Exlservice Holdings Inc (EXLS) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third-quarter 2010 EXL conference call. My name is Allie and I will be your operator for today.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Mr. Jarrod Yahes, EXL's Treasurer. Sir, please proceed.

Thanks so much, Allie. Greetings and thanks everyone for joining EXL's third-quarter 2010 earnings announcement. Joining us today from the NASDAQ are Rohit Kapoor, our President and Chief Executive Officer, and Vishal Chhibbar, our Chief Financial Officer.

We hope you have had the opportunity to review the press release we issued yesterday after the market closed along with the updated investor friendly fact sheet that's available for review in 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 themes we're seeing in the marketplace for business process outsourcing and our services, and provide color on some of the investments we're making in our front end and partnerships. Vishal will then take you through the financial details of the third quarter, provide additional color on our guidance and then close the presentation before we take questions.

30 AM and we look forward to seeing you here at the NASDAQ market site.

Some of the matters we will discuss on 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 periodic reports as well as 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 do believe provide useful information for investors. Reconciliations of those measures to GAAP can be found in the press release. I'll now turn the call over to EXL's President and Chief Executive Officer Rohit Kapoor. Rohit?

Thanks Jared. Good morning, everyone, and thank you for joining today's call. I would like to start by giving investors a sense of what we are seeing in the marketplace and then go into discussing EXL's quarterly results.

First of all, the secular long-term trend towards outsourcing remains fundamentally intact. The benefits of outsourcing are better understood today and the acceptance of placing back-office operations with companies that have a focused approach towards process management continues to increase.

However, clients are also faced with the reality of ensuring a smooth change both from an economic standpoint as well as from an employee engagement standpoint. What we are seeing today is that major corporations are taking a balanced approach to outsourcing and transformation decisions.

They continue to optimize their short-term goals by reengineering their existing processes and taking advantage of making better decisions through data-driven analytics. At the same time, they continue to build longer-term sustainability and flexibility in their operating models through leveraging offshore BPO in a gradual yet deliberate manner.

Given the recent turbulence in the economic environment over the last couple of years, there is a heightened level of conservativism in planning for the future. Companies are quite conscious of the upfront costs involved in a BPO engagement.

These costs include both out-of-pocket costs for transitional processes, as well as costs pertaining to internal organizational change to enable outsourcing. The reaction of clients we've seen in terms of making their offshoring plans for the future has therefore been mixed.

Some clients are delaying outsourcing decisions to defer some of these tough decisions and [smoothing out] the upfront costs involved. On the other hand, a fair number of clients also seem to be accelerating their drive towards offshore BPO to realize faster cost savings and operational benefits.

We hope to assist both client sets with their initiatives and help them benefit from our ability to drive demonstrable value to these relationships. From our perspective, the demand from major corporations seeking to adopt transformation has become very strong and is prevalent across the board.

Companies have become more comfortable with outsourcing higher complexity processes and now recognize the tremendous value that can be delivered with the right skill set and correct focus on domain and process. This change is resonating very well with EXL's business model.

Our sharp domain focus with well-developed transformational skills allows us to assist clients in a differentiated manner. And we remain well positioned to be the recipient of all outsourced work if and when that becomes the preferred option.

As you will recall, EXL started building up a comprehensive transformation business more than four years ago, well before the trend started. This capability was developed by combining a decision analytics acquisition that we did in 2006 along with our process excellence and risk management skill sets that we had built internally. At that point, we began managing these assets as a comprehensive business segment and offering it in an integrated manner along with our outsourcing services.

Today, we believe we have a transformation offering that is unparalleled in the industry in terms of capabilities, growth and integration with our outsourcing service offerings. We really are well positioned for this recent market shift and have been way ahead of the curve in understanding the importance that transformational skills play in offshore BPO.

Deal sizes in the market continue to be relatively small in terms of the initial scope of work that clients are choosing to move forward with. What is important for EXL in terms of our future growth is the potential size and scale of the overall business that we can possibly grow our business to with clients that we are signing up.

We believe that with our ability to add significant value, we can successfully expand our client relationships over time. The sweet spot for EXL has always been working with large global 1000 companies by initiating small engagements and then through successful execution, significantly growing these relationships over time.

This is best evidenced by the number of clients we have today who are at $1 million, $5 million and $10 million in revenues. Since our public offering in 2006, our clients with revenues over $1 million have gone up from 16 to 26. Those with revenues over $5 million have gone from six to 13 and those with over $10 million in revenue have gone from two to seven.

In the context of the broader market dynamics I mentioned, we are extremely pleased with EXL's quarterly results and future growth prospects. EXL's third-quarter revenues grew 14.3% year on year and 11.5% sequentially quarter on quarter.

Last quarter a significant portion of our growth was from our recent acquisitions. Whereas this quarter our growth was almost entirely organic.

This organic growth was balanced across both our service lines. The growth was broad-based and came primarily as a result of (inaudible) expansions with existing clients and through on-boarding of new customer relationships.

In outsourcing services, we migrated 28 new processes to our centers across a range of clients in the insurance, utilities and travel industry verticals. We commented last quarter that we expected to experience growth in outsourcing in the back half of the year and we are in fact seeing that growth materialize.

In addition to the growth of existing clients that is coming through, I am reasonably positive on our pipeline in outsourcing. We have three strategic prospects in our pipeline where we are shortlisted into the final round. These prospects are in the insurance, financial services and travel industry verticals.

Transformation services had its fourth record-breaking quarter in a row in terms of revenues and the business has really been on an accelerated growth path since the middle of 2009. The momentum and transformation can be attributable to the same three factors that I mentioned in the last call.

Number one, the high demand for our advanced analytics and risk and financial management capabilities; number two, the growth in annuity and recurring revenues; and number three, an increase in clients' discretionary spending on process change. I am happy to report that we have already commenced work for the US strategic insurance client in transformation services that we announced last quarter.

We're hiring aggressively both onshore and offshore to meet the needs of our clients. We look forward to giving investors more color on our various service lines and capabilities in transformation services and how that growth breaks out later this morning at our investor day.

We continue to add to our client facing personnel and invest aggressively in the front end. This quarter we brought on board a Senior Adviser to help us grow our travel vertical and leverage the American Express GTSC acquisition with other clients.

We also hired a senior client executive to focus on the financial services vertical. As you can see, we have managed to strike the right balance between achieving the leverage we are getting in our G&A line and then redeploying that into sales and marketing. Our sales and marketing spend will increase this year and in nominal terms, we will increase our spend by about $5 million in one year or close to 40%.

This quarter, we're also announcing several new partnerships. We will continue to seek out partnerships to create unique solutions and IP in our service offerings.

As part of our focus on partnerships, we have assigned a dedicated Senior Vice President at EXL to the task of leveraging partnerships, to enhance our growth and stickiness of our client relationships and to develop proprietary IP-led solution offerings.

The first partnership we have announced is with Microsoft where EXL LifePRO will be working with Microsoft to cross-sell to our respective client bases as well as facilitate further investment into the functionality of the product for new and existing LifePRO customers. This is a great example of EXL doing an acquisition and leveraging our larger size and scale to seek out levers to accelerate the growth of the acquired company.

The second partnership we are announcing this quarter is with Datanomic. This partnership will allow us to leverage our experience with Datanomics with a large financial services client in Europe where we have a engagement focused on the new compliance regulations.

We think this is a huge market opportunity and are actively working on getting key members of our risk and financial management practice trained and familiarized with their product and developing joint products and solutions. In closing, this has been another excellent quarter and I'm really pleased with EXL's performance.

The results highlight EXL's steady execution of our long-term strategy. 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. EXL's third-quarter results reflect strong revenue growth from new and existing clients that surpassed our expectations. We are pleased by the record set in transformation services coupled with good visibility into a strong organic revenue growth coming from outsourcing clients.

Revenues this quarter were $67.6 million representing a growth of [14.3%] year-over-year and 11.5% sequentially. Of the 11.5% sequential growth, only approximately 1% or $900,000 came from additional [months of] acquisition of PDMA.

This is the sixth consecutive quarter of sequential revenue growth if you exclude a one-time client payment we received in the fourth quarter of 2009. Of the [14.3%] growth year over year, approximately 27% is attributable to organic growth if you exclude [arriba] revenues that were [wound down] in the end of 2009. We believe this to be amongst the highest in the industry and above our long-term organic growth target of 15 to 20%.

Although most of the growth this quarter was driven by existing clients, delivery on two strategic clients we announced last quarter also commenced. While their contribution was still fairly quite small this quarter, we expect their contribution to grow and accelerate over the [next course of few] quarters.

We continue to diversify client contributions with our top 10 clients now contributing 75% of our revenues versus 77% a year ago. Also worthwhile to note is that our topline now contributes only 14.3% of this quarter's revenue versus 21.9% same time last year.

Outsourcing services revenue for this quarter was $50.5 million compared to $37.7 million for the third quarter last year, an increase of 34%. This quarter we transitioned 28 new processes and it continued to ramp for our existing clients.

We believe this is one of the strongest quarters on record in terms of new process migration and is a testament to the scope expansion we are experiencing by focusing on client (inaudible) and service delivery quality. Outsourcing gross margins this quarter was 41.3% compared to 41% for the same period last year and 38.6% in the prior quarter. Margins were up sequentially due to higher (inaudible) from new clients and productivity gains.

This is the fourth (inaudible) quarter for transformation services and revenues this quarter being significantly higher than our expectations. Revenues increased by approximately 79% year over year and 21.6% sequentially to $17.1 million this quarter.

All the growth in transformation business has been organic. The three service lines continued to experience strong sequential gross predicated on strong demand for value-add transformation service offerings, tight coupling of transformation with outsourcing and continued high level of discretionary spending by clients.

Of particular note, our decision analytics and risk and financial management business experienced continued strong growth in headcount additions for much of the offshore annuity-based revenue. Onshore we have been actively hiring as we have continued demand from clients.

This quarter the annuity-based revenue comprised one-third of the transformation business, and an increase of nearly 70% of nominal dollar value of annuity business year over year. Transformation gross margins this quarter were 35.9% compared to 37.5% for the same period last year and 37.2% in the prior quarter. Margins were down sequentially due to higher proportion of onshore work and ongoing people additions and investments.

As we scale and grow our our revenues, we continue to see incremental operational leverage by from general and administrative expenses. This quarter we increased operational leverage by approximately 60 basis points from the same period last year, as G&A expenses were down to 15.5% of revenues. We believe it is possible to sustain 50 to 100 basis point annual increase in operating leverage from our support infrastructure.

We continue to invest a sizable portion of the G&A leverage into strengthening our sales and marketing. Over the last 12 months we've increased our investment by over 50% while meeting our operating leverage goals.

As we mentioned last quarter, we continued to upscale front-end service personnel to capitalize on the market opportunities, driving up our sales and marketing expenses to $5.3 million or nearly 7.9% of revenue compared to $3.5 million in the third quarter of the prior year or 7.2% and $4.6 million in the prior quarter or 7.6%. All of this is an investment in continuing to maintain our growth momentum.

Depreciation and amortization expense was higher this quarter at $4.2 million compared to $3.9 million in the prior quarter. The increase was a direct consequence of one additional month of intangibles and depreciation from the LifePRO acquisition and the capitalization of our SEZ facility in Jaipur, India.

Operating income margin for the third quarter was 10.3%, up from 8.7% last quarter and slightly down from 10.7% for the third quarter of 2009. Adjusted operating margin which excludes the impact of stock compensation expense and amortization of intangibles for this quarter was 14.5% compared to 13.5% in the prior quarter driven by -- mainly due to higher gross margins.

Our foreign exchange strategy designed to reduce the effect of currency volatility on future cash flows continues to see good results. Foreign exchange gains this quarter were $900,000 compared to a loss of $2 million in the third quarter of 2009.

Based on the current exchange rates of 44.5 rupees to a dollar, we expect the foreign exchange gains for the full year to be at least $3.5 million. Effective tax rate for this quarter was reduced to 4.7% compared to 25% in the prior quarter.

This decrease was due to one-time reduction in our FIN48 result of one of our Indian subsidiaries following an adoption of a recent guidance of Indian income tax department on treatment of unrelated gains and losses of foreign exchange derivative contract. We expect the effective tax rate to be in the range of 17 to 19% for the full year now. We expect the effective tax rate for the next year to be in the mid 20s.

This quarter we delivered our highest ever net income of $7.8 million compared to $4 million for the same period last year. Diluted earnings per share from continuing operations was $0.26, an increase of 83% over the third quarter of 2009.

This quarter we have started to disclose our adjusted net income and adjusted diluted EPS as additional non-GAAP financial measures. Historical quarterly adjusted diluted EPS figures are included in our investor fact sheet online. We believe these metrics will provide investors additional color to our financials and serve as comparable metrics to our peers.

Adjusted diluted EPS this quarter was $0.32 compared to $0.19 in the third quarter of 2009, representing a growth of more than 68% year over year. We grew our adjusted EPS sequentially by 39%.

Adjusted EPS is growing even faster than our adjusted operating profit partially because of the lower tax rate and also because of a hedging program which is delivering enhanced cash and profit to our shareholders and protecting our margins in a weak dollar environment. Cash flow from operations this quarter was a record $16.7 million.

This record cash flow was driven by higher revenues, lower taxes and efficiencies in our billing and collections, resulting in improved DSOs. This quarter we improved DSOs to 56 days, our lowest ever compared to 61 days last quarter and 58 days in the third quarter of 2009. Adjusted EBITDA for the quarter was $13.3 million compared to $10 million same period last year, an increase of 33%.

EXL has generated over $53 million of adjusted EBITDA over the trailing 12 months. EXL's cash position continues to grow as cash including short-term investments as of 30 September was $105 million after a payment of $4.9 million in CapEx this quarter for the development of two SEZ facilities, leasehold improvement, technology equipment for managing new and existing clients.

I am pleased to announce that we are increasing both our revenue as well as our adjusted operating margin guidance for the year 2010. After an exceptionally strong third quarter, visibility into existing ramps and demand for our services, we believe that the revenues will be approximately $247 million, up from the top end of our earlier guidance range of $235 million to $240 million.

In our raised guidance, we have taken into account known decreases in our transformation business that we expect in the fourth quarter. The Q4 sequential decrease is a combination of some known project runoff and fewer delivered days in the month of December as is the normal course.

I would reiterate that the business remains healthy and demand signals continue to be good. Adjusted operating margin excluding the impact of stock-based compensation expense and amortization of intangibles for the calendar year 2010 is expected to be in the range of 14 to 14.5% based on current exchange rates.

This is up from our earlier guidance at the top end of 13 to 14%. This has been an extremely strong quarter characterized by higher than expected organic revenue growth and solid profitability.

We are taking advantage of our industry-leading revenue growth to make investments for long-term growth while still showing consistent annual incremental adjusted margin operating margin expansion. We very much look forward to seeing many of you at our investor day and providing more insight into our business strategy and our management team. I would now like to open the floor to any questions you may have. Thank you.

(Operator Instructions) Tim Fox, Deutsche Bank.

Good morning and congratulations on this current quarter. My first question is for Rohit, just about the commentary you made about customers being willing to take on more complex processes. And just given some of the slowdown in ramps we've seen from peers in the space, I'm just wondering if you could give us your perspective on how project ramps in the future may play out as you get more and more complex geographically and doing multi processes. Is there any risk to those project ramps just getting extended because of the nature of your business?

From our perspective, clients are recognizing the value that domain-specific service providers are being able to provide to them, and particularly those service providers that have got the skill sets to reengineer and restructure their backend processes and provide incremental value. What we are seeing is there is clearly a bifurcation of our client base and prospect base where some clients are moving much faster and other clients are moving much slower.

And the way in which EXL has positioned itself by having a very sharp industry focus, having exceptionally good domain skills and subject matter expertise, having a very strong transformation practice, we are able to navigate this kind of an environment and continue to build and grow our business. Based upon our experience and what we hear back from our customers, they are seeing the value that we are able to deliver to them and we see continued strength in terms of building and growing our business.

So as such, I think the acceptance by clients of moving more complex work is increasing. Their confidence in our ability to create additional value through transformation is now well established and I think we are very well positioned to continue to benefit despite the difficult economic environment and the challenges that many of the clients face and what the market is presenting us today.

Great, that's helpful. Vishal, just a quick clarification. In your guidance you were talking about Q4 transformation business. Did you say that you would expect there to be a sequential decline in that business, just the normal seasonality and project ramps?

Yes, Tim, that will be the case. We expect the transformation business to decline in Q4.

Ashwin Shirvaikar, Citigroup.

Hi, good morning, guys, and let me add my congratulations. My first question is just to follow up on Tim's with the transformation business.

You comment on seasonal weakness, I would have thought that the seasonality would sort of go down as you increased your annuity based revenue. Is that not the case or is this more a question of Q3 was so strong that you're looking for weakness? I'm trying to separate out market impact, what's going on in the spending environment versus seasonality.

This is Vishal. Partly what you said is right which is the fact that our revenue base has increased to $17 million in Q3. Even though our annuity base has gone up, but in terms of percentage, it remains flat at 33%.

And the seasonality impact which comes down is more driven by projects which are getting run off. And also the number of days on which we can go and work with the clients and clients are signaling to us that they will have some days off where we can do and perform some work. So I think it's the combination of those two factors.

Let me just add to that. If you take a look at the quarterly revenue breakout of our transformation business, except for 2009, in 2008 and 2007 we saw the decline take place in the fourth quarter of the year and that primarily takes place on account of the holidays as well as the fact that everything really shuts down post middle of December.

And since there is still a fair amount of project based work that we do out here which is based on the number of billing hours that we're able to generate in a particular quarter, that's what impacts it. Last year in 2009, there was a huge amount of pent-up demand as well as there was a budget flush that took place towards the end of the year because companies ended up doing much better than their expectations and they wanted to spend money in the same calendar year.

Last year in fact our transformation revenues stepped up significantly in the fourth quarter on account of this budget flush that took place. But as a normal operating cycle, Q4 for us will tend to be the weakest quarter in a year and clearly that is something which we are trying to mitigate by moving more and more work towards annuity based and offshore-based formats in the transmission line so that we can smooth out this curve.

Got it. Then a question on the BPO side with regards to more work being sourced from I guess existing clients. Can you talk to the sales cycle and the sales environment, both from that perspective, getting new work from existing clients, as well as the other perspective that is going out and getting all new clients? Could you address that?

Sure. First of all, the sales cycle with new customers continues to remain long and continues to remain at least 12 to 18 months and in some situations, it ends up being longer. And particularly with clients unwilling to commit in this kind of an economic environment, those sales cycles are long.

With existing customers, the color that I would like to provide to you is most of the new work we are seeing is also being driven off the fact that we are being able to engage with customers not only in a single line of business, but in multiple lines of businesses in multiple geographies and expand that relationship from a single service line to a multiple product line service offering. And I think our understanding of the business of our customers and our domain expertise in these industry verticals is what is allowing us to engage with these clients much more actively and to be able to grow that business.

Great. See you guys later.

David Grossman, Stifel Nicolaus.

If you look at the third-quarter results, clearly a stronger quarter than most of us had expected and probably you as well. Perhaps you can help us understand how much of that was just conservativism after the June quarter vis-a-vis what ended up being faster ramp of existing customer relationships or perhaps more discretionary revenue that came in the quarter.

And perhaps you could kind of roll that into kind of what we were thinking for the fourth quarter. I mean, you've guided to a 5% sequential decline I believe in revenue if my math is right in the fourth quarter. And I understand the seasonality comments as well as your comments in your opening remarks.

However, [help us in] the fewer billing days, I guess. But if you could help us understand in the context of what was a very strong third quarter, vis-a-vis your expectations, how much conservativism is felt into the fourth quarter versus some of these mechanical items that are really more a function of number of days and time of year?

Sure, David. For us -- let me try and explain what happened in the third quarter. First of all, the transformation business was really [on attack] and we had a very sharp acceleration of the transformation business which is not something which we had anticipated and planned for, and that clearly contributed to the growth.

But more importantly I think what we are pleased with is that the outsourcing business also grew and it actually -- the growth in the outsourcing business was much more broad-based and therefore it wasn't one particular client or one particular situation that resulted in that growth, but it was a broad-based growth that took place across multiple clients that resulted in these revenue numbers being higher.

Looking at Q4, while we anticipate a decline in the transformation revenues, I think it's important to note that for the outsourcing business, we continue to expect growth to take place in Q4 as far as the outsourcing business is concerned. So the longer-term trend of growth remains intact for us. It's just the seasonality and the lesser number of working days impact for the transformation business which will result in lower revenues in Q4.

So in that context, can help us understand where we are? I think, Vishal, I think I missed it when you mentioned it earlier about where we are in terms of strategic customer ramps for business won over the last 12 months versus what we should have going forward. And perhaps you could also help us understand for those three strategics in the pipeline when you would expect to see some kind of decision one way or the other.

Sure, we had announced two strategic client wins in the second quarter. One was in transformation and the other one was in outsourcing.

The client which is in transformation already commenced activity and billing in Q3 2010 itself. So we have already started work on that and the revenue is being recognized as such in Q3 itself. The second strategic client is actually going to engage with us in both transformation and outsourcing and we would expect the outsourcing revenues to kick in sometimes towards the end of first quarter next year.

Okay.

As far as the three perspective strategic prospects are concerned, that is something where we are in the final stages of evaluation and decision-making by our prospects. We really don't know as to when that decision will be made.

We anticipate that a couple of them will probably get made before the end of this year, but it is possible that some of them might slip in terms of their final decision-making to next year. And our historical track record as you're aware is typically we expect a closure rate of about 25%. So if we won one of these three strategic deals, we would feel good about it.

Thanks. One quick follow-up if I could, just one other question on the headcount. I just want to make sure I've got the numbers right. It looks like headcount was flat sequentially. Do I have that right? And if so, maybe you could help reconcile the flat headcount with the incredibly strong revenue momentum you're experiencing.

Sure, David. I think if you look at our growth, there was phenomenal growth in our transformation business which is more increased utilization of our existing headcount and then -- that helped us to increase our revenues without really adding anymore heads. Also we had $900,000 from our acquisition, which is again from PDMA where there was no additional headcount which came through.

For the remainder of sequential growth in our revenues, the outsourcing business, a lot of our processes where people are in training and are kind of doing migration became fully billable in this quarter. And also one thing that you would like to highlight is in our outsourcing business that are as we are changing our operating model in oursourcing and increasing our span of control and driving more outcome and transaction based (inaudible) which also helps us to de-couple the headcount and revenues over time. So combined, all these factors have helped us to grow our revenues while keeping our headcount flat.

Tien-Tsin Huang, JPMorgan.

Great quarter. I wanted to ask about the sales and marketing spend. I think you mentioned it was $5 million. What exactly are you spending money on there? I know the headcount was generally flat. I'm just curious where the spend is going.

Sure, so in sales and marketing, there a couple of key investments that we are making. Number one is we are upgrading the quality of the front end very, very significantly. And therefore we are bringing in much more experienced domain experts who understand a particular industry vertical and who have been engaged with clients in a particular industry vertical for a period of time and therefore can have a much more strategic conversation with our clients and prospects.

So even though the headcount number is the same, we have actually hired a number of individuals on the front end which are much more experienced and are much more talented as compared to the people that we have let go in the front end. And our goal really is to upgrade that front end very, very significantly so that we can have strategic capability conversations with our customers.

The other area of investing in the front end is really to expand our approach towards select industry verticals. So we have just taken on a senior adviser who will help us develop the travel industry vertical and that's a new industry vertical that we got into by the acquisition offer, American Express's back-office operations for their travel business and that is a vertical that we believe is right for us to invest in and for us to expand.

We are also investing more significantly on the client management function and we've just re-created a full new client management function which is going to be much more directly engaged with our clients and help us drive more revenue with existing customers. So that's where the spend is going.

Got it. Good to know. Just a couple other questions. Insurance obviously was -- stood out. It drove most of the growth. I'm curious how broad-based was that growth, how much came from LifePRO, etc.?

I think the insurance industry vertical for us continues to be a great industry vertical and our positioning in the insurance industry vertical obviously is unparalleled. For us, the growth this quarter was pretty broad based and it was across a large cross-section of clients within the insurance industry vertical. And as we mentioned, the new strategic clients that we signed up, they started doing work with us in the transformation line of business and that revenue was recognized immediately in Q3.

As far as LifePRO is concerned, the reason why the revenues of LifePRO went up as compared to the previous quarter is because we had one extra month of billing for LifePRO since the acquisition was only completed on May 1 last quarter and therefore in the second quarter, we have only two months of billing for LifePRO and in the third quarter, we had three months of billing and that was roughly the increase that took place on account of that business.

Okay, got it. Last one for me, I guess. I'll ask the question about your large client. It looks like Centrica was basically flat sequentially. I'm curious if that's in line with your expectation that there's still some room to penetrate that account.

Centrica as we have said previously, we would expect that to grow in a gradual manner because it is a mature client. There is however a significant amount of opportunity for us to continue to build and mine that account because there are still a number of divisions within Centrica that we currently do not serve and we are engaged in conversations about expanding those relationships.

There are a number of subsidiaries of Centrica that we currently do not have a relationship with and there is an ability and an opportunity to expand our scope of work to these subsidiaries and Centrica continues to expand and grow both organically as well as through acquisitions and we would see opportunity out there.

So as such with the Centrica, we would expect that there will still be a growth opportunity and there is also a growth opportunity with Centrica on the transformation line of business where we think there is a huge opportunity in decision analytics for doing work with Centrica.

Vincent Lin, Goldman Sachs.

I just wanted to follow up in terms of the growth trajectory and margin into next year. I think previously you stated the fact that you think that [the model] is capable for about 30% revenue growth in terms of organic plus some acquisitions for 2011. Are we still on track for that just based on the demand momentum and then also pipeline you are seeing right now in terms of process transitioning taking place?

What we had previously stated is that the Company is looking at a growth trajectory of 25 to 30% on a combined basis which would include both organic growth as well as inorganic growth. We would expect the inorganic growth piece to be up to 10% and be able to do that without raising any additional capital. We believe that that growth trajectory is still intact and we should be able to grow our business on an organic basis between 15 to 20% and on a combined basis between 25 to 30%.

Okay, great. And then in terms of margins, it looks like you have ramped up the investments pretty significantly in terms of spending on the front end, hiring domain experts and it looks like the investments would drop significantly or in fact it could actually increase further into next year. Can you just help us understand the puts and takes on the margin front and just given the kind of revenue growth scenario that you have laid out for 2011, should we expect that margin expansion to continue into next year?

Sure, Vincent. I think from a margin perspective, as we continue to increase our volume, there is certainly additional operating leverage that we expect. We would also continue to expect to make further investments in the front end as well as terms of adding on subject matter capability.

However, on a net basis, given the operating leverage that we anticipate and the additional investments that we would make, we think we can expand our margins over a period of time at a rate of about 50 basis points each year, and that is something which we have stated previously and that is something which is -- what we believe even today and we are pretty consistent in terms of our ability to be able to expand margins on that basis. The key however is obviously subject to constant currency. If the currency shifts, then obviously it can have an impact on our margins one way or the other.

Okay, great. And then can you talk about maybe about a little bit about pricing, how is that trending, and if there's anything changing on the margin in terms of the competition?

Sure, from a pricing perspective, what we have seen is -- actually there is some amount of pricing pressure. So there are some transactions which we have been pursuing where some of our competitors are coming in quite low on pricing.

But in other situations where clients are dealing with us, then the pricing is pretty stable and has settled down, particularly amongst the larger and well established players. So, I would say that we continue to see lower pricing from some of the smaller players or some of the players that are challenged.

But otherwise, pricing is fairly stable with the larger customers. And at the end of the day, our approach with our clients is to get them to focus on the value that we can deliver to them and the subject matter expertise that we bring to the table which is much, much more important to them than the pricing.

(Operator Instructions) Joseph Vafi, Jefferies & Co.

Good results. I was wondering if you could maybe give us a little more clarity or bifurcate the market opportunities. What are you seeing in Europe versus the US in terms of differences of on-boarding new processes and being more open actually to just more volume and actually to BPO in general? Are there any differences that you are seeing between the two markets at this point?

That is a great question that you asked because there is a difference between what we are seeing in the US versus Europe. In the US what we are seeing is larger companies embrace outsourcing and transformation but they're doing it cautiously and they're doing it by starting out small and then over a period of time expanding those relationships.

In Europe, we are seeing fewer number of companies embrace outsourcing but they are embracing it much more aggressively and they're moving forward much more aggressively in terms of their outsourcing and transformation initiative. So for us, so far, most of the work that we've done has been primarily in the UK and we're now seeing a fair amount of interest from continental Europe.

And we think there is a tremendous opportunity for us to engage with clients in Continental Europe where the engagement of activities can be pretty rapid and pretty quick once a decision has been taken. And we think that could be a huge area that we can tap into and that presents an exciting opportunity for us.

Okay and then just maybe one more question. I know you're not obviously really doing anything with guidance for next year yet.

But for transformation businesses indeed the drop-off is seasonal. Just wanted to make sure there were no big projects that were actually ending in transformation here in Q3. And so if it's more seasonal, I guess we would expect an uptick in transformation in Q1. Is that the way to think about it in general?

Joe, the way I think we should think about the transformation business is a third of the business is already annuity and offshore based, and that provides a stable foundation for us. And the rest of the work that we do on transformation is spread across multiple clients and multiple engagements and there isn't really any one major project which can tail off in 2011.

And therefore we would expect that that business line for us will continue to grow. It will obviously depend upon the economic environment in 2011 and clients' appetite to engage in some of this discretionary spend. And provided the market government is stable, we would expect the transformation business to continue to grow into 2011.

Jonathan Maietta, Needham & Co.

Hi, thanks very much. Just two quick ones for me. Bookings activity, could you talk about just directionally -- I know you don't report a number -- but directionally what you saw in the outsourcing business in the quarter versus the previous quarter?

John, so from a booking perspective, Q@ we had announced two strategic wins, Q3 we don't have any strategic win that we have in outsourcing. So we have had a couple of wins in transformation but we don't have any of it in outsourcing in the third quarter.

So if you excluded those, Rohit, is it more or less the same level of activity if you excluded the two strategics from Q2?

Yes, I think the level of activity is pretty much the same except our pipeline has gone up. At the end of the second quarter, we had announced that we had only one strategic prospect in our pipeline. At the end of the third quarter, we have now got three strategic prospects in our pipeline. So to that extent, that has expanded.

And then around sales and marketing investment, you have done good work building out the insurance vertical. How should we think about the investment next year? Will a disproportionate amount go toward building out transportation for example or some other vertical?

Yes, John, our intent is to grow all the five industry verticals that we currently serve. And today we've got a leadership position in the insurance industry vertical and we would like to develop and build up our other four industry verticals as well.

We think there are a couple where we have got a significant edge over our competitors and there are a couple that we need to develop and build up. For us, the travel industry vertical is a vertical that we would like to build up and develop and others like utilities are much better developed already and we continue to focus on trying to make sure that we have a balanced approach towards building up all five industry verticals.

Joseph Foresi, Janney Montgomery.

I wonder -- instead of giving 2011 maybe guidance, I know you've given some color around what you want to grow. If you could talk about how visibility is and what you are hearing from clients heading into 2011 maybe versus what you heard in 2010 and where that puts your confidence as far as what you said about your general goals.

Sure, Joe. I think based upon all the client activity we have seen this year, we continue to feel good about the momentum that the Company has been able to generate. And going into 2011, we feel good and positive.

I will say this that in terms of our growth trajectory, we would need to bring in one more strategic client this year or early first quarter next year to be towards the higher end of the range we are targeting. And that is something which we would wait and see how that plays out. But from our interactions with existing clients and with prospective clients, the activity levels are -- continue to be quite good and we seem to be in a good place and with good momentum going into 2011.

So, just to be clear, you need [one of the three] strategic deals. What do you need from your pipeline in acquisitions and what are you kind of maybe looking at in general on that side?

I think on the acquisition side, clearly the pipeline is very active and I think for acquisitions, we continue to look at acquisitions where we can add on capability, where we can acquire assets at a reasonable price and we are focused on building up our industry vertical competence as well as creating an onshore -- US onshore capability.

So that is an area that we are focused in parallel and we think our pipeline is fairly active. And again with M&A, you can never say until the time a deal is done, but the level of activity and the kind of deals that we are seeing and the stage of negotiation and discussions on those deals, we feel very good about.

Just to be clear, you're expecting it to be accretive, your acquisition from day one, and you expect a close one in the next 12 months?

I can't be that clear, Joe. I think we need to see each deal on its own merits. There are some deals which will be accretive and there will be some other deals which may not be accretive.

We really look at each transaction on an individual stand-alone basis and evaluate the merits of each and every transaction. And depending on what the strategic value of the combination is and what the purchase price is and what's the capability we are acquiring, we will make a decision as to how we should proceed.

And again from a timeframe standpoint, I really cannot commit to whether we would be able to close a deal in the next quarter, six months or 12 months. These are very lumpy by their nature and the deal will take place as and when it takes place and we really have no way of forecasting when that might happen.

Dave Koning, Baird.

Nice job. I just wanted to pursue gross margins. They were up sequentially despite rupee strength, despite industry attrition and wage inflation. So really nice job there with margins improving sequentially, and I'm just wondering, can that continue given kind of the backdrop with the rupee etc. or do you expect gross margins to start to stabilize?

David, we do expect the margins to be stable. And historically if you see that combined gross margins for the Company have been in the 40s and that's where we expect them to be.

Okay, great, and then I guess the second question just on free cash flow. Really nice bounce back here in Q3. Maybe you can just give us your CapEx again for the year and then kind of how you look at free cash flow dynamics the rest of this year and into next year given your growth. Can free cash flow be in line with earnings? Or given the big growth, should we expect it to be a little below earnings just given that trajectory?

Yes, so, David, for the Q4, we expect the cash from operations to be in the range of $11 million to $12 million. And there is a little bit of impact it may have because of the holiday season on our DSOs and collections. So we expect the cash from operations to be $11 million to $12 million. CapEx we expect in Q4 to be between $5 million to $6 million and for the year, roughly around $20 million.

Bryan Keane, Credit Suisse.

Congratulations on the quarter. My two questions, the first one, just when you were talking about the industry with some clients delaying outsourcing and some driving forward, I guess are these existing clients that are delaying some of their decisions on outsourcing or were you talking about the pipeline?

We were talking mainly about the pipeline and these are new customers, some of them who are delaying that decision making. With existing clients who've already established service delivery capability, they continue to move forward in terms of expanding their outsourcing and transformational relationships.

So some of those strategic clients that we're talking about now that there's three of them in the pipeline, those are just taking longer to close and there's been some pushout there, unlike one of your competitors which it was more ramp up of existing clients. I just want to be clear on that point.

I can only comment on our pipeline and on our business. And with us, it's the new clients which some of them are delaying their decisions and pushing back, and some others are moving forward. And that's what we are seeing.

Okay and just my second question is just on attrition. I think it came in at close to 33%. Were you guys happy with that number? I know that was -- it looked like an improvement from last quarter and what are some of the things you guys are doing to try to push that number lower going forward?

Sure. So, Brian, I think the number declining quarter on quarter is a good initial trend but that is not our goal and target and we still remain a little bit away from our goal and target and therefore we continue to take measures to make sure that we can drive attrition much lower than where we are right now.

Some of the indicators that we are seeing are actually quite positive. So we have had some initial indicators of an initial employee engagement survey that we have done on a dipstick basis and the results out there are very encouraging.

Clearly we are making incremental investments in learning and development and stepping up our investments on training, career development and learning for our employees and that is part that we will continue to accelerate. We also continued to provide much better career opportunities for our employees.

And lastly with the success in terms of growing our business on a periodic basis, it allows us a much better opportunity to afford great careers for the employees and I think that's something which our employees are beginning to understand. Clearly the attrition at the senior management levels and the senior levels has dropped very, very sharply and therefore the senior employees and the middle-management employees, they understand our business model and the fact that EXL is a long-term successful growth company seems to be resonating very well with this set of employees.

We just hope that that message percolates down to the lower levels as well. And it will be our endeavor to try to reduce the attrition from where we stand today and bring it down further.

Can you just remind us what the target range is for attrition?

We would really like the attrition levels to be somewhere below 30% and I think given the fact that most of the work that we do is at nighttime in India or in the Philippines, the attrition levels by its very nature will remain high. They will not be really low because this is not daytime work that we are doing. But we would really like to drive that attrition rate below 30%.

I'm showing no further questions. I would like to turn the conference back over to Mr. Kapoor.

Thank you. Thank you all for joining today's call. We look forward to hosting many of you at our second annual investor day here at the NASDAQ market site or otherwise we will see you at the next quarter's call. Thank you.

Ladies and gentlemen, that does conclude today's conference. Have a wonderful day.