Satyam Computer Services Limited
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934
For the quarter ended December 31, 2007
Commission File Number 001-15190
Satyam Computer Services Limited
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
Satyam Technology Center
Bahadurpally Village
Qutbullapur Mandal,
R.R.District — 500855
Hyderabad, Andhra Pradesh
India
(91) 40-3063-3505
(Address of principal executive offices)
Indicate by check mark whether the Registrant files or will file annual reports under cover of
Form 20-F or Form 40-F.
Form 20-F þ Form 40-F o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule 101(b)(1): o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule 101(b)(7): o
Indicate by check mark whether the Registrant by furnishing the information contained in this
Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under
the Securities Exchange Act of 1934.
Yes o No þ
If “Yes” is marked, indicate below the file number assigned to Registrant- in connection with
Rule 12g3-2(b) : Not applicable.
The Company is incorporating by reference, the information and exhibits set forth in this Form
6-K into its registration statement on Form
S-8 (Registration No. 333-13772 and Registration No. 333-139949).
TABLE OF CONTENTS
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| EX-99.1.1 Press Release of the Company, dated January 21, 2008, concerning financial results. |
| EX-99.1.2 Press Release of the Company, dated January 21, 2008, concerning acquisition of M/s Bridge Strategy Group |
| EX-99.2 Summary of Financial Results of the Company, dated January 21, 2008, for the quarter and nine months ended December 31, 2007. |
| EX-99.3 Investor Link News Update of the Company dated January 21, 2008. |
| EX-99.4 Unconsolidated/standalone financial statements for the quarter and nine months ended December 31, 2007 under Indian GAAP (audited). |
| EX-99.5 Consolidated financial statements for the quarter and nine months ended December 31, 2007 under Indian GAAP (unaudited). |
| EX-99.6 Consolidated financial statements for the nine months ended December 31, 2007 under US GAAP (unaudited). |
| EX-99.7 Letter Agreement between the Company and Citibank, N.A. dated November 7, 2007 |
| EX-99.8 Amended and Restated Audit Committee Charter |
2
Currency of Presentation and Certain Defined Terms
Unless otherwise stated in this Quarterly Report or unless the context otherwise requires,
references herein to “we,” “our,” “us,” “Satyam” and “our company” are to Satyam Computer Services
Limited and its consolidated subsidiaries and other consolidated entities.
In this Quarterly Report, references to “US”, “Dollars” or the “United States” are to the United
States of America, its territories and its possessions. References to “India” are to the Republic
of India. References to “GoI” are to the government of India. References to “$,” “Dollars” or
“U.S. dollars” are to the legal currency of the United States and references to “Rs.,” “rupees” or
“Indian rupees” are to the legal currency of India. References to a particular “fiscal” year are to
our fiscal year ended March 31 of such year.
For your convenience, this Quarterly Report contains translations of some Indian rupee amounts into
U.S. dollars which should not be construed as a representation that those Indian rupee or U.S.
dollar amounts could have been, or could be, converted into U.S. dollars or Indian rupees, as the
case may be, at any particular rate, the rate stated below, or at all.
Except as otherwise stated in this Quarterly Report, all translations from Indian rupees to U.S.
dollars contained in this Quarterly Report have been based on the noon buying rate in the City of
New York on December 31, 2007 for cable transfers in Indian rupees as certified for customs
purposes by the Federal Reserve Bank of New York. The noon buying rate on December 31, 2007 was
Rs.39.41 per $1.00.
Information contained in our websites, including our corporate website, www.satyam.com, is not part
of this Quarterly Report.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
We have included statements in this Quarterly Report which contain words or phrases such as “may,”
“will, “ “will likely result,” “believe,” “expect,” “will continue,” “anticipate,” “estimate,”
“intend,” “plan,” “contemplate,” “seek to,” “future,” “objective,” “goal,” “project,” “should” and
similar expressions or variations of such expressions, that are “forward-looking statements.”
Actual results may differ materially from those suggested by the forward-looking statements due to
risks or uncertainties associated with our expectations with respect to, but not limited to, our
ability to implement our strategy and our growth and expansion.
In addition to historical information, this Quarterly Report contains forward-looking statements
within the meaning of section 27A of the Securities Act of 1933, as amended and section 21E of the
Securities Exchange Act of 1934, as amended. The forward-looking statements contained herein are
subject to risks and uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled “Item 2. Operating and Financial
Review and Prospects — Risk Factors” and elsewhere in this Quarterly Report. You are cautioned not
to place undue reliance on these forward-looking statements, which reflect management’s analysis
only as of the date of this Quarterly Report. In addition, you should carefully review the other
information in this Quarterly Report and in our periodic reports and other documents filed with the
United States Securities and Exchange Commission, or SEC, from time to time. Our filings with the
SEC are available on its website, www.sec.gov.
In addition, other factors that could cause results to differ materially from those estimated by
the forward-looking statements contained in this document include, but are not limited to, general
economic and political conditions in India, Southeast Asia and other countries which have an impact
on our business activities, changes in Indian and foreign laws, regulations and taxes, changes in
competition and other factors beyond our control, including the factors described in this “Risk
Factors” section.
We are not required to update any of the forward-looking statements after the date of this
Quarterly Report to conform such statements to actual results or to reflect events or circumstances
that occur after the date the statement is made or to account for unanticipated events.
3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Please see Exhibit 99.6 under Item 6 of this Form 6-K for our unaudited U.S. GAAP consolidated
financial statements for the nine months ended December 31, 2007.
Item 2. Operating and financial review and prospects
The following discussion of the financial condition and results of operations of our company should
be read in conjunction with the financial statements and the related notes included elsewhere in
this document. This discussion contains forward-looking statements that involve risks and
uncertainties. For additional information regarding these risks and uncertainties, please see Risk
Factors.
Overview
We are a global information technology (“IT”) solutions provider, offering a comprehensive range of
IT services to our customers, including application development and maintenance services,
consulting and enterprise business solutions extended engineering solutions, infrastructure
management services. We also offer business process outsourcing or BPO services through our
wholly-owned subsidiary, Satyam BPO Limited (formerly known as Nipuna Services Limited) or Satyam
BPO. We are the fourth largest Indian IT software and services company, based on the amount of
export revenues generated during our fiscal year ended March 31, 2007. Our total revenues for
fiscal 2007 were $1,461.4 million and over the past three fiscal years our revenues have grown at a
compound annual growth rate of 37.2%.
On May 12, 2005, we acquired a 75% interest in Citisoft Plc or Citisoft, a specialist business and
systems consulting firm that has focused on the investment management industry since 1986. Citisoft
is a UK-based firm, with operating presences in London, Boston and New York. On June 29, 2006, we
exercised the call option and acquired the remaining 25% equity interest in Citisoft, making
Citisoft our wholly-owned subsidiary from that date. The operating results of Citisoft are
evaluated by the management under IT services segment. On June 29, 2007, Satyam Computer Services
entered into an amendment agreement with the selling shareholders. As per the amendment agreement,
Satyam Computer Services was required to pay in July 2007, $3.5 million to the selling shareholders
in lieu of the 2008 deferred and earn out consideration and $ 0.2 million towards Employee
Benefit Trust (“EBT”) contribution in lieu of the 2008 EBT contribution. The deferred consideration
of $3.7 million payable in July 2007, has been paid during nine months ended December 31, 2007.
On August 21, 2006, the shareholders of Satyam Computer Services approved a two-for-one stock split
(in the form of stock dividend) which was effective on October 10, 2006. Consequently, Satyam
capitalized an amount of $17.7 million from its retained earnings to common stock. All references
to number of shares, per share amounts, stock option data and market prices of Satyam Computer
Services’ equity shares have been retroactively restated to reflect the stock split unless
otherwise noted.
On November 20, 2006, a Share Purchase, Redemption and Amendment Agreement (“SPRA Agreement”) was
entered into between Satyam, the investors and Satyam BPO. Out of the total preference shares, 50%
of the preference shares ($10 million) would be redeemed for $13.6 million at the target date on
May 21, 2007 and the balance 50% would get converted into equity shares of Satyam BPO based on the
terms of the existing subscription agreement. Since 50% of the preference shares are mandatorily
redeemable, Satyam Computer Services has reclassified 50% of the preference shares as a current
liability measured at fair value and accrued redemption premium amounting to $3.6 million up to
March 31, 2007. The 50% preference shares were redeemed in August 2007 for US$13.8 million.
The investors gave Satyam BPO a notice of conversion of preference shares and in January 2007
preference shares amounting to $10.0 million have been converted into 6,422,267 equity shares of
Satyam BPO. Due to the issue of shares by Satyam BPO, Satyam Computer Services’ ownership interest
in Satyam BPO was reduced from 100.0% as at March 31, 2006 to 74.0% as at March 31, 2007. The
shares issued to the investors are at amounts per share higher than Satyam Computer Services’
average cost per share. With
4
respect to this transaction, the resulting gain of $7.9 million, net of taxes during the year ended
March 31, 2007 has been recorded as an increase in additional paid in capital. Since the losses
applicable to the minority interest in Satyam BPO exceeded the minority interest in the equity
capital of Satyam BPO, such excess and further losses have been charged in Satyam’s consolidated
statement of income.
During the nine months ended December 31, 2007, in accordance with the share purchase agreement,
Satyam Computer Services acquired 24.4% equity shares of Satyam BPO for a consideration of $46.5
million. The acquisition has been accounted using the purchase method and the purchase price has
been allocated to the assets acquired and liabilities assumed as of the date of acquisition, on a
preliminary basis based on management’s estimates. The finalization of the purchase price
allocation, which is expected to be completed within one year from the date of the acquisition,
will result in adjustments to the purchase price allocation. The preliminary allocation of the
purchase price resulted in goodwill of $46.5 million. The goodwill has been allocated to the BPO
segment.
During the nine months ended December 31, 2007 an Employee Stock Option Exercises and Share
Transfer Agreement was entered into between Satyam Computer Services, Satyam BPO and certain
employees of Satyam BPO holding Satyam BPO-Employee Stock Option Plan. Satyam Computer Services has
acquired 286,952 shares at $7.2 per share. Since the award is cash settled at its current fair
value as of the settlement date no incremental compensation cost has been recognized. The
acquisition has been accounted for using the purchase method and the purchase price has been
allocated to the assets acquired and liabilities assumed as of the date of acquisition, on a
preliminary basis based on management’s estimates. The finalization of the purchase price
allocation, which is expected to be completed within one year from the date of the acquisition,
will result in adjustments to the purchase price allocation. The preliminary allocation of the
purchase price resulted in goodwill of $2.1 million. The goodwill has been allocated to the BPO
segment.
Due to the above transaction Satyam Computer Services ownership interest in Satyam BPO was
increased to 100.0% as at December 31, 2007 from 74.0% as at March 31, 2007.
On October 23, 2007, we announced that we intend to acquire Nitor Global Solutions Ltd (“Nitor”),
United Kingdom, a Company specialized in the Infrastructure Management Services (IMS) space. We
intend to acquire 100% of the shares of Nitor. The total consideration for this acquisition would
be approximately $5.6 million including a performance-based payment of up to $2.6 million over two
years conditional upon specified revenue and profit targets being met. The initial consideration of
$3.0 million was payable by January 3, 2008 of which $0.5 million is payable by October 31, 2007.
The transaction was not consummated as of December 31, 2007.
On January 21, 2008, Satyam Computer Services announced its intention of acquiring 100% of the
shares of Bridge Strategy Group LLC, (“Bridge”) a Chicago based strategy and general management
consulting firm for a total consideration of US$35.0 million comprising of initial consideration,
deferred consideration (non contingent) and a contingent consideration.
During fiscal 2007, we also established the following schemes “Associate Stock Option Plan —
Restricted Stock Units (ASOP — RSUs)” and the “Associate Stock Option Plan — RSUs (ADS)”.
We believe customers are increasingly demanding full-service IT providers that have expertise in
both existing systems and new technologies, access to a large pool of highly-skilled technical
personnel and the ability to service customers globally at competitive rates. To meet these
requirements, we offer our customers an integrated global delivery model, which we refer to as the
“Right Sourcing Model,” to provide flexible delivery alternatives to our customers through our
offshore centers located in India, offsite centers which we have established in our major markets,
nearshore centers located geographically near our customers’ premises and through our onsite teams
operating at our customers’ premises. In addition, we use the expertise resident in our focused
industry groups to provide specialized services and solutions to our customers in the
manufacturing, banking and financial services, insurance, TIMES, healthcare, retail and
transportation industries.
Our revenues and profitability have grown significantly in recent years. Our total revenues
increased by 45.2% to $1,524.8 million during the nine months ended December 31, 2007 as compared
to $1,050.1 million during the nine months ended December 31, 2006. Our net income increased by
43.7% to $304.7 million during the nine months ended December 31, 2007 from $212.1 million during
the nine months
5
ended December 31, 2006. Our revenue and profitability growth is attributable to a number of
factors related to the expansion of our business, including increase in the volume of projects
completed for our widening customer base, increase in our associate numbers, increased growth in
our consulting and enterprise business solutions business and a strengthening of our customer base
in United States and Europe. Our growth has continued despite increasing pressure for higher wages
for our associates coupled with pressure for lower prices for our customers. For the nine months
ended December 31, 2007 and in fiscal 2007 our five largest customers accounted for 21.0% and 19.9%
respectively, of our total revenues. As of December 31, 2007, we had 48,661 employees (including
employees of our subsidiaries), whom we refer to as associates, worldwide as compared to 39,018
associates as of March 31, 2007. With our continuing geographical expansion we now have offshore
facilities in India and overseas facilities located in Australia, Canada, China, Hungary, Japan,
Malaysia, Singapore, the United Arab Emirates, the United Kingdom and the United States. We also
have sales and marketing offices located in Brazil, Canada, Germany, Italy, the Netherlands, Saudi
Arabia, Spain, Sweden, the United Kingdom and the United States and sales and marketing offices in
the rest of the world.
Satyam has adopted Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about
Segments of an Enterprise and Related Information” (“SFAS 131”) which requires disclosure of
financial and descriptive information about Satyam’s reportable operating segments. The operating
segments reported below are the segments of Satyam for which separate financial information is
available and for which operating profit/loss amounts are evaluated regularly by executive
management in deciding how to allocate resources and in assessing performance. Management evaluates
performance based on stand-alone revenues and net income for the companies in Satyam. The executive
management evaluates Satyam’s operating segments based on the following two business groups:
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IT services: We provide a comprehensive range of IT services, including application
development and maintenance, consulting and enterprise business solutions, extended
engineering solutions and infrastructure management services. We seek to be the single
service provider capable of servicing all of our customers’ IT requirements. Our consulting
and enterprise business solutions includes services in the area of enterprise resource
planning, customer relationship management and supply chain management, data warehousing
and business intelligence, knowledge management, document management and enterprise
application integration. We also assist our customers in making their existing computing
systems accessible over the Internet. The segment information includes the results of
Citisoft and Knowledge Dynamics Pte Ltd, Singapore, or Knowledge Dynamics, which were
acquired during 2005. |
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BPO: We provide outsourced BPO services in areas such as human resources, finance and
accounting, customer care (such as voice, email and chat) besides also providing
industry-specific transaction processing services. We target our BPO services at the
insurance, healthcare, banking and financial services, transportation, tourism,
manufacturing, automotive, telecommunications, media, utilities and retail industries.
Revenues from this business segment currently do not constitute a significant proportion of
our total revenues; however, we anticipate that this proportion will increase over time.
Our BPO services are offered through our wholly-owned subsidiary, Satyam BPO. |
Revenues
We generate revenues through fees for professional services rendered in our two segments, namely,
IT services and BPO services.
6
The following table sets forth the total revenues (excluding inter-segment revenues) for our
business segments for the three months and nine months ended December 31, 2007 and 2006:
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Three months ended December 31, |
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Nine months ended December 31, |
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2007 |
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2006 |
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|
2007 |
|
|
2006 |
|
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(unaudited) |
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(unaudited) |
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(unaudited) |
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|
(unaudited) |
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| Segment |
|
Amount |
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% |
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|
Amount |
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% |
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Amount |
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% |
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Amount |
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% |
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(in millions, except percentages) |
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IT services |
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$ |
551.9 |
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|
98.0 |
% |
|
$ |
368.5 |
|
|
|
98.1 |
% |
|
$ |
1,493.9 |
|
|
|
98.0 |
% |
|
$ |
1,029.7 |
|
|
|
98.1 |
% |
BPO |
|
|
11.0 |
|
|
|
2.0 |
|
|
|
7.1 |
|
|
|
1.9 |
|
|
|
30.9 |
|
|
|
2.0 |
|
|
|
20.4 |
|
|
|
1.9 |
|
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Total |
|
$ |
562.9 |
|
|
|
100.0 |
% |
|
$ |
375.6 |
|
|
|
100.0 |
% |
|
$ |
1,524.8 |
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|
100.0 |
% |
|
$ |
1,050.1 |
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100.0 |
% |
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We discuss below the components of our IT services revenues by technology type, contract type,
offshore or onshore designation, top customers and customer geography:
Revenues by technology
The vast majority of our revenues are generated from our various IT service offerings. The
following table presents our IT services revenues (excluding inter-segment revenues) by type of
service offering for the periods indicated:
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Three months ended December 31, |
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Nine months ended December 31, |
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2007 |
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2006 |
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2007 |
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2006 |
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(unaudited) |
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(unaudited) |
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(unaudited) |
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|
(unaudited) |
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| Technology type |
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Amount |
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% |
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|
Amount |
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% |
|
|
Amount |
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% |
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|
Amount |
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|
% |
|
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(in millions, except percentages) |
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Application development and
maintenance services |
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$ |
242.6 |
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|
44.0 |
% |
|
$ |
172.8 |
|
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|
46.9 |
% |
|
$ |
652.2 |
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43.7 |
% |
|
$ |
489.3 |
|
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|
47.5 |
% |
Consulting and enterprise
business solutions |
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|
249.6 |
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45.2 |
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155.7 |
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42.3 |
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|
672.7 |
|
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45.0 |
|
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425.7 |
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41.3 |
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Extended engineering solutions |
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37.5 |
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6.8 |
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25.5 |
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6.9 |
|
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103.4 |
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6.9 |
|
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66.4 |
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6.5 |
|
Infrastructure management services |
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22.2 |
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4.0 |
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14.5 |
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3.9 |
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65.6 |
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4.4 |
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48.3 |
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4.7 |
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Total |
|
$ |
551.9 |
|
|
|
100.0 |
% |
|
$ |
368.5 |
|
|
|
100.0 |
% |
|
|
1,493.9 |
|
|
|
100.0 |
% |
|
$ |
1,029.7 |
|
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|
100.0 |
% |
|
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Revenues by contract type
Our IT services are provided on a time-and-material basis or on a fixed-price basis. Revenues from
IT services provided on a time-and-material basis are recognized in the period that the services
are performed. Revenues from IT services provided on a fixed-price basis are recognized under the
percentage of completion method of accounting and are recorded when we can reasonably estimate the
time period to complete the work. The percentage of completion estimates are subject to periodic
revisions and the cumulative impact of any revision in the estimates of the percentage of
completion is reflected in the period in which the changes become known to us. Although we have
revised our project completion estimates from time to time, such revisions have not materially
affected our reported revenues to date. In recent years, we have experienced some pricing pressure
from our customers, which has had a negative impact on margins. In response to current market
trends, we are considering the viability of introducing performance-based or variable-pricing
contracts. Even though in percentage terms there has been decline in fixed-price contracts
for the nine months ended December 31, 2007 as compared with the nine months ended December 31,
2006, we expect that revenue from fixed-price contracts will increase in the long term.
The following table presents our IT services revenues (excluding inter-segment revenues) by type of
contract for the periods indicated:
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|
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|
|
|
|
|
|
|
| |
|
Three months ended December 31, |
|
|
Nine months ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
| |
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
| Contract type |
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
| |
|
(in millions, except percentages) |
|
Time-and-material
basis |
|
$ |
382.8 |
|
|
|
69.4 |
% |
|
$ |
231.8 |
|
|
|
62.9 |
% |
|
$ |
1,020.0 |
|
|
|
68.3 |
% |
|
$ |
612.4 |
|
|
|
59.5 |
% |
Fixed-price basis |
|
|
169.1 |
|
|
|
30.6 |
|
|
|
136.7 |
|
|
|
37.1 |
|
|
|
473.9 |
|
|
|
31.7 |
|
|
|
417.3 |
|
|
|
40.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
551.9 |
|
|
|
100.0 |
% |
|
$ |
368.5 |
|
|
|
100.0 |
% |
|
$ |
1,493.9 |
|
|
|
100.0 |
% |
|
$ |
1,029.7 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
Revenues based on offshore and onsite/offsite
We provide our IT services through a combination of (i) offshore centers located throughout India,
(ii) teams working onsite at a customer’s location, (iii) nearshore centers located in Canada,
China and Hungary to service U.S.-based, Asia Pacific based and Europe based customers,
respectively and (iv) 29 offsite centers in locations in Australia, Brazil, Canada, China, Germany,
Hungary, Japan, Korea, Malaysia, Singapore, South Africa, Thailand, the United Arab Emirates, the
United Kingdom and the United States. Offshore IT services’ revenues consist of revenues earned
both from IT services work conducted at our offshore centers in India as well as onsite work
conducted at customers’ premises which is related to offshore work. Offshore IT services’ revenues
do not include revenues from our offsite or nearshore centers located outside of India or revenues
from onsite work which is not related to any offshore work. These latter revenues are included in
onsite/offsite revenues.
We generally charge higher rates and incur higher compensation expenses for work performed by our
onsite teams at our customer’s premises or at our offsite and nearshore centers, as compared to
work performed at our offshore centers in India. Services performed by our onsite teams or at our
offsite centers typically generate higher revenues per capita, but at a lower gross margin, than
the same amount of services performed at our offshore centers in India.
The following table presents our IT services revenues (excluding inter-segment revenues) based on
the location where services are performed for the periods indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended December 31, |
|
|
Nine months ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
| |
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
| Location |
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
| |
|
(in millions, except percentages) |
|
Offshore |
|
|
284.1 |
|
|
|
51.5 |
% |
|
$ |
184.6 |
|
|
|
50.1 |
% |
|
$ |
761.5 |
|
|
|
51.0 |
% |
|
$ |
498.2 |
|
|
|
48.4 |
% |
Onsite/Offsite |
|
|
267.8 |
|
|
|
48.5 |
|
|
|
183.9 |
|
|
|
49.9 |
|
|
|
732.4 |
|
|
|
49.0 |
|
|
|
531.5 |
|
|
|
51.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
551.9 |
|
|
|
100.0 |
% |
|
$ |
368.5 |
|
|
|
100.0 |
% |
|
$ |
1,493.9 |
|
|
|
100.0 |
% |
|
$ |
1,029.7 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by top customers
Our top two customers accounted for 10.4% of our IT services’ revenues during the nine months ended
December 31, 2007, as compared to 11.4% of IT services’ revenues during the nine months ended
December 31, 2006. Our top five customers accounted for 20.1% of IT services’ revenues during the
nine months ended December 31, 2007, as compared to 21.5% of IT services’ revenues during the nine
months ended December 31, 2006.
Revenues based on customer location
We have experienced increasing volumes of business from customers located in the United States and
Europe, attributable to both new customers and additional business from existing customers. We
expect that most of our revenues will be generated in the United States followed by Europe and Rest
of the world in the remaining quarter in fiscal 2008. The following table gives the composition of
our IT services revenues (excluding inter-segment revenues) based on the location of our customers
for the periods indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended December 31, |
|
|
Nine months ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
| |
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
| Geographic location |
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
| |
|
(in millions, except percentages) |
|
North America |
|
$ |
325.3 |
|
|
|
58.9 |
% |
|
$ |
233.4 |
|
|
|
63.3 |
% |
|
$ |
881.2 |
|
|
|
59.0 |
% |
|
$ |
660.9 |
|
|
|
64.2 |
% |
Europe |
|
|
115.4 |
|
|
|
20.9 |
|
|
|
71.4 |
|
|
|
19.4 |
|
|
|
310.8 |
|
|
|
20.8 |
|
|
|
193.6 |
|
|
|
18.8 |
|
Japan |
|
|
8.7 |
|
|
|
1.6 |
|
|
|
6.1 |
|
|
|
1.7 |
|
|
|
22.2 |
|
|
|
1.5 |
|
|
|
15.1 |
|
|
|
1.5 |
|
India |
|
|
15.9 |
|
|
|
2.9 |
|
|
|
16.6 |
|
|
|
4.5 |
|
|
|
52.1 |
|
|
|
3.5 |
|
|
|
46.8 |
|
|
|
4.5 |
|
Rest of the world |
|
|
86.6 |
|
|
|
15.7 |
|
|
|
41.0 |
|
|
|
11.1 |
|
|
|
227.6 |
|
|
|
15.2 |
|
|
|
113.3 |
|
|
|
11.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
551.9 |
|
|
|
100.0 |
% |
|
$ |
368.5 |
|
|
|
100.0 |
% |
|
$ |
1,493.9 |
|
|
|
100.0 |
% |
|
$ |
1,029.7 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Expenses
Cost of revenues
Our cost of revenues consists primarily of the compensation cost of technical staff,
stock-compensation cost, depreciation on dedicated assets and system and application software
costs, amortization of intangibles, travel costs, data communication expenses and other expenses
incurred that are related to the generation of revenue.
The principal component of our cost of revenues is the wage cost of our technical associates. Wage
cost in India, including in the IT services industry, has historically been significantly lower
than wage cost in the United States and Europe for comparably skilled professionals. However, as
wages in India increase at a faster rate than in the United States, we may experience increase in
our costs of personnel, particularly project managers and other mid-level professionals.
The utilization levels of our technical associates also affect our revenue and gross profits. We
calculate utilization levels on a monthly basis, based on the ratio of the actual number of hours
billed by technical associates in such month to the total number of billable hours. For purposes of
such calculation, we assume that an associate is 100.0% utilized if he or she works 157 hours per
month. We manage utilization by monitoring project requirements and timetables. The number of
associates assigned to a project will vary according to size, complexity, duration and demands of
the project. Associate utilization levels for IT services were 85.5% and 83.9% for the nine months
ended December 31, 2007 and 2006 respectively.
Selling, general and administrative expenses
Selling, general and administrative expenses generally include the compensation costs of sales,
management and administrative personnel, stock-compensation cost, travel costs, advertising,
business promotion, depreciation on assets, rent, repairs, electricity and other general expenses
not attributable to cost of revenues.
Subsidiaries
As of December 31, 2007, we have six wholly-owned subsidiaries, Satyam BPO, Satyam Technologies
Inc., or STI, Satyam Computer Services (Shanghai) Company Limited, or Satyam Shanghai, Citisoft,
Knowledge Dynamics and Satyam Computer Services (Nanjing) Company Limited. These six subsidiaries
have been consolidated in our consolidated financial statements for the nine months ended December
31, 2007.
Citisoft
On May 12, 2005, Satyam Computer Services acquired a 75% interest in Citisoft Plc or Citisoft, a
specialist business and systems consulting firm located in the United Kingdom that has focused on
the investment management industry since 1986. The results of Citisoft’s operations have been
consolidated by Satyam Computer Services from the consummation date of May 12, 2005. The
acquisition has been accounted for by following the purchase method of accounting.
The consideration for the 75% equity interest in Citisoft amounted to $17.4 million comprising of
an initial consideration of $14.3 million (including direct acquisition costs of $0.9 million) and
deferred consideration (non-contingent) of $3.1 million. Deferred consideration for the acquisition
of the 75% equity interest was accounted for as part of the purchase consideration and disclosed as
a current liability in the consolidated balance sheet as of March 31, 2006 this has been paid
subsequently in June 2006. Satyam Computer Services was also required to pay a maximum earn out
consideration amounting to $3.9 million in May 2007 based on achievement of targeted revenues and
profits for the year ended April 30, 2007. Since the revenue and profit targets have not been
achieved, the earn out consideration is not payable.
Satyam Computer Services had a call option and the minority shareholders had a put option to
acquire / sell the balance 25% equity shares in two tranches 12.5% on April 30, 2007 and 12.5% on
April 30, 2008. The consideration payable for the first tranche of 12.5% equity shares on April 30,
2007 would amount to $2.8 million and a maximum earn-out consideration amounting to $2.7 million
based on achievement of
9
targeted revenues and profits. The consideration payable for the second tranche of 12.5% equity shares on
April 30, 2008 would amount to $2.9 million and a maximum earn-out consideration amounting to $4.2
million based on achievement of targeted revenues and profits. Satyam Computer Services recorded
the put option at fair value at each balance sheet date, with the initial fair value of the put
option included as part of the consideration for its 75.0% interest in Citisoft. The difference
between the fair values at each valuation date was charged to selling, general and administration
expenses in statement of income. On the basis of an independent valuation, the value of put option
was $Nil and $1.1 million as of May 12, 2005 and March 31, 2006 respectively.
On June 29, 2006, Satyam Computer Services exercised the call option and acquired the remaining 25%
equity interest for a deferred consideration of $3.2 million and $ 3.3 million payable on April
30, 2007 and 2008 respectively and a maximum earn-out consideration of $2.7 million and $4.2
million payable in May 2007 and 2008 respectively based on achievement of targeted revenues and
profits for the years ended April 30, 2007 and 2008 respectively. As a result Satyam reversed the
put option liability during the year ended March 31, 2007. The acquisition was accounted for as a
step purchase of the 25% equity interest, the deferred consideration for the acquisition of the 25%
equity interest was accounted for as part of the purchase consideration and disclosed as a current
liability in the consolidated balance sheet as of March 31, 2007. The deferred consideration of
$3.2 million payable on April 30, 2007 has been paid during the nine months ended December 31,
2007. Since the revenue and profit targets have not been achieved, the 2007 earn out consideration
is not payable.
Satyam Computer Services is also required to fund an Employee Benefit Trust (“EBT”) formed by
Citisoft for the purpose of providing additional incentive to employees to contribute to the
success of Citisoft. Satyam was required to fund a maximum of $3.4 million and $1.8 million on
April 30, 2007 and 2008 respectively, based on achievement of targeted revenues and profits. Satyam
Computer Services paid an amount of $2.0 million towards EBT contribution in April 2007.
On June 29, 2007, Satyam Computer Services entered into an amendment agreement with the selling
shareholders. As per the amendment agreement, Satyam Computer Services is required to pay in July
2007, $3.5 million to the selling shareholders in lieu of the 2008 deferred and earn out
consideration and $ 0.2 million towards EBT contribution in lieu of the 2008 EBT contribution.
Satyam Computer Services had accounted for the deferred consideration of $3.3 million as part of
purchase consideration and disclosed it as a current liability. Satyam Computer Services has now
accounted for $0.4 million in the consolidated statement of income for the three months ended June
30, 2007 as part of cost of revenues and disclosed it as a current liability as of June 30, 2007.
The deferred consideration of $3.7 million payable in July 2007, has been paid during the nine
months ended December 31, 2007.
The purchase consideration for acquisition of interest has been allocated to the assets acquired
and liabilities assumed as of the date of acquisition based on management’s estimates and a
valuation done by an independent valuer in accordance with Statement of Financial Accounting
Standards No. 141, Business Combinations. The goodwill has been allocated to the IT services
segment. The purchase price allocation is as follows:
| |
|
|
|
|
|
|
|
|
| $in millions |
| |
|
Acquisition of |
|
Acquisition of |
| |
|
75% interest |
|
25% interest |
Purchase price |
|
$ |
17.4 |
|
|
$ |
5.9 |
|
Allocated to: |
|
|
|
|
|
|
|
|
Net current assets |
|
$ |
2.2 |
|
|
$ |
0.7 |
|
Tangible assets |
|
|
0.3 |
|
|
|
0.1 |
|
Customer Contracts related intangibles |
|
|
0.8 |
|
|
|
0.3 |
|
Customer relationship related intangibles |
|
|
5.4 |
|
|
|
0.7 |
|
Trade name |
|
|
0.7 |
|
|
|
0.1 |
|
Goodwill |
|
|
10.3 |
|
|
|
4.4 |
|
Deferred tax liability |
|
|
(2.3 |
) |
|
|
(0.4 |
) |
| |
Total |
|
$ |
17.4 |
|
|
$ |
5.9 |
|
| |
Pro forma disclosure regarding this acquisition has not been provided because it is not material to
the operations of the Company.
10
Knowledge Dynamics
On July 21 2005, Satyam Computer Services announced its intention to acquire 100% of the shares of
Knowledge Dynamics, a leading Data Warehousing and Business Intelligence Solutions provider. The
transaction was consummated on October 1, 2005, the date of transfer of shares to Satyam Computer
Services and Satyam Computer Services has consolidated Knowledge Dynamics, from October 1, 2005.
The acquisition has been accounted for by following the purchase method of accounting.
The consideration for this acquisition amounted to $3.3 million comprising of initial consideration
of $1.8 million (including direct acquisition costs of $11 thousand) and deferred consideration
(non-contingent) of $1.5 million. The total deferred consideration for the acquisition of $1.5
million has been accounted for as part of the purchase consideration out of which $0.8 million has
been paid during the year ended March 31, 2007 and $0.7 million has been disclosed as a current
liability in the consolidated balance sheet as of March 31, 2007 and has been subsequently paid in
April 2007. Satyam Computer Services was also required to pay a maximum earn out consideration
amounting to $1.1 million and $1.1 million on April 30, 2007 and 2008 respectively based on the
achievement of targeted revenues and profits from the date of acquisition upto April 30, 2007 and
2008 respectively. The earn-out consideration will be accounted for as purchase consideration when
the contingency is resolved. Since the revenue and profit targets have not been achieved, the 2007
earn out consideration is not payable. During the nine months ended December 31, 2007, Satyam
Computer Services paid an amount of $0.8 million towards deferred consideration payable in April
2007.
On July 19, 2007, Satyam Computer Services entered into an amendment agreement with the selling
shareholders. As per the amendment agreement, Satyam Computer Services is required to pay $0.7
million to the selling shareholders in July 2007 and deferred payment of $0.2 million and a maximum
earn out consideration of $0.5 million payable in May 2008 in lieu of 2008 earn out consideration.
The earn out consideration is payable based on achievement of targeted revenues. Satyam has
accounted for $0.9 million in the consolidated statement of income as part of cost of revenues and
$0.7 million has been paid in the nine months ended December 31, 2007. The deferred payment of $0.2
million payable in May 2008 was disclosed as a current liability in the consolidated balance sheet.
The earn-out consideration will be accounted for as purchase consideration when the contingency is
resolved.
The purchase consideration has been allocated to the assets acquired and liabilities assumed as of
the date of acquisition based on management’s estimates and a valuation done by an independent
valuer in accordance with Statement of Financial Accounting Standards No. 141, Business
Combinations. The goodwill has been allocated to the IT services segment. The purchase price
allocation is as follows:
| |
|
|
|
|
|
| |
|
$in millions |
Purchase price |
|
|
$ |
3.3 |
|
|
|
|
|
|
|
Allocated to: |
|
|
|
|
|
Net current assets |
|
|
$ |
0.5 |
|
Customer Contracts and Related Relationships |
|
|
|
1.0 |
|
Trade name |
|
|
|
0.1 |
|
Goodwill |
|
|
|
2.1 |
|
Deferred tax liability |
|
|
|
(0.4 |
) |
| |
Total |
|
|
$ |
3.3 |
|
| |
Pro forma disclosure regarding this acquisition has not been provided because it is not material to
the operations of the Company.
Acquisition of Minority Interests in Satyam BPO
During the nine months ended December 31, 2007, in accordance with the share purchase agreement,
Satyam Computer Services acquired 24.4% equity shares of Satyam BPO for a consideration of $46.5
million. The acquisition has been accounted using the purchase method and the purchase price has
been allocated to the assets acquired and liabilities assumed as of the date of acquisition, on a
preliminary basis based on management’s estimates. The finalization of the purchase price
allocation, which is expected to be completed within one year from the date of the acquisition,
will result in adjustments to the purchase price
11
allocation. The preliminary allocation of the
purchase price resulted in goodwill of $46.5 million. The goodwill has been allocated to the BPO segment.
During the nine months ended December 31, 2007, an Employee Stock Option Exercises and Share
Transfer Agreement was entered into between Satyam Computer Services, Satyam BPO and certain
employees of Satyam BPO holding Satyam BPO-ESOP. Satyam Computer Services has acquired 286,952
shares at $7.2 per share. Since the award is cash settled at its current fair value as of the
settlement date no incremental compensation cost has been recognized. The acquisition has been
accounted for using the purchase method and the purchase price has been allocated to the assets
acquired and liabilities assumed as of the date of acquisition, on a preliminary basis based on
management’s estimates. The finalization of the purchase price allocation, which is expected to be
completed within one year from the date of the acquisition, will result in adjustments to the
purchase price allocation. The preliminary allocation of the purchase price resulted in goodwill of
$2.1 million. The goodwill has been allocated to the BPO segment.
Due to the above transaction Satyam Computer Services’ ownership interest in Satyam BPO was
increased to 100% as at December 31, 2007 from 74.0% as at March 31, 2007.
Preferred Stock of Subsidiary
Satyam BPO issued 45,669,999 and 45,340,000 0.05% convertible redeemable cumulative preference
shares of par value Rs 10 ($0.23) per share in October 2003 and June 2004 respectively to the
investors at an issue price of Rs.10 ($0.23) per share, in exchange for an aggregate consideration
of $20 million.
As per the agreement, these preference shares were mandatorily convertible into equity shares of
Satyam BPO no later than June 2006, if Satyam BPO achieved certain targets for revenues and profits
earned up to March 31, 2006. If these targeted revenues and profits were not achieved by Satyam BPO
along with other triggering events, the investors had an option to either redeem these preference
shares or convert them. Although certain triggering events for early redemption as per the
agreement occurred during the period January 2004 to December 2004 the investors waived the right
of early redemption. Further Satyam BPO had not achieved the targeted revenues and profits upto
March 2006.
If not converted, early converted or redeemed, these convertible preference shares were redeemable
on maturity in June 2007 at a redemption premium, which could range between 7.5% to 13.5% p.a. The
Investors were entitled to receive dividends at the rate of 0.05% per cent per annum, on the face
value of Rs. 10 ($0.23) from the date of issuance of such Preference Shares. The dividends were
cumulative and payable in cash at the rate indicated above, whether or not they had been declared
and whether or not there were profits, surplus or other funds of Satyam BPO legally available for
the payment of dividends. These preference shares were ranked senior to all classes of Satyam BPO’s
existing capital stock or established subsequently with respect to dividend distributions and
repayment of capital and premium upon a Bankruptcy Event or Change in Control with respect to
Satyam BPO, unless the terms and conditions of such class expressly provide that such class would
rank senior to or on parity with the convertible redeemable cumulative preference shares. No
dividends were paid on the preference shares.
On November 20, 2006, a Share Purchase, Redemption and Amendment Agreement (“SPRA Agreement”) was
entered into between Satyam, the Investors and Satyam BPO. Out of the total preference shares, 50%
of the preference shares ($ 10 million) were to be redeemed for $ 13.6 million at the target
date on May 21, 2007 and the balance 50% would get converted into equity shares of Satyam BPO based
on the terms of the existing subscription agreement. Since 50% of the Preference Shares were
mandatorily redeemable, Satyam had reclassified 50% of the preference shares as a current liability
measured at fair value and accrued redemption premium amounting to $3.6 million up to March 31,
2007. The 50% preference shares were redeemed in August 2007 for $13.8 million.
Further as per the SPRA Agreement, Satyam agreed to purchase and the Investors agreed to sell these
equity shares at an aggregate purchase price based on a formula. If the share purchase closing
would occur on or before the share purchase target date (May 21, 2007) then the purchase price
would range from a minimum of $ 35 million to maximum of $ 45 million, however if an
acceleration event would occur the purchase price would equal $45 million. If the share purchase
closing would occur after the share purchase target date then the purchase price would not be less
than $ 35 million however if an acceleration event would occur the purchase price would not be
less than $45 million. This was subject to fulfillment of terms
12
and conditions specified in the agreement and obtaining necessary approvals
from appropriate authorities. As of March 31, 2007 an acceleration event had occurred.
The forward contract was freestanding and had been accounted for under SFAS 150 and the issuance of
Satyam BPO’s equity shares was considered as a minority interest. The Investors gave Satyam BPO a
Notice of Conversion of Preference Shares and in January 2007, preference shares amounting to $10
million were converted into 6,422,267 equity shares of Satyam BPO. Due to the issue of shares by
Satyam BPO, Satyam Computer Services’ ownership interest in Satyam BPO reduced from 100.0% as at
March 31, 2006 to 74.0% as at March 31, 2007. The shares issued to the Investors were at amounts
per share higher than Satyam Computer Services’ average cost per share. With respect to this
transaction, the resulting gain of $7.9 million, net of taxes during the year ended March 31, 2007
was recorded as an increase in additional paid in capital. Since the losses applicable to the
minority interest in Satyam BPO exceeded the minority interest in the equity capital of Satyam BPO,
such excess and further losses were charged in Satyam’s consolidated statement of income. The
Investors holding in Satyam BPO had been accounted for as a minority interest.
The forward contract had a zero fair vale at inception and at balance sheet date since as per
regulatory requirements the transaction could take place only at fair value. Upon settlement of the
forward the acquisition of the minority interest was reflected as a step acquisition. (Refer note
on Acquisition of Minority interests in Satyam BPO).
Income Taxes
Effective April 1, 2007, Satyam adopted the provisions of Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of
FASB Statement No. 109 (“FIN 48”). The Interpretation clarifies the accounting for uncertainty in
income taxes recognized in an entity’s financial statements and prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition. The adoption did not have a material impact on our financial position, cash flows,
or results of operations.
The statutory corporate income tax rate in India is currently 30.0%. This tax rate is presently
subject to a 10.0% surcharge. The amount of tax and surcharge payable is further subject to a 3.0%
education cess, resulting in an effective tax rate of 33.99%. The provision for foreign taxes is
due to income taxes payable in overseas tax jurisdictions by our offsite, nearshore and onsite
centers, principally in the United States. We benefit from tax incentives provided to software
entities as an exemption from payment of Indian corporate income taxes until the earlier of fiscal
2009 or 10 consecutive years of operations of software development facilities designated as
“Software Technology Parks,” or STP units. The benefits of this tax incentive have historically
resulted in our effective tax rate being well below statutory rates. The exemption for two of our
STP units in Hyderabad and one in Bangalore expired at the beginning of fiscal 2006 and one in
Hyderabad, Chennai, Pune and Bhubaneswar expired at the beginning of fiscal 2007, and the exemption
for two and six of our STP units will expire in fiscal 2008 and fiscal 2009 respectively. We also
earn certain other foreign income and domestic income, which are taxable irrespective of the tax
holiday as stated above.
Our subsidiaries are subject to income taxes of the countries in which they operate. Our
subsidiaries’ operating loss carried forward for tax purposes amounted to approximately $29.8
million as of December 31, 2007, which is available as an offset against future taxable income of
such entities. These carried forward amounts expire at various dates primarily over eight to twenty
years. Realization is dependent on such subsidiaries generating sufficient taxable income prior to
expiration of the loss carried forward. A valuation allowance is established attributable to
deferred tax assets and losses carried forward in subsidiaries where, based on available evidence,
it is more likely than not that they will not be realized. Currently, a full valuation allowance
has been made for such losses since we believe that our subsidiaries will not generate sufficient
taxable income prior to expiration of carry forwards and under Indian regulations we are not
allowed to file a consolidated tax return.
13
RESULTS OF OPERATIONS
The following table sets forth operating data in dollars and as a percentage of total revenues for
the periods indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended December 31, |
|
|
Nine months ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
| |
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
| Statement of Operations data: |
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
| |
|
(in millions, except percentages) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT services |
|
$ |
552.2 |
|
|
|
98.1 |
% |
|
$ |
368.7 |
|
|
|
98.2 |
% |
|
$ |
1,495.0 |
|
|
|
98.0 |
% |
|
$ |
1,030.2 |
|
|
|
98.1 |
% |
BPO |
|
|
15.3 |
|
|
|
2.7 |
|
|
|
9.6 |
|
|
|
2.6 |
|
|
|
42.2 |
|
|
|
2.8 |
|
|
|
26.6 |
|
|
|
2.5 |
|
Inter-segment |
|
|
(4.6 |
) |
|
|
(0.8 |
) |
|
|
(2.7 |
) |
|
|
(0.8 |
) |
|
|
(12.4 |
) |
|
|
(0.8 |
) |
|
|
(6.7 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
562.9 |
|
|
|
100.0 |
|
|
|
375.6 |
|
|
|
100.0 |
|
|
|
1,524.8 |
|
|
|
100.0 |
|
|
|
1,050.1 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT services |
|
|
(350.8 |
) |
|
|
(62.3 |
) |
|
|
(232.8 |
) |
|
|
(62.0 |
) |
|
|
(955.2 |
) |
|
|
(62.6 |
) |
|
|
(660.2 |
) |
|
|
(62.9 |
) |
BPO |
|
|
(14.0 |
) |
|
|
(2.5 |
) |
|
|
(7.3 |
) |
|
|
(1.9 |
) |
|
|
(36.2 |
) |
|
|
(2.4 |
) |
|
|
(19.6 |
) |
|
|
(1.9 |
) |
Inter-segment |
|
|
4.3 |
|
|
|
0.8 |
|
|
|
2.6 |
|
|
|
0.8 |
|
|
|
11.4 |
|
|
|
0.7 |
|
|
|
6.5 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
(360.5 |
) |
|
|
(64.0 |
) |
|
|
(237.5 |
) |
|
|
(63.1 |
) |
|
|
(980.0 |
) |
|
|
(64.3 |
) |
|
|
(673.3 |
) |
|
|
(64.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT services |
|
|
201.4 |
|
|
|
35.7 |
|
|
|
135.9 |
|
|
|
36.2 |
|
|
|
539.8 |
|
|
|
35.4 |
|
|
|
370.0 |
|
|
|
35.2 |
|
BPO |
|
|
1.3 |
|
|
|
0.3 |
|
|
|
2.3 |
|
|
|
0.6 |
|
|
|
6.0 |
|
|
|
0.4 |
|
|
|
7.0 |
|
|
|
0.7 |
|
Inter-segment |
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
— |
|
|
|
(1.0 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
|
202.4 |
|
|
|
35.9 |
|
|
|
138.1 |
|
|
|
36.8 |
|
|
|
544.8 |
|
|
|
35.7 |
|
|
|
376.8 |
|
|
|
35.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT services |
|
|
(92.9 |
) |
|
|
(16.5 |
) |
|
|
(57.0 |
) |
|
|
(15.2 |
) |
|
|
(248.4 |
) |
|
|
(16.3 |
) |
|
|
(156.9 |
) |
|
|
(14.9 |
) |
BPO |
|
|
(2.6 |
) |
|
|
(0.5 |
) |
|
|
(3.6 |
) |
|
|
(1.0 |
) |
|
|
(9.8 |
) |
|
|
(0.6 |
) |
|
|
(9.5 |
) |
|
|
(0.9 |
) |
Inter-segment |
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
1.0 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and
administrative expenses |
|
|
(95.2 |
) |
|
|
(16.9 |
) |
|
|
(60.5 |
) |
|
|
(16.2 |
) |
|
|
(257.2 |
) |
|
|
(16.9 |
) |
|
|
(166.2 |
) |
|
|
(15.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT services |
|
|
108.5 |
|
|
|
19.2 |
|
|
|
78.9 |
|
|
|
21.0 |
|
|
|
291.4 |
|
|
|
19.1 |
|
|
|
213.1 |
|
|
|
20.3 |
|
BPO |
|
|
(1.3 |
) |
|
|
(0.2 |
) |
|
|
(1.3 |
) |
|
|
(0.3 |
) |
|
|
(3.8 |
) |
|
|
(0.2 |
) |
|
|
(2.5 |
) |
|
|
(0.2 |
) |
Inter-segment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income/(loss) |
|
|
107.2 |
|
|
|
19.0 |
|
|
|
77.6 |
|
|
|
20.7 |
|
|
|
287.6 |
|
|
|
18.9 |
|
|
|
210.6 |
|
|
|
20.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
17.3 |
|
|
|
3.1 |
|
|
|
9.6 |
|
|
|
2.6 |
|
|
|
50.5 |
|
|
|
3.3 |
|
|
|
22.4 |
|
|
|
2.1 |
|
Interest expense |
|
|
(2.2 |
) |
|
|
(0.4 |
) |
|
|
(0.7 |
) |
|
|
(0.2 |
) |
|
|
(4.0 |
) |
|
|
(0.3 |
) |
|
|
(1.9 |
) |
|
|
(0.2 |
) |
Other income/(expense), net |
|
|
1.5 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
1.5 |
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
0.1 |
|
Gain/ (loss) on foreign
exchange transactions |
|
|
1.8 |
|
|
|
0.3 |
|
|
|
(12.6 |
) |
|
|
(3.4 |
) |
|
|
(22.3 |
) |
|
|
(1.5 |
) |
|
|
0.2 |
|
|
|
0.1 |
|
Gain/ (loss) on foreign
exchange forward and option
contracts |
|
|
(2.8 |
) |
|
|
(0.5 |
) |
|
|
4.7 |
|
|
|
1.3 |
|
|
|
31.0 |
|
|
|
2.0 |
|
|
|
1.4 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
and equity in
earnings/(losses) of
associated companies |
|
|
122.8 |
|
|
|
21.8 |
|
|
|
78.9 |
|
|
|
21.0 |
|
|
|
344.3 |
|
|
|
22.5 |
|
|
|
233.0 |
|
|
|
22.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
(13.1 |
) |
|
|
(2.3 |
) |
|
|
(8.2 |
) |
|
|
(2.2 |
) |
|
|
(39.6 |
) |
|
|
(2.5 |
) |
|
|
(21.7 |
) |
|
|
(2.1 |
) |
Equity in earnings/(losses)
of associated companies, net
of taxes |
|
|
— |
|
|
|
— |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
|
0.8 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
109.7 |
|
|
|
19.5 |
|
|
$ |
71.1 |
|
|
|
18.9 |
|
|
$ |
304.7 |
|
|
|
20.0 |
|
|
$ |
212.1 |
|
|
|
20.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
$ |
10.6 |
|
|
|
1.9 |
|
|
$ |
8.6 |
|
|
|
2.3 |
|
|
$ |
29.4 |
|
|
|
1.9 |
|
|
$ |
24.0 |
|
|
|
2.3 |
|
Stock-based compensation |
|
|
6.0 |
|
|
|
1.1 |
|
|
|
2.8 |
|
|
|
0.7 |
|
|
|
18.2 |
|
|
|
1.2 |
|
|
|
9.9 |
|
|
|
0.9 |
|
|
|
|
| (1) |
|
Inclusive of stock-based compensation expenses of $2.7 million and $2.7 million for the three
months ended December 31, 2007 and 2006 respectively, and $8.3 million and $9.4 million for
the nine months ended December 31, 2007 and 2006 respectively in the IT services segments |
| |
| (2) |
|
Inclusive of stock-based compensation expenses of $3.3 million and $0.1 million for the three
months ended December 31, 2007 and 2006 respectively, and $9.9 million and $0.5 million for
the nine months ended December 31, 2007 and 2006 respectively in the IT services segments. |
14
Comparison of results for the nine months ended December 31, 2007 and December 31, 2006.
Revenues. Our revenues increased by 45.2% to $1,524.8 million during the nine months ended December
31, 2007 from $1,050.1 million during the nine months ended December 31, 2006. This revenue growth
of $474.7 million during the nine months ended December 31, 2007 was primarily the result of an
increase in business from existing customers. Revenues from existing customers increased by 55.0%
to $1,399.2 million during the nine months ended December 31, 2007 from $902.5 million during the
nine months ended December 31, 2006, the increase was primarily due to new projects/orders from our
existing customers. Revenues from new customers decreased by 14.9% to $125.6 million during the
nine months ended December 31, 2007 from $147.6 million during the nine months ended December 31,
2006. We added 98 and 103 customers including 8 and 2 from the Fortune Global 500 and Fortune U.S.
500 list during the nine months ended December 31, 2007 and 2006, respectively.
During the nine months ended December 31, 2007, revenues (IT services excluding inter-segment
revenues) from consulting and enterprise business solutions increased by $247.0 million, revenues
from application development and maintenance increased by $162.9 million, followed by extended
engineering solutions and infrastructure management services, increased by $37.0 million and $17.3
million respectively. In terms of percentage growth during the nine months ended December 31, 2007
over the nine months ended December 31, 2006, revenues from consulting and enterprise solutions has
grown by 58.0%, application development and maintenance services has grown by 33.3%, extended
engineering solutions and infrastructure management services have grown by 55.7% and 35.8%,
respectively.
Revenues from IT services (excluding inter-segment revenues) provided on a time-and-materials basis
increased to 68.3% during the nine months ended December 31, 2007 from 59.5% during the nine months
ended December 31, 2006. Revenues from IT services provided on a fixed-price basis decreased to
31.7% during the nine months ended December 31, 2007 from 40.5% during the nine months ended
December 31, 2006 due to shift in customer preferences regarding type of contracts from fixed-price
to time-and-material. However in long term we expect that revenue from fixed-price contracts will
increase.
The onsite revenues increased to $508.4 million during the nine months ended December 31, 2007 from
$377.4 million during the nine months ended December 31, 2006 primarily on account of new
engagements in consulting and enterprise business solutions and the need for extensive interactions
with customers in the early stages of new engagements to understand their business needs and create
the relevant processes before we move the appropriate portion of the work offshore.
Of the total increase of $474.7 million in revenues during the nine months ended December 31, 2007,
$240.6 million was due to increased business in the United States, $115.4 million in Europe, $114.0
million in rest of the world and $7.2 million in Japan which was offset by decrease in business in
India by $2.5 million. Our increased business in the United States, Europe and rest of the world
was due to additional business from existing customers.
Cost of Revenues. Total cost of revenues increased by 45.6% to $980.0 million during the nine
months ended December 31, 2007 from $673.3 million during the nine months ended December 31, 2006.
Cost of revenues represented 64.3% of revenues during the nine months ended December 31, 2007 and
64.1% during the nine months ended December 31, 2006. This increase of $306.7 million was
attributable primarily to increases in associate compensation and benefits expenses, traveling
expenses, communication expenses, depreciation and other expenses, attributable largely to an
overall increase in our business during this period. Associate compensation and benefits expenses
increased by 51.9% to $788.0 million, or 51.7% of revenues, during the nine months ended December
31, 2007 from $518.2 million, or 49.3% of revenues, during the nine months ended December 31, 2006.
The increase in the associate compensation and benefits is due to: (i) the revision of salaries on
July 1, 2007 to the associates (ii) an increase in the total number of technical associates by
10,245 to 45,705 as of December 31, 2007 from 35,460 as of December 31, 2006 (iii) an increase in
number of onsite technical associates by 2,054 to 5,871 as of December 31, 2007 from 3,817 as of
December 31, 2006, to whom we pay a higher compensation. Traveling expenses increased by 35.0% to
$78.3 million, or 5.1% of revenues, during the nine months ended December 31, 2007 from $57.9
million or 5.5% of revenues, during the nine months ended December 31, 2006. This
15
increase was primarily due to increase in the number of travels resulting from increase in the
number of technical associates. Communication expenses increased by 21.1% to $14.5 million or 1.0%
of revenues during the nine months ended December 31, 2007 from $11.6 million, or 1.1% of revenues
during the nine months ended December 31, 2006. This increase was primarily due to increase in
number of locations of operations, both in India and abroad. Depreciation expense increased by
20.8% to $26.1 million, or 1.7% of revenues, during the nine months ended December 31, 2007 from
$21.6 million, or 2.1% of revenues during the nine months ended December 31, 2006. Other expenses
comprised mainly of rent, power and fuel and maintenance expenses. Other expenses increased by
18.7% to $64.7 million, or 4.2% of revenues, during the nine months ended December 31, 2007 from
$54.5 million, or 5.2% of revenues during the nine months ended December 31, 2006. Stock-based
compensation expenses were $8.3 million, or 0.5% of revenues, during the nine months ended December 31, 2007 as compared to $9.4 million, or 0.9% of revenues during the nine months ended December 31,
2006.
Selling, general and administrative expenses. Total selling, general and administrative expenses
increased by 54.8% to $257.2 million during the nine months ended December 31, 2007 from $166.2
million during the nine months ended December 31, 2006. Selling, general and administrative
expenses represented 16.9% of revenues during the nine months ended December 31, 2007 and 15.8% of
revenues during the nine months ended December 31, 2006. This increase of $91.0 million during the
nine months ended December 31, 2007 was a result primarily of increase in associate compensation
and benefits for non-technical associates, communication expenses and traveling expenses. Associate
compensation and benefits increased by 45.7% to $136.1 million, or 8.9% of revenues, during the
nine months ended December 31, 2007 as compared to $93.4 million or 8.9% of revenues during the
nine months ended December 31, 2006 primarily on account of (i) the revision of salaries on July 1,
2007 to the associates. and (ii) an increase in number of non-technical associates by 717 to 2,956
as of December 31, 2007 from 2,239 as of December 31, 2006. Professional charges increased by 99.0%
to $20.3 million or 1.3% of revenues during the nine months ended December 31, 2007 from $10.2
million or 1.0% of revenues during the nine months ended December 31, 2006, primarily on account of
advisory services. Traveling expenses increased by 33.7% to $25.0 million or 1.6% of revenues
during the nine months ended December 31, 2007 from $18.7 million or 1.8% of revenues during the
nine months ended December 31, 2006. Communication expenses increased by 35.3% to $6.9 million or
0.5% of revenues during the nine months ended December 31, 2007 as compared to $5.1 million or 0.5%
of revenues during the nine months ended December 31, 2006. Stock-based compensation expenses
increased to $9.9 million, or 0.6% of revenues, during the nine months ended December 31, 2007 from
$0.5 million, or 0.1% of revenues during the nine months ended December 31, 2006 due to issue of
Restricted Stock Units in January 2007. Other expenses comprised primarily of power and fuel, rent,
marketing, repairs and maintenance and advertisement expenses. Other expenses increased by 54.0% to
$59.0 million or 3.9% of revenues during the nine months ended December 31, 2007 from $38.3 million, or 3.6% of revenues during the nine months ended December 31, 2006.
Operating income. Our total operating income was $287.6 million during the nine months ended
December 31, 2007, representing an increase of 36.6% over the total operating income of $210.6
million during the nine months ended December 31, 2006. As a percentage of revenues, operating
income was 18.9% during the nine months ended December 31, 2007, as compared to 20.1% of revenues
during the nine months ended December 31, 2006. This decrease in operating income as a percentage
of revenues was primarily due to increase in selling and general administrative expenses from 15.8%
of revenues during nine months ended December 31, 2006 to 16.9% of revenues during the nine months
ended December 31, 2007.
Interest income. Interest income increased by 125.4% to $50.5 million during the nine months ended
December 31, 2007 from $22.4 million during the nine months ended December 31, 2006. This increase
in interest income was primarily due to increase in bank deposits to $839.5 million as of December 31, 2007 from $732.3 million as of December 31, 2006.
Gain/(loss) on foreign exchange transactions. Our revenues generated in U.S. dollars were 71.4% and
76.4% of revenues during the nine months ended December 31, 2007 and 2006, respectively. The
average exchange rate of Indian rupee to U.S. dollar during the nine months ended December 31, 2007
was Rs. 39.36 against Rs. 45.49 during the nine months ended December 31, 2006. As at December 31, 2007,
16
the Indian rupee appreciated to Rs. 39.41 against Rs. 44.11 at December 31, 2006 and against Rs.
43.10 at March 31, 2007. As at December 31, 2006, the Indian rupee appreciated to Rs. 44.11 against
Rs. 44.48 at March 31, 2006. As a result of these fluctuations in exchange rates during nine months
ended December 31, 2007 and December 31, 2006, loss on foreign exchange transactions was $22.3
million during the nine months ended December 31, 2007 as compared to a gain of $0.2 million during
the nine months ended December 31, 2006.
Gain/(Loss) on foreign exchange forward and option contracts. Gain on foreign exchange forward and
option contracts were $31.0 million during the nine months ended December 31, 2007, as compared to
gain on foreign exchange forward and option contracts were $1.4 million during the nine months
ended December 31, 2006. The increase in the gain on foreign exchange forward and option contracts
is primarily on account of gain on forward and options contracts due to rupee appreciation to Rs
39.41 as on December 31, 2007 from Rs 43.10 as on March 31, 2007 and as on December 31, 2006 rupee
appreciated to Rs.44.11 from Rs.44.48 as on March 31, 2006 and also due to increase in outstanding
forward and option contracts by $654.0 million to $907.5 million as on December 31, 2007 from
$253.5 million as on December 31, 2006.
Income taxes. Income taxes were $39.6 million during the nine months ended December 31, 2007,
representing in an increase of 82.5% from $21.7 million during the nine months ended December 31,
2006. The expiry of tax exemption benefit for seven of our STP units resulted in an increase in
income taxes by $19.4 million to $27.1 million during the nine months ended December 31, 2007 as
compared to $7.7 million on account of the expiry of tax exemption benefit for three of our STP
units during the nine months ended December 31, 2006. Tax on interest and other income increased by
$3.3 million to $5.7 million during the nine months ended December 31, 2007, from $2.4 million
during the nine months ended December 31, 2006. These increases were offset by decrease in tax on
income of foreign branches by $4.8 million from $11.6 million during the nine months ended December
31, 2006 to $6.8 million during the nine months ended December 31, 2007, primarily on account of
rupee appreciation, primarily against US dollar.
Equity in earnings/(losses) of associated companies, net of taxes. Equity in earnings/(losses) of
associated companies was $(3) thousands during the nine months ended December 31, 2007 as compared
to $0.8 million during the nine months ended December 31, 2006. Equity in earnings/(losses) of
Satyam Venture Engineering Services Private Limited, or Satyam Venture, CA Satyam ASP Private
Limited, or CA Satyam amounted to $(41) thousands and $38 thousands respectively, during the nine
months ended December 31, 2007 as compared to $0.6 million and $0.2 million respectively, during
the nine months ended December 31, 2006.
Net income. As a result of the foregoing, our net income was $304.7 million during the nine months
ended December 31, 2007, representing an increase of 43.7% over our net income of $212.1 million
during the nine months ended December 31, 2006. As a percentage of revenues, net income decreased
to 20.0% during the nine months ended December 31, 2007 from 20.2% during the nine months ended
December 31, 2006.
Comparison of results for the three months ended December 31, 2007 and December 31, 2006.
Revenues. Our revenues increased by 49.9% to $562.9 million during the three months ended December
31, 2007 from $375.6 million during the three months ended December 31, 2006. This revenue growth
of $187.3 million during the three months ended December 31, 2007 was primarily the result of an
increase in business from existing customers. Revenues from existing customers increased by 60.6%
to $522.5 million during the three months ended December 31, 2007 from $325.3 million during the
three months ended December 31, 2006, the increase was primarily due to new projects/orders from
our existing customers. Revenues from new customers decreased by 19.9% to $40.3 million in during
the three months ended December 31, 2007 from $50.3 million during the three months ended December
31, 2006. We added 32 and 34 customers including Nil and 1 from the Fortune Global 500 and Fortune
U.S. 500 list during the three months ended December 31, 2007 and 2006, respectively.
During the three months ended December 31, 2007, revenues (IT services excluding inter-segment
revenues) from consulting and enterprise business solutions increased by $93.9 million, revenues
from application development and maintenance increased by $69.8 million, followed by extended
engineering solutions and infrastructure management services, increased by $12.0 million and $7.7
million respectively.
17
In terms of percentage growth during the three months ended December 31, 2007 over the three
months ended December 31, 2006, revenues from consulting and enterprise solutions has grown by
60.3%, application development and maintenance services has grown by 40.4%, extended engineering
solutions and infrastructure management services have grown by 47.1% and 53.1%, respectively.
Revenues from IT services (excluding inter-segment revenues) provided on a time-and-materials basis
increased to 69.4% during the three months ended December 31, 2007 from 62.9% during the three
months ended December 31, 2006. Revenues from IT services provided on a fixed-price basis decreased
to 30.6% during the three months ended December 31, 2007 from 37.1% during the three months ended
December 31, 2006 due to shift in customer preferences regarding type of contracts from fixed-price
to time-and-material. However in long term we expect that revenue from fixed-price contracts will
increase.
The onsite revenues increased to $183.8 million during the three months ended December 31, 2007
from $127.8 million during the three months ended December 31, 2006 primarily on account of new
engagements in consulting and enterprise business solutions and the need for extensive interactions
with customers in the early stages of new engagements to understand their business needs and create
the relevant processes before we move the appropriate portion of the work offshore.
Of the total increase of $187.3 million in revenues during the three months ended December 31,
2007, $97.9 million is due to increased business in the United States, $44.3 million in Europe,
$45.5 million in rest of the world and $2.7 million in Japan which is offset by decrease of $3.1
million in India. Our increased business in United States, Europe and rest of the world was due to
additional business from existing customers.
Cost of Revenues. Total cost of revenues increased by 51.8% to $360.5 million during the three
months ended December 31, 2007 from $237.5 million during the three months ended December 31, 2006.
Cost of revenues represented 64.0% of revenues during the three months ended December 31, 2007 and
63.2% during the three months ended December 31, 2006. This increase by $123.0 million was
attributable primarily to increases in associate compensation and benefits expenses, traveling
expenses, communication expenses, depreciation and other expenses, attributable largely to an
overall increase in our business during this period. Associate compensation and benefits expenses
increased by 62.1% to $294.7 million, or 52.4% of revenues, during the three months ended December
31, 2007 from $181.8 million, or 48.4% of revenues, during the three months ended December 31,
2006. The increase in the associate compensation and benefits is due to: (i) the revision
of salaries on July 1, 2007 to the associates (ii) an increase in the total number of technical
associates by 3,252 to 45,705 as of December 31, 2007 from 42,453 as of September 30, 2007 when
compared with increase in technical associates by 3,206 to 35,460 as of December 31, 2006 from
32,254 as of September 30, 2006 (iii) an increase in number of onsite technical associates by 1,182
to 5,871 as of December 31, 2007 from 4,689 as of September 30, 2007 to whom we pay a higher
compensation. Traveling expenses increased by 19.7% to $27.3 million, or 4.9% of revenues, during
the three months ended December 31, 2007 from $22.8 million or 6.1% of revenues, during the three
months ended December 31, 2006. This increase was primarily due to increase in the number of
travels resulting from increase in the number of technical associates. Communication expenses
increased by 23.8% to $5.2 million or 0.9% of revenues during the three months ended December 31,
2007 from $4.2 million, or 1.1% of revenues during the three months ended December 31, 2006. This
increase was primarily due to increase in number of locations of operations, both in India and
abroad. Depreciation expense increased by 20.5% to $9.4 million, or 1.7% of revenues, during the
three months ended December 31, 2007 from $7.8 million, or 2.1% of revenues during the three months
ended December 31, 2006. Other expenses comprised mainly of rent, power and fuel and maintenance
expenses. Other expenses increased by 16.8% to $20.9 million, or 3.7% of revenues, during the three
months ended December 31, 2007 from $17.9 million, or 4.8% of revenues during the three months
ended December 31, 2006. Stock-based compensation expenses were $2.7 million, or 0.5% of revenues,
during the three months ended December 31, 2007 as compared to $2.7 million, or 0.7% of revenues
during the three months ended December 31, 2006.
Selling, general and administrative expenses. Total selling, general and administrative expenses
increased by 57.4% to $95.2 million during the three months ended December 31, 2007 from $60.5
million during the three months ended December 31, 2006. Selling, general and administrative
expenses represented 16.9% of
18
revenues during the three months ended December 31, 2007 and 16.1% of revenues during the three
months ended December 31, 2006. This increase of $34.5 million during the three months ended
December 31, 2007 was a result primarily of increase in associate compensation and benefits for
non-technical associates, communication expenses and traveling expenses. Associate compensation and
benefits increased by 46.2% to $50.6 million, or 9.0% of revenues, during the three months ended
December 31, 2007 as compared to $34.6 million or 9.2% of revenues during the three months ended
December 31, 2006 primarily on account of (i) revision of salaries on July 1, 2007 to the
associates and (ii) an increase in the total number of non-technical associates by 172 to 2,956 as
of December 31, 2007 from 2,784 as of September 30, 2007 when compared with increase in
non-technical associates by 34 to 2,185 as of December 31, 2006 from 2,151 as of September 30,
2006. Traveling expenses increased by 38.5% to $9.0 million or 1.6% of revenues during the three
months ended December 31, 2007 from $6.5 million or 1.7% of revenues during the three months ended
December 31, 2006. Professional charges increased by 122.2% to $8.0 million or 1.4% of revenues
during the three months ended December 31, 2007 from $3.6 million or 1.0% of revenues during the
three months ended December 31, 2006 primarily on account of advisory services. Communication
expenses increased by 50.0% to $2.4 million or 0.4% of revenues during the three months ended
December 31, 2007 as compared to $1.6 million or 0.4% of revenues during the three months ended
December 31, 2006. Stock-based compensation expenses increased to $3.3 million, or 0.6% of
revenues, during the three months ended December 31, 2007 from $0.1 million, or 0.03% of revenues
during the three months ended December 31, 2006 due to the issuance of RSUs in January 2007. Other
expenses comprised primarily of power and fuel, rent, marketing, repairs and maintenance and
advertisement expenses. Other expenses increased by 40.2% to $27.2 million or 4.8% of revenues
during the three months ended December 31, 2007 from $19.4 million, or 5.2% of revenues during the
three months ended December 31, 2006.
Operating income. Our total operating income was $107.2 million during the three months ended
December 31, 2007, representing an increase of 38.1% over the operating income of $77.6 million
during the three months ended December 31, 2006. As a percentage of revenues, operating income was
19.0% during the three months ended December 31, 2007, as compared to 20.7% of revenues during the
three months ended December 31, 2006. This decrease in operating income as a percentage of revenues
was primarily due to increase in selling and general administrative expenses from 16.1% of revenues
during nine months ended December 31, 2006 to 16.9% of revenues during the nine months ended
December 31, 2007.
Interest income. Interest income increased by 80.2% to $17.3 million during the three months ended
December 31, 2007 from $9.6 million during the three months ended December 31, 2006. This increase
in interest income was primarily due to increase in bank deposits to $839.5 million as of December
31, 2007 from $732.3 million as of December 31, 2006.
Gain/(loss) on foreign exchange transactions. Our revenues generated in U.S. dollars were 71.4% and
74.2% of revenues during the three months ended December 31, 2007 and 2006, respectively. The
average exchange rate of Indian rupee to U.S. dollar during the three months ended December 31,
2007 was Rs. 39.46 against Rs. 44.86 during the three months ended December 31, 2006. As at
December 31, 2007, the Indian rupee appreciated to Rs. 39.41 against Rs. 44.11 at December 31, 2006
and against Rs. 43.10 at March 31, 2007. As at December 31, 2006, the Indian rupee appreciated to
Rs. 44.11 against 44.48 at March 31, 2006. As a result of these fluctuations in exchange rates
during three months ended December 31, 2007 and December 31, 2006, gain/(loss) on foreign exchange
transactions was $1.8 million during the three months ended December 31, 2007 as compared to a loss
of $(12.2) million during the three months ended December 31, 2006.
Gain/(Loss) on foreign exchange forward and option contracts. Gain on foreign exchange forward and
option contracts were $(2.8) million during the three months ended December 31, 2007, as compared
to gain on foreign exchange forward and option contracts were $4.7 million during the three months
ended December 31, 2006. The increase in the gain/(loss) on foreign exchange forward and option
contracts is primarily on account of gain on forward and options contracts due to rupee
appreciation to Rs 39.41 as on December 31, 2007 from Rs 39.75 as on September 30, 2007 and as on
December 31, 2006 the Indian rupee appreciated to Rs. 44.11 from Rs. 45.95 as on September 30, 2006
and also due to an increase in
19
outstanding forward and option contracts by $654.0 million to $907.5 million as on December 31,
2007 from $253.5 million as on December 31, 2006.
Income taxes. Income taxes were $13.1 million during the three months ended December 31, 2007,
representing an increase of 59.8% from $8.2 million during the three months ended December 31,
2006. The expiry of tax exemption benefit for seven of our STP units resulted in increase in income
taxes by $6.4 million to $9.7 million during the three months ended December 31, 2007 as compared
to $3.3 million on account of expiry of tax exemption benefit for three of our STP units during the
three months ended December 31, 2006.
Equity in earnings/(losses) of associated companies, net of taxes. Equity in earnings/(losses) of
associated companies was $18 thousands during the three months ended December 31, 2007 as compared
to $0.4 million during the three months ended December 31, 2006. Equity in earnings/(losses) of
Satyam Venture Engineering Services Private Limited, or Satyam Venture, CA Satyam ASP Private
Limited, or CA Satyam amounted to $(5) thousands, $23 thousands respectively, during the three
months ended December 31, 2007 as compared to $0.1 million and $0.3 million, respectively, during
the three months ended December 31, 2006.
Net income. As a result of the foregoing, our net income was $109.7 million during the three months
ended December 31, 2007, representing an increase of 54.3% over net income of $71.1 million during
the three months ended December 31, 2006. As a percentage of revenues, net income increased by 0.6%
during the three months ended December 31, 2007 from 18.9% during the three months ended December
31, 2006 to 19.5% during the three months ended December 31, 2007.
Liquidity and Capital Resources
Net cash provided by operating activities
Net cash provided by operating activities was $232.4 million and $212.6 million during the
nine months ended December 31, 2007 and 2006 respectively.
During the nine months ended December 31, 2007, non-cash adjustments to reconcile the $304.7
million net income to net cash used in operating activities consisted primarily of depreciation and
amortization expense of $30.4 million, stock-based compensation expense of $18.2 million and
increase in net accounts receivable and unbilled revenues. Net accounts receivable and unbilled
revenues increased by $112.6 million primarily as a result of an increase in our revenues and
increase in collection period. Accounts payable and accrued expenses increased by $89.8 million
primarily on account of provision for gratuity and unutilized leave by $25.5 million increase in
accrued compensation and benefits by $25.0 million, other accrued expenses by $25.3 million and
increase in provision for taxation net of payments by $1.4 million.
During the nine months ended December 31, 2006, non-cash adjustments to reconcile the $212.1
million net income to net cash used in operating activities consisted primarily of depreciation and
amortization expense of $25.4 million and increase in net accounts receivable and unbilled
revenues. Net accounts receivable and unbilled revenues increased by $74.9 million primarily as a
result of an increase in our revenues and increase in collection period. Accounts payable and
accrued expenses increased by $35.7 million primarily on account of provision for gratuity and
unutilized leave by $17.3 million and increase in accrued compensation and benefits by $9.6
million.
20
Net cash used in investing activities
Net cash used in investing activities was $122.2 million and $385.3 million during the nine
months ended December 31, 2007 and 2006 respectively.
Net cash used in investing activities during the nine months ended December 31, 2007 decreased
by $263.1 million to $122.2 million from $385.3 million during the nine months ended December 31,
2006. This decrease in net cash used in investing activities was primarily due to investments in
bank deposits of $319.9 million made during nine months ended December 31, 2006 as compared to $Nil
during nine months ended December 31, 2007.
Net cash used in investing activities during the nine months ended December 31, 2006 increased
by $394.9 million to $385.3 million from $9.6 million of net cash provided during the nine months
ended December 31, 2005. This increase in net cash used in investing activities was primarily due
to investment in bank deposits amounting to $319.9 million and purchase of premises, plant and
equipment to $61.7 million during the nine months ended December 31, 2006, due to expansion of new
facilities at Bangalore, Chennai, Hyderabad and Visakhapatnam.
Net cash used in financing activities
Net cash used in financing activities was $67.6 million and $26.8 million during the nine
months ended December 31, 2007 and 2006, respectively.
Net cash used in financing activities during the nine months ended December 31, 2007,
increased by $40.8 million to $67.6 million from $26.8 million during the nine months ended
December 31, 2006. This increase in net cash used in financing activities was primarily due to cash
dividends paid amounting to $68.3 million during the nine months ended December 31, 2007 as
compared to $56.7 million during the nine months ended December 31, 2006 and due to redemption of
preferred stock of subsidiary for $13.8 million. We also used cash in repayment of loans amounting
to $13.3 million. This increase in net cash used in financing activities was offset by cash
received from short-term debt by Satyam BPO of $19.2 million.
Net cash used in financing activities during the nine months ended December 31, 2006,
increased by $19.3 million to $26.8 million from $7.5 million during the nine months ended December
31, 2005. During the nine months ended December 31, 2006, we received cash from issuance of
associate stock options of $26.4 million, $1.4 million from short-term debt by Satyam BPO and $4.3
million from long-term debts by Satyam BPO. We used cash in repayment of loans amounting to $2.2
million. Cash dividends paid amounted to $56.7 million during the nine months ended December 31,
2006.
As of December 31, 2007, we had cash and cash equivalents of $208.0 million, U.S. dollar
denominated loans of Satyam BPO amounting to $21.4 million, short-term borrowings of Satyam BPO
amounting to $20.9 million and hire purchase loans amounting to $6.3 million with maturities
ranging from one to three years. As of December 31, 2007, we had an unused non-funded lines of
credit of $24.0 million from banks.
The following table describes our outstanding credit facilities as of December 31, 2007
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Amount |
|
Interest |
|
Computation |
| Loan Type |
|
Lenders |
|
outstanding |
|
(per annum) |
|
method |
| |
|
(dollars in millions) |
|
|
|
|
|
|
|
|
Working capital term loan
|
|
BNP Paribas
|
|
|
$10.9 |
|
|
6 month LIBOR +0.95%
|
|
Floating |
External commercial borrowing
|
|
BNP Paribas
|
|
|
10.5 |
|
|
6 month LIBOR +0.95%
|
|
Floating |
Overdraft facility
|
|
BNP Paribas
|
|
|
20.9 |
|
|
6 month LIBOR +0.25%
|
|
Floating |
Other loans
|
|
Various other parties
|
|
|
6.3 |
|
|
3.0%-14.5%
|
|
Fixed |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$48.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We anticipate capital expenditure of approximately $100.0 million in fiscal 2008 of which we have
incurred $59.0 million during the nine months ended December 31, 2007, principally to finance
21
construction of new facilities in our offshore centers, expand facilities in offshore centers in
India and establish offsite centers outside India. We believe that existing cash and cash
equivalents and funds generated from operations will be sufficient to meet these requirements.
However, we may significantly alter our proposed capital expenditures plans and accordingly, may
require additional financing to meet our requirements. In either case, we cannot assure you that
additional financing will be available at all or, if available, that such financing will be
obtained on terms favorable to us or that any additional financing will not be dilutive to our
shareholders.
The following table sets forth our contractual obligations and commitments to make future payments
as of December 31, 2007. The following table excludes our accounts payable, accrued operating
expenses and other current liabilities which are payable in normal course of operations.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments due as at December 31, 2007, |
| |
|
Within 1 |
|
1-3 |
|
3-5 |
|
After 5 |
|
|
| |
|
Year |
|
years |
|
Years |
|
Years |
|
Total |
| |
|
(dollars in millions) |
Long-term debt |
|
$ |
2.4 |
|
|
$ |
25.0 |
|
|
$ |
0.2 |
|
|
$ |
0.1 |
|
|
$ |
27.7 |
|
Operating leases |
|
|
7.0 |
|
|
|
7.0 |
|
|
|
1.2 |
|
|
|
0.3 |
|
|
|
15.5 |
|
Unconditional purchase obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other commercial commitments |
|
|
106.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
106.2 |
|
Bank guarantees |
|
|
9.3 |
|
|
|
2.3 |
|
|
|
7.8 |
|
|
|
6.1 |
|
|
|
25.5 |
|
Gratuity Plan |
|
|
2.8 |
|
|
|
7.4 |
|
|
|
11.8 |
|
|
|
27.1 |
|
|
|
49.1 |
|
Knowledge Dynamics deferred and earn-out consideration (1) |
|
|
0.7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.7 |
|
Nitor deferred and earn-out consideration (2) |
|
|
1.0 |
|
|
|
1.6 |
|
|
|
— |
|
|
|
— |
|
|
|
2.6 |
|
Total contractual cash obligations. |
|
$ |
129.4 |
|
|
$ |
43.3 |
|
|
$ |
21.0 |
|
|
$ |
33.6 |
|
|
$ |
227.3 |
|
|
|
|
| (1) |
|
Earn-out consideration of Knowledge Dynamics is based on certain conditions.
|
| |
| (2) |
|
Earn-out consideration of Nitor is based on certain conditions. |
| |
| (3) |
|
We anticipate to incur capital expenditure of $100 million in fiscal 2008 of which we have
incurred $59.0 million during nine months ended December 31, 2007. |
Based on past performance and current expectations, we believe that our cash and cash equivalents
and cash generated from operations will satisfy our working capital needs, capital expenditures,
investment requirements, stock repurchases, commitments and other liquidity requirements associated
with our existing operations through at least the next 12 months. In addition, there are no
transactions, arrangements and other relationships with unconsolidated entities or other persons
that are reasonably likely to materially affect liquidity or the availability of our requirements
for capital resources.
Stock-based Compensation
Effective April 1, 2006, Satyam adopted the fair value recognition provisions of SFAS No. 123
(revised 2004), “Share-Based Payment” (“SFAS 123R”). Prior to the adoption of SFAS 123R, Satyam
recognized stock-based compensation using the intrinsic value-based method of Accounting Principles
Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”) and
related interpretations including Financial Accounting Standards Board (“FASB”) Interpretation No.
44, Accounting for Certain Transactions involving Stock Compensation an interpretation of APB
Opinion No. 25, issued in March 2000 to account for its employee stock-based compensation plan.
Satyam has therefore adopted the pro-forma disclosure requirements of SFAS No. 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”) and SFAS No. 148, “Accounting for Stock-Based Compensation —
Transition and Disclosure, an amendment of FASB Statement No. 123”(“SFAS 148”). Pursuant to SFAS
123, all equity instruments issued to non-employees are accounted for based on the fair value of
the consideration received or the fair value of the equity instruments issued, whichever is more
reliably measurable. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No.107 (“SAB
107”) regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for
public companies. Satyam has applied the provisions of SAB 107 in its adoption of SFAS 123R.
Satyam adopted SFAS 123R using the modified prospective transition method, which required the
application of the accounting standard as of April 1, 2006, the first day of Satyam’s fiscal year
2007. Under this transition method, stock-based compensation expensed for the year ended March 31,
2007 includes a)
22
compensation expense for all stock-based compensation awards granted prior to, but
not yet vested as of April 1, 2006, based on the grant-date fair value estimated in accordance with
the original provisions of SFAS No. 123 and b) stock-based compensation expenses for all
stock-based compensation awards granted after April 1, 2006 is based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123R. In accordance with the modified
prospective transition method, Satyam’s Consolidated Financial Statements for the prior periods
have not been restated to reflect and do not include, the impact of SFAS 123R.
We have five associate stock option plans. See “Item 6. Directors, Senior Management and Employees
— Employee Benefit Plans” of our Annual Report on Form 20-F for the year ended March 31, 2007 filed
with the SEC for more information.
Satyam’s Consolidated Financial Statements as of and for the nine months ended December 31, 2007
reflect the impact of SFAS 123R. In accordance with the modified prospective transition method,
Satyam’s Consolidated Financial Statements for the prior periods have not been restated to reflect
and do not include, the impact of SFAS 123R. As required by SFAS 123(R), management has made an
estimate of expected forfeitures and is recognizing compensation costs only for those equity awards
expected to vest. Upon adoption of SFAS 123R, Satyam had no cumulative adjustment on account of
expected forfeitures for stock-based awards granted prior to April 1, 2006. During the nine months
ended December 31, 2007, Satyam recorded stock-based compensation related to stock options of $18.2
million on a graded vesting basis for all unvested options granted prior to and options granted
after the adoption of SFAS 123R. As of December 31, 2007, there was $24.0 million of unrecognized
compensation cost related to unvested options which is expected to be recognized over a weighted
average period of 0.88 years.
The fair value of each option award is estimated on the date of grant using the Black Scholes
option-pricing model. The following table gives the weighted-average assumptions used to determine
fair value:
| |
|
|
|
|
| |
|
Nine months ended |
| |
|
December 31, 2007 |
Dividend yield |
|
|
0.78% |
Expected volatility |
|
|
56.64% |
Risk-free interest rate |
|
|
8.0% |
Expected term (in years) |
|
|
0.88 |
Expected Term: The expected term represents the period that the Company’s stock-based awards are
expected to be outstanding and was determined based on historical experience of similar awards,
giving consideration to the contractual terms of the stock-based awards, vesting schedules and
expectations of future employee behavior.
Risk-Free Interest Rate: The risk-free interest rate is based on the applicable rates of government
securities in effect at the time of grant.
Expected Volatility: The fair values of stock-based payments were valued using a volatility factor
based on the Company’s historical stock prices.
Expected Dividend: The Black Scholes option-pricing model calls for a single expected dividend
yield as an input.
Estimated Pre-vesting Forfeitures: When estimating forfeitures, the Company considers voluntary
termination behavior. Estimated forfeiture rates are trued-up to actual forfeiture results as the
stock-based awards vest.
23
Effect of recently issued accounting pronouncements
In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which establishes a framework
for measuring fair value in generally accepted accounting principles and expands disclosures about
fair value measurements. This Statement applies under other accounting pronouncements that require
or permit fair value measurements. SFAS 157 is effective for fiscal years beginning after November
15, 2007, which is fiscal year commencing April 1, 2008 for us. We are in the process of evaluating
the impact SFAS 157 will have on our financial position, results of operations, liquidity and its
related disclosures.
In February 2007, the FASB issued FASB Statement 159, The Fair Value Option for Financial Assets
and Financial Liabilities (“SFAS 159”). SFAS 159 allows the company to choose to measure many
financial assets and financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS 159 is effective for
fiscal years beginning after November 15, 2007, which is fiscal year commencing April 1, 2008 for
us. We are in the process of evaluating the impact SFAS 159 will have on our financial position,
results of operations, liquidity and its related disclosures.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”),
which replaced SFAS 141. SFAS 141R retains the fundamental requirements of SFAS 141, but revises
certain principles, including the definition of a business combination, the recognition and
measurement of assets acquired and liabilities assumed in a business combination, the accounting
for goodwill, and financial statement disclosure. SFAS 141R will be effective on February 1, 2009
and is applicable to business combinations that occur on or after this date. We are evaluating the
impact that this statement will have on our consolidated financial statements. This Statement
applies prospectively to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008, which is
fiscal year commencing April 1, 2009 for us. An entity may not apply it before that date. Early
adoption of SFAS 141(R) is prohibited. We are in the process of evaluating the impact SFAS 141(R)
will have on our financial position, results of operations, liquidity and its related disclosures.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements — An Amendment of ARB No. 51. SFAS No.160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financial statements and separate from the
parent’s equity. The amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement. SFAS No.160 clarifies that
changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial interest. In addition, this
statement requires that a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling
equity investment on the deconsolidation date. SFAS No.160 also includes expanded disclosure
requirements regarding the interests of the parent and its noncontrolling interest. SFAS No.160 is
effective for fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2008, , which is fiscal year commencing April 1, 2009 for us. We are in the process
of evaluating the impact SFAS 141(R) will have on our financial position, results of operations,
liquidity and its related disclosures.
Effects of Inflation
India has experienced relatively high rates of inflation in the past however it has not had a
significant effect on our results of operations and financial condition to date.
24
Exchange Rates
The following table sets forth, for each of the months indicated, information concerning the number
of Indian rupees for which one U.S. dollar could be exchanged based on the average of the noon
buying rate in the City of New York on the last day of each month during each of such months for
cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of
New York:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Month |
|
Month end |
|
Average |
|
High |
|
Low |
| |
|
(Rupees) |
April-2006
|
|
|
44.86 |
|
|
|
44.82 |
|
|
|
45.09 |
|
|
|
44.39 |
|
May-2006
|
|
|
46.22 |
|
|
|
45.20 |
|
|
|
46.22 |
|
|
|
44.69 |
|
June-2006
|
|
|
45.87 |
|
|
|
45.89 |
|
|
|
46.25 |
|
|
|
45.50 |
|
July-2006
|
|
|
46.49 |
|
|
|
46.37 |
|
|
|
46.83 |
|
|
|
45.84 |
|
August-2006
|
|
|
46.43 |
|
|
|
46.45 |
|
|
|
46.61 |
|
|
|
46.32 |
|
September-2006
|
|
|
45.95 |
|
|
|
46.01 |
|
|
|
46.38 |
|
|
|
45.74 |
|
October-2006
|
|
|
44.90 |
|
|
|
45.36 |
|
|
|
45.97 |
|
|
|
44.90 |
|
November-2006
|
|
|
44.59 |
|
|
|
44.73 |
|
|
|
45.26 |
|
|
|
44.46 |
|
December-2006
|
|
|
44.11 |
|
|
|
44.48 |
|
|
|
44.70 |
|
|
|
44.11 |
|
January-2007
|
|
|
44.07 |
|
|
|
44.21 |
|
|
|
44.49 |
|
|
|
44.07 |
|
February-2007
|
|
|
44.08 |
|
|
|
44.02 |
|
|
|
44.21 |
|
|
|
43.87 |
|
March-2007
|
|
|
43.10 |
|
|
|
43.79 |
|
|
|
44.43 |
|
|
|
42.78 |
|
April-2007
|
|
|
41.42 |
|
|
|
42.02 |
|
|
|
43.59 |
|
|
|
40.73 |
|
May-2007
|
|
|
40.78 |
|
|
|
40.57 |
|
|
|
41.42 |
|
|
|
40.48 |
|
June-2007
|
|
|
40.58 |
|
|
|
40.59 |
|
|
|
40.90 |
|
|
|
40.27 |
|
July-2007
|
|
|
40.18 |
|
|
|
40.27 |
|
|
|
40.42 |
|
|
|
40.12 |
|
August-2007
|
|
|
40.63 |
|
|
|
40.68 |
|
|
|
41.15 |
|
|
|
40.25 |
|
September-2007
|
|
|
39.75 |
|
|
|
40.17 |
|
|
|
40.81 |
|
|
|
39.50 |
|
October-2007
|
|
|
39.26 |
|
|
|
39.37 |
|
|
|
39.72 |
|
|
|
38.48 |
|
November-2007
|
|
|
39.52 |
|
|
|
39.33 |
|
|
|
39.68 |
|
|
|
39.11 |
|
December-2007
|
|
|
39.41 |
|
|
|
39.38 |
|
|
|
39.55 |
|
|
|
39.29 |
|
RISK MANAGEMENT POLICY
Our functional currency is the Indian rupee, however we transact a major portion of our business in
U.S. dollars and other currencies and accordingly face foreign currency exposure from our sales in
the United States and elsewhere and from our purchases from overseas suppliers in U.S. dollars and
other currencies. Accordingly, we are exposed to substantial risk on account of adverse currency
movements in global foreign exchange markets. The exchange rate between the rupee and the U.S.
dollar has changed substantially in recent years and may fluctuate substantially in the future.
We manage risk on account of foreign currency fluctuations through treasury operations. Our risk
management strategy is to identify risks we are exposed to, evaluate and measure those risks,
decide on managing those risks, regular monitoring and reporting to management. The objective of
our risk management policy is to minimize risk arising from adverse currency movements by managing
the uncertainty and volatility of foreign exchange fluctuations by hedging the risk to achieve
greater predictability and stability. Our risk management policies are approved by senior
management and include implementing hedging strategies for foreign currency exposures,
specification of transaction limits; specifying authority and responsibility of the personnel
involved in executing, monitoring and controlling such transactions.
We enter into foreign exchange forward and options contracts to mitigate the risk of changes in
foreign exchange rates on cash flows denominated in U.S. dollars. We enter into foreign exchange
forward and options contracts where the counter party is generally a bank. We consider the risks of
non-performance by the counter party as non-material. These contracts mature between one and twenty
seven months. These contracts do not qualify for hedge accounting under SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities”, as amended (“SFAS 133”). Any derivative that is
either not a designated hedge, or is so designated but is ineffective per SFAS No. 133, is marked
to market and recognized in earnings.
25
The following tables give details in respect of our outstanding foreign exchange forward and
options contracts:
| |
|
|
|
|
|
|
|
|
| |
|
As at December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
Amount |
|
|
Amount |
|
| |
|
(dollars in millions) |
|
Aggregate contracted principal amounts of contracts outstanding: |
|
|
|
|
|
|
|
|
Forward contracts |
|
$ |
349.0 |
|
|
$ |
86.0 |
|
Options contracts |
|
|
558.5 |
|
|
|
167.5 |
|
|
|
|
|
|
|
|
Total |
|
$ |
907.5 |
|
|
$ |
253.5 |
|
|
|
|
|
|
|
|
Gains/(loss) on outstanding contracts: |
|
|
|
|
|
|
|
|
Forward contracts |
|
$ |
14.8 |
|
|
$ |
1.4 |
|
Options contracts |
|
|
13.2 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
28.0 |
|
|
$ |
1.1 |
|
|
|
|
|
|
|
|
Gains/(losses) on foreign exchange forward and options contracts included in the statement of
income and are as stated below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended December 31, |
|
|
Nine months ended December 31, |
|
| |
|
2007
Amount |
|
|
2006
Amount |
|
|
2007
Amount |
|
|
2006
Amount |
|
| |
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
| |
|
(dollars in millions) |
|
|
(dollars in millions) |
|
Forward contracts |
|
$ |
(1.5 |
) |
|
$ |
2.2 |
|
|
$ |
14.7 |
|
|
$ |
0.9 |
|
Options contracts |
|
|
(1.3 |
) |
|
|
2.5 |
|
|
|
16.3 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(2.8 |
) |
|
$ |
4.7 |
|
|
$ |
31.0 |
|
|
$ |
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
We currently do not engage in any off-balance sheet arrangements.
Foreign Currency Transactions/ Translation
During the nine months ended December 31, 2007 and 2006, 71.4% and 76.4%, respectively, of our
total revenues were generated in U.S. dollars. A significant amount of our expenses were incurred
in Indian rupees and the balance was primarily incurred in U.S. dollars, European currencies and
Japanese yen. Our functional currency and the functional currency for our subsidiaries located in
India is the Indian rupee; however, U.S. dollar, Pound Sterling, Singapore Dollar and Renminbi are
the functional currencies of our foreign subsidiaries located in the United States, United Kingdom,
Singapore and China respectively. The translation of such foreign currencies into U.S. dollars (our
reporting currency) is performed for balance sheet accounts using current exchange rates in effect
at the balance sheet date and for revenue and expense accounts using monthly simple average
exchange rates prevailing during the reporting periods. Adjustments resulting from the translation
of functional currency financial statements to reporting currency are accumulated and reported as
other comprehensive income, a separate component of shareholders’ equity.
We expect that a majority of our revenues will continue to be generated in U.S. dollars for the
foreseeable future and that a significant portion of our expenses, including personnel costs as
well as capital and operating expenditures, will continue to be denominated in Indian rupees.
Consequently, our results of operations will be affected to the extent the rupee appreciates/
depreciates against the U.S. dollar.
The average exchange rate of rupee to U.S. dollar during the nine months ended December 31, 2007
was Rs. 40.27 against Rs. 45.49 during the nine months ended December 31, 2006. As at December 31,
2007, the rupee appreciated to Rs. 39.41 against Rs. 44.11 as at December 31, 2006 and against Rs.
43.10 as at March 31, 2007. As at December 31, 2006, the rupee appreciated to Rs. 44.11 against Rs.
44.48 as at March 31, 2006. As a result, loss on foreign exchange transactions was $22.3 million
during the nine months ended December 31, 2007 as compared to a gain of $0.6 million during the
nine months ended December 31, 2006.
26
Risk Factors
The following factors together with the other information contained in this Quarterly Report and
other reports and documents submitted to, or filed with, the SEC, could affect our results. If any
of the following risks actually occur, our company could be seriously harmed and the market price
of our ADSs could decline.
Risks Related to Our Overall Operations
Our revenues and profitability are difficult to predict and can vary significantly from period to
period which could cause our share price to decline significantly.
Our revenues and profitability have grown rapidly in recent years and may fluctuate significantly
in the future from period to period. Therefore, we believe that period-to-period comparisons of our
results of operations are not necessarily meaningful and should not be relied upon as an indication
of our future performance. The quarterly fluctuation of revenues is primarily because we derive our
revenues from fees for services generated on a project-by-project basis. Our projects vary in size,
scope and duration. For example, we have some projects that employ several people for only a few
weeks and we have other projects that employ over 100 people for six months or more. A customer
that accounts for a significant portion of our revenue in a particular period may not account for a
similar portion of our revenue in future periods. In addition, customers may cancel contracts or
defer projects at any time for a number of different reasons. Furthermore, increasing wage
pressures, employee attrition, pressure on billing rates, the time and expense needed to train and
productively utilize new employees and changes in the proportion of services rendered offshore can
affect our profitability in any period. There are also a number of factors, other than our
performance, that are not within our control that could cause fluctuations in our operating results
from period to period. These include (i) the duration of tax holidays or tax exemptions and the
availability of other GoI incentives; (ii) currency fluctuations, particularly when the rupee
appreciates in value against the U.S. dollar, since the majority of our revenues are in U.S.
dollars and a significant part of our costs are in rupees; and (iii) other general economic and
political factors. As a result, our revenues and our operating results in a particular period are
difficult to predict, may decline in comparison to corresponding prior periods regardless of the
strength of our business. If this were to occur, the share price of our equity shares and our ADSs
would likely decline significantly.
Any inability to manage our rapid growth could disrupt our business and reduce our profitability.
We have experienced significant growth in recent periods. Our total revenues for the nine months
ended December 31, 2007 increased by 45.2% as compared to the nine months ended December 31, 2006
and in fiscal 2007 our total revenues increased by 33.3% as compared to fiscal 2006. As of December
31, 2007, we had 48,661 associates, whom we refer to as associates, worldwide as compared to 37,645
associates as of December 31, 2006. In addition, we are continuing our geographical expansion. We
now have offshore facilities in India and overseas facilities located in Australia, Canada, China,
Hungary, Japan, Malaysia, Singapore, United Arab Emirates, the United Kingdom and the United
States. We also have sales and marketing offices located in Brazil, Canada, Germany, Italy, the
Netherlands, Saudi Arabia, Spain, Sweden, United Kingdom and United States and sales and marketing
offices in the rest of the world. We have incurred $59.0 million of capital expenditure during the
nine months ended December 31, 2007 and $81.5 million in fiscal 2007 and, in fiscal 2008, we expect
to incur capital expenditure of approximately $100.0 million to finance the construction of new
facilities and the expansion of our existing facilities in our offshore centers and to establish
offsite centers outside of India.
We expect our growth to place significant demands on our management and other resources and to
require us to continue to develop and improve our operational, financial and other internal
controls, both in India and elsewhere. In particular, continued growth increases the challenges
involved in:
| • |
|
recruiting and retaining sufficiently skilled technical, marketing and management personnel; |
| |
| • |
|
providing adequate training and supervision to maintain our high quality standards; |
27
| • |
|
preserving our culture and values and our entrepreneurial environment; and |
| |
| • |
|
developing and improving our internal administrative infrastructure, particularly our
financial, operational, communications and other internal systems. |
Our inability to manage our growth effectively could disrupt our business and reduce our
profitability.
The current economic environment, pricing pressure and rising wages in India have negatively
impacted our revenues and operating results.
We do experience pricing pressures from our customers, which can negatively impact our operating
results. If economic growth slows, our utilization and billing rates for our associates could be
adversely affected which may result in lower gross and operating profits.
Wage costs in India, including in the IT services industry, have historically been significantly
lower than wage costs in the United States and Europe for comparably skilled professionals, which
has been one of our competitive advantages. However, large companies are establishing offshore
operations in India, resulting in wage pressures for Indian companies, which may prevent us from
sustaining this competitive advantage and may negatively affect our profit margins. Wages in India
are increasing at a faster rate than in the United States, which could result in increased cost of
IT professionals, particularly project managers and other mid-level professionals. We may need to
increase the levels of our employee compensation more rapidly than in the past to remain
competitive with other employers, or seek to recruit in other low labor cost jurisdictions to keep
our wage costs low. Compensation increases may result in a material adverse effect on our financial
performance.
Our business will suffer if we fail to anticipate and develop new services and enhance existing
services in order to keep pace with rapid changes in technology and the industries on which we
focus.
The IT services market is characterized by rapid technological change, evolving industry standards,
changing customer preferences and new product and service introductions. Our future success will
depend on our ability to anticipate these advances and develop new product and service offerings to
meet customer needs and complement our offerings of end-to-end IT services. For example, we have
invested significant resources in research and development efforts, such as in our enterprise
business solution laboratory and grid computing laboratory, in order to continually develop
capabilities to provide new services to our customers. Should we fail to develop such capabilities
on a timely basis to keep pace with the rapidly changing IT market or if the services or
technologies that we develop are not successful in the marketplace, our business and profitability
will suffer and it is unlikely that we would be able to recover our research and development costs.
Moreover, products, services or technologies that are developed by our competitors may render our
services non-competitive or obsolete.
Our revenues are highly dependent on customers primarily located in the United States and customers
concentrated in certain industries and economic slowdowns or factors that affect the economic
health of the United States and our customers’ industries may affect our business.
In the nine months ended December 31, 2007 and in fiscal 2007 and 2006, approximately 59.9%, 63.2%
and 64.9%, respectively, of our total revenues were derived from the United States. For the same
periods, we earned 24.1%, 27.0% and 28.6% of our IT revenues from the manufacturing industry and
17.0%, 26.3% and 27.3%, of our IT revenues from the banking and finance and insurance industry,
respectively. If the growth in the United States does not continue, our customers may reduce or
postpone their technology spending significantly, which may in turn lower the demand for our
services and negatively affect our revenues and profitability. Further, any significant decrease in
the growth of the manufacturing or banking and finance industries, or significant consolidation in
these industries, or other industry segments on which we focus, may reduce the demand for our
services and negatively affect our revenues and profitability. Additionally, any slowdown in the
United States economy will have an adverse impact on our revenues since a large portion of our
revenues are derived from the United States
28
However, some countries and organizations have expressed concerns about a perceived association
between offshore outsourcing and the loss of jobs. In the United States, in particular, there has
been increasing political and media attention on these issues following the growth of offshore
outsourcing. Any changes in existing laws or the enactment of new legislation restricting offshore
outsourcing may adversely impact our ability to do business in the United States, which is the
largest market for our services. In the recent past, some U.S. states have proposed legislation
restricting government agencies from outsourcing their back office processes and IT solutions work
to companies outside the United States or have enacted laws that limit or to discourage such
outsourcing. Such laws restrict our ability to do business with U.S. government — related entities.
It is also possible that U.S. private sector companies working with these governmental entities may
be restricted from outsourcing projects related to government contracts or may face disincentives
if they outsource certain projects. Any of these events could adversely affect our revenues and
profitability. Similarly, legislation came into effect in the United Kingdom in April 2006
requiring offshore outsourcing providers in certain circumstances to compensate U.K. employees for
loss of jobs arising from the offshore migration of business processes.
We face intense competition in the IT services and BPO markets which could prevent us from
attracting and retaining customers and could reduce our revenues.
The markets for IT services and Business Process Outsourcing, or BPO, are rapidly evolving and
highly competitive and we expect that competition will continue to intensify. We face competition
in India and elsewhere from a number of companies, including:
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consulting firms such as Accenture, BearingPoint, Capgemini and Deloitte Consulting; |
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divisions of large multinational technology firms such as Hewlett-Packard and IBM; |
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IT outsourcing firms such as Computer Sciences Corporation, Electronic Data Systems and IBM
Global Services; and |
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offshore IT services firms such as Infosys Technologies Limited, Tata Consultancy Services
Limited and Wipro Limited. |
We also compete with software firms such as Oracle and SAP, service groups of computer equipment
companies, in-house IT departments of large corporations, programming companies and temporary
staffing firms. Satyam BPO Limited (formerly known as Nipuna Services Limited), our wholly-owned
subsidiary, through which we provide BPO services, faces competition from firms like Infosys BPO
Limited formerly known as Progeon Limited and Wipro BPO, formerly known as Wipro Spectramind.
A significant part of our competitive advantage has historically been the cost advantage relative
to service providers in the United States and Europe. Since wage costs in this industry in India
are presently increasing at a faster rate than those in the United States and Europe, our ability
to compete effectively will become increasingly dependent on our reputation, the quality of our
services and our expertise in specific markets. Many of our competitors have significantly greater
financial, technical and marketing resources than we have and generate greater revenues than we do
and we cannot assure you that we will be able to compete successfully with such competitors and
will not lose existing customers to such competitors. We believe that our ability to compete also
depends in part on a number of factors outside our control, including the ability of our
competitors to attract, train, motivate and retain highly skilled technical associates, the price
at which our competitors offer comparable services and the extent of our competitors’
responsiveness to customer needs.
Our revenues are highly dependent upon a small number of customers.
We derive a significant portion of our revenues from a limited number of corporate customers. In
the nine months ended December 31, 2007 and in fiscal 2007 and fiscal 2006, our largest customer
together with its affiliates, accounted for 5.2%, 6.3% and 8.8%, respectively, of our total
revenues. In the nine months ended December 31, 2007 and in fiscal 2007 and fiscal 2006, our second
largest customer accounted for 5.0%, 4.4% and 5.1%, respectively, of our total revenues. In the
nine months ended December 31, 2007 and in
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fiscal 2007 and fiscal 2006, our five largest customers accounted for 19.7%, 21.0% and 24.2%,
respectively, of our total revenues. The volume of work performed for specific customers is likely
to vary from year to year, particularly since we are usually not the exclusive outside service
provider for our customers.
There are a number of factors other than our performance that could cause the loss of a customer
and that may not be predictable. In certain cases, we have significantly reduced the services
provided to a customer when the customer either changed its outsourcing strategy by moving more
work in-house or replaced its existing software with packaged software supported by the licensor.
Some customers could also potentially develop competing offshore IT centers in India and as a
result, work that may otherwise be outsourced to us may instead be performed in-house. Reduced
technology spending in response to a challenging economic or competitive environment may also
result in lower revenues or loss of a customer. If we lose one of our major customers or one of our
major customers significantly reduces its volume of business with us, our revenues and
profitability could be reduced.
Our fixed-price contracts expose us to additional risks, many of which are beyond our control,
which may reduce the profitability of these contracts.
As a core element of our business strategy, we offer a portion of our services on a fixed-price
basis, along-with a time-and-materials basis. In the nine months ended December 31, 2007 and in
fiscal 2007 and fiscal 2006, we derived 31.1%, 39.0% and 35.1%, respectively, of our IT services
revenues from fixed-price contracts. Although we use our software engineering processes and past
project experience to reduce the risks associated with estimating, planning and performing
fixed-price projects, we bear the risk of cost overruns, completion delays and wage inflation in
connection with these projects. We may also have to pay damages to our customers for completion
delays. Many of these project risks may be beyond our control. Our failure to accurately estimate
the resources and time required for a project, future wage inflation and currency exchange rates,
or our failure to complete our contractual obligations within the time frame committed could reduce
the profitability of our fixed-price contracts.
Our customers may terminate projects before completion or choose not to renew contracts, many of
which are terminable at will, which could adversely affect our profitability.
Our contracts with customers do not commit our customers to provide us with a specific volume of
business and can typically be terminated by our customers with or without cause, with little or no
advance notice and without penalty. Any failure to meet a customer’s expectations could result in a
cancellation or non-renewal of a contract. Additionally, our contracts with customers are typically
limited to a specific project and not any future work. Our multi-year contracts will be due for
renewal from time to time and we cannot assure you that our customers will choose to renew such
contracts for a similar or longer duration, on terms as favorable as their current terms or at all.
Other than our performance, there are also a number of factors not within our control that could
cause the loss of a customer. Our customers may demand price reductions, change their outsourcing
strategy by moving more work in-house or to one of our competitors, or replace their existing
software with packaged software supported by licensors, any of which could reduce our revenue and
profitability.
A number of our customer contracts are conditioned upon our performance, which, if unsatisfactory,
could result in less revenues than previously anticipated.
We have not yet offered any performance based or variable pricing terms to our customers. However,
we continue to consider the viability of introducing performance-based or variable-pricing
contracts. Should we use value-based pricing terms, it will become more difficult for us to predict
the revenues we will receive from our customer contracts, as such contracts would likely contain a
higher number of contingent terms for payment of our fees by our customers. Our failure to meet
contract goals or a customer’s expectations in such performance-based contracts may result in lower
revenues and a less profitable or an unprofitable engagement.
Some of our multi-year customer contracts contain certain provisions which, if triggered, could
result in lower future revenues and profitability under the contract.
30
Some of our multi-year customer contracts contain benchmarking provisions, most favored
customer clause and/or provisions restricting personnel from working on projects of our customers’
competitors. Benchmarking provisions allow a customer in certain circumstances to request a
benchmark study prepared by an agreed upon third-party comparing our pricing, performance and
efficiency gains for delivered contract services with that of an agreed list of other service
providers for comparable services. Based on the results of the benchmarking study and depending on
the reasons for any unfavorable variance, we may be required to make improvements in the services
we provide or to reduce the pricing for services to be performed under the balance term of the
contract, which may result in lower future revenues and profitability under the contract.
Most favored customer clauses generally provide that if, during the term of the contract, we were
to offer similar services to any other customers on terms and conditions more favorable than those
provided in such contract, we would be obligated to offer equally favorable terms and conditions to
the customer. As pricing pressures increase, some customers may demand price reductions or other
pricing incentives. Any pricing reduction agreed to in a subsequent contract may require us to
offer equally favorable terms to other customers with whom we have a most favored contract under
the remaining term of contracts with those customers which may result in lower future revenues and
profitability.
The contracts containing benchmarking provisions/most favored customer/and other similar clauses
impact new projects or future services on existing projects and do not impact the terms of
previously delivered projects/services. The most favored customer clause provides that the Company
will offer the best pricing to a new customer if they are identified as a most favored customer. If
an existing customer is granted a most favored customer status, the revised terms would apply to
the services rendered to such customer after the grant of the most favored customer status. This
clause is triggered if a similar contract is negotiated at a lower rate with a new / existing
customer having similar volume, skill set, services offered, geography and domain. The reduction in
the rates for a most favored customer would be applicable only from the time the Company offers a
lower rate to any other customer who enters into a contract similar in nature to the most favored
customer.
Historically no delivery / price adjustments have been required to be made on account of any of
these clauses and we do not anticipate that these clauses will have a material future effect on our
financial condition and results of operations.
A number of our customer contracts provide that, during the term of the contract and for a certain
period thereafter ranging from six to twelve months, we may not provide similar services to any of
their competitors using the same personnel. This restriction may hamper our ability to compete for
and provide services to customers in the same industry, which may result in lower future revenues
and profitability.
We may be unable to attract skilled professionals in the competitive labor market.
Our ability to execute projects and to obtain new customers depends largely on our ability to
attract, train, motivate and retain highly skilled technical associates, particularly project
managers, project leaders and other senior technical personnel. We believe that there is
significant competition for technical associates who possess the skills needed to perform the
services that we offer. An inability to hire and retain additional qualified personnel will impair
our ability to bid for or obtain new projects and to continue to expand our business. Also, we
cannot assure you that we will be able to assimilate and manage new technical associates
effectively. In the nine months ended December 31, 2007 and in fiscal 2007 and fiscal 2006, we
experienced associate attrition in the IT services segment at a rate of 13.1%, 15.7% and 19.2%,
respectively. Any increase in our attrition rates, particularly the attrition rate of experienced
software engineers, project managers and project leaders, could harm our growth strategy. We cannot
assure you that we will be successful in recruiting and retaining a sufficient number of
replacement technical associates with the requisite skills to replace those technical associates
who leave. Further, we cannot assure you that we will be able to redeploy and retrain our technical
associates to keep pace with continuing changes in evolving technologies and changing customer
preferences. Should we be unable to successfully recruit, retain, redeploy or retrain our technical
associates, we may become less attractive to potential customers and may fail to satisfy the
demands of existing customers, which would result in a decrease in revenues and profitability.
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We dedicate significant resources to develop international operations which may be more difficult
to manage and operate.
In addition to our offshore IT centers in India, we have established IT centers in Australia,
Canada, China, Hungary, Japan, Malaysia, Singapore, United Arab Emirates, the United Kingdom and
the United States and plan to open additional international facilities. Because of our limited
experience in managing and operating facilities outside of India, we are subject to additional
risks related to our international expansion strategy, including risks related to complying with a
wide variety of national and local laws, restrictions on the import and export of certain
technologies and multiple and possibly overlapping tax structures. In addition, we may face
competition in other countries from companies that may have more experience with local conditions
or with international operations generally. We may also face difficulties integrating new
facilities in different countries into our existing operations, as well as integrating employees
that we hire in different countries into our existing corporate culture.
We are investing substantial cash assets in new facilities and physical infrastructure and our
profitability could be reduced if our business does not grow proportionately.
As of December 31, 2007, we had contractual commitments of approximately $106.2 million for capital
expenditures and we estimate spending a further $100 million in fiscal 2008. We may encounter cost
overruns or project delays in connection with new facilities. These expansions will significantly
increase our fixed costs. If we are unable to grow our business and revenues proportionately, our
profitability will be reduced.
Restrictions on immigration may affect our ability to compete for and provide services to customers
in the United States and in other countries, which could hamper our growth and cause our revenues
to decline.
The vast majority of our associates are Indian nationals. Most of our projects require a portion of
the work to be completed at the customer’s location which is typically outside India. The ability
of our associates to work in the United States, Europe and in other countries outside India depends
on the ability to obtain the necessary visas and work permits. As of December 31, 2007, the
majority of our associates located outside India was in the United States and held either H-1B
visas or L-1 visas, allowing the employee to remain in the United States during the term of the
work permit only temporarily. Although there is no limit to new L-1 visas, there is a limit to the
aggregate number of new H-1B visas that the U.S. Citizenship and Immigration Services, or USCIS,
may approve in any government fiscal year. The 2005 Appropriations Bill further precludes foreign
companies from obtaining L-1 visas for employees with specialized knowledge: (1) if such employees
will be stationed primarily at the worksite of another company in the U.S. and the employee will
not be controlled and supervised by his employer, or (2) if the placement is essentially an
arrangement to provide labor for hire rather than in connection with the employee’s specialized
knowledge. The USCIS has also issued new guidelines to more closely verify the qualifying criteria
to restrict the liberal usage of L1visas. Immigration laws in the United States may also require us
to meet certain levels of compensation and to comply with other legal requirements including labor
certifications as a condition to obtaining or maintaining work visas for our associates working on
H-1B in the United States. The USCIS announced on April 3, 2007 that it had received sufficient
applications to fill up all 65,000 visas that were available for the year. A notification by the
USCIS that it will apply a lottery system if the number of H1-B applications exceed the annual
65,000 quota has led to a scramble among IT firms and their attorneys to line up applications to
the USCIS office.
Immigration laws in the United States and in other countries are subject to legislative change, as
well as to variations in standards of application and enforcement due to political forces and
labour and economic conditions. It is difficult to predict the political and economic events that
could affect immigration laws, or the restrictive impact they could have on obtaining or monitoring
work visas for our employees. Our reliance on work visas for a significant number of associates
makes us particularly vulnerable to such changes and variations as it affects our ability to staff
projects with associates who are not citizens of the country where the work is to be performed. As
a result, we may not be able to obtain a sufficient number of
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visas for our associates or may
encounter delays or additional costs in obtaining or maintaining the condition of such visas.
We may engage in acquisitions, strategic investments, strategic partnerships or alliances or other
ventures that may or may not be successful.
We may acquire or make strategic investments in complementary businesses, technologies, services or
products, or enter into strategic partnerships or alliances with third parties in order to enhance
our business. It is possible that we may not be able to identify suitable acquisitions targets and
candidates for strategic investments or partnerships, or if we do identify such targets or
candidates, we may not be able to complete those transactions on terms commercially acceptable to
us, or at all. The inability to identify suitable acquisition targets or investments or the
inability to complete such transactions may affect our competitiveness and our growth prospects. As
of the date of this document, we have no agreements or understanding to enter into any material
acquisition, investment, partnership, joint venture or alliance.
If we acquire a company, we could have difficulty in assimilating that company’s personnel,
operations, technology and software. In addition, the key personnel of the acquired company may
decide not to work for us. In some cases, we could have difficulty in integrating the acquired
products, services or technologies into our operations. These difficulties could disrupt our
ongoing business, distract our management and employees and increase our expenses.
We may make strategic investments in early-stage technology start-up companies in order to gain
experience in or exploit niche technologies. However, our investments may not be successful. The
lack of profitability of any of our investments could have a material adverse effect on our
operating results.
System failure could disrupt our business.
To deliver our services to our customers, we must maintain a high speed network of satellite, fiber
optic and land lines and an active voice and data communications 24 hours a day between our main
offices in Hyderabad, our other IT centers in India and globally and the offices of our customers
worldwide. Any systems failure or a significant lapse in our ability to transmit voice and data
through satellite and telephone communications could result in lost customers and curtailed
operations which would reduce our revenue and profitability.
We may be liable to our customers for damages caused by disclosure of confidential information or
system failure.
We are often required to collect and store sensitive or confidential customer and consumer data.
Many of our customer agreements do not limit our potential liability for breaches of
confidentiality. If any person, including any of our associates, penetrates our network security or
misappropriates sensitive data, we could be subject to significant liability from our customers or
from our customers’ clients for breaching contractual confidentiality provisions or privacy laws.
Unauthorized disclosure of sensitive or confidential customer and consumer data, whether through
breach of our computer systems, system failure or otherwise, could damage our reputation and cause
us to lose customers. Many of our contracts involve projects that are critical to the operations of
our customers’ businesses and provide benefits which may be difficult to quantify. Any failure in a
customer’s system or breaches of security could result in a claim for substantial damages against
us, regardless of our alleged responsibility for such failure. Generally, we attempt to limit our
contractual liability for consequential damages in rendering our services; however these
limitations on liability may be unenforceable in some cases, or may be insufficient to protect us
from liability for damages. In respect of some of our contracts, we sub-contract a part of the work
to certain sub-contractors. We are liable to our customers for any breach or non-performance by our
sub-contractors under the sub-contracts. We maintain general liability insurance coverage,
including coverage for errors and omissions; however this coverage may not continue to be available
on reasonable terms and may be unavailable in sufficient amounts to cover one or more large claims.
Further, an insurer might disclaim coverage as to any future claim. A successful assertion of one
or more large claims against us that exceeds our available insurance coverage or results in changes
in our insurance policies, including premium increases or the imposition of a large deductible or
co-insurance requirement, could adversely affect our operating results and profitability.
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Our success depends in large part upon our management team and key personnel and our ability to
attract and retain them.
We are highly dependent on the senior members of our management team. Our future performance will
be affected by any disruptions in the continued service of these persons. We do not maintain key
man life insurance for any of the senior members of our management team or other key personnel,
except for our chief executive officer. Competition for senior management in our industry is
intense and we may not be able to retain such senior management personnel or attract and retain new
senior management personnel in the future. The loss of any member of our senior management team or
other key personnel may have a material adverse effect on our business, results of operations and
financial condition.
Our insiders, who are significant shareholders, are able to influence the election of our board and
may have interests which conflict with those of our shareholders or holders of our ADSs.
Our executive officers and directors, together with members of their immediate families,
beneficially owned, in the aggregate approximately 0.22% of our outstanding equity shares as of
December 31, 2007. In addition, two of our executive directors control SRSR Holdings Private
Limited, which holds approximately 8.35% of our outstanding equity shares as of December 31, 2007.
As a result, acting together, this group has the ability to exercise influence over most matters
requiring our shareholders’ approval, including the election and removal of directors and
significant corporate transactions. These insider shareholders may exercise influence even if they
are opposed by our other shareholders. Without the consent of these insider shareholders, we could
be delayed or prevented from entering into transactions (including the acquisition of our company
by third parties) that may be viewed as beneficial to us and our shareholders.
The value of our interest in our subsidiaries may decline.
Satyam BPO formerly known as Nipuna, our subsidiary, has experienced losses during each year since
its inception and it is likely that it will continue to experience such losses in the future. Our
recently acquired subsidiaries, Citisoft and Knowledge Dynamics have also experienced losses since
our acquisition and they may also incur losses that might have an adverse effect on our operating
results in future periods.
Impairment of goodwill on account of our investments may impact our net income under U.S. GAAP.
We make estimates in the preparation of financial statements including the utility of goodwill.
Changes in such estimates resulting from events, many of which are outside of our control, may
result in the impairment of goodwill which would negatively impact our net income under U.S. GAAP.
Such impact on net income may result in a reduction of the market value of our shares.
Stock-based compensation expenses may significantly reduce our net income.
Although we have suspended, except in certain cases, new grants of stock options as of April 1,
2005, our reported income has been and will continue to be affected
by the grant of warrants, options or RSUs under our various employee benefit plans. Under the terms of our existing plans, some of
which have outstanding obligations to grant options in future, employees are typically granted
warrants, options or RSUs to purchase equity shares at a substantial discount to the current market
value. Effective April 1, 2006, we adopted the fair value recognition provisions of SFAS 123R. We
adopted SFAS 123R using the modified prospective transition method, which required the application
of the accounting standard as of April 1, 2006, the first day of our fiscal year 2007. Under this
transition method, stock-based compensation expensed for the year ended March 31, 2007 includes
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compensation expense for all stock-based compensation awards granted prior to, but not
yet vested as of April 1, 2006, based on the grant-date fair value estimated in accordance
with the original provisions of SFAS 123 and |
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Stock-based compensation expenses for all stock-based compensation awards granted after
April 1, 2006 is based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123R. In accordance with the modified prospective transition method, our
consolidated financial statements for the prior periods have not been restated to reflect
and do not include, the impact of SFAS 123R. Depending on the grant date fair value and
future grants are made, amortization of |
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deferred stock-based compensation may contribute to
reducing our operating income and net income. Our subsidiaries also have stock option
schemes which may generate stock-based
compensation expenses and which have and in the past reduced, and may in the future reduce
our operating income and net income. |
Compliance with new and changing corporate governance and public disclosure requirements adds
uncertainty to our compliance policies and increases our costs of compliance.
Changing laws, regulations and standards relating to accounting, corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, the SEC regulations, the New York Stock
Exchange, or NYSE, rules, Securities and Exchange Board of India, or SEBI, rules and Indian stock
market listing regulations are creating uncertainty for companies like ours. These new or changed
laws, regulations and standards may lack specificity and are subject to varying interpretations.
Their application in practice may evolve over time, as new guidance is provided by regulatory and
governing bodies. This could result in continuing uncertainty regarding compliance matters and
higher costs of compliance as a result of ongoing revisions to such corporate governance standards.
In particular, our efforts to continue to comply with Section 404 of the Sarbanes-Oxley Act of 2002
and the related regulations regarding our required assessment of our internal controls over
financial reporting and our external auditors’ audit of that assessment requires the commitment of
significant financial and managerial resources. We consistently assess the adequacy of our internal
controls over financial reporting, remediate any control deficiencies that may be identified and
validate through testing that our controls are functioning as documented. While we currently do not
have any material weaknesses there can be no assurance that future tests will not result in our
independent auditors being unable to issue unqualified attestation reports on management’s
assessment on the operating effectiveness of our internal controls over financial reporting.
Additionally, under revised corporate governance standards adopted by Bombay Stock Exchange Ltd.,
or BSE, and The National Stock Exchange of India Limited, or NSE, which we collectively refer to as
the Indian Stock Exchanges, we have been required to comply with additional standards from December
31, 2005. These standards include a certification by our chief executive officer and chief
financial officer that they have evaluated the effectiveness of our internal control systems and
that they have disclosed to our auditors and our audit committee any deficiencies in the design or
operation of our internal controls of which they may become aware, as well as any steps taken or
proposed to resolve the deficiencies.
We are committed to maintaining high standards of corporate governance and public disclosure and
our efforts to comply with evolving laws, regulations and standards in this regard have resulted in
and are likely to continue to result in, increased general and administrative expenses and a
diversion of management time and attention from revenue-generating activities to compliance
activities. In addition, the new laws, regulations and standards regarding corporate governance may
make it more difficult for us to obtain director and officer liability insurance. Further, our
board members, chief executive officer and chief financial officer could face an increased risk of
personal liability in connection with their performance of duties. As a result, we may face
difficulties attracting and retaining qualified board members and executive officers, which could
harm our business. If we fail to comply with new or changed laws, regulations or standards of
corporate governance, our business and reputation may be harmed.
As a foreign private issuer, we are subject to different U.S. securities laws and rules than a
domestic issuer, which may, among other things, limit the information available to holders of our
securities.
As a foreign private issuer, we are subject to requirements under the Securities Act of 1933, as
amended, or Securities Act and the Securities Exchange Act of 1934, as amended, or Exchange Act,
which are different from the requirements applicable to domestic U.S. issuers. For example, our
officers, directors and principal shareholders are exempt from the reporting and “short-swing”
profit recovery provisions of Section 16 of the Exchange Act and the rules there under with respect
to their purchases and sales of our equity shares and/or ADSs. The periodic disclosure required of
foreign private issuers is more limited than the periodic disclosure required of domestic U.S.
issuers and therefore there may be less publicly available information about us than is regularly
published by or about U.S. public companies in the United States.
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Terrorist attacks or a war could adversely affect our business, results of operations and financial
condition.
Terrorist attacks, such as the attacks of September 11, 2001 in the United States and other acts of
violence or war, such as the continuing conflict in Iraq, have the potential to have a direct
impact on our customers. To the extent that such attacks affect or involve the United States, our
business may be significantly impacted, as the majority of our revenues are derived from customers
located in the United States. In addition, such attacks may make travel more difficult, may make it
more difficult to obtain work visas for many of our associates who are required to work in the
United States and may effectively curtail our ability to deliver our services to our customers.
Such obstacles to operate our business may increase our expenses and negatively affect the results
of our operations. Many of our customers visit several IT services firms, including their offshore
facilities, prior to reaching a decision on vendor selection. Terrorist threats, attacks or war
could make travel to our facilities more difficult for our customers and may delay, postpone or
cancel decisions to use our services.
Risks Related to Investments in Indian Companies
We are incorporated in India and a substantial portion of our assets and our employees are located
in India. Consequently, our financial performance and the market price of our ADSs will be affected
by changes in exchange rates and controls, interest rates, GoI policies, including taxation
policies, as well as political, social and economic developments affecting India.
The actions of GoI to curtail or eliminate tax benefits that we have historically benefited from.
The statutory corporate income tax rate in India is currently 30.0%. This tax rate is presently
subject to a 10.0% surcharge. The amount of tax and surcharge payable is further subject to a 3.0%
education cess, resulting in an effective tax rate of 33.99%. We benefit from tax incentives
provided to software entities such as an exemption from payment of Indian corporate income taxes
until the earlier of fiscal 2009 or 10 consecutive years of operations for software development
facilities designated as “Software Technology Parks,” or STP units. The benefits of this tax
incentive have historically resulted in our effective tax rate being well below statutory rates.
The exemption for our STP units was reduced from 100.0% to 90.0% for the fiscal 2003. The exemption
for two of our STP units in Hyderabad and one in Bangalore expired at the beginning of fiscal 2006
and one in Hyderabad, Chennai, Pune and Bhubaneswar expired at the beginning of fiscal 2007 and the
exemption for balance of our STP units will expire in fiscal 2008 and fiscal 2009. We also earn
certain other foreign income and domestic income, which is taxable irrespective of the above tax
exemption.
When our tax holidays expire or terminate, our tax expense will materially increase, reducing our
profitability. We cannot assure you as to what action the present or future governments of India
will take regarding tax incentives for the IT industry.
Foreign investment restrictions under Indian law may adversely impact the value of our ADSs,
including, for example, restrictions that limit your ability to reconvert equity shares into ADSs,
which may cause our equity shares to trade at a discount or premium to the market price of our
ADSs.
Our equity shares are listed and traded on the Indian Stock Exchanges and they may trade on these
stock exchanges at a discount or premium to the ADSs traded on the NYSE, in part because of
restrictions on foreign ownership of the underlying shares.
Our ADSs are freely convertible into our equity shares under the deposit agreement governing their
issuance, or the Deposit Agreement. The Reserve Bank of India, or RBI, prescribes fungibility
regulations permitting, subject to compliance with certain terms and conditions, the reconversion
of equity shares to ADSs provided that such equity shares are purchased from an Indian Stock
Exchange through stock brokers and the actual number of ADSs outstanding after such reconversion is
not greater than the original number of ADSs outstanding. If you elect to surrender your ADSs and
receive equity shares, you will only be able to trade those equity shares on an Indian Stock
Exchange and, under present law, it is unlikely you will be permitted to reconvert those equity
shares to ADSs. Additionally, investors who exchange ADSs for the underlying equity shares and are
not holders of record will be required to declare to us details of the holder
36
of record and the
holder of record will be required to disclose the details of the beneficial owner. Any investor who
fails to comply with this requirement may be liable for a fine of up to Rs.1,000 for each day
such failure continues. Such restrictions on fungibility of the underlying equity shares to ADSs
may cause our equity shares to trade at a discount or premium to the ADSs.
The sale of equity shares underlying the ADSs by a person not resident in India to a resident of
India does not require the prior approval of the RBI, provided such sales are effected through the
Indian Stock Exchanges. Any sale of such underlying equity shares by a person not resident in India
to a resident of India outside of the Indian Stock Exchanges can, however, be completed without
prior RBI approval, provided such equity shares are transferred based on a pricing formula
established by the Indian foreign exchange laws which set a maximum price requirement for sale of
such equity shares.
Regional conflicts or natural disasters in South Asia and elsewhere could adversely affect the
Indian economy, disrupt our operations and cause our business to suffer.
South Asia has from time to time experienced instances of civil unrest and hostilities among
neighboring countries, including between India and Pakistan. In recent years there have been
military confrontations between India and Pakistan that have occurred in the region of Kashmir and
along the India-Pakistan border. There has also been a recent increase in the incidence of
terrorist attacks in India, including bombings at Delhi, Mumbai and Hyderabad. Military activity or
terrorist attacks in the future could influence the Indian economy by disrupting communications and
making travel more difficult and such political tensions could create a perception that investments
in Indian companies involve higher degrees of risk. This, in turn, could have a material adverse
effect on the market for securities of Indian companies, including our equity shares and our ADSs
and on the market for our services. In addition, as an international company, our offshore and
onsite operations may be impacted by natural disasters such as earthquakes, tsunamis, floods,
disease and health epidemics. In December 2004, certain parts of India were severely affected by a
tsunami triggered by an earthquake in the Indian Ocean and in October 2005, certain parts of
northern India, Pakistan and Afghanistan were severely devastated by a major earthquake. Though our
operations were not affected by these disasters, we cannot guarantee that in the future our
operations will not be affected by the effect such natural disasters may have on the economies of
India and other countries in the region.
Political instability could seriously harm business and economic conditions in India generally and
our business in particular.
During the past decade, the GoI has pursued policies of economic liberalization, including
significantly relaxing restrictions on the private sector. Nevertheless, the role of the Indian
central and state governments in the Indian economy as producers, consumers and regulators has
remained significant. The general elections in 2004 for the lower house of the Indian Parliament
resulted in no party winning an absolute majority and a coalition government has been formed. We
cannot assure you that these liberalization policies will continue in the future. Government
corruption scandals and protests against privatization could slow down the pace of liberalization
and deregulation. The rate of economic liberalization could change and specific laws and policies
affecting technology companies, foreign investment, currency exchange rates and other matters
affecting investment in our securities could change as well. A significant change in India’s
economic liberalization and deregulation policies could disrupt business and economic conditions in
India generally and our business in particular.
Currency exchange rate fluctuations may affect the value of our ADSs and our financial condition.
Our functional currency is the Indian rupee, although we transact a major portion of our business
in U.S. dollars and several other currencies and accordingly face foreign currency exposure through
our sales in the United States and elsewhere and purchases from overseas suppliers in U.S. dollars
and other currencies. Historically, we have held a substantial majority of our cash funds in
rupees. Accordingly, changes in exchange rates may have a material adverse effect on our revenues,
other income, cost of services sold, gross margin and net income, which may in turn have a negative
impact on our business, operating results and financial condition.
37
The exchange rate between the rupee and the U.S. dollar has changed substantially in recent years
and may fluctuate substantially in the future. In the nine months ended December 31, 2007 and in
fiscal 2007 and
fiscal 2006, our U.S. dollar-denominated revenues represented 71.4%, 74.7% and 77.6%, respectively,
of our total revenues. We expect that a majority of our revenues will continue to be generated in
U.S. dollars for the foreseeable future and that a significant portion of our expenses, including
personnel costs as well as capital and operating expenditures, will continue to be denominated in
rupees. Consequently, our results of operations will be adversely affected to the extent that the
rupee appreciates against the U.S. dollar. Depreciation of the rupee will result in foreign
currency translation losses in respect of foreign currency borrowings, if any.
We have sought to reduce the effect of exchange rate fluctuations on our operating results by
entering into foreign exchange forward and options contracts to cover a portion of our outstanding
accounts receivable. As of December 31, 2007 and 2006, we had outstanding forward and options
contracts in the amount of $907.5 million and $253.5 million, respectively. We may not be able to
purchase contracts adequate to insulate ourselves from foreign exchange currency risks.
Additionally, the policies of RBI may change from time to time which may limit our ability to hedge
our foreign currency exposures adequately.
Fluctuations in the exchange rate between the rupee and the U.S. dollar will also affect the U.S.
dollar conversion by our Depositary of any cash dividends paid in rupees on the equity shares
represented by the ADSs. In addition, fluctuations in the exchange rate between the Indian rupee
and the U.S. dollar will affect the U.S. dollar equivalent of the Indian rupee price of our equity
shares on the Indian Stock Exchanges. As a result, these fluctuations are likely to affect the
prices of our ADSs. These fluctuations will also affect the dollar value of the proceeds a holder
would receive upon the sale in India of any equity shares withdrawn from our Depositary under the
deposit agreement. We cannot assure you that holders of ADSs will be able to convert rupee proceeds
into U.S. dollars or any other currency or with respect to the rate at which any such conversion
could occur. In addition, our market valuation could be seriously harmed by the devaluation of the
rupee if U.S. investors analyze our value based on the U.S. dollar equivalent of our financial
condition and results of operations.
Our ability to acquire companies organized outside India as part of our growth strategy depends on
the approval of the GoI and/or RBI and failure to obtain this approval could negatively impact our
business.
We have developed a growth strategy based on, among other things, expanding our presence in
existing and new markets and selectively pursuing joint venture and acquisition opportunities.
Foreign exchange laws in India presently permit Indian companies to acquire or invest in foreign
companies without any prior governmental approval if the transaction amount does not exceed 400% of
the networth of the acquiring company as of the date of its most recent audited balance sheet. If
consideration for the transaction is paid out of the proceeds of an American Depositary Receipt, or
ADR, or Global Depositary Receipt, or GDR, sale, Indian exchange control laws do not impose any
investment limits. Acquisitions in excess of the 400% networth threshold require prior RBI
approval. It is possible that any required approval from RBI may not be obtained. Our failure to
obtain approvals for acquisitions of companies organized outside India may restrict our
international growth, which could negatively affect our business and prospects.
If we are unable to protect our intellectual property rights, or if we infringe on the intellectual
property rights of others, our business may be harmed.
The laws of India do not protect intellectual property rights to the same extent as the laws in the
United States. Further, the global nature of our business makes it difficult for us to control the
ultimate destination of our products and services. The misappropriation or duplication of our
intellectual property could curtail our operations or reduce our profitability.
We rely upon a combination of non-disclosure and other contractual arrangements and copyright,
trade secret and trademark laws to protect our intellectual property rights. Ownership of software
and associated deliverables created for customers is generally retained by or assigned to our
customers and we do not retain an interest in such software and deliverables.
38
We have registered “Satyam” and other related marks in India and the United States under certain
classes and have applied for the registration of such marks in other jurisdictions where we carry
on business. We currently require our technical associates to enter into non-disclosure and
assignment of rights agreements
to limit use of, access to and distribution of confidential and proprietary information. We cannot
assure you that the steps taken by us in this regard will be adequate to prevent misappropriation
of confidential and proprietary information or that we will be able to detect unauthorized use and
take appropriate steps to enforce our intellectual property rights.
Although we believe that our services and products do not infringe upon the intellectual property
rights of others, we cannot assure you that such a claim will not be asserted against us in the
future. Assertion of such claims against us could result in litigation and we cannot assure you
that we would prevail in such litigation or be able to obtain a license for the use of any
infringed intellectual property from a third party on reasonable commercial terms.
We expect that the risk of infringement claims against us will increase if more of our competitors
are able to obtain patents for software products and processes. Any such claims, regardless of
their outcome, could result in substantial cost to us and divert management’s attention from our
operations. In the future, litigation may be necessary to enforce our intellectual property rights
or to determine the validity and scope of the proprietary rights of others. Any infringement claim
or litigation against us could therefore result in substantial costs and diversion of resources.
Indian laws limit our ability to raise capital outside India and may limit the ability of others to
acquire us, which could prevent us from operating our business or entering into a transaction that
is in the best interests of our shareholders.
Presently, Indian technology companies such as ours are able to raise capital outside of India
without the prior approval of any Indian governmental authority through an ADR or GDR issuance or
an issuance of convertible debt securities, subject with respect to convertible debt issuances to a
limit of $500 million in any fiscal year. Changes to Indian foreign exchange laws may create
restrictions on our capital raising abilities. For example, a limit on the foreign equity ownership
of Indian technology companies may constrain our ability to seek and obtain additional equity
investment by foreign investors. In addition, these restrictions, if applied to us, may prevent us
from entering into certain transactions, such as an acquisition by a non-Indian company, which
might otherwise be beneficial for us and the holders of our equity shares and ADSs.
Conditions in the Indian securities market may affect the price or liquidity of our equity shares
and our ADSs.
The Indian securities markets are smaller and more volatile than securities markets in more
developed economies. The Indian stock exchanges have in the past experienced substantial
fluctuations in the prices of listed securities and the price of our equity shares has been
especially volatile. The high and low prices of our shares on the BSE from fiscal 2003 until the
latest practicable date are set forth in the table below.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
High |
|
Low |
| Fiscal Year |
|
Rs |
|
$ equivalent |
|
Rs. |
|
$ equivalent |
2003 |
|
|
145.9 |
|
|
|
3.1 |
|
|
|
87.6 |
|
|
|
1.8 |
|
2004 |
|
|
195.5 |
|
|
|
4.5 |
|
|
|
63.7 |
|
|
|
1.5 |
|
2005 |
|
|
221.0 |
|
|
|
5.1 |
|
|
|
125.0 |
|
|
|
2.9 |
|
2006 |
|
|
431.0 |
|
|
|
9.7 |
|
|
|
182.2 |
|
|
|
4.1 |
|
2007 |
|
|
524.9 |
|
|
|
12.2 |
|
|
|
270.5 |
|
|
|
6.3 |
|
2008 (through January 21, 2008) |
|
|
522.3 |
|
|
|
13.0 |
|
|
|
330.0 |
|
|
|
8.4 |
|
On January 21, 2008, the closing price of our shares on the BSE was Rs. 371.40. For comparison
purposes, these prices have been adjusted to give effect to our October 10, 2006 two-for-one stock
split (in the form of stock dividend). The prices of our shares have been translated into U.S.
dollars based on the noon-buying rate as certified by the Federal Reserve Bank of New York on the
last date of each period presented.
The Indian Stock Exchanges have also experienced problems that have affected the market price and
liquidity of the securities of Indian companies. These problems have included temporary exchange
39
closures, the suspension of stock exchange administration, broker defaults, settlement delays and
strikes by brokers. In addition, the governing bodies of the Indian Stock Exchanges have, from time
to time, restricted securities from trading, limited price movements and restricted margin
requirements. Moreover, from time
to time, disputes have occurred between listed companies and stock exchanges and other regulatory
bodies, which in some cases may have had a negative effect on market sentiment. Similar problems
could occur in the future and, if they do, they could harm the market price and liquidity of our
equity shares and our ADSs.
It may be difficult for you to enforce any judgment obtained in the United States against us or our
affiliates.
We are incorporated under the laws of the Republic of India. Many of our directors and key
managerial personnel and some of the experts named in this document reside outside the United
States. In addition, virtually all of our assets and the assets of many of these persons are
located outside the United States. As a result, you may be unable to:
| |
(i) |
|
effect service of process upon us outside India or these persons outside the
jurisdiction of their residence; or |
| |
(ii) |
|
enforce against us in courts outside India or these persons outside the jurisdiction of
their residence, judgments obtained in United States courts, including judgments predicated
solely upon the federal securities laws of the United States. |
We have been advised by our Indian counsel, that the United States and India do not have a treaty
providing for reciprocal recognition and enforcement of judgments (other than arbitration awards)
in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by
any federal or state court in the United States on civil liability, whether or not predicated
solely upon the federal securities laws of the United States, may not be enforceable in India.
However, the party in whose favor such final judgment is rendered may bring a new suit in a
competent court in India based on a final judgment which has been obtained in the United States. If
and to the extent Indian courts were of the opinion that fairness and good faith so required, it
would, under current practice, give binding effect to the final judgment which had been rendered in
the United States unless such a judgment was founded on a claim which breached the laws of India.
You may be subject to Indian taxes arising out of capital gains on the sale of the underlying
equity shares.
Generally, capital gains, whether short-term or long-term, arising from the sale of the underlying
equity shares in India are subject to Indian capital gains tax. For the purpose of computing the
amount of capital gains subject to tax, Indian law specifies that the cost of acquisition of the
equity shares will be deemed to be the share price prevailing on the BSE or the NSE on the date the
Depositary advises the custodian to exchange receipts for underlying equity shares. The period of
holding of such equity shares, for determining whether the gain is long-term or short-term,
commences on the date of the giving of such notice by our Depositary to the custodian. With effect
from October 1, 2004, any gains realized on the sale of listed equity shares held for more than 12
months to an Indian resident, or a non-resident investor in India, will not be subject to Indian
capital gains tax if the securities transaction tax has been paid on the transaction. Investors are
advised to consult their own tax advisors and to consider carefully the potential tax consequences
of an investment in our ADSs.
There may be less company information available in Indian securities markets than securities
markets in other countries.
There is a difference between the level of regulation and monitoring of the Indian securities
markets and the activities of investors, brokers and other participants and that of markets in the
United States and other developed economies. SEBI is responsible for improving disclosure and other
regulatory standards for the Indian securities markets. SEBI has issued regulations and guidelines
on disclosure requirements, insider trading and other matters. There may, however, be less publicly
available information about Indian companies than is regularly made available by public companies
in developed economies.
40
Risk Related to our ADSs and our Trading Market
Historically, our ADSs have traded at a significant premium to the trading prices of our underlying
equity shares, a situation which may not continue.
Historically, our ADSs have traded on the NYSE at a substantial premium to the trading prices of
our underlying equity shares on the Indian Stock Exchanges. We believe that this price premium has
resulted from the relatively small portion of our market capitalization represented by ADSs,
restrictions imposed by Indian law on the conversion of equity shares into ADSs and an apparent
preference for some investors to trade U.S. dollar-denominated securities. Over time, some of the
restrictions on the issuance of the ADSs imposed by Indian law have been relaxed and we expect that
other restrictions may be relaxed in the future. As a result, the historical premium enjoyed by
ADSs as compared to equity shares may be reduced or eliminated due to our sponsored ADS offering or
similar transactions in the future, a change in Indian law permitting further conversion of equity
shares into ADSs or changes in investor preferences.
You may be restricted in your ability to exercise preemptive rights under Indian law and thereby
may suffer future dilution of your ownership position.
Under the Companies Act, 1956 of India, or the Companies Act, a company incorporated in India must
offer its holders of equity shares preemptive rights to subscribe and pay for a proportionate
number of shares to maintain their existing ownership percentages before the issuance of any new
equity shares, unless the preemptive rights have been waived by adopting a special resolution by
holders of three-fourths of the shares which are voted on the resolution. You may be unable to
exercise preemptive rights for equity shares underlying ADSs unless a registration statement under
the Securities Act is effective with respect to the rights or an exemption from the registration
requirements of the Securities Act is available. Our decision to file a registration statement will
depend on the costs and potential liabilities associated with any given registration statement as
well as the perceived benefits of enabling the holders of our ADSs to exercise their preemptive
rights and any other factors that we deem appropriate to consider at the time the decision must be
made. We may elect not to file a registration statement relating to preemptive rights otherwise
available by law to you. In the case of future issuances, the new securities may be issued to our
Depositary, which may sell the securities for your benefit. The value, if any, our Depositary would
receive upon the sale of such securities cannot be predicted. To the extent that you are unable to
exercise preemptive rights granted in respect of the equity shares represented by your ADSs, your
proportional interests in our company would be reduced.
Holders of ADSs may be restricted in their ability to exercise voting rights.
At our request, our Depositary will mail to you any notice of shareholders’ meeting received
from us together with information explaining how to instruct our Depositary to exercise the voting
rights of the securities represented by ADSs. If our Depositary timely receives voting instructions
from you, it will endeavor to vote the securities represented by your ADSs in accordance with such
voting instructions. However, the ability of our Depositary to carry out voting instructions may be
limited by practical and legal limitations and the terms of the securities on deposit. We cannot
assure you that you will receive voting materials in time to enable you to return voting
instructions to our Depositary in a timely manner. Securities for which no voting instructions have
been received will not be voted.
Under Indian law, subject to the presence in person at a shareholder meeting of persons holding
equity shares representing a quorum, all resolutions proposed to be approved at that meeting are
voted on by a show of hands unless a poll is demanded by a shareholder or shareholders present in
person or by proxy holding at least 10.0% of the total shares entitled to vote on the resolution or
by those holding shares with an aggregate paid up value of at least Rs. 50,000. Equity shares not
represented in person at the meeting, including equity shares underlying ADSs for which a holder
has provided voting instructions to our Depositary, are not counted in a vote by show of hands. As
a result, only in the event that a shareholder present at the meeting demands that a poll be taken
will the votes of ADS holders be counted. Securities for which no voting instructions have been
received will not be voted on a poll.
As a foreign private issuer, we are not subject to the SEC’s proxy rules, which regulate the form
and content of solicitations by U.S.- based issuers of proxies from their shareholders. To-date,
our practice has been to provide advance notice to our ADS holders of all shareholder meetings and
to solicit their vote on such matters through our Depositary and we expect to continue this
practice. The form of notice and proxy
41
statement that we have been using does not include all of the information that would be provided
under the SEC’s proxy rules.
An active or liquid trading market for our ADSs is not assured.
We cannot predict the extent to which an active, liquid public trading market for our ADSs will
exist. Active, liquid trading markets generally result in lower price volatility and more efficient
execution of buy and sell orders for investors. The lack of an active, liquid trading market could
result in the loss of market makers, media attention and analyst coverage. If there is no longer a
market for our equity shares, or if we fail to continue to meet eligibility requirements, we may be
required to delist from the NYSE and this may cause our share prices to decrease significantly. In
addition, if there is a prolonged decline in the price of our equity shares, we may not be able to
issue equity securities to fund our growth, which would cause us to limit our growth or to incur
higher cost funding, such as short-term or long-term debt.
Liquidity of a securities market is often a function of the volume of the underlying shares that
are publicly held by unrelated parties. Although you are entitled to withdraw the equity shares
underlying the ADSs from our Depositary at any time, there is no public market for our equity
shares in the United States.
The future sales of securities by our company or existing shareholders may harm the price of our
ADSs or our equity shares.
The market price of our ADSs or our equity shares could decline as a result of sales of a large
number of ADSs or equity shares or the perception that such sales could occur. Such sales also
might make it more difficult for us to sell ADSs or equity securities in the future at a time and
at a price that we deem appropriate. As of December 31, 2007, we had an aggregate of equity shares
outstanding of 667,301,640 (excluding 2,229,580 equity shares held by the Satyam Associate Trust),
which includes underlying equity shares of 130,426,642 represented by 65,213,321 ADSs. In addition,
as of December 31, 2007 we had outstanding options to purchase approximately 23,054,527 of our
equity shares. All ADSs are freely tradable, other than ADSs purchased by our affiliates. The
remaining equity shares outstanding may be sold in the United States only pursuant to a
registration statement under the Securities Act or an exemption from the registration requirements
of the Securities Act.
Item 3: Quantitative and Qualitative Disclosure about Market Risk
Our currency, maturity and interest rate information relative to our short-term and long-term debt
are disclosed in Note. 12 “Borrowings” to our consolidated financial statements.
The table below provides information about our financial instruments that are sensitive to changes
in interest rates and foreign currencies as of the dates shown. Weighted average variable rates
were based on average interest rates applicable to the loans. The information is presented in U.S.
dollars, which is our reporting currency, based on the applicable exchange rates as of the relevant
period end. Actual cash flows are denominated in various currencies, including U.S. dollars and
Indian rupees.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As at December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(unaudited) |
|
|
(unaudited) |
|
| |
|
Total Recorded |
|
|
Total Recorded |
|
| |
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
| |
|
|
|
|
|
|
|
|
|
( dollars in millions) |
|
|
|
|
|
|
|
|
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate short-term debt |
|
$ |
20.9 |
|
|
|
|
|
|
$ |
20.9 |
|
|
$ |
5.3 |
|
|
|
|
|
|
$ |
5.3 |
|
Average interest rate |
|
|
|
|
|
|
8.58 |
% |
|
|
|
|
|
|
|
|
|
|
6.48 |
% |
|
|
|
|
Variable rate long term debt |
|
$ |
21.4 |
|
|
|
|
|
|
$ |
21.4 |
|
|
|
20.2 |
|
|
|
|
|
|
|
20.2 |
|
Average interest rate |
|
|
|
|
|
|
7.99 |
% |
|
|
|
|
|
|
|
|
|
|
6.96 |
% |
|
|
|
|
Fixed rate long-term debt |
|
$ |
6.3 |
|
|
|
|
|
|
$ |
6.3 |
|
|
|
4.8 |
|
|
|
|
|
|
|
4.7 |
|
Average interest rate |
|
|
|
|
|
|
9.54 |
% |
|
|
|
|
|
|
|
|
|
|
7.86 |
% |
|
|
|
|
42
Limitations
Fair value estimates are made at a specific point in time and are based on relevant market
information about the financial instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
We also face market risk relating to foreign exchange rate fluctuations, principally relating to
the fluctuation of U.S. dollar to Indian rupee exchange rate. Our foreign exchange risk principally
arises from accounts payable to overseas vendors. This risk is partially mitigated as we have
receipts in foreign currency from overseas customers and hold balances in foreign currency with
overseas banks.
During the nine months ended December 31, 2007 and fiscal 2007, 96.8% and 94.9%, respectively, of
our total revenues were generated outside of India. Using sensitivity analysis, a hypothetical 10%
increase in the value of the Indian rupee against all other currencies would decrease revenue by
2.9%, or $43.6 million, in the nine months ended December 31, 2007, 2.5%, or $36.9 million, in
fiscal 2007 while a hypothetical 10% decrease in the value of the Indian rupee against all other
currency would increase revenue by 2.9% or $43.6 million, in the nine months ended December 31,
2007, 2.5%, or $36.9 million in fiscal 2007.
We had outstanding forward and options contract amounting to $907.5 million and $452.6 million as
at December 31, 2007 and March 31, 2007 respectively. Gains/(losses) on outstanding forward and
options contracts amounted to $28.0 million and $4.5 million during the nine months ended December
31, 2007 and in fiscal 2007, respectively. Using sensitivity analysis, a hypothetical 1% increase
in the value of the Indian rupee against all other currencies would decrease these gains by $2.3
million in the nine months ended December 31, 2007 and by $0.7 million in fiscal 2007 while a
hypothetical 1% decrease in the value of the Indian rupee against all other currency would increase
these gains by $2.3 million in the nine months ended December 31, 2007 and by $0.7 million in
fiscal 2007.
In the opinion of management, a substantial portion of this fluctuation would be offset by expenses
incurred in local currencies. As a result, the aggregate of the hypothetical movement described
above of the value of the Indian rupee against all other currencies in either direction would have
impacted our earnings before interest and taxes by $45.9 million during the nine months ended
December 31, 2007 and $37.6 million in fiscal 2007. This amount would be offset, in part, from the
impacts of local income taxes and local currency interest expense. As of December 31, 2007, we had
approximately $194.9 million of non-Indian rupee denominated cash and cash equivalents.
Item 4: Controls and Procedures
Not applicable.
43
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Satyam and its subsidiaries on a consolidated basis are not currently a party to any material legal
proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In May 2001, we completed an offering of 16,675,000 ADSs (representing 33,350,000 equity shares) at
a price of $9.71 per ADS. We received approximately $150.6 million in cash, net of underwriting
discounts, commissions and other offering costs. Our Securities Act registration statement on Form
F-1 with respect to the offering was declared effective by the SEC on May 14, 2001 (Registration
No. 333-13464). As of December 31, 2007, the entire $150.6 million of these proceeds had been used
for prepayment of loans ($26.9 million); strategic investments in our subsidiaries ($39.3 million);
development of facilities and infrastructure ($58.5 million) and working capital and general
corporate purposes ($25.9 million). None of the net proceeds from our ADS offering were paid,
directly or indirectly, to any of our directors, officers or general partners or any of their
associates, or to any persons owning ten percent or more of any class of our equity securities, or
any affiliates.
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports
| |
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|
|
|
|
|
99.1.1 |
|
|
|
|
Press Release of the Company, dated January 21, 2008, concerning financial results. |
|
99.1.2 |
|
|
|
|
Press Release of the Company, dated
January 21, 2008, concerning acquisition of M/S Bridge Strategy
Group. |
|
99.2 |
|
|
|
|
Summary of Financial Results of the Company, dated January 21, 2008, for the
quarter and nine months ended December 31, 2007. |
|
99.3 |
|
|
|
|
Investor Link News Update of the Company dated January 21, 2008. |
|
99.4 |
|
|
|
|
Unconsolidated/standalone financial statements for the quarter and nine-months
ended December 31, 2007 under Indian GAAP (audited). |
|
99.5 |
|
|
|
|
Consolidated financial statements for the quarter and nine months ended December
31, 2007 under Indian GAAP (unaudited). |
|
99.6 |
|
|
|
|
Consolidated financial statements for the nine months ended December 31, 2007
under US GAAP (unaudited). |
|
99.7 |
|
|
|
|
Letter Agreement between the Company and Citibank, N.A. dated November 7, 2007 |
| |
|
|
|
|
|
|
The parties entered into this Letter Agreement to supplement the Deposit Agreement
dated May 14, 2001, as amended by letter agreement dated September 4, 2002, by and
among the Company, Citibank, N.A. and the holders and beneficial owners of
American Depositary Shares evidenced by American Depositary Receipts issued
thereunder. The purpose of the Letter Agreement is to enable the establishment by
Citibank, N.A., as Depositary, of a direct registration system (the “DR System”)
for ADSs and the issuance by the Depositary of “uncertified ADSs” as part of the
DR System. |
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99.8 |
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Amended and Restated Audit Committee Charter |
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On January 21, 2008, the Audit Committee Charter was amended and restated to add
under the section “Roles and Responsibilities” the following responsibility for
the Audit Committee as required by a recent amendment to the listing agreement by
the Indian stock exchanges on which our equity shares are listed. |
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“Reviewing, with the management, the statement of uses / application of funds
raised through an issue (public issue, rights issue, preferential issue, etc.),
the statement of funds utilized for purposes other than those stated in the offer
document/prospectus/notice and the report submitted by the monitoring agency
monitoring the utilization of proceeds of a public or rights issue, and making
appropriate recommendations to the Board to take up steps in this matter.” |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, there under duly authorized.
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Satyam Computer Services Ltd.
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/s/ G. Jayaraman
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Name: |
G. Jayaraman |
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Title: |
Global Head — Corp. Governance &
Company Secretary |
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Date: January 28, 2008
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