ExlService Holdings, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; it also reports unaudited fourth-quarter results. Amounts below are in U.S. dollars.
Business context
EXL provides business process management, operations management, consulting, and analytics services, primarily to clients in the insurance, healthcare, travel, transportation and logistics, financial services, and utilities industries. It had approximately 29,100 employees at year-end. Analytics represented 32.3% of 2018 revenue. The July 2018 acquisition of healthcare analytics provider SCIO contributed $40.0 million of revenue after closing.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $883.1 million | $762.3 million |
| Gross profit / margin | $298.3 million / 33.8% | $267.2 million / 35.0% |
| Operating income / margin | $49.8 million / 5.6% | $72.7 million / 9.5% |
| Net income | $56.7 million | $48.9 million |
| Diluted EPS | $1.62 | $1.39 |
| Cash from operations | $92.4 million | $113.2 million |
| Cash, cash equivalents and short-term investments at year-end | $280.4 million | $265.3 million |
| Borrowings at year-end | $284.7 million carrying value | $60.7 million |
| Working capital at year-end | $344.8 million | $308.6 million |
Fourth quarter: Revenue was $234.9 million versus $197.9 million in Q4 2017; gross profit was $80.0 million versus $68.6 million. Net income was $3.9 million, compared with a $9.4 million net loss in Q4 2017. Diluted EPS was $0.11 versus a loss of $0.27.
Changes versus prior comparable period
- Annual revenue increased 15.8%. Analytics grew 35.9% to $285.3 million, including SCIO; Insurance revenue rose 9.9%, while Travel, Transportation and Logistics declined 1.0%.
- Gross margin fell 120 basis points to 33.8%, and operating margin fell to 5.6%. Operating income declined 31.5%, mainly due to a $20.1 million impairment charge and higher depreciation and amortization.
- Net income rose despite lower operating income, principally because income tax expense fell to $3.4 million from $36.1 million. The 2017 tax expense included a $27.2 million transition tax related to U.S. tax reform. The 2018 effective tax rate was 5.6% versus 42.5%.
- Operating cash flow decreased $20.7 million, reflecting working-capital use, including higher receivables and advance income tax. Investing cash outflow increased to $277.5 million, including $231.8 million net cash paid for acquisitions. Financing provided $197.8 million, including debt proceeds.
Outlook, commentary, risks and unusual items
- The filing provides no formal revenue or earnings guidance. Management expected 2019 capital expenditures of $40–$45 million and described continued investment in facilities, technology, digital capabilities, automation, and robotics.
- In Q4, EXL recorded $20.1 million of impairment charges against Health Integrated goodwill and intangible assets, following lower-than-budgeted revenue and profitability, customer contract losses, cost pressures, and weaker cash-flow and growth expectations. The company reported $14.2 million goodwill impairment and $5.9 million intangible-asset impairment.
- EXL acquired SCIO for approximately $245.0 million in consideration. The acquisition was funded through borrowings, cash, and restricted shares. The $150 million convertible notes issued in October 2018 bear 3.50% interest, mature in 2024, and have an initial conversion price of approximately $75 per share. The revolver is $300 million, matures in 2022, and the company reported compliance with its covenants at year-end.
- Key exposures include customer concentration (the top ten clients generated 37.2% of revenue), client termination rights and pricing pressure, labor costs and employee turnover, competition, foreign exchange, cybersecurity and data privacy, integration of acquisitions, and tax incentives that may expire. EXL disclosed Indian tax disputes with demands of $18.2 million net of applicable advance payments; it had paid or provided guarantees for $8.2 million and had not accrued a liability, believing its position would likely be sustained.
- Management reported effective disclosure controls and internal control over financial reporting; the SCIO control environment was excluded from the 2018 assessment and was to be included starting in 2019. Deloitte issued unqualified opinions on the 2018 financial statements and internal controls.
Important facts for investors to verify
- Whether Analytics growth, including SCIO, translates into sustained organic growth and margin improvement.
- Health Integrated’s post-impairment performance, remaining integration risks, and the assumptions behind goodwill and intangible-asset valuations.
- Receivables and cash conversion: accounts receivable rose to $164.8 million, including $64.0 million unbilled.
- Debt service and potential dilution or cash needs related to the $150 million convertible notes, alongside the $150 million revolver balance and covenant headroom.
- Potential outcomes of Indian tax disputes and the impact of expiring tax holidays on the effective tax rate.