Syntel Slashes Outlook On Slow Health-Care Sales, Stock Price Tumbles

Solution provider Syntel cut its 2014 earnings outlook Thursday, citing a longer health-care sales cycle. The company's stock price dropped on the news.

The Troy, Mich.-based solution provider reported a profit and sales boost in the third quarter of its fiscal year, with year-over-year revenue for the quarter ended Sept. 30 climbing 9 percent from $209.9 million to $228.3 million. That, however, fell well short of Zacks Investment Research estimates of $237.5 million.

Third-quarter earnings also increased by 3 percent from $59.4 million to $61.6 million, or $1.47 per share. This topped Zacks' prediction of $1.39 per share.

[Related: Solution Provider Syntel Names New Head Of North American Sales]

But Syntel, No. 40 on the CRN Solution Provider 500 list, also lowered its 2014 earnings outlook from a range of $920 million to $940 million to a range of $908 million to $915 million due to headwinds in the health-care and life sciences verticals.

"We view this pause as temporary, and remain confident that the health-care industry presents a significant opportunity for Syntel," Syntel President and CEO Nitin Rakesh said Thursday on the earnings call.

Wall Street worries, however, sent Syntel's stock price nose-diving 10.1 percent from $90.57 at the end of the day Wednesday prior to the earnings announcement to $81.41 midday Thursday.

Rakesh emphasized that the company's health-care business has grown 20 percent annually for each of the past three years, and said he remains confident that the industry holds significant promise. Syntel derived 16 percent of its total revenue from health care and life sciences, placing it second only to banking and financial services.

But early indications are that customers' health care-related projects -- most of which are discretionary -- got pushed out due to regulatory reform and higher costs associated with sales integration, Rakesh said.

Specifically, Rakesh said many of Syntel's clients suspended projects after the deadline for converting to the tenth revision of the International Classification of Diseases (ICD-10) -- a system of codes used to classify diagnoses and procedures for claims submitted to Medicare and private insurance payers -- was pushed from October 2014 to October 2015.

As the 2015 budget cycle approaches, though, Rakesh believes the health-care spending will come back.

"I'm pretty confident that some of these things will come back in quarters to come," he said. "The industry continues to have high demand for modernization and technology investment."

Europe is leading the way when it comes to Syntel's growth, with sales climbing 21 percent over the past year. Rakesh said he expects Syntel's growth rates in Europe to be larger than the company as a whole as the solution provider works both to expand its footprint with current clients and find new ones.

Another area of focus for Syntel has been its fourth through 30th largest clients, which represent 46 percent of the company's total revenue. Business with those companies has grown 12 percent over the past year, Rakesh said, and he believes there's enough headroom for that segment to continue growing faster than the company as a whole.

"Every segment and every geography has shown good growth," he said.

For the year, Syntel is projecting earnings per share of $5.60 to $5.70, up from $5.50 to $5.65.

PUBLISHED OCT. 16, 2014