ExlService Holdings, Inc. - Q2 2009 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009. ExlService Holdings, Inc. is a leading provider of outsourcing and transformation services, primarily serving Global 1000 companies in the insurance, utilities, financial services, and transportation sectors. The company operates delivery centers in India, the Philippines, and recently expanded into Europe with an acquisition in the Czech Republic and a new center in Romania.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Revenues | $42,385 | $83,371 |
| Gross Profit | $16,558 | $33,188 |
| Gross Margin | 39.1% | 39.8% |
| Net Income (Continuing Ops) | $1,252 | $4,274 |
| Net Income (Total) | $1,252 | $4,135 |
| EPS (Diluted) | $0.04 | $0.14 |
| Cash and Equivalents | $114,291 | $114,291 |
| Operating Cash Flow | N/A | $6,601 |
| Total Debt | $0 (No long-term debt) | $0 |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 9.8% year-over-year for the quarter and 8.8% for the six-month period. This was primarily driven by the appreciation of the U.S. dollar against the U.K. pound sterling and reduced discretionary spending by clients on transformation services due to the global economic downturn.
- Cost Efficiency: Cost of revenues decreased 14.5% (quarter) and 14.7% (six months), outpacing the revenue decline. This was largely due to the depreciation of the Indian rupee against the U.S. dollar, which reduced salary and personnel costs.
- Margin Expansion: Despite lower revenues, gross margins improved to 39.1% (quarter) and 39.8% (six months) compared to 35.7% and 35.6% in the prior year periods, respectively.
- Foreign Exchange Impact: The company reported a significant foreign exchange loss of $1.7 million for the quarter and $3.0 million for the six months, negatively impacting net income compared to the prior year.
- Discontinued Operations: The company sold its Noida Customer Operations Private Limited (NCOP) unit in August 2008. Consequently, there was no income from discontinued operations in the current period, whereas the prior year included significant income from this segment.
Outlook, Risks, and Contingencies
- Acquisitions and Expansion: On July 3, 2009, the company acquired Schneider Logistics Europe S.R.O. in the Czech Republic for approximately $3.2 million. A new operations center in Cluj, Romania, is also being established.
- Tax Disputes: The company is involved in ongoing transfer pricing and permanent establishment disputes with Indian tax authorities. Assessment orders totaling approximately $11.0 million have been issued for tax years 2003-2006. The company has deposited $7.6 million against these demands and believes the probability of loss is remote, though it must secure additional bank guarantees (approx. $3.5 million) in Q3 2009 to halt collection efforts.
- Client Concentration: The top three clients accounted for 46.7% of revenues in the quarter and 43.9% for the six months. Centrica alone represented 23.5% of quarterly revenues.
- Legislative Risks: Negative publicity and potential legislation regarding offshore outsourcing in the U.S. and U.K. pose risks to future revenue growth.
- Capital Expenditures: The company expects to incur $5.0 million to $8.0 million in capital expenditures for the remainder of fiscal 2009 to support growth and facility expansions.
Investor Verification Checklist
- Verify the status of the Indian tax disputes and the sufficiency of the $7.6 million deposit against the $11.0 million assessment orders.
- Monitor the integration and financial performance of the new Schneider Logistics Europe acquisition.
- Assess the impact of the strong U.S. dollar on future revenue recognition, particularly for U.K.-based clients.
- Review client retention rates given the high concentration of revenue from the top three clients.
- Confirm the timeline and cost implications of the new Romania operations center.