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Syntel revises down Q4 profit for warrant cost
By siliconindia
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Tuesday, 04 March 2003, 20:30 IST
TROY: Syntel Inc. (Nasdaq:SYNT), a software applications outsourcing company, Tuesday announced that its audited results for 2002, which are expected to be filed in the Form 10-K with the Securities and Exchange Commission, will include a non-cash adjustment that has the effect of reducing previously reported fourth quarter revenue and pre-tax income by $2.9 million, or $1.8 million after tax.
The adjustment, based on developments since the Company reported its quarterly results on February 12, 2003, is related to a contract with a large customer that had been issued warrants by Syntel as disclosed in the Company's second and third quarter 10-Qs in 2002. Under the terms of Syntel's warrant agreement with its customer, certain minimum revenue milestones were required to be met in order for the holder to earn its warrants. At year-end 2002, the Company, after consultation with its independent auditors and based on available information, had previously estimated that such a milestone would not be met.
Syntel now estimates that certain revenue milestones associated with the warrants will be met in 2003. The change is based on two developments since the 2002 fourth quarter's results were issued. Late on February 11, 2003, the customer notified Syntel of its intention to exercise all of the 322,210 warrants in a cashless exercise resulting in an issuance of 209,739 shares. Second, subsequent to the issuance of the earnings press release on February 12, 2003, Syntel received positive indications of new business from the customer. These developments required Syntel to revise its estimate that the minimum revenue milestone would be met.
Because it has not yet filed its 10-K, Syntel is required under Generally Accepted Accounting Principles (GAAP) to account for its change in estimate about the associated sales incentive as an adjustment to the Company's previously reported fourth quarter results. Accordingly, the Company has accounted for the sales incentive in proportion to the revenue earned in 2002. The remaining deferred sales incentive will be recognized as earned in 2003.
If the customer does not reach the required milestone during 2003 and therefore does not earn the shares, the estimated liability for the sales incentive would be reversed. Under this warrant agreement, the customer is also entitled to certain additional performance warrants at significantly higher revenue milestones. The financial impact of such warrants, when accounted, is expected to be significantly less than the value of the currently accounted sales incentive and to have no material impact on the Company's financials. Syntel has no other agreements, formal or otherwise, under which any customer or partner can obtain warrants or any other equity instrument in Syntel.
"Syntel is privileged to have strong and enduring relationships with many of its customers, and we are very pleased that our potential pipeline of business with one large customer has continued to expand in recent weeks," said Bharat Desai, Syntel Chairman and CEO. "This positive event has required us to adjust our fourth quarter 2002 revenue and earnings that were announced on February 12, 2003. Importantly, the adjustment we announced today is a non-cash charge that has no impact on our previously provided guidance for the first half of 2003. We reiterate our expectation of revenue between $85 and $87 million and earnings per share ranging from $0.40 to $0.42 for the first six months of 2003. "
Fourth quarter revenue including the $2.9 million adjustment is $39.4 million, compared to $43.3 million in the year-ago period. Fourth quarter earnings, including the adjustment, are $11.2 million, or $0.28 per diluted share, compared to $2.2 million, or $0.06 per diluted share, in the 2001 fourth quarter.
Fourth quarter revenue, which excludes the adjustment, is $42.3 million, as originally reported. Fourth quarter 2002 net income, excluding the after- tax $1.8 million adjustment, explained above, as well as the one-time effects of the Metier-related liability reversal and vacation allowance reversal, increased to $8.7 million, or $0.22 per diluted share, from $6.3 million, or $0.16 per diluted share, in 2001, excluding $4.1 million, net of tax, related to an impairment of investments and write-off of software development costs.
Full-year revenue for the Company including the $2.9 million adjustment explained above is $161.5 million, compared to $172.3 million in 2001. Net income for 2002 including the after-tax $1.8 million adjustment explained above increased to $32.5 million or $0.81 per diluted share from $20.4 million or $0.52 per diluted share in 2001.
Full-year 2002 net revenue excluding the $2.9 million is $164.4 million, as originally reported. Net income for 2002, after excluding the one-time effects of the adjustment explained above, Metier-related liability reversal and vacation allowance reversal, increased to $30 million or $0.75 per diluted share from $25.3 million or $0.65 per diluted share in 2001, excluding $4.1 million, net of tax, related to an impairment of investments and write- off of software development costs and $0.8 million in operating losses related to the Company's incubator investments.