Exlservice Holdings Inc (EXLS) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2008 EXLService Holdings, Inc. Earnings Conference Call. My name is Nykita, and I will be your operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the call over the Mr. Jarrod Yahes, head of Investor Relations. You may begin, sir.

Thank you, Nykita. And thanks, everyone, for joining us today on our Third Quarter 2008 Earnings Announcement.

Joining us this morning in New York are Rohit Kapoor, our President and Chief Executive Officer, and Matt Appel, our Chief Financial Officer.

We hope that you've had an opportunity to review the news release we issued this morning, as well as the PowerPoint presentation that's available for review on the Investor Relations section of EXL's Website. Let me quickly outline the agenda for the call this morning.

Rohit will first talk about the economic environment, and the effect that we see that having on EXL's business, as well as some of the recent exciting client wins that we've experienced. Matt will then take you through the financial details of the third quarter, and provide an update on the remainder of 2008, and then close the presentation before we take any questions.

As you know, 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 materially differ 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 SEC from time to time. EXL assumes no obligations to update the information presented on this conference call.

During our call today, we may reference certain non-GAAP financial measures, which we believe provide useful information for investors. And you can find reconciliations of those measures to US GAAP on our press release. Now, let me turn the call over the Rohit Kapoor, our CEO and President. Rohit?

Thanks, Jarrod. And good morning, everyone. The last quarter has been one of the most challenging economic environments in recent history. In this difficult economic environment there have been a number of concerns around the sustainability of growth rate for the BPO business. However, in our viewpoint, we believe that outsourcing will continue to be embraced by clients, and the secular growth trend in our industry will continue with tier-one service providers.

We believe that the penetration rate of off-shoring amongst our clients is relatively low, as compared to IT outsourcing. Further, BPO is not a discretionary expense. And the benefits to our clients by off-shoring are immediate and substantial.

We would expect to see clients and prospects gravitate their choice of outsourcing partners to more well-established and financially secure service providers. As such, we are seeing that our clients and prospects are becoming even more aggressive in cutting their costs. And, therefore, we would expect them to increase their usage of EXL's transformation and outsourcing services.

Our business model continues to demonstrate resilience and renewed growth momentum, even in this difficult business environment. Fortunately for us, EXL derives almost 45% of its revenues from clients in the insurance industry vertical, and 23% from the utility industry. These are relatively safer industry verticals that are well regulated.

We also have two primary lines of business -- outsourcing and transformation, which provides the much-needed diversification in our overall business.

Consistent with the last several quarters, EXL experienced another quarter of exceptionally strong demand for our transformation services. EXL's transformation business has seen a continual acceleration since the end of 2007, and we believe 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 reengineering, risk-advisory services, and consulting to deliver strategic enterprise-wide costs reduction.

Transformation business grew over 10% sequentially in the third quarter, over 14% sequentially in the second quarter, and over 10% in the first quarter.

Transformation services now represent over 25% of our consolidated revenues, and we believe this is a highly strategic component to EXL's overall value proposition. Our ability to offer integrated transformation services, along with our outsourcing capabilities, creates a truly differentiated positioning for us that will take our competition at least 18 to 24 months to catch up on.

Part of what drove the growth in our transformation business this quarter was growth with several existing accounts that continue to expand their relationships with us.

We also continue to win new accounts to support the base of annuity revenue in our transformation business. For example, this quarter, we won an offshore analytics pilot with a leading UK bank in the credit-card area that could prove sizeable. Additionally, we had risk-advisory wins with a large wholesale-distribution company, as well as a leading US bank.

We are enthusiastic about the sea-level relationships we have developed in our transformation line of business, as well as the growing pipeline of cross-sell opportunities from transformation into outsourcing that have emerged.

EXL has historically done a great job of converting outsourcing clients into transformation clients, and we are now seeing significant momentum the other way around. This would inherently lead to much higher volume and business growth. We hope to have more to report to the market on this front next quarter, and would provide detail on actual conversions as they materialize.

We are working in an extremely focused manner to reinvigorate the organic-growth rate in our outsourcing business, with high-quality business from strategic accounts. Last quarter, we reported that there were six strategic deals in our pipeline, across multiple industry verticals, including one in utilities, three in insurance and two in transportation and other verticals.

I am extremely proud to report that we have won three of these deals, including the one in utilities, and two in insurance. All three of these opportunities were in competition with our key competitors, and could each represent $10 million or more of annuity revenues when fully ramped-up.

The three remaining decisions are yet to be taken, and are progressing well. We expect those decisions to be taken before the end of the year, or in Q1 2009, depending on the pace of client decision-making.

This win-person pace is well above our expectations, and it makes the business-development results in the third quarter as our best ever. We also believe that we are being selected by new clients because of our impeccable references, strong domain knowledge, financial strength with no leverage, and our demonstrated and unfettered ability to focus on organic growth.

I'm also excited by how our pipeline continues to mature and grow. Since the last earnings call, we have now been down-selected to among a handful of providers for three additional strategic relationships, in addition to the six we mentioned previously. Two of these are in our insurance-industry vertical sweet-spot, and an additional opportunity is in finance and accounting.

In addition to our strategic win in utilities, we also won another outsourcing client in the utilities sector, truly providing EXL a leadership position in the utilities vertical. With these two new utilities wins to complement our strategic relationship with British Gas, EXL should be able to develop even deeper industry-vertical expertise in the utilities sector, and a greater diversity of processes.

We should also be in an advantageous position to win additional client relationships in the utilities sector going forward. We believe that the intensive manual nature of much of the finance and accounting work in the utilities vertical, combined with the relative stability of the industry during these difficult economic times, makes this an extremely attractive core vertical to focus for EXL, to complement our insurance vertical.

To execute on this important opportunity to establish a leadership position in the utilities vertical, we plan on putting additional client-relationship resources into this area, to continue to assist with business development and client execution.

Our other two strategic wins were in the insurance vertical, which has a core position of strength and leadership for EXL. With these wins, EXL now serves seven of the top 10 US insurance companies.

We continue to consistently be selected by the world's largest insurance companies, based on our domain expertise, diversity of processes, and exceptionally strong management and delivery teams in this vertical. I would also call out that we continue to be highly disciplined and conservative with respect to pricing and deal structures within the insurance vertical, and have won these deals on that basis.

We believe that our ability to consistently deliver quality of service and innovation to our insurance clients is predicated on the sustainability of margin, and our ongoing financial help. Therefore, we will no pursue acquisition transactions or uneconomic pricing transactions that could put our long-term financial health at risk.

In addition to the above new-client wins, EXL has also seen significant demand from our existing strategic clients, and have received orders from three existing strategic clients to expand the scope of work that we do with them.

While we do not believe that these orders are directly coordinated with the difficult economic environment, what is clear is that cost pressures continue unabated in a number of industries, and off-shore BPO offers a rapid return on investment for our clients, with lower execution risk in response to these pressures.

The orders that we have received from existing clients are meaningful in size -- at least 100 [FDs] or more. And, more importantly, the new processes should be able to be migrated to our delivery centers on an expedited basis. As you know, we are able to expand existing client relationships much more quickly than new-client relationships, so these orders should provide a boost to us in early 2009.

To prepare for the immediate take-on of this new business, we are opening a 300-additional-seat center in Noida, effective in the fourth quarter, to have adequate capacity for these clients. We will also be investing in a separate, new SEC infrastructure in Punay to support our growth plans with new clients in that location.

We also continue to win new outsourcing business in the Philippines. This quarter, we signed our fourth client in the Philippines, and there are several large prospects in the pipeline that we expect to hear from before the end of the year.

We are focused on building volume in the Philippines with the clients that we have won. However, our ability to achieve our state goal of reaching normal operating utilization by mid-2009 will be dependent on the conversion of some of these opportunities.

We believe that the new-client wins we have mentioned, in conjunction with expansions we have been awarded from existing clients, and the continued strength of our pipeline, we'll return the outsourcing business to its 25% plus organic-growth rate over time, as we rebuild momentum in our core business, over the next several quarters.

In terms of our operations, EXL continues to receive leading scores, and improves year on year, from a customer-satisfaction perspective. As you know, we measure client satisfaction in an extremely rigorous manner, along the lines of overall customer satisfaction, quality of service, timeliness of service, compliance to SLAs, accuracy of reports, and responsiveness of staff.

The first half of 2008 results have arrived, and we are excited to share the outcome. EXL increased its overall client satisfaction to 89% in 2008, from 79% in 2007, and 64% in 2006.

The other sub-categories have also been moving in a manner consistent with the feedback we receive from our clients -- that our focus on operational excellence is the key to client satisfaction.

EXL's attrition for the quarter was 36%, as compared to 39% in the same quarter last year, and 29% last quarter. We believe that the up-tick in attrition is a result of difficult comparisons versus the record-low attrition of the last several quarters, combined with some specific clients in the quarter that experienced higher-than-normal attrition due to process uncertainty -- for example, our relationship with a UK telecom provider.

We continue to focus on our long-term attrition management, and the development of industry-leading human-resources practices to continually drive down our attrition year on year. In addition, we believe that the slowdown of the GDP growth rate in India and the Philippines will enhance our ability to hire, train, and retain talent in our principal delivery locations.

While we remain actively engaged in exploring strategic acquisition opportunities to enhance our capabilities, and expand our delivery footprint, we believe that the private-market valuation expectations have not come down adequately in response to the large reduction in public-market multiples.

Despite this being the case, we continue to evaluate a number of acquisition opportunities in our selected verticals. At the same time, we continue to generate sizeable cash flow from operations, even when taking account capital expenditures required to support our business growth.

Based on our confidence in our current business plans, and our surplus-cash position, we are announcing a $10 million share buyback. We expect to execute this buyback over the course of 2009, the timing of which will depend on market conditions, share price, and other factors.

We believe that this limited stock-buyback plan will not constrain our ability to pursue strategic acquisitions, nor will it prevent us from investing for business growth.

We continue to have a high degree of confidence in our ability to take advantage of the strong-demand environment in our market segment. EXL is winning good-quality new business on profitable terms that will reduce our client concentration and allow for a strong base of organic growth in 2009. Now, let me pass it over to Matt, who will provide more detail on our financial performance.

Thanks, Rohit. And good morning, everyone.

With the sale of the Aviva BOT during the third quarter, this operation is now accounted for as a discontinued operation. What this means is that tour financial statements now separately report our continuing operations from our discontinued operation, and that all financial measures will now be based on the continuing operations of the Company.

Please keep in mind that this method of reporting is applicable to all periods reported, including prior periods. Therefore, certain amounts have been recast for reporting and comparability purposes.

A full bridge of our prior and current income statements has been posted online to aid in your understanding of the changes. And there will be additional information you may find useful in our 10-Q filing that is scheduled for next Monday.

As an example, in the third quarter of 2008, the Aviva BOT generated approximately $3.1 million in revenue. Therefore, our revenue for the third quarter would be $49.7 million on our prior basis of reporting. We hope this information will be helpful to you in updating your models to include just the continuing operations of the Company.

Revenues for the quarter ended September 30, 2008, were $46.6 million, up 17.9% from $39.5 million in the quarter ended September 30, 2007, and were essentially unchanged as compared to $47 million in the second quarter of 2008.

In the third quarter, the UK pound depreciated 9.2%, as compared to the US dollar, and has continued this trend subsequent to quarter end, falling an additional 10%. The depreciation of the UK pound had a year-over-year impact of $1.7 million, or 4.3% on revenue, and a sequential impact of $1.1 million, or 2.3%.

This quarter, our transformation-services business posted revenues of $12 million, which represents 10.7% sequential growth, and growth of 43.5% year over year. The growth in our transformation-services business is primarily attributable to the ramp-up of new-client engagements with both new and existing customers. This is a direct result in progress we have made in developing, and more tightly integrating our transformational service offerings.

In the third quarter of 2008, outsourcing services accounted for revenues of $34.5 million, reflecting growth of 10.9% year over year, and a decline of 4.4%, from $36.1 million in the second quarter of 2008.

Excluding the impact of currency on revenues of outsourcing services, the sequential decline would have been only 1.3%. The lower revenue growth in outsourcing services was a result of previously discussed headwinds related to British Gas, and the continued decrease in revenues from our mortgage clients.

Excluding these factors our outsourcing business exhibited strong growth, and migrated 19 new processes for six different clients during the quarter. On a year-over-year basis outsourcing-services revenues grew over 60%, if you exclude Aviva, British Gas, and our mortgage clients from the calculation.

Gross margin for the quarter ended September 30, 2008 was 39.8%, compared to 34.3% in the quarter ended September 30, 2007, and 35.7% in the quarter ended June 30, 2008.

The significant increase in gross margin of 550 basis points, as compared to the second quarter, is attributable to higher staff utilization in transformation services, combined with better utilization of facilities in outsourcing services.

We expect facility utilization to continue to improve, as we expand business conducted in our new Philippines operating center, over the next 12 months.

Currency movements in the third quarter did not contribute significantly to gross-margin expansion, as the positive impact related to depreciation of the Indian rupee was essentially offset by the impact that the depreciating UK pound had on revenues.

Operating margin for the quarter ended September 30, 2008 was 11.3%, compared to 4.4% in the quarter ended September 30, 2007, and 5.2% in the quarter ended June 30, 2008.

Adjusted operating margin for the quarter, excluding the impact of stock-compensation expense and the amortization of intangibles, was 14.7% for the quarter ended September 30, 2008, compared to 7.9% in the quarter ended September 30, 2007, and 9.7% in the quarter ended June 30, 2008.

In the third quarter of 2008, stock-compensation expense and amortization of intangible assets were approximately $0.5 million lower than the second quarter of 2008, due to the fact that we have completed amortization of certain intangibles, and that stock-compensation expense has declined due to higher forfeitures in our equity plans.

Operating-margin performance, which excludes any impact from the Aviva BOT, was extremely strong, and is attributable to the aforementioned increase in gross margin, as well as cost reductions in general administrative expenses totaling $900,000. These cost reductions were achieved throughout all expense categories, and reflect our keen focus on staffing levels, professional fees and discretionary expenditures.

Please note that corporate overhead generally cannot be allocated to discontinued operations. Therefore, our performance in this area is a net reduction that reflects management's conscious decision to maintain capabilities that will support anticipated growth over the next six to nine months.

Over the last few months, the exchange-rate environment has been extremely volatile, and well outside of any historical precedent. For example, the UK pound stood at $1.99 on July 1, 2008, and fell to $1.80 by September 30, and now stands at approximately $1.60.

The Indian rupee experienced similar volatility in the third quarter, ending at $0.47, compared to $0.43 at the beginning of the quarter. Since September 30, the rupee has depreciated above $0.50 on an intraday basis, and now stands just above $0.47.

This extreme volatility has had a very significant impact on the FX line in our income statement, as you would expect, and has also made it quite difficult to forecast profitability going forward. FX losses in the third quarter amounted to $6.6 million, of which approximately $4.8 million are considered one-time in nature.

These amounts break down as follows. $1 million of the loss is attributable to hedge contracts that were canceled during the third quarter, due to a decline in UK-pound-denominated revenues associated with the loss of a contract with a UK-based telecom provider during the quarter, and lower expected revenues with other UK-based clients.

An additional $3.8 million of this loss, comprising the remainder of the one-time items is attributable to losses incurred in the translation of foreign-denominated monetary assets and liabilities into the functional currency of their respected subsidiary. These accounts primarily consist of accounts receivable and payable on both a third-party and inter-company basis.

Effective in the fourth quarter, we have initiated a series of actions, including an additional hedging program designed to mitigate, if not eliminate, such losses in the future. $1.8 million of the total FX loss for the quarter are primarily losses incurred on hedge contracts that matured during the quarter.

As of September 30, 2008, and based on exchange prevailing at that time, we have unrealized losses associated with hedge contracts placed over the past 18 months, amounting to $11.8 million, of which $9.5 million would mature over the next 12 months. For the fourth quarter of 2008, we expect losses from our hedge contracts of approximately $3 million, based on prevailing exchange rates.

EXL's income from continuing operations for the quarter ended September 30, 2008 was $0.4 million, as compared to $4 million for the quarter ended September 30, 2007.

Diluted earnings per share from continuing operations was $0.01 this quarter, which is net of a $0.16-per-share impact from the one-time FX losses, as compared to $0.14 for the quarter ended September 30, 2007, and $0.23 for the quarter ended June 30, 2008. Let me emphasize again that earnings per share would have been approximately $0.17 for this quarter, if you were to exclude the one-time FX losses.

Other income for the quarter ended September 30, 2008 was $1.2 million, and increased from $1 million for the quarter ended September 30, 2007, and $0.7 million for the quarter ending -- ended June 30, 2008.

FX losses incurred in the third quarter have resulted in an income-tax benefit from continuing operations for the quarter, and -- as well as on a year-to-date basis.

EXL continues to have an exceptionally strong balance sheet, with cash balances of approximately $102 million. For the third quarter of 2008, we generated $9.8 million of cash flow from operations, and $8.4 million of free-cash flow. Year to date, we have generated $18.4 million of cash flow from operations.

As Rohit mentioned, we have announced a stock-repurchase program of $10 million. With the strength of our balance sheet and the proven ability to generate cash flow, this program will not impact our ability to make strategic investments required to support our growth plans.

I would like to conclude by providing guidance for the fourth quarter of 2008. Our guidance is based on prevailing exchange rates in effect as of -- as of this time.

Our revenue guidance for the fourth quarter of approximately $41 million is based on the current exchange rates for the pound, and known reductions in certain clients, such as the UK telecom client we mentioned earlier.

Adjusted operating margin, excluding the impact of stock-based-compensation expense and the amortization of intangibles -- guidance for the fourth quarter is 7%. This reflects a profitability impact of revenues at $41 million, as we hold our support team in place to address the anticipated growth that we spoke of earlier today.

As a result of the highly volatile exchange-rate environment, we will no longer provide guidance on earnings per share, and will, instead, focus on revenues and adjusted operating profit.

In closing, it is clear that in the volatile market environment we are currently in, it is prudent, if not necessary, to maintain a bulletproof balance sheet. With over $100 million of cash, and no debt, EXL is well-positioned to maintain and grow our business.

Now, I'd like to open the floor for questions you might have.

(Operator Instructions)

And our first question comes from the line of Dave Koning, with R.W. Baird.

You may proceed.

Yes. Good morning, guys.

My first question -- just on the revenue in Q4 of $41 million -- is that a good base to grow off of? I know you're experienced the headwind of the UK sequentially, and the UK telecom client.

You do get -- well, let's see -- one month of revenue from that telecom client in Q4. But I'm just wondering if Q1 -- we should expect everything to start improving sequentially off of that base?

Yes. Hi, Dave. This is Rohit.

I think you are right in your assessment. I think the Q4 guidance of $41 million would be a good base to start building up again [or on]. And we would expect to grow sequentially off that base.

Okay, great.

And then, secondly, just -- as we think of the Q4 margin, and knowing that you're going to have FX losses of $3 million, and those seem to be separate from the more one-time FX losses, it would seem like the whole point of a hedging program is to offset the benefits above the line of the rupee going in the right direction.

So, it seems to me like you'd have a pretty big operating-margin benefit above the line that, then, would just be offset by those hedge losses below the line. So, I'm, I guess, a little surprised that the margin's down so much sequentially, if the point of the hedging program is just to offset the fluctuations.

Right. I think the big reason for that is the decline in the volume of business. And because of the decline in the volume of business, and the fact that we are maintaining our existing support and corporate overhead, as well as the fact that we will be making additional new investments in infrastructure in the fourth quarter to be able to support client-growth activity in the first quarter and second quarter of 2009 -- those investments are the ones that depress our operating profit in the fourth quarter of 2009.

Okay. So, then is it fair to say that we should get some pretty nice operating-income benefits -- or operating-margin benefits -- to start again, already by Q1 '09.

That is absolutely correct. As we start to pick up on volume, we will start to see an improvement in the margins of our business. And the operating-margin guidance that we've provided for the fourth quarter of 2008 is by no means representative for what we will be able to accomplish in 2009.

All right, great. Thank you.

Our next question comes from the line of Joseph Foresi, with Janney Montgomery Scott. You may proceed.

Hello. My first question is -- you talked about demand from the insurance vertical as being very strong. I wonder if you can just, maybe, tell us what is driving that right now in an economy where I think a lot of clients are skittish to spend money.

Yes. Hi, Joe.

I think the big reason for the demand in the insurance-industry vertical is that the insurance industry has generally been a slow adopter of off-shoring services. And in the past, there have been a number of internal obstacles that the insurance industry faced, which did not allow them to move forward much more aggressively in terms of adopting off-shoring, whereas, if you take a look at the banking-industry vertical, they adopted off-shoring far more aggressively.

And I think, given the current economic environment, the fact is that every single company, in order to be able to sustain and survive, needs to be competitive in terms of their cost structure. And particularly for them, as their volumes come down, and as their return on investments from the equity markets come down, they are looking to cut costs, and to be able to realize those gains immediately in 2009.

As such, we are seeing faster decision-making by our clients in the insurance-industry vertical. And they're also making much larger transaction decisions than we would have expected them in the past. And, therefore, today they are not looking at just doing a pilot with us. But, instead, they are thinking about launching their programs on a full-fledged basis, right from the very first month. And, therefore, I think this demand environment is very encouraging for us.

Geographically, where are the new insurance wins?

The two new insurance wins that we've had are both in the US And these are US clients that we've signed up. And they're both large insurance carriers in the US

And I know you talked a little bit about acquisitions -- you guys have some cash. What -- are you -- it sounded like you're waiting for the right opportunity. Maybe you could talk a little bit about what that opportunity looks like, and what the valuations are that you're looking at and, maybe, what (technical difficulty) they're in.

Sure. In terms of acquisition opportunities, we are looking at acquisitions in select industry verticals. And for us, the verticals in which we currently have a leadership position in are the verticals that are attractive. We're also looking at acquisitions that will allow us to diversify our service-delivery-location capability, and an expansion into Eastern Europe -- as we've always stated, it would make a lot of sense to us.

What we are finding is that the acquisitions that we would have to do in this kind of an environment are largely going to be cash-driven transactions. And cash-driven transactions -- we would like to structure them in a manner that provides for an appropriate integration, and the longevity of the management team of the acquired entity to stay with us.

The valuation expectations of private companies have not come down very significantly. And I think that's where we typically have difficulty -- where -- we want to be able to acquire these strategic assets at the right level, rather than to overpay for these assets.

And then just one last question -- you guys have talked about the build-out. I'm curious. It's obviously changing your cost structure a little bit. Should we think of that as being an absolutely necessary build-out? In other words, would you be at capacity if you didn't do their particular build-out?

I'm just curious. Because, from a cost standpoint, to -- I would think that you'd probably want to utilize your present facilities and your present people before you went out and put out some additional CapEx, just given what's going on in the economy.

I think you're absolutely right. I think, clearly, from our standpoint, we've thought about this. And we are only making necessary capital investments at this point in time, where we are certain about getting new business. And based upon the fact that we've signed up four new strategic clients in outsourcing, and the business that we would anticipate from these clients, which is on a committed basis.

We are making the necessary investments in infrastructure to support that volume growth which would take place.

And how soon -- I'm sorry. I'm sorry. Go ahead.

And, yes -- in terms of the timing of these investments, the 300-seat center in Noida, we've already taken up. And we would expect to make the investment into the new SCC facility in Punay sometime during the fourth quarter of this year.

And how soon with the 300-seat facility be filled?

The 300-seat facility, actually, will be ready and operational very soon, because this is a pre-fitted facility that we are taking on. And, therefore, we will be able to bring this operational very, very rapidly.

Okay. Thank you.

Our next question comes from the line of Bryan Keane, with Credit Suisse.

You may proceed.

Yes, hi. Good morning.

When do the three large deals that you signed in the quarter -- when do they start ramping up? And what's the margin profile you're expecting for those clients?

Sure, Bryan.

The three deals that we've signed up, which are part of the original six, will start to ramp up in Q1 and Q2 of 2009. However, some of the initial work pertaining to the transition and migration is already beginning, and will begin, in the fourth quarter of 2008.

So, we would expect to make the investments in terms of the infrastructure, but also in terms of the transition and migration. We would start enabling that in the fourth quarter of 2008.

In terms of pricing, margin and commercial terms, we have been very, very disciplined in terms of our pricing for getting new business. And all of these clients that we have won, we have won them at full pricing and at full margins. And there is no up-front consideration that we are paying for acquiring this business. This is normal third-party business that we have won against competition. And, in a number of cases, it is actually at a price premium to competition.

Okay.

And just -- the adjusted operating margin -- I understand some of the reasons why it dropped this quarter. Does it go back to more a normalized range in any kind of a long-term target you want to stick with for adjusted operating margin going forward?

Yes. I think we've always stated that our goal in terms of a long-term operating margin on an adjusted basis would be approximately 12%. And --

So, there's no change there?

I -- no. We believe that the business that we are winning, and when we get through this hiccup that we're going to experience in the fourth quarter, which we had already disclosed at the end of the second quarter -- we would be back to normal operating margins.

Okay.

And then, just finally -- I understand the loss of the UK client. But you also talked about some reduction in other clients and volumes. Can you just talk about what you're seeing in volumes from your clients?

Sure. There are a couple of clients that we have, for example, in the mortgage space. And there is a slowdown of activity. And, certainly, the volumes have come down, and they continue to come down there.

We also have a large client in the UK, where the business has become quite mature. And, therefore, there is no further growth opportunity there. And there are some isolated cases where clients have been impacted by the dislocation in the financial and credit markets. And those client situations would be impacting us negatively as well.

Okay.

And just finally, I -- the -- it sounds like, from winning these deals -- and that you've been able to keep pricing -- it sounds like -- that the market is still being rational on pricing, and nobody is coming in, trying to lowball to win clients.

I think that is -- the first part of our comment is accurate, which is that we've been able to maintain pricing at normal levels, and to be able to get this new business on the right commercial terms.

But as far as competition is concerned, some players are trying to compete on irrational pricing terms, given the fact that they have not been able to win business. And I think clients are just making a conscious choice to go with service providers which are well-referenced, have capability, and have got strong financial balance sheets. And we'll be able to support them in terms of three sharp ramp-ups that are likely to take place in 2009. And, therefore, they're not going to other companies which may not be able to deliver these factors to them.

Okay. That's it for me. Congratulations on the three large deal wins.

Thank you.

Our next question comes from the line of David Grossman, with Thomas Weisel Partners. You may proceed.

Hi. This is actually [Nicole Conway], in for David. He had to jump on another call. I have just a couple questions. In terms of stock comp, do you guys -- are you still expecting the same level of stock comp in the year, and I was curious if you -- anything for 2009 -- any guidance there?

Hi, Nicole. This is Matt.

Stock-compensation expense for the year, we're now expecting to be around $6.1 million.

Sorry?

$6.1 million for the full-year 2008.

Okay.

And we're not -- we're not really releasing any 2009 numbers at this time.

Okay.

But it's down -- it's down slightly for the reasons that I had indicated before.

Right. Okay.

And then for your guidance for 4Q, for revenue -- could you kind of break that out into how much that's being affected by FX, how much is the loss of the telecom, and how much is slowing growth -- your changing guidance there

So, the -- as I discussed before, the UK pound has continued its freefall since the end of the third quarter. The average rate for the pound in the third quarter that we have embedded in our financials is $1.87.

Okay.

For this, too -- we're now at $1.60. So, we've seen over a 10% reduction on all -- across the board on all UK business.

The UK telecom client that we've discussed -- that work ceased on October the 31st. There is a small fee that we'll collect for November and December, related to the cancellation of the transaction. But that -- those revenues are going to be approximately 40% of what they had been in the prior quarter.

The company's largest client, British Gas, is UK-based. And at the level of activity that we continue with this large, mature client, there'll be a -- the FX has a pretty sizeable impact on that. And so the way to think about this is -- pretty equal division of FX, the UK telecom client and the impact on -- of FX on this -- on this large UK-based client. So, it's -- those three reasons are about equal.

Okay.

And we're not breaking it down any further than that. But depending on where the pound should go for November and December -- could affect us.

Got it. Okay.

And then, just real fast -- you said that your outsourcing base was growing about 50%, excluding Aviva, British Gas and mortgage. Is that also excluding the telecom client?

No, it is not.

Okay. So, as like a -- kind of a run rate, going forward -- what would you expect that base to grow at?

Well, I think we talk about our business in terms of 25% plus long-term growth rate.

Okay.

What I was pointing out, Nicole, in that particular point, is that you really -- if you look at the parts of our business base that aren't so large, we are continuing to express -- experience very significant growth, and -- which we will certainly maintain based on the deals that we were talking about this morning.

Okay.

So, that underlying health of this -- of our revenue -- is intact.

Great.

Okay. Thank you for taking my questions.

Our next question comes from the line of Jon Maietta with Needham & Company. You may proceed.

Okay. Thanks very much.

Rohit, I was just wondering if you could comment on the pipeline, and sort of the size of the pipeline today, versus three or six months ago. It sounds like it's larger. And then, just, how you think about the pipeline notionally -- do you assume you'll sort of -- lower close rate today, given the economic environment, than maybe you would have three or six months ago?

Yes, hi, Jon.

We've stated that the pipeline for us has actually become much stronger in the second quarter and the third quarter of this year. And, really, there was a bunching up of activity, which took place in the third quarter. And fortunately for us, all the decisions came out to be in our favor. And we're very pleased about that, because we won that on appropriate pricing terms.

I would say that our pipeline continues to develop quite nicely. And even after winning the three strategic client relationships, we've added on three more new strategic client relationships where we are on the final short list.

The value and the term of these contracts are very meaningful and substantial. And from our vantage point, where we see those prospects and our pipeline, we would say that, actually, clients are quickening their decision-making, and they're also making decisions on larger-value contacts for longer terms.

So, we are actually quite happy with the way the pipeline has progressed, and the way clients are making their decisions at this point of time.

Got it. Okay. And then, Matt, just one housekeeping item -- did you disclose the -- I may have missed it -- the total number of new clients signed in the quarter?

We did not.

Okay -- because you have --.

Go ahead. I'm sorry.

Yes. I think the total number of clients we have signed up are four in outsourcing. And there are an additional three clients or so in the transformation business.

Got it. Okay. Thanks very much.

It appears there are no additional questions. I will now turn the call over the Rohit Kapoor for closing remarks.

Thank you.

Well, I just wanted to thank everybody for joining our call. I think I'd just like to say in closing that we had already anticipated that there would be a slowdown in our business in the second half of 2008, and most of that really gets felt in the fourth quarter of 2008.

We do believe that this is really the base that we would build up on, and rebuild our company from here. And I think we are very excited by the fact that we've won several large strategic clients that give us adequate visibility into 2009. And you can see from the investments that we are making in our infrastructure that we are now going to be poised in terms of focusing in on execution, and growing our business once again. Thank you very much for joining, and we will see you later next time.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.