Exlservice Holdings Inc (EXLS) 2008 Q4 法說會逐字稿

Good day and welcome to the fourth quarter 2008 EXL conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Jarrod Yahes, Head of Investor Relations. You may proceed.

Thank you, Operator, and thanks everyone for joining us today on our fourth quarter 2008 earnings announcement. Joining us here in New York are Rohit Kapoor, our President and CEO, and Matt Appel, our CFO. We hope you've had an opportunity to review the news release we issued this morning as well as the power point presentation that is available for review on EXL's website in the Investor Relations section. Let me quickly outline the agenda for today's call. Firstly, Rohit will provide a business update for the year, discuss some of EXL's key investment imperatives and provide guidance for 2009. Matt will then take you through the financial details of the fourth quarter, the year, as well as provide additional color on our guidance 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 these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include but are not limited to general economic conditions and those factors set forth in today's press release discussed in the Company's periodic reports and other documents filed with the Securities and Exchange Commission from time to time. EXL assumes no obligation to update the information presented on this conference call. During our call today we may reference certain non-GAAP financial measures which we believe provide useful information for investors, and you can find reconciliation of those measures to GAAP on the press release. So now let me turn the call over to Rohit. Thanks, Rohit.

Thanks, Jarrod. Good morning, everyone and thank you for joining today's call. 2008 was a year of transition for EXL. Despite the economic turmoil impacting several of our clients, I am pleased to report that we were able to grow our revenue by 19.5% year-over-year and increase our adjusted operating margin year-on-year from 7.1% to 11.8%. Had the sterling pound remained stable for the year, EXL would have grown its revenues on an entirely organic basis by 23.5% despite the aforementioned client revenue growth head winds.

In 2008, our transformation services business grew 38% year-over-year, and our outsourcing services business grew approximately 15% year-over-year. The strength of our transformation services revenue growth was broad based across a spectrum of services we offer including decision analytics, operations and process excellence, and risks and financial management. In each of these service lines, we were able to grow revenue strongly with key existing strategic relationships as well as open new relationships and diversify the revenue streams. While the work that we do in transformation largely project based, and therefore subject to discretionary expense budgets, our effort is mostly focused on improving the economics of our clients' business and to ensure greater compliance and control with regulatory requirements. We therefore believe that clients will continue to leverage our skill sets to gain cost efficiencies and to improve their operations.

EXL was also able to significantly grow its revenue from outsourcing services and thereby reduce our client concentration. We also are experiencing broad-based growth amongst a core base of strategic outsourcing clients that we believe will provide for additional client diversification in the year to come. Client diversification by growing existing relationships is an important priority for the Company.

As you are all aware, we decided to expand our global delivery capability by establishing a green field operation in the Philippines in 2008. We are pleased to report that we now have around 375 full-time employees in the Philippines and are on a path to creating significant revenue growth from our outsourcing operation in the Philippines in 2009. We expect to break even on this facility in the first half of 2009 which is in line with our previously announced expectations for the growth and profitability of the facility. As we build out our volume of business in the Philippines we would expect to further enhance our margins in the back half of 2009.

Our adjusted operating profit margins increased significantly in 2008. This is attributable to several factors including favorable exchange rates, higher operations productivity, and tighter cost management. Despite the fact that we had client head winds in 2008, we were able to enhance our margins significantly due to the strong flexibility that EXL has developed in its operating model. We have developed the capability to rapidly redeploy our people resources and quickly convert existing physical infrastructure to be responsive to client requirements. For example, as a result of growth with new and existing customers, we have already redeployed our infrastructure that was previously utilized by our mortgage clients as well as the UK telecommunications client. By tightly managing our physical and telecom infrastructure we believe that we can be more nimble in responding to the economic environment and in turn better be able to respond to the changing needs of our clients with minimal margin impact to our own business.

In 2009, we will continue to strike the right balance between growth and profitability. We will focus on running a tightly managed operation from a cost perspective while at the same time making the necessary growth oriented investments to allow to us achieve a strong growth rate in the year to come. For example, some of the key growth investments we anticipate making in the next year include, number one, further geographical expansion and investment in growing our physical infrastructure. Number two, beefing up our business development and strategic account management functions. Number three, introducing further automation of our back end finance and HR systems, and number four, training and development of talent within the organization.

Let me expand on our investment in each of the mentioned areas. Our prudent infrastructure growth strategy is reflective of our continued belief in the long-term growth prospect of our industry and the near-term demands that we are experiencing from our existing clients. In 2009, in addition to fully utilizing 300 feet of temporary facility space (inaudible) we are building significant additional infrastructure in Pune of nearly 500 seats. This will support the growth in existing as well as recently acquired clients. We expect that our new Pune facility will be operational in April of 2009 and improve our balance of infrastructure in the western part of India. Furthermore, we expect to have a facility on-line in eastern European countries earlier this year. This will further expand our global geographical presence and allow us to serve customers with requirements in multiple European languages.

In 2008, we achieved our objective of substantially increasing our investment in sales and marketing and strategic account management. We invested an incremental $2 million in our front end in 2008 as compared to 2007. Part of that investment was the continued maturation and evolution of our strategic account management function. By having dedicated account managers closely aligned to the operational and business needs of our clients, we expect to deepen our relationships over time and continue to sustain a rapid growth rate with our existing strategic client relationships. In 2008, we had 10 key customer relationships that grew over 50% or more where the size of the relationship is now over $1 million. For us, this is an indicator that we are meeting and exceeding our client expectations, and that they are continuing to grow with EXL as they enhance their plans for outsourcing and transformation. We expect to continue with our investment in sales and marketing in 2009.

Another area of strategic importance is to make investments in the automation of our back end processes and ensure easy scalability of our operations. In 2008, we made several enhancements to our talent management systems and workforce management applications that would improve our productivity and should provide benefits to the scalability of our organization. We also continue to enhance our financial reporting capabilities through the implementation of a comprehensive finance transformation program. This will enhance the accuracy and timeliness of our reporting capabilities to provide us better insight into our cost structure and business performance.

For us, investing in training and development of our employees is a high priority investment area. We will continue to invest in establishing both functional and managerial development programs for our employees and allow them to continue to progress their careers with EXL. We are also expanding our internal job rotation program to provide greater experiential learning for our employees and to train them to take on bigger challenges in the future within the organization. While we are aware of the uncertainty and volatility created by the economic environment, I would like to point out that there is a positive cost impact to our cost structure as well. For example, we continue to refine our operating model to make it leaner and to have a smaller roster to take advantage of lower attrition rates that we are experiencing.

In 2008, our attrition decreased by 7% to 34% from 41% in 2007, and we believe that this could go even lower in 2009. While the reduction in attrition could be partly attributable to the broader market dynamics, we have also been able to enhance our employee commitment index for the third consecutive year. This survey is conducted by an independent advisory firm and shows that we are continuing with our strong progress in being the employer of choice in our industry and the place where employees are energized and committed to the organization from a career perspective. Going forward, we expect to have the benefit of significantly lower wage increments this year than in past years, and that should also benefit our gross margins.

In light of some of the recent events that have transpired in our industry in India, I would just like to make a few comments about corporate governance at EXL. We believe that EXL continues to be a leader in corporate governance standards in our industry for six primary reasons that we feel are important for investors to be aware of. Number one, in the culture of our Company and in our corporate values, we have always fostered an environment of integrity, honesty, and transparency. Number two, from an information security perspective, we are an ISO 27001 compliant company and comply with the requirements of information security audits and security regulations.

Number three, from an accounting perspective, we are audited by a world-class accounting firm, Ernst and Young, and our signing partner is located in the US. Number four, in terms of the governance provided by our Board of Directors, our nine-member Board of Directors includes seven independent directors. Furthermore, two of the directors on our audit committee are former CFOs of large US public companies. Number five, from a legal perspective, we are a US Delaware registered company and a US SEC registrant. Furthermore, EXL has a robust internal audit team and from a cultural perspective we continue to uphold the highest standards of integrity and governance. And lastly, number six, in our first year of eligibility as a public company, we were fully Sarbanes-Oxley 404 compliant which we believe is a strong accomplishment for a company of our size. And as you are all aware, we continue to offer Sox 404 services in our governance, risk, and control practices within our transformation services group, as a service offering to our clients.

Just to provide you a quick update on our CFO search, we are continuing with our retained search and have made substantial progress in identifying several qualified candidates. However, we have not yet reached a final decision and expect to do so shortly. In the interim, Matt has agreed to stay with the company until May 15th, 2009. Since we are already well into the first quarter, Matt will assist us in the filing of the March 31st, 2009 10-Q. I am thankful to Matt and appreciative of his staying with us to assist with an orderly transition and allowing us more time to select the right candidate for the position.

I would like to close my remarks with a few words on the pipeline as well as provide financial guidance for 2009. The pipeline of opportunities in outsourcing across insurance, utilities, and transportation continues to be robust. We continue to see strong velocity of RFPs from new clients and see strong demand signals from our existing strategic clients. Last quarter, we commented on three previous opportunities from the prior quarter and three additional relationships that were still at decision making stage. Of those, three have yet to be decided and are still in process. We did not win two of the opportunities which were opportunities outside of our core industry verticals. However, we were able to win another new strategic US insurance client for outsourcing. And we are already engaged in the transition of several processes for this client.

We view our competitive positioning in the insurance and utilities industry vertical as extremely strong and this is showing in our continued client acquisition momentum in both those verticals. To characterize the pipeline, some clients are facing a long decision making process. However this has always been typical in terms of the sales cycle in our industry. However, other clients have chosen to move much more rapidly to get the savings more quickly for the upcoming year, potentially in consideration of the economic environment.

For 2009, we are providing revenue guidance of between $170 million to $175 million and an adjusted operating profit margin guidance of 10% to 12%. This guidance assumes that our base of normalized revenues is $40.5 million, which excludes certain revenues that we expect to be one-time revenues associated with specific client transitions. Annualizing our normalized fourth quarter revenues to $162 million implies a 5% to 8% revenue growth next year on an organic basis. Implicit in the revenue and margin guidance is a decline that we would expect in our transformation services business, as well as some of the growth from new and existing outsourcing clients where we have a high degree of visibility and confidence. Any particular strength that we might see in our transformation business would provide a source of upside to these numbers, both with respect to revenues and margins. Now let me pass it over to Matt who will provide more detail on our financial performance and additional color around our guidance.

Thanks, Rohit, and good morning to everyone. EXL's 2008 financial results reflect 19.5% year-over-year growth in revenue to $181.7 million for the year ended December 31st, 2008, despite a 4% negative impact related to the depreciation of the UK pound against the US dollar. For the year ended December 31, 2008, approximately 57% of our revenues were denominated in US dollars with the remaining 43% denominated in UK pounds. By comparison, in 2007, approximately 54% of our revenues were denominated in US dollars and approximately 46% were denominated in UK pounds.

In 2009, we expect our revenues will come increasingly from US-based clients reflecting both it anticipated growth as well as the loss of certain UK pound denominated business in the second half of 2008. EXL's growth in 2008 was driven by a combination of new client wins and growth in existing clients. New clients contributed $4.2 million to our revenues, or approximately 15% of our growth while existing clients contributed the remainder. Historically, existing client relationships contribute approximately 85% of our growth, and 2008 was no exception. Our insurance industry vertical once again led our growth at approximately 54% year-over-year. Revenues attributable to outsourcing services for the year ended December 31, 2008, increased approximately 15% to $138.8 million compared to $120.9 million in the year ended December 31, 2007.

Transformation service revenues for the year ended December 31, 2008 increased 38% to $42.9 million compared to $31.1 million for the year ended December 31, 2007. As Rohit mentioned, for 2009 we expect strong growth in outsourcing services in contrast to an expectation of lower revenues in transformation services. Revenues for the quarter ended December 31st, 2008 were $43.7 million, compared to $43.2 million in the quarter ended December 31, 2007. Revenues attributable to outsourcing services for the quarter ended December 31, 2008 decreased approximately 5% to $33.2 million compared to $34.9 million in the quarter ended December 31st, 2007, due to the previously discussed reductions attributable to a UK telecom client that we mentioned earlier and depreciation of the UK pound against the US dollar. Transformation services revenues for the quarter ended December 31, 2008 increased 27.3% to $10.5 million compared to $8.3 million in the quarter ended December 31st, 2007.

Gross margin for the year ended December 31, 2008 was 38.1% compared to 34.2% for the year ended December 31st, 2007. Gross margin increased approximately 400 basis points in 2008 compared to the previous year due to improved utilization of transformation services, productivity improvements and cost reductions in outsourcing services driven by enhancements in our operating model and the net positive impact of currency movements during the course of the year. Gross margin for the quarter ended December 31st, 2008 was 41.6% compared to 36.7% for the quarter ended December 31, 2007. Similar to the full year, the improvement in gross margin of approximately 500 basis points is attributable to net favorable currency movements during the quarter and productivity improvements in cost management and outsourcing services.

During 2008, we continued to invest in front end sales and marketing and strategic account management increasing our spend to $11.3 million in the year ended December 31, 2008, from $9.2 million in the year ended December 31, 2007. We ended the year with 26 full-time sales and marketing and strategic account management personnel based in both the US and the UK. We believe that making prudent investments in our front end continues to be the right strategy to enhance our long-term growth despite these uncertain times.

Our general administrative expenses decreased to 17.1% of revenue for the year ended December 31st, 2008 from 18.9% for the year ended December 31st, 2007, an improvement of 180 basis points attributable to tighter controls over discretionary expenses as well as depreciation of the Indian rupee against the US dollar. Adjusted operating margin for the fourth quarter 2008 which excludes the impact of stock compensation expense and amortization of intangibles was 14.4% compared to 6.7% in the fourth quarter 2007. On a sequential basis adjusted operating margin was essentially flat compared to 14.7% in the third quarter 2008. Full year stock compensation expense for 2008 was $5.3 million.

For 2009, we expect stock compensation expense will be approximately $7 million reflecting grant of approximately 1.5 million options during the first quarter of 2009. For the full year 2008, FX losses amounted to approximately $9.3 million as compared to a gain of $7.6 million in 2007, representing a swing of almost $17 million that was due to the highly volatile foreign exchange environment in relation to the hedges we had placed. At year end 2008 the rupee stood at approximately INR49 to the dollar compared to INR39 at year end 2007. Likewise, the UK pound had undergone a similar movement from GBP2 at year end 2007 to GBP1.45 at the end of 2008. During 2009 the volatility has continued with the rupee as low as INR52 and the pound at GBP1.38. As a significant mitigating factor we initiated a balance sheet hedging program in fourth quarter 2008. This program is now fully operational and serves to offset approximately $2.5 million of losses that we would have incurred in the fourth quarter of 2008 had this program not been in place. Of the $9.3 million loss in 2008, a net loss of $5.7 million was attributable to the balance sheet, and it is these types of losses that our balance sheet hedging program is designed to mitigate.

Also, as a result of changes in our business during 2008, we expect that UK pound denominated revenues will represent an increasingly smaller portion of total revenues. For 2009, we expect FX losses of approximately $8 million based on the exchange rates utilized for our guidance of 50 for the rupee and 140 for the pound. For the full year 2008, other income, which consists primarily of interest income, totaled $3.5 million compared to $4.3 million in 2007 as a result of sharply declining yields in the marketplace applied against our increased cash balances. With short-term yields well below 100 basis points we expect that interest income will continue to fall in 2009.

For the full year 2008 EXL had a tax benefit of approximately $1.3 million as compared to a benefit of $1 million in 2007. For 2009 we expect that our effective tax rate will fall between 5% and 10%. This increase reflects taxes arising from the expected geographical distribution of our taxable income in 2009.

For the year ended December 31, 2008, net income was $15.4 million as compared to $27 million for the year ended December 31, 2007. This decline is largely attributable to foreign exchange losses incurred in 2008 of $9.3 million as compared to the gain of $7.6 million in 2007. Of the -- I'd like to remind everyone of the $9.3 million foreign exchange loss in 2008, $5.7 million of this were losses due to the translation of balance sheet assets and liabilities into their respective functional currency net of any hedge gains associated with our balance sheet hedging program. As I mentioned earlier we initiated a balance sheet hedging program in the fourth quarter 2008, and this program should significantly mitigate our balance sheet exposure during 2009. So again, our guidance with respect to FX losses having to do with hedge contracts maturing in 2009 is approximately $8 million. If the rupee strengthens from its nearly historical lows, these losses will diminish some. And finally, we would like to mention, diluted earnings per share from continuing operations for the quarter ended December 31, 2008, was $0.12, which is well above our expectations for the quarter when we last articulated guidance in November 2008.

Cash flow from operations was exceptionally strong in 2008 it at $30.3 million, an increase of every 200% as compared with $13.7 million in 2007, reflecting strong cash flow generation by the business in combination with reduced DSOs, and this resulted in an ending cash balance of $112 million. It is worth mentioning that in these turbulent times, we remain focused on maintaining the strength of our balance sheet which contains no debt. Our balance sheet positions us as a financially secure partner for our clients and allows us the flexibility to invest in our businesses needed to support anticipated growth. Capital expenditures for 2008 were approximately $14.8 million of which a significant portion was related to the Philippines operating center. We expect that capital expenditures in 2009 will fall in the range of $15 million to $20 million. Now I would like to open the floor for any questions that you may have. Thank you.

(Operator Instructions) And your first question comes from the line of Tien-tsin Huang of JP Morgan.

Thanks it's Tien-tsin, appreciate the detail. A couple questions, first a comment on pricing. I don't think I heard that, Rohit, both on the transformation and outsourcing side. Can you give us an update there?

Sure. As far as pricing is concerned, certainly in this kind of a market environment, there is bound to be some amount of pricing pressure. And therefore, our clients are asking us for -- looking at all possible ways in which we can reduce their costs and provide them with better economics. However, I would just like to point out a couple of things. Number one, our business, which is really in the outsourcing and transformation business is quite different from the IT services business which typically has had very high levels of operating margins, where as the business that we run and operate is a much more stable and reasonable levels of operating margins that we maintain. The way in which we've responded to our clients is really to align our cost structure where we can take out certain expenses associated with running and managing their business and providing with them an effectively lower cost while at the same time maintaining and protecting our margins.

We've also encouraged our clients to be able to provide us with greater certainty regarding the volume of business that they will do with us so that we can give them better pricing, and we have always insisted upon creating a fair alignment of interest as far as the exchange rate risk is concerned, and therefore creating a fair and a stable environment for our clients to do business with us. At the end of the day, our clients want to have a stable secure and a strong financial and an operating partner, and I think for us, while there is pricing pressure, we are able to maintain our pricing levels and reach an alignment of interest between our operations cost structure and the pricing that is ultimately provided to the client.

Okay. So maintaining pricing. But I guess the margin discussion really not much of an impact on pricing? Is that a fair assumption? It sounds like it's mostly on the investment side.

That is correct.

Okay. On the investment front, it sounds like it's a couple percentage point impact on the margins in terms of investments. Is this a fair way to frame it, and how much of this do you view as sort of one time in nature2009 versus potentially repeating again in 2010 in order to grow at your target rate on the top line?

As far as our margins are concerned, I guess there are three fundamental factors impacting it. Number one is the weakness in the transformation business which has a direct impact in terms of our operating margins. Number two is really the volatility and uncertainty in the business environment, and number three are the investments that we are making, and particularly some of the investments that we will make to expand our geographical service delivery capabilities into eastern Europe and into other geographies.

Just as last one, sorry if I'm taking up too much time, the transformation business, is there any customer concentration issue there? I know you noted some caution there. Is it broader based, or is it isolated to just a few accounts?

The transformation business has been reducing its client concentration over the last several years. However, we still have have a few large customers within the transformation business that contribute a significant percentage of our revenues within that business line. Many of our clients that we deal with on the transformational services business line are clients within the banking and financial services industry, and certainly there has been an impact out there because of the economic environment.

Great. Thanks so much.

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

I was wondering if we could talk about how we should think about how earnings ramp throughout 2009 given kind of the various things that happened in 2008 and in that same context, if you could talk a little bit more about the customers that you signed in the third quarter and how those ramps are progressing so far.

Sure, David. For us the customers that we signed at the end of the third quarter and the clients that we've signed recently, all of those clients are basically moving forward with the transition of their processes to our offshore delivery locations. We would expect, as is typical with most of our strategic new account wins, that these transitions and ramp-ups will take place over a 12 to 15-month period. And as such, most of the revenue impact associated with these new client wins will really be felt in the second half of 2009. That is also the time when we will have a much better facility utilization and an infrastructure utilization, and therefore we would expect our margins to increase significantly in constant currency terms in the second half of 2009.

So as we think about the first quarter then, I mean, I assume we're down sequentially from where we are in the fourth quarter, then just start ramping throughout the balance of the year. Is that the way to think about 2009?

David, for us, as we mentioned, the fourth quarter revenue did have some revenue items which are one-time in nature, and, yes, I would agree with you that the first quarter revenue will be down sequentially, and it will ramp up from there on.

In terms of the currency and, Matt, I think you gave a lot of detail there, but I just want to make sure I understand it. Is the $8 million of FX loss that you are expecting for this 2009 at current spot rates is that the FX loss that shows up below the line, or is that the total FX impact on the P&L?

No, David, you are right, that $8 million is the amount that would show below the line, and that relates to the hedges that we currently have placed based on the current -- basically the current spot rates.

Okay. And I think just in reference to the last question that was asked about, I think the margins, your margin guidance is obviously in a fairly wide range. Is is it utilization that's going to be the major impact on that, or is it just the uncertainty around currency? What is the major factors that impact that range which seems to be in a fairly wide band this year?

So, David, most of that has really got to do with the uncertainty and the volatility in the business environment. In this kind of an economic environment, the volume of business that we have from our clients can go up or down quite significantly, and that can have quite a significant impact on our margins. Also, the currency will directly impact our adjusted operating margins, and therefore, given the volatility in the currency markets, again, we've chosen to give a wide range because of that uncertainty and be a little bit cautious out here.

Okay, great, thanks very much.

(Operator Instructions) Your next question comes from the line of Vincent Lynn of Goldman Sachs.

I wanted to go back to the 4Q '08 operating margin. The 14% is a lot higher than the 7% than you guided to last quarter. Just wondering if you can talk about would the various variances are in terms of currency, whether there was any delay in terms of push-out and investments, et cetera.

Sure, Vincent. This is Matt. So the contributors to the margin enhancement are as follows. The one-time nonrecurring revenues that we'd both spoken about. Certainly FX contributed. There was a very significant change in the rupe during the quarter, and that contributed slightly less than half of the difference, as well as very tight cost management across the business. With the -- with economic conditions declining steadily throughout 2008, as we've talked about before, took a series of very serious actions inside the business to understand and limit any discretionary expenditures that weren't required across all categories. And so what you see is the -- is the combination of these factors driving slightly better margins than we had anticipated in our guidance.

Got it. Okay. Just in terms of the growth outlook, obviously you have been talking about weaker expectations out of the transformation area, and also on some uncertainty on volume expectations. Just wondering if you can talk about the volume sensitivity of your business in terms of how much of your total revenue on the outsourcing side really is exposed to volume volatility.

Vincent this is Rohit, and I will address that. For us, the outsourcing business is relatively stable as far as the volume of business for our clients is concerned, because the kind of activities and the processes that we handle for our customer -- for our customers is essentially those that are critical to their business and for them to continue to provide services to their end clients. As such, unless and until there is a severe impact to a particular sector or to a particular client, we would not expect significant volume changes to take place within the outsourcing business. And the visibility and the clarity and the confidence that we have in our outsourcing business has typically been always consistently very high, and even in this economic environment, continues to be high.

Got it. So most of the the uncertainties in terms of the business environment that you are citing earlier really came from the transformation side? Is that the correct way to think about?

Yes, a large part of the uncertainty is associated with the transformation business.

Okay. Finally, if you can just provide us with an update on the share buyback plan that you announced last quarter, how much has been done and what's the expectation for 2009? Thanks.

Sure, Vincent. So our share buyback plan went into effect shortly after we talked about it. We did purchase slightly less than 10% of the overall allotment for that, and we, of course, being opportunistic with respect to volatility in our share price, in intervening timeframe, and we'll continue to do so for the duration of the program. We expect that should our -- should the share price fall into range that we'll have slightly more purchases. But we're being opportunistic about the stock buyback in terms of where our shares have come from. You will recall we were below 5 when we were talking about it and the shares of hit really went up significantly towards the end of the year, and we had -- most of our purchasing activity took place before the middle of December, and we recently made some additional purchases, but we would expect that there will be more purchased during 2009.

Okay, thanks.

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

Wanted to ask is it possible to break out the guidance between transformation and outsourcing services? Sounds like you are calling for some stability in outsourcing, possibly if you could talk about how some of the new signings are going to ramp, and then with regards to transformation services, it would be helpful if you can provide some information around utilization type of metrics, so we can track that.

Hi, Ashwin this is Rohit. I will try and provide with you some color around that. One of the challenges that we have is that we offer transformation and outsourcing services to our clients in an integrated fashion, and that actually makes the job of bifurcating these two business lines in very discrete terms quite difficult. But I guess for the transformation business, I would just like to point out that our focus is, number one, in terms of reducing the cost of our customers' operations, and in terms of helping them gain better control with regulatory requirements, and both of these two types of activities that we undertake in the current economic environment, even though the demand for these services is somewhat muted because of the discretionary and project based nature of the work this is something which we believe our clients will eventually to have continue to deal with as they try and improve their operating economic business model.

The other part is that we are constantly focused in terms of increasing the annuity-based component of business within transformation services, and this really falls under some of the analytical services business line, some of the risk advisory service line, and also in terms of annuity contracts on process re-engineering. What we are finding is that the annuity business and the annuity component within transformation is actually increasing quite rapidly, and the adoption of that by our customers is increasing very, very significantly, and our capacity utilization for these types of services is pretty much between 85% to 95%. It's really on the on shore project based work that we do within transformation services, where the utilization rates have come down and where there is a greater level of volatility associated with the transformation business. I hope that's helpful.

That's helpful. If you can add would percent of transformation is annuity based currently, even for the last quarter maybe. And you didn't mention a number for onshore utilization. You just said it came down.

Right, the annuity part of continues is close to about 25% of the transformation services revenues, and for us, the onshore utilization rates typically that we would target would be about 75% to 85%, and right now we are probably somewhere between 50% to 60%.

Got it. Moving on to the $40.5 million that you are using as a basis for your growth projections, I wanted to understand what was the difference between that $40.5 and the $43.7? I know you've said there's stuff that's one time in nature, but can you maybe provide some more incremental details?

Sure, Ashwin. This is Matt. A significant portion of the difference relates to the UK telecom client that I think we've talked about before, and in terms of the revenues that we earned through provision of services during the fourth quarter as well as certain other charges related to the ramp-down of that work, also included in this are some fees earned in relation to the transition of certain other work to another service provider, and finally, the remainder relates to a large outsourcing and transformation project that is really unique in terms of its size and scale that has come to an end, and not expected to recur quite in that fashion.

Okay. And finally, I just wanted to ask if you clients are, as you approach prospects and clients for signing contracts, are they asking you to possibly use your balance sheet more aggressively in regards to -- the ramping new contracts or anything like that, use your balance sheet for that, or are contract terms changing in any fashion that you noticed recently?

Ashwin, in a few instances, we have noticed that clients are asking for us to use our balance sheet, and they are asking us to do that in a couple of different ways. In some instances, they've asked us if some of the transition and migration expenses, which are upfront in nature, can be amortized over a longer period of time, and in other situations, they've spoken to us about whether we'd be interested in looking at some carve-out opportunities of their existing operations and taking over control of their existing operations.

From our standpoint, we've looked at it in a highly strategic manner where we certainly like to assist our clients where it makes rational, business economic sense for us to amortize some of the costs over the longer period of time, provided we have confirmed certainty and confidence in terms of the volume of business that we will be able to get and derive stability and certainty associated with that business. In terms of some of the carve-out opportunities, which are there, if it meets with some of our strategic global expansion programs of creating a strategic service delivery capabilities, we will look at some of these ideas but in most other cases, if it does not make sense, we are unlikely to entertain such kind of requests and use our balance sheet.

Okay, one last housekeeping question. Tax rate and share count assumed in your '09 guidance?

The tax rate that's implied in our guidance for 2009 is 5% to 10%, Ashwin.

Okay.

And in terms of the share count, I don't think there's any -- there's no significant change in the share count between where we ended 2008 and expected to be at 2009.

Okay, great, thank you, guys.

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

Hello, gentlemen. My first question here-- not to give this too much attention--on the transformational business side, I think early on, as we started to enter some of these economic challenges, it appeared that people were maybe turning to that business to help them out, rather than maybe go with some higher level more expensive consulting. Has that decision changed at all? Are you seeing a push-out of work or are you seeing cancellation?

Joe this is Rohit. I think what we are seeing on the transformation side of the science clearly a lot of clients are using transformation as a front-end capability that allows them to pursue strategic offshoring in a very significant manner, and they're continuing to move forward with that kind of decision making. However, in the early part of 2009, we have seen some of the clients actually push back their decision making until the time they have budgetary allocations that they can deploy towards engaging in these types of activities. Our approach on this is that the kind of work that we do within transformation is definitely something which is going to be beneficial and useful to our customer base. In our sense right now it just seems to be a push-back from a timing perspective.

Okay. And so would you say the transformational work is probably a little bit more discretionary than your standard outsourcing stuff?

Absolutely.

And then just -- maybe you could give us some idea of what your thoughts are for the cash balance. Obviously it's pretty healthy at this point. Are you in talks with any kind of potential acquisitions? Are you looking at specific stuff? What would fit your needs?

Well, the one thing which I think has become apparent to all of us is that a healthy cash balance and zero debt on the balance sheet of the Company is actually strategically very important for us to win new business and for us to continue to maintain the confidence of our existing clients and to allow them to continue to grow their business with us quite aggressively. And therefore, we would always maintain a very healthy stable cash balance on our balance sheet. At the same time, I think we've always said that we would supplement our organic growth rate with M&A and with inorganic growth acquisitions. For us, the M&A strategy is very simple. It's essentially based around two fundamental priorities. Number one is geographical expansion, and number two is capability enhancement. And as we continue to explore the market in terms of opportunities for meeting these two strategic objectives, we will do disciplined M&A transactions that will bolster our ability to provide services to our clients and to be able to grow our business much faster than before.

So just in conjunction with that, have you -- I know this question was asked earlier, so forgive me if I missed it, but are you slowing down on your buyback program going forward?

We've always said that our buyback program is going to be opportunistic, and it is going to be opportunistic to be institutionalize a share buyback program that's going to be accretive for the Company and to minimize dilution, because of the fact that we issue out stock options to our employees. So those are the two primary objectives for the stock buyback. And depending on how the stock performs and how the market conditions evolve, we will take a call in terms of implementing and executing the stock buyback program. We've placed a small limit in place, and we'll really to have see how things play out this year in order to utilize that particular program and deploy that program.

And then just one last question on the pricing front. A lot of the IT services guys have started to move into BPO. Are they -- I understand you explained sort of what you are doing ton pricing front. Are you seeing increased pressure from them on pricing for deals? Are they showing up on more deals, or is that not a factor at present?

No, I think the IT services firms are clearly viewing BPO as a strategic opportunity right now, and their interest levels in BPO have gone up quite significantly over the past several months. We are seeing an increased presence of IT services firms in BPO transactions and and in deals and we are seeing is that they are being very, very aggressive in terms of their pricing for business, for new business in BPO.

And just to take that one last -- one last question, just to take it one step further, how do you see that playing out over the next two or three years? What is -- how do you see their entry into the market affecting pricing and your ability to gain share?

I think, Joe, for us, the way in which we've chosen to operate and run and build our business is being on very clear discipline of being able to grow our business with sound quality of clients, with complex customer processes and on economic terms that make good business sense for our Company. So we've seen pricing pressure in the past by Tier 2 and Tier 3 companies within BPO, and some of our prospects tried out those smaller players, and then regretted it later, and actually came back to us. We've seen pricing pressure by some competitors of ours that have been not in line with making adequate margins on the business, and that strategy has not worked too well. Right now we are seeing some of the IT services firms deploy that kind of pricing strategy. I think ultimately our belief is that if you focus in on specific domains, and you are able to provide the capabilities to your customers on operational excellence and enhancement of their processes, we will continue to gain new clients and build on our business. So we will continue to remain disciplined in terms of our pricing, and in our acquisition of new customers.

Okay, thank you.

Your next question comes from the line of Tim [Wojays] with Robert W. Baird.

Just looking at revenue guidance and what our estimates are for this impact in '09, it looks like the FX, just the pound, is really about 8% to 9% headwind on growth. Is that fairly accurate?

No, actually what we expect is that given the nature -- given the extent to which we have incorporated FX protection increasingly in our contracts, and also given the way in which the UK pound revenue will come down during the 2009, the FX does not after very dramatic impact on the revenue.

Okay. That's actually helpful. Secondly, is there a way we could provide the sub segment gross profit breakout for the quarter?

You would like it for the fourth quarter, for the year?

Just for the quarter will be great.

So in the fourth quarter, the outsourcing segment had a gross margin of 43.7%. Transformation had 34.9%. Overall we were 41.6%. And for the year, outsourcing was at 38.6%, transformation at 36.6%, and the overall business at 38.1%.

Thanks. That's helpful, too. Then just finally, (inaudible) can you comment on volumes? I think most of that is British pound, and probably sequential decrease, British pound denominated. Can you comment on that?

I'm sorry, Tim, we couldn't hear your question quite clearly. Could you please repeat your question?

When you look at (inaudible) and there's a pretty substantial sequential decline in that revenue line related to (inaudible) is that mostly the British pound depreciation? Could you comment on volumes from (inaudible) the business opportunity there?

Sure. As our largest client, the volumes have declined, and we also got impacted by the currency sought it's really been a combination of both factors. In the early part of 2008, we had guided the street towards stabilization and, in fact, some of the processes which had exceptionally high volumes in the first half of the year, where the volume levels were coming down because the number of exceptions were becoming less due to much better process control and process maturity. So there has been a reduced level of transactions on account of that, and as well as the currency impacting the revenue. Both have resulted in that revenue declining for that client.

Okay, thanks a lot.

Your next question comes from the line of John Maietta of Needham & Company.

First question I had, Matt, with regard to the FX loss in the quarter, $3.4 million, how much of that was balance sheet related?

So almost none of it was balance sheet related because of our hedging program kicking in, in October.

Okay.

So very significant portion of it was related to hedges and not to the balance sheet.

Got it, okay. And I just wanted to piggyback off a couple other questions with regard to the outlook. When you talk about Q1 revenues potentially being down sequentially, is that off of the reported revenue number for Q4 or that $40.5 million run rate level?

No, off of the reported number.

Okay. And then when you talk about growth in outsourcing, is that growth year-over-year for the full year, or are you talking the about just kind of a sequential ramp progressing as we move forward in '09?

Sequential ramp.

I guess just the last question, Rohit, with regard to sales cycles and decision making cycles, maybe if you could talk about what you have seen kind of quarter to date. Has it been pretty stable, February, March, or it has been a change at all? If you could just comment on that, that would be helpful.

Well the sales cycle actually is splitting up into two streams, as we said. One is pretty much clients which are continuing to take the normal time that they take to decide on these kinds of strategic initiatives, and the other grouping is actually with some clients which are taking much faster decisions and moving forward with their decision making process in a collapsed timeframe. Typically for us, the sales cycle has been about 12 to 18 months, as such, and we are seeing in some situations sales cycle drop down to between four to eight months.

Got it. Okay. Thanks very much.

thanks.

Your next question comes from the line of Sachin Jain of Jefferies & Company.

Hi, this is (inaudible) so my first question is, what amount of visibility do you have to the calendar '09 guidance when you compare it to the last year? How much of the low end revenue outlook is already in the backlog or committed volumes versus a year ago?

For our outsourcing business, the level of visibility is very high. Typically the amount of revenue that we accrue from new clients that have not yet been identified in any particular year for outsourcing generally is quite small. Historically, as we've mentioned, the number is about 10% to 15%. So that's -- provides us with visibility which is very, very high. On the transformation business, the visibility is actually high for the annuity type of work that we do for our clients. However, it is quite low for some of the project based work that we undertake for our customers.

Okay. And then secondly, on top of supply side pressure, what additional levers can you meaningfully pull to offset potential pricing cuts you just talked about? Let's say as compared to higher offshore mix (inaudible), are you seeing a growing trend for outward based pricing as clients (inaudible) -- something along those lines?

We are seeing our clients request more for transaction based pricing models, and particularly with clients where we've had stable volume relationships. We are able to benchmark pricing off their operations on a transaction basis, on a transaction basis. And we will endeavor to move the pricing model in alignment with our client requirements towards a transaction based pricing model. And I think what that will do is it will allow us to introduce a greater amount of flexibility into our operating business model and to be able to minimize our overall costs on an aggregate basis and provide much greater flexibility and variability to our clients as well.

All right, that's helpful. Thank you.

And there are no further questions at this time. I would like to turn it back to management for closing remarks.

Thank you. Well, I would just like to thank everybody for joining this call, and I just want to reemphasize that EXL I think is extremely well positioned for growing our business in 2009. I think we've got a terrific balance sheet. We've got a terrific positioning in the marketplace, and we've got some known client ramp-ups which are already there with us. We hope to be able to execute and deliver in 2009 despite the uncertainty in the marketplace. Thank you all for joining, and we'll see you next quarter.

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