ExlService Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. ExlService provides business process management, operations management and analytics services. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $222.5 | $243.5 | $468.5 | $483.1 |
| Gross profit / margin | $64.1 / 28.8% | $81.1 / 33.3% | $147.4 / 31.5% | $163.4 / 33.8% |
| Operating income / margin | $9.9 / 4.4% | $13.9 / 5.7% | $37.4 / 8.0% | $30.7 / 6.4% |
| Net income | $8.4 | $12.6 | $30.8 | $27.3 |
| Diluted EPS | $0.24 | $0.36 | $0.89 | $0.78 |
| Operating cash flow | Not separately presented | Not separately presented | $58.9 | $47.7 |
Q2 revenue fell 8.6% year over year, while first-half revenue declined 3.0%. Q2 gross margin contracted 450 basis points; first-half gross margin contracted 230 basis points. First-half operating income rose 21.6%, despite lower revenue, helped by lower SG&A and the absence of 2019 impairment and restructuring charges. First-half net income increased 13.1%; Q2 net income declined 32.9%.
Business and segment changes
- Effective January 1, 2020, the company reorganized reporting into Insurance, Healthcare, Emerging Business and Analytics; prior segment comparisons were recast.
- Q2 segment revenue changes year over year: Insurance declined 5.0% to $81.3 million; Healthcare increased 14.9% to $25.0 million; Emerging Business declined 28.5% to $34.5 million; Analytics declined 7.0% to $81.7 million.
- Management attributed lower Insurance, Emerging Business and Analytics revenue primarily to COVID-related volume or engagement declines and, for Emerging Business, certain contract ramp-downs. Healthcare growth reflected existing-client expansion, partly offset by the prior-year Health Integrated business wind-down.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $163.6 million, short-term investments $172.0 million, and restricted cash $7.2 million. Cash, cash equivalents and short-term investments totaled $335.6 million; $275.5 million was held in foreign jurisdictions and was not then intended for distribution.
- Reported borrowings were $236.2 million, including $99.0 million drawn on the revolver and $150.0 million principal of convertible notes. The notes mature in 2024; the company reported compliance with credit-facility covenants.
- First-half operating cash flow of $58.9 million included working-capital outflows, notably lower accrued employee costs and lease liabilities. Investing cash flow was $1.1 million; capital expenditures were $22.1 million. Financing cash outflow was $13.4 million.
- The company drew $100 million on its credit line in March as a precaution and repaid it in April. It temporarily suspended buybacks during the first half and resumed them July 1, 2020.
Outlook, management commentary and risks
- Management expected COVID-19 and related economic disruption to adversely affect fiscal 2020 results, financial position and cash flow, but did not expect a material adverse effect on liquidity in the foreseeable future. The filing gives no specific revenue or EPS guidance; the duration and scale of the pandemic’s effect remained uncertain.
- Cost measures included postponing discretionary spending and some capital expenditures, deferring scheduled salary increases, temporarily reducing certain salaries, and suspending discretionary 401(k) contributions. The company expected 2020 capital expenditures of $32–$38 million.
- COVID-related disruption, remote-work productivity and cybersecurity, customer concentration, client demand and payment risk, foreign exchange, and goodwill recoverability were identified as risks. The top ten clients generated 38.7% of Q2 revenue.
- The company recorded a one-time $1.3 million tax expense after two Indian subsidiaries elected a lower-rate tax regime that required foregoing certain tax credits. Q2 effective tax rate was 32.4%, compared with 17.5% a year earlier.
- Goodwill impairment tests found no impairment through June 30, 2020; management cautioned that future conditions or revised assumptions could lead to impairment. Indian tax disputes involved $16.2 million of assessments net of advances; the company had paid or guaranteed $7.9 million and had not accrued a liability, stating it expected its position to be sustained. Potential retroactive Indian employee-benefit contributions could not be reliably estimated.
- Management reported disclosure controls were effective as of June 30, 2020. No material change in internal control over financial reporting was reported for the quarter.
Investor facts to verify
- Whether revenue volumes and margins recover as pandemic restrictions and client activity evolve, especially in Emerging Business and Analytics.
- Whether the company’s cost reductions and resumed repurchases are consistent with operating needs, capital spending and liquidity.
- Cash generation and working-capital trends, including the portion of cash and investments held abroad and potential tax costs upon distribution.
- Future credit-loss allowances, goodwill impairment assumptions, and the outcome or exposure from Indian tax and employee-benefit matters.
- Debt repayment obligations, covenant compliance, and the effect of foreign-exchange movements and hedging on earnings and comprehensive income.