ExlService Holdings, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. ExlService provides business-process solutions through Operations Management and Analytics and Business Transformation. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $143.5 | $121.8 | +17.8% |
| Gross profit / margin | $50.4 / 35.1% | $46.9 / 38.5% | Margin down 3.4 percentage points |
| Operating income / margin | $13.5 / 9.4% | $15.5 / 12.7% | Income down 13.0% |
| Net income / margin | $9.6 / 6.7% | $11.1 / 9.2% | Income down 14.2% |
| Diluted EPS | $0.28 | $0.33 | Down $0.05 |
| Cash from operations | $0.1 | $5.0 | Down $4.8 |
- Revenue by segment: Operations Management was $110.7 million, up 10.6%; Analytics and Business Transformation was $32.8 million, up 51.3%.
- Cost of revenue rose 24.3%, faster than revenue. Management cited acquisition-related employee costs, wage increases, higher headcount, and facilities and technology spending. SG&A increased 19.3%.
- Income tax expense rose to $6.2 million from $4.5 million; the effective tax rate increased to 39.4% from 28.6%. Management attributed much of the increase to approximately $1.8 million of tax expense for prior-year items and the expiration of a Philippine tax holiday.
Balance sheet, liquidity, and debt
- At March 31, cash and cash equivalents were $151.3 million and short-term investments were $14.3 million. The filing separately notes $165.6 million in cash and short-term investments, including $104.9 million held by foreign subsidiaries, which management does not intend to repatriate.
- Total borrowings were $80.0 million: $5.0 million short-term and $75.0 million long-term. The company had a $100 million revolving facility, maturing October 2019, with borrowings secured by substantially all assets of the company and material domestic subsidiaries. The reported facility interest rate was 1.56% during the quarter.
- Operating cash flow was $0.1 million; capital expenditures were $8.8 million. Investing cash outflow was $56.2 million, mainly including $44.4 million for the RPM acquisition. Financing cash inflow was $31.2 million, including $30.0 million of borrowings. Cash declined $25.2 million during the quarter.
- Current assets were $295.1 million and current liabilities were $84.9 million at quarter-end. Total assets were $611.0 million; total liabilities were $174.1 million.
Material changes and unusual items
- ExlService acquired RPM on March 20, 2015, for initial cash consideration of $47 million, subject to adjustments, plus restricted shares and potential earn-out consideration of up to $23 million. The preliminary purchase-price allocation included $32.3 million of goodwill; purchase accounting remained incomplete. RPM contributed $1.2 million of quarterly revenue after acquisition.
- Overland, acquired in October 2014, contributed $16.9 million of Q1 2015 revenue. Revenue growth also reflected client volume gains and other acquired businesses, partly offset by lower Travelers revenue and foreign-exchange effects.
- A change in estimated useful lives of certain fixed assets reduced Q1 depreciation expense by $0.5 million and increased net income by $0.3 million, or $0.01 per share.
- Top ten clients accounted for 45.9% of revenue, down from 54.2%; no individual client exceeded 10% in either period. U.S. and U.K. clients generated 78.0% and 18.0% of Q1 2015 revenue, respectively.
Outlook, risks, and contingencies
- Management expected $10–$15 million of additional capital expenditures during the remainder of 2015, primarily for facilities, technology, and infrastructure. The filing provides no specific full-year revenue or earnings guidance.
- Management said it expects to use operating cash flow for smaller acquisitions, capital spending, and working capital; significant acquisition-led growth could require additional financing. Operating cash flow was pressured by working-capital needs, including lower accrued employee costs and higher receivables.
- Indian tax authorities have disputed transfer-pricing and permanent-establishment matters. The aggregate disputed amount was $20.2 million at March 31, 2015; the company had paid or secured $15.4 million. Management considered ultimate liability remote and recorded no accrual, but additional assessments may arise.
- Other cited risks include customer and industry concentration, client retention, acquisition integration, hiring and retention, competition and pricing pressure, foreign-exchange movements, technology disruption, data confidentiality, regulatory changes, and political or economic conditions in operating regions.
- The filing reports no material change in market-risk exposure, no off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2015.
Important facts for investors to verify
- Whether revenue growth from RPM and other acquisitions can be sustained and translated into improved operating margins.
- Whether operating cash flow recovers from its near-zero Q1 level and how working capital evolves.
- The final RPM purchase-price allocation, earn-out exposure, and integration costs.
- The effect of the higher tax rate, prior-year tax adjustments, and expiration of the Philippine tax holiday on future earnings.
- Developments in Indian tax disputes and any additional assessments or required deposits.
- Debt-facility utilization, covenant compliance, interest costs, and the company’s plans for cash held overseas.