ExlService Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; compared with the corresponding 2020 periods. ExlService provides business process management, operations management and analytics services. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $275.1M | $222.5M | $536.5M | $468.5M |
| Gross profit / margin | $104.4M / 37.9% | $64.1M / 28.8% | $207.0M / 38.6% | $147.4M / 31.5% |
| Operating income / margin | $35.8M / 13.0% | $9.9M / 4.4% | $77.4M / 14.4% | $37.4M / 8.0% |
| Net income | $28.0M | $8.4M | $60.0M | $30.8M |
| Diluted EPS | $0.81 | $0.24 | $1.75 | $0.89 |
- Quarterly revenue increased 23.6%; first-half revenue rose 14.5%. Analytics was the largest growth driver: Q2 revenue increased 36.4% to $111.4M, and first-half revenue increased 22.8% to $213.7M. Q2 growth also came from Insurance (+16.5%), Healthcare (+13.1%) and Emerging Business (+17.8%).
- Management attributed margin improvement primarily to higher revenue, operational efficiencies and comparison with COVID-related expenses in 2020. First-half SG&A rose 23.5% to $105.2M, mainly on higher employee-related costs; other income fell $3.2M, largely due to lower mutual-fund returns.
- First-half operating cash flow was $53.9M, versus $58.9M; capital expenditures were $19.9M. Cash flow was affected by higher receivables and deferred revenue, partly offset by increased accrued expenses and employee costs. Receivables days sales outstanding improved to 58 days from 63.
- At June 30, cash and cash equivalents were $150.2M and short-term investments were $144.5M. Total borrowings were $154.4M, including $15.0M under the revolver and $150.0M principal on 3.5% convertible notes due October 2024, net of debt discounts and issuance costs. The $300M revolving facility was available subject to its terms; the company reported covenant compliance.
- Six-month financing cash outflow was $131.4M, driven chiefly by $99.0M of borrowing repayments and $57.4M of treasury-stock purchases. The company repurchased $55.4M of shares under its program during the first half.
Outlook, commentary and risks
- No full-year revenue or earnings guidance is provided. Management cautions that first-half results are not necessarily indicative of full-year 2021 results. It expects 2021 capital expenditures of $35M–$40M, primarily for growth, facilities, technology and digital capabilities.
- Management reported moderate improvement in business indicators in the first half, but COVID-19, new variants and potential restrictions remain uncertain. India and the Philippines experienced outbreaks and lockdowns; the company said its operations were not materially affected, while noting further developments could disrupt operations. Remote delivery, employee support and information-security measures continue to entail costs.
- Customer concentration is material: the top ten clients represented 38.5% of first-half revenue. Contracts may be terminable on short notice; analytics projects can be short-term and cyclical, and increased use of multi-vendor sourcing or alternative pricing could pressure revenue and margins.
- Indian tax disputes and assessments totaled $26.2M net of advance payments as of June 30; the company had paid or provided guarantees of $8.0M and had not accrued a loss, stating it believes its position will be sustained. Potential retroactive Indian social-security contributions could not be reliably estimated. The filing also cites ordinary-course litigation, without a reasonably estimable loss range.
- Foreign exchange exposure is managed in part with forward contracts; results remain exposed to currency movements. Management reported no material change in market-risk exposure during the quarter.
Important facts for investors to verify
- Whether Analytics growth and the marked year-over-year margin recovery persist, particularly as comparison periods normalize.
- Cash conversion and working-capital trends, including receivables, deferred revenue and the effect of client payment terms.
- Progress on debt reduction, the 2024 convertible-note maturity, revolver availability and planned capital spending.
- COVID-related operating conditions, remote-work costs and any impact on delivery capacity or information security.
- Developments in Indian tax and social-security matters, and the potential implications of client concentration and contract termination or pricing terms.