Exlservice Holdings Inc (EXLS) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 ExlService Earnings Conference Call. My name is Grace Ann and I will be your coordinator for today. (OPERATOR INSTRUCTIONS.) I would now like to turn the presentation over to your host for today's conference, Mr. Jarrod Yahes, Head of Investor Relations and Corporate Development. Please proceed, sir.

Thank you, Operator, and thanks, everyone for joining us today on EXL's Third Quarter 2007 Earnings Announcement. Joining us today are Vikram Talwar, our Vice Chairman and Chief Executive Officer, Rohit Kapoor, our President and Chief Operating Officer, and Matt Appel, EXL's Chief Financial Officer.

We hope you've had an opportunity to review the news release we issued this morning, as well as the PowerPoint presentation that is available for review on EXL's website in the Investor Relations section. Let me quickly outline the agenda for today's call. Vikram will first begin with an overview of the third quarter, including specifics on some of our new client wins and the investments we've made recently in the front end of our business. Rohit is then going to talk about some of the operational highlights we've had during the quarter, including a discussion of our success in workforce management and our international expansion. And Matt will then take you through the financial details and provide the revised outlook for the year 2007, and then close the presentation before we go on to take questions.

As a reminder, 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 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 periodic reports, and other documents filed with the Securities and Exchange Commission from time to time.

EXL assumes no obligation 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 reconciliations of those measures to GAAP on the press release itself. So now, let me turn the call over to Vikram, Vice Chairman and CEO of EXL. Vikram?

Thank you, Jarrod, and good morning to everyone. We are very pleased to report that the third quarter 2007 performance was above our expectations and the business continued to demonstrate strong growth trends and operational performance. We delivered revenues of $46.6 million in the third quarter, which represents growth of 8.4% from the preceding quarter. The continuation of our rapid revenue growth was driven by very strong performance in BPO. The BPO business grew 46% year-over-year and 7.5% sequentially. The advisory business line also posted strong results and as expected the research and analytics business line turned the fourth quarter this year with growth of 23% on a sequential basis to $5.3 million.

This quarter I will touch on two themes that are in sharp focus as we plan EXL's growth into 2008 and beyond -- new client acquisition and the investments we are making in our sales and marketing and strategic account management functions.

In terms of new BPO client wins, we continued our industry leadership in the insurance vertical. Last quarter, we discussed the strength of the insurance pipeline. This quarter we are pleased to report that we have added a new leading U.S. insurance company as a BPO client and there are two other insurance companies that we expect to close shortly.

Our strategic focus on the insurance industry is continuing to pay off and today we are the clear leader in property and casualty and life insurance BPO in both quality, [referenceability] of our client base, diversity and complexity of our insurance processes and the breadth of capabilities we offer to the industry. EXL offers unique transformation capabilities to the insurance industry that facilitates their efforts to improve their processes whether they outsource or offshore them to EXL or leverage our transformation capabilities.

Within the banking, financial services, and insurance sector, our focus continues to be insurance. As a reminder, insurance represents just under half of EXL's revenues and we now have over 15 insurance clients. During the third quarter, we also added a leading U.S. investment bank as a finance and accounting client in what we believe will be a key long term relationship for EXL.

All of the above-mentioned wins have the ability to become strategic clients of more than $5 million of annuity revenue over the course of the next several years. Furthermore, as we widen our lead in the insurance and banking verticals, we continue to demonstrate success in new industry vertical penetration. On the heels of our win in 2006 with British Gas, and the recent finance and accounting signing with a Fortune 500 transportation and logistics provider that we announced last quarter, we are pleased to announce that we have established a significant new client relationship in the telecom vertical.

While at this stage the work is primarily voice-based, we believe that we will see strong growth opportunities going forward to provide a suite of back office and analytical services encompassing the full range of our service offerings over time. While historically the telecom sector has progressively outsourced customer service, going forward we expect there to be significant opportunities to provide back office and analytics functions that are mainly in-house at the major telecom companies, and we believe we are well positioned to capitalize on this opportunity.

It is worth mentioning a few words on the current pricing environment. EXL continues to be extremely disciplined when it comes to pricing. In today's global economic environment, we believe there is a broad understanding that the cost of imports are increasing in India, and that this is the result of both wage inflation and the appreciation of the Indian Rupee. As a result, we have been successful in introducing annual price increases and currency protection in our recent contracts that are priced to significant changes in cost factors.

These changes protect both parties, our margins are effectively hedged, while our customers can expect benefits of a long-term stable relationship. We believe that this is a healthy partnership perspective for clients and offshore providers. While we are pleased with our current growth and the momentum we have created in the market, we continue to focus aggressively building the front-end of our organization, both in terms of strategic account management and sales and marketing.

Within our strategic account management function this quarter, we added Andrew Gibson, a senior subject matter expert in insurance. Andy brings over 23 years of experience in the insurance field and was most recently the head of HCL's North America insurance practice. We welcome Andy to the team with the expectation that he will make a significant contribution to our efforts to bring transformation of outsourcing solutions that add value to our strategic clients.

On the sales and marketing front, we continue to execute well on our vision to enable the engine for new client acquisition. During the third quarter, we welcomed Krishna Nacha to EXL as the Chief Sales and Marketing Officer. Krishna has a strong industry background and is a welcome addition to the team. As we execute on our plan to invest in sales and marketing, our spend has increased from approximately 4.5% of sales last year to 5.5% during the third quarter of 2007. We intend to continue to invest as we scale our front end to our vertical expansion into 2008.

I would like to end with a few comments about our relationship with Aviva and our exposure in the mortgage industry. As you know, EXL has a strong relationship with Aviva since 2003 and today we are the largest provider of BPO services to Aviva. Investors are also aware that one of the two contracts EXL has with Aviva is a build/operate transfer contract that provides Aviva the option to take their tooling operations back in-house. This option was previously available to Aviva as of January 2008 with a six-month notice period. On September 10, EXL modified its agreement with Aviva to push back the exercise date for the BOT to April 2008 and also to shorten the notice period Aviva is required to give EXL to three months.

There has been a great deal of speculation recently regarding Aviva's plans and its future BPO strategy. But there has been no public statement by Aviva on its definitive decision. Due to strict confidentiality requirements between the parties we are unable to provide any further details or comments on any speculation as to what options Aviva may or may not be considering at this time. Furthermore, we are also unable to provide an estimate as to when we may have additional information to provide. Please be assured that we will report on the subject as soon as it is appropriate to do so. And in the meantime, we will have no further comment on this subject.

With respect to the mortgage industry, as you know, this industry continues to experience significant duress in an unprecedented market environment. EXL has two clients in the mortgage industry that comprise approximately 7% of our revenue. IndyMac Bank is the largest at approximately 5% of our total revenues. We have a great relationship with IndyMac and believe that they have a well run business model that leverages offshoring. We will continue our transparent reporting on the subject when and if there is a material change.

If you have any questions about IndyMac's business and outlook, we suggest you speak directly with them as they are naturally the best source of such information.

Now, let me pass it over to Rohit to comment on our operations for the quarter.

Thank you, Vikram. I am going to highlight four critical areas of business performance for the quarter. These include our strong operational delivery across all three business lines, progress in our research and analytics business, our efforts in talent management, and the implementation of our strategy on international expansions. Historically, EXL has had a very strong operational delivery capability. This capability has been institutionalized within EXL based on the vigorous implementation of highly disciplined and mature operating processes as well as the use of proprietary tools and methodologies.

During the third quarter, EXL continued to successfully execute and deliver superior levels of service quality across all three business lines. With the addition of a new plant operation in the telecom vertical, we have now been able to seamlessly manage operations across three geographic locations in India - Noida, Pune, and Gurgaon. The results of our most recent semi-annual customer satisfaction survey reflects a significant step up in our scores and provides us with the confidence that we can continue to grow our business at a rapid pace. Our BPO business continues to scale very well and the risk advisory business has now expanded into Europe and has minimal seasonality.

As we discussed last quarter, the second quarter was considered to be the low point for our research and analytics business and we expect it to gain significant traction in the second half of 2007. I am pleased to report that the third quarter was quite strong for the research and analytics business, as it posted revenues up 23% sequentially and had a corresponding return to more normalized margins. The increased volumes are broad based and are a combination of increased business from existing accounts, winning new accounts, and successfully cross-selling to existing EXL accounts.

This has resulted in a significant diversification of customer concentration in this business. We are also particularly encouraged by our ability to attract research and analytics business that is contracted and longer term in nature as compared to traditional project based work.

While this shift will take some more time to fully play out, it will enable this business to grow and scale along with the BPO business over the longer term. Also, we have made key structural and management changes to facilitate growth of the R&A business and refined our focus on select offerings. Our efforts to provide integrated, transformational, and outsourcing services will be key to delivering enhanced value to our clients and to create a differentiated competitive positioning.

During the third quarter, EXL continued to invest in building robust HR practices within the organization. Our investments in training, management development, and career-pathing for our employees are starting to bear fruit. We are very pleased to report that our attrition has improved again this quarter for the second quarter in a row to 39%, a 3% improvement from the second quarter and a 5% improvement from the first quarter.

While we view this 5% reduction in attrition over two quarters as a strong positive trend, we continue to focus our efforts on the longer term development of talent within the organization. This will be achieved through a more proactive balanced management initiative, continued investment in leadership and functional skills training, and the implementation of rigorous HR practices. This quarter we made key management additions to our corporate HR team and our compensation and benefits group. We believe it will be critical to continue to groom talent within the organization and to attract new talent to scale up the organization.

During the third quarter, we have also posted significant progress in terms of execution of our international expansion strategy. We are pleased to report that during the third quarter, we added a key member to the EXL team to lead our efforts, to strategically manage global infrastructure, and handle special projects. This individual will be charged with developing EXL's organic infrastructure footprint in locations around the globe as we respond to changing needs of our clients.

Last quarter, we announced a commitment to be operational in the Philippines within three to six months. We have advanced this initiative significantly as we have secured a facility that will house approximately 800 seats and will be operationally ready in the early part of the second quarter of 2008. We also continue to evaluate strategic options for expansion in Eastern Europe.

Lastly, we held our semi-annual client marketing event in La Jolla, California this past month and I just wanted to provide some feedback on that event. What we are hearing is that our clients continue to look for transformational solutions that improve their back office operations in a more strategic manner rather than lift and ship outsourcing strategies. We are also hearing that they want to diversify their delivery operations outside of India. We will continue to focus on executing on all of these important opportunity sets as we position EXL for the future.

Now let me pass it over to Matt who will provide more detail on our financial performance and guidance.

Thanks, Rohit. EXL's revenue for the third quarter ended September 30, 2007 increased to $46.6 million, up 31% from $35.7 million in the quarter ended September 30, 2006, and once again exceeded our expectations for the quarter. As compared with the second quarter of 2007, revenue for the third quarter of 2007 increased $3.6 million, or 8.4%, including increases of $2.7 million or 8% in BPO, and $1.0 million, or 23% in research and analytics.

Within EXL's business lines, BPO accounted for $38.0 million or 82% of total revenue in the second quarter. Analytics contributed $5.3 million, or approximately 11% of total revenue, and advisory contributed $3.4 million, or approximately 7% of total revenue. From a qualitative standpoint, BPO continues to benefit from both the growth in work performed for existing customers as well as work for new customers. Research and analytics experienced an expected strong quarter as compared to the second quarter of 2007 with the conversion of additional new client and cross-sell revenues.

Gross margin for the quarter ended September 30, 2007 was 36.0%, compared to 39.7% in the quarter ended September 30, 2006. In the second quarter of 2007, our gross margin was 33.1%. The improvement experienced in the third quarter of 290 basis points is primarily attributable to improved performance and staff utilization in the research and analytics business, as well as growth in our BPO business.

From a currency perspective, the Rupee appreciated only 1% during the third quarter, compared to the unprecedented appreciation of 7% during the second quarter, while the U.K. pound appreciated approximately 2% during the third quarter. With approximately 52% of our revenues denominated in U.K. pounds, this natural hedge served to offset the impact of the Rupee appreciation on our gross margin. Therefore, compared to the second quarter of 2007, there has been no net change in the impact of currency on our gross margin. We yielded approximately 2.3 million of gains from our hedging program during the third quarter, which delivered substantial cash flow. But please keep in mind that these gains don't help us from a gross margin perspective and are also not sustainable over the longer term.

Finally, I would like to point out that gross margin for our advisory business was 44.1% for the quarter ended September 30, 2007, compared to 29.8% in the previous quarter. Third quarter gross margin reflects a change in bonus allocation among our business lines, as compared to the second quarter. And that's the reason for the difference.

Adjusted operating margin for the quarter, excluding the impact of stock compensation expense and amortization of intangibles, was 13.0% for the quarter ended September 30, 2007, compared to 15.7% for the quarter ended September 30, 2006, and 10.0% for the quarter ended June 30, 2007.

The increase in adjusted operating margin of 300 basis points sequentially is primarily attributable to the improved performance in staff utilization in the research and analytics business as well as growth in our BPO business that I mentioned previously. During the third quarter, we experienced an anticipated increase in sales and marketing expense of approximately 80 basis points as a percentage of revenue as we executed on our investment strategy in both sales and marketing and strategic account management.

As we've discussed previously, we have an active hedging program in which we hedge our Rupee and U.K. pound exposure approximately 15 to 18 months into the future. While we realized gains of $2.3 million from this program in the third quarter, our expectation is that due to the continuing weakness of the U.S. dollar, our realized gains in the fourth quarter would approximate $2.5 million if currency rates remained at current levels. Again, I would remind you that this level is not sustainable and our expectation is that gains from our hedging program in 2008 will be significantly lower than 2007 levels.

As we have pointed out in the past, our business is very complex from both a service and geographical standpoint, and as a result we expect that our effective tax rate will experience fluctuations from quarter to quarter. Our effective tax rate for the third quarter of 2007 is 22%, as compared to 5% in the second quarter of 2007, and stands at 15% for the nine months ended September 30, 2007. The geographic distribution of our income in the third quarter, principally due to improved performance in research and analytics and the impact of exchange rate fluctuations on realized gains from our hedging program are the principal reasons for the rate change. We expect our effective tax rate for the full year 2007 to fall between 15 and 20%.

Before opening the floor for your questions, I'd like to conclude by providing guidance for the full year of 2007. Based on the strong revenue performance we have experienced so far this year and our increasing level of confidence in the business going forward, we are increasing our revenue guidance to between 176 and $178 million from 168 to $172 million previously.

In addition, we are maintaining our adjusted operating margin guidance before stock compensation expense and amortization of intangibles at 12% of revenues for the full year. Finally, with respect to diluted earnings per share guidance for the full year, we are revising this upward to between $0.76 and $0.80 per share from $0.74 to $0.78 per share previously.

Please note that we will provide guidance on 2008 at the time of our fourth quarter 2007 earnings release in early 2008.

At this time, we'd now like to open the floor for your questions.

(OPERATOR INSTRUCTIONS.) And your first question comes from the line of David Grossman of Thomas Weisel Partners.

Thanks. And I guess good afternoon to you in India. Just quickly, a couple of questions on some of the new business. You talked about the activity in the quarter as well as the prospects I think for two new insurance clients in the fourth quarter. Can you give us a sense for the size of those contracts and the rate at which those contracts you expect to ramp in terms of timing?

Hi, David. This is Vic here. The size of the contracts, as we mentioned in the earlier transcript, we basically -- these are also going to be strategic clients. And we expect these to over time generate approximately $5 million is the definition that we have for strategic clients. In terms of timing, we anticipate that we should be closing the contracts in this quarter and hopefully see some ramp ups coming through in the first quarter of 2008.

I'm sorry, Vikram. What did you say the revenue level was for a strategic client?

It was $5 million.

On an annual basis?

On an annual basis, over time obviously.

Right. And you talked about the telecom opportunity and the contract you assumed in the fourth quarter or you're going to assume, can you help us better understand just how near term the telecom opportunity is in terms of what you're seeing within the telecom vertical that would suggest perhaps the potential for that vertical to accelerate here over the next 12 to 24 months?

Hi, David. This is Rohit. I'll take that. The activity for the client in the telecom vertical actually began in the third quarter and it started off on the first of September 2007. This year, we will obviously not be earning revenue for the full year with this client. And we would expect that we would be able to realize a full year of revenues in 2008, as well as to see some expanded business with this particular client relationship.

The opportunity set for us with this particular client is both on the voice side as well as on the back office side where there are a number of opportunities in finance and accounting and research and analytics related work that we would hope to undertake for this particular relationship. It's also a client that gives us an entry into the telecom vertical, which is a very large and substantial vertical and can be a great opportunity set for us to participate, particularly for doing finance and accounting and back office work for the telecom vertical.

Okay. And if I can just again stay on some of the new contracts. You talked about foreign currency protection that you're getting in some of your new contracts. Can you help us understand the mechanics of how that's working and what kind of protection it offers to EXL?

Sure. The way in which we are structuring our customer contracts with new clients is to give them a fixed price as long as the currency remains within a band. And the range of the band is something which we negotiate with each customer. Typically, it ends up being an exchange rate band of plus/minus 2% to plus/minus 5% at the widest end. So the pricing remains fixed as long as the currency remains within that particular exchange rate band. And outside of that exchange rate band the pricing is adjusted either upwards or downwards in order to effect the change in the foreign exchange rates.

Okay. And then, just a question on the tax rate. I know, Matt, you talked about obviously a pretty big up tick in the fourth quarter based on your guidance for the year. Is that dynamic or is that level for this year? Should we think about that being a level that we should be modeling for 2008 as well?

Well, David, thanks for the question. No, we're not providing any tax guidance, in fact, any financial guidance for 2008. I'm happy though to speak to the change that we've experienced here in the third quarter and what we expect for the fourth quarter. And to the extent that we experience more U.S. based income as we do, for example, in our research and advisory business as -- and analytics business has performed as it has in the third quarter, we will experience a significantly higher tax rate. And that's what we had in the third quarter, quite a bit more U.S. income. And the hedge gains also are taxable in -- to us in the U.S. And so, both of those things came to bear on our tax rate in the third quarter. We're taking some actions here that are too preliminary to discuss. But for now, feel that the current level of taxation is about what you might expect for the fourth quarter, which is why we gave guidance in the 15 to 20% range for the full year.

Okay. And just one other question, really it's related to capacity utilization and margins. It looks like the BPO margins were relatively flat sequentially. And it would assume that you would -- should have gotten some benefit from slightly better utilization of the new facility. So I'm wondering if you could just help us understand better kind of the margin dynamic that you're experiencing in the BPO business sequentially as well as -- whether better capacity utilization should drive that up in the fourth quarter.

Typically, better capacity utilization would drive higher margins, David. And you're right that the margins sequentially remain unchanged. But there are other factors at play in terms of gross margin, in terms of the costs in India. And so, it's not related just entirely to capacity utilization. Costs related to, for example, to transportation and to other employee related costs and certain factors that are above the line and other elements of cost come to roost. But we're committed to offsetting those kind of cost increases through productivity, which is why you see the margins kind of holding rather steady given the constant exchange environment.

So I guess how should we -- how should we think about that? Because sequentially I think you said that the currency did not necessarily impact the gross margin. So as I look sequentially, what were the kind of costs, if you will, that increase sequentially that offset the leverage that you would typically see given the better capacity utilization in the September quarter?

Really too detailed to really drive into at this time, David. But just I would expect that margins--gross margins in that side of our business for Q4 remain relatively the same at this level of revenue, so at approximately the 36% rate. And that's where we've settled into in the current currency environment and I think that's a good measure. As this business has gotten larger, it's approaching $38 million worth of revenue in the third quarter, I think it's really hard to move the margin needle too significantly with any one item.

Okay, thanks. And just one last -- I'm sorry.

--Go ahead.

Just one last question was really just on the Rupee. What -- your guidance -- what's the Rupee rate that you're assuming in your guidance?

We're assuming the current rate, which is approximately 39.2 -- somewhere between 39.5 and 39 -- 39.2, 39.3.

Okay, very good. Thank you.

Your next question comes from the line of Ashwin Shirvaikar of Citigroup.

Hi, thanks. And congratulations, guys, on a very nice quarter. I know you cannot necessarily comment externally on Aviva and IndyMac, but is it fair to say that the -- that your appropriate expectations are included in your guidance? I mean, your comments were a little bit uncertain. I just wanted to make sure that was in your guidance.

It very much is, Ashwin. It's -- for the guidance that we've given for the full year, yes, it is included.

Okay. I wanted to understand about 2008, as the hedging gains roll off, what should we see for operating profit? Is there an offset there in terms of what we should expect?

Hi, Ashwin. This is Matt. And I'll take that. We're really not giving any guidance or setting any expectations for 2008. What I'll say about the hedging gains is that they will begin to roll off rather significantly even in the first quarter of '08 and throughout '08 as you would expect. But we'll speak in more detail about 2008 when we release our fourth quarter earnings in late February or early March.

Okay. I just wanted to point out you are providing some guidance for '08 by saying your hedging gains will roll off, but not providing the offset to that. Could you --.

--Ashwin, this is Rohit. If I can just add to Matt's comment. The areas where we will benefit positively is as our research and analytics business continues to grow and get back to normal levels of profitability and volume, that's going to actually provide us with additional margin growth in 2008, and we would certainly expect that that would happen, and there's certainly other areas where we get leverage which includes the price increases with our customers, it includes the operating leverage and a better utilization of our infrastructure. So some of the currency, hedge gains which will be reducing. Some of those we will be able to offset with some of these measures.

Okay, got it. You know, I just wanted to also drill-down into the research analytics, the new contracts that you're signing there, you said that they were broad based and longer term, could you provide some quantification around what you mean by longer term? Is this multiyear contracts?

Yes, certainly. We signed up, for example, in the research and analytics business a new customer which is a three-year customer contract. We've also increased the scope of business under an existing long-term contract that we have with one of our insurance clients. So, you know, we are definitely seeing more annuity based revenue and these contracts are extending up to three years with volumes that will allow us for annuity based work across multiple years.

Right. And my last question is that Matthew talked a little bit about the change in bonus allocation, but I did not quite understand the implications. Could you go through that?

Sure, Ashwin. In each quarter we reevaluate our bonus provision, as you would expect. And what we -- a slight reallocation in that provision that took place in the -- between the second and the third quarter has a dramatic impact on our smallest line of business, and so there was about a $200,000 adjustment that we realized we needed to make to that provision in the third quarter and it has a rather dramatic impact on their margins.

The way to think about that business, though, is not in terms of this bonus adjustment, but rather to look at the second and third quarter together, and what you see are margins that are pretty steadily at 36% to 37% gross margins, and that's representative of what that business is, the level of that business performance. It's just that the -- this adjustment kind of skewed Q2 and Q3. That's what we were trying to point out.

Oh, got you.

As you look --.

Okay. Thank you.

Your next question comes from the line of Joseph Vafi of Jefferies & Company.

Hi, gentlemen, and good quarter here. I was wondering if we could drill-down a little bit more on to some of the comments you made on contracts and the, you know, taking into account FX here. Is this something that you believe or that you're seeing start to emerge across the industry or is this something that's more specific right now to EXL based on what you know in the industry?

Yes, Joe, this is Rohit, and I'll take that. We have seen this actually being adopted by the tier one players on a much more broad based basis, and also we are seeing our customers agreeing to providing annual price increases in the contracts, as well as agreeing to the foreign exchange protection, so there's a much better acceptance of that from the clients, there's a much more broad based industry acceptance of this practice, and I think that's a very encouraging sign for this industry and for EXL.

Okay. Is -- do you believe that the acceptance by the customer here is being driven by just still very strong demand or maybe more by just, you know, deeper partnerships and sharing risks and benefits and doing work for customers?

I think it's a combination of both of those factors, as well as the fact that clients want to deal with partners that are going to be profitable and are going to be there to serve them the long term, and, therefore, they're willing to share the risks with their partners.

It's also being driven by the fact that the benefit that our clients receive is somewhere between 40% to 50% of cost savings and, therefore, their ability to absorb the exchange rate movement of 5% to 10% is much better than the ability on our part to absorb that kind of an exchange rate movement.

Okay. That's helpful. And then maybe one question on the Philippine build out, how should we be looking at that relative to how much of the build out right now is baked into your cost structure versus what might be additional incremental cost over the next few quarters?

So the Philippines build out in 2007 principally has some startup and operational costs built into it and which we've already factored into our financial guidance and plan for 2007. It does involve a significant capital outlay, as well cash outlay in terms of security deposits and rent advance payments, and we will be providing more color on that when we give full-year guidance of 2008.

Okay. And then if you could just remind us again, you're planning on generating revenue out of that facility in 2008, earlier in 2008 or later in 2008?

Yes, we would expect to start operations from that facility and, therefore, to earn revenues there beginning in Q2 of 2008.

Okay. Very good. Thank you, Rohit.

Sure.

And your next question comes from the line of Cynthia Houlton of RBC Capital Markets.

Just a couple of questions. First, could we just get the seat count, some of those metrics?

Yes, the -- I'm sorry, the seat count is currently at about the 7,500. It's actually 7,450 as of the end of the third quarter.

And so that's -- any split in terms of how that segments out by the different groups?

No, we don't break the seat count down by groups. That's our overall productive seat count.

Okay. And then just another follow-up on this telecom win that you're starting out with the voice services. Obviously, that seems like an interesting opportunity because you've -- I guess you've talked about some of the other non-voice opportunities over time. When you sign this customer is that something that was laid out as a part of the contract or is it that you initially signed this client to do voice services and over time you see the opportunity to discuss these other services? Or is it just that you're going to do the build out of voice first and then you're going to build out the other areas? Could you just clarify that in terms of what your contract is with them currently?

Sure, Cynthia. The contract currently states that it's only for voice services. However, we have been participating in some of the requirements for back office and for research and analytics and other services, so we're currently engaged in active dialogue with this client in terms of talking to them about providing other types of services which are back office and transaction processing.

Okay. That's helpful. And then in terms of -- is this -- would -- are you willing to give anymore clarity whether this is wireless or any more clarity on the nature of the client?

It's -- this is Vik. It's wireless.

Okay. And then --.

Primarily.

Okay. And then this is someone that you see as a possibility in your current contract with them, meaning the voice services, that that is an opportunity to be strategic or is it more, again, some of these other opportunities added in with what your current contract is?

I believe it's both.

Okay. And then just in terms of the Philippines build out you talked about roughly 800 seats as kind of the first opportunity. Is this something that over time is your idea to continue to expand in the Philippines or are you thinking more you need to have other geographies based on customer requirements, like eastern Europe or South America, et cetera?

So, Cynthia, we will continue to expand in the Philippines as we see the demand and as we continue to service clients out there, but, having said that, we are focused in terms of expanding into other geographic locations, as well. And a high priority for us right now is eastern Europe, and we are currently carrying out diligence activities in eastern Europe and also looking at different and inorganic ways of being able to establish a presence there.

Thank you.

(OPERATOR INSTRUCTIONS.)

Your next question comes from the line of Julio Quinteros of Goldman Sachs.

Hey, guys. Real quickly, can I get the operating cash, CapEx, and free cash flow for the quarter?

Certainly, Julio. This is Matt. So the cash provided for -- generated from operations was $10 million.

Is that a nine-month figure or a three-month figure?

No, that's a three-month figure.

Three-month.

And the nine-month figure, if you'd like that, is $11.1 million from operations. Our free cash flow in the third quarter was $7.8 million, and $4 million on a YTD basis. We've spent approximately $7 million worth of CapEx YTD, and would expect to spend somewhere in the neighborhood of say $11 million to $15 million in the full year. And our expenditures on that $7 million of CapEx are fairly evenly spread throughout the year. We spent approximately $2.2 million during the third quarter.

Okay. Great. And just wanted to go back to the nature of the work. It sounded like based on everything you had said that you guys are willing to start off with a voice based contract and then move to additional services. What is the nature of the voice? I mean is this the kind of stuff that we've seen in the past where there's some type of transaction associated with the voice or is it more of the kind of the commodity type work where it's inbound, outbound kind of work?

Julio, this is Rohit. The kind of work that we are currently engaged in is customer service work. And it's typically, you know, what we will do with a customer in new vertical and then expand into other products and services. It also involves, you know, activity which involves financial activity pertaining to the customer accounts and, therefore, it's not just a low end commoditized piece of business.

Got it. Great. And then if we were to look at the -- there's -- I think you guys gave us the seat, the productive seats but I wanted to know what the total number of seats was?

Well, that was the total number of seats that we gave you, 7,450.

7,450 is the total number of seats?

7,450 were the total seats.

Got it. Okay. And then -- go ahead.

No, I'm waiting for your next question, Julio, please?

Okay. And then if I look at the revenue per head figure for you guys just can you give us some general color on the directional trend of revenue per head?

Just give us a second. You know, we generally don't publish that anywhere, Julio, so I'd have to sit here and calculate it.

You know what, I guess I'm just trying to understand the productivity on a per head basis. I mean do you guys have any sense on whether things are actually going up, going down, are they flat, you know, what's the directional trend of revenue productivity?

It's flat, you know, generally flat at this point, Julio.

Okay. But with pricing kind of working in your favor going forward should we expect that to remain flat or should we expect some improvements on the pricing side to drive improvements on the productivity of the revenue?

You should expect some improvements in the future in line with the kind of pricing improvements that Rohit talked about.

Okay.

And, of course, you know, Julio, it's easy to concentrate just on the BPO business because it carries 82% of our revenue, but as the other parts of our business average in, and as R&A, research and analytics, continues to pick-up momentum we'll see them contributing to that revenue per employee rather significantly.

Got it. Okay. And then just going back to the commentary about the investment bank in F&A, what other verticals are you guys already doing F&A work in today?

So, Julio, we're doing F&A work in the insurance industry vertical, we do a fair amount of F&A work in mortgage and banking and financial services. We also signed up a large client in the transportation industry vertical this year, where the work is principally in finance and accounting. We also have a media client that was signed up, which is, again, finance and accounting work. And then, you know, our large customer in the utility industry we do some finance and accounting work there.

Now, the nature of our finance and accounting work is a little bit different in the sense that we also have the added capability of doing finance and accounting work in our risk advisory group, and there typically we are doing high end reconciliation work, as well as internal audit work which is different types of processes within finance and accounting.

Okay. Got it. And then just to sort of finish out on kind of the end of year and then possibly just some color into 2008, as we think about the budget cycles, finishing out 2008 and into 2007 and then looking out to 2008, what should we be thinking about what the impact is of budget cycles to your current book of business? And as they begin to sort of ramp down for '07 and into '08 how quickly should we expect these things to come back online for you guys assuming that there's any push-outs or cancellations or delays in terms of budgets, just given all the sort of volatility that we're seeing kind of in the backdrop right now?

So our sense is that, you know, for the clients that we have within the insurance industry vertical they are relatively stable and they have been making their plans and budgeting for their offshoring strategies in 2008, and we are already seeing what kind of demand there is likely to be in 2008 from some of these existing clients within the insurance industry vertical. Also, some of the new customer relationships that we have signed up are giving us fairly good visibility in terms of the volume of business that we can expect from them going into 2008. So I would say that despite the uncertainty and the volatility in the marketplace we are actually seeing very good visibility in terms of the volume of business going into 2008.

Also, bear in mind, a large portion of our revenue in the year comes from existing clients, and we don't see anything slowing down there.

Yes, no, I appreciate that part of it. I guess all I'm trying to get my arms around is, you know, even though they're existing clients as they go through their own budgeting sort of cycles kind of at the end of the year here are you guys seeing any sort of conversations or having conversations where they're coming back to you and saying anything along the lines of we want to hold things off or we're pushing out plans for the ramp-ups so that there would be, you know, a sequential impact as we kind of begin to look at the first half of 2008? That's what I'm trying to get my arms around.

Broadly, with most of our clients, we see none of that. In fact, we are in discussions on possible ramps. The one exception possibly could be in the mortgage industry where it could possibly see some slow-down for obvious reasons.

Right.

With the others, we don't see anything at the moment.

Okay. Great. Thank you very much.

(OPERATOR INSTRUCTIONS.) Your next question comes from the line of Mitali Ghosh of Merrill Lynch.

Hi, good evening. I just wanted to understand a bit on your fourth quarter resumption. If I understand that correctly are you looking for a slight margin decline next quarter and what are you really building into that?

So, Mitali, this is Matt. You're commenting on our adjusted operating margin guidance?

Yes, that's right.

So, okay. So we always leave ourselves a little headroom for investment and for the unexpected, but we pride ourselves in always overachieving and so, no, we don't expect any decline. We know that we're 12.9% on a YTD basis, and never knowing what the currency climate might be, as well, but, no, we're not forecasting a decline in our margins.

Okay. So --.

And our guidance should not imply that to you; okay?

Right. They've just been [calculated].

That'd be one way to characterize it.

Okay. Right. Okay. The second thing is just on, you know, you mentioned about the -- I think Rohit mentioned about the investments being made in selling and marketing, I was just wondering if you could give us a sense of, firstly, what your sales and marketing team is now? Because I know you are in the process of expanding that. And, secondly, you know, is there a sort of level of investment at which you would be comfortable going forward, you know, the percentage to sales?

Okay. The sales and marketing -- this is Vik. How are you? Sorry about that.

Hi.

The sales and marketing team has a total of about 54 people now, and that includes the marketing team in India, the UK, and what we have in Inductis. And that has shown growth over the previous quarter, and we will continue to add to that.

Bear in mind, it is not merely the sales and marketing team but our investment in the last quarter in what we call our strategic account management team, that I had mentioned earlier, which is the addition particularly of subject matter experts, like [Andy], and people that we now, as I mentioned, dedicate to existing relationships to enhance value, as well as work to mine additional business from these relationships. And that is also an additional spend that we have that is classified under sales and marketing.

Sure. And what would the number be, the corresponding number for what you just gave, in the previous quarter? Just to make sure I have like-to-like?

The corresponding number -- of the 54 that I gave you, is that the question?

Yes.

Okay. I think the corresponding number was approximately 48.

Okay. Okay. And then on the level of sales and marketing investment, that you think you could stabilize that?

I'm sorry, could you repeat that, please?

Yes, I was just wondering, you mentioned earlier that you've taken up your selling and marketing investments to roughly I think 5.5%, so just wondering --.

That's correct.

-- whether you have a number where you think could be a sustainable number going forward?

We should be really looking at -- what we would be comfortable with would be around 7%. And we aim to get there. And we've said that before, I believe.

Right, right. And, finally, just Matt, on the tax rate, just wanted to understand is there any fringe benefit tax element in the taxation that you have provided and anything that we should be baking in for this year or next year?

No, the fringe benefit tax is not accounted for in income taxes, so it's above the line. It's not in that 22% that we're reporting this quarter.

So, Matt, you were --

One second. Of course, we do accrue for fringe benefit tax, and so it is included in our operating results but it's not in this -- it's not in the effective tax rate.

Right. Is that something you would have provided only this quarter, I mean or --?

No, no, we have been providing -- this is the second quarter for which we've provided full -- the fringe benefit tax, so since the inception of the new tax law as of April 1st, so the second full quarter for which we've provided it.

Right. Right. And though you will be recovering this from employees presumably it's not something that you're taking the credit for in the P&L; is that the correct understanding?

That's correct, Mitali, because we understand that the accounting for this being enforced on the industry is that it's expensed at the time, the liability is recognized on vesting, and when it's recovered the credit goes to capital, so there's no netting in the P&L. It's quite onerous but that's what -- that's the situation we're faced with at this time, as I believe our competitors are, as well.

Right, right. And just finally if I can, you know, just a couple of metrics I was looking for, you know, if there was anything you could share on the shift utilization, how that has trended up?

The shift utilization is currently at 1.36, and it's relatively unchanged from the prior quarters. It varies minimally from quarter to quarter.

Okay. Thank you.

Okay.

Your next question comes from the line of Dave Koning of Baird.

Yes, hey, guys. Nice quarter.

Thank you.

Just two real quick ones. First of all, I guess the biggest client is it still Aviva, or did Centrica pass Aviva this quarter?

Aviva is still the largest client. It comprises 26.5% of our revenue. Centrica is the second largest client at 25.7%.

Okay. And then just, secondly and finally, you know, the currency benefit this quarter, the hedge benefit, $2.2 million or so, last quarter you gave the amount of operating profit drag that was going against it and then the delta between the two being kind of at the access hedge benefit. I'm wondering if you can kind of disaggregate those two pieces again this quarter?

Well, the -- you mean on a -- I really provided my insight quarter over quarter rather than on a cumulative basis. There's no impact to this quarter due to the appreciation of the pound. It appreciated approximately 2% during the quarter and offset the would be appreciation, so you should think in terms of the drag the same as we reported the last quarter. There's no incremental drag this quarter.

Okay. Great. Thank you.

And our next question is a follow-up from the line of Julio Quinteros of Goldman Sachs.

Matt, I just wanted to clarify I think it was Mitali who asked the question about the full year guidance for margins, if you're at 12.9% YTD but the guidance suggests 12% for the full year, I'm not sure I understand how that's not a decline in quarter over quarter margins?

I think she characterized it very well when she said we were being conservative. We don't expect to have a decline in our margins, however, there is uncertainty in the market, especially in the currency situation, and so that's why we've held that guidance at 12% for the full year.

Okay.

You know, Julio, we always aim to overachieve and this would be one area.

Yes, I know, I realize that, but it just seems like to go from 12.9% to 12% for the full year, I mean, you know, just it doesn't make -- I mean to me it just seems like you -- you might as well just give a number that shows the current run rate as opposed to assuming that things are going to be more conservative or trying to be more conservative given the kind of up side that you guys have been able to deliver all year as it is.

Yes, we understand, Julio. Thanks for your comments.

And we have no further questions at this time. I would now like to turn the call back over to Management for closing remarks.

Thank you very much. Ladies and gentlemen, thanks a lot for joining us today. As I mentioned at the very beginning, we are very pleased with our results, and it is our expectation that you will be joining us again at our next earnings call sometime in February. Again, we thank you for your time, your questions, and hope to see you in the near future. Thank you.

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect.