ExlService Holdings, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are included below. Amounts are in U.S. dollars unless noted.
Business context
EXL provides business process management, operations management, consulting and analytics services, principally to insurance, healthcare, banking and financial services clients. It had approximately 31,700 employees at year-end and generated most revenue in the United States and United Kingdom. Effective January 1, 2020, EXL reorganized reporting into Insurance, Healthcare, Analytics and Emerging Business; the change does not affect consolidated financial statements.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $991.3 million | $883.1 million |
| Gross profit / margin | $335.9 million / 33.9% | $298.3 million / 33.8% |
| Operating income / margin | $76.5 million / 7.7% | $49.8 million / 5.6% |
| Net income | $67.7 million | $56.7 million |
| Diluted EPS | $1.95 | $1.62 |
| Operating cash flow | $168.4 million | $92.4 million |
| Capital expenditures | $40.1 million | $40.4 million |
Revenue increased 12.3%; operating income rose 53.5%, and net income increased about 19%. Operating cash flow improved substantially. Gross margin was broadly stable. Income tax expense rose to $15.2 million from $3.4 million; the effective tax rate increased to 18.3% from 5.6%, largely because of one-time tax benefits and higher stock-award tax benefits in 2018.
Fourth quarter: Revenue was $256.9 million versus $234.9 million in Q4 2018; gross profit was $88.6 million versus $80.0 million; net income was $21.4 million versus $3.9 million; diluted EPS was $0.62 versus $0.11.
Revenue mix: Analytics revenue grew 25.3% to $357.3 million, including the contribution from the 2018 SCIO acquisition and growth in client engagements. Insurance grew 14.0% to $294.2 million. Healthcare grew 7.3% to $90.6 million; Finance and Accounting grew 8.8% to $106.6 million. Travel, Transportation and Logistics declined 3.2% to $68.0 million, while All Other declined 14.3% to $74.6 million, primarily reflecting lower project-based and existing-client revenue.
Liquidity and debt: Cash, cash equivalents and short-term investments totaled $321.4 million at year-end, including $250.4 million held in foreign jurisdictions that EXL did not currently intend to distribute. Cash, cash equivalents and restricted cash were $127.0 million. Working capital was $311.9 million. Balance-sheet borrowings were $235.0 million; scheduled principal payments totaled approximately $249.9 million, including $150 million of 3.5% convertible notes due in 2024 and $99 million outstanding on the revolving credit facility. The revolver matures in 2022; EXL was in compliance with its covenants at year-end. The company reported no cash dividends.
Changes, outlook and notable items
- 2019 operating results included $8.7 million of impairment and restructuring charges related to the Health Integrated business wind-down, substantially completed by year-end. The charges included $5.1 million of restructuring costs and $3.6 million of asset impairment. In 2018, EXL recorded $20.1 million of goodwill and intangible-asset impairments related to Health Integrated.
- SCIO generated substantial goodwill exposure: $163.8 million, approximately 47% of total goodwill. Its reporting unit was not impaired, but estimated fair value exceeded carrying value by only about 10%; a 50-basis-point increase in the discount rate, with other assumptions unchanged, would reduce that cushion to about 6%.
- Management expected 2020 capital expenditures of $40–$48 million, mainly for facilities, technology, product development, automation and infrastructure. The filing does not provide a clear 2020 revenue, earnings or margin guidance figure.
- EXL authorized a new $200 million share-repurchase program for 2020–2022. It repurchased approximately $39.9 million of shares under the prior program during 2019.
- Key risks include customer concentration (the top ten clients contributed 36.1% of 2019 revenue), employee attrition (33.2% for employees with over 180 days’ tenure), wage inflation, pricing pressure, client termination rights, foreign-exchange exposure, cybersecurity and privacy obligations, and reliance on offshore operations. The company also cited potential U.S. economic weakness and uncertainty around Brexit and the transition from LIBOR.
- Indian tax authorities had demanded $16.2 million, net of applicable advances, for transfer-pricing and permanent-establishment disputes through 2015. EXL had deposited or secured $8.1 million and had not accrued the disputed amount, stating it believed its position would be sustained. A separate Indian judicial interpretation of statutory employee contributions could create additional liabilities if applied retrospectively; the amount and timing were not estimable.
- The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting. Goodwill impairment testing was identified as a critical audit matter.
Most important facts for investors to verify
- Whether Analytics growth, including SCIO-related and recurring engagement growth, continues and translates into improved profitability.
- Whether Healthcare stabilizes following the Health Integrated wind-down, and whether any further restructuring or impairment charges arise.
- Whether the SCIO reporting unit maintains sufficient goodwill valuation headroom under changes in forecasts, discount rates or market multiples.
- How cash held abroad, tax incentives that are expiring, and the Indian tax disputes affect cash availability and the effective tax rate.
- Debt repayment capacity, covenant headroom and potential dilution or cash demands from the convertible notes.
- Whether revenue concentration, high attrition, wage inflation, foreign-exchange movements and cybersecurity or regulatory exposures affect margins and cash flow.