Exlservice Holdings Inc (EXLS) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EXL third quarter earnings conference call. My name is Keisha and I will be your operator for today. We will conduct a Q&A session towards the end this conference. (Operator Instructions) I would now like to turn the call over to your host for today, Jean Liang. Please proceed.

Thank you Keisha. Good morning, everyone and thanks for joining our third quarter 2009 earnings announcement. Joining us today from the NASDAQ market site in New York are Rohit Kapoor, our President and Chief Executive Officer and Vishal Chhibbar, our Chief Financial Officer. We hope you've had an opportunity to review the press release we issued this morning along with the updated investor friendly fact sheet. Both are available for review in the investor relations section on EXL's website.

On the agenda for today's call, Rohit will discuss our recent business announcements and provide an update on our operations for the quarter. Vishal will take you through the financial details of the third quarter, provide an update on our guidance and then close the presentation before we take questions.

Later this morning we will be hosting our first annual investor day here at the NASDAQ market site and we look forward to seeing you. Registration will begin at 9:30 a.m. Presentations will begin at 10:00 and the event will conclude at 1:00 p.m. For those of you who are unable to attend in person, the dial-in information is available on our press release and website.

Some of the matters we will discuss during this call are forward-looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed our implied by such statements. Such risks and uncertainties include but are not limited to general economic conditions, 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 to investors. Reconciliations of these measures to GAAP can be found on the press release. Now I will turn the call over to Rohit.

Thank you, Jean. Good morning, everyone and thank you for joining today's call. As we look to differentiate ourselves in the increasingly competitive marketplace, it becomes more and more clear that deep domain knowledge is not only imperative to our clients, but critical to our success. We have been sharply focused on client centricity and execution in our operations, sales efforts and M&A to drive strategy to becoming a category killer in our selected verticals. Our focus and effort is paying off.

Our financial results this quarter reflect both the hard work our team has committed to serving our clients and the capital investments made to accommodate the ramp-up from new client wins we have announced in the last 12 months. Over the past year we have further diversified our client base and not only have we restored revenues to their peak levels in 2008, but also exceeded them. Qualitatively our current market position and ability to generate strong growth going forward has never been better. We just need to continue executing over the next several years.

Our revenues for the third quarter grew 14% over the second quarter to $48.2 million, our fastest sequential revenue growth ever. We continue to ramp up in outsourcing for multiple clients in different geographies and realize an increase client activity in our transformation line of business. Last quarter our seat utilization was at an all time low as we prepared to ramp up. This quarter seat utilization is up to 1.25 from 1.17 last quarter and trending towards our historical average of 1.34.

Our second center in Pune which became operational at the end of May grew to over 260 employees at the end of September. Our Philippines operations, which became operationally profitable in the second quarter continued to ramp and at the end of the third quarter we had over 800 employees working out of our Manila center.

We continue to enhance our strong leadership position in the insurance vertical. I am pleased to announce the win of a long-term outsourcing contract with a global [C and C] and reinsurance leader with whom we have been in exclusive negotiations. This is our fourth outsourcing contract win in the past 12 months in insurance and it underscores the value of our deep insurance domain knowledge and capabilities. The contract is a five-year contract and we will be servicing this client out of our India operations as well as the new Romanian facilities under development that we announced last quarter. Development of our Romanian facilities continues to be on schedule and we expect delivery of client work to begin in the first quarter of next year.

As you all know, we generate the vast majority of our growth from existing clients. As such, we have expanded our relationship with American Express with a new eight-year agreement to service the back office operations of American Express Travel and we associated acquisition of one of their business process operations in Gurgaon, India. American Express has been one of our most important clients. They selected us because of our track record of delivery, common commitment to excellence in customer service and they know that we have the desire, capabilities and process to increase our scale.

Next, American Express knows we would be committed to investing and growing the business travel back office capability to maximize professional growth opportunities for our employees. The opportunity not only expands our processing capability, but brings to us deep domain knowledge, a solid stream of revenue and cash flows, brand benefits as well as low integration risk. This transaction will increase our capabilities in analytics, exception processing, transaction processing and expand our transportation and logistics vertical to include travel. We will also gain a highly experienced and talented workforce along with an energized management team. We look forward to welcoming the approximately 800 personnel to the EXL team.

The purchase price for this transaction will be approximately $30 million including certain working capital adjustments and we expect it to be margin neutral and accretive. Revenues are expected to be at least $160 million over the course of the contract with additional growth potential both at American Express and with other clients. We expect that the deal will close in the first quarter next year and will continue to keep you posted on all the progress.

Our decision to keep a robust level of stopping within our transformation team throughout the challenging economy was validated this quarter as transformation activity returned to levels we saw in 2008. Activity increased as we successfully expanded our existing client relationships while increasing the annuity based percentage of the business. Although we will note that while our clients are much more positive, they continue to display cautious optimism and remain focused only on the highest priority projects. For example, one such project we were engaged on this quarter was for an existing global insurance client that focused on compliance and cost management work that the CFO commissioned.

As our clients are working through their budgets and rethinking their operating models, we have been able to leverage our existing outsourcing client relationships to engage our transformation offerings. Last quarter we reported that our annuity based revenue within transformation accounted for approximately 25% of transformation revenues. This quarter annuity based revenues grew to over 33% of transformation revenues, up from 18% in the same period last year. The continued growth in this annuity based revenue stream will improve our transformation revenue mix yielding less volatility and improved visibility. We expect our annuity based business to continue growing at well over 50% in the coming year and plan to roll out some new annuity based products before the end of the year.

One product under development is in the area of claims analytics. We are using the experience and knowledge that we have developed in risk analytics for credit cards and applying those principles to analyzing the risk portfolio for our insurance clients. From an operational perspective, we are pleased to register attrition of 22% this quarter, down considerably from 37.3% in the third quarter of last year and flat relative to the 22% we reported last quarter. While we continue to benefit from the slowdown in the economic growth in India and the Philippines to create more favorable supply side dynamics in our business, we remain committed to investing in our people management methodologies, training and development programs and creating opportunities for employee growth within the Company.

Our internal insurance academy has conducted nearly 20,000 man-hours of training for over 500 employees since July and we have been recognized by the Life Office Management Association with an award for outstanding performance and commitment to professional development.

This quarter headcount climbed to nearly 10,500 people. As our organization continues to grow and expand, we have made some leadership changes that will allow us to scale up much faster as an organization. Earlier this week we announced that Vikas Bhalla will be joining our senior management team as head of outsourcing. In this role Vikas will lead outsourcing operations for all EXL delivery centers globally. Vikas is a world class business leader and we are proud to have him build his career at EXL and lead a substantial part of our operations. We also continue to invest in business by adding key leadership positions within our finance department. This quarter we hired a new vice president for corporate development which reflects our commitment to M&A. Our M&A pipeline also remains robust and we are actively evaluating opportunities that will enhance our key verticals or focus areas.

With regard to our sales pipeline, we have observed a change in the types of opportunities. Specifically there are a greater number of smaller deals that we are seeing, an uptick in banking and financial services and transportation and logistics opportunities. There is also more interest in multilingual capabilities and integrated services. Integrated services are solutions that combine our outsourcing and transformation capabilities. Over the last 12 months we have diversified our client base with seven new client wins and we continue to be optimistic as we compete for new clients in the marketplace. We continue to be encouraged by our sales pipeline.

Based on the operational and financial results of this quarter, we believe that we have emerged from the challenges of the past year as a much stronger company. We remain vigilant in the management of gross margins and profitability and believe that the Company is firing on all cylinders. However, we do anticipate a few potential headwinds as we move forward. First, India is becoming more aggressive with respect to taxation and we do expect our tax rate to increase. Further, some of our STPI facilities will be expanding as far as our tax holiday is concerned and that will impact our tax rate. We are actively evaluating SEC options which would provide a tax benefit for new business over the next five to 10 years. The other issue we are concerned about is the continued weakness in the US dollar. We hope to mitigate this through our hedge program to ensure that we protect our margins.

Later this morning we will be hosting EXL's first annual investor day here in New York at the NASDAQ market site in Times Square. Our management team will be in attendance to further enhance the transparency in our financial reporting and provide greater insight to EXL's operating model. We look forward to seeing many of you there.

Before I hand the call over to Vishal, I wanted to highlight that this quarter demonstrates EXL's relentless focus on our clients and execution. From a strategic perspective, we are seeing early signs of our strategy resonating with clients as we remain domain focused. Operationally, our ramp-up effort from the wins we have discussed over the past years are proving out financially. The tenacity of our transformation team is becoming evident as annuity based revenues continue to grow and project based revenues return.

And finally, our discipline and diligence on the M&A front has enabled us to find a deal that will deliver strategic and financial value. Although I am pleased with the results of the quarter, I am even more excited about the current market positioning of the Company and the future growth opportunities in front of us. Now let me pass it over to Vishal, who will provide more detail on our financial performance and an update on guidance.

Thanks, Rohit and good morning to everyone. EXL's third quarter results proved that the investments we have made in our delivery infrastructure expansion in the first half of this year are paying off. We are pleased to have significantly exceeded our expectations this quarter for revenue growth. Revenue this quarter was $48.2 million, compared to $42.4 million last quarter and $46.6 million for the third quarter of 2008. Outsourcing services revenue for this quarter was higher at $37.7 million, compared to $34.5 million for the prior quarter and $34.5 million for the third quarter of last year. This quarter we migrated 32 new processes as we continue to ramp up the new clients we have signed over the last year.

As Rohit mentioned we continue to benefit from faster decision making by our transformation clients as revenue in that segment increased to $10.5 million from $7.9 million last quarter. While our sequential growth increased rapidly this quarter, we expect outsourcing revenue to continue its growth momentum into the next quarter and expect transformation revenues to be impacted due to lower utilization associated with the winter holidays.

Gross margins for this quarter was 40.2% compared to 39.1% for the second quarter this year and 39.8% for the third quarter of 2008. Outsourcing gross margins this quarter was at 41% compared to 41.9% last quarter. We are encouraged by the increased utilization in transformation as client activity increased this quarter. This growth transformation margin higher than 35.5% from 26.8% last quarter. General and administrative expenses were at 16.1% of revenue for this quarter compared to 18% in the prior quarter. The 190 bips improvement reflects our greater operating leverage as our revenues continue to grow. However, we expect this increase to increase slightly in the next quarter to reflect nonrecurring one-time costs such as expenses related to the Am Ex transaction.

Sales and marketing expenses for this quarter was $3.5 million compared to $3.3 million last quarter and $3.1 million for the third quarter last year. Depreciation expenses for this quarter were $2.9 million compared to $2.8 million last quarter remaining relatively flat. Adjusted operating margin which excludes the impact of stock compensation expense and amortization of intangibles for this quarter was 14.8% compared to 11.3% in the second quarter and 14.7% in the third quarter of 2008. This increase of 350 basis points was due to higher utilization of our physical infrastructure, the continued client ramps and improved operating leverage.

During this quarter the Indian budget was ratified by the Indian parliament. The ratification clarified the expiration of tax holiday for certain of our units in India and extended the holiday for some of our other units as well. As a result of our adjustment arising if this opportunity we leave the net benefit of $1 million to our tax line which resulted in a benefit of half a million for the quarter. We expect the effective tax rate to be normalized next quarter and will be in the range of 10% to 12%. Further, I just want to reiterate as I had mentioned in our last quarter call that for fiscal year 2010 we expect our tax rate to be meaningfully higher than this year.

Foreign exchange losses related to cash flow hedging this quarter were at $1.9 million compared to one $1.7 million the last quarter. Based on the current prevailing exchange rates we expect foreign exchange loss for the remainder of the year to be approximately $1 million. Net income this quarter was $3.9 million compared to $1.3 million last quarter and $0.4 million for the same period last year. Diluted earnings per share from continuing operations were $0.14 for this quarter compared to $0.04 in the second quarter and $0.01 in the third quarter of last year.

We continued to generate strong operating cash flow this quarter with $9.7 million compared to $7.8 million last quarter with a 23% increase quarter on quarter. Our cash balance for this quarter stood at $117.5 million compared to $104.3 million as of June 30th, 2009. Capital expenditures this quarter was $2.5 million compared to $1.8 million the second quarter of '09 as we continue to invest in our infrastructure to accommodate new client wins and rampups. In the fourth quarter we will be investing in the build-out of our Romanian facility and normal business rampups.

Our efforts to achieve greater efficiencies in our billing cycle and greater emphasis on client collections has resulted in improved DSO. This quarter our DSO was at 59 days from 68 days last quarter and 76 days in the third quarter of 2008. We are pleased to increase our calendar year 2009 guidance for revenue to $178 million to $180 million from our previous amount of $170 million to $175 million and our adjusted operating margin between 13.0% to 13.5% from 10% to 12%. Finally, we believe that our continued focus on execution for our clients, improving he efficiency of our operations, tightly controlling our discretionary spend and maintaining the strength of our balance sheet positions us well for continued growth. I would like to open the discussion for your questions.

Ladies and gentlemen (Operator Instructions). Your first question comes from the line of Jon Maietta with Needham and Company. Please proceed.

Thanks very much. Rohit, I was wondering if you could give us a sense as to how the American Express deal may ramp as we move into next year. Is this a case where we are going to hit the ground running and we will be at a full run rate immediately or will there be some ramp over the quarters?

Sure, Jon. As you know, the American Express operations that will be transferred over to EXL are already in existence and they already provide services to American Express. As such, when this transaction closes, there will be a volume of business that will become immediately impacting our financials both on the revenue and on the profit line. The transaction that we have structured with American Express has a minimum volume commitment over an eight-year period and the current minimum volume commitment that we have is very close to the level of business that is currently being serviced out of this center. So we do expect there to be future growth in this business both from American Express as well as an ability to leverage this capability in the marketplace.

Okay. That's helpful. And not that these size deals come along every day, but do you have other such strategic opportunities in the pipeline today?

The M&A pipeline is actually fairly active for us and has been for several quarters and therefore we continue to explore these opportunities. The area that we are most focused on is to remain disciplined in terms of our acquisition costs and pricing as well as to acquire domain knowledge and capability, which is fundamental to our M&A growth strategy. So we will continue to remain disciplined both in terms of the type of assets that we acquire as well as the value that we pay for acquiring these assets. And there is a significant amount of transactions and deals in the pipeline that are there. And with our recently enhanced team capability internally, we will be able to leverage that capability in terms of looking at transactions in the marketplace.

Okay. And last question from me with regard to the outsourcing business, have you noticed the change in the duration of sale cycles?

No. I think the duration of the sales cycle is pretty much the same. In some cases we have seen as we get towards the end of the year, that clients are planning for their budgets for 2010 and therefore accelerating their decision making but as such, the client cycle for new sales remains pretty much at the same levels.

Your next question comes from the line of Brandon Dobell with William Blair. Please proceed.

Thanks. A couple of questions about the quarter first off. The revenue upside to our model, I guess maybe to your own internal projections, was it driven more by faster ramp end business that had been contracted earlier in the year or perhaps more volumes or maybe less pricing pressure? Just trying to get a sense of where you're seeing surprises to the upside on the revenue volume these days.

Thanks, Brandon. This is Vishal here. Our revenues which grew from last quarter were primarily driven by better rampups in our outsourcing business, coupled with the fact that we closed the Schneider deal this quarter and we started booking revenues for the Schneider acquisition. And also better revenue growth in our transformation business, so it has been primarily driven by growth in our business.

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

Thanks. I've got a couple of quick questions. First on the fourth quarter guidance, I think it implies flattish revenues sequentially and you made a comment about Am Ex and ramp-up costs on margin. So I'm wondering if you could help us explain, is that seasonality in the fourth quarter on the transformation business that results in the flattish revenue? Or have some of these contracts that have been ramping hit at least their current plateaus? And then secondly if you could help us understand what impact Am Ex has on the margins in the fourth quarter.

Sure, David. For us the guidance that we have given for the fourth quarter does presume there would be continued rampups in our outsourcing business. However, our transformation business in the fourth quarter is expected to come down primarily because of the holidays and the number of working days that there are in the fourth quarter. So we do expect there to be some drop-off inactivity as compared to the third quarter in the transformation line of our business.

As far as the American Express transaction is concerned, that transaction is expected to close in the first quarter of next year and as such we do not expect there to be any impact in terms of revenues or in terms of our margin in the fourth quarter.

Except that we might have some costs related to the Am Ex deal closure.

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

Hi, guys, good morning. Nice results. I was wondering if you could talk a little bit more about some of the pipeline commentary you mentioned Rohit, you're seeing more smaller deals. Is that -- what is that a function of at this point? Is this more middle market companies starting to look at BPO offerings? Is this larger companies that are starting to maybe initiate BPO offerings or is it something else? Thanks.

Sure. I think in the past we used to see some client opportunities where they will be thinking about fairly large scale enterprisewide programs that they would initiate for strategic offshoring and outsourcing. Today what we are seeing is exactly what you mentioned, which is the mid tier and the second tier companies getting more engaged in terms of talking about outsourcing and they are looking at starting off with a smaller employee base as well as smaller pieces of their processes and their operations and then scale that over a period of time.

I think this is also be driven by the sensitivity that companies have towards any employee impact that they might be creating in the current environment. And I think it's this kind of activity actually plays to EXL's strengths because we are seen as a player that can absorb these types of transactions quite easily and provide the requisite amount of attention and customer centricity to these transactions. And we are seeing a lot more activity in terms of the number of deals which are taking place and which are coming into the pipeline and a lot many more engaging conversations as far as our prospects are concerned.

Okay. Thank you.

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

Hi. It's Ashwin Shirvaikar. Good results, guys, and nice guidance. My question is with regards to the tax rate. Can you help us with where the tax rate might go to next year and also an update on where you stand with SECs? And if you could also address whether the Philippines and Romania give you at least some modest tax advantage.

Hi Ashwin. This is Vishal. I'll take that. Our tax rate for next year, we have not given the full-year guidance now so we will be providing full-year guidance next year but we expect that to be in our -- in the mid-20s for next year. And you are right, the Philippines has a tax holiday which will help us to maintain lower tax rate and also there is a tax benefit in our European facilities.

Okay. And if I can ask a question on M&A, Rohit, you mentioned the importance of domain knowledge when you look at M&A targets. Should we assume that given that you have considerable domain knowledge in insurance and you're building up transportation, that this is the area you focus on, transportation and maybe utilities?

Yes, absolutely, Ashwin. For us, there are a few verticals and horizontal capabilities that we are focusing on. For us the verticals that are important are insurance, utilities, banking and financial services and transportation and logistics including travel. And from a horizontal standpoint the capability that is important is finance and accounting. So these are going to be the areas that we are going to focus on in terms of acquiring deep domain capability and we will be looking at some of the M&A opportunities in these areas.

Okay. And one last question, if I can squeeze that in. Can you quantify the impact of fewer billing days as a percentage for the fourth quarter?

Ashwin, I don't think we have the exact numbers with us, but basically in the fourth quarter with Thanksgiving as well as the holidays, there are a number of working days that actually get taken out from the fourth quarter and that has an impact on the transformation line of business.

Further, in the fourth quarter as we get towards year-end for most companies, there are projects which actually will get shifted over to the first quarter of the following year when new budgets are released and when companies can engage with us in terms of doing transformational work.

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

Hi my question here is on hiring and any wage inflation. Maybe talk a little bit about what your plans are for the ramping in headcount in the next couple of quarters and any impact you might be expecting from any wage increases.

Hi, Joe, this is Rohit. For us hiring in India or in the Philippines does not present a real challenge and we have been able to hire employees quite easily. And given our improving brand recognition and our becoming more of an employer of choice in the marketplace, our ability to attract the right talent is now well established. We do not have any projections in terms of the number of employees that we will be hiring going forward into the future, but one thing is becoming evidently clear is that as our attrition rates come down, our hiring for backfill is also reducing and therefore the challenges on the supply side of the talent equation are becoming a lot easier.

From a wage inflation perspective, we typically look at salary increments in India on an annual cycle and the time period when we make salary adjustments is typically in the second quarter of a calendar year. Our expectation based upon the current economic activity in India and the Philippines is that activity has picked up out there and there is demand for talent. And we may have to have salary increments which are higher than what we had in calendar year 2009 but these are not going to be substantially higher increases and these are going to be something that we will be able to well manage within our our operational guidelines.

I think last -- or the last couple of quarters you have talked about some significant deals and making their way into the number, I think five or something of that nature. What is in the pipeline, maybe if you could quantify it in those terms going forward.

So over the last 12 months we have now signed up seven new clients for outsourcing and out of those seven new clients, four are what we would categorize as being strategic new customers for EXL. In terms of the pipeline, we have several strategic prospects in the pipeline. However, there are two strategic prospects in the pipeline where we are in the final stages of evaluation by these prospects and we would expect a decision by these clients hopefully by the end of this year or the beginning of next year.

Okay. Thank you.

Your next question comes from the line of Vincent Lin with Goldman Sachs. Please proceed.

Great. Thanks. I might have missed from the comments but can you give us the -- or give a hint on whether there was any material impact from FX on the top line on a quarter to quarter basis?

Hi, Vincent, this is Vishal. The FX impact, especially the UK pound had had a marginal impact for us on our top line with about $400,000 growth coming from FX on our revenues and so it was not very significant for us.

Okay. And then secondly, can you talk about pricing trends, whether it's from a customers and also from a competitive standpoint? I think your comments throughout this year has been in terms of pricing comments has been a little bit more denied than even some of your peers. I'm just wondering if the -- in terms of anything has changed on the pricing side. Whether customer and competition standpoint?

Sure, Vincent. I think pricing continues to be stable and we are not seeing anything which is different as what we have been reporting in the past. From EXL's perspective, we remain disciplined in terms of pricing, factoring in in terms of our long-term customer contracts to make sure that we have full protection on foreign exchange volatility as well as on inflation factors. So we are, as you know, engaged in signing up several long-term contracts and we are very, very disciplined in terms of making sure that we are able to manage the risk on foreign exchange and on inflation with these contractual arrangements.

Okay. And then just finally, in terms of your transformation business, I know, I think you commented on budgets finalizing -- won't finalize until the first quarter of 2010, but just wondering relative to maybe the same period last year, going to 2010, if you can comment on the relative visibility on the transmissional side of business and whether we can expect momentum going to next year based on your current discussions with clients. Thanks.

Sure, Vincent. So the activity that's taking place in the transformation line of business has certainly stepped up from the first half of this year, and there is much, much more confidence in terms of the pipeline and the discussions that we are taking -- that are taking place with our customers in the transformation line of business. Also, as the transformation business becomes more annuity based, we think there will be less volatility going into 2010 and we think that we will be able to have greater level of visibility for the transformation business moving forward into 2010.

The last piece is that as I mentioned earlier, we are also introducing some new product lines within transformation for our customers and we think that there is a terrific opportunity for us to be able to capitalize on these new products that we would introduce into the marketplace which will resonate very well with our client requirements.

Great. Thanks.

Your next question comes from the line of Devin Fitzgerald with Deutsche Bank .

This is Devin in for Tim Fox. Thanks for taking the call. Could you provide a little bit more operational detail on the type of analytics work that you will be doing at American Express and maybe what the margins on that work might look like relative to the transaction processing element of it?

Sure, Devin. So as you know, American Express has been a long standing client of Exl and we have been working with them for the past several years and the work that we have been fundamentally doing for American Express so far has been in the area of transformation and in the area of analytics. With the acquisition of their travel service center in India, we will be expanding the scope of work to include analytics work for the travel business.

In specific terms, we will be doing work on business intelligence, data warehousing and data mining activities in addition to the work that we have been currently doing for American Express in terms of helping them out on their marketing strategies in terms of their customer loyalty programs, in terms of pricing and underwriting and specific programs on cost management within American Express.

Okay. Great. Thank you. That's very helpful. And also can you give us a bit of an update on the integration efforts at Schneider and whether there are any other prospective logistics clients out there that you might be able to serve out of that delivery sensor?

Sure. The integration of the Schneider operations are actually going off extremely well. We have been able to integrate a number of the functional processes and combine that with EXL's capability. What we are currently focused on is also building out our Romanian facilities and we are leveraging the management team at all amounts in the Czech Republic to help us support the build-out of our Romanian infrastructure. And that's going to be an additional responsibility that the management team in all amounts would be taking on.

For us, there are several prospects in the transportation and logistics industry vertical that are in our sales pipeline today, and many of the processes that we handle for Schneider out of our Czech facility are the same kind of processes that these customers are looking to outsource. So we think there is a tremendous opportunity for us to be able to leverage that capability and to be able to service these new transportation and logistics clients both out of India as well as out of our central and eastern European facilities.

Great. Thanks very much.

Your next question comes from the line of Tim Weiss with Robert W. Baird. Please proceed.

Hi, guys. Just had a question on the -- the weakening of the US dollar and how that should impact your results in '09 -- into 2010. Just based on your hedging program and if you can provide a brief overview of exactly how you're hedging right now, what do you expect for FX losses going into 2010?

Hi, Tim. Thanks for the question. This is Vishal. Based on the current exchange rates and based on our existing hedging program, we do not currently expect FX loss in 2010. In fact, we may -- we think that we can ride on the EPS tailwind when compared to the '09 year.

Is there any --

Let me just add to that comment. For us, as the US dollar weakens and the rupe strengthens our FX hedging program is effective for a 12 to 18 month period and subsequent to that, it will have an impact in terms of our profitability. The way in which we manage that risk is actually to structure long-term contracts with our customers where we share the risk of the foreign exchange movements. And we have been able to embed these contractual terms in our customer contracts where we will share the risk on foreign exchange movements over long-term periods. And therefore it's both the hedging mechanism in the short term as well as the contractual provisions for the long term that provide us protection on foreign currency movements.

Thanks for the color.

Your next question comes from the line of Tien-tsin Huang with JPMorgan. Please proceed.

Thanks. Good quarter. I wanted to just get a couple of questions in on the American Express. The $160 million in TCV, wanted to make sure that's all new revenues and not existing work. And also is it possible just to get the year one revenues on the deal?

That's correct the $160 million is all incremental new work that we will be taking on and this is eight-year contract and therefore this is approximately $20 million per annum revenue stream.

Okay. So maybe we should start at the 20, out the gate in year one.

Yes. Depending on when the deal closes, the actual impact in the calendar year will need to be prorated accordingly.

Sure. Absolutely, absolutely. And then I guess the deal margin you mentioned was mutual to accretive. Is this on a GAAP or non-GAAP basis?

Sure. So the margin characteristics of this business are quite similar to the existing margins that EXL has. It is also a transaction which is certainly accretive on a non-GAAP basis and as far as a GAAP basis is concerned, we still don't have the finalized numbers and it will depend upon how this transaction is closed-- upon closing and what the allocation on goodwill and intangibles are going to be. But from our early preliminary estimates, we think that this transaction would be accretive even on a GAAP basis.

Excellent. That's great to hear. Then lastly just a transaction processing elements of the deal. I'm curious if there's any volume based, you know, fee income that you could expect out of American Express.

No. There isn't any volume based fee that we he could expect but we certainly would expect to get additional volume of business as such which we can service for American Express out of the center. And the center certainly has additional capacity to take on more volume of work and there are other areas where we can service American Express on the outsourcing side.

Terrific. Thank you.

Your next question comes from the line of Bryan Keane with Credit Suisse. Please proceed.

Hi. Just the four new strategic clients that you guys have won this year, how many of those clients have ramped and what's the expectation for the large PC insurance client ramping up?

Sure, Bryan. So we have had several of these strategic clients ramp up and some of the ramp-up is now visible in our revenue numbers in the third quarter. However these clients have not fully ramped up all of their operations and we have not reached steady state in terms of the projected numbers that these clients anticipated outsourcing to us. For the global PNC insurance company that we have just recently signed, we would expect the business to start ramping up toward the middle of first quarter next year and most of the ramp will really take place in the second and third quarters of next year.

And do we know how big that contract is annually?

We have not disclosed what the size of this contract is because we do know what the initial piece of the work that we are going to be doing for them, but there's always a possibility for us to have changes to that and the business can actually expand well beyond that.

And the margins of these strategic clients, are they all pretty much in line with the company average or do they start lower, then they ramp up to your average?

The pricing that we have is very disciplined and therefore the margins that we expect from these businesses and these new clients that we are signing up are about the same as our existing business. However, you're right that during the initial on boarding and transition of these processes we do incur incremental expenses and during the first six months of the transition of a client, these contracts do have additional expenses associated with it which do impact our margins associated with the ramp.

And then just two clarifications. One was the effective tax rate for 2010 you said was mid-20s; is that right?

Yes, that's correct.

And then the last one is just a Schneider acquisition. How much revenue did that contribute in the quarter?

Schneider acquisition this quarter contributed about $1.5 million dollars to the outsourcing segment.

Okay. Great. Congratulations. Thank you.

Thank you.

Your next question comes from the line of Chris Wickland with Wells Fargo. Please proceed.

Hi good morning. Can you just remind us if there's any seasonality between Q4 and Q1 on your existing client base?

So there is no real seasonality that we have particularly for the outsourcing line of business. The transformation line of business, as we said earlier, just by virtue of the fact that there are lesser number of days that we have to engage with clients on projects and transformation-related activities, the revenue can be down sequentially quarter over quarter.

Okay. Thanks. And then also just wanted to confirm that the Am Ex transaction that was funded with existing cash?

Yes, the Am Ex transaction is going to be 100% cash transaction.

Great. Thank you.

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

Hi. Just a couple of small related follow-ons for me. Did you proactive non-GAAP EPS or non-GAAP tax rate?

No.

No? Is it possible you could or is the non-GAAP piece only for the operating metrics?

Ashwin, our preference and we have been consistent on this throughout is to provide with revenue guidance with adjusted operating margin guidance and provide guidance on the tax rate as well as capital expenditure and expected foreign currency gains. Given our size and scale and the volatility in the marketplace, there are a number of factors that impact our bottom line and we choose not to give guidance on those factors.

Okay. And CapEx looking at next year, will you need a new center or is there anything -- anything you can do with either the Am Ex or the Schneider is that enough for you to expand next year?

So based upon our existing customer visibility and the pipeline, we certainly think that we will need incremental infrastructure to be built up next year. The timing of that still needs to be ascertained and we would make a decision as we get to a higher capacity utilization, and a much better visibility in terms of our customer activity.

And just to add, we also would look at moving into an (inaudible) special (inaudible) zone environment which may also entail some capital expense.

Okay. And last question is the American Express work just a clarification. You said the margins have similar to existing work but did you mean existing work in the BPO segment or transformation? I'm assuming it's transformation.

The work we are taking on is primarily in outsourcing and the margins are similar to the work we do in outsourcing.

Thank you.

With no further questions in the queue, I would now like to turn the call back over to Rohit Kapoor for closing remarks. You may proceed.

Well, I just want to thank everybody for joining this call. We think we have had a great quarter and we think we are are very well positioned in the marketplace to take advantage of the opportunities in front of that. We look forward to continue to follow through on our executions. We are also hosting our first annual off-site meeting here today at the NASDAQ market site and we look forward to seeing many of you there later today. Thank you.

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