ExlService Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are to Q1 2020 unless stated otherwise. ExlService provides business process management, operations management and analytics services, with customers principally in the U.S. and U.K. Figures below are in millions of dollars except per-share amounts and percentages.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $261.4 | $246.0 | +6.3% |
| Gross profit / margin | $102.6 / 39.2% | $83.3 / 33.9% | Margin +5.3 pts |
| Operating income / margin | $41.6 / 15.9% | $27.5 / 11.2% | Income +51.2% |
| Net income | $31.9 | $22.4 | +42.5% |
| Diluted EPS | $0.93 | $0.65 | +$0.28 |
| Operating cash flow | $15.2 | $(13.6) | Improved $28.8 |
Revenue growth was led by Analytics (+10.7%), Healthcare (+12.0%) and Insurance (+8.9%). Emerging Business revenue fell 12.0%, mainly reflecting reduced travel and transportation volumes amid COVID-19. Analytics represented 39.1% of revenue. U.S. revenue was $224.4 million; the top ten clients generated 39.3% of revenue, up from 37.3%.
Gross margin expansion reflected higher revenue, lower operating costs and improved segment margins. SG&A increased 12.8% to $48.9 million, including higher employee-related costs. The effective tax rate rose to 21.9% from 20.7%. Net income benefited principally from higher operating income and lower interest expense, partly offset by higher taxes, lower other income and lower foreign-exchange gains.
Cash, liquidity and debt
- Cash and cash equivalents were $177.1 million and short-term investments $198.7 million at quarter-end; together they totaled $375.8 million. Cash, cash equivalents and restricted cash declined to $184.7 million from $225.5 million at year-end.
- Operating activities provided $15.2 million; investing used $26.0 million and financing used $29.0 million. Capital expenditures were $12.7 million. Operating cash flow less capital expenditures was approximately $2.5 million.
- Borrowings totaled $227.7 million carrying value, including $25.0 million current debt; principal obligations totaled $239.0 million. This included $150.0 million principal of 3.50% convertible notes due October 2024 and $89.0 million under the revolving facility. The company reported compliance with facility covenants.
- Current assets were $596.6 million and current liabilities $197.7 million. Operating lease liabilities totaled $100.4 million.
Outlook, risks and unusual items
- No full-year revenue or earnings guidance is provided in the supplied filing text. Management expects 2021 capital expenditures of $35–$40 million, primarily for growth, facilities, technology and digital capabilities.
- Management reported moderate improvement in selected conditions during Q1 but emphasized that COVID-19’s duration and business impact remain uncertain. A serious outbreak in India and rising cases in the Philippines had not materially affected operations as of the filing, but renewed restrictions could disrupt delivery and results. Remote-work technology, security and employee-safety costs continue.
- Management cited client concentration, competition and pricing pressure, hiring and retention, operational and cybersecurity risks, foreign-exchange exposure, and the potential loss of major clients. Contracts can often be terminated on short notice; multi-vendor arrangements may pressure revenue and margins.
- Indian tax authorities’ demands related to transfer-pricing and permanent-establishment disputes totaled $16.7 million net of advance payments; $8.1 million had been paid or secured. The company recorded no accrual, believing its position is more likely than not to be sustained. Potential retrospective Indian social-security obligations cannot yet be reliably estimated.
- Other items to note: $27.0 million of repurchases under the public program during the quarter; $3.3 million of property-and-equipment purchase commitments; and $6.3 million of deferred employer FICA taxes payable in installments in December 2021 and December 2022. Management identified no goodwill impairment trigger at quarter-end.
Important facts for investors to verify
- Whether Analytics growth and substantial gross-margin improvement persist, and whether Emerging Business recovers as travel-related activity changes.
- How India and Philippines COVID-19 conditions affect staffing, service delivery, client demand and costs.
- Cash conversion and working-capital movements, including the effect of deferred revenue and employee-cost accruals; quarter-end cash declined despite positive operating cash flow.
- Client concentration and any changes in major customer relationships, contract renewals or pricing terms.
- Developments in the Indian tax disputes and social-security assessment, including any new estimates, deposits or financial-statement accruals.
- Debt maturities, convertible-note settlement terms, planned capital spending and the pace of share repurchases.