Exlservice Holdings Inc (EXLS) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EXL earnings call for 2007. My name is Lisa and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

I would now like to turn this presentation over to your host for today's call, Mr. Jarrod Yahes, Head of Investor Relations. Please proceed, sir.

Thank you, operator, and thanks, everyone, for joining us today on EXL's fourth quarter 2007 earnings announcement. Joining us this morning in New York are Vikram Talwar, our Vice Chairman and Chief Executive Officer, Rohit Kapoor, our President and Chief Operating Officer, and Matt Appel, our Chief Financial Officer.

We hope you've had an opportunity to review the news release that we issued last night, as well as the PowerPoint presentation, available for review on EXL's website on the Investor Relations section. Let me quickly outline the agenda for today's call. Vikram will first begin by providing some perspective on the growth EXL's experienced this past year and the continued market validation of EXL's value proposition, Rohit will take you through an operational update on how we've been managing our business, and Matt will provide a financial detail on the quarter, as well as provide 2008 guidance before we open it up for 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 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 our press release. So, now, let me turn the call over to Vikram Talwar. Vikram?

Thank you, Jarrod, and good morning to everyone. I would like to being by providing a perspective of EXL's 2007 growth and then provide color on the strategic investments we are making to sustain that growth. I would characterize 2007 as an extremely successful year.

Pardon the interruption. This is the operator. Is there anyone on the line? Miss [Cole]? We cannot hear your line. Pardon the interruption. Miss Cole? Pardon the interruption. Is there anyone on the line?

We entered into the transportation and telephone industry verticals and have matured significantly as a company in several respects, especially as it pertains to our client relationship management focus and our value proposition.

In 2007, we made important investments to become closer with our existing and prospective clients to better service their needs. Our investments in our front end was significant this year with the expansion of our sales and marketing team and the establishment of our strategic account management function. Our strategic account management function now includes ten individuals with industry and horizontal focus who provide the entire breadth of EXL's service offering to our clients and help them think through their most pressing operational challenges.

Our goal is to build the strongest and deepest relationships in the industry that will permit us to grow in a predictable and sustainable manner for many years to come. This year, EXL had more than 80% of our growth come from existing clients and we would like to see that continue as an indictor of our value that our clients draw from our suite of services and close relationships we foster.

In 2007, we have evolved our value proposition. While EXL has always been, and will continue to be, a vertically-focused provider of business process outsourcing services, we are increasingly partnering with our clients on a high value added transformational initiatives and closely integrating that work with our outsourcing capabilities. We believe that coupling and integration of business process outsourcing with analytics, Six Sigma process reengineering, and risk advisory services is the key lever to driving increased efficiency, effectiveness, and enhancing the controlled environment of our clients.

We firmly believe that this is the future of outsourcing and the combination of transformation and outsourcing is a highly differentiated and winning proposition that provides our clients the real change that they have been looking for in their organizations.

This quarter, our outsourcing business continued to grow rapidly. Six different clients migrated a total of 22 new processes to EXL in the fourth quarter. Our pipeline of outsourcing business with our existing clients also looked strong and we expect broad-based growth across client relationships in the year to come.

Our risk advisory services continued to execute strongly and diversified client base and suite of service offerings. Finally, our analytics business was slightly sequentially down this quarter as two key mandates with major banks that we believe will provide a nice tailwind for the business as we look towards 2008.

In 2008, we will become even closer to our clients and continue to help solve their critical business issues. We will also seek to capitalize on the strong growth environment EXL finds itself in today. While the general economy enters a slow period, the need to cut costs will only accelerate for the type of work our outsourcing business focuses on. The opportunity for organic revenue growth has never looked stronger with new and existing clients.

For new clients, our pipeline includes a number of meaningful insurance opportunities, as well as our opportunities within other industry verticals. We are seeing continued strength in the insurance vertical, as we have mentioned on several calls, and I will reiterate the same sentiment today. We continue to deepen and expand our relationships with our existing clients and expand our relationships with them. We believe that we have excellent visibility into our growth for existing clients and that EXL is an intrinsic part of their offshore plans. We would also like to note that the outsourcing services we provide are not considered part of a discretionary budget on the part of our clients and that this is the work that will continue to be performed either in house or externally.

Over the course of the next year, in addition to organic growth, we will continue to evaluate and target opportunities for acquisitions that provide value to our client base and allow us to expand our service capabilities. We are seeing valuations become more reasonable in the marketplace as compared to last year and we will capitalize on some of these opportunities.

Now, let me pass it over to Rohit, who will provide more detail on the way we are executing on our business objectives. Rohit?

Thanks, Vikram, and good morning, everybody. Consistent with our strong growth and financial performance this past year, we continue to execute well with respect to our operations and delivery capabilities. For example, this quarter we experienced a significant decline in attrition to 30% from 39% last quarter and 42% in the same quarter in 2006. This marks our third consecutive quarter of decreased attrition. As we have previously stated, our target for attrition would be in the low [30%s] and this quarter, we exceeded that target well in advance of our expectations. We believe that these impressive results are a direct result of our continued investment in training and development and focus on employee --

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-- for this quarter while continuing to deliver strong sequential revenue growth and increased realization [per FEE]. The growth experienced in the fourth quarter was broad based and included continued growth from several insurance clients, as well as clients in the telecommunications vertical.

To provide the analyst community a better understanding of the metrics and rigor with which we manage our business, I would now like to spend some time talking about six key operating metrics that we consider as measures of excellence at EXL. These include, number one, customer satisfaction index, or Csat. This is a survey that EXL conducts in order to gauge satisfaction amongst its client base. This survey is rolled out twice a year for outsourcing clients and once a year for transformation clients. I'm happy to report that EXL's client satisfaction scores, that EXL scores in the top two boxes on a five-point scale are at 84%.

Number two, manpower efficiency index, or MEI. MEI helps us track the number of resources that it takes for EXL to run its client operations for every hundred billable FEEs. It is partially as a result of improving the MEI that EXL is able to achieve revenue growth without consequent increases in headcount and provide leverage to our model and increase our realization for FEE. In 2007, we were able to improve our MEI by 3%.

Three, productivity gain index, or PGI. PGI is a measure that tracks gains in productivity within client processes that are already in steady state at EXL. PGI is an indication of how we are adding value from technology point solutions or process transformation solutions that we implement each year.

Number four, performance effectiveness index, or PEI. PEI is an index that's determined on a monthly basis. The percentage of all processes rated by FEE that are rated as meeting or exceeding client expectations in terms of service delivery. The purpose of this metric is to track and report quality of service delivery. We were able to improve the PEI index by 12% in 2007 over the previous year.

Number five, employee satisfaction, or Esat. Esat is an important measure of how well we are engaging with our employees and aligning the organization around their needs. This past year, our employee satisfaction was the highest ever, as demonstrated by a commitment index of 80%.

And, lastly, number six, attrition. Attrition is a function not only of e-sat but also of our compensation and HR policies. It is also influenced by the breadth of growth and development opportunity that we provide for our employees and for our brand equity in the marketplace. As mentioned earlier, we were able to drop our quarterly attrition rate to 30% in the fourth quarter of 2007.

I am most pleased to report that across all of the above indices, EXL has improved its performance over the previous year and we have set the goals for ourselves of improving them even further next year. We believe that continued focus on running the most efficient operation is fundamental to delivering the best execution for our clients and will also be the key to EXL's future success. EXL has also been executing effectively on our short-term and long-term plans to mitigate currency risk in our business. From a short-term perspective, there are three primary mechanisms which we have used to offset currency risk.

Number one, with respect to pricing, we have been seeking and receiving price improvements from our existing clients to compensate us for the compression in margins in 2007 on account of currency movements. Number two, from an operating perspective, we have been getting more efficient and productive. We have applied an increasingly rigorous operating discipline with respect to the way in which we run our business to become more cost competitive. And, number three, because our revenue is almost equally split between the U.S. and the UK and our costs are principally in India, we continue to have an effective and active hedging program in place.

From a longer-term perspective, there are three primary levers EXL is using to mitigate currency risk. Number one, we are pushing strongly to sign all new clients with clauses that mitigate foreign exchange risk. Number two, we are diversifying our delivery infrastructure into multiple countries. In addition to the Philippines, we expect to enter into Eastern Europe late this year as part of our geographic expansion plans and potentially other countries, as well, in the future. And, number three, as we further integrate and couple our transformation and outsourcing services, we are changing our business mix and moving up the value chain with better pricing and margins.

EXL plans to open our center in the Philippines in April, on schedule for our clients. This is a significant investment to expand our geographic footprint. There are several clients that are actively evaluating our infrastructure and capabilities at present. We hope to secure new customers in the second quarter this year. Our facility is located in a world-class development in Pasay City. It will house approximately 900 production seats.

We believe this location will provide an attractive environment for EXL to be able to recruit and retain talent. To build up our Philippines operation, we have been hiring management talent locally in the Philippines and also seating it with experienced managerial talent from India. We believe that we are on the path to get this operation off to a successful start. Now, Matt will take you through our financial performance and provide guidance for the upcoming year.

Thanks, Rohit, and good morning to everyone. EXL's revenues for the year ended December 31, 2007 were $179.9 million, an increase of 47.7%, as compared to $121.7 million for the year ended December 31, 2006. For the year ended December 31, 2007, approximately 46% of our revenues were denominated in U.S. dollars and approximately 54% were denominated in UK pound sterling. EXL's growth in 2007, which was predominantly organic, was driven by a healthy combination of new client wins and growth in existing clients.

New clients contributed $11 million to our revenues, or approximately 19% of net growth, while existing clients contributed the remainder. Our growth was broad based in 2007 and came from a range of client relationships in different industry verticals. British Gas in the utilities vertical contributed approximately 42% of our total revenue growth.

For the quarter ended December 31, 2007, EXL had revenues of $50.4 million and experienced strong sequential revenue growth of 8.1%. This quarter, EXL benefited from growth in multiple client relationships, including the first full quarter of business we performed for a leading UK telecom provider. In the fourth quarter of 2007, our BPO and advisory businesses continued to experience strong growth and demand. BPO accounted for $41.9 million, or 83.1% of total revenue, while our transformation businesses, including research and analytics and advisory services, contributed $4.7 million, or 9.3%, and $3.8 million, or 7.5%, respectively. We remain enthusiastic about our growth prospects in all services lines in 2008.

Gross margin for the quarter ended December 31, 2007 was 39.3% as compared to 36.0% in the quarter ended September 30, 2007. Gross margins expanded from the third quarter by 330 basis points, primarily as a result of ongoing productivity improvements in our BPO business and the higher utilization of professional staff in our transformation businesses. We exceeded our gross margin expectations this quarter and experienced the second consecutive quarter of gross margin expansion during the period of unprecedented appreciation of the Indian rupee.

As Vikram mentioned earlier, we committed, at the beginning of 2007, to build a strong front end, both in terms of sales and marketing and strategic account management. During 2007, we reinvested an additional 1% of revenue in sales and marketing, growing from 3.9% of revenues in 2006 to 5% of revenues for the year ended December 31, 2007. We fully intend to increase our investment in sales and marketing commensurate with our growth of our business. We are confident that these investments will allow us to sustain our growth rate and are fully justified by the growth opportunity we seen in the marketplace.

Our general and administrative expenses increased 18.7% of revenue in the fourth quarter of 2007 from 15.4% in the fourth quarter of 2006. General administrative expenses increased as a result of one-time and seasonal factors, including professional fees associated with Sarbanes-Oxley compliance and year-end audits, hiring to support anticipated growth across the Company, and preparations for our new 900-seat operating center in the Philippines. I am very pleased to report that in our first full year as a public company, we have received a clean opinion on our SOX audit that was recently concluded. This achievement is due, in large part, to the assistance of our advisory services practice, which offers these same services to our clients.

Adjusted operating margin for the fourth quarter of 2007, excluding the impact of stock compensation expense and the amortization of intangibles, was 12.8% compared to 13.0% in the third quarter 2007 and 19.7% in the fourth quarter of 2006. It is important to note that as the dollar has continued to fall against the Indian rupee throughout 2007, we have maintained performance levels and exceeded guidance. As a reminder from our past discussions, each 1% increase in the rupee decreases our operating margin by approximately 50 basis points. Accordingly, the appreciation of the rupee in 2007 of approximately 10%, taken on its own, lowered our 2007 operating margin by approximately 500 basis points.

EXL had a net tax benefit for the quarter ended December 31, 2007 of approximately $1 million. The tax benefit as a result of a change in our transfer pricing agreements between the U.S. and our Indian subsidiaries to exclude foreign currency hedge gains and losses from the computation of the transfer price retroactive to April 1, 2007. This change added approximately $0.06 to earnings per share in the fourth quarter. Our effective tax rate for the year ended December 31, 2007 was 7.2%. For 2008, we estimate that our effective tax rate will approximate 15% as a result of higher income in the U.S. attributable to our research and analytics business.

EXL's net income for the year ended December 31, 2007 was $27.0 million, an increase of 101.2%, as compared to $13.4 million for 2006. Other income for the year 2007 included interest income of $4.3 million that is generated primarily by the investment of our excess cash balances and the highest rate investment grade commercial paper. Note that we do not invest in auction rate notes. Other income also includes approximately $7.7 million in foreign exchange gains that resulted from our active hedging program during the year. For 2008, we expect that foreign currency hedge gains will approximate $6 million, based on currently prevailing exchange rates. Should the U.S. dollar appreciate relative to the Indian rupee, or should the pound sterling appreciate further relative to the U.S. dollar in 2008, these hedge gains would decrease with a corresponding expansion of both gross and operating margins.

Cash flows from operations grew to $23.4 million for the year 2007 compared to $19.8 million in 2006. Our capital expenditures for 2007 were approximately $9 million. We expect capital expenditures in the range of $16 million to $20 million in calendar year 2008 with a significant portion related to the Philippines operating center. Fourth quarter 2007 operating cash flow was $12.0 million. Capital expenditures for the quarter were $1.6 million, netting free cash flow in the quarter of approximately $10.4 million.

I'd like to conclude by providing guidance for calendar year 2008. Our guidance is based on exchange rates for the rupee, pound sterling, and Philippine peso that approximate current prevailing rates. While we are substantially protected on a net margin basis, significant changes in these exchange rates, whether up or down, could impact our ability to achieve our revenue or operating margin guidance.

For 2008, we expect revenues of between $205 million and $210 million and adjusted operating margin, excluding the impact of stock-based compensation expense and the amortization of intangibles, of 12% of revenue. Please note this revenue and adjusted operating margin guidance assumes that the Norwich Union build operate transfer option is exercised on May 1, 2008 and the associated revenues and costs are excluded from our guidance from that point forward.

After adjustments for the estimated revenue contribution for the Norwich Union BOT in 2008 and at the midpoint of our revenue guidance, our growth estimates for 2008 remain squarely in line with the 30% long-term organic revenue growth estimates that we are focused on achieving. In closing, we are very enthusiastic about the strong momentum in our business. Fourth quarter 2007 financial results were strong and position us well for an excellent 2008. I would now like to open the floor for any questions you might have.

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question comes from [Joseph Baffy] from Jeffries & Company. Please proceed.

Hi, gentlemen. Good results for Q4. I thought maybe we could start a little bit by focusing a little bit on the analytics segment. I know in your commentary, you said that it was down a bit sequentially. Anything there we should be worried about in the sequential downtick there on analytics?

Yes. Hi, Joe. This is Rohit. On the research analytics business, we actually feel very good about this business, primarily from two viewpoints. Number one is the diversification of the customer base in this business is increasing and we are adding on new customers that is helping us achieve that diversification. And that's also an indication of the strength of the value that we provide in this business.

And the second is as we get into an economy which is slowing down and which is focusing in on cost reduction, some of the key elements and capabilities that we have in the research and analytics business is really to help our customers improve their operating efficiency, as well as to be able to reduce their cost structure. So we are finding that we are engaging with several new clients and prospects even in a time period when the economy is slowing down. And, therefore, this business for us looks and remains healthy and is showing a good positive trend even though the sequential numbers in the fourth quarter were a slight decline over the previous quarter.

Okay. And then maybe as a follow up to that, I know you mentioned that there were two new pretty large analytics wins in the quarter. Is there any -- was that bundled business at all with BPO or is it really kind of analytics standalone?

Both these wins are really standalone wins and while there have been several other bundled wins, obviously not new clients for us, but rather are opportunities where we've sold the transformation services and the outsourcing services on a bundled basis. But these two new banks that we've added on are standalone analytics businesses.

Okay.

I just might add to that. This is Vikram here. As I mentioned earlier, we are looking at what we talk about as transformational outsourcing and there will be several occasions where we actually do use our analytics capability not just to acquire new BPO clients but also to service their needs such that BPO business will, in fact, expand and become a core part of the client's relationship with us. So, therefore, sometimes we may not always measure that in terms of revenue. That is generated on analytics.

But it is the total revenue that is brought into EXL as a combination of transformation and outsourcing, which is our stated strategy going forward. It's how that is going to impact us and therefore a very important part of our ongoing strategy to develop greater revenues and growth with our new and existing clients, Joe. I think that's the important thing.

Okay. That's helpful, Vikram. And then maybe just a little bit more, I know, Rohit, you were talking a little bit about some efficiencies in the cost structure, maybe a little more color there. And maybe some seat utilization commentary, as well, will be helpful. Thanks.

Certainly, Joe. As you know, we added on infrastructure earlier on in the year and we've been able to improve our seat utilization. We've been able to improve our manpower efficiency index and that's actually helped us drive down the cost and increase our revenue. From seat utilization, we've been able to increase our seat utilization from [0.79] at the end of the third quarter to about [0.88] at the end of the fourth quarter and that was a significant step up in terms of seat utilization.

All right. Thank you very much.

Our next question comes from Ashwin Shirvaikar from Citigroup. Please proceed.

Thanks. Congratulation, guys, on the great results here. The question I have for you is do you expect the six operating metrics that Rohit laid out, do you expect them to continue to improve, year over year, this year?

Ashwin, yes. The target for us is to continuously keep moving up the scores on this. Obviously, we will reach a point where we will be able to improve them only marginally in each subsequent period. But, right now, given where we stand, we think that there is adequate room for us to be able to squeeze out efficiency and productivity gains as far as our operations are concerned.

Is it possible to quantify the total impact of what you seek to achieve?

Of the indices that we laid out to you, there are a few which are, for example, employee satisfaction and attrition, where we think, we've already given guidance. Attrition, we've said that we would like to have a long-term target of the low 30%s and we are already there. The areas where I think we can improve further is around manpower efficiency index and the productivity gain index and those are areas which we think we can get improvements of anywhere between 3% to 5%.

Okay. And what about pricing in general on the new contracts that you're signing?

The pricing scenario for us is that new client contracts that we are signing are at slightly higher price points than where our existing clients are at, as well as the pricing for new clients has two important clauses built into it. Number one is the protection on foreign exchange rate movements and number two is an annual increment that we are seeking from our clients to offset the salary increases that take place each year in India.

Okay. And SG&A, you expect to grow consistently with revenue or is there an outside increase in SG&A?

No, Ashwin. This is Matt. We would expect SG&A to be fairly consistent or slightly above the average for 2007 but not at the rate that we experienced in the fourth quarter. So where we did a little over 16% for G&A, we would expect that to possibly trend slightly higher, as high as 17%. And on the sales and marketing side where we invested at a 5% rate, that might scale to 5.5% as we continue to grow our strategic account management and sales functions. But nothing dramatic.

Okay. I mean, look at all these factors and I look at the guidance and it seems as though the guidance is conservative. I mean, it's something you would like to beat.

Well, we would always like to beat our guidance, Ashwin. That certainly is the goal. It is March and we only have visibility to the actual results for a very small portion of our year but we think that this guidance is appropriate given the visibility that we have, as well as the current exchange rate environment that we're currently in. And we're comfortable that it adequately represents our view at this point.

Ashwin, I would just add that the way in which we have thought about the guidance is to try and balance out the risks that are associated with our business, as well as the upside that is possible in our business and really take a balanced view, taking all of these factors into account. This year, in particular, is going to be an important year for us because we are expanding out strategically into the Philippines and that's going to be a new Greenfield operation for us and we do not have much visibility into the kind of revenue that we will be able to achieve there, as well as we do have 20% of our business, as you know, which is the transformation business on which the visibility is limited to only 60 days to 90 days.

Understood. Okay. Thanks.

Our next question comes from Joseph Foresi from Janney Montgomery Scott. Please proceed.

Hi, gentlemen. Nice quarter. I was just curious. What was the seat count in the year? And I wonder if you could give us some idea of how we should look at headcount versus utilization, heading into next year. Was this just sort of a slowdown and then will it pick up? Or is there going to be more of a focus on the utilization side?

The seat count at the end of the year was 7,450 seats, which is identical to what it was at the end of the third quarter. We didn't add any capacity in the fourth quarter, although I would remind everyone that we added a significant amount of capacity near the end of the third quarter with a new client acquisition that we had in September. The headcount is 10,000 people, relatively unchanged. We put that workforce to better use through our focus on attrition and so our utilization, as Rohit suggests, has gone up significantly of those seats in the fourth quarter and I think that's attributable to the operating efficiency, as well as the attrition management that we spoke about previously.

And how would you expect those to trend heading into next year? I know you have a Philippine build out. Would you expect headcount to eventually come back up or are you going to continue to focus on utilization?

Certainly headcount will come up from this point. We're hopeful that we'll ramp capacity in a systematic fashion in the Philippines and it's possible that we could add some additional capacity beyond that later in the year as our business expands. But we're not putting any numbers around that this morning.

Okay. And then just on the margin guidance. You finished the year at about [$13 million]. You're giving [$12 million] for next year. Can you help us understand why it's still at [$12 million]? It seems like the currency sort of moved in your favor a little bit. Is that because you plan on continuing to increase SG&A with the build out in the Philippines?

Yes, a substantial portion of it has to do with the Philippines ramp up and the investment that we're making, obviously. The operation comes online in the second quarter and will ramp throughout 2008 and into 2009. But, in addition, currency headwinds are pretty strong. Quarter over quarter, the fourth quarter, we saw a 2.5% appreciation of the rupee versus Q3 and we're cautious about what might occur. The rates have been very volatile, as I'm sure you've noticed, and the rupee appreciation has been significantly beyond the way in which the pound has helped us. And so, and the pound only helps half our revenue. We're now incurring about 67% of our cost in rupees and so it's a pretty strong headwind that we're cautious about.

In additional to that, this is Vikram here, in addition to that, we have always stated as part of our overall strategy to continue to invest in two areas. One is the front end and I think we've spoken about that a little bit ago. We will continue to add to that during the course of this year. In addition to that, we have always focused on management development and that is one of the primary reasons why we seek a very, very good employee sat, as well as the imploring of attrition rates.

We will continue to focus on that and obviously invest in that area. We are a long-term business and we really believe that in the initial years, we really need to make an investment in that long term. As a result of that, you will see some further investments in SG&A as we try and manage the leverage in accordance with our overall strategy.

And just on the pricing front, have you seen any pushback recently from any of your clients, especially given the economic downturn that maybe they're not as receptive to a change in pricing?

The interesting thing about our business is that this is a core business for most of our clients, as I mentioned a little while ago. We don't really believe there will be overall pressures at least on the spend that they have to have compared to maybe the IT industry and I think that's a major distinction between us as a pure play BPO and the overall IT industry. In fact, if anything, I think in order for them to get best value and for them to be able to get the best transformational outsourcing opportunities with service providers like ourselves, they may be, in fact, willing to pay what is the required amount to get that quality of service rather than put down the pressure on us.

Okay. And just one last question. Any update that you might have on the Aviva BOT? Thanks, guys.

Nothing further than what we stated in our recent 8-K. The review that Aviva is currently undertaking is still being undertaken by them and we have absolutely nothing further to state in that other than the expectation of the execution of that, as Matt had mentioned and as we've mentioned in our 8-K.

Okay. Thank you.

And our next question comes from Bryan Keane from Credit Suisse. Please proceed.

Hi. Good morning and solid quarter. Just a couple of follow ups. What should be the relationship between headcount and seat count as it relates to revenue? Should it mirror revenue going forward?

So, Bryan, I'll take that. This is Rohit. In general, the headcount addition that we would have would not be the same as the revenue growth that takes place and that's primarily for a couple of different reasons. Number one, as you know, we've got a fair amount of business in our transformation line of business and as that revenue expands, the realization for FEE is a lot higher in that part of our business.

The second is there are some annual price increases which take place and therefore there is a volume increase, as well as a price increase. And, lastly, the third factor is the efficiency gains that we can drive in the system are also going to allow us to be able to scale revenue much faster than our headcount growth rate.

Now the headcount growth rate and the seat growth rate is also expected not to be consistent and the same and we would expect the seat growth rate to be slightly lower than the employee headcount growth rate. And that's on account on our ability to improve the shift utilization. And we believe as we expand and as we become a bigger organization and as we have more mature customer relationships, we will be able to improve our seat utilization, as well.

Okay. And just following up on some previous questions, just drilling down on it, with attrition down and productivity up and seat utilization up, headcount flat, I guess I would've expected operating margins to be up, sequentially, and then for a little strong adjusted operating margin guidance for 2008 since all the metrics seem to be going well. Is there anything else there or big items that we should think about? I mean, you talked a little bit about a little more sales and marketing, but other reasons why margins wouldn't be going up?

No. Bryan, it's what we've said before. Rupee, Philippines, the sales and marketing, and slightly higher G&A are the principle reasons. There's no other big items there.

Okay. And then, rupee, what do you have in your guidance for the rupee/dollar relationship?

So we've included it at a rate of [LKR40] to the dollar and let me also mention, before you or anyone else asks, we have the pound at about $2.

Okay.

And that approximates the current prevailing rates.

Okay. And then you mentioned visibility for just a smaller portion or some visibility in some of the businesses as not as high as others. There's obviously BPO business being higher. What do you guys say your visibility is for 2008? And I guess as we go through the quarters, I assume visibility goes down a little bit.

Let me speak first to the work under contract then I'll let Vikram talk about the pipeline a little bit. About 70% of the BPO revenue that we had in 2007 is under contract throughout 2008 and we would expect a very high rate of renewal on the remainder. As it relates to new clients, Vikram?

This combination of existing clients and new clients. So you've already mentioned the contracted business from existing clients. There is also the expectation of additional business from existing clients, our entire relationship management area, which we believe will continue to develop growth and give us more revenues. Our pipeline is looking very robust at this point and time.

As I mentioned, the overall insurance sector is extremely attractive to us and we continue to be the leader in that area with a large number of relationships and therefore the domain expertise and the reputation that we have built there. So we continue to get a pretty good and decent pipeline from the insurance sector.

As you know, we recently entered into the telecom vertical where we will continue to focus and grow and are putting more resources in that area as we are in the overall utilities area. So the pipeline is looking good. Our existing relationships will continue to generate more revenues for us and we look at the pipeline as being healthy.

Okay. And then, just last question. Matt, any help on the tax rate for 2009?

Sure. For 2009, no. The only help I can offer you is that we fully expect, and thinking is unchanged in this regard, that the tax holiday will expire in India on March 31, 2009 and that will be factored into our tax rate. But we're not offering any guidance or expectation with respect to 2009 at this point.

Okay. Thanks.

And our next question comes from Tien-tsin Huang from JP Morgan. Please proceed.

Hi. It's Tien-tsin and I had a question about G&A. Can you actually help us size the impact of the one-time items you highlighted in the fourth quarter? I'm just trying to get a better sense of what a clean quarterly run rate would be for G&A going forward.

Sure. Think about the growth from Q3 to Q4 as slightly more than 50% one time and non-recurring and a little under 50% as recurring so as that will continue on. So there was, there's some seasonality to our G&A, as well, which I haven't characterized, but slightly more than 50% would be non-recurring, would be one time.

Okay. So half the growth was unusual and then sort of normal seasonality if we look back in history for G&A in the fourth quarter?

Well, we've had some -- now that our business is public and this is our first SOX audit, that's a pretty healthy investment that a company needs to make in becoming SOX compliant. It was obviously money well spent for us in that we passed the audit for 2007, but nothing beyond that.

Okay, very good. And then, I guess, I know there's a lot of questions about margins this year. How about maybe can you update us on your thinking of long-term operating margins for the business?

Not beyond 2008. I think our margins, I think what's implied in our 2008 would suggest what we're thinking long term.

Okay. Okay. Then the, just two more. Just a question on the outlook for your larger clients. It sounds like Centrica has been quite good. I'm curious about going forward. American Express also, given some of their cautionary comments when they pre-announced earlier this year.

Sure. I think, again, American Express for us continues to be a strong client and I think we expect to continue to do a great amount of volume of work for them and we're not seeing any real decline taking place in our research and analytics business and with that particular client, as well.

Great.

One thing which I would add to the previous question in terms of our expectations for the long-term operating margin, we believe that the long-term operating margin that we would strive for us closer to about 15% and not 12% where we are currently. And as Vikram stated, right now, for the next couple of years, we intend to make investments and reinvest any excess surplus money that we might have in terms of learning and development and in terms of our front end. But over the long term, over the next three to five years, we will be working towards inching up our operating margin towards 15%, which we believe is a reasonable target and the right level for our business and our industry.

Got it. That's very helpful. Then the last one I have was just sort of on the same lines. I think I heard you say Eastern Europe was a planned facility, sometime towards the end of the year. Where are you in the evaluation process or actually selecting a facility and maybe other countries down the road?

On Eastern Europe, we've done our diligence on several countries out there and we've narrowed down that we are most likely going to look at doing something in Romania. We haven't yet decided as to what part we will take in terms of creating our capability and presence out there but we expect that, over the next couple of months, we will finalize that. And before the end of this year, we will have something ready and operational there in Eastern Europe for our clients.

Okay, very good. Thanks for all the details.

And our next question comes from Ashwin Shirvaikar from Citigroup. Please proceed.

Hi. Just a quick follow up on the Philippines. Do you have clients that specifically asked for the Philippines or what's the procedure to fill up that capacity as it comes online?

Yes, Ashwin. This is Vikram here. We have a very focused view on how to go about that business. There is a combination of our existing client base that is extremely interested in our capabilities there. We have several clients visiting us as we go online and have an office to show there, which will be operational sometime in April, as Rohit mentioned.

So what we're looking for there is a pent-up demand from our existing client base to diversify into the Philippines, which has been stated recent by them and a very important part of our decision making process to get into the Philippines and we anticipate that that will be a major force in getting new business for us there. And that is going to become activated once we have something to show to them on the ground there.

In addition to that, we are focused on a large number of companies that have expressed interest in the Philippines in the past who might already be there in some part. And those who have not ventured there in the past because of the inability of them to acquire proper and more qualified service providers for their domain. We believe we'll be able to attract those now, once we have an operation there. We are very, very positive about that pipeline and are working with a very focused, strategic plan to be able to get that client base into the Philippines.

We have taken a certain amount of revenue into account for 2008 but as we will appreciate. This is a Greenfield operation, not an acquisition, like some of our competitors and therefore will take its time to generate. However, we do believe that that is the right strategy. We want to be able to service our clients in the same fashion as we have been able to provide quality in India and that is the overriding reason why we've gone toward a Greenfield operation rather than inherit somebody's legacy problems.

And the way I understand the cost receipt in the Philippines is relatively comparable to India.

It is relatively comparable to India. It is marginally more expense. Bear in mind the Filipino peso has revalued quite substantially over the past few months. Early expectation is that it may revalue some more, depending on how low the dollar goes. But, overall, the cost is marginally higher than India. Something that is, by the way, recognized by the marketplace and is accepted in view of the wise capabilities there, as well as risk mitigation on a political basis. In other words, diversification of risk.

Okay. And what's the quarterly G&A impact if you can give that one?

Well, it depends on the quarter that we're talking about, Ashwin, as we ramp our expenditures.

The third quarter will be the first full quarter, right?

The third quarter will -- no, we'll continue to ramp our expenditures there commensurate with as we fill the capacity. So the third quarter will not be a full quarter. We will not get ahead of ourselves in terms of the support cost for the operation until -- we'll scale in commensurate with the clients as we attract them.

Okay. So what's the full run rate?

Sorry?

What's the full run rate for depreciation on the facility?

We're not disclosing a separate cost profile in the Philippine operation. That is contemplated in the guidance that we've given for 2008 and we'd like to leave it at that.

Okay. Thank you.

Thanks. Operator, we're ready for the next question. Sorry, everyone. We're just trying to get through to the operator to permit more questions.

Our next question comes from [David Koenig]. Please proceed. Your line is open, Dave.

Yes. Hi, guys. This might be an opportunity for you to take some share in the conference services business to do some more outsourcing there, it seems like. First of all, you did mention the economy a little bit and how you have a strong pipeline. I'm just wondering kind of the economic impact you're seeing right now on the sale cycles for new clients, the impacts on existing client programs, kind of on an organic basis, if you're seeing vibes fluctuate. And then on the mortgage business. You've talked about that before. Maybe just a little update.

Okay. Let's talk about volumes for a moment on our existing business. Our primary business line is insurance, as you know, and while there has been some downturn in the mortgage industry and the other financial services industry, we haven't quite seen any downturn in the insurance industry. As a result of that, we have not seen any downturn, either actual or projected, in terms of volumes that we might have during the course of 2008. That's not our expectation. We have seen nothing, we don't expect much at this point and time unless the economy goes into a real tailspin, which at least, something that we don't expect at this point and time.

With regard to the new pipeline, again, the industries that we are looking at, primarily the areas of insurance, the area of utilities, and other essential commodity and telecom, which is also an essential commodity in a sense of speaking, areas where we don't see any reduction in terms of volumes because of the impact of the economy. Luckily, for us, our mortgage portfolio is limited. As you know, our primary client there of material size is IndyMac.

We have factored in the reduced volumes in our projections that we have provided for you in terms of guidance. In continued discussions, which are on a very regular basis with this client, we don't foresee any further reduction in terms of our volumes or FEEs that we currently have. So we have factored that into our business. We are obviously not going after new mortgage clients at this point and time so that's not an issue. I hope that answers your question.

Okay. The only, I guess the only other piece of that question was on new potential clients, there is a sale cycle lengthening at all.

Again, as I mentioned, our new sales cycle is based on companies out of the insurance industry, primarily, where we see continued growth in the requirements of these companies, both in terms of the types of business they want to outsource. There's a lot more companies interested today in offshoring that have not come up in the past, again, for the same reason that most companies do, which is initially cost arbitrage, and that is something that we believe will continue to happen as the economy goes into a downturn as cost savings become more and more important, even to those insurance companies.

So we, in fact, see an up-tick in that demand as we go forward. With regard to the other two that I mentioned, again, these are essential commodities where cost savings are going to become, again, extremely important in the back-office operations of these companies. So even in the sales cycle for new companies, we seen a greater, improved demand.

Great. And then just one final question, more on the financial side. The FX hedge gains, it sounds like $6 million or so expected in '08. Do those all go away in '09? So, basically, if the currency stays flat, in around [40, 41], are we going to see that $6 million go to zero? And given that's a pretty big headwind, do you expect EPS growth in '09?

Well, we're not going to articulate guidance for 2009. Let me say this about our hedging program. We've talked in the past about the fact that we hedge 18 months to 24 months out and our program does include hedging through the end of 2009. While we're nearly fully hedged for 2008 now, we still have some capacity for 2009. And so, depending on where the rates go, we would not expect that the hedge gains would go away but they would be diminished in 2009. And so, it would not from [6 to zero] but we'll provide more color on 2009 at the time we give such guidance, but we are fairly aggressively hedging 2009 at this point.

Great. Thank you.

Our next question comes from Mitali Ghosh with Merrill Lynch. Please proceed.

Thanks. Good morning. I want to understand the supply side situation that you are seeing currently and what is a kind of rate outlook that you expect for this year?

Yes. Hi, Mitali. From a supply side standpoint and a recruitment standpoint, we really are not seeing any issues as far as back-office hiring is concerned and there, we are able to fill in the positions and meet our customer requirements on a fairly actuated timeline. We are seeing a relative, I guess, longer cycle for hiring of voice resources. And as we set up our operations in the Philippines, that should probably give us some relief. And, lastly, in terms of the resources that we hire for our transformation lines of businesses, we are actually embarking on a two-pronged approach of hiring externally trained staff, as well as running training programs internally, as well, and developing our own internal talent. And that's what we are looking at in terms of the staffing.

From a salary increases standpoint, we would expect a little bit of softening as compared to the previous years, though not by much. And, therefore, we would say the salary increments that will take place this year are probably comparable to the previous year, perhaps one percentage point lower.

Right. And just going back to the question on margin, I didn't quite get what you said on the G&A. I think Matt mentioned something on how he expects G&A cost to go. Did you say move up a bit?

Slightly higher than the average for 2007 but not at the rate that we reported for the fourth quarter of 2007 because of significant one-time/seasonal items that were included in the fourth quarter.

Right. And, finally, just a follow up to the comment that I think Vikram made earlier on the pipeline. Can you comment at all on what the outlook is for some of the other industries, like utilities and transportation and telecom, that you got into more recently? And what is the momentum looking in terms of order flow from some of these verticals?

So the utility industry is extremely interesting for us right now. We are looking at a robust pipeline over there and are talking to some clients, potential clients, that we believe will be offering us the opportunity going forward. There's certainly interest in that area, which we are seeing particularly because of our capabilities. As you know, British Gas is a very major client of ours and we've developed capabilities there which are unique in the marketplace. So that puts us at an extremely attractive position for potential clients.

With regard to the telecom industry, as you know, we've very recently gotten into that in terms of our relationship that we entered into in the fourth quarter and we believe that that opportunity will continue to grow. As you know, the boom in the telecom industry, particularly the mobile side of it, continues even though there's been some slowdown in some countries. But, overall, that continues and the demand for that, particularly now in the back-office space, we believe, will be potential growth for us. And we continue to focus on clients, both in Europe, as well as in the U.S.

Is it safe to assume that the sort of [RFP] flow and sale cycle, if at all, have accelerated in the last couple of months?

By far. A major increase in that flow. The first few months of this year, we have seen far more interest than we have had in the past and, again, there is some seasonality to that, as you might expect. December does become somewhat slow for obvious reasons so there is certainly a seasonality factor. But, other than that, there is certainly an up-tick in the interest level that we have seen, particularly from existing, as well as new, clients in the areas that we have interest in.

And, finally, if I may, just two follow ups to that. One, given the whole sort of election situation in the U.S., do you foresee any bottlenecks because of any backlash to outsourcing, particularly because BPO has much more large numbers? And, secondly, if you can also just comment on the competitive environment that you see. How is your run rate sort of been trending?

As you know, election years always bring some degree of consternation with regard to the overall outsourcing philosophy in the country, in the U.S., particularly. Bear in mind, a large portion of our business comes out of the UK so that's not an issue in the UK. As far as the U.S. is concerned, the rhetoric in this regard has actually not been as high as one might have expected with the current environment. Do we see any issues with that? The answer is no. I don't believe we will see too much of a negative headwind in that particular area. Again, these are things that happen, in our opinion, will, over time, pass by and will not really impact the volumes of business that we are predicting in our guidance for this year.

And the second question was on the competitive environment.

The competitive environment, as you know, the interesting thing about our business is that there has been no real additions in terms of competitors so that's an interesting situation when you are dealing in an industry that, in itself, is not adding new competitors. Our competitors remain the same and we continue to walk through the marketplace in an extremely effective fashion. In the areas in which we focus on, we are leaders and we believe that we will continue to have that position as we go forward. Our wins in that area speak for themselves and we believe that we will continue to have that position, particularly in the insurance and the utilities areas. Rohit, you want to add something?

Yes, Mitali. I would just like to add to that, as you're aware, new capital formation in India has come to a grinding halt and therefore we think that there's a fair amount of increase in business opportunity that is flowing the way of third-party service providers like ourselves. And that, actually, is very helpful to us from a business standpoint, as well as from an attrition and the ability to attract and retain employees, as well.

Then just do you see any change in competitive pressure from the integrated IT and BPO companies in the likes of DCS and [Infosys] possibly?

I think purely as the BPO industry matures and as some of the IT players realize the value of this industry, some of those who are well entrenched will try and make a much more strategic push in this direction. However, I think the opportunity for us is to remain domain focused, as well as a provider which can combine outsourcing along with transformational capabilities and continue to differentiate ourselves from competition.

Okay. Thanks a lot.

And our next question comes from Julio Quinteros from Goldman Sachs. Please proceed.

Hi, guys. I wanted to just go back real quickly. On a percentage of revenue basis, can you just walk us through, Rohit, the volume component that's exposed to revenue? And then, secondly, on a project basis, as well, if you could just give us a sense on how much revenue is exposed to project base work.

So, Julio, in terms of project-based revenue, almost all of that comes in from our transformation lines of business, which approximately is, for the fourth quarter, is about 17% to 18%. And even within that transformation line of business, as you know, some of the project work that we do is quite similar to IT services. While it is project based, there is a very high level of revenue that takes place. So I would estimate that almost half of that business is what we would categorize as a true project-oriented business and the remaining balance is such that it has a high likelihood of getting automatically renewed and is a stable base and a platform for us in the transformation business.

Got it. And then what about the volume side? I know you talked a little bit about the components of it, but how do we think about how much revenue could be subject to any sort of ebbs and flows on pure client-driven volume, so transactions on the volume side for the clients that you're actually servicing?

Sure. So, as you're aware, a large portion of our revenue that we do in outsourcing is actually on a pricing mechanism which is on a per FD per annum basis. And if there are inter-month changes in volume, those really do not impact us. What impacts us is there is a permanent shift in the volume levels that our clients are seeing and typically they can adjust these volumes with us with a 90 day to 180 day notice period.

What we are seeing is that our customers, even if they have a reduction in volume, are choosing to make the cuts onshore rather than with their offshore services that we provide to them and therefore EXL, as such, has not been experiencing very significant volume adjustments from its clients, whereas the clients themselves may have been experiencing volatility in their volumes.

Okay. That makes sense. And then, secondly, when we look at the components of the G&A up-tick, I guess what I wanted to understand was the Philippines buildup, is that Matt is referring to as a one-time item? And I guess if the Philippines buildup is not done, how many more quarters should we expect that to be sort of flowing to the G&A expenses?

So the Philippines build out, the Philippines facility will open in April of this year but when that facility is opened, it will not be ready to house 900 agents at one time so we'll continue to scale that and our expenditures commensurate with the buildup. The one time that I'm talking about in the fourth quarter with respect to the Philippines is bringing on board the support personnel and some of the pre-opening expenses to build the infrastructure. And you should expect that that would be, other than the pre-opening expenses, the support will be absorbed by the revenues that we ultimately yield from that operation.

And what's the payback period expected on the Philippines operation?

We're not going to delve into the specific economics of that investment.

When do you expect it to be at run rate, at margin run rates that are comparable to the [firm wire] run rate right now?

Within a one-year period or so, which would be maybe second quarter of 2009.

Okay. Okay. And, just lastly for me, can you just give us a total number of clients that you have right now and the number of processes per clients?

Yes, Julio. The total number of clients we have is approximately [80] and the total number of processes that we run is approximately [300].

Got it. Okay. Great. All right, guys. Thank you very much. Good luck.

Thank you, Julio.

And our last question comes from David Grossman with Thomas Weisel Partners. Please proceed.

Actually, my questions have been answered. Thanks very much.

Thank you, David. Do you have any other questions that you might -- we have some time remaining here.

(OPERATOR INSTRUCTIONS).

No further questions at this time, sir.

Thank you very much, ladies and gentlemen, for joining us. We appreciate your time. I'm sorry for some of the hiccups we had on the call itself. I do apologize for that. We'll consider outsourcing as a suggestion. Maybe that might help. But thank you again for joining us today and have a nice day. Bye.

Thank you for participating in today's conference. This concludes the presentation. You may now disconnect. Have a great day. Thank you.