Exlservice Holdings Inc (EXLS) 2006 Q4 法說會逐字稿

Good morning. My name is Sharona and I will be your conference operator today. At this time I would like to welcome everyone to the EXLService fourth quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. [operator instructions].

It is now my pleasure to turn this over your host, Mr. Jarrod Yahes, Head of Investor Relations. Sir, you may begin your conference.

Thank you, operator, and thanks everyone for joining us today on the fourth quarter 2006 announcement for EXL. Joining us this morning from India are Vikram Talwar, our Vice Chairman and Chief Executive Officer; Rohit Kapoor, our President and Chief Financial Officer, who will take us through the earnings numbers and answer your questions today; we're also happy to be joined by Matt Appel, Vice President and CFO designate of EXL, who's in India today with both Vikram and Rohit.

We hope you've had an opportunity to review the news release we issued a short while ago, as well as the PowerPoint 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. Vikram is first going to begin with an overview of our results and our operational performance. Rohit will then take you through the financial details and provide an outlook for the year 2007 and then close the presentation before we take questions.

Some of the matters we will 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 to differ materially from those expressed 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, discussed in the company's period reports, and other documents filed with the Securities and Exchange Commission from time to time. EXL assumes no obligations to update the information presented on this conference call. During our call today we may reference certain non-GAAP financial measures which we believe provide useful information for investors and you can find reconciliation of those measures to GAAP on our press release.

So now let me turn the call over to Vikram Talwar, CEO and Vice Chairman of EXL. Go ahead, Vikram.

Thank you, Jarrod, and good morning to every one. We are very pleased to note that this has been a successful quarter for EXL not only financially, but also in terms of executing our business plan of making strategic investments for long term growth and success in an exciting marketplace. Let me just give you a snapshot of the strong business performance we delivered in the quarter.

We delivered record quarterly revenues of $39.3 million. We executed our profit outlook both at the gross margin and operating margin levels by a significant margin. Our results were driving by continued strong performance across all three of our business lines, EPO, research and analytics, and risk and advisory services, and continued growth in our existing client base.

To highlight this, our top five clients grew by 11% sequentially this quarter. Growth in our existing clients is an indicator of client satisfaction and our operations delivery capabilities. Of note, we added 7 new processes in total for a leading mortgage company and two global insurance clients.

I am most pleased that while expanding our client relationships and delivering financially during the quarter, we continue to focus on expanding our leadership team and our strategic objectives. We hired Matt Appel to become our Chief Financial Officer. Matt has over 30 years of experience in finance and business process outsourcing and was most recently Vice President, BPO Product Management at EDS. Previously, Matt was the SVP of FMA/BPO at ACS and has had progressive roles as Director of Internal Audit, Treasurer, and Controller for Newport News Shipbuilding. Matthew is a CPA and has worked as a public accountant for 7 years with Arthur Andersen.

Some of the key areas we expect Matt to add strategic value to EXL include strategic investment for our activation and planned development, internal and external financial reporting, enhancing the scalability of our back end systems, and enhancement of our merger and acquisition integration capabilities.

We also brought on Sridhar Kadaba as Vice President, Risk Advisory Services. Sridhar was a Principal within the Financial Service practice at Ernst & Young and Partner in the Financial Services division of Unisys Corporation. Sridhar will help us further expand our service offering and mentor and grow our talent pool in the Risk Advisory Services group.

Our pipeline of new business from new clients also looks attractive. The insurance industry is particularly active in both the life and P&C areas, which are looking aggressively at off-shoring. EXL, as a leader in the insurance space is poised to continue to benefit from this trend. Our domain focus is paying off and this quarter we continue to see interest from new and existing clients for our research and analytics business clients, particularly within the financial services and insurance space.

The integration with Inductis continues to proceed well and we are starting to see real attraction in terms of client cross sell as we execute an integrated go to market strategy, combining BPO with analytical and transformational capabilities.

We added several new analytics and consulting clients including a large personal auto insurer, a large outsourcer of retail credit card operations, and a top five U.S. bank. We are also doing some outsourcing [files] that are high on the complexity spectrum. We also signed a definitive agreement for the leading U.S. insurance company to provide a range of BPO services. We expect this to wrap up in mid-2007.

On the people front, we continue to expand the EXL family and added approximately 300 new professionals to our business during the quarter. We are now approximately 8200 people strong, and increase of 49% over the same quarter in 2005. Our division, however, inched up during the quarter to 41.9% from 39.8% last quarter, but significantly gone down to 38.8% for calendar year 2006 from 54 -- 5.4% for the calendar year 2005.

We believe that our continued investment in employee retention, training, and development of people will drive attrition down in the coming year. Of note, we have appointed one of our senior operations vice presidents as a fully dedicated head of BPO human resources. He is specifically focused of making strategic investments in our people processes and in combating attrition.

Lastly, the senior management team has gone through the process of restating EXL's strategic vision and identifying its priorities for 2007 and 2008. These are investing in the training and development of our people, especially our middle and senior management. This will allow them to grow and develop their careers within the organization and make EXL one of the best places in the industry to build a long term career. Further enhance our domain and profit capability by investing in specialized offering and highly qualified subject matter experts. Thirdly, investing in front end sales and marketing infrastructure and expanding our client relationships management crew. Fourthly, selectively pursuing acquisitions to compliment organic growth. And lastly expanding our geographical footprint.

Our priorities are driven by our vision for the future, a vision that states that EXL will provide a competitive edge to its clients by transforming and outsourcing their business processes.

Now let me pass you over to Rohit who will provide more detail on our financial performance and guidance. Rohit?

Thanks, Vikram, and good morning everyone. This is Rohit, I'm the President and CFO of EXL. Let me take you through the income statement and provide some detail behind the numbers for the quarter.

Revenues for the fourth quarter ended December 31, 2006 increased to $39.3 million, up 97% from $20 million from the quarter ending December 31, 2005. Revenue on a sequential basis increased 10% in the quarter ending December 31, 2006 from $35.7 million in the quarter ending September 30, 2006.

Within EXL's business line segments in terms of revenue, BPO accounted for $29.4 million, or 75% of total revenues in the fourth quarter. Research and analytics contributed $7.2 million, or approximately 18% of total revenues. And risk advisory services contributed $2.7 million, or approximately 7% 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 up of processes for existing clients resulting in revenues being ahead of plan. Our research and analytic services continue to be well received by EXL's client base. We also had one of our top three research and analytic clients significantly step up their work with us in quarter four.

EXL's risk advisory services had an excellent quarter, with progression in several key client relationships due to which it successfully mitigated the seasonal downturn that we had seen historically for the fourth quarter. We have also successfully mitigated the seasonality of this business by expanding our base of service offerings and decreasing our reliance on SOX-related work. However, please note that the month of both our research and analytics, as well as risk advisory services, is largely based on discretionary spending and a downturn could have a negative impact on these businesses.

From a gross margin perspective, the gross margin for the quarter ending December 31, 2006 was 42.9%, as compared to 37.5% in the quarter ending December 31, 2005,and 39.7% in the third quarter ending September 30, 2006. Gross margins expanded primarily as a result of several factors that may not be expected to continue going forward, or maybe non-recurring in nature, including a favorable foreign exchange rate environment, unexpected strength of the risk advisory services business during the historically slow fourth quarter, higher utilization of our existing physical infrastructure, and an increase in project based business in our research and analytics business.

We would like to note that as we add on to our infrastructure and commission center six in the first quarter of 2007, and incur expenses appropriated with training and ramp up, our gross margin profitability will be negatively impacted.

Adjusted operating margin for the quarter, excluding the impact of stock compensation expense and amortization of intangibles, was 19.7% for the quarter ending December 31, 2006, compared to 10.6% in the quarter ending December 31, 2005, and 15.7% in the quarter ending September 30, 2006.

We expect that our SG&A expenses will increase significantly as we continue to add on to our sales and marketing and client relationship managers, as well as by filling key U.S. based leadership positions, such as the CFO, which we have now filled, Head of Relationship Management, and our industry domain and functional experts in insurance, banking, and finance and accounting. Our SG&A expenses also positively benefited this quarter from a voluntary bonus reduction of $600,000 pertaining to select senior individuals in the R&A business line.

At the time of the acquisition of Inductis we set a target of 10% operating margins for that business in 2006 and provided the flexibility to adjust compensation for certain female individuals to allow them to make that target while continuing to grow the revenue.

Our tax provision increased substantially to an extent of $1.7 million for the quarter. The increase is primarily the result of an increase in income attributable to our U.S. entities on account of intra-company foreign exchange gain, interest on higher cash balances after our public offering, and a reduction in interest expense of our debt. We would expect to see continued volatility in our effective tax rate on a quarter to quarter basis, depending on the income contribution of each business line and each legal entity. We would expect an estimated effective tax rate of between 15% to 20% for the next couple of years. We are also going to be impacted by the recent tax regulations in India. We have not yet completed our review of this and are still determining the impact on our effective tax rate going forward.

Now let's go to our business outlook for the full year 2007. We expect revenues of between $160 to $170 million for the calendar year ending December 31, 2007, and expect adjusted operating income before stock compensation expense and amortization of intangibles to be 12% of revenues. Historically, the first quarter of the year is seasonally our weakest quarter. We would therefore expect the revenues to come down slightly from Q4 2006 on a sequential basis.

While EXL did achieve 19.7% adjusted operating margin in the fourth quarter, this was the result of several factors that should not be expected to continue going forward. Our margins will be impacted on account of our infrastructure build out, our continued investment in business development, client relationship management function, and hiring of senior leadership.

We also expect stock compensation expense in 2007 to increase from our current run rate on account of ongoing annual performance stock option grants and based on the stock price of the company.

In summary, we intend to focus on building the business for long-term success. We are confident of meeting our short-term projections, even as we execute on investing in key strategic priorities. We believe that this approach will allow us to position the company in a manner that can best capitalize on the vast and exciting opportunities that EXL has in front of it today.

Now, I will open the floor for questions.

[Operator Instructions] Our first question comes from Ashwin Shirvaikar from Citigroup.

Hi, congratulations on the quarter. The question is, it's the second time in a row that you indicated that margins have exceeded, due to your short-cycle businesses. Structural factors that affect the demand side; what do you see that might impact the short-cycle businesses and cause them to not perform like they have in the last two quarters?

Ashwin, this is Rohit and I'll address the question. Firstly, thank you so much for congratulating us.

In response to your question, the answer from our perspective is slightly difficult to respond to because some of the project based businesses that we have are very difficult to predict with long term visibility. In general, if you take a look at our business, the third quarter is normally our seasonally strongest quarter, and quarter one is seasonally our weakest quarter. It so happened that in the fourth quarter of this year we actually had strong revenue growth across all three business lines and it was not only the revenue growth that was strong, the profitability of the business was also exceptionally strong.

Going forward, the risk really is if the project based nature of our business on the risk advisory services side and research and analytics -- if that revenue stream is impacted it will impact our overall revenues and the profitability, and unfortunately it is very difficult for us to be able to predict when or how that will happen, and a large portion of this is really discretionary spending.

The effort from the company side is to diversify its client base, as well as to diversify the number of service offerings that we have within each one of these business lines. And as we do that and scale up our operations, we believe that we will be able to diminish the volatility associated with these business lines.

We are also very careful in terms of managing our portfolio with a complimentary mix of an annuity revenue stream on the BPO side, along with the project based revenue streams that we have on research and analytics, as well as the risk advisory business.

Okay, but do you currently see any factors that would actually cause the risk advisory business or the analytics business to not perform well in the first quarter and second quarter? What is the impact of seasonality there? If you could quantify it.

If there is a severe economic downturn in the U.S. economy, or in the European economies, it think that will have an impact on the discretionary spending of some of our clients, particularly within the research and analytical business lines. However, the contra-factor to that is that some of these clients will also be looking at saving and cutting back on their costs, and therefore will be looking at increased activity on the BPO side as well as in terms of working with us on certain projects that will allow them to optimize their back end operations.

So it really depends from a client-to-client situation, but the broadest indication is perhaps if there is a general economic downturn, that could have an impact on the discretionary spending.

Okay. Just to switch gears a bit; could you talk about the actual economic cost application? What is the cost of it; and is that an economic cost or is it a cost in terms of quality? If you could talk about that.

Ashwin, as you are aware, the economic cost of attrition is in our minds somewhat understating total cost of attrition. In general, the cost of attrition is to be able to invest the time and effort for recruitment as well as for training individuals to get up to the same levels of productivity and process efficiency as experienced associates. Depending upon the process complexity, with training times being anywhere from 4 weeks to 6 months in some cases, the cost of partition, depending on the complexity of the process, could be quite different.

The real impact to us really is by virtue of customer satisfaction and client satisfaction and our ability to scale up our operations. Clearly, if we have a very attrition rate, then scaling up the organization becomes an even more challenging task, and that I think is a much more complete view of the cost of attrition.

Okay. And last question, if I may, the cause for the occasion always the same as one of your competitors stated, which was in Pune; you had three captive come up. Is that the cause of it?

Hi, Ashwin, this is Vikram here. The change in our attrition rate was marginal compared to the other example you just gave. The reasons here are, it's very difficult in this business to really pinpoint an exact reason. The fact that there are captives, or the fact that somebody came and raided you, in my opinion, is not really something that you can pinpoint down to the last reason for why attrition takes place and when it takes place. A 2% swing this way or that way, or a little less than that, will be had, is something that's going to happen from time to time. There are several reasons. There are seasonal reasons; there are reasons relating to personal issues, and I think it's very, very difficult for us here to sit down and pinpoint one or two or three specific reasons why this happens. You could very well see a downturn in that attrition rate by a couple of percentage points here and there. I think the key is, over the year, w have seen a dramatic reduction in attrition rate; I think I mentioned a number close to -- 55%, down to roughly 38%, 39%, and that is really the trend you should be looking at, and not merely monthly or quarterly shifts. And again, it isn't a significant shift in our case.

Okay, great. Thank you.

Our next question's coming from David Grossman from Thomas Weisel Partners.

Thanks. Rohit, you went through in your prepared comments about the seasonality and some of the unexpected strengths in the professional services business in the fourth quarter, and I'm wondering if you can talk a little bit about both the analytics business and the risk advisory business. On the research side, if you could talk a little bit about what kind of traction you're getting in terms of selling those services to your existing base, and what kind of visibility you have in the pipeline going into the first half of the year; and secondly, how much of the fourth quarter performance in the advisory business was really a function of new services that, again, that will be available in the first half of the year that may help you mitigate some of the seasonal trends that you have historically seen.

Sure. David, for us, the two business lines actually behave somewhat differently. The risk advisory services business line normally would have a component of SOX work that we would do for our clients, which typically would be approximately 60% of the total amount of work that we do in the risk advisory services business line. And the SOX business line is actually the part that causes the seasonal volatility as far as that business line is concerned.

We have been able to diversify into other services and businesses, where we are helping client carry out internal audit functions. We are helping them conduct high end accounting and reconciliation functions as well as providing them with support and advice on financial planning. As we expand these services the seasonality for this business line will come down, and as we expand our client base for this particular business line, again, our ability to manage the seasonality will be a lot better.

The research and analytics business line typically is discretionary spending and it doesn't really have a seasonality to it, but it can have spending from our clients linked to their budgetary cycles; and depending upon how they are performing, vis a vis their plans and their internal budgets, they would have availability of funding to be able to engage in these projects.

I think the most positive factor that we take away from the research and analytics business is just like what we had planned when we acquired Inductis, the integration of Inductis within EXL is actually proceeding extremely well and it's not only the internal integration, but also the integration vis a vie our customers is playing out extremely well. So today we have a number of situations where existing EXL customers are embracing the skill set and the capabilities and the services of our research and analytics business line and getting started with small pilots and working on these issues and problems that Inductis is solving for them. We think that there is a huge opportunity for us to be able to combine the analytical capability along with EXL's processing capability and provide significant value to the customer, and we are seeing good traction in that direction.

Can you give us a few metrics on the research business in terms of number of new clients and perhaps give us a sense for how the utilization rate is trended over the last three months?

The research and analytics business added 4 new clients in the fourth quarter of 2006. It has also gotten started with a couple of existing clients which have started out with pilot projects with them and we hope to be able to continue to build that forward as we build up this alignment between the two businesses. For the research and analytics business line the fourth quarter was a high -- from a revenue standpoint did about $7.2 million of revenue in Q4. And for us, an initial engagement could be a relatively small engagement, but over a period of time as we build out our relationships with our customers that could expand quite significantly.

And in terms of utilization rate, can you give us qualitative stats at least of how that trended sequentially and how it's trending in the first quarter?

David, the utilization rate is something which we have not shared and at this moment we're not providing that to the outside world. It is something which we are actually working on in terms of defining that metric internally, validating that, and then we'll be in a position to share that with you.

Okay. And actually I was wondering if you could talk a little bit just in general about the pipeline, and perhaps you could differentiate between what's happening in the insurance vertical, compared to what may be happening in some of the other verticals that you're starting to develop.

The insurance vertical is clearly an industry which has been lagging behind banking and financial services in terms of its adoption rate of off-shoring processes. However, in the last 6 to 12 months we are actually seeing increased traction amongst insurance carriers, particularly within P&C carriers in the U.S. which are using a good financial year that they have enjoyed because of 2006 having very few catastrophic losses, and they're using their strong financial position to actually invest in terms of building up the off-shoring capability and the partnerships with service providers such as EXL. We do believe, however, that this will be a gradual process. However, given the fact that most insurance carriers do not really have an international footprint, most of these carriers are likely to adopt third party service providers as their partners in their off-shoring strategy.

We are also seeing an increased amount of traction in the mortgage industry and that's another sweet spot for us as we service a number of processes for a number of client relationships within the mortgage industry. And, lastly, we are seeing traction on finance and accounting related processes which are increasingly being moved to India, and again, EXL is well positioned to participate in this.

From a pipeline perspective, the pipeline is very active. It is becoming much broader and we are also moving up into the final rounds with many of our prospects and we would expect that -- as is normal in previous years -- that over the next 3 to 6 months we would be closing on significant relationships.

And just one last related question here, how much visibility do you have right now on your $160 to $170 million revenue guidance for '07?

The revenue guidance, David, that we have provided you has a very high level of visibility and it essentially factors in all of our existing clients and the ramp ups associated with our existing clients and very little of our new client revenue. So you have a high level of confidence in that number and the visibility is very strong.

Okay, very good. Thank you.

Our next question is coming from Julio Quinteros from Goldman Sachs.

Hi, thanks. This is Vincent, sitting in for Julio. I guess our first question is regarding -- you mentioned that one of your three research analytic clients stepped up significantly during the quarter, and just wondering how much, in terms of revenue and profitability, and what's your expectation in terms of client contributions from that client going forward?

With the research and analytics client we have not provided a break up of that, but clearly that client relationship is also one of our top three client relationships for the overall company. It's a relationship that Inductis has had for over 6 years and it's a very broad based relationship that we have with this client. We continue to work with them and build out several different processes and projects for them, and the quarterly spending or the monthly spending by this client really depends on each project that we undertake from them. There was a bunching up of projects that took place with this client relationship towards the end of the fourth quarter, and that's why you see the increase in revenue from this client relationship in Q4.

Okay. So is it reasonable to assume that the quarterly contribution next quarter is expected to drop, versus this quarter?

Yes. Because of some of these projects were bunched up in the fourth quarter, it is reasonable to expect that that would come off in Q1.

Okay, great. And then secondly, attrition; could you comment now, do you know how attrition has been trending during the March quarter?

Hi, this is Vikram. The trending is approximately the same levels as we have seen over the previous quarter and it's basically flat.

Okay. And then I just wanted to get a little bit more color on the expected margin and revenue decline in Q1 and given all of the various factors that contributed to your out performance in Q4, just trying to think what are the quarter over quarter decline in the March quarter. Should we expect it to be -- the magnitude in decline to be more -- to be larger, if you will, over previous years, just given the various factors that you sited in our remarks?

The way I would characterize it is that there are ramp ups that are taking place on existing clients. There is, as we had mentioned before, we have signed up a large insurance carrier and we are beginning to do the engagement on that carrier in Q1, and therefore the revenue associated with that also kicks in Q1. So I think you would expect to see a stronger revenue sequentially on the BPO line of business and you would see moderated revenue from the risk advisory services and the research and analytics business line.

Got it. And then finally a housekeeping question. What's your expectation in terms of stock compensation expense in '07?

This, again, it's difficult to provide specific guidance on the stock compensation expense for 2007, but in general our stock compensation expense is trending up particularly as the stock price of the company keeps going up and we have to issue stock options with a strike price, which is the same as the market price of the company stock.

In terms of the number of options at the time of us doing a public offering, we had kept aside a certain number of stock options for a 3 year period. We believe that we will be able to allocate these stock options over the 3 years as we had planned, and therefore there is no increase in the number of stock options that we would anticipate issuing out over the 3 year period. But it's really the volatility of the stock price and the stock price itself which will determine this charge and that could go up or go down depending on how the stock price moves.

Okay. Got it. Thanks.

Our next question is coming from Edward Caso from Wachovia Securities.

Good morning. Ed Caso, Wachovia. Could you talk a little bit about -- I'm sorry if I missed it -- your cash flow from operations, your free cash flow from both the quarter, the year, and maybe some outlook for 2007?

Sure. We've provided the cash flow statement. We will provide that in our 10-K filing. In general the cash flow provided by our operating activities was $20 million. We used up $12 million in terms of capital expenditure and the acquisition of Inductis, and the net cash addition for the year included the public offering, so as you know we raised close to about $70 million net of the industry bank commission, which added to the cash flow of the company.

So from operating activities, the cash that was added was $8 million, and in addition to that we had an additional $70 million from the IPO and after paying down the preferred and the debt of $12 million, we added about close to $58 million of cash for the balance sheet.

The cash position of the company at the end of the year is $85 million, and we think that that's significant liquidity for the company which we have net gained.

Any sense on cash from operations in 2007 and what your capital needs will be?

Our capital needs for 2007 are expected to be similar as what we have spent in 2006. The one big difference which is there is if we considering purchasing some of the real estate for the facilities which we currently lease out, then that number could change. In 2006 we did invest $3.5 million and we bought out one of our centers in Pune, and it is likely that in 2007 we will also go ahead and make investments and purchase the real estate that we currently lease, and that will have a significant impact on the cash flow.

Talk a little bit about the Aviva situation, what the timing of that will be as far as impacting revenue and margin.

Hi, Ed, this is Vikram. As far as our information goes, there has been no particular change from what we reported in the last quarter, which is the expectation is that in early 2008 we anticipate that they will execute or implement the option of the transfer of the Pune facility. As you know, in our case, the BOT is only on the Pune facility and not on the overall relationship which includes the Noida business, which is on a third-party basis.

The revenue impact as we had stated then would be about half of what we generally get from Aviva because the business is somewhat equally split between the two locations at this point in time. At the end of the fourth quarter, Aviva represented roughly about 27% of our revenue during the quarter.

Last question. The DSO's, what were the in the quarter?

DSO's are roughly 60 days and it's generally been fairly steady at that level.

Thank you.

Our next question is coming from Mitali Ghosh.

Congrats on a very good quarter. My first question is to try and understand the revenue guidance that you have given for this year. If you could help us understand what the mix of business was for this year, in terms of your three business lines, and what is the kind of assumption in your revenue guidance of this year?

Mitali, when you refer to this year, are you talking about 2007?

So what the revenue mix by business line was in 2006, and what is the assumption that you have for 2007 guidance?

We actually do not break out the revenue by business line and provide that. I general we manage these businesses both on an independent basis as well as with joint revenue targets across the product line for a single client relationship, and that's the reason why it's difficult to provide that to you.

For 2006 it's somewhat easier to provide you with a little bit more detail and color. In 2006 the break up of the revenue, as well as between each one of those business lines was such that in the fourth quarter of 2006 each of our business lines ended up exceeding the internal plan that we had for the business line, and therefore there was trend in all three business lines.

Am I to understand that the 75%, 18%, and 7% that you mentioned for BPO research and risk advisory -- is that the similar mix that you had for CY06?

Yes. It's not for the calendar year '06, it's for Q4 '06 because Inductis only became part of EXL on July of 2006. So it's not for CY06, but it's true for the third and fourth quarter.

Sure. So I guess the reason I'm asking this question is to try and understand what is the visibility on your calendar '07 guidance to the extent -- should we expect your research and analytics and risk advisory to maybe move up because those tend to be a little more project-based and [invisibility] would be lower, so that's the only reason for the question.

In general we would expect all three business lines to grow at the same pace, and therefore we would not expect any real change between each one of our business lines, so we would expect 75% approximately to be contributed by BPO, and the balance 25% to be contributed by risk advisory and research and analytics.

Okay. Second thing is on your margin guidance that you have given, just trying to understand what would be the kind of assumptions in terms of your SG&A spent, where you expect that to trend to? And why you don't comment on a number on utilization, if you could give us something in terms of -- where is the scope of surprise in both those two assumptions?

On the SG&A, as we've said, the one area we will continue to invest in is sales and marketing and client relationship management. Currently the total strength of professionals that we have in the U.S. and U.K. is 15 and we want to take that number up very significantly, almost doubling that number in size by the end of 2007. So that's going to be a fairly significant expense as all of these resources are based in the U.S. or the U.K. We also will be making an investment in a Head of Relationship Management and we will be making investments in domain experts within insurance, banking, and finance and accounting.

So that's actually going to take up our SG&A expense quite significantly and we hope that the operating leverage that we gain as we build and grow the organization, we will be able to reinvest a large portion of that operating leverage into funding for these resources.

So your G&A expense, I mean, which is I think roughly around 14% of sales, where do you think that can eventually go to on a steady state kind of basis?

I think it's the sales and marketing expenses -- if you take a look at calendar year 2006 currently it's at 4%. We think that that number can expand to 6% to 8%. The G&A expense, which is 14% will stay at similar levels, or maybe 100 to 200 basis points higher.

Okay, thanks. And finally, just a last question on the proposed tax charges in the budget in Pakistan and India, in terms of the fringe benefit tax that has been proposed on stock options, what kind of -- at least conceptually -- what is the kind of impact it could have assuming it is maybe just on options issued this year?

Mitali, this is Vikram here. We've really looked at this and talked to a lot of people and I think the true answer to that is nobody really knows what's going to happen on this. There is a lot of discussion within the industry, with people in the industry, experts, etc., as to whether or not this expense was really meant to be paid by the employer; there's some conversation with regard to that. What this will ultimately end up being, whether foreign issuaries of stock will be covered under this or not, it's not clear. And if I may quote the finance minister in a recent discussion that I heard him make, he said, "Nothing is really being said today about this and it would best be for all companies to wait for the guidelines." So I think it's best that we wait for the guidelines and not jump the gun on estimating any such expense at this point.

Okay. Thank you very much.

[operator instructions] I will now turn the floor back over to management for any closing remarks.

I just wanted to thank everybody for joining us today and for your very good questions. We will be available for further discussions as you require. Thank you for joining us at this early hour.

Thank you.

This concludes today's EXLService fourth quarter 2006 earnings conference. You may now disconnect.