ExlService Holdings, Inc. - 10-Q Summary (Period Ended Sep 30, 2008)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for ExlService Holdings, Inc., covering the three and nine months ended September 30, 2008. The Company provides Outsourcing Services (front, middle, and back-office processes) and Transformation Services (research, analytics, and advisory) primarily to clients in the United States and the United Kingdom. Operations are conducted through centers in India, the Philippines, the U.S., and the U.K.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $46.6 million | $138.0 million |
| Net Income (Loss) to Common Stockholders | $(1.1) million | $11.0 million |
| Income from Continuing Operations | $0.4 million | $7.7 million |
| Gross Profit Margin | 39.8% | 37.0% |
| Cash and Cash Equivalents | $101.8 million | $101.8 million (Balance Sheet) |
| Net Cash Provided by Operating Activities | N/A | $18.4 million |
| Total Debt (Capital Leases) | $0.4 million | $0.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 17.8% for the quarter and 26.8% for the nine-month period compared to 2007, driven by expansion of the client base and new Transformation Services.
- Profitability Impact: Despite revenue growth, the Company reported a net loss of $1.1 million for the quarter (vs. $6.2 million profit in Q3 2007). This was primarily due to a significant foreign exchange loss of $6.6 million (vs. a gain of $2.1 million in Q3 2007) resulting from the movement of the Indian rupee against the U.S. dollar relative to hedged positions.
- Discontinued Operations: The Company sold its Noida Customer Operations Private Limited (NCOP) subsidiary on August 11, 2008. Results for NCOP are now reported as discontinued operations, contributing a loss of $1.4 million for the quarter.
- Operating Expenses: SG&A expenses increased 10.6% for the quarter, partly due to the addition of a new 900-workstation facility in the Philippines and increased sales and marketing staff.
Guidance, Outlook, and Risks
- Outlook: Management anticipates revenue growth through organic expansion and acquisitions. Capital expenditures for 2008 are expected to be approximately $17.0 million to meet client growth requirements.
- Foreign Exchange Risk: The Company remains highly exposed to fluctuations between the U.S. dollar, U.K. pound sterling, and Indian rupee. While hedging strategies are in place (outstanding forward contracts of $87.9 million and GBP 27.7 million), ineffective hedges contributed to recent losses.
- Tax Contingencies: The Company is involved in disputes with Indian tax authorities regarding transfer pricing and permanent establishment status. Assessment orders totaling approximately $8.0 million have been issued. The Company has deposited $6.1 million against these claims but believes the probability of loss is remote and has not accrued a liability.
- Client Concentration: The two largest clients accounted for 22.6% and 11.2% of total revenues in the quarter. The contract with Centrica (22.6% of revenue) was extended for 12 months.
Investor Verification Checklist
- Foreign Exchange Hedging Effectiveness: Verify the extent of unrealized losses in accumulated other comprehensive income and the potential for future reclassification to earnings.
- Indian Tax Disputes: Monitor the status of the $8.0 million in tax assessment orders and the potential for additional assessments on the 2005-06 tax year currently under audit.
- Client Retention: Confirm the renewal status of the Centrica contract (extended to Jan 2010) and the impact of the NCOP sale on the Norwich Union relationship.
- Philippines Expansion: Assess the utilization rates and cost impact of the new Pasay City facility, which contributed to decreased utilization rates in the quarter.
- Discontinued Operations: Confirm the finalization of the $1.8 million remaining consideration from the NCOP sale.