ExlService Holdings, Inc. — FY 2013 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2013; it is not a standalone quarterly filing. ExlService provides business-process outsourcing and transformation services, including analytics, finance transformation and operations consulting, primarily to large companies in insurance, healthcare, utilities, financial services, and travel and logistics. Most employees and delivery operations are in India, with additional centers in the U.S., Philippines and Europe.
Financial performance and position
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $478.5 million | $442.9 million | +8.0% |
| Gross profit / margin | $187.5 million / 39.2% | $171.1 million / 38.6% | Margin +0.6 percentage points |
| Operating income / margin | $67.4 million / 14.1% | $57.2 million / 12.9% | Income +17.8% |
| Net income / margin | $48.1 million / 10.1% | $41.8 million / 9.4% | Income +15.0% |
| Diluted EPS | $1.42 | $1.26 | +$0.16 |
| Operating cash flow | $82.8 million | $65.8 million | +$17.0 million |
- Outsourcing revenue rose 7.7% to $395.0 million; transformation revenue rose 9.6% to $83.5 million. Fourth-quarter revenue was $124.1 million and net income was $15.9 million.
- Gross-margin improvement reflected higher margins from the Landacorp acquisition and weaker rupee and peso exchange rates; lower utilization and expenses in transformation services partly offset the improvement. SG&A was 19.9% of revenue in both years.
- Foreign-exchange losses increased to $5.0 million from $2.5 million. The effective tax rate was 26.0%, compared with 26.2%.
- Cash and cash equivalents were $148.1 million; short-term investments were $6.0 million. Working capital was $176.6 million. The company reported no borrowings under its credit facility; capital-lease obligations totaled $2.5 million.
- Investing cash outflow was $17.5 million, versus $54.8 million, principally because 2012 included the Landacorp acquisition. Capital expenditures were $15.9 million. Financing activities used $15.7 million, including $21.2 million of share repurchases.
Material changes versus the prior comparable period
- Revenue growth slowed to 8.0% from 22.9% in 2012. In 2013, growth included $17.2 million of Landacorp-related revenue and net volume increases of $22.8 million, partly offset by currency effects.
- Operating and net margins improved year over year. Cash from operations increased, supported by better receivables collection and higher accrued expenses and other liabilities; days sales outstanding improved from 56 to 55 days.
- Cash increased to $148.1 million from $103.0 million. The company repurchased 820,849 shares for approximately $21.2 million under a newly authorized $25 million program; no cash dividends were declared.
Outlook, commentary, risks and unusual items
- Travelers termination: Travelers represented 9.7% of 2013 revenue and issued a termination notice in November 2013. Management estimated a $12–$20 million reduction in 2014 revenue as services transition, plus additional revenue reductions for expense reimbursements and higher costs for transition services. The company said those additional amounts could not yet be reasonably estimated.
- Investment and outlook: The filing does not provide a clear full-year revenue or earnings forecast. Management expected 2014 capital expenditures of $20–$25 million for client growth, facilities and technology. It described growth opportunities in annuity-based transformation work and software platforms, alongside continued investment in delivery capacity.
- Concentration and execution: The top ten clients generated 57.9% of revenue; the largest client loss could materially affect results. Outsourcing contracts often have long sales and implementation cycles, and many do not guarantee business volumes. Employee turnover was 25.8% for staff with more than 180 days’ tenure.
- Currency and tax exposure: Most revenue was denominated in U.S. dollars or pounds sterling, while substantial expenses were in rupees and pesos. The company used currency hedges but cautioned that they may not fully offset exchange-rate movements. Tax holidays in India and the Philippines may expire or change; Indian tax authorities’ disputed assessments totaled $14.7 million, of which $13.8 million had been paid or covered by bank guarantees. Management considered the likelihood of crystallization remote and recorded no provision for those disputes.
- Other items: A $2.0 million receivable acquired with Landacorp was written off. Goodwill was not impaired in 2013. The company disclosed risks involving data security, service disruption, wage inflation, competition, regulation, offshore-outsourcing sentiment and acquisitions. Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Progress and final financial impact of the Travelers transition, including reimbursed expenses and disentanglement costs.
- Whether new client wins and existing-client volumes can offset the Travelers revenue reduction and sustain growth across both segments.
- Trends in gross and operating margins, utilization, wage costs, employee turnover and transaction-based contract pricing.
- Cash conversion and receivables quality, including the effect of the Landacorp receivable write-off and continued working-capital changes.
- Resolution of Indian tax disputes and any changes to India or Philippines tax incentives; the filing does not quantify a reliable payment timing for uncertain tax positions.
- Currency-hedge performance and the sensitivity of results to rupee, peso and sterling movements.