Exlservice Holdings Inc (EXLS) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2010 ExlService Holdings, Inc. earnings conference call. My name is Jonathan and I will be your operator today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host today, Mr. Jarrod Yahes, EXL's Treasurer. Sir, please proceed.

Thank you, operator. Greetings and thanks to everyone for joining EXL's second-quarter 2010 earnings announcement. Joining us today from India are Rohit Kapoor, our President and Chief Executive Officer, and Vishal Chhibbar, our Chief Financial Officer.

We hope you have had an opportunity to review the press release we issued yesterday after the market close along with the updated investor-friendly fact sheet that is available for review in the investor relations section on EXL's website.

On the agenda for today's call, Rohit will provide a business update for the quarter, discuss some of the underlying drivers for the momentum in our business, and provide color on some of the investments we are making to continue our growth trajectory. Vishal will then take you through the financial details of the second quarter, provide additional color on our guidance, and then close the presentation before we take questions.

We also look forward to seeing you on our third-quarter call and investor day that we scheduled on November 4 in New York and we look forward to providing you additional detail on this event in the weeks to come.

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 could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include but are not limited to general economic conditions, those factors set forth in today's press release, discussed in the Company's periodic reports, as well as other documents filed with the Securities and Exchange Commission from time to time. EXL assumes no obligations to update the information presented on this conference call.

During our call today, we may reference certain non-GAAP financial measures which we do believe provide useful information for investors. Reconciliations of those measures to GAAP can be found on the press release.

Now I will turn the call over to Rohit Kapoor, EXL's President and Chief Executive Officer. Rohit?

Thanks, Jerrod. Good morning to those of you joining us from the US and good evening to those of you joining us in Europe and Asia. Thank you for joining today's call.

I am delighted to talk to you about EXL's second-quarter results for 2010. EXL's focus on select industry verticals and its customer-centric approach continues to resonate in the marketplace. Outsourcing and transformation are two strategic levers clients are applying to meet their twin objectives of cost reduction and improvement in customer service.

By tightly integrating our transformation and outsourcing services, we have created an attractive and differentiated value proposition for our clients. This is providing a more meaningful impact to the economics of our clients' businesses. This success is now apparent in our results as well as in our growth from both new and existing customers.

EXL's second-quarter revenues grew 43.1% year-on-year and 11.3% sequentially. Our business has evolved significantly as compared to last year. This year we have increased the number of our strategic clients by more than 30%. Strategic clients for us contribute more than $5 million in annual revenues.

We have also increased our total number of clients by 50% as a result of our organic and inorganic business growth initiatives. This larger and more diversified client base has given us a stronger foundation on which to operate and will help to accelerate our growth momentum in both operating segments.

As we steadily execute on our plan to becoming the partner of choice for our clients, we feel that we will grow further our market share and enhance our leadership position.

In outsourcing services, we are currently implementing migration of several processes and training our employees for incremental business from both new and existing clients. This will drive revenue growth in the second half of the year.

Last quarter we mentioned that we were in exclusive negotiations with a strategic insurance prospect. I am pleased to announce that we have signed a multi-year strategic contract with that leading European insurance company to provide a wide breadth of services.

Transformation services had another record-breaking quarter. The momentum in our transformation business can be attributed to three factors. Number one, the high demand for our advanced analytics and risk advisory capabilities; number two, the growth in annuity and recurring revenue streams within transformation; and number three, an increase in our clients' discretionary spending and investment in initiatives that improve that business and cost structures.

In transformation services, we have pioneered the creation of an analytic center of excellence particularly for clients in the insurance and banking verticals. These centers of excellence are based on our comprehensive capabilities in analytics across various functional areas, deep domain expertise in select industry verticals, proprietary methodologies, and our micro-analytics tool set. Micro-analytics provides a unique advantage to our clients by reducing the time needed to develop analytical models to solve business problems.

Our comprehensive analytical capabilities support a wide range of business needs including customer and market segmentation, risk and pricing analysis, financial analysis and reporting, and analysis for functional areas like claims and new product development. We are also providing increased support to our clients in analytics, process change, and compliance work driven by regulatory requirements such as UN sanctions, Solvency II and SOX.

Through the proven execution of our analytic center of excellence, we have won a strategic transformation deal this quarter with a US insurance client which meaningfully expanded that relationship. We are building an offshore capability for this client that will provide a suite of services spanning the marketing, claims, and fraud functions. This three-year annuity-based win has the potential to be EXL's largest analytical services contract and is unique in the marketplace in terms of its size and scope.

We have been working to improve the revenue mix and reduce the volatility in our transformation business. By calendar year 2011, we expect more than 50% of our transformation revenues to be driven by annuity and recurring contracts as we continue to experience strong customer satisfaction for our industry-focus transformation services.

Finally, we have seen some increase in clients' discretionary spending for projects in the second quarter. Utilization is up significantly across all transformation service lines and we have been actively hiring to meet client demands and the project pipeline.

Our customer pipeline and recent wins prove that our financial results are not just a byproduct of the general secular growth trend but of our execution and positioning in the marketplace. While insurance constitutes the majority of our pipeline, there is growing interest in banking, travel, and transportation industry verticals.

We have also seen more opportunities and interests from clients based in Europe. While we had been seeing smaller deals in the past few quarters, we have experienced a reemergence of large deals in the second quarter. We believe that today there is greater interest and focus at the board level of our prospective clients in outsourcing and cost reduction strategies.

EXL is at an inflection point for accelerated growth. To prepare for this next phase of growth, we have unified our client-facing teams under Bill Bloom, including sales and marketing, strategic account management, and transformation services. Last month we had announced Bill's appointed as Executive Vice President Global Client Services. We believe that the new leadership and the structure of the front-end team will enable us to better cross-sell our capabilities and increase our ability to win complex deals.

In addition to Bill, we have also attracted new talent in our operations leadership including Jaideep Pradhan as the new center head and Senior Vice President in the Philippines. Jaideep joins us from Dell and brings extensive delivery expertise and experience in growing organizations. We believe that our strong positioning in the marketplace over the past year has enabled us to attract high performing leaders like Bill and Jaideep.

As the Indian economy returns to strong growth, demand for people resources has increased. As such, attrition increased to nearly 35% this quarter. While it has become more challenging to retrain individuals in this environment, attrition is at a manageable level and has not impacted our ability to deliver.

We have a high level of stability in our senior and middle management ranks where the level of attrition is significantly lower. In order to decrease attrition prospectively, we will continue to invest in our long-term strategy of creating a strong culture of employee engagement and talent management, as well as developing rewarding career paths and providing training opportunities for all of our employees. Headcount for the quarter increased by over 450 to approximately 12,200.

Our integration efforts for our recent acquisitions of American Express Global Travel Service Center and EXL LifePRO have been smooth and on schedule. As anticipated, we have observed growing interest from new and existing clients for the recently acquired capabilities. For example, we are currently working with select insurance clients to define a complete end-to-end solution for life insurance policy administration.

We are also in discussion with a number of EXL LifePRO clients regarding possible opportunities of providing outsourcing and transformation services.

In closing, this has been a very good quarter. The results highlight EXL's steady execution on our long-term strategy. EXL grew revenues while managing profitability. We have signed two strategic contracts and have commenced preparations to onboard them in their new SEC delivery centers. Although we still have more work to do this year, these wins increase our level of confidence in attaining our organic growth targets in 2011.

Our market positioning is resonating with existing and potential customers and a number of global companies interested in partnering with us for the transformation and outsourcing it has increased.

I am very proud of our team and the accomplishments so far. I strongly believe that we are very well positioned to take a leadership role in this vibrant and high-growth market.

Now let me pass it over to Vishal, who will provide an update on the financial performance and guidance.

Thanks, Rohit. And thanks, everyone, for joining us today. The growth momentum we witnessed in the last few quarters buoyed by our recent acquisitions have resulted in a fifth straight quarter of sequential revenue growth. We recorded our highest ever revenues this quarter of $60.6 million compared to $42.4 million for the same quarter last year, representing a year-over-year growth of 43.1%. Of this, approximately 24% came on from organic growth, which we believe is amongst the highest in the pure play BPO industry.

We see considerable demand for our services from new and existing clients and expect revenues to continue to increase in the back half of this year.

Outsourcing revenue for this quarter was $46.6 million compared to $34.5 million for the second quarter last year, an increase of 34.9%. This revenue -- this includes revenues from two recent acquisitions of American Express and LifePRO, which are performing at slightly better than our expectations. This quarter we transitioned 32 new processes as we continue to ramp new and existing clients.

We had another record quarter in transformation services as revenues increased by approximately 79% year-over-year to $14.1 million this quarter. All service lines experienced growth as the new product we introduced -- products we introduced earlier this year continued to differentiate our transformation offering in the marketplace coupled with increased demand.

While we continue to feel good about the growth in transformation and the leadership position we have taken in this area, we are even more excited about the change going in the underlying nature of the business. This quarter the annuity-based revenue comprised of approximately 35% of transformation business. This compares extremely favorable to below 25% this same last quarter, same quarter last year. We expect our strategic wins in both our sourcing and transformation business to largely ramp over the course of 2011 and they will have a minimal impact to our 2010 numbers.

Gross margin this quarter was 38.2% compared to 39.1% for the same period last year and 42.2% in the prior quarter. Margins were down sequentially due to a combination of three factors. First, the effect of wage increments being paid in the second quarter had an impact of approximately 150 basis points.

Second, an investment in people and infrastructure to support future growth had an impact of approximately 200 basis points. And finally, an increase in fuel, power, and insurance costs that had an impact of 40 basis points. Currency, especially in the [DPB] denominated revenue would have had a slightly negative impact this quarter compared to prior quarters. However, the effect was largely mitigated by the protection we have built into our contracts.

While some of the gross margin decrease is related to onboarding of new clients and will even out as the revenue is recognized, we also expect to regain margins from ongoing improvements in process productivity as well as increasing utilization.

Over the last few quarters, we have discussed the opportunity to get operational leverage from our general and administrative expenses. The results are now visible. This quarter we improved operational leverage by approximately 150 basis points. G&A expense was down to 15.6% compared to 17.1% in the prior quarter. Although we believe that this type of decrease in a single quarter is high, we expect the strength to continue, albeit in smaller increments. As revenues increase, we anticipate operating leverage from our support infrastructure to grow between 50 to 100 basis points per annum.

Sales and marketing expense continues to be an aggressive area of investment for EXL and we are deploying a significant amount of our G&A leverage into this area. With Bill coming on board and the anticipated continuing upscaling of our front-end and client service personnel as well as the new business opportunities we are seeing in the market, we expect sales and marketing to be closer to 8% of sales for the year. Sales and marketing expenses for the second quarter was $4.6 million compared to $4.2 million in the prior quarter and $3.3 million in the second quarter last year.

As expected, depreciation and amortization expense were higher this quarter at $3.9 million compared to $3.1 million in the prior quarter. This increase was due to the higher depreciation expense and higher amortization of intangibles both as a direct consequence of our recent acquisitions.

As a result of the increased acquisition-related intangibles, we continue to believe that our adjusted operating margin and adjusted EBITDA are more valuable measures of our operational performance and cash flow generating ability.

We expect depreciation to increase as we begin to operate the two SEZ facilities in the second half of the year. To keep the impact to a minimum, we are trying to build off the delivery centers in phases which are aligned with our clients' plans and existing pipeline.

Adjusted operating margin which excludes the impact of stock compensation expense and amortization of intangibles for this quarter was at 13.5% compared to 15.6% in the prior quarter. This decrease was mainly due to the lower gross margins and partially offset by the operational leverage from G&A expense that I discussed earlier, coupled with additional sales in marketing investments we have made.

Adjusted EBITDA for the quarter was $11.5 million compared to $7.6 million same period last year, an increase of over 50%. The capital we have deployed for acquisitions and capital expenditure continues to be replaced by robust cash generation. Over the last four quarters, EXL has generated approximately $50 million of adjusted EBITDA.

We continue to maintain a debt-free capital structure with a strong and growing cash position. EXL's cash balance including short-term investments as of June 30 was $91.4 million after a payment of $14.1 million to settle the PDMA acquisition and another $4.8 million in capital expenditures for growth capacity.

Capital expenditures this quarter were primarily related to the development of two SEZ facilities, leasehold improvements, and technology equipment for managing new and existing plant operations.

Our continued disciplined approach to mitigate the currency volatility resulted in foreign exchange gains to -- on cash flow hedging of approximately $900,000 in this quarter compared to a gain of $600,000 in the prior quarter. Based on the current exchange rate of INR46.2 to the dollar, we expect foreign exchange gains for the year to be at least $2.8 million. Every 1% movement in the Indian rupee to the dollar impacts the adjusted operating margins by 40 plus 50 basis points. Most of this is compensated by an opposite movement in foreign exchange realization on our hedges.

Net income increased 290% this quarter to $4.9 million compared to $1.3 million for the same period last year. Diluted earnings per share from continuing operations were at $0.16, an increase of 4 times over the second quarter of 2009.

In our last earnings call, we have increased our revenue guidance to -- from $225 million to $230 million to $235 million to $240 million. We now believe after a strong first half of the year that we will be closer to the top end of that range based on demand for our services in the marketplace and existing client [times] currently underway. We have a high visibility to that number; however, this assumes there is no significant deterioration in discretionary spending in back half of the year.

Adjusted operating margin excluding the impact of stock-based compensation expense and amortization of intangibles for the calendar year 2010 is expected to be at the top end of our guidance range of 12% to 14% based on our current exchange rates. This includes the impact of wage increments and the (inaudible) from the buildout of our SEZ facilities as well as the additional investments we are making in our client facing sales and marketing efforts and operational leadership which would help us in meeting our growth sale targets in 2011 and beyond.

EXL had what we believe is an extremely -- believe has had an extremely strong quarter characterized by strong revenue growth and business wins and we feel confident in our ability to continue to execute on our plans and deliver strong operating results.

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

(Operator Instructions) Ashwin Shirvaikar, Citi.

I just wanted to say congratulations on the good quarter and guidance. My first question is how much visibility do you have into the pace of ramps of the signed business? And does that increase your visibility into 2011 for example to your customary levels already?

Sure, Ashwin, for us, the two major strategic contracts we have signed, we have got significant visibility into the ramps of the client that we've signed up in our outsourcing segment. The client that we've signed up for our transformation business, which is also going to be a significant strategic client for us, there the visibility is slightly less but we have an understanding in terms of the volume of business that we will be able to contract with this particular client over the next three years. So we do have directionally as to how this business will grow. However, the final details of that ramp will be determined as we go along.

Okay, and then separate from any utilization of the transformation business, what are the trends in terms of client decision-making pace, the duration of work that you are signing and pricing?

Sure. So on the transformation segment, I think there is increased activity and there is increased engagement that we are seeing across our client base as well as new prospects that we are engaging with. And I think the level of decision-making is fairly quick and customers are looking to move forward with various types of cost reduction strategies and changes to their business models, which is where we can help them and add a tremendous amount of value to that relationship.

In terms of outsourcing, the decision-making is still deliberate and it is still a slow cycle in terms of decision-making. However, what we are noticing is that there is greater engagement at the board level where the management teams are being questioned about their cost reduction strategies on a longer-term basis by the boards of these companies, and therefore they are thinking about this in a much more strategic way.

The sales cycle for us in outsourcing still remains 12 to 18 months; however, the decision-making is much more deliberate.

As far as pricing is concerned, we are seeing stable pricing and currently the competition seems to be at a place where we can take on business without there being aggressive price cutting, and therefore we are seeing fairly stable pricing associated with the signing up of new customer contracts.

(Operator Instructions) Jon Maietta, Needham & Co.

Thanks very much. Rohit, I was just wondering if you could talk a little bit about the PDMA acquisition and specifically how are you going to market there? It sounds like you have completed the integration and now it's just a function of maybe getting folks trained and getting everybody in the field comfortable selling the solution.

Yes, Jon, as far as the PDMA acquisition is concerned, our first step was really to integrate the business within the XL and to reach out to the existing customer base of PDMA to assure them about our support and commitment to the existing platform and product that EXL LifePRO has in the marketplace and with their current installed base of user groups. We have since completed that exercise.

We are also in the process of hiring a sales resource that can help us augment the selling of the licenses for the EXL LifePRO policy administration platform and we have also identified an internal resource that can help pitch to customers for the integrated sale of the licensing as well as the processing capability associated with policy administration.

I would say that the initial reaction from the existing customer base of PDMA as well as some prospective clients that we have spoken to has been pretty much on track and as per our expectations when we did this transaction and the business case for this particular acquisition seems to be holding out very, very well.

Okay, just one more question. You had mentioned boards getting active in the decision-making process on the outsourcing side. Is that something you had seen? Have you ever seen that previously I guess, particularly pre-downturn? Or is this a new phenomenon altogether?

I guess we have seen this take place in a few isolated cases with our prospective and existing customers, but now what we are seeing is that there seems to be a cross-pollination of the discussion because as you know, several of the directors on boards also sit on boards of other companies. And as they have seen the success take place with some of the companies which have gone forward and engaged in outsourcing, they are challenging the management teams as well as providing information as to the various types of strategic cost-reduction levers that a particular company can choose. They are no longer shy about looking and exploring all the particular alternatives. And therefore the engagement at the board level definitely has stepped up after the downturn.

That's interesting. Thank you.

David Grossman, Stifel Nicolaus.

Thanks. Rohit, you continue to have very good success in the insurance vertical and I was wondering if you could update us on fundamentally what's going on in the insurance markets right now. You have had success for quite some time in that particular vertical and really just curious what stage we are in terms of outsourcing and sending work offshore and other types of technology upgrades required that may be catalysts for continued outsourcing in that vertical?

Sure. So, David, as you are aware, the insurance industry is an industry where companies generally tend to look around and see what their competitors are doing and they typically tend to be followers in terms of outsourcing. What we have been experiencing for the last couple of years and certainly this trend seems to be bearing out as we go forward as well, is that insurance companies are looking at adopting outsourcing in a more and more engaged manner and we are seeing a broader cross-section of insurance clients adopt outsourcing much more meaningfully.

The fact that -- the data points that I would like to point out to is even though insurance represents about 50% of our business, in terms of our outsourcing relationships within insurance, we [delivered] about 12 to 15 companies on the insurance side on outsourcing and our ability to increase the number of clients for whom we do outsourcing work within insurance is significantly larger than the current set of customers that we have. And therefore we feel very good about the opportunity within insurance to expand into new customer relationships as well as for us to grow our business with existing customers where the volume of work that we do for them and the penetration that we have with existing customers is still relatively low.

I think the other trend that we are seeing amongst clients within insurance is that they are starting to get more and more comfortable in terms of outsourcing some of their claims processes and so far we had restricted ourselves to doing work primarily in in-force policy administration work and now they are thinking about newer areas such as new business as well as claims. And by expanding into these newer areas, I think the opportunity set for us expands very, very significantly.

Okay, thanks. Just one follow-up to that. Just is there any -- or can you distinguish between the types of insurance companies that have adopted outsourcing and those that haven't? So for example life, property, casualty, is there any kind of trend in that sense in terms of new verticals within insurance that may have lagged the broader industry?

Sure, we would typically categorize the insurance industry into four different buckets. We would categorize it into P&C, life insurance, health insurance, and reinsurance. And within these four segments, our experience has been that particularly in the US market, the P&C carriers have been slightly ahead of their other peers and have adopted outsourcing more significantly. The life insurance companies have traditionally been lagging behind in terms of adoption of outsourcing. And the health insurance carriers have outsourced in the past. Sometimes they have created their own capital but now they're looking at third-party outsourced operations.

So for us particularly with the acquisition that we have done of PDMA, we get access to a number of life insurance companies which we think are right for outsourcing and therefore the opportunity set for us is great across the board within insurance because we've got tremendous capability for clients within the P&C vertical. For life insurance, we've got an insurance policy administration platform and we've also started to engage with clients in the health insurance space.

So there's significant opportunity for us to grow out there. The one area where we currently would like to build up more capability in is in reinsurance and that's an area that we would be focused on as we develop this vertical for ourselves.

Thanks. If I could just stick one other question in on the margins, the margins actually have been bounced around for known reasons. You've got wage increases and new facilities ramping and new customers ramping. How should we think about the margin profile as the businesses gain scale here? Are we going to see that kind of volatility quarter-to-quarter as we go into next year or do you think that we should see a more consistent path for the margins now that the business is over -- approaching a $250 million run rate?

I would certainly hope that the margin volatility will reduce as we increase in size and scale. But the one factor which does have an impact for us in the second quarter particularly of every year is the annual increment cycle that we have throughout the Company. We are looking at ways in which we can spread out the salary increases over the year rather than to have all of that be based on a single quarter, and we are looking at ways to smoothen out the impact of the salary increases.

But for now, that is a large part of the decrease in our margins which takes place in the second quarter and that is a challenge that we do face. But as we grow up in size and scale, certainly the volatility will come down quite significantly.

Great, thank you.

Tim Fox, Deutsche Bank.

Thanks, first question was around the annuity-based business within transformation. I was just wondering if you could help us frame how those contracts are structured and if there's any outcome-based element of these contracts or is it largely still an FTE-based type of relationship, just happens to be a three-year commitment from your customers?

Sure, Tim, so currently the annuity portion of our business within transformation is largely on an FTE-based pricing model. However, we are looking at ways in which we can move from FTE-based pricing model towards a transaction-based pricing model and then finally towards an outcome-based pricing model.

For us, we have taken a goal as a company to be able to change the method in which we contract with our customers to a transaction-based pricing model and we think we would be able to shift almost a third of our business over the next year or two towards a transaction-based pricing model. And we think that's the right business model for our customers as well as for ourselves. And that is -- that has got a much better alignment in terms of us trying to reach our customers goals and objectives as well as for us to be able to improve our profitability with these particular contracts.

But presently most of the annuity and recurring work that we do within transformation is on an FTE-based pricing model.

Great, that's helpful. I guess it dovetails with that question and a follow-up to David's regarding margins. As you pointed out obviously the insurance vertical still has a lot of room for growth and presumably investment on your end. How should we think about the margin improvement over, say, the next three years, FX aside, just from an operational perspective in scaling? You are going to return some of this obviously to reinvestment, but should we -- how should we frame the margin improvement over the next, say, two to three years as this business grows?

This is Vishal. You know, we expect to gain the margin expansion from, as we had mentioned many times, from operating leverage as we scale up and grow our business especially on the G&A side. And we think that we will be able to achieve adjusted operating margins in the high teens over the next few years.

Great, thank you. Nice execution, guys.

Robert Riggs, William Blair.

You've obviously continued to have good success in the transformation piece of the business and seem pretty optimistic about some return in the discretionary spending. That is driving you to look and hire some more people. In the event that the discretionary spending does take a pause or scale back, how quickly I guess can you scale back that hiring? Or just maybe talk about your approach there to get us comfortable that the profitability will remain solid there.

Sure. So I guess they way we look at our business is that many times the work that we do for our clients in transformation is lead in work which oftentimes will result in a relationship getting established with the customer and an opportunity for us to be able to build on our outsourcing business segment. So for us doing more work in transformation and engaging with multiple customers in transformation expands our relationships with our customers and gives us an opportunity to be able to cross sell our outsourcing capabilities.

Within transformation, what we've tried to do is to take on stuff only at those times when we absolutely need them and try and manage our people resources very, very tightly with a high utilization of our resources at times when the demand is strong and then to be able to deploy these resources for product development, for training, and also working on doing analytical work on our existing outsourcing processes at times when the demand is low.

So as an example, last year in 2009 when the demand for transformation services was weak, we actually redeployed some of our resources within transformation to look at some of the processes that we were doing within outsourcing to provide value to our customers and to be able to build on these relationships and apply the transformational capabilities along with our outsourcing capabilities.

So we generally will be very, very prudent and careful in terms of our staffing within the transformation segment and utilize these resources with a high level of utilization during peak demand times and then being able to leverage this capability during times when the demand wanes.

Great, thank you.

Joseph Foresi, Janney Montgomery.

My question here is just maybe a quick question here on guidance. I know you guys pointed to the upper end of guidance and obviously didn't raise it. Maybe you could just give us some insight into your thought process and why -- it sounds like the demand backdrop is pretty strong. In fact, it's holding strong through the beginning of the year, why you decided to hold at that level?

Is there anything in the demand environment that you are worried about or is it just the timing in the pipeline?

Sure, Joe. I think clearly we have had strong execution in the first half of the year and we certainly are optimistic about the second half of the year and we definitely expect to grow our business into the second half of the year.

The one area which has been something that moderates our expectations, is the project-based nature of the work that we do within transformation and the visibility that we have within the transformation line of business outside of the annuity and recurring work is only 60 days. And that's something which moderates our expectations for the full-year revenue guidance.

I think with the two new wins that we have had, which are strategic customers, that gives us much better clarity and visibility into our 2011 revenue numbers and if we were to sign up another new client in the next five months, I think our 2011 numbers would look real solid and real good.

Just to be clear, there's not a slowdown in transformation. You just don't have anymore visibility -- past 60 days. Is that correct?

That is correct. You know, the transformation business for us has been strong. It's -- was very strong in the first quarter. In the second quarter, it grew and every thing that we see in terms of our pipeline and our engagements has been good and the percentage of annuity and recurring work is increasing. So all signals as far as that business line are concerned are very, very positive.

And then just finally, I know we've talked in the past about a certain number of strategic wins in the pipeline and potential acquisitions. Maybe you could just update us on what you have in the pipeline as far as potential strategic wins and maybe what you have for acquisitions.

Sure. So our pipeline currently has a number of prospective clients and the largest part of that is clients within the insurance industry vertical. We currently have one strategic prospect in the pipeline where we are in the final stages of evaluation by that particular customer in terms of their decision-making and we expect that that decision will get made over the next three to six months.

For us, the pipeline of M&A targets continues to be very, very attractive and we are seeing opportunities both in terms of independent standalone private companies which are based on shore in the US and in Europe that are right for an acquisition, as well as we are seeing opportunities where there can be a carve out of certain captives, as well as a carve out of existing operations of our customers.

So we feel very good about the pipeline that's there for getting new strategic wins as well as the pipeline for M&A.

Bryan Keane, Credit Suisse.

This is [Alvin Garcia] for Bryan Keane. I guess just a quick question. In the quarter, you had two acquisitions, the MX and the LifePRO and you said that was little ahead of schedule. Can you just break that down a little bit for us?

In terms of the acquisitions, we have guided that the acquisitions from MX we will deliver revenue of about $20 million per annum and for PDMA about $10 million per annum. And the revenue currently is in line or slightly better, not something which will drive revenues very high. So they are slightly better than the initial pro forma we had given.

Okay, that's helpful. And then I guess I'm just looking at the new deals you guys signed on in the quarter. Just wondering as they ramp up, how do you guys expect them to impact margins and maybe a little bit on the pricing profile?

Sure. So the client that we have signed up within transformation we have already engaged with the customer and we've begun the process of transition and migration. That activity has commenced in the third quarter this year.

The client that we signed up in outsourcing will commence work only in the beginning of next year. So our increase in volumes due to these two customers will take place in the third quarter this year with the transformation client and in the first quarter with the outsourcing client.

For us any time we sign up a new customer relationship and we onboard a new customer relationship, there is an investment in infrastructure, people, and transitions that we need to make and there is a marginal drag in terms of the profitability of our business at times when we onboard a new customer relationship. But for us, I think some of our existing new clients that we have onboarded, those are becoming more mature. And as they become more mature and move towards full profitability, they will offset the drag that we have from new customers.

And I think right now we are at a point of our cycle in terms of executing where new customers that we have already onboarded are becoming mature and increasing their level of profitability and we will continue to make investments about onboarding new customer relationships.

Okay, then just switching over to utilization a little bit, it came up in the quarter I think the highest in the past few years. I'm just wondering do you guys expect to maintain that in order to help margins or does that come down as new facilities come on board?

Sure, for us we will see actually a significant expansion to our existing capacity which will take place in the third quarter and fourth quarter of this year as we bring on our new SEZ facilities. Our facility in Jaipur that we have created is already on stream right now. And the facility that we are creating in Noida will become operational sometime towards the end of the third quarter, beginning of the fourth quarter.

As these facilities become operational for us, we would expect to see the utilization go down. And as we ramp up on our customer businesses, we will be able to bring back the utilization over a period of time.

Joseph Vafi, Jefferies & Co.

Good evening and good day. Congratulations on the good results. Most of my questions have been answered, but I was wondering if you could comment a little bit on what you are seeing in volumes in some of the more cyclical lines of business within your existing base and in the core business right now?

Sure. So for us the clients that we have within insurance and within utilities industry verticals, there the volumes are typically very steady and they don't really vary much based upon the economic cycles. However, clients that we have within transportation and logistics as well as travel, there the volumes do vary and what we have been seeing this year for the first half of the year is actually that the volumes have been stepping up for our clients both in the travel industry vertical as well as for the transportation and logistics industry vertical.

The clients and the prospects that we had for banking and financial services basically last year had disengaged and this year they are starting to engage once again. So it's not a question of volume as far as our relationship with them is concerned, but much more about our ability to engage with these customers, and I think that engagement is increasing this year.

Okay. Would you say, Rohit, that the volumes in logistics and travel are cyclically starting to get better or would you say that maybe there is other factors going on, maybe share gains by EXL with those specific customers?

I would say that there is a cyclical upturn in the volumes of our clients out there.

All right, thank you very much.

Vincent Lin, Goldman Sachs.

Thanks, maybe just a quick follow-up in terms of margin as it relates to your guidance. I think at the top end of the range it would suggest flattish margin profile for the back half of the year versus 2Q levels. Am I understanding correctly that it's just because of a function of increased sales marketing investment, higher depreciation expense as the new facilities come on line? Because typically your margins would expand the second half of the year as you pass the wage inflation cycle.

Vincent, this is Vishal. You are right, although we have outperformed year-to-date on our margins, we are not increasing the adjusted operating guidance for the reasons you said, and you know it includes also the investment we are making in strengthening our product development and sales team including the PDMA acquisition, continued investment in sales and marketing, and the hiring of the operational leadership and also because of the discretionary based nature of transformation projects. So those are the factors which are keeping us from increasing their operating guidance on the margins for the second half. And we think we will have a flattish operating margins.

Got it, that's helpful. And just real quickly on the transformation line of the business, I think historically there tends to be a bit of seasonality in terms of back half of the year because of the mix coming from regulatory and compliance line of the work. And I understand that the mix might be a little bit different now. So just wondering how should we think about seasonality if at all for the transformation side of the business into the second half of the year? Thanks.

Sure, Vincent. In the past, we would have a greater amount of seasonality and our work particularly within the risk advisory business would increase significantly in the third and the fourth quarter primarily because the percentage of work that we did within risk advisory for Sarbanes-Oxley compliance work was very significant.

Today when we take a look at our business mix, the percentage of work that we are doing on SOX compliance has come down very, very significantly and we are engaged in doing other forms of regulatory compliance work such as UN sanctions as well as looking at requirements for Solvency II. And these are regulatory requirements which companies have to comply with on an ongoing basis. So there's no seasonality associated with these revenue streams.

As such, we would expect the seasonality in our transformation line of business to come down. However, the fourth quarter of the year always carries the possibility of either a budget flush or a freeze in budgets because companies in the fourth quarter will make a evaluation as to how they have done for the year and if there is any surplus funding that is available, there will be a budget flush out. And conversely, if they're not doing too well, they will simply freeze their investments and roll forward into the subsequent year. We really don't know how that is going to play out. It really could go either way.

So is it fair to say that your guidance hasn't included a budget flush type of scenario?

Yes, we have not included a budget flush type of a scenario for the transformation line of our business.

Got it, that's helpful. And just real quickly, can you remind me again what are the numbers of additional capacity in terms of seats that you are going to bring now in the third quarter? Thanks.

So the incremental seats that we are building is 600 in Jaipur, and 800 for the Noida SEZ in the first phase. And then we have a second phase which will kick into operation next year, which will give us an incremental 1300 seats.

Got it. Great, thanks.

Tien-Tsin Huang, JPMorgan.

Great, thanks so much. Good quarter. I just wanted to ask on the facility side again the CapEx for the next couple of quarters, what we should consider? And maybe if you can just remind us what the maintenance CapEx per seat, that metric, what that looks like, that would be helpful as well. I am just trying to gauge where free cash flow would shake out this year with and without the facility expansion.

This is Vishal. On the second half, we expect the CapEx to be around $7 million to $8 million, which will come through as these -- as we get operational. And in terms of the maintenance CapEx or the maintenance [call], it will be about $2000 per seat, hopefully around $2000 per seat.

Okay, $2000 per seat. Anything else we should consider as we think about free cash flow in the second half of the year as it relates to -- you gave us the CapEx -- obviously as it relates to working capital considerations.

I think the working capital gets offset by the operating cash flow we generate. So we think that the CapEx is the only track we will have on our cash flow.

Okay, perfect. That's good to know. Thanks so much.

Tim Wojs, Baird.

Hi, guys. Nice quarter. Just a quick one from me. You've talked in the past about establishing a bigger onshore presence. Can you kind of talk about an update there?

Sure, so one of our strategic priorities has been to create a greater onshore capability in the US and we will explore that both through inorganic as well as organic means. We are looking at a number of different M&A opportunities which will give us an enhanced capability in an industry vertical as well as an onshore presence and then we are also looking at certain types of structured transactions with our prospective clients where we could establish an onshore capability of our own along with those transactions. So that is an imperative for us.

We've got multiple deals in our pipeline for M&A as well as for customer acquisitions where we will evaluate how best we can create that capability. Right now that is a goal but it is something which we hope to achieve over the next 12 months or so.

Sounds good, thank you.

Vincent Collicchio, Noble Financial.

Just one quick one. Most of mine were answered. With attrition levels at the highest levels in some time, are supply constraints limiting your abilities to grow in any important verticals?

Sure. You know, I think the supply side for us, the only area which is constrained right now is our ability to recruit for voice-based functions in India within outsourcing. And for us the transformation line of business is growing very, very rapidly. And there we do need a minimum lead time to be able to onboard new employees and train them on some of the processes that we have had them working on for our customers.

But the supply side of the equation is still somewhat manageable and it's not really constraining our ability to grow our revenues. It is -- it does require us to do better planning and for us to engage with our customers with more long-range planning so that we can execute and deliver and meet their expectations.

Thanks. Nice quarter, guys.

Edward Caso, Wells Fargo.

Thanks a lot. I think you mentioned organic growth was 24%. Could you break that out into your different groups? And then if you could define what the big difference is -- obviously you have AMEX and PDMA, but did you also exclude Schneider and the reverse out of Aviva?

Yes, of the 24%, 17% came from our sourcing business and the balance with in the transformation segment. And yes, when we look at the growth -- it is on a constant currency basis and we do back out the Aviva decline.

Okay, and could you just be clear for me on your assumption for this year, full year on operating cash flow and for CapEx? Thank you.

Yes, so for CapEx, we have in the first half spent about $7 million and in the second half expect another $10 million as mentioned earlier. And in terms of the operating cash flow this year, in this quarter we had about $7 million of cash flow in the first half and in the second half, you would expect it to be in the same range, slightly better because revenues have increased a bit.

Thank you. This does conclude the question-and-answer session for today's program. I would like to turn the program back to Rohit Kapoor for any closing comments.

Thanks. I just want to thank everybody for joining this call. I think the second quarter for us was a strong quarter and particularly with the two strategic wins that we have gotten under our belt, I think the visibility for our business in 2011 is looking even better. We look forward to continuing to execute with our customer base and growing our business. And we look forward to hosting our next call on November 4, which will also be the analyst day, and we will do this call in person in New York City. Thank you very much.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.