ExlService Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. ExlService provides data analytics and digital operations and solutions across Insurance, Healthcare, Analytics and Emerging Business. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $329.2 million | $261.4 million | +25.9% |
| Gross profit / margin | $121.7 million / 37.0% | $102.6 million / 39.2% | Margin down 2.2 percentage points |
| Operating income / margin | $44.0 million / 13.4% | $41.6 million / 15.9% | Income +5.8%; margin down 2.5 points |
| Net income / margin | $36.2 million / 11.0% | $31.9 million / 12.2% | Net income +13.3%; margin down 1.2 points |
| Diluted EPS | $1.07 | $0.93 | +15.1% |
| Operating cash flow | $(26.9) million | $15.2 million | Down $42.1 million |
| Capital expenditures | $16.1 million | $12.7 million | Higher by $3.5 million |
Revenue growth was led by Analytics, up 45.7% to $149.0 million, including $10.2 million from the Clairvoyant acquisition and $36.9 million from higher client volumes. Emerging Business rose 34.7% to $50.7 million and Insurance rose 13.3% to $103.3 million. Healthcare declined 13.6% to $26.2 million, primarily following client contract terminations.
Gross margin fell as employee-related costs, wage inflation, performance incentives and other delivery costs grew faster than revenue. Healthcare margin declined 10.0 percentage points to 32.5%; Insurance, Emerging Business and Analytics margins also decreased. SG&A rose 31.0% to $64.1 million, driven mainly by employee costs, including higher headcount and Clairvoyant-related expense.
Liquidity, debt and balance sheet
- Cash, cash equivalents and restricted cash were $115.1 million at quarter-end, down from $143.8 million at December 31, 2021. Cash and short-term investments together were $269.2 million; total borrowings were $295.0 million.
- Operating cash use reflected higher receivables and annual incentive payments. Accounts receivable reached $239.3 million, and days sales outstanding increased to 64 days from 54 days a year earlier.
- Investing activities used $4.7 million; financing activities provided $3.6 million, including $35.0 million of revolving-facility borrowings, partly offset by $31.4 million of treasury-stock purchases.
- At March 31, debt included $35.0 million current and $260.0 million long-term borrowings. The company reported compliance with credit-facility covenants.
- On April 18, 2022, after quarter-end, the company amended and restated its facility, increasing commitments to $400 million and extending maturity to April 18, 2027; U.S. dollar borrowings reference SOFR. The agreement permits a further $200 million increase subject to conditions.
Changes, outlook and risks
- Net income rose, supported by higher revenue, lower interest expense following the 2021 settlement of convertible notes, and higher foreign-exchange and other income. The effective tax rate increased to 23.7% from 21.9%.
- Comprehensive income was $27.3 million versus $28.2 million, as foreign-currency translation losses contributed to an $8.8 million other comprehensive loss.
- Management expects 2022 capital expenditures of $40–$45 million. It states current cash, short-term investments and other liquidity sources should meet requirements for the next 12 months. The filing provides no specific revenue or earnings guidance.
- Management said COVID-19 had not significantly affected Q1 results, financial position or cash flow, and reported minimal service disruption. The duration and future effects remain uncertain; remote-work technology, security and operating costs continue.
- Key risks include client concentration and termination rights, hiring and wage pressure, competition and pricing, acquisition integration, foreign-exchange exposure, cybersecurity and service disruptions, and uncertain global economic and political conditions. The top ten clients generated 36.2% of Q1 revenue, versus 39.3% a year earlier.
- Indian tax matters remain contingent: authorities’ transfer-pricing and other corporate-tax demands totaled $30.7 million net of advance payments, and VAT demands were $6.0 million, with separate GST refund claims of $3.3 million rejected. The company has appealed and recorded no provision, believing its positions are more likely than not to be sustained. Potential retrospective Indian social-security obligations cannot be reliably estimated.
- The company reported no goodwill impairment trigger at March 31, 2022. The Clairvoyant acquisition’s purchase-price allocation remained preliminary; up to $20 million of earn-outs are possible, with $9 million estimated fair value recorded as contingent consideration.
Investor verification priorities
- Check whether revenue growth converts into improved margins given wage inflation, hiring, incentives and elevated delivery costs.
- Track receivables, DSO and operating cash flow; Q1 cash generation was negative despite higher earnings.
- Assess Healthcare recovery after contract losses and the sustainability of Analytics growth, including the Clairvoyant contribution.
- Review utilization of the expanded credit facility, capital spending against the $40–$45 million outlook, and ongoing share repurchases.
- Monitor Indian tax and social-security proceedings, Clairvoyant earn-out and purchase-accounting updates, and the effects of currency movements and geopolitical uncertainty.