EXLS

ExlService Holdings, Inc. - 10-Q Summary (Period Ended Sept 30, 2009)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for ExlService Holdings, Inc., a provider of outsourcing and transformation services, for the period ended September 30, 2009. The company operates primarily in the United States and the United Kingdom, with delivery centers in India, the Philippines, and recently the Czech Republic. The report includes unaudited financial statements and management discussion regarding continuing operations, excluding the discontinued operations of Noida Customer Operations Private Limited (NCOP), which was sold in August 2008.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: For the three months ended Sept 30, 2009, revenue increased 3.5% to $48.2 million compared to $46.6 million in 2008, driven by new clients and volume increases in outsourcing services. For the nine months, revenue decreased 4.7% to $131.6 million from $138.0 million, primarily due to a $9.2 million reduction from the appreciation of the U.S. dollar against the U.K. pound sterling and lower discretionary spending on transformation services.
• Profitability: Net income from continuing operations for the three months increased significantly to $4.0 million from $0.4 million in the prior year, largely due to a reduction in foreign exchange losses. For the nine months, net income from continuing operations rose to $8.3 million from $7.7 million.
• Foreign Exchange: Net foreign exchange losses decreased substantially to $2.0 million for the quarter (from $6.6 million) and $5.0 million for the nine months (from $5.9 million), attributed to favorable currency movements relative to hedging positions.
• Acquisitions: The company acquired Schneider Logistics Europe S.R.O. in the Czech Republic for approximately $3.5 million in July 2009.

Guidance, Outlook, and Risks

Outlook and Commentary: Management anticipates revenue growth through organic expansion and acquisitions. The company is setting up a new operations center in Cluj, Romania. Capital expenditures for the remainder of 2009 are expected to be between $3.0 million and $5.0 million. The company maintains a share repurchase program authorized up to $10.0 million, with approximately $0.4 million repurchased through September 30, 2009.

Risks and Contingencies:

• Tax Disputes: The company is involved in disputes with Indian tax authorities regarding transfer pricing and permanent establishment status. Assessment orders totaling approximately $11.0 million have been issued for tax years 2003-2006. The company has deposited approximately $7.6 million and obtained bank guarantees of $2.8 million to halt collection. Management believes the probability of loss is remote.
• Client Concentration: The three largest clients accounted for 45.5% of revenue in the quarter and 44.5% for the nine months. Centrica alone represented 21.9% of quarterly revenue.
• Legislative Risk: Negative publicity and proposed legislation regarding offshore outsourcing in the U.S. and U.K. could materially affect revenues.
• Subsequent Event: On November 4, 2009, the company entered into an agreement to acquire the American Express Global Travel Service Center in India for approximately $30 million.

Investor Verification Checklist

• Verify the status and potential financial impact of the ongoing tax disputes with Indian authorities, specifically the $11.0 million in assessment orders.
• Monitor the integration and revenue contribution of the Schneider Logistics Europe acquisition and the pending American Express acquisition.
• Assess the impact of currency fluctuations (USD vs. GBP and INR) on future margins, given the significant historical volatility.
• Review the concentration risk associated with the top three clients, particularly Centrica, and the expiration of their contract in April 2012.
• Confirm the company's ability to meet export obligations for its Indian and Philippine units to avoid penalties and loss of tax incentives.