Exlservice Holdings Inc (EXLS) 2008 Q2 法說會逐字稿

Good day, ladies and gentleman and welcome to the Q2 2008 EXL Service Holdings Earnings Conference Call. My name is Katie and I'll be your coordinator for today. At this time, all participants will be in a listen-only mode. We will be conducting a question and answer session at the end of this conference.

(OPERATOR INSTRUCTIONS)

I would like to now turn the call over to the host for today, Mr. Jarrod Yahes, Head of Investor Relations. Sir, you may proceed.

Thank you, Operator. And thanks everyone for joining us today on our Q2 2008 Earnings Announcement. Joining us from India are Rohit Kapoor, our President and Chief Executive Officer, and Matt Appel, our Chief Financial Officer. We hope you've had an opportunity to review the news release we issued last evening that is available for review on EXL's website on the Investor Relations section.

Let me quickly outline the agenda for today's call. Rohit will talk about the demand environment and some of the recent key developments at EXL. And Matt will take you through the financial details of the second quarter, as well as provide an update on our outlook for 2008 and then close the presentation before we take questions.

Some of the matters we'll discuss in this call are forward-looking and you should keep in mind that these forward looking statements are subject to known and unknown risks and uncertainties that could cause actual results 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 refer to non-GAAP financial measures which we believe provide useful information for investors and you can find reconciliations of those measures, the GAAP, on the press release. Now, let me turn it over to Rohit.

Thanks, Jarrod and good morning to those of you in the U.S., and good evening to everyone in India. I would like to start with just a few words about the macro-economic environment in the U.S., UK and Europe and the resultant demand environment for the type of outsourcing and transformation services that EXL delivers.

As you are all well-aware, the economic environment continues to be uncertain and challenging for most of our clients. This environment is particularly difficult in the Mortgage and Banking Industry verticals, where business volumes have dropped significantly and where there are real and immediate concerns on the survival of several of these financial institutions.

In our view, this has resulted in a clear bifurcation in the demand for our services. Decision making in the Banking Industry vertical has slowed down considerably for outsourcing. And mortgage companies are significantly scaling back their volume of business, particularly in origination activity. However, other industry verticals, like Insurance, Utilities, Transportation and Telecom, are becoming increasingly active in seeking strategic cost management solutions.

There is a renewed focus on change management to enable significant cost reductions. As such, companies are seeking service providers who can quickly transform their business to reduce cost and also manage their (inaudible) in an off-shore location, and hence, reduce operating costs even further. This strength plays very well to the competencies of EXL where we have tremendous skills in both transformation and in outsourcing.

Furthermore, EXL is fortunate that that exposure in providing outsourcing services to the Mortgage and Banking vertical is limited to less than 6% of overall revenues. We believe that increased demand for transformation services by our clients, will lead to additional work that can be outsourced downstream after the re-engineering projects are complete.

The most exciting story within EXL's business this quarter is the way in which we have been able to capitalize on the need for strategic cost management and grow our Transformation Services revenues in this difficult economic environment. By building high-level relationships with our clients and assisting them with critical initiatives, such as enhancing the efficiency and effectiveness of their operations, we believe we are well-positioned to get the downstream work as we effectively front-end the outsourcing journey.

In fact, EXL's Transformation business has seen a continual [activation] since the end of 2007 and we believe that this has become a huge competitive advantage for EXL in the marketplace. Nobody else in our competitor set can provide this level of client engagement with skills in analytics, Six Sigma based process re-engineering, risk advisory services and consulting to deliver strategic, enterprise-wide, cost reduction.

The Transformation business grew close to 14% sequentially this quarter and over 10% sequentially in the first quarter as well. From a revenue contribution standpoint, Transformation Services are now over 20% of the consolidated revenues of EXL. Importantly, we have grown our Transformation business in a well-diversified manner across multiple client relationships.

While our transformation services business grew extremely rapidly this quarter, we are also experiencing meaningful revenue growth this quarter in our Outsourcing business, particularly from two Insurance client relationships. This growth [grows] 7.7% sequential growth in our Outsourcing business, then excluding our top two client relationships, and 3.5% on an aggregate basis, then you include our top two client relationships. This quarter EXL transitioned 23 new outsourcing processes for eight different clients.

Our relationship with British Gas continues to be strong and stable. This quarter we successfully extended the British Gas relationship by an additional year [to] the beginning of 2010. Over the course of the next year, we will seek to expand our relationship with British Gas, as well as work towards a longer term contract that focuses on accountability for outcomes. We continue to view British Gas as a strategic relationship for EXL in terms of client relationship management and operational delivery and have consistently focused on providing additional value to British Gas through our transformation services.

Our contract with Orange continues to until the fourth quarter of 2008 and we are actively engaged in discussions with Orange to determine the future scale and scope of the relationship. Additionally, we extended our agreements to provide outsourcing services to Aviva in a larger facility until 2012. This extension is testimony to our close relationship and strong operating performance through the years. This contract signing was announced at the time of the conclusion of the strategic review process conducted by Aviva.

While we will no longer have the Aviva Pune BOT business, we believe that the outcome of the strategic review process will eventually be better for both EXL clients and shareholders based on the purchase price ultimately paid for the Aviva BOT contracts. Our analysis of the acquisition of the contracts and the commercial terms led us to value the transaction lower than other parties. We believe any acquisition should be profitable on a U.S. GAAP net income basis and we consciously chose to remain disciplined and rational in our bid process.

After this transaction, for several reasons, we believe EXL is extremely well positioned to be able to grow our business well into the future. Firstly, we will continue to service Aviva well into the future, both in terms of the transformation and the off shore Outsourcing businesses we currently perform for Aviva on a range of processes.

EXL continues to have Aviva as an important client in order to showcase our process expertise and knowledge particularly for U.S. and UK Insurance processes. EXL is also the only service provider in India for Aviva, where Aviva holds an equity stake as well as has a senior executive on our advisory board. Also, very importantly, EXL can now pursue other Insurance clients in the UK, which we will contractually prohibited from doing so in the past.

Secondly, EXL continues to have the largest number of Insurance outsourcing relationships and unparalled breadth of Insurance processes that we operate for our clients. We also have a base of Insurance domain expertise in our transformation business that is the best in the industry, particularly in areas such as analytics and process re-engineering.

We have a fundamental belief that process expertise and domain knowledge is more important than skill in competing for incremental Insurance business. Currently, we have significantly lowered client concentration after this transaction resulting in lower risk and potentially enhancing our future aggregate growth profile. As we grow from a diversified revenue stream, we should be able to accelerate the growth over time.

And lastly, we have maintained a strong balance sheet and have close to $100 million of cash and no debt on our balance sheet to service. We have the freedom and the flexibility to invest our cash flow from operations into high rate of return of investments, by undertaking acquisitions very aggressively.

As previously disclosed, one our clients, IndyMac has been taking over by the banking regulators, and they have stopped all origination activity. Hence, our volume of business with this client will come down in the second half of 2008.

Our other clients continue to build and grow nicely. We continue to add significant value to all customer relationships with high levels of service delivery and strong customer satisfaction scores. Our ability to get strong endorsements and references from all of our existing clients, provides us with a huge amount of confidence that our target of long term organic growth rate of 25%-plus will continue to be met.

We would also like to emphasize that our organic growth rate in our revised 2008 guidance, excluding Aviva over 2007 with the same basis, is 28% despite all the softness in revenues from our larger clients and ramped down from select clients.

From an operational perspective, EXL's attrition for the quarter was the lowest ever, since we have been recording it. EXL's second quarter attrition was 29% as compared to 44% in the same quarter last year. We believe that this third consecutive quarter of exceptionally low attrition is a result of our ongoing focus on attrition management, best in class work force management, and positioning and support of EXL's brand in India. Among other factors, EXL's low attrition is indicative of the positive reputation we have in India, as well as the future prospects that employees see for growth in our company and development in their own careers.

In the second quarter of 2008, we had significantly lower utilization of our physical infrastructure based on the addition of 900 seats in the Philippines. Based on total production seats of approximately 8,500 seats our utilization decreased to 80% as compared to 90% last quarter. Despite this lower seat utilization, and our annual rate increments at the beginning of the second quarter, our gross margins and our operating profits increased. We are extremely pleased that we were able to increase our adjusted income from operations by 71% on a year-over-year basis.

We also continue to bring Outsourcing business in the Philippines. The previous interest we described amongst our existing clients for expansion into the Philippines has translated to three clients beginning work in the Philippines, all of whom are Insurance companies. While we are focused on building volume in the Philippines, we will be careful to take on business that is sticky and profitable. We would expect to reach normal operating capacity by early 2009.

This year, however, we are incurring a higher than anticipated cost of carry as we build out our Green Seal capability in the Philippines. We do expect this cost to be conditional and this should turn into a profit next year as we grow this operation and amortize our fixed costs. As we have discussed before, we also continue to evaluate a range of opportunities to enter into new geographies around the world and further broaden our delivery footprint.

Now, let me spend some time talking about our customer pipeline. Despite the economic slowdown, we have not observed any related impact on the demand for our Outsourcing and Transformation Services. We continue to see large number of RFPs in the marketplace in industry verticals such as Insurance and Utilities. While the decision making on these larger deals have been delayed, and they are yet to close, we expect some definite decisions to be made in the third quarter that would have a large impact on our visibility of business going into 2009.

There at least six large deals in our pipeline, each with annual revenue potential in excess of $10 million where EXL is in the final shortlist. Half of these deals are proprietary in nature where EXL has been engaged with our clients in creating these opportunities on an exclusive basis. Should we win any two of these deals, we will be in a very good position to have an extremely nice growth trajectory for our business in 2009.

Although 2008 has been impacted by some of the client specific turmoil that is outside of our control, and this does impact the guidance for 2008, we are very confident about our business model of strong growth and profitability for the next several years. We believe that we are well-positioned for 2009 to be a strong year for us as clients focus on securing partners that have deep domain knowledge, strong execution skills, and are financially sound.

On the M&A front, we remain actively engaged in exploring strategic acquisition opportunities. While the number of target acquisition opportunities has increased, the valuation expectation of target companies still remains high. Converting our cash over the past year has positioned EXL extremely well to capitalize on these opportunities for inorganic growth.

We have been looking for opportunities that focus particularly in the Insurance and banking domain verticals as well as finance and accounting and other specialized horizontal processes. We continue to believe that M&A is an important tool for EXL to acquire additional process capabilities that we can then sell to our client's base to deliver incremental value and differentiation and enhance our growth rate. Now, let pass it over to Matt, who will provide more detail on our financial performance and updated guidance.

Thank, Rohit, and hello to everyone. Let me first take you to the income statement and provide some detail behind the numbers for the quarter. On an overall basis, the Company's financial performance in the second quarter met our expectations. Revenues for the quarter ended June 30, 2008, increased to $53.8 million, up 25.1% from $43 million in the quarter ended June 30, 2007. As compared to the first quarter of 2008, revenues for the second quarter increased by $2.9 million or approximately 6%.

Please note that effective April 1, 2008, we've revised our three previous reporting segments into two segments, Outsourcing Services and Transformation Services, to match the way our business now operates and markets its products. Transformation Services is comprised of the former Research and Analytics and Advisory segments with the addition of Process Advisory Services. Outsourcing Services is comprised of the former Business Process Outsourcing Segment excluding Process Advisory Services.

This quarter, our transformation services business, once again, led EXL's revenue growth. The transformation services business grew 14.3% as compared to last quarter and 46.1% year-over-year. Growth in our transformation services business is primarily attributable to the ramp up of several new client engagements with the Global Financial Services customers that we had mentioned on recent calls as well as increased work with existing customers.

In the second quarter of 2008, outsourcing services accounted for revenues of $42.9 million reflecting growth of 20.7% year-over-year, and 3.6% growth on a sequential basis. Excluding revenues from our top two clients, outsourcing services revenue grew [70.7%] sequentially.

Gross margin for the quarter ended June 30, 2008 was 37.0% compared to 33.1% in the quarter ended June 30, 2007 and 36.5% in the quarter ended March 31, 2008. The increase in gross margin of 50 basis points from the first quarter is primarily attributable to the positive impact of exchange rates during the quarter while offset by company wide annual wage increases and costs associated with the opening of our new Philippines facility. Wage increases this year were slightly lower than our historical experience in an attempt to control highly inflationary labor costs in India.

Operating margin for the quarter ended June 30, 2008 was 9.8% compared to 6.1% in the quarter ended June 30, 2007 and 9.9% in the quarter ended March 31, 2008. Adjusted operating margin for the quarter, which excludes the impact of stock compensation expense and amortization of intangibles, was 13.7% for the quarter ended June 30, 2008 compared to 10.0% in the quarter ended June 30, 2007 and 12.3% in the quarter ended March 31, 2008. Additionally, and importantly, adjusted operating profit totaled $7.4 million in the second quarter, which represents and increase of 71% from the second quarter of 2007.

In the second quarter of 2008, stock compensation expense was approximately $900,000 higher than the first quarter of 2008 due to the additional cost of 2008 equity grants. We expect stock compensation expense to be approximately $6.2 million for calendar year 2008, and in line with expectations.

We are particularly pleased with our operating margin performance this quarter in light of the wage increases granted as well as the headwind associated with our Philippines facility which opened in April 2008. We expect that over the next three to four quarters, we will attract additional business to fully scale our Philippines infrastructure and achieve our revenue and margin targets for this facility.

Over the last few months, the exchange rate environment has been extremely volatile. For example, during the second quarter 2008, the rupee depreciated approximately 8% and within a three-week period, from May 1 to May 21, the rupee depreciated approximately 6%.

Since the end of the second quarter, the rupee has appreciated approximately 2.5%. This kind of unpredictable volatility in the currency that denominates the overwhelming majority of our operations costs, makes it understandably difficult to normalize the optics of our financial results. And as you would recall, the same is true of the second quarter of 2007, when the rupee appreciated quite sharply.

Let me also mention, that from a revenue standpoint, the pound has been relatively stable, and depreciated slightly less than 1% in the second quarter. In addition, we are also increasingly subject to movements in the Philippine peso. The peso has also experience very significant volatility during the second quarter of 2008. Between April 1 and June 30, 2008 the peso depreciated approximately 8% and depreciated an additional 2% during July before appreciating roughly the same amount.

With this highly volatile foreign exchange environment as a backdrop, let me now explain the movements that have impacted our earnings in the second quarter. We reported a net foreign exchange loss as an element of other income of approximately $150,000 for the second quarter. This loss is comprised of losses on foreign currency hedges and gains on foreign currency transactions with customers and among the various EXL subsidiaries as well as the quarter end revaluation into U.S. dollars of our foreign currency balance sheet items.

We estimate that foreign exchange added approximately $900,000 while 1.7% to gross profit and $1.2 million dollars or 2.3% to operating income during the second quarter. Keep in mind that these movements represent the net impact of pound depreciation on revenue as well as rupee depreciation on cost.

EXL's net income for the quarter ended June 30, 2008 was $5.3 million as compared to $5.6 million for the quarter ended June 30, 2007 and $6.8 million for the quarter ended March 31, 2008. Diluted earnings per share was $0.18 a share this quarter as compared to $0.19 for the quarter ended June 30, 2007 and $0.23 for the quarter ended March 31, 2008.

Net income and earnings per share on a GAAP basis for the second quarter were primarily impacted by the impact of foreign exchange on other income. Contribution from foreign exchange was approximately $2 million lower in the second quarter than in the first quarter of 2008 resulting in a loss of approximately $150,000. Net income also continues to be impacted by the lower yields on our cash balances as compared to 2007.

During the second quarter, interest income was approximately $600,000 which is 40% below what we earned one year ago. Our effective tax rate for the second quarter of 2008 was 8.0% which in line with the rate for the first quarter of 8.2%, as well as for all of 2007, which was 7.2%.

With respect to key elements of our balance sheet, accounts receivable decreased by approximately $3 million as compared to the end of the first quarter 2008 due primarily to an improvement in collections. As a result, our day sales outstanding stand at 75 at the end of the second quarter 2008 as compared to 84 at the end of the first quarter.

We also ended the second quarter with cash of approximately $98 million as compared to $86 million at the end of the first quarter 2008, and therefore generated significant cash flow from operations during the quarter. On that note, EXL generated approximately $16.3 million of cash from operations for the second quarter compared to a use of approximately $8 million in the first quarter of 2008, and generation of approximately $9.4 million in the second quarter 2007.

Our capital expenditures for the second quarter were approximately $4 million. Year to date, our capital expenditures total approximately $10.5 million, with a large portion of those capital expenditures related to the new Philippines facility. We continue to expect that capital expenditures for the year will approximate $20 million with the largest share of that amount related to the Philippines.

I would like to conclude by providing an update on 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. Based on lower growth expectations at several of our existing client relationships in the second half of the year, and the specific impact on one of our mortgage clients, we are adjusting our revenue guidance by $5 million to a range of $200 million to $205 million.

While revenue performance has been quite strong this quarter, and also year-to-date as well it is explained in the short term, this is attributable to slower growth on existing clients, which we believe to be a timing issue, and certain client specific reductions.

Most notably, we are maintaining our adjusted operating margin guidance excluding the impact of stock based compensation expense and amortization of intangibles at 12% of revenue. While we have achieved 13% of adjusted operating margin year-to-date, lower revenues, and the timing of our ramp up in the Philippines from a financial perspective in the second half, drive a full year expectation of 12%.

Our GAAP earnings per share guidance now stands at 65% per diluted share. The key elements of the change from our previous guidance, which are largely items that do not impact operating income, include the following; one time, non-operating charges relating to tax on the transfer of the Aviva Pune BOT of $0.07 per share, and transaction costs totaling $0.02 per share, related to the recent sale of Aviva's off-shore business totaling $0.09 per share.

Indian tax law differs significantly from U.S. tax law. Capital gains taxes in India are based on an imputed value of an entity as specified in the regulations, rather than the actual consideration received. In addition, Indian tax law, unlike in the U.S. also imposes a tax on dividends paid by a subsidiary to its parent company. As we prepare to consummate the transfer of the Pune-based subsidiary that operates the BOT, we have paid a dividend to ourselves to reclaim the cash sitting in this entity.

Based on current exchange rates, especially the rupee, which now stands at approximately 42 to the dollar, we expect the net loss for the second half of 2008, totaling approximately $0.03 per share, from our hedge contracts, as well as non-cash revaluation of our balance sheet, due to timing and volume mismatches for the following -- for the various currencies, in which we conduct our business, we believe that this loss will result.

The revenue guidance reductions previously discussed are also expected to have a $0.03 per share impact on our earnings in 2008. Finally, timing related to revenue additions at our Philippines facility, combined with slightly higher costs, is expected to impact earnings per share by $0.03 for 2008.

In closing, we continue to believe that the key measures of the performance of our business are adjusted operating margin and adjusted operating profit. From this perspective, it is quite clear that our business remains sound during a period of unprecedented economic turmoil in the world. From a long term perspective, we continue to believe that the fundamentals of our business model, including growth rate and adjusted operating margin, are intact. I'd now like to open the floor for any questions you may have.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Ashwin Shirvaikar from Citi. Please proceed.

Thank you. Guys, my question is on -- are you reevaluating, perhaps, your decision to build up your call center capability? It seems as though between Orange and the Philippines, if the call center side is, obviously, more economically sensitive and perhaps, even for part of your 2008 guidance.

Yes, hi, Ashwin. In terms of what we've always said about getting engaged on [Voice spaced] businesses is that we will always work on those parts of the Voice business that are much more stickier and that provide additional value as well as give us the opportunity to engage in transformation activities with our customers.

So, as you know, we do not do any telemarketing and telesales as part of our Voice business. Most of the whites businesses that we are currently engaged in are actually extensions of services and processes on behalf of our existing clients.

And it is our intent to continue to provide a wide spectrum of services, both back office, as well as Voice space services, in the outsourcing domain to our customers. So, we're going to continue to build on that strategy of ours, and we will stay away from some of the more commoditized Voice services, which are subject to margin dilution and are very border.

Fair enough. The six large deals that you mentioned, and you said that 2009 would have pretty good growth if you won two of those, ordinarily is your win rate more than 33%?

So as far as this pipeline is concerned, these six transactions are only those transactions in which we are in the final shortlist of the last two or three service providers that the client is making a decision on. And these are substantial prospects which have the potential to give us revenues in excess of $10 million annually. Based upon our previous historical win ratio, when we get to such a final shortlist, typically, we will end up winning anywhere close to 25% to 40% of these deals.

Keep in mind, however, also the fact that three of these deals are actually proprietary. And in the proprietary deals, we do not really have any competition and if the client decides to move forward, then, that is something which we would expect to come to us. So, yes, we actually believe that there is a good chance for us to be able to get at least two deals and we could even have the possibility of some upside by winning more than two deals out of this six that we have in the pipeline.

And how are you situated as it relates to your delivery capacity, given the 80% utilization -- if you were to win these deals, [cutbacks] and seats for nine to 10?

Absolutely, and that's a great question, and given the slow down of some of our select customer relationships, in the second half of the year, given the fact that we don't have the Aviva transaction to contend with, we actually can focus in all of our effort and energy in terms of the execution of these customer contracts.

We have the physical infrastructure, we have the management bandwidth, and we have the ability to focus all of our attention, in terms of ensuring the success of the transition of these particular new client relationships. In fact, we think we are better positioned than competition at this point of time, to be able to secure these customer relationships and we can reduce the risk associated with the transition for our prospects, which are there in the pipeline. So, we feel very good about the infrastructure, the people, the management bandwidth, and the attention that we can give to these deals.

Okay. Thank you.

Your next question comes from the line of [Dave Conan] from Robert W. Baird. Please proceed.

Yes, hey guys. When we look at the historical growth in the BPO segment, we looked last year and all the quarters were growing sequentially 8% to 11%, this year, it's much more choppy, and certainly understandable with some of the client transition issues you're dealing with, but if we look at Q4 as a new base, given the Aviva contract will be gone by then and IndyMac will largely be gone, from that Q4 base, are we going to see more normalized 5% or better sequential growth given the pipeline et cetera?

Hi, Dave, this is Rohit. Absolutely. You know, if the volatility we are seeing with our existing customer base and we really can't do anything associated with this volatility because our clients are making decisions based upon economic factors that are impacting their business. And this has got nothing to do with our service delivery quality or our capability. And once that settles down, and if we have these two or larger numbers of deals that we win, which are there in our pipeline today, absolutely, we would expect to grow at 5% plus sequentially quarter on quarter from the fourth quarter of 2008.

Great, thanks. And secondly, just on the margins, you know the first half of the year, 13% or so, second half it looks like it's going to be 11% or so, is the 11% more the way to think about next year, given it still will take more time to ramp capacity or utilization et cetera, or do you expect to bounce back pretty quickly more to the more normalize 13% type range?

No, from our standpoint, we've always said that we would expect our long term operating margins to be above 12%, and we've been able to historically demonstrate that. So, while for the second half of this year, we expect our operating, adjusted operating margins to come down, we would expect that in 2009 our operating margins will go back up and we will be able to be at least 12% or so.

Now, the other thing which you need to keep in mind is that if the currency remains at current levels, we would be able to actually expand on those margins. However, if the currency appreciates, if the India rupee appreciates against the US dollar, then obviously, our margins will be impacted.

That's helpful. Then, just finally, if we look at this year, the $0.65 number, and add back a lot of the one-time type expense, even including the Philippines, since that's some cost that won't recur, I guess long term, you get to maybe and $0.80 or so number. Then if we strip out the Aviva from this year and some of the IndyMac from this year, you get more towards a low $0.70 number, kind of a normalized base of EPS, is that kind of the EPS base to grow '09 off of. You're talking about 20% or so normalized growth, are those all kind of the right metrics to be thinking of as we start to think about '09?

Hi, this is Matt. I think that is the proper base to think about how to measure our 2009 performance, and that's certainly what we (inaudible).

Great, thank you.

Your next question comes from the line of Julio Quintero from Goldman Sachs. Please proceed.

Hey, Rohit, just wanted to go back to your absolute comments about 5% quarter to quarter growth for '09. By saying that, I'm just trying to understand, to make sure that you're effectively setting a tone for the kind of guidance you want us to start thinking about for 2009, and the implied growth rate on a 5% sequential for the full year. I believe, if my calculations are right for the organic growth rate, would get you to something around 20% or so. Is that the kind of growth rate you want us thinking about for '09 on an organic basis?

Hi, Julio. So, you know, first of all, we're not providing guidance for 2009, but we are rather trying to provide you with qualitative assessments of the way we think about our business. The way we think about our business is that in the second half of 2008, there is some known customer impact, which unfortunately, we at the EXL can't do very much about.

However, once that known customer impact normalizes, we do expect to be able to grow our business at 25%-plus, in terms of our organic growth rate over the long term. And therefore, yes, we do expect, once this has normalized, to be able to build up our business at that particular pace.

Yes, I guess I'm just -- relative to where we started this year and the tone that you guys had at the beginning of the year, as far as implied visibility, somewhat the revenue streams you guys would have had, to where you are now, obviously, it's very disappointing to not have -- to not still be on track, clearly, you guys can't control it, but juxtaposing with some of your competitors who are actually still executing against their revenue plans and even raising guidance, what is the difference in the sense that in the kind of concentration of revenues that you guys would have, where you just don't have a handle on the revenues -- is it your mix of revenues, is it your client concentration, and how can we get comfortable that you guys are actually on top of this at this point?

Look, I think that we had certain challenges that were known at the time when we entered into 2008. We certainly knew about the Aviva Pune BOT business, and we had factored that in. However, there were other clients, and we had certainly factored some amount of growth, which we had seen historically, and some of those assumptions certainly changed as we went into 2008, and as we've gone through half of 2008, and we know what to expect for the remainder of 2008.

I think the one thing which is very true for our business is that getting in new customers takes time, and building up revenue from new customers takes time. We are unable to build up revenue very rapidly, but we are able to layer it on top of the previous revenue, and the sequential growth momentum, once it starts to kick in results in a very good momentum for our business and results in much higher revenue growth.

The second half of this year is a peculiar period where we have had fewer pipelines actually bring down the volume of business and there has been a simultaneous delay in the signing of new customer contracts. But, once this volume normalizes, and once we have the contracts decided upon, we should be back on the trajectory of being able to grow our business at 25% plus.

Can you just delineate between the volume and delay comments between the two segments, between transformation and outsourcing, just to get a better sense for where that really is, specifically. In other words, is it more the transformation side, or is it more the outsourcing side of when you say volume and delays?

No, I think on the transformation side, there has been no delay in terms of customers taking decisions. In fact, that part of our business is growing extremely well, and we are very well engaged with a broad cross section of clients and customers are taking decisions very quickly because they can see the benefits accruing to them very, very quickly.

It is really in the outsourcing part of our business where the decision making is a little bit slower, because our clients will only get the benefit over the next 12 to 18 months and therefore, they're thinking about different strategies where they can get faster benefits.

So, while there has been some delay, in terms of our decision making, the pipeline has actually become much more stronger, and much more ready for decision making and we do expect to have some imminent decisions over the next 8 to 12 weeks.

Great. Thanks.

Your next question comes from the line of Joseph Foresi from Janney Montgomery Scott. Please proceed.

Hi, my first question here is, you talk about lower volumes from some of your present clients, you also talked about some delays in signing new contracts, I was wondering if you could give us more visibility on both -- first, on how long you expect these lower volumes to continue from present client base, and second, maybe the reasoning behind the delays of the signings of the new contracts.

Sure, Joe, in terms of the lower volume that we are experiencing from some of our clients, the clients that we had in the Mortgage Industry vertical, that business has really changed out there, and they have, in fact, stopped doing any origination activity, and therefore, the volumes have been cut back in -- quite significantly.

Other clients have chosen to maintain steady volumes and not grow their business as they have done so in the past, historically. And some of these, for us, are particularly large client relationships. And therefore, when a large portfolio doesn't grow, it will have an impact in terms of overall volumes.

In terms of the delay in decision making on outsourcing transactions, clearly, all decision making in the Banking Industry vertical is pretty much at a standstill right now. And we don't see any real decision making for outsourcing services in the Banking Industry vertical. We do, however, see decision making for transformation services in the Banking Industry vertical.

As far as the other industry verticals are concerned, they are continuing to make decisions and move forward in terms of looking at outsourcing and off-shoring. However, there has been a bunching up of activity, and I think all of this activity, at least for EXL is getting bunched up into the third quarter of this year.

And it's just coincidental that it's gotten bunched up into the third quarter of this year. We will see what kind of decisions get made, but we remain very confident that we've got a strong pipeline here and we'll get some favorable decisions, which will allow us to be able to continue to progress our growth.

When you say, bunched up, are you referring to the fact that the deals are potentially going to be signed, and or started, or how would you characterize that term?

I think these deals, as I said, in the final stages of the decision making and clients have their final shortlist ready and they're looking to make a decision, here. And just by contrast, I will mention to you that today -- and right now, as we report, we've got six major clients, which are intending on making a final decision. If you took a look at that at the beginning of this year, we had only two major clients at that point of time were thinking about making a decision. And one of them has actually carried forward, and not made a decision, and one did make a decision.

So, you would say the pipeline is stronger on an annual basis than it was last year?

Yes, it absolutely is.

Okay. And then, just secondly, you mentioned acquisitions, that's probably more aggressively than we've heard it in the past, have you intensified your search for an acquisition, and what exactly are you looking for in that particular area?

Sure. So, one of the things which I think everybody would be aware of is that since we were competing for the Aviva business, that was a major acquisition that we were competing for, and therefore, we had actually restrained ourselves from looking at other opportunities and that had clearly taken up a lot of our attention in terms of acquisition opportunities. Now that the Aviva decision has actually been made, we have the flexibility and the freedom, as well as the capital, to take a look at other acquisitions.

When we take a look at the economic environment, and we take a look at our industry, there clearly are a number of players which are struggling in our industry and in our business, and therefore, with our financial strength, and with our size, we think we are well-positioned to take advantage of consolidating some of these particular companies, whether they be in the U.S. or in UK, Europe or in India.

The areas that are of interest to us are to build up our capabilities in the verticals where we operate in, so for us, Insurance and Banking, would be the two verticals that we would look at for building up our capabilities and our range of service offerings and expanding our customer base in and we would also look at finance and accounting as a horizontal service offering where we'd want to be looking and seeking acquisitions.

And then just one last quick question -- just on the currency side, maybe you guys could give us some color on what you expect the hedging to look like going forward, and maybe what you have currently on the balance sheet in that regards and maybe tax rates, thanks.

Sure, first this is Matt. Let me speak to the hedges, first. Let me just make an overall comment, Joe, that managements of FX is difficult in a normal environment, but in the volatile environment that we're in right now, with some of the movements that I had talked about, it is extremely challenging.

There are at least five, if not more, elements of managing FX that come into play that may not be entirely obvious to everyone. Whether it's the balance sheet, hedging, or whether it's the interaction of the various currencies that we do business in. It also has to do with the settlement of foreign currency transactions that, for example, revenue or receivables that are denominated in pounds, and also the settlement of transactions between our companies, which are also denominated in foreign currencies, and of course there's a balance sheet revaluation that's done at the of the period.

To make it even more complicated, we start the year with a certain level of hedging, with respect to our forecasted financial activity, and then we put on additional hedges during the year that would mature in this particular year. So, when you take all of that into account, we have a very complicated and dynamic situation that's exacerbated by the kind of movements that we've seen during the second quarter. Having the currency move so swiftly and so steeply in three weeks is quite suggestive of that.

So, Joe, we do hedge rather aggressively. We've got about 80% of our activity hedged out approximately 18 months and we have hedges totaling about $84 million U.S. dollars or rupee, and almost a similar amount, slightly less, $41.7 million pounds to hedge the pound.

At this moment, the -- if you look at these hedges as we have to for reporting purposes, at the rates that existed as of the balance sheet date, we are looking at losses that really don't quite correlate to what might happen, for example, if the hedges were closed out today, because the rate at the end of June was 43.02, today, it's danced around 42.

So, what I'm suggesting is that $13.1 million of losses that we had in our hedges as of the end of June now looks substantially less, at maybe a third of that, at the rates -- at the foreign currency rates that are in place today. In fact, if the rupee were to move to 41 or 40.5, you would see this turn in the other direction.

And so, our -- my outlook on foreign currency, the Company's outlook, which you saw characterized in our guidance, can only be couched in terms of the rates that exist now. And any movement, in any direction, will have an impact on our expectations in terms of FX as well as the impact on our operating income and gross margin.

Thank you.

Your next question comes from the line of David Grossman from Thomas Weisel Partners. Please proceed.

Good morning. Just [a minute] on that foreign currency question -- how much of the current quarter's loss and your commentary about the outlook was cash kind of hedging gains and losses versus non-cash balance sheet mark-to-market at the end of the quarter?

Hi, David. How much of our loss is related to cash itself?

That a component of the loss is marking the balance sheet assets to market at the end of the quarter or to the current exchange rate. So, I'm just curious, how much of the loss during the quarter was non-cash as a result of the balance sheet translation adjustments? And similarly, how much of your $0.03 of loss, as you talked about in the outlook, are non-cash as well?

So, we don't disclose that separately, David, but each of the elements were netted to less than $1 million, $0.5 million or less to give us the $145,000 loss we had for the period. So, the thing to key in on here is that, while the impact in the second quarter wasn't all that significant, it was a marked change based on the rates that we saw in the first quarter, where we had a net gain of $1.8 million. And if you take into context the outlook that I had given you for our hedges, depending on what might happen, through the rest of this quarter, and the rest of this year, you could really see quite a different result.

I see. And just backing up, you made a comment about stock comp expense, did you say $6.2 million for the year?

I did, David. That's been our -- where we've been for quite some time.

Right. And if you -- it looks like, though, it would have to come down sequentially for that to happen, is that -- am I understanding that correctly?

Yes, there is a reduction later in the year for -- related to some equity instruments that have been fully compensated. But what you should look at is the change between the first quarter and the second quarter. We normally grant the overwhelming majority of our equity in the second quarter. That actually took place in late April. And so, you see quite a change in April that would start to define the run rate less some sequential reduction as you've noted later in the year. The $6.2 million will be just about spot on.

Okay. And then, the margins that you talked about, how much of a headwind is the loss of the Aviva business from an overhead absorption standpoint? So, as you look at the margin performance in the second half of the year, obviously, there's going to be a fairly substantial adjustment that has to made in revenue growth to overcome that, is it as substantial as it seems, or is that not that big of an issue?

It's slightly larger than the margins on our other outsourcing business. But, with the growth that Rohit has spoken about, fairly confident that with the infrastructure and support that we have running our company, we'll be able to absorb that in short order. And that's our plan.

Okay. And then, just getting back to I guess, Rohit, your comments about volumes and demand, I guess I'm a little confused, and maybe you can just help distinguish -- or isolate the elements, it seems like we've had some known issues in the portfolio of both on the telecom side and the mortgage side that were fairly well known going into the second half of the year.

And I'm just curious, how much of the -- if I do the math, it just seems like the declines in revenue and volumes from those clients -- you know, for the most part makes up the $5 million reduction in guidance -- so, am I understanding that right, that your reduction in guidance is pretty much, for the most part, isolated to those two customers, or is it really extending beyond that, and I'm just not fully understanding that?

Well, David, it is just those two clients, but we've also said that our relationship with British Gas has been somewhat stable. That's another customer relationship that has an impact on our revenues in the second half of the year. And it's basically, all of those factors that are having an impact in terms of our revenues in the second half.

Right, so, your largest customer remains relatively flat sequentially, is there any reason to think that that would -- when you isolate that, do you mean it just remains flat, or does it, in fact, decline in the second half of the year?

Yes, for us, the British Gas relationship is fairly stable and mature and there is not too much of growth that we can anticipate out there. If the volume of work that we do for them comes down because of efficiencies savings that we can deliver for them, then that certainly can have an impact on the volume of business that we have with them in the second half.

Okay, very good, thank you.

Your next question comes from the line of [Ed Casil] from Wachovia. Please proceed.

Hi. Good morning and good evening. My first question, on the six deals, can you let us know what vertical markets they're in?

Sure. The six deals that we have, one of them is in Utilities, we have three in Insurance, and the other two are in Transportation and other verticals.

Thank you. And Matt, can you comment on the guidance for the tax rate and -- I guess the last two quarters, we've been looking fourteenish, and it's been coming in at eight, and just wanted to get a sense of the back end of the year, and what may move it around.

Sure, Ed, I'd expect that if you exclude the one time taxes on the Aviva BOT transfer that I talked about early, the taxes would come in at 8% for the year. What you should see is that we've been providing our taxes on a much more stable outlook for the year as opposed to the quarter to quarter volatility that you'd recall from last year, and so I think the tax provision of 8% for this quarter, again with the exception of these one time taxes, is reflective of our expectation for the full year.

Great, thank you. On the resourcing side, obviously the Indian economy is slowing down a bit, your business is slowing down a little bit, you and your peers, and given that half your work force turns over fairly rapidly, do you have the ability to sort of screw down on the average wage level here. I know you do annual increases, but that's just for your existing workforce, so is there an opportunity to sort of reduce your cost of services?

Yes, it, clearly, with the Indian economy slowing down, some of the things that we are noticing is that the increase in the real estate costs are coming down quite significantly. In fact, in some situations, there is a decline in the real estate costs, so that certainly is helpful to us.

Also, the rate of salary increments is coming down, and it's coming down in the industry group. And thirdly, it's becoming easier to recruit people for doing work, particularly for back office and transaction processing work. And therefore, there is some amount of advantage that we can gain out there.

Now, keep in mind, as far as EXL is concerned, our attrition rates have been coming down, and we are particularly pleased with the attrition rate being below 30%. And again, that's something which gives us a fair amount of leverage in terms of our recruitment and training costs and expense space.

Great. Last question, can you remind me if you have a [shared] purchase authorization in place and more generally, is there any interest in doing shared purchase, obviously, your stocks having a tough day today -- at what level does that become an opportunity, or are you just totally focused in on [dry powder] for acquisitions?

Sure, so, we do not currently have any authorization for stock purchase, nor do we have any intent of really doing stock purchases. From our standpoint, we've got cash on our balance sheet, and we want to use it for growth purposes. We think there are adequate opportunities which are very attractive, which can meaningfully increase the value of equity for our stock holders. And we intend to use the cash to grow our business and add greater value to our share holders in that particular manner.

Great, thank you.

Your next question comes from the line of [John Matea] from Needham and Company. Please proceed.

Yes, thanks very much. Not sure if the question is for Rohit or Matt, but with regard to the 2008 revenue guidance, does that new guidance reflect the potential for further softening in that 6% of revenues comes out of banking and the mortgage industry?

Yes, hi, John, this is Rohit. Yes, we have factored in the softening that is currently anticipated from the mortgage and the Banking Industry vertical. And that is included in our guidance.

Okay, and then, the second question I had, with regard to the $0.03 charge associated with opening the Philippine location, whatever that expense was, does that go away as we move into calendar '09, or is there potential to further cost overance there?

No, John -- this is Matt -- it certainly goes away. It just reflects slightly slower revenue, slightly higher expenses during this initial period, but it would certainly go away as we ramp up that facility and achieve the utilization in the margins that we expect.

Got it. Thanks very much.

Your next question comes from the line of Matt McCormick from FBR.

Hi, good morning. In terms of the pipeline in new business, you did mention that one is coming from the Utility vertical. But with, Centrica as one of your top clients, I guess, could you talk about the opportunity that you see in that vertical in terms of parlaying your domain expertise from that client into other areas. Because, it seems as though your more focused on the BFSI segment. So, what kind of opportunities should we expect there.

Sure, Matt, this is Rohit. You know, for us the Utilities Industry vertical has become a very strong vertical with almost 22% of our revenues coming in from that particular industry vertical and British Gas. The number of processes that we handle in the Utilities industry is now extremely wide.

Our domain knowledge of the Utilities industry is extremely strong and has got a tremendous amount of depth and therefore, we do think that we will be able to leverage this domain capability, knowledge and experience that we have in the Utilities Industry vertical. And there are some very significant outsourcing opportunities with other Utilities clients that we have as an opportunity for ourselves. And this definitely is a growth industry vertical for us.

Okay, in terms of Orange, you'd mentioned that you're currently in negotiations with them, I guess, could you talk about what potential outcomes there could be. And then, what is implied in your commentary about 5% sequential growth next year with respect to Orange?

Sure. So, the contract with Orange really goes up into the fourth quarter of this year and we are in discussions and dialogue with them to determine what the scope of services may be going forward. There are broadly, two different sets of opportunities that we are currently negotiating with them.

One is on the Voice, what we do in the customers functionality, where we are talking to them about different types of customer service work we can handle for their mobile business, as well as for their home business. And then, the second stream of activity that we are talking to them about is on back office work, which is something which they are also contemplating outsourcing and we are engaged with them as far as that is concerned.

Now, if we are able to successfully win, then we will be able to grow this account, our relationship going into 2009. If we are unsuccessful in any of these bits, then that is something which we will see and will let everybody know as soon as we know the outcome of this discussion.

Okay, great. Thank you.

Your next question comes from the line of [Pen Jung Yeung] from JPMorgan. Please proceed.

Hi, thanks. Sorry, if you discussed this already. I was disconnected. Pricing -- any update on pricing, both in outsourcing and on the transformation side?

Yes, on pricing, actually, on the transformation side of our business, pricing is fairly stable. There is a [part] of the transformation business which is in analytics, and there, in some of the large off-shore analytic transactions, there is competiveness in terms of the pricing levels, because there is a fair amount of volume that companies can pick up in that particular business line offering.

As far as outsourcing is concerned, pricing, generally, has been relatively stable. There are occasional situations where we do see competition price very aggressively and price in and irrational manner, but broadly speaking, pricing has been fairly steady.

Okay. And then, Rohit, the six deals in the pipeline, anything unusual there in terms of capital intensity that might be required? And then, what kind of services are being demanded, as well?

Sure. All these six deals, which are there in the pipeline, are all third party service contracts. There is no capital requirement out there. There is no upfront conservation that we need to pay to get this business. And each one of these is something which is in the final stages of their decision making. As I said earlier, three of them are in Insurance, and therefore, we feel are very, very strong about our odds of winning the business of them, and are in very good position in order to win that business. And we will get to know the outcome hopefully, in the next 8 to 12 weeks.

And the type of services that are being demanded, is it primarily F&A or --

Yes, absolutely. It's -- there are basically, most of this is back office and transaction processing work, and there are a couple of deals which are F&A work. So, it's really a combination of F&A and back office transaction processing both.

Okay, so pretty traditional. Then one last question just for Matt, on the foreign exchange hedge contracts, you mentioned the losses related to, I think, volume mismatches for the currency, does the risk there -- let me ask it this way, does the change in the Aviva contract and IndyMac, et cetera, does that increase the risk of this mismatch going forward, on the hedge side?

No, it really doesn't -- sorry to cut you off -- no, it doesn't. We were quite careful in hedging, with respect to the Aviva contract. And, we have -- a company would have a problem if they got in front of themselves, in terms of hedging, so you have to be very careful not to get "over hedged". So, we're very careful with respect to the Aviva transaction so that does not cause us a problem.

On the IndyMac contract, as it's come down over the quarters from last year, it no longer comprises as significant a portion of our cost here in India. So, it's really not that much of a risk and wouldn't have a material impact on the hedging.

Okay, good to know. Thank you.

At this time, I'm showing you have no further questions. I would like to now turn the call back over to Rohit Kapoor for closing remarks.

Thank you. I would just like to conclude by saying that while we have a challenge in the second half of this year, I think our pipeline is very strong, our strategy is playing out extremely well, we are well positioned in the marketplace, and our financials are extremely strong. So, we remain very confident about the future and the growth of our business, as well as our business model. And thank you so much for joining us and we look forward to talking to you later again. Bye-bye.

Ladies and gentleman, thank you for your participation in today's conference call. You may now disconnect, have a wonderful day.