Exlservice Holdings Inc (EXLS) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2010 ExlService Holdings Incorporated earnings conference call. My name is Christi and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the conference over to your host for today, Ms. Jean Liang, Head of Investor Relations. Ma'am, please proceed.

Thanks, Christi. Good morning from New York, and thank you for joining our first-quarter 2010 earnings announcement. Joining us today from India are Rohit Kapoor, our President and Chief Executive Officer; and Vishal Chhibbar, our CFO.

Hopefully, you had an opportunity to review the press release we issued last night, along with the updated investor fact sheet which is available for review in the Investor Relations section on our website.

We will be doing some investor marketing this quarter and look forward to discussing our business with you on the road.

On the agenda for today's call, Rohit will provide a business update for the quarter, discuss our latest acquisitions and provide an update on our guidance and growth trajectory. Vishal will then take you through the financial details of the first quarter, provide additional color on our guidance and then close the presentation before we take questions.

Some of the matters we will discuss in this call are forward-looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that can 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 issues, those factors set forth in today's press release, discussions and 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. Reconciliations of those measures to GAAP can be found on the press release.

I will now turn the call over to Rohit.

Thanks, Jean. Good evening to those of you joining us in Asia, and good morning to those of you joining us from the US.

In the last few quarters, we have remained focused on execution as we worked to differentiate ourselves in the marketplace through our deep domain knowledge and a sharpened ability to remain a highly customer-centric organization. Our execution has translated to results, and through our efforts, we have generated terrific momentum and have firmly cemented our place as a tier 1 player in the BPO market.

The pure-play outsourcing environment is becoming more stratified where stronger companies are pulling away from the pack. We believe that we are such a company and have a clear line of sight on how to establish our stronger leadership position.

As clients continue to look forward towards BPO a steady part of their long-term strategic plan and their discretionary spending budgets increase, EXL is poised to gain greater market share for four primary reasons. First, we have an integrated outsourcing and transformation offering that is unique and that continues to resonate extremely well with our clients. Second, we are vertically focused and have deep knowledge of our chosen domains. Third, we have now acquired a platform capability which will enable us to offer clients a total outsourced operating solution that provides a lower-cost and more flexible business model. Finally, we remain financially disciplined, prudent, and a secure, stable partner for our clients.

EXL's Strong first-quarter performance demonstrates the effectiveness of our positioning in the reviving market as we grew revenues nearly 33% year on year, added several new clients in our key focus verticals and made a strategic investment in a well-established insurance platform.

In outsourcing, our client base continues to diversify and grow. This quarter, our top five clients contributed 60% of revenues compared to 67% in the first quarter of 2009. This change is due to greater growth in a larger group of clients. We currently have more clients on track to contribute over $5 million for financial year 2010 than we have ever had in the past, and the contribution from strategic client accounts has increased by 30% year-over-year. Although growth amongst our client base will always remain varied, the stronger mix of strategic clients in our portfolio is encouraging and showcases EXL's ability to quickly scale with new and existing clients. Further, we have no large client relationship up for contract renewal during the year.

The strength of our Transformation offering continues to generate growth momentum. Transformation had a record quarter with $12.9 million in revenues. The growth in our Transformation business is particularly encouraging because this business oftentimes will act as a precursor to growth in our outsourcing business.

Transformation gross margins increased to 38.7% from 19.7% a year ago. This is a validation of our decision to retain our bench through the downturn and illustrates the relevance of our offering to clients. In particular, our clients are asking for greater insight into their customers and their operational risks.

We also saw greater demand for our services from capital markets clients who are interested in our ability to work with complex problems. One example is that we are working with a large investment bank to evaluate their intra-company transaction processes and provide assistance in testing a new automated trading platform.

We continue to improve the revenue mix in Transformation. Earlier this year, we rolled out four new products that are annuity-based in nature. In addition, we have been continuously developing new product offerings that are relevant to our customers. We will be launching another set of new products shortly as we grow our annuity-based Transformation business. This will also help us maintain the strength of our Transformation business.

As we had previously announced, this year, we will make additional investments in expanding our infrastructure to support the growth that we anticipate from our clients. Our SEZ facilities expansion to Jaipur and the Noida campus will be ready in the third quarter. These investments will help us to improve our tax rates as our STPI tax benefits expire. As we mentioned last quarter, we plan to roll out these facilities in phases, such that [they come light] as we bring on additional clients.

From a people perspective, I am pleased to announce that Sanjay Gupta will be the new global head of Human Resources. Sanjay has been with EXL since 2000 and has over 24 years of work experience. He was most recently the head of Human Resources for our outsourcing business, and prior to that was a Vice President of Operations for EXL. In his new role, Sanjay will be responsible for developing and implementing the human resources strategy in support of the Company's business objectives. He will also be joining our executive committee and we look forward to his contribution in this new capacity.

Attrition increased this quarter to 32.7% from 27.3% in the fourth quarter, based on greater demand for experienced talent in the macro environment. Given our stability and expected growth, we believe the attrition rates will come down over time. The investments we've made in human capital have helped our recruiting efforts. Despite the attrition, we were able to increase our headcount to nearly 11,800 as of March 31, the highest in our Company's history.

Wage increases have taken effect and were on average in the high single digits. The impact of the increment has already been factored into our margin guidance.

In terms of other macro factors impacting our business, we do believe that Indian rupee appreciation remains a concern. EXL is approaching the issue in a comprehensive manner.

First, more than 60% of our exposures have contractual provisions or guaranteed minimum volume and termination provisions that allow us to hedge most effectively. We continue to engage our clients in this manner and believe this is the right structure for sustainable long-term partnership agreements.

Second, the natural growth of EXL globally will diversify our cost structure. In addition to our buildup in the Philippines and Eastern Europe, we endeavor to have an operation in the US to create greater flexibility and diversification in our cost base, and the acquisition of PDMA is a step in this direction.

Finally, we regularly adjust our hedging program to protect our margins from any remaining exposures over a three-year rolling period. We expect FX gains in each of the next three years, based on an exchange rate of INR 44.5 per US dollar, and will continue to be vigilant with our hedging program.

As investors will recall, is the AMEX acquisition that we announced this past November closed in early March this year. The integration has been a remarkable success, from a changed management and people perspective so far, and continues in a focused manner. We expect the financial contribution to be achieved as planned.

Further, we anticipate our ability to capitalize on some growth opportunities in this calendar year as volumes return to business travel, related verticals, and the industry as a whole. In fact, in this short period of time, we have gained credibility in the travel vertical and have several new strategic prospects in the pipeline. Although there certainly are cost pressures in the travel industry, we believe the strong brand reputation and unique capabilities of the American Express Travel Center will allow us to win business and represents a distinct competitive advantage.

Our customer pipeline continues to grow and develop with more mature prospects. The pipeline is also strong in insurance as our customers move forward with their outsourcing plans. Not only does the insurance vertical remain robust, we are actually seeing heightened activity in insurance.

This quarter, we gained three new insurance clients. Additionally, we are in exclusive negotiations with a strategic insurance client where we expect a favorable decision in the next quarter. We will keep you all posted on our progress.

Of the three new outsourcing clients we gained this quarter, one was in the insurance vertical and the other two client wins were in our other areas of strength, utilities. We are seeing many midsized deals in our pipeline, and this plays to EXL's strength as we have demonstrated the ability to prove ourselves to clients over time and grow client relationships based on strong operational delivery.

In line with our focus on select verticals and strengthening our dominant position in insurance, we are make industry specific investments in intellectual property and proprietary technology. Insurance was the natural place for us to make this type of investment. As such, I am pleased to announce the acquisition of PDMA Inc., maker of the LifePRO quality administration system used by approximately 40 life, annuity and health insurers globally. We are excited by the opportunities it presents, not only to existing PDMA and EXL clients but also to new prospects, particularly in the middle market. PDMA has a large client base with long tenure, and we are enthusiastic about engaging those customers and supporting them with strong customer service, investing in the LifePRO platform, and introducing them to EXL's service offerings. In addition, EXL's existing clients will benefit from access to PDMA's highly experienced business and technology professionals who have significant actuarial, regulatory and stock and tax knowledge specific to the insurance industry.

We chose to make this investment in LifePRO because there are opportunities to deliver valuable outsourcing and transformation services to PDMA clients in the short-term. However, we also believe there is a longer-term opportunity to create a more comprehensive solution comprising both technology and services.

For over seven years, EXL has been responsible for performing over 100 discrete processes on LifePRO, and we are an experienced operator on the system. We are familiar with how the platform is used by insurance and what the nature of a combined offering might be. The technology investment will allow clients to reduce their total cost of ownership, create more variable cost structures, and facilitate greater scalability in EXL's business model.

The aggregate purchase consideration was approximately $14.1 million, paid in cash net of working capital adjustments. EXL expects PDMA to generate about $10 million in annual revenue and be immediately accretive to GAAP earnings per share. The transaction closed on May 1.

The acquired company will be branded as EXL LifePRO and continue to be managed by Rick Briggs, PDMA's Chief Operating Officer, and his excellent client service and delivery team. We are extremely pleased to welcome the PDMA employees to EXL and look forward to their contributions to our Company and enjoying rewarding careers with EXL. Integration is already in progress for the PDMA transaction.

We now have a dedicated integration team that has successfully integrated two acquisitions and implemented processes and procedures to ensure seamless operational transitions. This capability development is critical to us as our M&A pipeline remains very strong. We are actively evaluating bolt-on acquisitions, opportunities to expand into niche areas in additional geographies, and bolster capabilities in our focus verticals.

We are also interested in acquiring onshore US BPO capabilities to provide a true end-to-end outsourcing capability to our clients from onshore data capture, to offshore processing.

Before I conclude, I would like to give all of you a better sense of our long-term business model. We strongly believe that, with our current capabilities, strong positioning in the marketplace, and talent pool of experienced and capable professionals in our team, EXL can continue to grow at 25% to 30% per annum for the next several years on a sustained basis without the need to raise additional equity capital.

As you are all aware, we increased our revenue guidance for the year to between $235 million to $240 million. The midpoint of this increased guidance represents growth of 28% over 2009. On the back of this momentum, we can see with enhanced visibility growth in our business by at least 30% in 2011 over 2010 through a combination of organic and inorganic growth. Our confidence to achieve this high growth is based on several factors, including a return to health in the general economy, receptivity for our integrated service offerings, our new technology platform capability, and the demand signals from our existing clients.

To the extent that we look at inorganic growth opportunities, we will exercise the same discipline and proven approach which we have consistently demonstrated. We also believe that this high growth can be sustained with EBITDA margins of around 20% and with greater operating leverage kicking in as we scale up our business. As such, even though we are smaller in absolute size than some of our competitors, we are positioned for a faster growth rate than the industry and an improvement in margins over the next three to five years. This should provide an attractive entry point for new investors.

Before I hand the call over to Vishal, I would like to thank the EXL team. We challenged our team this quarter to find new organic growth opportunities, integrate a new business and also identify and close another acquisition. These accomplishments shows the depth of talent and the dedication of our team members to our clients and our Company.

In Q2, we expect a full quarter of the American Express contribution as well as a contribution from PDMA, both of which should support further organic growth.

I will now pass the call to Vishal, who will take you through our financial update and open the floor for questions.

Thanks, Rohit. Good morning, and thanks, everyone, for joining us today.

EXL's first-quarter results exceeded our expectation. Coming on the heels of significant growth we experienced in the latter half of 2009, this quarter shows we are building on that momentum in 2010.

Revenue this quarter was $54.5 million compared to $41 million for the first quarter of 2009, representing year-over-year growth of 32.9%. This is the fourth quarter that EXL has grown revenue sequentially quarter-on-quarter, a clear indication that we are benefiting from the improving economy, the return of client confidence, and demand in our industry.

This quarter, approximately 73% of our revenues were denominated in US dollars and approximately 26% in UK pounds, and the balance in other currency. By comparison, in the same period last year, approximately 66% of our revenues were denominated in US dollars and approximately 34% in UK pounds. This shift in revenue mix from UK pounds to US dollars but only takes away some of our FX risks from our revenues but also reduces the risk on our adjusted operating margin and net income.

Outsourcing revenue for this quarter was $41.6 million compared to $33.4 million for the first quarter last year, an increase of nearly 25%. This quarter, we transitioned 27 new processes as we continue to ramp new and existing clients.

We also recognized one month of revenue for the American Express Global Travel Service Center acquisition we announced last November. We expect to realize a full quarter of contribution from AMEX acquisition in the second quarter.

Transformation service revenue increased to $12.9 million this quarter, which is a new record for the business. We saw strength across all service lines and the team continues to innovate and create new product offerings to differentiate EXL in the marketplace.

Compared to the first quarter last year, revenues were up approximately 70%. This increase is predicated on strong demand for value-add transformation service offerings, our relentless customer centricity, and a surge in client discretionary spending.

The energy business remained stable at about one-third of the Transformation revenues.

Gross margin for this quarter was 42.2% compared to 40.6% from the same period last year. Next quarter, we expect gross margins will be marginally below 40% due to the impact of wage increments as well as the impact from the appreciation of the Indian rupee we have witnessed this year.

Our outsourcing gross margin this quarter were 43.3% compared to 45.3% for the same period last year, mainly due to the appreciation of the Indian rupee and partially offset by efficiencies in our delivery infrastructure. We are encouraged by the increased utilization in Transformation as client activities continued. This increase drove Transformation gross margin higher to 58.7% from 36.3% last quarter and 19.7% in the first quarter of 2009.

General and administrative expenses were down this quarter by approximately $400,000 to 17.1% of revenue compared with the previous quarter. We expect the G&A expenses to gradually decrease as a percentage of revenues going forward, as we gain operating leverage of our support infrastructure and grow our revenue base.

This quarter, we increased our sales and marketing and strategic account management teams to 55 professionals who are actively involved in expanding the mind share of EXL with our prospects, clients, and advisory community. Sales and marketing expenses for the quarter were $4.2 million compared to $3.9 million last quarter and $3.2 million for the first quarter last year. We view investment in sales and marketing as a leading indicator of our future growth and a critical ongoing investment for us to capture share as the market of outsourcing expands. At the current quarterly run rate, EXL has been able to expand operating margins and EBITDA while increasing sales and marketing dollars at about 35% component growth since 2006.

Depreciation and amortization expense was marginally down this quarter at $3.1 million compared to $3.3 million in the previous quarter. Going forward, we expect this number to go up for two reasons. First, we expect depreciation to increase as we bring on the two new (inaudible) facilities Rohit had referred to earlier. To minimize the impact, we plan to do the buildout in phases and time them with the planned ramps of our clients.

The second reason is because of our two recent acquisitions that will result in incremental amortization of related intangibles. For the AMEX acquisition, we capitalized approximately $9.4 million of intangibles to be amortized over ten years, of which approximately $800,000 will be in the calendar year 2010. We are still evaluating the breakup between goodwill and intangibles from the PDMA acquisition, and we'll have more details in our next call.

Adjusted operating margin, which excludes the impact of stock compensation expense and amortization of intangibles, for this quarter was 15.6% compared to 14.2% in the first quarter of last year.

Adjusted EBITDA for the quarter was $11.4 million, compared to $8.3 million in the same period last year, an increase of 37%. Over the last four quarters, EXL has generated approximately $41 million of adjusted EBITDA, excluding the one-time client payment received in Q4 of last year. Including that one-time client payment, we would have generated approximately $46 million of adjusted EBITDA. We believe this is a testament to the cash flow generating power of the Company and the continued operating leverage we are seeing as we accelerate growth while maintaining a competitive cost structure and remaining disciplined in our pricing and contracting framework.

As the Indian rupee appreciates, we will see a compression in our adjusted operating margin. Every 1% movement in rupee impacts 40 to 50 bips to our adjusted operating margin, which is compensated by an increase in foreign exchange gains realized on our hedges. We reported foreign exchange gains related to cash flow hedging this quarter of $600,000 compared to a loss of $900,000 in the prior quarter. Based on the current exchange rates of 44.5 rupees to the dollar, we expect foreign exchange gains for the year to be at least $4 million, approximately $2 million higher than our previous guidance at 46 rupees to the dollar.

Net income this quarter was $5.6 million compared to $2.9 million for the same period last year, representing a growth of 93.1% year-over-year. Diluted earnings per share from continuing operations was $0.19 compared to $0.10 for the same period last year, representing a growth of 90%.

EXL's cash balance, including short-term investments, for the first quarter was at $101.5 million after settling for the American Express acquisition and payment of our annual incentive bonus.

DSO was maintained at 58 days.

EXL's continued strong EBITDA generation is permitting us to replenish, at a rapid clip, the capital we are deploying for acquisitions, such that we are able to maintain a debt-free capital structure with significant free cash on the balance sheet to maintain flexibility. Capital expenditure this quarter was $5.4 million, primarily related to development of our SEZ facilities in India, and leasehold improvements on existing facilities, and purchase of telecom equipment and computer hardware in connection with managing our client operations.

Due to the strong quarter, the PDMA acquisition and our line of sight for the rest of the year, we are increasing our 2010 guidance of revenues to between $235 million to $240 million from $225 million to $230 million. Two-thirds of this increase is attributable to the eight months of revenue contribution of PDMA, and the remaining one-third is based on strong ongoing business performance and demand for both our sourcing and transformation services.

The guidance also includes some known headwinds to future sequential revenue growth, such as the ramp down of the [Wiwa] business which represented $800,000 in the first-quarter revenues, and one-time transformation revenues of approximately $1 million that were recognized this quarter.

Adjusted operating margin, excluding the impact of stock-based compensation expense and amortization of intangibles for the calendar year 2010 is now expected to be at the top end of our guidance range of 12% to 14%. This is based on the prevailing exchange rate of INR44.5 to $1 and is inclusive of the impact of wage increments and drag from the buildout of the SEZ facilities.

Our earlier guidance, which was announced in March, was based on an exchange rate of INR46 to $1 which implies that our revised guidance would have been approximately 1.1% higher had the exchange rate remained unchanged. We feel confident and positive in our ability to continue to deliver strong operating results for 2010.

I would now like to open the discussion for your questions.

(Operator Instructions). Tim Fox, Deutsche Bank.

Thanks. Good evening. My first question was around the transformation business, great performance there this quarter. Just some clarity around the potential that there was some pent-up demand maybe in that business and your visibility, specifically into the next few quarters, around that business, understanding that it is a little bit shorter term in nature, at least two-thirds of that business. If you could just give us some color around the backlog there and maybe how that pipeline might unfold over the next two to three quarters?

Sure, Tim. This is Rohit. The transformation business for us was strong in the first quarter, primarily due to three reasons. Reason number one is our clients are looking at readjusting their operating models to be able to deliver and perform better business results in the current economic environment. As they do that, we are able to engage with them and provide them with assistance in adjusting these operating models both from a customer acquisition and retention standpoint, as well as from their operational delivery, execution and process reengineering standpoint.

Number two, this quarter, we were able to cross-sell a lot more of our transformation services to our clients within the outsourcing segment. Our clients in the outsourcing business are already familiar with EXL and they rapidly adopted some of our Transformation services and products which were very, very useful and valuable for them.

The third factor which contributed to the increase in growth was because of the need for compliance to satisfy some of the enhanced regulatory environments, particularly for our customers in insurance, banking and financial services.

For these three reasons, we do believe that, going forward, the Transformation business will continue to remain strong. There is, however, a one-time budget flush that took place between last year and this year by view of many of our clients wanting to spend money before the calendar year and the budgets were flushed out. So, that's something which did carry forward and as Vishal spoke about, that represented close to about $1 million that carried forward into the first quarter.

Okay, great. That's helpful. Just one question, if I could, on PDMA? Could you remind us how exactly their business model works? Is this more of a software systems sale? How is that model going to integrate going forward? I know you're looking for about $10 million on a run rate basis, but are you going to expand that -- the existing PDMA revenue model or is it going to be more of an integrated sale going forward?

Sure. So the PDMA business model right now is a software business model where they've got license revenue when they sell new software license system new customers. They've got revenue associated with ongoing maintenance of fee licenses which are in an installed customer base. They get revenues for all of the modifications and customizations that need to be made to their software in order to customize this product for each individual client situation. That represents close to $10 million of annualized revenue, and we would expect that revenue will continue on as normal.

The opportunity for us really is twofold. Number one is for us to be able to cross-sell outsourcing and Transformation services to the existing customer base of PDMA; and number two, for us to be able to take an integrated product offering to these customers and offer them a total outsource solution which combines technology and servicing. We expect the second part of our strategy to enhance revenue and to be able to engage with customers on a total outsource solution to play out over a longer term period, whereas we would have an enhanced ability to cross-sell our Transformation and outsourcing services in the short-term.

Thank you and congratulations.

Jon Maietta, Needham & Co.

Rohit, I just wanted to first piggyback off of one of Tim's questions with regard to Transformation services and how you may see linearity playing out in that business as we move through the year.

Well, the transformation business is quite difficult for us to predict as to how it will shape out for the year, because the visibility in that business line is fairly limited. However, as we've said repeatedly in the past and as we've worked on improving the quality of the business and also improving the stability of that business, we are shifting more and more of our business in Transformation towards annuity-based customer accounts. As such, today, approximately 30% of the Transformation business is annuity-based and provides a stable base of revenues for us on an ongoing basis. We do have project-based revenue that gets layered on top of that on which we have limited visibility.

All I could tell you right now is that the demand for Transformation services is strong. We do see a strong pipeline with our customer base that would like to engage with us for the specific transformation skill sets that they bring to the table, and we believe that activity remains strong and we are encouraged by that demand environment.

However, as to how it plays out for the rest of the year, it's still going to be uncertain and we will get to know about it as we see it.

Okay. Then you had talked about, for 2011, through a combination of organic growth and acquisitions, a growth rate north of 30%. Would you care to take a stab at a potential top line growth rate for calendar '11 with the existing as-is business, including the PDMA acquisition?

Well, if you take a look at the guidance that we've provided for 2010 as well as some of the acquisitions that we have already done, we believe that there is adequate room for us to be able to grow off this existing business that we currently have and to be able to deliver a large part of the 30% growth in 2011. However, we do retain the flexibility of doing some additional tuck-in acquisitions as we go along and as we have demonstrated our ability to do so and do that in a financially disciplined and prudent manner.

I got it. thanks very much.

David Grossman, Thomas Weisel.

Thanks. Just kind of going back, I guess, Rohit, to some of your comments about the secular profile of the business, you know, as you think about the organic growth rate of the business versus what you are going to acquire, is it fair to say that the organic growth rate is somewhere between the 15% to 20% and the acquired piece is probably in the 10%-plus range? Do those sound like reasonable parameters?

Yes, David, I think we would certainly expect our organic growth rate to be around the 20%-plus mark, based on our existing book of business going into 2011.

We do think what we've been able to develop is create multiple engines of growth for the Company. If you take a look at our business today versus two years ago, today we have got geographical expansion into the Philippines, into Central and Eastern Europe, and many of our existing customers and new customers are adopting our services from these new geographies. We've added on new industry verticals, particularly the travel industry vertical, which is a new source of opportunity for us. We've acquired PDMA which gives us a backbone-based capability, and we've got some very attractive assets which are there in our M&A pipeline which we can acquire.

So it really boils down to a much better demand environment, a much greater capability set, and a much better positioning the gives us the confidence on the 30% growth rate for 2011.

Just again going to your margin guidance of 20% on the EBITDA line, what is the -- you know, I think depreciation runs about 6%. I assume are you backing out stock comp from that number as well?

Yes, that's true, the adjusted EBITDA.

Right, so it just seems that you are already running above those rates, right, because your share looks like 20% EBITDA, you have 6% depreciation and then I think 3% or 4% in amortization between stock comp and intangibles. So, that guidance seems relatively conservative in the 20% range, particularly given that you are close to operating above those levels now.

Yes, David. I think the point that I was trying to make is, despite the higher growth rate of 28% in 2010 and 30%-plus in 2011, we think we will be able to at least sustain our existing margins and perhaps even improve them as we gain operating leverage.

I see.

Ashwin Shirvaikar, Citi.

Congratulations on the good quarter. My first question is you've talked a lot about M&A contributing both this year and next year, but can you maybe help characterize the M&A pipeline as it stands? Should we continue to expect similar kind of deals that we've seen recently, including the one that was announced, the PDMA that was announced yesterday?

So, Ashwin, our M&A pipeline actually remains extremely strong despite the fact that we've closed out a couple of acquisitions in the interim. We believe that the landscape of assets that we would wish to acquire is extremely attractive and the valuation expectations of the sellers are reasonable.

We will always continue to look at M&A in terms of acquiring strategic capability, and that is fundamentally most important to us. Number two, we will always remain financially disciplined and prudent in terms of the acquisitions that we will do. So, we do think that the pipeline is strong, the opportunities are several and tremendous, and we will look at the right capability to acquire and acquire that at the right price.

Okay. Clearly, the -- I mean, the PDMA deal, I don't know when was the last time I saw something that was accretive on a GAAP basis from anyone, but you know, what percent of PDMA sales have historically happened to EXL? How important of a channel were you to them?

Actually, PDMA and EXL haven't really had any past relationship. However, the work that we do with some of our clients in the insurance industry vertical is on PDMA's platform LifePRO. Today, out of the 40 customers that PDMA has, there are three clients where EXL services these clients on the platform that is provided by PDMA. However, there is no other relationship that we've had in the past.

Okay? One last question if I may, moving from demand to the ability to sort of fulfill that demand. Could you provide a sort of facility ramp plan update beyond what's already going on in India?

So in terms of our infrastructure, in India, we are expanding into the new SEZs, both in Noida as well as in Jaipur. We are going to look at expansion in the Philippines as our Philippine Center gets close to full capacity out there. We recently built out a new center in Romania which has got adequate capacity.

I think one of the additional benefits of the PDMA acquisition is that we now have a physical infrastructure onshore in the US as well to be able to provide some front-end services to our customers and we will intend to use that infrastructure as well.

Okay.

Robert Riggs, William Blair & Co.

Good morning. As you start to talk about providing a more integrated product offering, does that change the type of salespeople that you would need to bring on or any structures with the salesforce? Because I think, if I remember correctly, you have a group of hunters and a group of farmers. But I mean are you going to be leading with this integrated product offering that will require a different type of salesperson?

Yes, Rob. The sale, which is an integrated sale, will require a different profile of an individual to go out and be able to sell an integrated solution. That individual will need to be a subject matter expert within insurance, have a deep understanding of the technology platform, as well as the processing capabilities that we have in India and in the Philippines. So we will need to combine that.

We are intending to hire a salesperson who will be dedicated for this particular task and be accountable for this responsibility. This would be an industry-specific person who has understanding of the platform as well as the processing capability.

Great. If I could, just one quick follow-up -- any early indication about how much longer these potential sales might take as opposed to just an outsourcing deal, a transformation deal?

Sure. So first of all, as we did our diligence calls on PDMA's platform, we were greatly encouraged by the requirement and the demand that we saw from the customers of PDMA for such integrated services.

Second, we also believe that since most of this pitch will be attractive to really the midsized companies, those companies are likely to have much faster decision-making than some of the larger companies which take much longer in terms of their decision-making cycles.

I think there still will be a long sale cycle. It's not going to be a short sale cycle. Perhaps the 12 to 18 months that we're used to in our outsourcing business will also be the sales cycle for selling the integrated solution. We obviously gain more knowledge and experience as we go along, but in terms of our going-in position, that would be our viewpoint.

Great, thank you.

Vincent Lin, Goldman Sachs.

Rohit, I just wanted to follow up on the one strategic insurance prospect that you mentioned that you would expect some decision in the coming quarter. First of all, is that baked into you I think revenue growth limitations for 2011? Then secondly, if I remember correctly, I think you also mentioned there were two other prospects you were discussing with last quarter. Can you provide us with an update on those two? Thanks.

Sure, Vincent. Yes, the strategic insurance prospect that we have in our pipeline where we would expect a favorable decision, the revenue from that is being factored into our revenue assumptions for 2011. We would fully expect that client to deliver significant revenues in 2011.

In terms of our pipeline, last quarter, we had mentioned that we have three strategic prospects which are all from the insurance industry, which are part of our pipeline. Of those three, one has dropped off and one has moved on to an exclusive stage of negotiation, which is the prospect that we just spoke about.

In addition to that, we've added two new strategic prospects in a more well-developed stage of evaluation which I've got added onto our pipeline. So at the end of the first quarter, we now have four strategic prospects as part of our pipeline.

That's helpful. Then secondly, from a vertical standpoint, I think Transportation and the Logistics sector I think seems to be seeing mixed results. I think the pace of recovery seems to be uneven versus some of the other sectors. I'm just wondering if you can provide us some expectations in terms of what you expect out of that specific vertical and how is that baked into your 2010 guidance.

Well, for the Transportation and Logistics vertical, we are seeing, again, a fair amount of activity. Most of the activity we have seen has resulted in some engagement on the Transformation side of our business which, as I said in my prepared remarks, is generally a precursor to the outsourcing business. So I think there is activity there. There is certainly clients who are looking at getting to understand how the global delivery model works, and they are adopting that in small steps. I would expect that segment to open up and become a relevant segment for us going forward towards the rest of 2010 and into 2011.

Okay. Then just lastly, in terms of competition, pricing trends in general, is there anything that is changing on the margin? Maybe you could just provide some colors in terms of trends that you'll see in the quarter. Thanks.

Sure. I think the competitive scenario and competition situation remains pretty much the same. We have seen, in some client situations, there being very aggressive pricing, and perhaps pricing that is more pertinent to exchange rates that existed earlier during the year or even towards the end of last year, where our competitors don't seem to have adjusted their pricing models to reflect the strengthening of the rupee that has taken place. But other than that, the competitive environment pretty much remains the same.

Tien-Tsin Huang, JP Morgan Chase.

Thanks. I just wanted to clarify or better understand what exactly is changing your margin view for the year? Can you help us with some of the drivers of that?

Yes, this is Vishal here. If you look at our Q1 adjusted operating margin of 15.6%, you know, that if -- the salary increments will get impacted on that by about 160 bips. The FX at INR44.5 impacts another 90 bips from the FX average. FX rate in Q1 was about INR45.7.

The capacity increase expansion which we are making in the latter half of the year had an impact of 50 bips.

That is offset by a productivity and operating leverage of 130 bips, which will give you approximately the top end of our guidance range.

But bear in mind that the FX impact gets offset by the FX gains line. Capacity costs will manifest itself in the growth in 2011, and also that there is certain inflation adjustments we are able to do with some of our clients based on a rate increase.

Right, so the inflation will help a little bit. I guess, with the margin, it sounds like, the second half, we need to contemplate the facility expansion into our margin. Am I correct in thinking that way? It sounded like 50 basis points? All else equal?

Yes, that's correct.

Okay. The last question for me, just on the acquisitions, just trying to better understand sort of the -- how you went about vetting that. Is there a risk that you might see some attrition from the client base across existing customers with the changeover? I am just trying to better understand sort of the potential risks of some of that from the acquisition.

Right. So, first of all, we are fully committed to supporting and investing in the LifePRO platform that PDMA has so that we can provide, at a minimum, the same level of support that PDMA was providing to its customers, and hopefully enhance that.

Number two, most of the installations that are in place, the conversion cost of switching out from the platform and moving away to a competitive platform is very, very significant.

Number three, with our ability to offer combined servicing as well as the platform in an integrated manner, we believe that we would actually attract some new customers and perhaps convert some existing customers into adopting that integrated business model.

So while there is a risk of attrition anytime there's a transition, we believe that, in this particular situation, that is fully mitigated. We look forward to being able to engage with the customers of PDMA and assuring them of our support and continuing to provide them with the excellent service that they are used to with PDMA.

As a follow on to that, as you sort of sell through your existing base and cross-sell the platform, is there any significant sort of transition or implementation or conversion fees that you can generate as you get people onto the platform, or companies onto the platform? Is that meaningful at all?

Well, it will really depend upon what a customer wishes to achieve. Certainly, in the past, the conversion costs may have been a lot higher because of a need to use onshore US resources. We will now be able to offer offshore resources at a lower price point and reduce the cost of conversion.

But at the same time, if clients are willing to sign up for a long-term committed contract, we will look at how the conversion costs can be either minimized or absorbed or be adjusted for in terms of a longer-term pricing arrangement with the customer.

Got it. Understood. Thanks. Good quarter.

Joseph Foresi, Janney Montgomery Scott.

My first question here is I just was curious as to why -- I mean we are about 25% of the way into 2010 -- why you would provide color on 2011. Is there anything that you are sort of seeing in the business that makes you feel confident about what next year might look like?

Well, I think the reason we felt that it was important to give the color is because I think the marketplace was perhaps not very sure of where EXL would end up in terms of its long-term growth trajectory. If you take a look at where we have come from, in 2009, we grew our revenues by 5%, but we did that despite losing our single largest customer and despite there being a lot of turbulence in our customer base.

This year, we expect to grow our business by 28%. I think we just wanted to be able to highlight to everybody that we would actually expect an acceleration of our growth rather than a deceleration in our growth by virtue of the enhanced capability that we've added on in 2010.

Okay. Then just on the currency front, maybe you guys could -- I think we've talked about this maybe in the past. Maybe you could talk about the impact of a 1% move in the pound and the rupee on your results, if we could just get an update on that.

This is Vishal. Yes, on the currency movement on pound, as I mentioned that now it is only 26% of our total revenues. All of those pound revenues are actually fully protected through a client contract, so we really don't see any exposure on the pound on our numbers.

On the dollar/rupee impact on our books, the currency which we have here, about 60% of our clients are FX protected through client contracts, and about another 25% we have taken cash flow hedges in 2010. As mentioned that, you know, any FX movement will be significantly covered in terms of the benefit on the FX gain line. That's why, in my prepared remarks, I said that the FX gain at INR44.5 would be about $4 million for this year, which should help -- which should go through and protect our margins and EPS.

Okay, and then just one last one. I know you talked about acquisitions being part of the strategy sort of going into 2011. Is this -- do you think that's also going to be a long-term strategy for the Company? I wonder if you could just run through the characteristics that you look at when you are looking at your acquisitions.

For us, when we look at acquisitions, as I said, we are looking at acquiring strategic capability. In the case of PDMA, it was a beautiful fit because it was a company in our core industry vertical, insurance. We got access to 40 new customers. We had an ability to sell a total outsource solution. It was financially attractive, and it gave us an opportunity to learn how to be able to leverage technology in our business model on a go-forward basis.

In terms of other acquisitions that we would now look at, we are still looking at acquiring capability which would give us a greater US onshore delivery platform, give us capability in terms of handling a process end-to-end from data capture towards offshore processing. We will continue to look at other transactions which can enhance our vertical dominance in our chosen domains.

Ed Caso, Wells Fargo.

This is Chris [Whitman] for Ed Caso. Has there been any change in your expectations for contribution from AMEX in 2010?

No, American Express is pretty much moving along as planned, and we certainly expect to have American Express deliver the business case on the basis of which we did the transaction. As you know, Chris, the American Express acquisition also has an eight-year contract with a minimum committed guaranteed volume. The minimum volume that has been guaranteed was pretty close to the level at which we took over the business. So, we would not expect any deterioration in that business to take place.

Okay. I guess what I'm trying to get a better handle on is has there been any positive revision since you initially gave us some guidance there?

Sure. I think, on the positive side, there certainly has been. The American Express acquisition for us is a key strategic capability of being able to handle work for travel-management companies on a global scale and perform work for them on an end-to-end basis. Based on the work that we do with American Express, we have actually been able to develop a very significant pipeline of strategic prospects in the travel industry vertical. That is an encouraging sign of what the upside might be.

We also are looking to enhance our relationship with American Express and be able to grow our business with American Express, both on the travel side as well as on the corporate side. So the upside that we would have anticipated from this transaction is playing out. There is nothing which has materialized so far, but it just, it does seem to be moving in the right direction and we have the right early indicators on it.

Great, thank you. That's helpful. Secondly, in regards to your HR initiatives, what does your guidance assume for attrition levels for 2010?

So Chris, for guidance purposes, we do not have a target attrition rate. While our attrition has gone up in the fourth quarter of 2009 and the first quarter of 2010, it is pretty much in line with what is happening in the industry, and we are fully anticipating this kind of an increase to take place.

I think the critical part for us, as far as attrition management is concerned, is attrition of middle management and senior management. Again, unlike some of our competitors, we are seeing a lot of stability in our middle management and senior management. I think that is a fundamental critical differentiator for us.

Okay, thank you. Then lastly, given the ramp of new facilities here, I know it's going to be phased, but how should we think about seat utilization?

So I think, in terms of the capacity we are building in the SEZ facilities, you know, that would be something which will also be supporting our growth in 2011. So in terms of seat utilization, I think we expect approximately 50% of that to be utilized in this year. For Noida and in case of Jaipur, I think we will have the capacity utilization for Jaipur, as you said, nearly 100% by the end of this year in terms of utilization.

Yes, Chris, just adding onto Vishal's comments, the current seat utilization that we have at the end of the first quarter is 1.19. Even though this utilization is historically a low level for us, we are choosing to make the investment because we want to be able to transition our new customers into the Special Economic Zones and get the tax benefit out there.

In Noida, we are also creating a campus-like environment in the Special Economic Zone, which is going to give us additional benefits. So while the seat utilization will not be fully optimized, I think this investment is necessary for us to be able to get longer-term benefits.

This concludes today's question-and-answer session. Mr. Rohit Kapoor, please proceed to closing remarks.

Well, I would just like to thank everybody for joining this call. EXL continues to have strong execution. We've got terrific momentum in terms of our growth and our business, and we have got added capability which makes the market environment and the opportunity in front of us very exciting.

I thank you all for joining, and I look forward to welcoming you at our next call.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.