Syntel's (SYNT) CEO Rakesh Khanna on Q4 2016 Results - Earnings Call Transcript

| About: Syntel, Inc. (SYNT)

Syntel, Inc. (NASDAQ:SYNT)

Q4 2016 Earnings Conference Call

February 16, 2017, 10:00 AM ET

Executives

Zaineb Bokhari - Vice President, Finance

Bharat Desai - Co-Chairman

Rakesh Khanna - Interim-CEO and President

Anil Agrawal - Chief Financial Officer

Analysts

Rick Eskelsen - Wells Fargo

Anil Doradla - William Blair

Joseph Vafi - Loop Capital

Bryan Bergin - Cowen and Company

James Friedman - Susquehanna

Eric Ciura - Robert W. Baird

Puneet Jain - JPMorgan

Joseph Foresi - Cantor Fitzgerald

Frank Atkins - SunTrust

Vincent Colicchio - Barrington

David Stratton - Great Lakes Review

Brian Kinstlinger - Maxim Group

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Syntel Fourth Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer-session. [Operator Instructions]

As a reminder, this call is being recorded today, Thursday, February 16, 2017. I would now like to turn the call over to Zaineb Bokhari, Syntel’s Vice President of Finance.

Zaineb Bokhari

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

Before I begin my prepared comments, I want to qualify one typo in one of our segment headings in the press release. The outlook that we have shared is for 2017 not 2016.

On the call with us today, we have Bharat Desai, Syntel’s Co-Chairman; Rakesh Khanna, Syntel’s Interim CEO and President; and Anil Agrawal, Syntel’s Chief Financial Officer. Our other Co-Chairman, Prashant Ranade is not able to attend this call due to an earlier commitment.

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 Co-Chairman, Bharat Desai. Bharat?

Bharat Desai

Thanks, Zaineb. Good morning, everybody and thank you for joining us today. We faced some challenges in 2016 in a soft macroeconomic environment as our customers’ experienced considerable uncertainty in their businesses. Thus far in 2017 the business climate key market remains uncertain. As a result, there is still a fair amount of caution built into our customer spending plan for the year. [Ph] We are monitoring ongoing cost (02:47) proposal that could potentially have an impact on our industry. It is too early to comment on this development situation.

Over the course of our company’s history, Syntel has had to evolve with business model several times in response to regulatory, economic and technology changes. We have always been consistent in our [inaudible] (03:12) on staying relevant to our customers. By leveraging our U.S. center and our global delivery footprint across Europe, India and the Philippine, we are confident in our ability to continue to provide uninterrupted service delivery to our customers.

Despite near-term business or policy development for any company, the longer term focus remained on helping our customers succeed in the digital economy. Across each industry the shift to digital have created many new opportunity for growth and has simultaneously introduced disruption and force innovation.

Most of our 2000 authorization also rely on systems and application that for decade have served as core processing engine for critical task. Sustaining this systems and application consume significant resources that could otherwise be channeled into driving growth for building competitive advantage.

Syntel has made significant investments in key technology areas to help our customer succeed [inaudible] (04:49) journey. Comprehensive service offerings and innovative tools enable implementation and support our customers’ initiative in areas like mobility, Internet of Things, cloud and big data and analytics, helping more connected responsive competitors.

Syntel is also helping customers modernize critical systems through these capabilities in core application and infrastructure management. Our intelligent automation platform SyntBots amplifies the values of these services to drive [ph] outsources (05:31) and free up scarce resources to fund modification and initiatives.

We have very clear strategy to defined approach that is centered on the business and operational needs of our customers. Syntel is committed to our customers as they embark on this transformation journey will help them through market uncertainty.

I would now like the call to turn to Rakesh Khanna, Syntel’s Interim Chief Executive Officer and President to provide further details. Rakesh?

Rakesh Khanna

Thank you, Bharat, and welcome everyone. I am excited to speak with all of you in my main role. Before I discuss our fourth quarter results, I want to share some insights about the environment and our discussions with customers.

It is really a time of significant change for the industries we serve. Our customers are focused on building sustainable competitive advantage, while catering to ever changing consumer preferences. To help achieve this, we continue to prioritize spending on digital initiative. At the same time, significant [inaudible] (06:45) in the support of existing application and infrastructure that have seen critical business functions and processes.

Syntel has developed [inaudible] (06:56) accelerator to help our customer, as well as their digital content and improve customer experiences. We have also enhanced our application offering with high impact [inaudible] (07:13) that modifies the whole system that business rely on. At this time, [inaudible] (07:17) platform great example. We have seen the holistic approach because we believe that increasingly our companies will need to undertake this journey. We are raising our workforce and our service offering to align with this kit.

Customer preferences have evolved, project signing for new engagements are smaller and deals seeing unbudgeted. The nature of delivery has also changed with short agile development becoming the norm. Despite this [inaudible] (07:54) we focused on improving our sales growth and execution. This is taking up our investment in sales. In addition, we have expanded a [inaudible] (08:07) bandwidth an account to support to grow each customer relationships. This includes a continued focus on strengthening our ties with our customers.

We are also directing a great deal of this investment at customer 4 to 50. This expansion of our earlier focus on driving higher contribution from customers 4 to 30. Given the normal evolution of our business and our larger scale this [inaudible] (08:42) next step. We have also invested in our U.S. centers to focus difficult initiative and open new one in [ph] Japan (08:50).

Bharat noted, there is ongoing macroeconomic softness in key markets like the U.S. and Europe. As a result of this, the demand environment is looking near-term. We have succeeded in Financial Services that some of our larger customer have remained cautioned. We are also seeing this is in Health and Lifesciences. We are executing regular discussions with our customers and keeping normal practice we have incorporated everything about our business at this time into our 2017 outlook.

As we have seen in past periods, uncertainties and due to delay finalization of spending and other decision, we are watching all developments totally and we will continue to provide updates on subsequent earnings call. After evaluating what we know as of now, we anticipate a slow start of the year. This is followed by modest growth in each successive quarter.

Now, let’s review our results for the fourth quarter. Syntel’s fourth quarter revenue was $237.9 million, down 6.6% year-over-year and 1.4% on a sequential basis. As discussed on our last earnings call, condition remained [inaudible] (10:18) during Q4, uncertainty across global market and several of our industry business. This contribute to delays in project starts and the push out of this from second half 2016.

Discretionary spending remained weak in the fourth quarter unlike macroeconomic trends. At an industry level we also faced difficult year-over-year growth comparisons in Banking and Financial Services segment in Q4. In the Healthcare and Lifesciences group, we expect impacted by M&A and regulatory and policy uncertainty.

During the fourth quarter, we continue to see discretionary spending recover in personal lines insurance. This was offset partly by some weakness in the commercial lines and life and retirement areas. Looking ahead, we expect major growth from our Insurance segment in 2017.

Retail, Logistics and Telecom segment grew [inaudible] (11:21) from customers across Retail and Logistics. While growth in Europe was impacted by push outs seen during the quarter, growth in the region push out for our company growth for all of 2016. We anticipate that growth from Europe will continue to take overall revenue growth in 2017. We also continue to watch for any development related business. Anil will expand on our Q4 metrics and 2017 outlook in his prepared remarks.

We estimate that revenue from digital projects accounted for approximately 15.8% of revenue in Q4, up from 15.5% in Q3 and 15% in a year ago quarter. Demand for digital services remained solid and we expect it to continue in 2017.

Fourth quarter gross margin expanded to 40.2% from 39.2% in the third quarter. This led higher average utilization for IT, modestly lower headcount and a slight improvement in delivering it. The mix between onsite versus offshore delivery improved to 24.4% and [ph] 5.6% (12:45) in Q4 as compared to 24.9% and 75.1% in Q3.

Offshore utilization for IT fell to 70.4% in Q4 from 73.4% in Q3 on repeated and basis. It rose to 71% in Q4 from 71.3% in the previous quarter on average. We still expect to drive utilization above long-term historical trend.

Net headcount decreased 44 employees on a sequential basis to 23,011 in the fourth quarter. Hiring continues across each of our geographic regions tied to anticipated need requirement of customers. Attrition calculated on a current quarter annualized basis was 20.3% in Q4 improving from 25.4% in Q3.

We are pleased with our effort to reduce [inaudible] (13:53) on that. This includes Syntel X.0 our new approach to talent management that helped process and learning environment at Syntel. With Syntel X.0 we will enhance employee engagement, power our workforce to acquire new skills and realize their potential more fully.

I will now turn the call over to Anil Agrawal, Syntel’s Chief Financial Officer, who will discuss Syntel’s financial performance. Anil?

Anil Agrawal

Thanks, Rakesh, and good morning, everyone. After I conclude my comments we will open the call for questions. Syntel’s fourth quarter revenue came in at $237.9 million, down 6.6% from prior year period and 1.4% lower than the prior quarter.

For the fourth quarter, Banking and Financial Services contributed 48.4%, with Retail, Logistics and Telecom at 17.6%, Health and Lifesciences 16%, Insurance 13.7% and Manufacturing 4.3%. On a year-over-year basis segment growth was led by the Insurance segment which grew 3.3%.

Syntel’s customer concentration levels were as follows, our top three-client represented 48.3% in the fourth quarter of 2016 as compared to 49.1% in a year ago quarter and 47.2% in the third quarter.

Accounts 4 to 30 represented 42% of revenue in the fourth quarter of 2016 as compared to 42.3% in a year ago quarter and 42.9% in the third quarter. Accounts 4 to 50 represented 47.6% of revenue in the fourth quarter of 2016 as compared to 47.2% in a year ago quarter and 48.2% in the third quarter. The fixed price component of our business was at 44% of revenue for fourth quarter of 2016.

With respect to Syntel’s margin performance, our fourth quarter revenue -- gross margin was 40.2% as compared to 41.8% reported in a year ago period and 39.2% in the third quarter of 2016.

By segment, gross margin for Banking and Financial Services was 41.4%, with Retail, Logistics and Telecom at 43.4%, Healthcare and Lifesciences at 39.6%, Insurance 36.3% and Manufacturing 30.9%.

During the fourth quarter, the Indian rupee depreciated by 0.3% on average relative to the U.S. dollar from the prior quarter. This raised gross margins by approximately 20 basis points.

Moving down the income statement, our selling, general and administrative expenses were 13.1% in the fourth quarter of 2016 compared to 11% in the prior year period and 12.2 % in the third quarter.

On a dollar basis, SG&A was higher by $1.5 million sequentially. The impact on Q4 SG&A from currency related balance sheet translation based on quarter end exchange rates was a $2.8 million as compared to a $1.8 million gain recorded in the third quarter. The depreciation in the average rupee rate lowered SG&A by $0.3 million.

Other expenses $2.1 million during the fourth quarter as compared to income of $4.2 million in the third quarter, including [inaudible] (18:18) approximately $0.3 million from mutual fund sales in the fourth quarter versus a $3 million gain in the third quarter.

Tax rate for the fourth quarter came in at 23% as compared to 413.5% for the third quarter. The third quarter tax rate included a one-time tax of approximately $270 million net off foreign tax credits upon the repatriation of $1.24 billion of cash held by Syntel's foreign subsidiaries.

Net income for the fourth quarter was $48 million or $0.57 per diluted share as compared to net income of $74.2 million or $0.88 per diluted share in the prior year period and net loss of $217.2 million or $2.58 per diluted share in the previous quarter. The company’s balance sheet at the end of the fourth quarter of 2016 remained healthy.

Our total cash and short-term investments balance on December 31st was $100 million and the portion held in U.S. Dollars stood at 64%. DSO levels were at 54 days. Capital spending for the quarter was approximately $2.2 million.

Syntel ended the fourth quarter with total headcount of 23,011 of which 7,710 were assigned to KPO. Our global headcount was lowered by 0.2% from the third quarter. Our billable headcount was 4,556 onsite and 16,731 offshore for a total of 21,287.

Utilization levels at the end of the quarter were 92.2% onsite, 77.7% offshore and 80.8% globally. Our delivery mix at quarter end was 24% onsite and 76% offshore. Voluntary attrition during the quarter was 21.3% as compared to 25.4% reported last quarter. Syntel added five new customers in the fourth quarter.

Looking forward, I would now like to provide you with guidance for 2017. Based on our current visibility level, Syntel expects revenue to be in the range of $900 million to $945 billion and earnings per share to be in the range of $1.75 to $2 for the full year of 2017.

The company currently has 63% visibility [inaudible] (21:34) of the revenue range and our guidance is based on an assumption for an average exchange rate of INR67 to the dollar. We anticipate that operating margins will be in the 24% to 26% range. Our effective tax rates will be mid 20% range for 2017 and CapEx is expected to be in the range of $15 million to $25 million.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Ed Caso with Wells Fargo. Your line is now open.

Rick Eskelsen

Hey. Good morning. It’s actually Rick Eskelsen on for Ed. I just wanted to ask question on the discretionary spending outlook and particularly in the Banking and Healthcare verticals referred from some of your peers more the optimistic tone on spending especially in Banking for 2017 than what you guys shared. So just curious if you could talk a little bit more about what you are seeing demand was and what you are hearing from clients and why you are more cautious going into the year?

Rakesh Khanna

Well, what we have seen is in pockets of sectors, Banking and Financial Services segment. We do see softness. We see some macro headwind which is causing more scrutiny under budget, under spending, that’s really impacting some of the decision cycles and delaying decisions in that pocket we see.

Bharat Desai

And just to add, Edward…

Zaineb Bokhari

I am sorry, I was just going to say that in some of these industries, I don’t think what we are calling out is terribly unique, for example, policy uncertainty in Healthcare, but we do have meaning a better footprint in the industry and so that is impacting us as well.

Rick Eskelsen

And specifically in Financial Services, I am wondering if you go maybe a little bit deeper on what are the pockets are you seeing the most weakness, maybe if you can break it down among banks payments things like that? Thank you.

Rakesh Khanna

Yeah. We are seeing some softness in some of our Banking and Financial Services customers are facing some headwinds and that's really impacting some of decisions to take. So those are some of the areas where we are seeing softness.

Rick Eskelsen

And just a last question on that, you are seeing projects getting cancelled or just at this point being delayed to start and slower to start than they typically would be?

Bharat Desai

We are seeing projects getting pushed out, so delay and getting pushed out.

Zaineb Bokhari

Yeah. Not too hard but…

Rick Eskelsen

Great. Thank you very much.

Zaineb Bokhari

If I can just finish on that point, I think that the uncertainty is contributing to delays and what is also probably going to translate into, there is a different seasonal pattern for the year, where we will probably get off to a slower start and then see modest improvement in successive quarters.

Rick Eskelsen

Thank you.

Operator

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

Anil Doradla

Hey, guys. Thanks for taking questions. So, Bharat, I have a couple of big picture questions. I mean, clearly there are many moving parts. So when you look at your 2017 outlook, how much would you attribute, I mean, perhaps, a little bit more qualitative but if you can quantify greater. How much would you attribute to company specific issues versus macro demand environment a little bit?

Bharat Desai

Well, for us, it is what it is kind of our [inaudible] (26:05) into the business world and to our customers specifically. This is the view point we have and we are giving you the best outcome and a view of the [inaudible] (26:36) in our -- in the markets we serve.

Anil Doradla

Okay. So because the reason I say that is, if you look at your overall growth over the last couple of years relative to the industry it’s been lower, and obviously, today’s commentary on the macro environment which is -- which you are saying is volatile, is there, perhaps, some consistent with what everyone else are seeing. So, I mean, I am just trying to understand, how much of this macro versus company expect, okay.

As a follow up to that, I mean, clearly when you look at some of your business, it’s a high-quality, you see that in the margin structure, it’s almost a BPO and when I talk about some of your big customers, isn’t it time to take a big picture look and make some, perhaps, big strategic M&A decisions when it comes to exploiting some of your strong areas such as beat street and what you do there and kind of scale it to other parts. I know it’s difficult, but the current environment in which you guys are really focusing on the IT business, given whatever is going on in the macro, it’s clearly tough. How about repositioning your business both together as one of the BPO company and then help grows up from there?

Rakesh Khanna

I think the same question last time, so I will give you the same answer. We take, first of all, remember, 90% of our revenue close to is in IT and this is where we are investing significant [inaudible] (28:27). We actually believe that with the company that we have invested across the value chain we see some outsize opportunity and we are just focused on executing on them. I think, maybe in a couple of industries with systems there is a little uncertainty due to the environment, but we are in many conversations about how this IT can be leverage, we are engaging several pilots and initial expense. So, and we spend a lot of time on thinking about that. And our strategy to be focused on market opportunities that we see and how we leverage our capabilities to gain -- to create a competitive edge and serve our customers. So to that end I think we are geared together with clear focus and are comfortable where our strategy is right now.

Anil Doradla

All right. Thanks, Rakesh.

Operator

And our next question comes from the line of Joseph Vafi with Loop Capital. Your line is now open.

Joseph Vafi

Hey, guys. Good morning. I was wondering if we could talk a little bit about gross margins for next year. I heard the operating margin range and I know you did a 40% number here in Q4, maybe what you think the gross margin outlook maybe for next year? And then, secondly, I heard a couple times on the overall outlook that maybe down Q1 number, which maybe, it sounds like you are calling that the trough and some color on your confidence that you think that this is indeed the trough at Q1? Thank you.

Anil Agrawal

So, thanks, Joseph, and I’ll take the margin question and then Rakesh may add on the Q4. So margin guidance would be 37% to 39% for the year 2017.

Rakesh Khanna

Yeah. In terms of, we are looking at soft Q1, but definitely looking at the modest growth in subsequent quarters and we continue to invest in our business, like Bharat said, we have some very strong service offerings which are resonating extremely well and as some of the macro headwind sectors we called up really in Banking and Financial Services and Healthcare due to some uncertainty around pending M&A. I think we are in a -- definitely in a sound position for growth.

Joseph Vafi

Thank you.

Rakesh Khanna

You’re welcome.

Operator

And our next question comes from the line of Bryan Bergin with Cowen and Company. Your line is now open.

Bryan Bergin

Hi. Thank you. I heard you mentioned the scale investment in sales. Can you quantify what you doing there and then the overall strategy, target strategy, your ability to expand any final opportunities, how should we think about that?

Bharat Desai

Yeah. We are spending of our investments in clients, [inaudible] (32:13), in sales and in deal closure related activity, and of course, we continue to investment in the fee in our intelligent automation platform SyntBots, so really that directionally. What also done is we release bandwidth and provide for executive color to really look at deal closures and we believe as soon as some of the uncertainty around budget exceeded, right, and hopefully we will give you some color or better refresh in April when we come with our Q1 results. We will be able to get you that time. But we believe that’s the way going forward. I am very confident of our strategy. We have strong service offerings and that really we have position of our growth.

Bryan Bergin

Okay. And then your -- the client list you have, clients 4 to 30, can you just talk about what’s going on there, I know insurances weighed throughout the year, but during the fourth quarter [inaudible] (33:25) continuation of that anything different there and then what you are expecting in that group of clients for 2017?

Rakesh Khanna

Yeah. We do expect clients 4 to 30 growth option and company average. Now last year because of some of the uncertainty in Healthcare and Insurance, it is kind of take those accounts out, 4 to 30 did grow asset than the company average. What we have done is we have expanded the coverage to cover accounts 4 to 50. Now as we scale, as we grow, we believe there is opportunity to manage the account and that expanded the coverage, like I said, we stepped up investment in the release executive bandwidth and we believe again this -- and of course, continue to focus on three accounts, these are very deep relationships. We have a very, very good feel, we are in fact searching room for a long time and definitely are happy to replicate some of these successes in the top three and also taking it from account 4 to 50, we believe is a very good foundation for growth and we see every customer have their growth account for Syntel.

Bryan Bergin

Okay. Last one for me, what share of your client base now is deployed SyntBots, particularly outside of the top three. Just want to understand the client reception to the managed service offering? Thanks you.

Rakesh Khanna

Approximately one-third of our first half year stages of implementation and we are really getting some fantastic feed and great response. We have a first mover advantage. We have invested ahead of the curve and it’s too early to quantify the results, but we are getting a great initial response as we propagate and go deeper in each of our client segments?

Bryan Bergin

Thank you.

Operator

And our next question comes from the line of James Friedman with Susquehanna. Your line is now open.

James Friedman

Hi. Thank you for taking my questions. It’s James from Susquehanna. I would just ask my two upfront. Bharat in your prepared remarks you were calling out mobility and IoT and analytics. Where are we in the journey for those maybe measured by client penetration or the growth contribution to the company? And then, Rakesh, with regard to your response on the SyntBots question, could you help us think about how SyntBots impact linearity of headcount at the company. Those really two, mobility, IoT, analytics and then the SyntBots question? Thank you.

Rakesh Khanna

Yeah. Thanks Jamie. See from a SyntBots managed is clearly what we see Jamie [inaudible] (36:29), okay. So that definitely has been the trend. We’ve shown that and we are on the same journey, right. So that will continue.

On the digital part, Jamie, that we do expect, if you see digital we grew 10% on an annual basis last year and we do expect digital to grow faster than company average and what we look at digital is really the snap, social, mobility, analytics, cloud plus IoT, including [inaudible] (37:02) IoT, that’s really the combination, which is the frontend stuff that we do and we believe gaining there is great opportunity for us to improve and modernize the core asset, see lot of our customers have huge technical depth, the [inaudible] (37:27) systems offered and we believe in the earnings for our customers, they have expected it just focus on the digital as a engagement there, but to now move to an ecommerce or transactional latter on the digital part, there is comparative need to upgrade the process of SyntBots core systems and that’s really part coupled with the frontend digital and the legacy growth backend we believe that we are in a strong position going in and we see that as the next evolution going forward.

Bharat Desai

Thanks. Thanks, Rakesh. And to your question on where we are on mobility, IoT and analytic, I would say, we have -- we are probably in first inning of penetration with our customers. But we want some very strategic engagement and are executing on some high pessimistic in each of that and kind of now leverage those successes and identify areas in our customer businesses where we have an opportunity to scale this. And each of them has lot of [inaudible] (39:01), I think, the issue that in each case the customer has to create a business case and the work at this stage is kind of mix every work with the customer and identify areas where can be, say, meaningful initiatives. So based on the successes we have seen we think that the potential is quite strong and we are scaling in each area.

James Friedman

Thank you both.

Bharat Desai

I hope I answered your questions, yeah.

James Friedman

Yes.

Operator

And our next question comes from the line of Eric Ciura with Robert W. Baird. Your line is now open.

Eric Ciura

Hi. Thanks for taking my question. First on the margin guidance, operating margin of 24% to 26% next year, can you maybe just walk through the moving parts between FX impact both kind of from the weaker INR and SG&A impacts, as well as the core margin expectations for 2017, fledge down versus ’16?

Anil Agrawal

Yeah. Look, let me start with saying that we are pleased with our margin performance and we are committed to deliver superior margins. As Rakesh alluded, we have stepped our investments in client engagement and geographic expansion, while we continue to invest on early transformation and IT improvements. And our projections do not factor us. We had one gain $3 million in ’16. I mean, this is what [inaudible] (40:48).

Eric Ciura

Okay. Thank you. And then, secondly, just for interest expense next year, maybe about $2 million rate in Q4 our expectation for 2017 as well.

Rakesh Khanna

Yeah. Our interest expense grow [inaudible] (41:12) $3.2 million expense I would say for the…

Eric Ciura

Okay. Thank you.

Rakesh Khanna

Third quarter, I am sorry, in third quarter.

Eric Ciura

Okay.

Operator

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

Puneet Jain

Yeah. Hi. Thanks for taking my question. A related question to one of the prior questions on digital, with high focus -- with the clients’ high focus on digital areas, can you comment on opportunities for small and medium-sized providers that are not your play in those areas, specifically at some of the larger firms are heavily investing in digital, acquiring companies to build capabilities. So how does that -- what does that mean for small mid-cap provider like Syntel competitively?

Zaineb Bokhari

Yeah. Puneet thanks for the question.

Bharat Desai

Yeah. Hi.

Zaineb Bokhari

Go ahead, Bharat.

Bharat Desai

Yeah.

Zaineb Bokhari

Go ahead.

Bharat Desai

Yeah. That’s an interesting question, Puneet, and what we are actually finding is customers are looking for specialists and are looking for organization that can -- that bring special skills as oppose to generic skills and are clearly rethinking there that [inaudible] (42:53). So at the end of the day, I think, what matters is, you understand the customers problem, you know how to solve it and then customer have problem and you have ability to do so. So, I think, we are focused on working with customers to grow our business.

Puneet Jain

Understood. And I don’t know if you disclosed it, what was the size of your digital practice in Q4?

Bharat Desai

We did.

Zaineb Bokhari

We’ve done it.

Rakesh Khanna

This was covered in update we had, 15.8%.

Puneet Jain

Thank you. Sorry, I missed that I think. And last one quickly, given increasing concerns around immigration rule in the U.S., can you talk about your Syntel and what can you do to minimize in part from a potential changes in Visa regulation?

Zaineb Bokhari

Yeah. Puneet, clearly we are monitoring all the politics that happening out that did potentially have an impact on us and our industry. It’s very early to offer any kind of a comment on the developing situation. I think, Syntel, has always been very committed with whatever laws when they are in asset and in addition to that if you look across our history, there is a many period of time during which we have tax evolve and our flexibility has allowed us to do that. I think our target is on continuing to provide uninterrupted high-quality service delivery to our customers. We are certainly monitoring all the developments that are happening there.

Puneet Jain

Got it. Thank you.

Operator

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

Joseph Foresi

Hi. So, my first question is, I think, you talked about the business in Financial Services and Healthcare being delayed as we go into year. Why would it be delayed and not canceled? And from a competitive standpoint have you seen any market share shifts or repurposing of budgets?

Zaineb Bokhari

So, Joe, I will start that and maybe Rakesh will chime in. On the Healthcare side throughout 2016 we saw pending M&A’s created pause in terms of some of the spending and moving forward plans. And as we enter this year there has been some news for that end but there is a lot of policy uncertainty. So what we are seeing is that in that case customers are taking some time to evaluate what their go-forward plans are and we think that it’s a more of a pause.

Similarly in Banking and Financial Services, the macro uncertainty is something that we called out as worsening in Q3, we saw some of that continue in Q4 and as we entered the year some of those conditions have persisted and at the end uncertainty create longer decision cycles and that’s what we are seeing at this point in time.

Joseph Foresi

Okay. And maybe just a little bit more color in Banking and Financial Services, what -- which is it among, maybe you could be more specific on what type of uncertainty is causing the hold up among banks, because a lot of the companies have talked about the interest rate environment getting a little bit better and maybe possibly lower regulation. So is it one client, is it three clients, what are the projects look like. Just a little bit more color would be grateful -- will be helpful?

Zaineb Bokhari

I think the weakness that we are seeing is certainly coming out of the caution with respect to the macroeconomic uncertainty and we've noticed that -- we have seen some of that caution at some of our larger Banking and Financial Services segment and so [inaudible] (47:11).

Joseph Foresi

Okay. And then, if I can speak numbers one in, do you expect headcount utilization to be up in 2017, I know you don't give guidance there, but I am just wondering, how those two pieces balance up throughout the year? Thanks.

Zaineb Bokhari

Yeah. I think, that we are going to increase focus on driving forward, utilization that is our trend and there is nothing here.

Joseph Foresi

Thank you.

Operator

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

Frank Atkins

Thanks for taking my questions. I want to ask a little bit about capital structure, capital allocation, capital return, given the topline trajectory, is there any change to your philosophy when you think about repurchase dividend or M&A?

Anil Agrawal

No. Frank, I think, we will continue to follow the principles we have in the past, as you know, our Board reviews this on a regular basis and what feels that we have excess capital we have returned it to shareholders. So we will continue to monitor our progress and continue to take a close look at capital structure and optimize as we go forward.

Frank Atkins

Okay. This is my follow-up I wanted to go back to kind of the political environment a little bit. One, are you seeing any changes in client behavior as a result of this? And two, any exposure or is it too early to comment on a border adjusted tax type scenario?

Rakesh Khanna

Well, look on the border investment tax, we are still monitoring the policy proposals, but it’s actually too early to comment on the situation that is still developing. However, I can just assure that, Syntel is committed to adherence of whatever [inaudible] (49:14).

Bharat Desai

Yeah. I didn’t quite get your first -- the first part of question?

Frank Atkins

Are you seeing any changes in client behavior as the political environment and headlines around…

Bharat Desai

Political environment, no, I think, no, but the customers [ph] being proactive communicated to (49:35) customers about our efficiency in running in our business and while action taking any customers, but I think everybody is waiting to see what the end up.

Frank Atkins

Okay. Great. Thank you very much.

Operator

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

Vincent Colicchio

Yeah. Bharat refresh when do you expect to potentially benefit from the cancellation of the Healthcare mergers?

Rakesh Khanna

Yeah. It’s a bit early to determined that, we could see some lingering uncertainty, and then, I guess, as clarity emerges we do expect a major recovery, but it’s really too early right now and hopefully, we update you in April with the refresh as we get more detail.

Bharat Desai

Yeah. A number of these involve in the transactions that are right are actually Syntel clients, so we are very closely monitoring the situation. And we will update you as develops on segment as we see.

Vincent Colicchio

And if your lines of communication remain refresh and strong throughout this process with those clients?

Bharat Desai

Absolutely.

Zaineb Bokhari

Absolutely.

Bharat Desai

Absolutely.

Rakesh Khanna

Yes.

Bharat Desai

And in the long-term, we are bullish and really our patience appear entire life management approvals, investments in some of the building that solutions. We are very confident once some of these uncertainties abate maybe we see opportunity of Syntel to add meaningful value...

Rakesh Khanna

Yeah. I think there are two sort of [inaudible] (51:49) initiative each of these organizations will have to take. One is the full area of consumer driven health plan and both organizations [inaudible] (52:02) back up there. So, and this is a key, because that gives them a competitive edge unless we see a customer, the consumers are asking for and we actually have to really [inaudible] (52:18) developing those. So that’s one. And the second is, any fall up may happen from the [inaudible] (52:25) impact we will have a direct impact on the processing and management systems, so both those, I think, we are cautiously following.

Vincent Colicchio

And what was the churn and win rates in the quarter for the business overall and then for digital projects in particular?

Rakesh Khanna

We won five new customers in the quarter. In terms of digital that was roughly 15.8% of our revenue and we grew to 10% on an annual basis and we do expect that to outpace company growth going forward.

Vincent Colicchio

Okay. Thanks for answering my questions.

Bharat Desai

Thank you.

Operator

And our next question comes from the line of David Stratton with Great Lakes Review. Your line is now open.

David Stratton

Good morning. Thank you for taking the questions. Most of that have been answered at this point. But I was wondering if you could talk a little bit about the current pricing environment and the competitive landscape given the overall uncertainty in the entire industry?

Bharat Desai

Yeah. Company level we see pricing is stable. We did see some pressure on running the business and we kind of use our [inaudible] (53:48) driven managed, lights on running a lot of some of pressures we saw in that part. But we saw very strong and see service offering, where -- what we do is we offer a managed lights on kind of work to clients and really the efficiency in that part to fund some of the modernization of the business. So that strategy really helped us to see stable pricing the company is expecting.

David Stratton

All right. Thank you. And then, I don’t know, if you mentioned this earlier, but did you gave a cash flow number and if not would you please?

Anil Agrawal

Okay. So our free cash flow for the quarter was $2.6 million, which we had during the quarter and component of that were cash flow $4.7 million and a CapEx of $2.1 million.

David Stratton

All right. Thank you very much.

Operator

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

Brian Kinstlinger

Great. Good morning. Syntel traditionally focus, I believe compares some of others on maximizing profitability space then we are at, you mentioned, you have transformed the company several times over the years which you have for sure. I know you are always making investments but in the face of two years of declining revenue does management plan to accelerate investments once again to transform the company, is that already happening or will we see SG&A increased steadily this year and next year?

Bharat Desai

I think, we will -- we are -- we have stepped up and we continue to make investments where we can, the competitive edge and to gain share and those investments have already taken into our forecast.

Brian Kinstlinger

Okay. Second question, yeah.

Zaineb Bokhari

Yeah, Brian, if you take a look at the gross margin and the overall margin outlook, those certainly incorporate some of the investments on customer engagement and some of the step of investments on the sale side that we talked about.

Brian Kinstlinger

Great. I know, Rakesh, is the Interim CEO. There has been significant turnover at ex-position since I have covered the company for a long time? And I'm curious is the Board thinking about an out -- looking outside the company, I know mostly your CEOs have come within the range and have grown up with Syntel or did I look for a new point of view and look for someone outside the company, I guess, I am curious, Rakesh, is it likely, is he going to become the CEO, what’s the process right now of finding who will lead the company next?

Bharat Desai

Yeah. That’s something the Board decides on. But I can share with you our philosophy has always been to provide opportunity for our proven leaders inside the company to run any position that comes out and we -- as you know we have a very strong track of having done.

Brian Kinstlinger

Great. Thank you.

Operator

And that concludes the question-and-answer portion of today’s call. I would now like to turn the call back over to Mr. Rakesh Khanna for closing remarks.

Rakesh Khanna

Thank you, Operator. And I want to close today’s call by thanking Syntel’s employees for their contribution. I look forward to updating you on our progress on our next quarter call. Thank you.

Operator

This concludes Syntel’s fourth quarter earnings call. A replay of today’s call will be available until February 23, 2017 by dialing 855-859-2056 and entering the pass code which is 60632903. Thank you.

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