Dear Stephen and all: SYNT just filed their 10Q for the qtr ended 9/30. Figures as we all know were fantastic. Profits up 300% from last year for qtr and ytd, Financial Condition strong as a Rock. For the life of me I cannot understand how it can be trading in this range right now. Seems to me like a stellar performer and quite safe. Anyhow, for the record I am posting the Managements Discussion and Analysis letter (MD&A) for the period below. I dont see a hint in it of anything negative. JDN
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SYNTEL INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Revenues. The Company's revenues consist of fees derived from its
IntelliSourcing and TeamSourcing business units. Revenues increased 29.8% to
$43.6 million in the third quarter of 1998 from $33.6 million in the third
quarter of 1997. Revenues for the first nine months of 1998 increased 44.4% to
$128.4 million from $88.9 million for the first nine months of 1997. The revenue
growth for both the three and nine month periods ended September 30, 1998 was
primarily attributable to growth in existing engagements, the addition of new
IntelliSourcing engagements, the acquisition of the consulting base from
Waypointe Information Technologies Inc., and increased average bill rates.
Worldwide billable headcount, including personnel employed by Syntel India, as
of September 30, 1998 increased to 1,768 compared to 1,593 as of September 30,
1997.
Cost of Revenues. Cost of revenues consist of salaries, payroll taxes, benefits,
relocation costs, immigration costs, finders fees, and trainee compensation for
consultants in both the United States and offshore. Costs of revenues were $27.8
million for the three months ended September 30, 1998, representing 63.7% of
revenues, compared to $23.7 million or 70.5% of revenues for the three month
period ended September 30, 1997. Costs of revenues for the first nine months of
1998 were $81.9 million , representing 63.8% of revenues, compared to $63.4
million or 71.3% of revenues for the nine month period ended September 30, 1997.
The decrease in cost of revenues as a percentage of revenues for both the three
and nine month periods ending September 30, 1998 was attributable primarily to
increased billing rates in both IntelliSourcing and TeamSourcing, as well as a
continued migration of the business mix to higher margin IntelliSourcing. The
impact of the billing rate increases and business mix migration was
approximately 6% and 3%, respectively, to the improvement in the direct margin
percentage for the three month period ending September 30, 1998, and was
approximately 6% and 5%, respectively, for the nine month period ending
September 30, 1998. This was partially offset by increased compensation,
benefits, and other direct costs of approximately 2% and 3%, respectively, for
the three month and nine month periods ending September 30, 1998.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses consist primarily of salaries, payroll taxes and
benefits for sales, finance, administrative, and corporate staff, travel,
telecommunications, business promotions, marketing and various facility costs
for the Company's Global Development Centers. Selling, general, and
administrative costs for the three months ended September 30, 1998 were $7.4
million, or 17.0% of total revenues, compared to $6.3 million, or 18.7% of
revenues for the three months ended September 30, 1997. Selling, general , and
administrative costs for the nine month period ended September 30, 1998 were
$20.4 million, or 15.9% of revenues, compared to $17.4 million, or 19.6% of
revenues for the period ended September 30, 1997. The $1.1 million increase in
selling, general, and administrative expenses in the third quarter of 1998 as
well as the $3.0 million increase for the nine month period ended September 30,
1998, were both primarily the result of additional staffing in sales, business
development, marketing, and administration. It is anticipated that selling,
general, and administrative costs will continue to increase as a percentage of
revenue from third quarter levels due to investments in personnel.
8
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital needs through operations. The
initial investment in the Chennai Global Development Center as well as expansion
of the Mumbai Global Development Center, both of which have been essentially
completed, have been financed from internally generated funds from Syntel
India's operations.
Net cash generated by operating activities was $25.8 million for the first nine
months of 1998. The $25.8 million increase was attributable primarily to net
income for the period of $19.2 million and increases in deferred revenues,
accrued payroll and other liabilities, partially offset by increases in accounts
receivables, advance billings and other current assets. The $4.8 million
increase in accounts receivable at September 30, 1998 as compared to December
31, 1997 was due primarily to a $8.2 million increase in third quarter revenues
over 1997 fourth quarter revenues and a slight improvement in days sales
outstanding. The $4.2 million increase in advanced billings and other assets is
primarily attributable to advanced billings to several new IntelliSourcing
clients and an increase in deferred tax assets. The $8.3 million increase in
accrued payroll and other liabilities is primarily attributable to increased
compensation obligations and warranty reserves associated with fixed price
projects. The $6.2 million increase in deferred revenues is primarily
attributable to the increase in advanced billings as well as an increase in the
timing difference between current billings and the revenue recognized on fixed
price projects for which revenue is recognized on a percentage of completion
basis.
Net cash used in investing activities was $2.8 million for the nine months ended
September 30, 1998, consisting of $1.7 million for facility expansion and
improvements at the Chennai and Mumbai Global Development Centers, $.4 million
in license fees for a new integrated accounting and Human Resources software
system, and $.7 million for computer hardware.
The Company has a line of credit with NBD Bank, which provides for borrowings of
up to $30 million. The line of credit expires on August 31, 1999. The line of
credit contains covenants restricting the Company from, among other things,
incurring additional debt, issuing guarantees and creating liens on the
Company's property, without prior consent of the bank. The line of credit also
requires the Company to maintain certain tangible net worth levels and leverage
ratios. At September 30, 1998, there was no indebtedness outstanding under the
line of credit. Borrowings under the line of credit bear interest at the lower
of the Eurodollar rate plus the applicable Eurodollar margin, the bank's prime
rate or a negotiated rate established with the bank at the time of borrowing. In
addition to the bank line of credit, the Company has a $15.0 million facility
with NBD Bank to finance acquisitions which also expires on August 31, 1999. The
Company has not borrowed any amounts under this facility.
The Company believes that the combination of present cash balances and future
operating cash flows will be sufficient to meet the Company's currently
anticipated cash requirements for at least the next 12 months. |
