ExlService Holdings, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; includes fourth-quarter results. Amounts are in U.S. dollars unless stated otherwise.
Business context
EXL provides operations management and analytics services, primarily to insurance, healthcare, banking and financial services, utilities, and travel-related clients. It reported two segments: Operations Management and Analytics. Operations Management generated 80.6% of 2015 revenue; Analytics generated 19.4%. The company reorganized its segment presentation in 2015 and restated prior-year segment data accordingly.
Financial performance
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $628.5 million | $499.3 million | +25.9% |
| Gross profit / margin | $225.6 million / 35.9% | $166.7 million / 33.4% | +35.3% gross profit |
| Operating income / margin | $67.3 million / 10.7% | $34.0 million / 6.8% | +97.8% |
| Net income / margin | $51.6 million / 8.2% | $32.4 million / 6.5% | +59.0% |
| Diluted EPS | $1.51 | $0.96 | +$0.55 |
| Operating cash flow | $96.7 million | $66.7 million | +$30.0 million |
Operations Management revenue rose 16.7% to $506.3 million; Analytics revenue rose 86.3% to $122.2 million. Analytics growth included $32.8 million from the RPM acquisition. FY 2015 revenue included no Travelers disentanglement-cost reimbursement; FY 2014 revenue was reduced by $26.3 million for such costs. Fourth-quarter 2015 revenue was $165.9 million versus $135.3 million in Q4 2014; net income was $14.8 million versus $7.5 million.
Cash and cash equivalents were $205.3 million at year-end, with short-term investments of $13.7 million, for combined cash, cash equivalents and short-term investments of $219.0 million. Working capital was $232.1 million. Borrowings were $70.0 million ($10.0 million current and $60.0 million long-term), versus $50.0 million at year-end 2014. Capital expenditures were $25.6 million. Investing cash outflow was $73.5 million and financing cash inflow was $10.0 million. EXL repurchased approximately $13.7 million of shares in 2015.
Material changes and unusual items
- Revenue growth reflected the RPM acquisition, contributions from the 2014 Blue Slate and Overland acquisitions, and increased client volumes. The RPM acquisition closed in March 2015; the purchase-price allocation included $33.2 million of goodwill and a contingent earn-out with a $4.1 million estimated fair value (maximum potential earn-out: $23.0 million).
- The effective tax rate increased to 32.0% from 13.8%. FY 2014 benefited from a $2.2 million reversal of an unrecognized tax benefit and a different mix of U.S. income. FY 2015 included approximately $2.5 million of tax expense related to immaterial prior-year errors.
- A change in estimated useful lives of certain fixed assets reduced 2015 depreciation expense by $1.7 million and increased net income by $1.0 million, or $0.03 per basic and diluted share.
- Gross margin improved from 2014, partly because the prior-year Travelers reimbursement reduced revenue and because of revenue mix, acquisitions, and currency effects. The 2015 operating and net margins also improved despite increased wage, staffing, and acquisition-related costs.
Outlook, risks and contingencies
The filing provides no numerical revenue or EPS guidance. Management expected 2016 capital expenditures of $25 million to $30 million, primarily for growth, facilities, and technology. It described plans to expand analytics, BPaaS and technology offerings, delivery locations, and client relationships. Management noted that pricing is shifting toward transaction- and outcome-based models, which can put pressure on margins if efficiency targets are not achieved.
- Client concentration remains material: the top 10 clients contributed 40.5% of revenue in 2015; no single client exceeded 10%. Revenue is heavily weighted to the U.S. (79.0%) and U.K. (17.3%).
- Employee attrition for staff with more than 180 days’ service was 33.3%, up from 32.3% in 2014. Wage inflation, hiring and training costs may pressure margins.
- Foreign exchange exposure is significant, particularly to the Indian rupee and Philippine peso; the company uses forward contracts but says hedging may not fully offset currency movements.
- Indian tax authorities disputed transfer-pricing and permanent-establishment matters. Aggregate disputed assessments were $21.4 million at year-end 2015; $14.7 million had been paid or secured by bank guarantees. The company accrued no liability, citing advice that ultimate liability was remote. Further assessments remain possible.
- Tax holidays in India and the Philippines are phasing out or may expire, potentially increasing the company’s tax rate. The filing also identifies data-security, service disruption, regulatory, competitive, acquisition-integration, and offshore operating risks.
- The $100 million revolving credit facility matures in October 2019; $70.0 million was drawn at year-end. EXL reported compliance with its covenants and no off-balance-sheet arrangements.
Management and the external auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements and controls. The control assessment excluded RPM, acquired in March 2015.
Important facts for investors to verify
- How much of revenue and profit growth was organic versus acquisition-driven, especially for Analytics and RPM.
- Whether margin improvement persists after excluding the prior-year Travelers reimbursement effect, currency benefits, and the fixed-asset useful-life estimate change.
- Cash conversion, receivables and unbilled services growth, and the company’s ability to fund acquisitions, capex, and share repurchases while carrying $70 million of debt.
- Developments in Indian tax disputes, any additional assessments or deposits, and the effects of expiring tax incentives on the effective tax rate.
- Client retention and concentration, employee attrition and wage trends, and the ability to preserve margins under newer pricing models.