ExlService Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are to the corresponding 2020 periods. ExlService provides business process management, analytics and digital solutions, reported across Insurance, Healthcare, Emerging Business and Analytics. Amounts below are U.S. dollars; financial statement figures are in millions unless noted.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $290.3 | $241.0 | $826.8 | $709.5 |
| Gross profit / margin | $112.6 / 38.8% | $88.9 / 36.9% | $319.5 / 38.6% | $236.3 / 33.3% |
| Operating income / margin | $42.4 / 14.6% | $34.4 / 14.3% | $119.8 / 14.5% | $71.8 / 10.1% |
| Net income | $26.5 | $26.4 | $86.5 | $57.3 |
| Diluted EPS | $0.77 | $0.76 | $2.52 | $1.65 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $113.8 | $126.3 |
Business performance and changes
- Q3 revenue increased 20.5%; nine-month revenue increased 16.5%. Analytics was the largest growth contributor, rising 33.1% in Q3 and 26.3% year to date. Nine-month growth also came from Insurance (+12.3%), Healthcare (+11.3%) and Emerging Business (+6.9%).
- Gross margin improved year over year, by 190 basis points in Q3 and 530 basis points for the nine-month period. Management attributed the improvement to revenue growth, operating efficiencies and lower COVID-related costs; Q3 Analytics margin edged down 30 basis points.
- Q3 operating income rose 23.3%, while net income was nearly flat. The comparison included a $12.8 million loss on settling convertible notes, partly offset by higher operating income and lower tax and interest expense. Q3 net margin declined to 9.1% from 11.0%; the nine-month net margin improved to 10.5% from 8.1%.
- Top ten clients represented 38.7% of Q3 revenue in both years and 38.6% of nine-month 2021 revenue, versus 37.3% in 2020. The United States and United Kingdom contributed 86.0% and 9.4% of Q3 revenue, respectively.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $114.6 million and short-term investments were $169.7 million, totaling $284.3 million; this compares with $402.8 million at December 31, 2020. Cash, cash equivalents and restricted cash were $123.7 million.
- Nine-month operating cash flow was $113.8 million, down from $126.3 million. Management cited higher working-capital needs, including receivables; days sales outstanding was 58 days versus 57 days a year earlier. Investing activities used $21.5 million and financing activities used $189.1 million.
- Total borrowings were $185.0 million, down from $227.0 million at year-end 2020. The company settled its $150 million convertible notes in August for $236.7 million of total consideration: $200 million cash funded by a revolver draw and 310,394 treasury shares. The company had a $300 million revolving facility and reported compliance with its covenants.
- Capital expenditures were $29.0 million through September; management expected $35–$40 million for full-year 2021. The filing provides no revenue or earnings guidance.
Management commentary, risks and unusual items
- Management described improving business conditions in the first nine months, but said COVID-19, new variants and possible restrictions could still disrupt operations. Work-from-home delivery, added technology and security costs, and employee-support spending continued; results to date were not considered indicative of full-year results.
- Indian tax authorities’ aggregate demands for transfer-pricing and other corporate tax matters, and a permanent-establishment dispute, were $34.4 million net of advance payments as of September 30. The company had paid or provided bank guarantees totaling $8.0 million, believed its positions were more likely than not to be sustained, and recorded no accrual for these matters.
- The potential effect of an Indian social-security interpretation, if applied retrospectively, could increase past-period contributions; the company said the timing and amount could not be reliably estimated. Pending litigation losses also could not be reasonably estimated, though management did not expect current cases to have a material adverse effect.
- Foreign-currency exposure, client concentration, competition and pricing pressure, hiring and retention, cybersecurity, and the uncertain recovery from COVID-19 are among the disclosed business risks. Management reported no material change in market-risk exposure and said disclosure controls were effective.
Important facts for investors to verify
- Whether Analytics growth and the improved gross and operating margins persist, particularly as employee and other operating costs rise.
- Receivables growth, collections and operating cash conversion, given the year-over-year decline in operating cash flow and increase in days sales outstanding.
- Debt repayment and liquidity after the convertible-note settlement, including the terms and availability of the revolving facility.
- Developments in Indian tax and social-security matters, including potential assessments or required deposits not accrued in the statements.
- COVID-related delivery, staffing and security risks, and the company’s progress toward its stated 2021 capital-expenditure range.