ExlService Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results are compared with the corresponding 2021 periods. ExlService provides data analytics and digital operations and solutions, reported across Insurance, Healthcare, Analytics, and Emerging Business.
Financial results
Amounts in $ millions, except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | 361.4 | 290.3 | 1,037.3 | 826.8 |
| Gross profit / margin | 130.9 / 36.2% | 112.6 / 38.8% | 378.2 / 36.5% | 319.5 / 38.6% |
| Operating income / margin | 50.1 / 13.9% | 42.4 / 14.6% | 141.2 / 13.6% | 119.8 / 14.5% |
| Net income | 39.1 | 26.5 | 111.1 | 86.5 |
| Diluted EPS | $1.16 | $0.77 | $3.28 | $2.52 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | 101.1 | 113.8 |
- Revenue increased 24.5% in Q3 and 25.5% year to date. Analytics led growth, rising 38.0% in Q3 and 42.6% for nine months; Insurance and Emerging Business also grew. Healthcare revenue declined 16.5% and 16.1%, respectively, primarily due to client ramp-downs.
- Gross margin contracted 260 basis points in Q3 and 210 basis points year to date. Management cited wage inflation, increased staffing and operating costs, new-client ramp-ups, and lower Healthcare revenue. Operating margin also declined.
- Q3 net income benefited from comparison with 2021, which included a $12.8 million loss on settlement of convertible notes. Higher 2022 tax expense partly offset operating gains. The effective tax rate was 24.2% for Q3 and 23.9% year to date, versus 13.7% and 20.3% in 2021.
- Nine-month operating cash flow was $101.1 million, down from $113.8 million. Capital expenditures were $32.1 million, implying operating cash flow less capex of approximately $69.0 million versus $84.7 million in 2021.
Liquidity, debt, and capital
- At September 30, cash, cash equivalents and restricted cash totaled $98.3 million; short-term investments were $172.9 million. Management reported $262.2 million of cash, cash equivalents and short-term investments.
- Total borrowings were $270.0 million, comprising $35.0 million current and $235.0 million long-term. The amended revolving facility provides $400 million of commitments, matures in April 2027, and uses SOFR for U.S. dollar borrowings. The company reported compliance with covenants.
- Nine-month cash used in investing was $75.2 million, including investment purchases, capital expenditures and acquisition payments. Cash used in financing was $61.8 million, including $71.7 million of treasury-stock purchases, partly offset by net borrowings.
Outlook, commentary, and risks
- Management expects 2022 capital expenditures of $37 million to $42 million; $32.1 million had been incurred through September. It stated existing liquidity should cover cash requirements over the next 12 months. The filing provides no specific revenue or earnings guidance.
- Acquisitions expanded Analytics capabilities: Clairvoyant contributed $12.5 million of Q3 and $33.7 million of year-to-date revenue growth; Inbound added insurance-focused digital marketing and lead-generation capabilities. The filing says neither acquisition materially affected consolidated results or cash flows.
- Foreign-exchange translation and hedge losses reduced Q3 comprehensive income to $18.3 million, versus net income of $39.1 million; nine-month comprehensive income was $46.4 million versus net income of $111.1 million. Foreign-currency translation and cash-flow hedge losses drove the difference.
- Customer concentration remains relevant: the top ten clients generated 34.2% of Q3 revenue and 33.7% of year-to-date revenue. Management notes that losing a top client could materially affect performance. Other disclosed risks include wage and hiring pressures, client ramp-downs, cybersecurity and operational disruptions, acquisition integration, and economic and geopolitical uncertainty.
- Indian tax matters remain unresolved. Tax authorities’ transfer-pricing and other corporate tax demands totaled $37.7 million, net of advance payments; the company had paid or provided guarantees for $7.7 million and recorded no provision, stating it believes its position will be sustained. Separate VAT demands and rejected GST refunds are also contested, with no provision recorded.
Important facts for investors to verify
- Whether Analytics growth can continue and Healthcare client ramp-downs stabilize, while monitoring revenue concentration.
- Whether wage inflation, new-client ramp costs and Healthcare weakness continue to pressure gross margins and cash conversion.
- Current borrowing availability, interest-rate exposure, and the effects of hedging and currency movements.
- Progress and potential outcomes of Indian tax disputes, including any new assessments, deposits or cash requirements.
- Whether planned capital spending and acquisition-related commitments remain consistent with management’s liquidity expectations.