low end of the guidance revenue range. And our guidance is based on an exchange rate assumption of INR 54 to $1. We expect the operating margins will be in the 25.5% to 27.5% range, and that our effective tax rate will be in mid-20s. CapEx for the year is expected to be in the range of $60 million to $65 million.

We'll now open the call for the question-and-answer session. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ed Caso from Wells Fargo.

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

I was curious -- I assume the company is still going to be working on their 20-20, 20% growth, 20% margin strategic approach. When do you think you might get back to that level and what would it take to get there?

Zaineb Bokhari

Ed, I would say that the 20-20 vision or framework for our company is a long-term aspiration, and it'll always be in the context of what we're seeing in the marketplace and in the broader industry. We are not backing away from that long-term aspiration. We still hold that in place.

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

I was wondering if -- Bharat, you could talk a little bit about the visa immigration bill and how the company may be positioning to respond to any changes that may impact your model?

Zaineb Bokhari

So Ed, the immigration reform that's being talked about, it's still early days and we don't know and can't really speculate on the changes until something is finalized. We've seen summaries of what the proposed bill could contain. If the proposed changes to the work visas are enacted, most of these will not go into effect until October 2014, so we'll have time to evaluate the final changes and compose an effective response with an eye on serving our customer needs the best. But our model is flexible and irrespective of government action, we do feel that we can deal with the changes. But the first priority is always going to be what our customers preferences are.

Bharat Desai

And if I can summarize, Ed, whatever the outcome is, we're comfortable we'll make the necessary adjustments to our business model to deliver compelling value to our customers.

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

And just a follow-up on -- wondering if you could give us an update on what you're seeing on the regulatory reform side both in health care and financial services, and has this moved more into the implementation as opposed to just consulting type work?

Prashant Ranade

Sure. Ed, in the health care space, most providers are behind the curve on the ICD-10 remediation and testing. Payers seem to be on schedule, but we do see certain uncertainty around the health care area beginning to fade away, so we do see a more stable outlook in the health care space going forward. Coming to the banking piece, we continue to see, definitely, a shift towards more regulatory, more compliance work and a lot of use of more business process management tools to streamline the processes, build a strong compliance and reduce around the business cost. But again, there, we do see signs of stabilizing overall.

Operator

And our next question comes from the line of Joseph Foresi from Janney Montgomery Scott.

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

I was wondering if you could talk about the growth in your -- both your top accounts and accounts 3 through 20. I know that one of your top clients had stopped some work towards the end of last year, was there any catch-up in what they did in the first quarter? And then maybe you could just talk a little bit about accounts 3 through 20.

Zaineb Bokhari

So with respect to our customer growth and as it relates to some of our larger relationships, broadly, we are very pleased to serve our customers and continue to build on the relationship with existing customers whether they're large or small, and we look forward to continuing to do the same across the base. And I'll ask Nitin to comment additionally.

Nitin Rakesh

Sure. I think it's been a while, we are very pleased with the growth we have in our top 2 clients and we reported out separately. What we are really trying to do is replicate that success to the next segment of our clients number 3 through 30. We've expanded that range 3 through 30 because we believe that there is a strong opportunity for us in this strategic subsegment in terms of getting a higher wallet share and penetrating deeper into those clients. And we are using all of the tools we have in terms of sales, engagement, domain, as well as executive coverage. Not to forget that our differentiators from IT and domain perspective is actually helping us win more market share there as well. And as a segment, this segment has grown faster than the rest of the company.

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

Okay. And then on the top client, was there any catch-up spending in the first quarter?

Zaineb Bokhari

So Joe, I would just characterize it as continuing to build on the relationship versus any kind of catch-up.

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

Okay. Just switching gears on demand in general. It sounds like it's off to a better start, and you said in your prepared comments that you're expecting 2013 to be better than '12. Can you just talk about some of the changes that you're seeing in either the customer base or decision making, maybe discretionary spending, that gives you that confidence? And has that momentum continued since the beginning of the year?

Prashant Ranade

Sure. Joe, we see a couple of trends. So for example, in the insurance space, we see the property and casualty market doing very well with insurance rates going up for the first time in a decade. And at Syntel, our IT and accelerators are helping to cope with that, to move to standard business warehouse for analytics, the tools around business process testing, which is positioning us extremely well to meet this demand. If you take the example of the retail vertical, there, we see a lot of focus around the omni-channel integration, where we see retailers are spending money to provide a single view of customer orders and inventory and new versions of point-of-sale to integrate across web, store and mobile devices. And again, our IT in this area is very useful in delivering faster, since speed and time to market in retail is very critical.

Nitin Rakesh

I think I'd only like to add that given that we've made investments in our service offerings, capabilities, sales and marketing, our pipelines are looking healthy and are building up as a result of these investments.

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

Okay. And then the last question for me. Could you remind us of the margin guidance that you gave just -- in your prepared remarks. I think I missed the full range. And then what is that dependent on? In other words, are you accounting for a continuous increase in headcount as you kind of continue to grow throughout the year? Is that based on present guidance? How should we think about that? I know, obviously, you've given the rupee guidance, but I'm just trying to get a feel for that range and what's included in it?

Arvind S. Godbole

Right. The range that we are looking right now is between 40% and 42%. And primarily, the reasons are that we are going to hire aggressively and we are also going to invest in commissioning new facilities. And also, we are going to invest in marketing and other costs and brand-building exercises. So primarily, it will be joined by increasing the headcount ahead of the demand.

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

Okay. And that's based on present guidance, correct?

Arvind S. Godbole

Yes.

Operator

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

Brian Kinstlinger - Sidoti & Company, LLC

One follow-up on the visa question you had. Can you break out roughly how many of your employees in the U.S. are on visas? And then furthermore, how many are on H-1s versus L-1s?

Zaineb Bokhari

So Brian, we disclosed that at the end of 2012, approximately 2,100 or about 10% of overall headcount was on either work permits or visas. And that's the extent of our disclosure and we have not -- led by Hs or Ls or anything like that.

Brian Kinstlinger - Sidoti & Company, LLC

Great. And would it cost you more if you had to hire local workers in the U.S. as opposed to use these workers on visas?

Zaineb Bokhari

Yes. The cost associated with on-site employees, if we had to hire locally, is higher than offshore employees, absolutely. But we have a few levers at our disposal, so we can leverage our on-site offshore ratio and we also have visa-ready people available. So we do have a few levers at our disposal.

Prashant Ranade

And Brian, as you know, to ensure that the attrition rate is manageable and lower than industry, which has been our focus as reflected in our attrition rate in this quarter. The compensation has to be competitive and the skill set and capabilities that we require are in line with what we do for our clients, our IT and our focus on execution.

Brian Kinstlinger - Sidoti & Company, LLC

Great. And then a question on the KPO business that I think increased nicely sequentially. Is that your one large JV or is that mostly or is that other accounts that are starting to grow?

Nitin Rakesh

So Brian, I think, and I'm pleased to say that we've actually added new customers, as well as we started to see some ramp up in the non-JV customers as well through the quarter. And I think we'll continue to focus on growing both those segments of the KPO business nicely.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. Two more. The first one is on SG&A, you said it came down. How much -- you mentioned today about the reserves for taxes impacting SG&A difference in the 4Q versus 1Q, I think. Can you just sort of go over the impact of each of those and how will that, in the future quarters, impact SG&A?

Arvind S. Godbole

The primary reason is the reduction is $2.2 million compared to previous quarter, and is primarily coming out of the tax [ph] loss of $0.4 million as was compared to $1.7 million of gain. So that made a difference of almost $2.1 million out of $2.2 million. And of course, it was also supported by, additionally, by the lower frozen for the certain taxes which we made in Q4.

Brian Kinstlinger - Sidoti & Company, LLC

Does that mean that, that $2.1 million it's not in SG&A, will be back in SG&A barring, other rebalancing or how that line item moves? Is that what you're saying in the second quarter?

Arvind S. Godbole

Yes. Primarily, the direction -- the reason for the direction is the [indiscernible] loss as compared to last quarter gain.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. The last question I had, you said you had 80% visibility to the low end of revenue. I'm wondering to get to the low end, how much of that rest of the 20% comes from maintenance renewal that don't always happen in the beginning of the year but sometimes happen in the second quarter or third quarter?

Arvind S. Godbole

Our breakdown, as far as maintenance, discretionary spending has been consistently 2/3, 1/3. So that is why we are comfortable with our visibility because it is recurring, predictable revenue. So 2/3 of it is maintenance.

Brian Kinstlinger - Sidoti & Company, LLC

Right. What I'm trying to get to is, you've got 20% more of your revenue guidance in terms of revenue dollars to get to the low end. So assuming you renew every maintenance agreement that you expect to renew throughout the year, is revenue visibility more like 90% because you really have 100% renewal rate on those maintenance agreements or is it higher? Do you follow my question?

Arvind S. Godbole

As we renew those, our visibility improves. And then every quarter end, we revise our guidance based on that visibility. But today, the visibility is at 80%, slightly under 80%, and that is the basis of the guidance.

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 from Jefferies. Just coming back to the guidance. In your EPS guidance, how much of the raise is actually because of the revenues guidance upside and how much from your expectation for FX? I believe now you're assuming INR 54 and last quarter it was at INR 53.

Arvind S. Godbole

Yes. It was a combination of both, one is that we have increased the revenue guidance by $5 million, so that will give us additional leap here. And also, the 1% movement of INR, the Indian rupee, affects the operating margin by 25 basis points at current levels of revenue and costs. So since we have increased from INR 53 to INR 54, we have increased the guidance partially because of that, as well as additional revenue.

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

Perfect. And just coming back to one of the line item on your balance sheet, which is revenues earned in excess of billings. Is it just the work that has been done but not being billed to the customers and is it already recognized? And why I'm asking this is, I know it generally fluctuates around quarter-to-quarter, but this particular quarter, there was a big sequential jump. Just trying to understand what that is and what does it mean?

Arvind S. Godbole

Right. It is that -- you are correct in saying that we recognized the revenue but we have not billed the customer. There are a couple of reasons for that. One is that for fixed price project, we have to bill after the schedule that is a great [ph] of the customer, so there is a time lag. And secondly, that we -- certain business we need the confirmation from the customer before we do the billing. So these are the 2 primary reasons, but most of the amount has been subsequently billed. It will be billed within the next 30 days and we already started billing that. And yes, the level this time has been higher than what it was in the past. As a percentage, it was average if you take 5 years percentage of first quarter, it was 12.5%. This time it is 13.2%. So -- which is slightly higher, but we are not seeing any issues there.

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

But is it already recognized or...

Arvind S. Godbole

Yes, it is.

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

Okay. Perfect. And just coming down to the immigration bill question again. You said you have around 2,100 employees on H-1, L-1 visas and your U.S. workforce is around 3,270 something. So are all these 2,100 employees in the U.S. or is that a rotating number?

Zaineb Bokhari

No. That 2,100 referred to employees on work permits and visas, and that's a global number.

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

Okay. And there's no -- I mean, you can't provide a number how much of those are actually right now based in the U.S.? How much of those constitute your U.S. workforce?

Prashant Ranade

I think we give overall on-site offshore ratio. We don't break out a number specific to U.S., but our overall number is 80-20. And that is what we break down and we provide in specific disclosure, a number of our associates on H-1, L-1, which Zaineb shared with you.

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

Okay. I mean, the only thing I'm trying to get to is that according to the bill, it seems like if you have more than 50% of your employees on H-1, L-1 there's a $10,000 fee and 30% to 50% is $5,000 sort of fees. So how -- I mean, at current, assuming the bill goes through the way it is, what type of margin impact are you -- that could happen to your business model?

Zaineb Bokhari

Amit, I would say that it's too early for us to even think about providing any kind of quantification of impact right now. Whatever the actions and whatever does go into effect, we'll have time to evaluate the impact on our business, and we will plan accordingly and our model is flexible enough. We feel that we can deal with the changes.

Operator

And our next question comes from the line of Rahul Bhangare from William Blair.

Rahul Bhangare

I think we've seen a couple of consecutive quarters of sequential declines in the e-Business segment. I was just wondering if you can give some commentary on that.

Prashant Ranade

Yes. See, what we are seeing out there is a lot of development is moving from waterfall to agile, which means the customers are looking for short ROI development work, whereas a lot of prototyping, proof of concept, demonstrate, do development in short bursts, launch that product and then do changes. So that really leads -- lends the e-Business revenue to start becoming a bit lumpy. We don't see any material change, but this is really the nature of the demand is changing.

Rahul Bhangare

Okay. And then could you comment on the overall pricing environment. Are you witnessing any of your larger peers get a little bit more aggressive recently?

Zaineb Bokhari

So I would say, Rahul, that our experience is that the pricing environment is stable and there are some upward bias out there that we've experienced.

Prashant Ranade

And what I would add to that, Rahul, is pricing is really a function of differentiation and value. And our focus is on domain knowledge, IP-based offerings and flawless delivery. So as long as we provide the value, we'll be able to remain competitive and provide compelling solutions to our clients.

Rahul Bhangare

Okay. And then just final one for me. Does guidance include a wage increase in April?

Arvind S. Godbole

Yes. That is for offshore. The on-site wage increase has been already given from first quarter.

Operator

And our next question comes from the line of Puneet Jain from JPMorgan.

Puneet Jain - JP Morgan Chase & Co, Research Division

Nice to see increase in revenue guidance, specifically at the top end also. Could you talk about the reasons, the drivers that gives you confidence the top end is achievable and will not face unexpected headwinds like you had last year. Basically, what I'm trying to get is, like how calculation of top end of revenue guidance is different this year than from last year?

Prashant Ranade

First of all, no one can comment on unknown unknowns. What we have -- what we do is have arms around our business in terms of the budget spending, in terms of pipeline, in terms of our associate readiness and capability and closeness to the clients. A combination of those things, first of all, we said the lower end of the guidance based on visibility as I mentioned earlier. And the upper end is a function of these factors. What we are hearing from clients, the fact that the budget is firmed up as well as our pipeline, and that's the reason we feel comfortable, which forms the basis of the higher end.

Puneet Jain - JP Morgan Chase & Co, Research Division

And it's achievable this year related to last year? I mean, but is it more -- have you baked in more conservatism this year in the top end?

Prashant Ranade

It cannot be, I cannot comment on whether it is conservative or easy. What I can share with you is the methodology. And we believe in having a consistent methodology, which is based on the visibility to low end and the high end is range bound based on what we have done in past, as well as the pipeline and visibility.

Puneet Jain - JP Morgan Chase & Co, Research Division

All right. And could you also talk about plans to ramp up U.S.-based hiring? Do you see demand from clients to set up nearshore centers in the U.S. and will that change after, assuming if this immigration bill gets passed in its current form?

Prashant Ranade

First of all, as you pointed out, a combination of low, as well as the high end of our guidance and our expectation and visibility was the reason why we added over 770 associates during Q1 ahead of the demand, while we allowed the utilization to drop. Because as we have shared with you in past, we want to make sure that we are ready to take advantage of opportunities we see, and we see those on various centers. Clearly, we have presence in several cities in the U.S.. In addition to that, we are expanding our facilities in India and expect our center in Manila, Philippines to come online around towards second -- towards the end of the second half -- I'm sorry, towards the end of first half of this year.

Puneet Jain - JP Morgan Chase & Co, Research Division

Okay. And last one for me. So obviously, with IT associate utilization wherever it is, it is well below the industry peers and it does present margin expansion opportunity, and specifically so as your size increases. Are there any thoughts of narrowing that 60% to 80% bond [ph] towards the higher end and freeing up dollars for investments or for margin expansion?

Prashant Ranade

I think the range of that bond [ph] depends on the dynamic nature. Meaning, if you look at hiring, we actually started hiring towards end of Q4 and continued through Q1. That's the reason there was a 5-point difference between the exit and average numbers of utilization. So in a stable environment that meaning the demand is growing at a constant rate, our demand is flat either scenario. So utilization range will be narrower than it would be when we see a change.

Puneet Jain - JP Morgan Chase & Co, Research Division

All right. But the question basically was, like with increase in size, you do not need to operate at 60% even in like in high demand because the number of people on bench will be much higher than what it would have been at 60% utilization 3, 4 years ago. So does it make sense to operate a, like to structurally operate at a high-utilization rate than what you would have done 3, 4 years ago, irrespective of demand?

Prashant Ranade

Your assumption is totally valid if you were looking at just fewer skill sets. Today, based on client needs, changing landscape of technology, there is multiplicity of skills and our focus is more on capabilities and skills. So when there is additional diversity, if you will, of skills or variations then it is not the model that you are describing. But I agree with you if you were looking at just a single skill set then the higher the numbers, higher would be utilization for human demand.

Bharat Desai

And the one other comment I'd like to overlay on that is we see many exciting opportunities in emerging technologies and the impact those can have on our customers' businesses. So we are going ahead and making the investments necessary to build capabilities, to create intellectual property. And it's very clear from results that those strategies are working. So we are pressing hard on those.

Operator

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

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

You mentioned that you plan to hire aggressively. Would that be linear towards the year and do you expect utilization levels to tick down further or stabilize or rise from current levels?

Prashant Ranade

We do expect utilizations -- utilization level to improve from here, and that is based on historic patterns. See, there are 2 things we are looking at. One is the historic pattern of how utilization changes from Q1 through Q4. And second, you overlay demand on top of that if the demand environment is either increasing or decreasing that is a dynamic nature and that causes the variation. So right now, the variation is caused by increasing demand and potential, and headcount additions that we have made. But second component of that your question, which is historic pattern from Q1 to Q4, it will increase.

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

Got it. Now as you've grown in size over the last few years, are you starting to get it right into the table with larger peers more often than you have seen in the past, is that something that you're seeing out there?

Nitin Rakesh

I think it's -- partly it's happening so we are seeing some of that but also consciously, we are driving our business towards more strategic deals, towards playing to our strength in areas where we have the capabilities, investments in IP and domain. So I think that's a conscious effort and obviously size helps.

Rakesh Khanna

And if I may add, in our chosen areas of domain, we want to be the best in terms of capability and have a what we call, areas of expertise, probably an inch wide but a mile deep in our chosen areas of expertise.

Prashant Ranade

And some of the trends we have seen over past few years is gone are the days when clients would only look at size. More their focus today is on capability and what can a partner do for us in chosen technologies, domain and comfort with execution. So based on that, absolutely, we get invited where those skill sets and requirements are matched.

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

Can you talk about the use of cash and your balance sheet, obviously, very healthy there and more than what you need for day to day.

Bharat Desai

So our board regularly looks at our balance sheet and the best uses of that cash and makes decisions accordingly. Clearly, there's an opportunity to grow, extend our reach through very strategic targeted acquisitions. And we're pleased with the performance of the business and the strength of the balance sheet.

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

Okay. [indiscernible] the broad mixed signals from your larger peers in the pricing environment? Are you getting any pushbacks from your existing lights on work on pricing?

Zaineb Bokhari

No. Our experience, Manish, is that the pricing environment has been fairly stable.

Operator

And our next question comes from the line of Vincent Colicchio from Noble Financial.

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

Most of mine were asked. On the insurance vertical, could you remind us what is driving strength there and will that continue through the rest of the year?

Prashant Ranade

Sure. Like I said on the insurance, the commercial line carriers, we see them focusing on legacy modernization in the race to take advantage of the premium market. On the life and retirement services, we see -- because of the low interest rate environment, they continue to look for modernization to cut operational costs, to reduce run the costs, run the business kind of cost. So these are really the 2 trends that we are observing for now.

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

And in terms of the wage inflation, what are you expecting for the second quarter?

Prashant Ranade

Yes. So we have already implemented our on-site wage increase, which was in mid-single digit. And our offshore wage increase will go into effect this month, and that is low-double digit.

Operator

And our next question comes from the line of Timothy Wojs from Baird.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

You talked about IT budgets being flat to slightly up. Could you talk about just what the spending has been so far against those budgets if it's in line with your expectations or not?

Prashant Ranade

Yes. The spending is in line with expectation. Budgets are firmed up but changed compared to a few years back even after firming of the budget if you separate lights on business versus discretionary spend. Lights on the commitments are made like they're made in past. Discretionary spending, there is more and more use of agile methodologies where there are intermediate milestones as opposed to releasing the budget for a very long period of time. So clients want to see the benefits of the project that is implemented, there are specific deliverables. And based on the outcomes, those budgets get further released.

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just in terms of how we should think about growth through the year, should we think of sequential growth as being pretty even through the rest of the year or should Q2, Q3 maybe be a little bit stronger relative to what you guys have done in the past?

Zaineb Bokhari

Tim, our normal seasonal patterns are expected to prevail where Q2 and Q3 are seasonally stronger versus Q1 and Q4.

Operator

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

Brian Kinstlinger - Sidoti & Company, LLC

Great. Just one follow-up. In the second quarter you talked about the obvious increases in salary to the offshore employees. I'm wondering, A, do you also -- have you already spent on the applications in the first quarter for visas or will that be a second quarter event? And then just sort of what is the margin pressure temporarily or overall in the second quarter versus the first quarter for the gross margin as a result of those?

Zaineb Bokhari

So Brian, we did have a little bit of expense in Q1 related to our immigration visa related costs, it's about $1 million. But the bulk of it will come in Q2.

Brian Kinstlinger - Sidoti & Company, LLC

So we're looking at -- because last year there wasn't much of a hit quarter-to-quarter on the margins and maybe some of that was the rupee. So is it going to be much greater this year?

Zaineb Bokhari

Well, so we would expect most of the pressure to come in Q2 and you're right. Last year, the visa depreciation almost entirely offset the overall impact of visas and increment that you see in Q2. But we expect normal margin pressure in Q2 related to those 2 factors.

Operator

And I see no further questions. This concludes Syntel's First Quarter Earnings Call. A replay of today's call will be available until April 25, 2013, by dialing (855) 859-2056 and entering the passcode which is 34742912. Thank you.

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