ExlService Holdings, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. The company provides operations management and analytics services. Unless otherwise stated, financial amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $167.0 | $143.5 | +16.4% |
| Gross profit / margin | $58.7 / 35.1% | $50.4 / 35.1% | Profit +16.4%; margin unchanged |
| Operating income / margin | $16.5 / 9.8% | $13.5 / 9.4% | Income +22.1% |
| Net income / margin | $13.8 / 8.3% | $9.6 / 6.7% | Income +44.4% |
| Diluted EPS | $0.40 | $0.28 | +$0.12 |
| Operating cash flow | ($10.4) | $0.1 | Decrease of $10.5 |
- Operations Management revenue was $128.1 million, up 3.4%; Analytics revenue was $39.0 million, up 98.2%. Analytics growth included $11.9 million from the RPM acquisition, as well as organic volume growth.
- Cost of revenue grew 16.3%, approximately in line with revenue. Gross margin held at 35.1%; operating margin improved 0.4 percentage points.
- Other income, net rose to $2.8 million from $1.2 million, including $2.2 million of interest and dividend income and a $0.3 million reduction in the RPM earn-out liability. Foreign exchange gain declined to $0.5 million from $1.1 million.
Liquidity, debt and cash flows
- At March 31, cash and cash equivalents were $95.8 million and short-term investments were $97.1 million, totaling $192.9 million. Cash and short-term investments were $219.0 million at December 31, 2015. The company reported that $134.7 million of the March total was held by foreign subsidiaries and said it intends to indefinitely reinvest foreign earnings.
- Total debt was $65.0 million, down from $70.0 million at year-end; $10.0 million was classified as short-term. The revolving facility matures in October 2019, is secured by substantially all company and material domestic-subsidiary assets, and carried a 1.90% effective rate in Q1. The company reported compliance with covenants.
- Cash used in investing was $89.8 million, mainly reflecting net purchases of short-term investments; capital expenditures were $8.5 million. Cash used in financing was $10.0 million, including $5.0 million of debt repayment and $6.2 million of share repurchases.
- Management attributed negative operating cash flow to a $39.0 million working-capital increase, particularly higher receivables and lower accrued employee costs. The filing reported no off-balance-sheet arrangements.
Material changes, outlook and risks
- Revenue growth was partly offset by currency translation: Operations Management faced a $2.7 million impact from depreciation of the Indian rupee, pound sterling and Philippine peso. The company cited wage increases, higher headcount and RPM-related expenses as cost drivers.
- The company expected 2016 capital expenditures of $25 million to $30 million. It anticipates Analytics revenue growth as it expands services and its client base; the filing provides no formal quantified revenue or earnings guidance.
- Management noted industry movement toward transaction- and outcome-based pricing and multi-vendor outsourcing, which could pressure margins and revenue. Other stated risks include client concentration, retaining trained employees, competition, technology disruption, offshore-outsourcing sentiment, and political, regulatory and currency exposures.
- Indian tax disputes cover transfer-pricing and permanent-establishment issues. The aggregate disputed amount was $20.8 million; $14.3 million had been paid or covered by bank guarantees. Management considered ultimate liability remote and recorded no accrual, but noted that further assessments may arise.
- The Q1 2015 comparison included $1.8 million of tax expense related to immaterial prior-year errors, contributing to its higher 39.4% effective tax rate versus 29.9% in Q1 2016. Q1 2016 also included $1.5 million of unrealized investment gains in interest and dividend income and $0.7 million of interest on Indian tax-assessment deposits.
- Reportable segments were revised to Operations Management and Analytics, with prior-period segment information restated. Consolidated financial statements were unaffected.
Important facts for investors to verify
- Whether Analytics growth, including the RPM contribution, is sustainable and translates into durable margins.
- Receivables collection and working-capital trends following negative Q1 operating cash flow.
- Cash availability and potential tax costs if foreign-held funds are repatriated.
- Developments in Indian tax disputes and any additional assessments, deposits or guarantees.
- Debt repayment, covenant headroom, planned capital expenditures and share repurchase activity.
- Exposure to foreign exchange movements, concentrated customers and pricing pressure from multi-vendor contracts.