Syntel Inc, the Troy, Michigan-based applications maintenance firm with annual revenue of around $166m has found Europe a difficult nut to crack. It first arrived in the UK in 1997 and has since only managed to clock up $1.6m in business from its European operations.
Syntel has sold services to some top European firms, such as Airtours, Zurich Financial Services, DaimlerChrysler, and Ryder and claims vertical industry experience in insurance, transportation, automotive/manufacturing, retail, and government. But so far the bulk of work has been draw from the company’s low-margin Teamsourcing IT consulting business which is basically a staff augmentation service. According to Syntel, the value of Teamsourcing is that it helps builds up client confidence in the hope of extending the relationship to Syntel’s second main line of business: outsourcing. Calling it Intellisourcing, the company says it can provide outsourcing services for the ongoing management, development and maintenance of business applications including Y2K compliance services. This is one aspect of Syntel that most its European customers have so far passed by.
Most recently Syntel has signed a multi-year deal with UK-based Budget-rent-a-car International to provide a range of applications maintenance services. The deal follows the successful completion of a Syntel managed project that started in October 1998. Working alongside Budget-rent-a-car’s IT personnel Syntel has built a three-tier client/server system to enable customer service representatives to speed up the process of booking car and van reservations. The system is expected to significantly increase the number of calls processed by the car hire company. Syntel also provided assistance in database design/administration, programming, testing and hardware/software configuration.
Some 70% of all Syntel’s revenues is currently derived from just 10 clients. Its number one customer, American International Group (AIG) accounted for no less than 26% of total revenue in FY98. There are all sorts of dangers with this level of reliance. Last year Syntel announced an expected slow-down in revenue growth at the end of the second quarter 98 stating that a number of key clients were focusing upon Y2K work. And true to its word for the first quarter of FY99 Syntel recorded a fall in revenue of 6.7% to $38.8m as compared with $41.6m for the same period in FY98. Gross profit margin improved for the period, however, rising to 38% as compared to 35% for the same period of FY98.
Syntel says that it was never really too heavily involved in Y2K remedial work. But when the company opened its European office in July 1997, Ricky Shankar CEO of Syntel Europe stated that Syntel entered the European market in order to help its customers meet the challenge of becoming Y2K and EMU compliant. We can only presume that Syntel has not been as successful as planned in winning Y2K work. In FY97 the level of Y2K contracts was ‘negligible’ according to Syntel and reached a peak in FY98 when it rose to 18%. The company is now actively trying to reduce this and expects Y2K to account for no more than 9% of revenue in FY99.
Syntel likes to carry out maintenance work on-site at a customer’s premises, and selectively uses its four offshore development centers at Chennai and Mumbai in India. The company’s delivery model is similar to peer group companies such as Infosys and Cognizant Technology Solutions.
Infosys returned revenue for the quarter ending March 31, 99 as $36m, an 81% increase on the previous year. Euro derived revenue for the year ending December 31, 1998 was recorded as $12m, making for 9% of total business. CTS returned revenue for the quarter ending March31, 99 as $20m, an increase of 50% on the previous year. Euro derived revenue for year ending December 31, 1998 stood at $10.48m, an increase of 300% on the previous year.
Both these companies have high exposure to Y2K though. Infosys drew 23.4% of revenue from Y2K in FY98 while CTS reported 30% of its revenue as being Y2K related. Both these companies have a broader business base that Syntel however and a much lower dependence upon a small group of clients.
With $65m in cash and a further $45m available in credit, Syntel says that it is ready to go on the acquisition trail. It has had access to this capital for some time however, with little activity resulting to date. Syntel states that the company’s finances have always been run conservatively and reports difficulties in finding the right buy. We’re not just interested in acquisitions to provide us with IT talent, said a company spokesperson, we’re more interested in buys that will generate revenue right away, extend our geographical reach or provide us with new clients.
