Exlservice Holdings Inc (EXLS) 2006 Q3 法說會逐字稿

Good morning, my name is Rich and I will be your conference operator for today. I would like to welcome everyone to the EXLService Third Earnings Quarter Call.

[OPERATOR INSTRUCTIONS]

Thank you. It is now my pleasure to turn [it] over to your host, Jarrod Yahes, Head of Investor Relations. Sir, you may begin your conference.

Thank you, operator. And thanks everyone for joining us today on EXL's third quarter of 2006 earnings announcement. As the operator just mentioned, I'm Jarrod Yahes, Head of Investor Relations and Corporate Development. And I'm delighted to be joining you today for EXL's first earnings call as a public company.

With me this afternoon are Vikram Talwar, our Vice Chairman and CEO and Rohit Kapoor, our President and CFO. We hope you've had an opportunity to review the news release we issued a short time ago, as well as the power point presentation that's available for review on EXL's website on the "Investor Relations" section.

Let me quickly outline the agenda for today's call. Firstly, Vikram will begin with an overview of our results and operational performance. Rohit will then take you through the financial details and will provide an outlook for the 2006 year end and then Vikram will then close the presentation before we take questions.

Some of the matters we'll discuss in this call are forward-looking, and you should keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results differ materially from those express or implied by such statements. Such risks and uncertainties include, but are not limited to general economic conditions, and those factors set forth in today's press release discuss under the 'risk factors' portion of the business section and our form S-1 and other SEC filings.

EXL assumes not obligation to update the information presented on this call. During our call today we may also reference certain non-GAAP financial measures, which we believe provide useful information for investors, and you can find reconciliations of those measures to GAAP on the press release.

So now, let me turn the call over to Vikram. Go ahead Vikram.

Thank you Jarrod, and good morning to everyone in the U.S., good afternoon to Europe and good evening to those of us in India. We're very pleased with our third quarter performance, which clearly shows continued strength and momentum in our business. Let me just give you a few highlights of strong performance we delivered in the quarter. We delivered record quarterly revenues of $35.7 million. We exceeded our profit outlook, both at the gross margin and operating margin level. And we continued to execute on multiple key strategic initiatives.

I'm most pleased that while delivering financially during the quarter, we did not take our eye off the ball in respect to our strategic objectives and client processes. We had a busy quarter, during the quarter we were able to complete the acquisition, and most of the integration of Inductis. This is a highly strategic transaction for EXL, and we are proud to bring on many extremely smart and talented individuals as part of the management team at EXL. And welcome Sandeep Tyagi, Kal Bittianda, Puneet Shivam and Lalit Wangikar and their team to EXL. We feel very good about the chemistry that has been built and the contributions they're going to make to our organization.

We executed on our IPO recently, after the quarter end. On October 25, 2006 we consummated our Initial Public Offering of our shares of common stock and our now a global, select company listed on the NASDAQ. The result is a single class of stock, a strong balance sheet and a start of a new and exciting journey for our employees and shareholders. We were excited about the broad level of interest in the IPO, and the understanding and support of EXL's strategic direction by investors.

On the people front, we continue to expand the EXL family, and added approximately 800 new professionals to our business during the quarter. EXL is now approximately 7900 people strong, an increase of 66% over the same quarter in 2005. Our attrition has inched up slightly during the quarter to 39.8%. And employee retention, training and development continues to be a key area of focus for us. In terms of our operating performance, I'm also pleased with out increased ability to drive operational efficiency in our business and the maturity we have developed with respect to operational and financial reporting.

We believe that our reporting of the operational and financial performance of our processes allows us, for us to create a customer centricity and responsiveness that we believe is a competitive advantage in the marketplace. And we are starting to see results. I credit the operations team for their ongoing commitment to this area, critical to the success of all of our business, is having the best people. Through the leadership of Parvan Bagai in Operations, Deepak Dhawan in HR and Narasimha Kini in Risk Advisory Services, we are endeavoring to continue and enhance our reputation as having among the strongest management teams in the industry.

Lastly, I'm proud of the progress we're making to make with expanding our front end [inaudible]. During the quarter we brought on Pramode Metre as Chief Sales and Marketing Officer. Pramode comes to EXL from a strong background, where he was a Corporate VP at e4e and an SVP of Business Development at Syntel. We are excited to have Pramode on board and as we increase our investments in our front end and grow our team of sales and business development professionals.

Additionally, EXL hired three additional business development professionals in the U.S., one of which will be focus mainly on research analytics business.

Next, I'd like to comment on the operational highlights which we've achieved across two dimensions of our business. Including industry sectors and business sectors.

With respect to industry sectors, I would like to highlight the performance of the insurance and banking and financial services sectors. EXL's insurance segment continues to be our leading group and contributes approximately 49% or our total company revenues.

We are seeing continued traction in the sector across BFSI, in the form of current and new client traction. As well as industry recognition from consultants as to the breadth of EXL's capabilities in that sector. In the insurance [vertical], EXL signs an interim agreement with a leading U.S. insurance company during the quarter and would expect the results of the ramp to be in 2007.

We continued a highly successful ramp up in the utilities sector during the quarter with our UK utility clients. EXL has over 1600 professionals working in the utility [vertical]. And we believe that we are the largest utility BPO provider in India today. With our UK utility client, EXL initiated and led the effort for this client in India. This is a great example of changing the technology platform and off shoring simultaneously, and was a highly complex migration that was successfully completed.

We believe that this is one of the most rapid ramps for an off shore back office process to date, and the client is pleased with our performance and commitment to the processes. This is a fine example of EXL's ability to expand to the demands of the strategic clients and scale the organization.

We continue to see opportunity in the utilities segment in general, and this an exciting growth area for EXL. With respect to three of our other business segments, in our BPO business, we've made significant progress over the past year in finance and accounting, insurance and mortgage. We continue to move up the process of [next cities] spectrum and our becoming the partner of choice for companies that are looking to build a long term relationship with a service provider for complex back office transactions requiring industry domain expertise and who de-risk the migrations process for their business owners.

I'm extremely pleased with our results in the third quarter of 2006. And I'm very excited about the prospect of continuing this momentum in 2007. In terms of new clients wins, we had one strategic win with the U.S. insurance client I mentioned. And are beginning ramping processes in finance and accounting in the health care and media sector.

We continue to be pleased with both with the quality and economics of the opportunities we're seeing in terms our [fifelife]. The research and analytics business is a more significant focus for this after the acquisition of Inductis. We continue on several initiatives for this business, including increasing the percentage of work delivered offshore, as well as increasing the annuity and [life] nature of the business.

We believe that this transition will take several years, but the end result will be highly valuable industry leading research and analytic business, with leading expertise in client acquisition, retention and risk management analytical capabilities using the global delivery model.

In our view, nobody is doing high-end analytical work with the sophistication that we are doing today. Our relationship with our clients in this business are at the senior most levels. And I would highlight that we just hired and promoted several senior professionals in the organization. As well as entered into important new client relationships with a major U.S. bank.

Our risk advisory business has been reorganized across four clear service offerings. Risk advisory, accounting and financial reporting, technology risk services and the process mapping services. Using the global delivery model and our team of over 125 professionals, we have truly differentiated this offering in an area which is important to us.

We continue to seek to grow the leadership team in this business and receive strong positive feedback from clients as to the value proposition EXL delivers. Relationships that were strengthened or added to during the quarter include operational and risk assessment work for a large leasing and financing company. And ongoing technology risk services for a leading specialty insurance provider that is part of the top five largest re-insurance groups in the world today.

Today most of the work that is delivered, is risk advisory, is on-shore. Going forward, enabling technologies and platforms will enable us to perform more work offshore for clients.

All and all, our financial and operational performance in the quarter as well as the advancement of key long term strategic initiatives of our company, demonstrates the overall strength and momentum of the EXL business model.

Now let me pass it over to Rohit, who will provide more details about our financial performance and guidance. Over to you , Rohit.

Thanks Vikram, and hello everyone. This is Rohit Kapoor, I'm the President and CFO of EXL. Let me walk you through our financial results. Our financial results for the third quarter speak to the continued strength of our business. We achieved strong revenue growth while maintaining solid bottom line performance and continuing to re-invest into the business for long term growth. Please excuse me for a minute, please. Sorry about that.

Let me take you through the income statement and provide some detail behind the numbers for the quarter. Revenues for the third quarter ended September 2006 increased to 35.7 million, up 94% from 18.4 million in the quarter ended, excuse me.

Sorry, I'm just going to continue on. This is Jarrod Yahes. We'll give Rohit a couple seconds to catch his breath. Revenue on a sequential basis increased 41% to the quarter ended September 30, 2006 from 25.2 million in the quarter ended June 30, 2006. Of the sequential quarterly increase, 16% was a result of continued growth in the existing business and 25% was a result of the acquisition of Inductis during the quarter.

We generally attribute our revenue growth to a number of factors, including the growth of our client base, both organically and through acquisitions, ongoing growth in existing client relationships, as well as new service lines that we create and market to clients. EXL generates revenues principally from our three operating segments. BPO, research and analytics and advisory services.

Breaking down by segment, BPO accounted for 26.1 million or 73% of total revenues for the quarter. Research and analytics contributed 6.8 million or approximately 19% of total revenues. And risk advisory services contributed 2.7 million or approximately 8% of total revenues. To provide some qualitative commentary on the revenue performance of the three business lines during the quarter, BPO continued to benefit from further ramp ups of processes for current clients, resulting in revenues being ahead of plan.

Our research and analytics business was integrated with Inductis during the quarter, and is reported in a research and analytic segment. Importantly, research and analytic services are being well received by EXL's client base. And we already have two examples of successful cross-sell of the analytics business, both as a stand alone service line and bundled for solutions with BPO and analytic. We believe that research and analytics is a long term and valuable growth area for EXL. And that the market place for this service line continues to grow and mature. EXL will be well positioned to participate and will be a leader in processes that are highest on the complexity spectrum.

Thanks Jarrod. I'm sorry about that. I just had to clear out my throat. I'll take in on from there. Let me talk a little bit about EXL's risk advisory services business line. EXL's risk advisory service business line had an excellent quarter, with progression in several key client relationships during the quarter. We would like to note for investors that this business is seasonal and the third quarter is usually the strongest quarter for this business line.

While the business is healthy and we see strong market place demand for these risk advisory services, delivered using a global delivery model, on a seasonal basis we would not expect these strong results for the risk advisory services segment to continue as we look towards the first quarter of next year. Also, if the regulatory environment were to change for SOX, this would have an impact on our risk advisory services business.

Due to the timing of client ramp up and some seasonality in certain of our business lines, EXL will be reporting revenues and operating margins quarterly as well as on a rolling 12 month basis. We believe that this is an important indicator of the growth and profitability of our business due to the quarterly volatility inherent in our business.

Revenue for the 12 month ended September 30, 2006 increased 43.4%, to $102.4 million from $71.4 million in the 12 months ended September 30, 2005. EXL continued to reduce its client concentration risk during the quarter by a substantial margin. Revenue generated by the company's largest client was 29.4% for the quarter ended September 30, 2006 compared with 49.5% for the quarter ended September 30, 2005. And 41.4% for the quarter ended June 30, 2006. Revenue generated by the company's three largest clients was 57.2% for the quarter ended September 30, 2006, compared to 74.9% for the quarter ended September 30, 2005.

Now let me take you through the rest of the income statement. On a gross margin basis, our gross margin for quarter ended September 30, 2006 was 39.7% an increase 200 basis points from 37.7% in the quarter ended September 30, 2005. And 290 basis points from 36.8% in the second quarter ended June 30, 2006. Gross margins expanded primarily as a result of an increase utilization of the company's existing infrastructure, strong demand for services from the risk advisory services group and favorable exchange rate movements during the third quarter of 2006.

Before we discuss SG&A expenses, I would just like to make a comment on additional financial disclosures that we will be providing for investors, for them to better understand what we believe to be the core operating performance of our business. We recently began expensing stock options based on accounting transition to FAS 123R. This expense is partly based on historical third party valuations of the fair value of EXL stock price as a private company. We will be incurring theses charges associated with amortization of acquisitions related intangible assets as a result of the acquisition of Inductis as well.

We believe that because these charges are either based on specific equity fair value assumptions made during our time a private company, these are non-recurring in nature, and that it is informative for investors to understand and review the adjusted financial performance provided in addition to the GAAP disclosures. You can find reconciliation of the GAAP figures for the quarter in our news release, where on the back in the last page we have provided this information to everybody.

As a percentage of revenues, SG&A expenses decreased from 22.2% for the three months ended September 30, 2005 to 20.7% for the three months ended September 30, 2006. SG&A expenses include $0.6 million for the first three months ended September 30, 2006. On account of amortization of stock compensation expense relating to our issuance of stock options to our non-operations staff, but little to no stock compensation expense for the three months ended September 30, 2005.

EXL's selling and marketing costs of the percentage of revenue continued to increase. Selling and marketing expenses increased 300% from $400,000 for the three months ended September 30, 2005 to $1.6 million for the three months ended September 30, 2006 for the quarter or 4.6 % of revenues. This increase was primarily due to the addition of additional infrastructure and sales and marketing staff in the U.S., as well as a result of the increase of the Inductis acquisition. And the hiring of additional business development professionals in the United States.

Depreciation and amortization increased 73% from $1.5 million for the three months ended September 30, 2005 to $2.6 million for the period ending September 30, 2006. This increase was primarily due to $600 thousand of expense related to amortization of intangibles as a result of the acquisition of Inductis. The increase was also due to the commencement of operations in February 2006 of [inaudible] in Noida. Adjusted operating margins for the quarter, excluding the impact of stock compensation expense and amortization of intangibles, was 15.7% for the quarter ended September 30, 2006 compared to 7.5% in the quarter ended September 30, 2005. And 13.1% in the quarter ended June 30, 2006.

Last 12 months on a rolling basis, adjusted operating margin for the 12 months ended September 30, 2006 increased to 12.3% from 6.4% for the 12 months ended September 30, 2005. As mentioned earlier, the adjusted operating margin was favorably impacted by both significant increases in gross margin as well as specific corresponding factors and as we have not yet completed our senior management hires in the company. And this is a trend that we would not expect to continue.

I would like to make a brief comment on the taxes, and other income for the quarter. EXL's provision for income taxes decreased from an expense of $700 thousand for the three months ended September 30, 2005 to actually a benefit of $200 thousand for the three months ended September 30, 2006. This decrease in tax and increase in the benefits is primarily a result of the recognition of our deferred tax benefit for our U.S. entities. Again, on a longer term basis, we would not expect this to continue and would expect an estimated effective tax rate of somewhere between 15 to 20%.

We would also like to note that because EXL paid off approximately $12.5 million of the remaining debt and preferred stock with the use of proceeds from the IPO, we would expect not to incur expense associated with dividends and amortization of the preferred stock, or the interest expense which appears in the third quarter going forward. Adjusted net income was consequentially $5.6 million for the quarter ended September 30, 2006 compared $1.1 million in the quarter ended September 30, 2005. Net income was $4.1 million for the quarter ended September 30, 2006 compared to $1.1 million in the quarter ended September 30, 2005.

Please also note, that the number shares used in computing earnings per share for the three months ended September 30, 2006 and for 2005, have been adjusted to effect for the two for one stock split and the conversion done by the company on October 20, 2006. But, it does not include 5.75 million shares that were issued as part of our public offering. And you should be including those numbers as you work out your calculations.

Now, let me turn to the cash flow and the balance sheet. Cash flow from operations for the nine months ended September 30, 2006 was $10.8 million, or DSOs increased, primarily as a result of the acquisition of Inductis, which historically has had higher DSOs. We believe that this is a potential area for us to work on, and there are improvements that will be brought about out here. And this does provide us with an opportunity for more efficient capital usage for the company.

At September 30, 2006 we had approximately $25.6 million of cash and cash equivalents on hand after paying down $4.3 million of debt associated with Inductis during that quarter. So that basically covers our financial statements for the period ended September 30, 2005. Now let me walk you through our business outlook for the full year, which is a calendar year for us, of 2006.

EXL will be providing annual guidance, so at the time of our fourth quarter 2006 earnings call, we will provide you with an annual 2007 business outlook. And we will then update you qualitatively on how we are performing the annual target each quarter. Today we expect revenues of between 117.5 to $118.5 million for the calendar year ending December 31, 2006. We expect adjusted operating income for the year 2006 to be approximately $14.5 million to $15.5 million.

And as we had indicated during the road show, we believe the increase of benefits that we get on account of operating leverage when considered in the context of our re-investment strategy, in terms of building out our front end, will result in a 100 to 200 basis points of improvement of operating margin over the next couple of years from our current historical levels of 10% operating profit levels. And this is before stock compensation expense and amortization of intangibles.

While we have achieved 15.7% adjusted operating margins this quarter, we believe this is an exceptional performance, and that realistic expectations that investors should have of our company would be in the 10 to 12% margin range going forward. And we will continue to execute on this strategy and on our long term business model on this status.

We also expect to incur approximately $8.5 million of cash outflow on account of capital spent in 2006, of which we had already incurred approximately $3.7 million as of September 30, 2006. We expect to incur approximately $4 million to establish a new operations facility in Noida, which will become operational in 2007. And therefore, this $4 million will be used up in 2006.

We also expect to incur approximately 11 to $13 million of cash outflow on account of capital spent in 2007. The increase in capital expenditures for 2006 and decrease in 2007, as per our [early balance] is basically a result of the acceleration of the timing for the capital spent associated with the new center that is being built out in Noida.

So with that, let me turn over the call back to Vikram for him to give some closing remarks.

Thank you Rohit. Before we begin the Q&A, I just wanted to summarize briefly on the overall call. In closing, this is an exciting time and position for EXL to be in. Our business is healthy and growing. We remain focused on our four objectives of offshore BPO leadership, delivering value to our clients, and maintaining and enhancing the levels of customer satisfaction and high quality that have created a strong reputation in the market place and long term sustainable growth without compromising on our values and obligations.

The momentum in our core BPO business continues. Our research and analytics and advisory services businesses continue to grow, mature and be unique in the market. In short, we are very well positioned for even further growth and profitability. Our recent results, including our record gross revenues and operating income, are a testament to the dedication, expertise and passion of our men and women around the world who remain focused on and committed to providing global solutions and delivering value to our clients.

With that, lets take some questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from Julio Quinteros of Goldman, Sachs

Good morning guys. I apologize, I have a rough throat this morning. Real quickly on the tax benefit for the quarter, I just want to make sure, that is a one time item that is not expected to recur. I think you said that the effective rate going forward would be something in the 15 to 20% range.

That's right Julio. We would expect that the tax rate will be between 15 to 20% and this is a one time accrual.

Got it, ok. And then, just another quick housekeeping item. I didn't see anywhere in the release, and maybe I might have missed it, but the, the reimbursement expenses in the quarter.

Yes, you're talking about the gross revenue and the net revenue?

Correct, of the past years it would have been in the numbers. So, I guess relative to the 35.7, is that a gross or a net number.

That's a gross number.

So what is the reimbursement expenses in the number? In the quarter?

If you could just bear with me, I'll try and get that out to you. Julio, instead of waiting on this-

If I may interject, I believe it's $1.4 million.

Right Vikram.

Ok. Ok, we, I mean if we can come back to that later on. I just needed the right number there. And then, just in terms of the, the business, the ramp ups and then just kind of giving us a general sense for any other metrics. I think you talked about an improvement in utilization levels and I just, maybe if you can give some color in terms of how utilized is the current infrastructure. How much more room is there. So if you could talk about, maybe, a couple of metrics as far as the seat turns, the sort of the effect of utilization levels. Just to kind of give us a sense on terms of where you are and then your ramp up plans for head count, as we kind of think about the next quarter or two as we go into the end of the year here.

Ok, I'll take that. Julio, in terms of our utilization of the infrastructure, as you know, we put up a new center which became operational in Noida in February of this year.

Yes

And that center is now getting to almost close to full utilization as we close out this year, and that's the reason why we're building up a new center, which is going to be for 1150 seats that will become operational during the first quarter of next year.

So, in terms of total space availability that we have for existing client ramp ups and for new client ramp ups, we're getting pretty close to the existing capacity that we have. And that's why we've referenced that in the third quarter, the utilization rate is much higher than normal, and therefore, is benefiting us in terms of our gross margin.

In terms of the shift utilization, our shift utilization continues to be low with some of our recent lines and tends to be somewhere between 1.1 to 1.3. However, we do see that shift utilization increasing with some of our earlier and more mature client relationships, where the shift utilization is anywhere from 1.5 to two times. As we become more deeply imbedded with some of our client relationships, we would anticipate that we would be able to increase our shift utilization over a period of time.

Ok, great. And maybe just coming back to the comments that you made about the strength and the seasonality of the business. Obviously relative to the what we were looking for going into this quarter, meaningful out performance across the boards. And trying to temper against the comments that you made about seasonality and not expecting this sort of run rate going forward, etc.

What was the biggest source of surprise in the current quarter then, as you kind of look at the way that the revenues and sort of the profitability sort of fell out. Was it purely the risk advisory business, or did you guys just do a much better job of converting processes and then being able to hit the revenue run rates on those converted processes?

Well, on the revenue side it really is a combination of three things. It's a combination of greater amount of strength of the risk advisory services business line, for which the third quarter is the season of peak quarter for them.

Why is that?

It's essentially because some of the work that is done on Sarbanes-Oxley Compliance -

Got it.

Handled in this quarter, so that companies can get ready for having external auditors look at their work in the fourth quarter and get certifications by the first quarter-

Got it. That's right. I remember now.

The second is on account of foreign exchange. As you know, that sterling pound in this particular quarter was particularly strong against the U.S. dollar. We have close to about 50% of our revenues coming in, which is denominated in sterling pound. And when you convert that into U.S. dollars, it will result in a higher number.

How much, how much was that in terms of basis points and margin benefit?

Julio, the issue is, we've tried to analyze that. And we come up with different numbers depending on what type of analyses you do on these numbers. So, if we compare, we try to compare the third quarter of 2006 with the third quarter of 2005, and the problem that we run into is that we did not have any meaningful revenue from British Gas or Centrica in 2005. And therefore, it skews the analysis.

Got it.

But needless, the foreign exchange did have an impact on the revenue. And the third element is really a stronger onboarding and a higher revenue from some of our core BPO clients, which did ramp up in the third quarter of this year.

Great, thanks.

The next question comes from Ashwin Shirvaikar of Citigroup.

Thank you and congratulations on the quarter and on being a public company. Could you comment on the end market demand or pipeline, perhaps also, addressing the distinction between what you expect from existing versus the net new clients?

Sure Ashwin. The pipeline for us continues to be fairly strong and robust. And it seems to be maturing well and it seems to be filling up quite nicely. As you know, we have announced a letter of intent with a major insurance carrier, that we hope to be able to sign into final contract and get into revenue and productive activities in 2007.

We also are seeing a broad level of activity, particularly from the mortgage industry and the insurance industry. Which seem to be getting fairly active at this stage. There is a fair level of interest in terms of finance and accounting processes that clients are looking to out source and to move forward. So, the pipeline seems to be fairly strong and healthy.

In terms of you second question, of the growth from existing business and the growth from new clients. Historically, new clients have added on a significant portion of the growth that we experience each year. As we become a much larger company, our expectation is that growth from the existing clients will contribute a larger and larger percentage of the overall growth of the company. And we are seeing a healthy trend between our existing clients relationships that will be growing as we now scale up our business and as we build deeper relationships with them.

Ok, thanks. And one question on the supply side of things, if you could comment on the attrition rate in the quarter, and on an annual basis, if possible.

Sure, this is Vikram here. Our attrition rate, as I mentioned, was a little over 39%. Which is statistically the same as what we had mentioned during our road show, of approximately 38% for the previous quarter. We believe this is a manageable number. We believe our focus on this will help us improve this over a period of time. We do not believe this to be a major risk to us, in the sense of managing the overall resource requirements of the company.

Do you think becoming a public company helps in that regard, or any indicators of that. I know it's only a few weeks here, but-

Yes, it's only been a few weeks, but let me just point out that there is no doubt in my mind that the impact on our brand and the awareness that the IPO and being a public company has already started to be seen. And we believe that this growth, in effect, assists not only in our attrition rates but also in our hiring and training efforts that will move forward in our Human Resource end.

Thank you.

The next question comes from David Grossman of Thomas Weisel Partners.

Good morning, and thanks. Vikram, you gave a little bit of information here, per comments about the status of some of the new contract ramps. I'm wondering if you could give us a few more details and maybe help us better understand how that new business is ramping, visa vi, the new capacity that coming online.

Our major ramps during the third quarter have been in primarily our relationship with our utilities company, the one that I eluded to, where we have close to about 1600 employees today. Bear in mind we had zero at the beginning of this year. So, that has been a major contributor to the use of our capacity as well as to the revenue lines. In addition to that, other major relationships, one with our large computer client as well as a couple of others, which has to ramp up over the last three to six months, have added to our capacity utilization and the fact that we've been able a fair number of employees during this period of time.

As Rohit mentioned, our capacity is reaching a level now where we will be fully utilized and we basically time our new capacity to as close adjusted time strategy as possible. Obviously you can never match it. But, we believe that we will be up and running with our new facility with 1100 seats in the January, February time frame. And that should give us more than adequate capacity, both for existing client ramp-ups and our new business pipeline over the next two or three quarters.

Can I ask you, on the newer clients that you're signing. Are you getting better seat utilization out of those contracts than on legacy contracts in terms of willingness to share facilities and such. Or is it pretty much tracking along with your legacy clients?

It's basically tracking. The early part of a relationship, as Rohit mentioned a moment ago, is always low utilization. And the reason is it's a slower ramp, it's dedicated seats and obviously we are unable to do, fully capitalize on the systems availability. And various other factors that contribute to utilization.

As the process matures, as the number of employees increases, and we get better utilization of the systems, the utilization of the seats obviously goes up dramatically. And we find that is basically true for all clients. And it's nothing different for our newer clients coming on board at this point in time. This a trend that we have found in the industry. And it is something that we have to live with, I think, over a period of time. And that's why ramps are so important to understand. And that those a part of the reason that causes lumpiness in our business.

And I guess again, consistent with what you said historically about the margins and the ranges is pretty much consistent with where you have been. But, at least visa vi where you are right now. Where do those incremental dollars get spent? And where should we expect to see that show up as the margins track back down to some your target range of 10 to 12%?

As Rohit mentioned, our intent is to continue to reinvest in our front end. It is something that we have always said, right through our road show and in previous discussions. It's an area that really requires focus by us, and there will be a fair amount of re-investment that will go into our front end.

In addition to that, we believe management development is extremely key area for us. Particularly for career development, as well as retention. And a fair amount of our dollars should go into that particular area. So, between the two, I believe we will be re-investing some of the margin appreciation we have seen. Such that we have much greater, long term strategic growth, which is very important in this industry.

Thanks. Just one question, Rohit, in terms of the number of customers over 10%. Can you just remind us how many and if you can , disclose who they are.

Sure David, one second, just bear with me. David, the customers which are greater than 10% for us, will be primarily three customers. And they are, American Express, British Gas and Weaver. And in terms of the order, it's the reverse order, Weaver is our largest client relationship, British Gas - Centrica, has now become our second largest client relationship and American Express would be our third largest.

Great, thanks very much and congratulations.

Thanks

The next question comes from Alan Hallawell of Lehman Brothers.

Good morning gentleman, this [Varan Bhokchi] on behalf of Alan Hallawell. Congrats on the wonderful result. My question is particularly regarding the acquisition of Inductis, I see much traction on the down streaming of revenues you have mentioned the two cross sellings which have occurred from Inductis. So, if you could just give me some color on that, and how you're using Inductis to diversify the newer verticals and newer geographies.

Sure. And thanks for your good comments on the performance for the third quarter. For us, the Inductis acquisition has only been in place for the last four and a half months. It is still early days for us. We have had success in two specific client situations. Where the client has chosen to use the services of Inductis along with the capabilities that EXL provides.

Our expectation is that this will build out gradually, and over a much longer down period. The integration with Inductis was done with a strategic intent of being able to offer much greater value to our customers by combining analytical capabilities of both creating analytical business models and creating analytical servicing services along with the process servicing capability that we have.

And our expectation is that this will payout over a one to three year time frame as opposed to paying out immediately. So, it's unlikely that it will result in increase in our revenue on a quarterly or an annual basis, but more likely to give us strategic benefit over a longer term period.

Ok, thanks a lot. And, are you kind of trying to use Inductis to diversify into newer verticals and geographies. Because, BFSI geo - vertical which accounts for an [inaudible] of their revenue. So, is that a kind of game plan for you?

If take a look at revenues of Inductis, they too are heavily skewed towards banking, financial services and insurance clients. And therefore, there is a great similarity of focus as well as fit between the two organizations. There are some situations where they deal with clients in an different verticals, and we will be looking at cross-sell opportunities both ways, for us to be able to cross-sell some of our BPO and risk advisory services to the clients of Inductis. And visa versa for Inductis to cross-sell into some of our client base as well.

Okay, thanks a lot for this.

There seems to be no further questions at this time, I'll turn it over to management for closing remarks.

Thank you, very much. Let me just in closing thank all of you to join us so early in the morning. And, look forward to our next call in about three months. And thank you very much again for all your support and help. Have a nice day.

This concludes today's EXLService conference call, you may now disconnect