ExlService Holdings, Inc. — FY 2012 Form 10-K
Business context and reporting period. This annual filing covers the year ended December 31, 2012; it is not a standalone fourth-quarter filing. ExlService provides business-process outsourcing and transformation services, principally to global clients in insurance and healthcare, utilities, financial services, and travel and logistics. It had approximately 21,000 employees. Insurance and healthcare contributed approximately 49% of annual revenue.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $442.9 million | $360.5 million |
| Gross profit / margin | $171.1 million / 38.6% | $140.6 million / 39.0% |
| Operating income / margin | $57.2 million / 12.9% | $41.3 million / 11.5% |
| Net income / margin | $41.8 million / 9.4% | $34.8 million / 9.6% |
| Diluted EPS | $1.26 | $1.10 |
| Cash from operations | $65.8 million | $56.2 million |
| Cash and short-term investments at year-end | $109.2 million | $90.3 million |
- Revenue rose 22.9%; outsourcing revenue increased to $366.8 million and transformation revenue to $76.2 million.
- Operating income grew 38.5%, with operating margin improving, while gross margin edged down and net margin declined slightly. The filing attributes operating-margin improvement mainly to operating leverage; acquisition mix and currency movements weighed on gross margin.
- Quarterly data show Q4 2012 revenue of $117.7 million and net income of $12.2 million, compared with $102.6 million and $9.6 million in Q4 2011. Q4 diluted EPS was $0.36 versus $0.29.
- Operating cash flow increased year over year. Capital expenditures were $18.8 million, implying approximate operating cash flow less capital expenditures of $47.0 million. Investing cash outflow was $54.8 million, including $37.5 million for the Landacorp acquisition.
- Year-end working capital was $133.6 million. Total liabilities were $91.3 million; the company reported no borrowings under its credit facility. Capital-lease obligations totaled approximately $4.4 million. The revolving facility’s availability had been reduced to $15 million, with potential expansion to $50 million subject to conditions.
Material changes and notable items
- Landacorp was acquired on October 12, 2012, adding healthcare care-management software and capabilities. The stated total purchase price was $38.7 million, including a working-capital adjustment. The acquisition contributed $4.0 million of revenue after closing; purchase accounting remained preliminary.
- Acquisitions and existing/new client volume were important revenue drivers; currency movements reduced revenue by a net $13.2 million, according to management.
- The effective tax rate increased to 26.2% from 25.4%, partly due to reduced Indian tax-holiday benefits and taxes at a Manila operating center. Management warned that changes or loss of tax incentives could raise future tax expense.
- Days sales outstanding increased to 56 days from 49, which management linked primarily to milestone-based billing on Landacorp software licensing and implementation contracts.
Outlook, risks and contingencies
- Management expects revenue growth through expanded services, clients and acquisitions, but gives no quantified revenue or earnings guidance in the provided filing text. It forecast 2013 capital expenditures of $25–$30 million.
- Demand for recurring, annuity-based transformation services had increased. The company also planned to expand transaction-based pricing, which may require efficiency gains to protect margins.
- Customer concentration remains significant: the top ten clients generated 59.1% of 2012 revenue. Travelers contributed 10.1%; related work orders expired in December 2013 and could be terminated without cause on 60 days’ notice.
- Key risks include client concentration and contract termination, employee turnover (29.3% among billable employees), wage inflation, foreign-exchange exposure, competition and pricing pressure, data-security or service disruptions, and changes to tax incentives. Revenue exposure included 72.3% in U.S. dollars and 20.2% in pounds sterling, while substantial costs were incurred in Indian rupees and Philippine pesos.
- Indian tax disputes involved aggregate demands of $18.6 million at year-end 2012; $14.7 million had been paid or supported by bank guarantees. The company stated that loss was remote and recorded no provision. It also disclosed $3.0 million of uncertain tax positions whose payment amount and timing were not reliably determinable for contractual-obligations reporting.
- Auditors issued unqualified opinions on the financial statements and internal controls. Management and the auditor excluded Landacorp from the 2012 internal-control assessment under the recently acquired business provision.
Important facts for investors to verify
- Whether organic growth, separated from acquisition contributions and currency effects, supports the reported revenue expansion.
- Whether gross-margin pressure, wage and retention costs, and adoption of transaction-based pricing affect future profitability.
- Renewal, termination, and volume trends for major clients, particularly Travelers, and progress in reducing client concentration.
- Collections and billing trends following the rise in DSO, including the realization of unbilled receivables.
- Final Landacorp purchase accounting, integration performance, and recoverability of goodwill and acquired intangible assets.
- Developments in Indian transfer-pricing and permanent-establishment disputes, and the durability of Indian and Philippine tax benefits.