ExlService Holdings, Inc. — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Unless stated otherwise, dollar amounts are U.S. dollars.
Business context
ExlService provides business-process outsourcing and transformation services, including insurance and healthcare processing, finance and accounting, analytics, and process improvement. Its clients are primarily in the U.S. and U.K.; delivery operations span India, the Philippines, the U.S. and several European and Asian countries. The company had approximately 18,900 employees at year-end.
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $360.5 million | $252.8 million |
| Gross profit / margin | $140.6 million / 39.0% | $101.5 million / 40.1% |
| Operating income / margin | $41.3 million / 11.5% | $26.5 million / 10.5% |
| Net income / net margin | $34.8 million / 9.6% | $26.6 million / 10.5% |
| Diluted EPS | $1.10 | $0.88 |
| Cash from operating activities | $56.2 million | $36.5 million |
| Capital expenditures | $19.5 million | $19.9 million |
- Fourth-quarter revenue was $102.6 million, gross profit $40.6 million, and net income $9.6 million, versus $70.0 million, $28.3 million, and $8.3 million, respectively, in fourth-quarter 2010.
- Year-end cash and cash equivalents were $82.4 million, with $7.9 million of short-term investments; working capital was $94.6 million. Cash plus short-term investments totaled $90.3 million.
- The company reported no borrowings under its $50 million revolving credit facility at year-end. Capital lease obligations were $6.0 million, including $1.7 million current. Total contractual cash obligations were $50.6 million, excluding $5.3 million of uncertain tax positions whose payment timing and amount were not reliably estimable.
- Accounts receivable were $55.7 million and days sales outstanding improved to 49 days from 57. Total assets were $377.4 million and stockholders’ equity was $278.5 million.
Changes versus prior periods
- Revenue increased 42.6% year over year. Outsourcing revenue rose to $294.4 million from $192.1 million, while transformation revenue rose to $66.2 million from $60.7 million.
- Growth included $63.6 million of revenue attributed to acquisitions, $38.3 million in net volume increases from existing and new clients, and a $2.3 million one-time client payment. OPI and Trumbull were acquired in 2011; OPI contributed $53.5 million of revenue after acquisition.
- Operating income increased 55.8%, and operating margin improved, with management citing operating leverage and lower SG&A as a share of revenue. Gross margin declined from 40.1% to 39.0%, principally reflecting acquisition effects.
- Net income rose 30.8%, but net margin declined from 10.5% to 9.6%. The effective tax rate increased to 25.4% from 17.1%, primarily because Indian tax holidays expired for most existing centers.
- Operating cash flow increased by $19.7 million. Investing cash outflow rose to $105.8 million, principally reflecting acquisitions; year-end cash fell to $82.4 million from $111.2 million.
- Three largest clients accounted for 31.8% of 2011 revenue, down from 41.2% in 2010. Travelers, Centrica and American Express contributed 11.6%, 10.8% and 9.4%, respectively.
Outlook, commentary, risks and unusual items
- Management expected revenue to grow through expanded services, client relationships and acquisitions. It forecast 2012 capital expenditures of $25–30 million. The filing does not provide a specific earnings or revenue-growth target.
- Management described increasing demand for recurring, annuity-based transformation services and a shift toward transaction-based pricing; 30% of 2011 outsourcing revenue came from transaction-based models. A majority of revenue remained billed on a time-and-materials basis.
- Key risks include dependence on a small group of clients and concentrated industries, contract termination rights, competition and pricing pressure, employee turnover and wage inflation, offshore-outsourcing sentiment, foreign-exchange exposure, cybersecurity and service disruption, and acquisition integration and execution.
- Foreign-exchange movements are material: 71.8% of revenue was denominated in U.S. dollars and 22.0% in U.K. pounds, while 57.6% of costs were incurred in Indian rupees. The company used forward contracts to hedge exposures; the filing warns hedges may not fully offset currency movements.
- Indian transfer-pricing and related tax assessments totaled $19.2 million including interest. The company had deposited $11.7 million and provided $2.5 million in bank guarantees, recorded no accrual, and said the probability of loss was remote based on its advisers’ assessment. Further similar assessments could arise.
- Tax incentives remain a source of uncertainty. Certain Indian tax holidays had expired; the company warned that changes to special economic zone incentives or Philippine tax holidays could raise its tax rate.
- Goodwill was $92.3 million at year-end, including $54.6 million from the OPI acquisition; management reported no goodwill impairment. The purchase-price allocation was preliminary. The 2011 financial statement and internal-control audits received unqualified opinions, but acquired OPI and Trumbull controls were excluded from the year-end internal-control assessment.
Important facts for investors to verify
- How much future growth and profitability depends on successful integration and performance of OPI and Trumbull, and whether acquired goodwill and intangible values remain supportable.
- Whether client concentration and termination provisions—especially at the three largest accounts—change, and how renewals or volume commitments affect revenue visibility.
- Whether gross-margin pressure, wage inflation, employee turnover and transaction-based pricing affect operating leverage and margins.
- The realized tax rate as Indian incentives expire, and developments in Indian transfer-pricing disputes, deposits and potential additional assessments.
- Cash generation and capital needs after acquisitions, planned 2012 capital spending, and any use of the revolving facility or additional financing.
- Foreign-exchange exposure, hedge effectiveness, and the effect of currency changes on earnings and accumulated other comprehensive loss.