ExlService Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results are compared with the same 2018 periods. The company provides business process management, operations management and analytics services, principally to U.S. and U.K. clients.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $243.5m | $210.1m | $483.1m | $417.1m |
| Gross profit / margin | $81.1m / 33.3% | $70.5m / 33.5% | $163.4m / 33.8% | $139.3m / 33.4% |
| Operating income / margin | $13.9m / 5.7% | $17.1m / 8.1% | $30.7m / 6.4% | $32.2m / 7.7% |
| Net income | $12.6m | $14.5m | $27.3m | $37.6m |
| Diluted EPS | $0.36 | $0.41 | $0.78 | $1.07 |
For the six months, operating cash flow was $47.7m, versus $13.8m a year earlier; investing activities provided $1.0m and financing activities used $61.1m. Capital expenditures were $22.3m. At June 30, cash and cash equivalents were $84.8m, short-term investments $168.2m, and restricted cash $6.6m. Management reported $253.0m of cash, cash equivalents and short-term investments, including $214.8m held outside the U.S. Long-term borrowings were $231.4m; total borrowing principal, including $150m of convertible notes and structured payables, was $268.5m. The company was in compliance with credit-facility covenants.
Material changes and drivers
- Q2 revenue increased 15.9%; first-half revenue increased 15.8%. Analytics led growth, up 47.4% in Q2 and 49.8% for the half, including SCIO acquisition contributions of $18.8m and $37.9m, respectively, plus organic client work.
- Q2 net income fell to $12.6m, primarily reflecting higher interest expense and lower operating income, partly offset by lower tax expense and higher investment-related other income. First-half net income fell to $27.3m, affected by higher interest and tax expense and lower operating income.
- Q2 gross margin was down 20 basis points; first-half gross margin was up 40 basis points. First-half Healthcare gross margin fell 370 basis points, with management citing Health Integrated and higher employee costs.
- Revenue concentration remains material: the top ten clients generated 36.5% of revenue in both the Q2 and first-half periods. The U.S. represented 81.3% of Q2 revenue.
Outlook, unusual items and risks
- The company began substantially winding down Health Integrated in March 2019 and expects the process to be substantially complete by year-end. It recorded $6.8m of impairment and restructuring charges in the first half, including $3.6m of restructuring costs and $3.2m of asset impairments; total expected restructuring costs were approximately $6.0m. Additional costs may arise.
- Management expects 2019 capital expenditures of $35m–$40m. The filing provides no specific revenue or earnings guidance.
- Indian tax authorities’ demands totaled $17.9m, net of advance payments, for transfer-pricing and permanent-establishment disputes. The company believes its positions will be sustained and has not accrued a liability; deposits and bank guarantees cover $8.3m. A separate Indian court interpretation concerning employee-benefit contributions could affect past and future payments, but the company said the amount and timing could not then be reliably estimated.
- Other risks include client concentration, competition and pricing pressure, foreign-exchange exposure, staffing and wage costs, acquisition integration, debt servicing, and potential impairment of goodwill or other assets. Adoption of the new lease standard added $104.0m of operating lease liabilities at June 30; prior-period statements were not restated.
Investor verification priorities
- Assess how much Analytics growth is organic versus attributable to SCIO, and whether segment growth and margins are sustainable.
- Track Health Integrated wind-down costs, completion timing, and any further impairments or customer impacts.
- Reconcile reported operating cash flow with working-capital movements, especially receivables and accrued employee costs.
- Review debt maturities, interest costs, convertible-note terms, covenant headroom, and the use of cash for repurchases and investment.
- Monitor Indian tax and employee-benefit matters, client concentration, and the effect of lease obligations on liquidity.