EXLS

ExlService Holdings, Inc. 2009 Annual Report (10-K) Summary

Business Context and Reporting Period

This summary covers the Annual Report on Form 10-K for ExlService Holdings, Inc. for the fiscal year ended December 31, 2009. ExlService is a leading provider of outsourcing and transformation services, primarily serving Global 1000 companies in the insurance, utilities, banking, financial services, and transportation sectors. The company operates delivery centers in India, the Philippines, the Czech Republic, and the United States, with a headcount of approximately 10,700 as of year-end.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 5.1% to $191.0 million. Outsourcing services revenue grew by $13.8 million, driven by volume increases from existing clients ($12.5 million), a $5.1 million contract termination fee, and new client revenue ($4.2 million). This was partially offset by a $7.9 million reduction due to the appreciation of the U.S. dollar against the U.K. pound sterling.
• Transformation Services Decline: Revenues from transformation services decreased by $4.5 million (10.5%) due to reduced client discretionary spending and foreign exchange impacts.
• Cost Efficiency: Cost of revenues decreased 2.7% to $109.4 million, primarily due to the depreciation of the Indian rupee against the U.S. dollar and cost management initiatives. Consequently, gross margin expanded by 460 basis points.
• Operating Income: Operating income increased 55.8% to $24.4 million, reflecting higher revenues and lower costs.
• Foreign Exchange: Net foreign exchange losses decreased by $3.4 million compared to 2008, attributable to favorable currency movements relative to the company's hedged position.

Guidance, Outlook, and Risks

• Acquisitions: The company completed the acquisition of Schneider S.R.O. in the Czech Republic in July 2009. In November 2009, it entered an agreement to acquire the American Express Global Travel Services Center in India for approximately $29 million, closing on March 1, 2010.
• Capital Expenditures: The company expects to incur capital expenditures of $20 million to $22 million in 2010 to support growth and new operations centers in Romania and India.
• Tax Holiday Expiration: A significant risk is the expiration of the Indian corporate income tax holiday for some operations centers in March 2010. Management expects tax expenses to materially increase and after-tax profitability to decrease in 2010 and beyond.
• Client Concentration: The two largest clients, Centrica and Travelers, accounted for 33.7% of total revenues in 2009. The loss of either client would have a material adverse effect.
• Tax Disputes: The company is involved in disputes with Indian tax authorities regarding transfer pricing and permanent establishment issues, with approximately $13.0 million in demands. The company has deposited $7.8 million against these demands but believes the probability of loss is remote.
• Employee Turnover: Turnover for billable employees decreased to 22.6% in 2009 from 34.0% in 2008, though rising wage costs in India remain a competitive pressure.

Key Facts for Investor Verification

• Tax Liability Impact: Verify the specific impact of the expiring Indian tax holiday on 2010 effective tax rates and net income projections.
• Client Concentration Risk: Monitor the status of contracts with Centrica (expires April 2012) and Travelers (renews annually), which together represent nearly one-third of revenue.
• Foreign Exchange Exposure: Assess the effectiveness of hedging strategies given that 63.8% of revenue is in USD, 33.9% in GBP, while 57.1% of expenses are in Indian Rupees.
• Acquisition Integration: Track the integration and financial contribution of the American Express Global Travel Services Center acquisition post-closing.
• Tax Dispute Resolution: Monitor the outcome of the $13.0 million transfer pricing dispute with Indian authorities and the status of the Mutual Agreement Procedure (MAP).