Exlservice Holdings Inc (EXLS) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to EXL's call. My name is Amy, 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. (Operator Instructions) We ask that you limit your questions to two each, please. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference to your host for today, Mr. Jarrod Yahes, EXL's Treasurer. Please go ahead.

Thank you, Amy. Greetings, and thanks to everyone for joining EXL's first quarter 2011 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've had an opportunity to review the two press releases we issued last night after the market close on EXL's first quarter 2011 results, as well as the OPI acquisition. We have also made available the updated investor fact sheet, as well as an investor presentation on the OPI transaction on the Investor Relations section on EXL's website.

On the agenda for today's call, Rohit will first provide a business update for the quarter, talk about the market environment for transformation and outsourcing services, and discuss our recent acquisition and the strategic rationale behind the deal. Vishal will then take you through the financial details of the first quarter, provide additional color on the financial implications of our recent acquisition, and then provide our updated financial guidance for 2011. We will then take questions at that point.

As you know, some of the matters we'll 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, and 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 believe provide useful information for investors. Reconciliations of those measures to GAAP can be found on the press release.

I will now turn the call over to Rohit Kapoor, our Chief Executive Officer. Rohit.

Thanks, Jarrod. 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 to discuss EXL's first quarter 2011 earnings results, as well as the recently announced acquisition of Outsource Partners International, or OPI.

I will start by providing you an update on our quarter and EXL's business, followed by our perspective on the OPI transaction, which we announced a short time ago.

For the first quarter, EXL delivered revenues and margins that were well above our expectations. Revenues and outsourcing had another record quarter. This is the ninth consecutive quarter with sequential growth in EXL's outsourcing business. This growth has been broad-based across new and existing client demand. EXL's existing clients continue to execute on their growth plans to outsource new processes with us, as well as expand volume in existing processes that are already outsourced to us.

In transformation, revenues were strong this quarter with demand for our cutting edge analytic solutions, high-quality, reengineering resources, and cost effective risk and compliance solutions continuing at an elevated level, although down slightly from the prior quarter.

Additionally, the two new strategic lines that we won last year across our two service lines are growing nicely. EXL is extremely well-positioned to take advantage of the ongoing strong demand in both our service lines, and our transformation service line remains a unique and competitive differentiator for us.

[Demand] signals with respect to long-term BPO engagements are similar to what we reported last quarter. Some clients are deliberately moving forward on their strategic outsourcing plans, while others continue to hesitate in moving ahead based on circumstances specific to their business.

We are also seeing strong demand in new emerging service areas such as legal services and clinical services. We have recently been mandated with a sizable engagement to provide clinical services out of Manila for an existing client in the healthcare [fair] market space.

In transformation services, (inaudible - heavily accented language) discretionary spending [acceleration] that we experienced in 2010, seems to have marginally abated. However, the overall business remains healthy and we expect normal growth this year.

One area that continues to evidence exceptionally strong demand is decision analytics. EXL now has over 400 professionals in this service line, and it continues to grow at an extremely rapid clip.

In decision analytics, EXL has particularly strong domain expertise in retail banking, including credit cards and fraud modeling, health insurance, P&C insurance, and life insurance. On the strategic deal front, of the three deals we discussed last quarter, we have been selected by a large US bank to provide a range of outsourcing and transformation services. We are in the middle of finalizing the contract.

One of our prior strategic prospects continues to evaluate their [path] forward, while another, unfortunately, decided to implement a [captive] model rather than outsource the work.

Separately, we have also added another strategic deal to the pipeline in the insurance vertical, which is very encouraging. Overall, I am optimistic the capacity for long-term sustainable growth in BPO continues, and that this will be a market that will grow long into the future.

While the timelines involved for clients to execute a strategic BPO engagement are significantly longer than in IT services, we believe that offshore BPO is still in the [maiden] stages of what is a major secular trend regarding the globalization of services. BPO constitutes a much larger portion of the overall cost equation for companies and is significantly less penetrated than IT services. EXL is exceptionally well positioned to benefit from that long-term growth trend.

Operationally, our investments in employee engagement and development are starting to pay off. Attrition was lower this quarter, and we hope that this trend is sustainable over the course of the year and that we can keep attrition at these levels or push it even lower.

Our significant build out of infrastructure is also on schedule and progressing as planned. We are reaching appropriate utilization in the first 900-seat phase of our SEZ facility in Noida. We anticipate commencing the second phase of the build out in the second quarter and then putting new business in that expanded area.

I remain highly confident in our core business and believe that we are establishing an even stronger competitive position for EXL each and everything quarter.

I would now like to turn to the recently announced acquisition of Outsource Partners International, or OPI. OPI is a company that we have known for some time now. We have competed against OPI in the marketplace on several occasions. We have an extremely high degree of respect for the company, its management team, and its employees. This is truly a unique company with specialized domain capability and tremendous focus.

The company was founded in 2001, currently services more than 80 clients, and has an employee base of approximately 3,700 professionals spread across the US, Asia, and Europe.

OPI has a strong professional services heritage and has grown into the largest pure-play provider of F&A outsourcing services in the marketplace. While OPI's client list is diversified in terms of client size and industry verticals, they have an extremely sharp domain focus on F&A and are truly best in class in this area.

The two co-founders of OPI, Clarence Schmitz, OPI Chairman and CEO, and Kishore Mirchandani, OPI President, will join the management team of EXL when the transaction closes, and lead the combined F&A center of excellence. We are excited to have them as a part of our management team and help lead and grow our combined business.

OPI and EXL have similar cultures with respect to a high-touch approach when engaging with clients. OPI's strong relationship management model is highly complimentary with what we have been investing in at EXL. OPI adds 15 extremely talented business development and client relationship management executives to EXL who are all located in the United States and in the UK.

Over the course of our diligence process, we have been continually impressed by the professional management talent at OPI, both in terms of an ability to execute as well as in terms of developing durable customer relationships. I believe that this team is going to be a tremendous addition to EXL. It brings a capability set and a level of F&A domain expertise that would have required a significant effort to replicate otherwise.

We believe that the acquisition of OPI is another example of EXL showing extremely strong financial discipline with respect to acquisitions and identifying the right companies to strengthen our capability set. According to Gartner, the global F&A BPO market is currently estimated at $17 billion and is expected to grow at 8% over the next few years.

In this attractive market, we were extremely careful to select a company that will continue to grow inline with EXL's expected overall growth of 15% to 20% on an organic basis and have a similar margin profile.

We have four key strategic objectives with respect to the OPI acquisition that I wanted to discuss. First, we intend to use our combined F&A domain capability to continue to accelerate our growth projectory in our chosen verticals.

F&A is a prime area of interest for EXL's current client base. In fact, three out of the five current verticals are EXL. Insurance, banking and financial services, and utilities are considered by (inaudible) to be leaders in terms of their adoption of F&A outsourcing.

Our other two verticals, transportation and travel are considered emerging and have strong prospects of expanding their use of F&A outsourcing. We believe that our win rates will increase with our new F&A capabilities and, when combined with our transformation offering in F&A, we have a suite of offerings that is impossible to replicate in the marketplace.

Second, one of the vehicles we will use to accelerate our growth is to leverage our risk and financial management, or RFM business, to win more downstream F&A business. The RFM business is one of our transformation service business lines that focuses on issues critical to the CFO, including governance, [rent], compliance, finance transformation, and decision support. However, EXL has traditionally not been dominant in terms of our F&A outsourcing capabilities in core F&A processes such as procure to pay, order to cash, general accounting, closing and reporting, and treasury and taxes.

By integrating OPI capabilities with our existing RFM and F&A outsourcing business, our new F&A center of excellence is now $125 million business line for EXL, and second only to the insurance business in terms of total revenues and employees. The F&A business will be consolidated into a single center of excellence and we will bring to market a comprehensive outsourcing and transformation service offering with leading domain expertise.

Third, we will capitalize on linkages between the vertically focused work we do in F&A. Today the industry specific processes which EXL provides are extremely close to the finance processes that are performed by OPI, and there are often strong linkages between the CEO's and the CFO's organizations. This is particularly the case in the insurance industry where claims and other processes directly impact results and many aspects of the P&L.

We will seek to expand our offerings with our existing clients so that we can service them in both industry specific processes and follow through with a spectrum of F&A services.

Lastly, OPI will enhance EXL's ability to leverage intellectual property, black holes, and technology to accelerate our non-linear revenue growth initiatives by seven additional solution offerings. OPI has a highly developed team of professionals focused on [building tools], black holes to enable more efficient F&A outsourcing service delivery.

For example, while many clients choose to use their existing internal systems for F&A outsourcing, OPI has developed a comprehensive platform to automate the entire procure to pay process called OPI Invoice, which is already being implemented at several clients. We plan to further invest in this and similar workflow platforms and add industry specific functionality where applicable.

We now also have an onshore US outsourcing presence via the additional of a talented group of US-based outsourcing professionals. We have also added to our European and Asian delivery footprints.

From an integration perspective, I believe that we are well ahead of the game. Our cross-functional integration team is already underway in terms of planning for the integration of client [spacing] functions and service delivery. We expect to have the integration largely complete by the end of 2011.

Before I hand the call over to Vishal, I want to emphasize that I'm really excited about this acquisition and also wish a warm welcome to all of the OPI employees who will become a part of the EXL family upon the closing of this transaction. We look forward to building our combined company with strong growth and healthy margins. Vishal?

Thanks, Rohit, and good morning, everyone. EXL was up for the first quarter of 2011, outperformed our expectations and are a testament to the continued strong momentum in EXL's core business. Our Q1 revenues were $72.9 million, up 33.8% from the first quarter of 2010, and up 4.1% sequentially.

Outsourcing revenues for Q1 grew 36.6% year over year to $56.8 million, compared to $41.6 million in the first quarter of 2010, and 6.2% sequentially. The sequential growth was due to a combination of growth from new and existing clients, including the one strategic client that we acquired in 2010.

In Q1, we made record 26 new processes [of] our clients, showing the scope and diversity of the outsourcing work that we are running.

Transformation revenues grew by 24.8% to $16.1 million in Q1, from [$12.9] million in the first quarter of 2010, and were slightly down sequentially. Demand for (inaudible) continues from clients, (inaudible) for banks and insurance companies.

We are making the right investments in our management bench to support further growth in the transformation business in light of the exceptional performance in the past 12 months.

Gross margin in Q1 met our expectation and was 39.3%, compared to 42.2% in the prior year and 40.4% in the December quarter. The decline in gross margin year over year was mainly due to the lower capacity realization based on our significant SEZ and other facility build out which had a 260 basis points impact, coupled with adverse foreign exchange [volume], which had a 30 basis point impact.

As one would expect, we captured [further] margin due to currency acquisition in the form of higher realized [products] engagement this quarter of $1.6 million, up from $0.6 million of [foreign exchange] in quarter one of 2010.

Our (inaudible) result for the quarter was $14.6 million, or 20% of our revenues, and (inaudible) of 28.3% year over year. The [trailing] quarter adjusted EBITDA was approximately $54 million. Our CapEx spend for the quarter was $7.2 million.

From a collections perspective, this quarter we [collected] $7.8 million cash from operation versus negative cash flow in Q1 of 2010, of $850,000. This improvement in cash flow is driven by a higher revenue rate, continued focus on collection, the DSO of 56 days this quarter versus 58 days in Q1 2010.

The adjusted operating margin for the quarter was 14.3% compared to 15.6% in the first quarter of 2010. In addition to the reasons for the change in gross margin that I discussed earlier, the adjusted operating margin movement was characterized by the [company's] G&A leverage and deploying that leverage into sales and marketing. Our G&A decreased for the quarter by more than 250 basis points, and we have deployed approximately 40 basis points of that in the sales and marketing.

On our FX [hedge] basis year over year, our adjusted operating margin would have been 14.8%. As mentioned earlier, we do make up almost all of the (inaudible) back to our (inaudible) line and, thereby, perfecting on net income and EPS. As we have mentioned in the past, we typically steer to a lower margin in Q2 by approximately 200 business points due to the impact of annual [wage] increment in India.

Our effective tax rate for the quarter was 11.8% due to the release of valuation [realized on] tax assets of approximately two million, due to the expansion of [tax] (inaudible) India. You will recall that earlier we had given a guidance on our ETR to be in mid-20 for the full year, and that will continue to be the case. As such, you should expect our tax rate to increase in the coming quarters as compared to the first quarter.

As we wrap up our tax advantage [facilities] in India, we expect ETR to come down gradually over the next few years.

Diluted EPS for the quarter increased 42.1%, to $0.27 from the first quarter of 2010, a diluted EPS of $0.19. Adjusted diluted EPS increased by 37.9% to $0.33, compared to $0.34 for the first quarter 2010, mainly due to the growth in our business and the net [qualitative] impact of foreign exchange [gain].

Before I provide revised guidance, I would like to -- I would first like to make some comments about the OPI acquisition from a financial perspective. We believe that the acquisition of OPI is an extremely attractive transaction for EXL shareholders. First [year guidance] for the [overall] profile of the company is strong. Over the last three years, OPI has grown organically at the (inaudible) of more than 15%, and the company delivered revenues of $76.1 million in 2010.

We hope to be able to (inaudible) [the growth rate] with a short (inaudible) as we integrate the two companies, and that eventually the accelerated revenue growth at OPI and expect no change to EXL's long-term expected growth profile of 15% to 20%.

Second is the OPI transaction is also attractive from valuation perspective. The purchase price is attractive, and we believe that this is another example of EXL showing value [addition discipline.] As a result, we expect the [foundation] to be accretive to both GAAP EPS and adjusted EPS for 2011. We expect that on [steady, state] full-year business, adjusted non-GAAP EPS accretion will be at least $0.10.

We cannot (inaudible) the impact of GAAP EPS until we close the transaction and finalize the purchase accounting.

In terms of our financing for the OPI transaction, we expect to predominantly use cash on our balance sheet at the time of closing. We will likely draw down approximately $50 million on revolver at the closing to create a cushion for ourselves. After the transaction, EXL will be in a net cash position and have no net debt.

In terms of the revolver, the pricing is extremely attractive at LIBOR plus 200 [bits], or approximately 3% at today's LIBOR rate. For 2011, we are [upgrading] our revenue guidance to between $347 to $355 million, up from our prior guidance of $295 to $305 million, representing year over year growth of 37.3% to 40.5%.

Implicit in our guidance is the impact of seven months of the OPI acquisition and (inaudible) previous revenue guidance range by $3 million (inaudible) performance of EXL in the [fourth] quarter and the additional confidence we have in our core business.

We are [continuing] our guidance for existing operating margins of 13% to 14%, taking into account the current dollar INR rate, which [was implicated] from our last guidance, and meaningful acquisition, as you can recall. While we are holding margin constant, we are increasing our guidance for the full year effective from $3.5 million to $5 million at the current exchange rate. This implies an effective increase to modern guidance on (inaudible) [growth basis], which is best understood by analyzing the growth and expansion of our adjusted EPS.

If OP continues to (inaudible) we believe EXL will be better positioned than our competitors. As we have discussed with investors previously, the majority of our contracts contain currency protection which allows us for less (inaudible) on our margin due to currency fluctuation.

The ETR for the combined entity will continue to remain in the mid-20s.

In closing, we are extremely excited about EXL's performance and the momentum both financially and operationally. We believe the OPI transaction is a phenomenal transaction for our shareholders, and look forward to providing you an update when we close the transaction.

Rohit and I also look forward to seeing many of you on the road in the coming weeks at the [Regis] Investor Conferences (inaudible).

Now I would like to open the floor to any questions you may have. Thank you.

(Operator Instructions) We ask that you please limit your questions to two each. (Operator Instructions) Our first question comes from Dave Koning of Baird. Your line is open.

Yes. Hey, guys. Great job on the quarter and with the acquisition. And I guess I would like to start out just by wondering, I was encouraged that the margin guidance stayed intact despite the acquisition. Often when acquisitions are made, there's initial costs around that. And I guess I'm just wondering if that's absorbed in 2011, meaning that in 2012 we could actually get nice margin expansion between the OPI, any nonrecurring costs there or things you could cut there, going away by 2012. And on top of that, I think you're doing a lot of internal investing at EXL.

So I guess the [nut] of it, I'm just wondering if margins can go up nicely next year.

Thanks, Dave. I think the way we look at it is you're right that we do have additional costs that kick in in 2011, which include both transaction costs associated with doing a significant acquisition, a well as integration costs of trying to combine the business.

I would point out, however, that we expect to continue to use inorganic growth as a complement to our organic growth strategy, and, therefore, we fully expect to continue down the path of using both our organic growth in our business as well as buying assets for capability enhancement.

In terms of the duplication of costs and in terms of the (inaudible - technical difficulty) thoughts of combining with OPI, the real synergy that we are seeking is really revenue synergy. And we continue to believe that for EXL on a standalone basis and for EXL and OPI on a combined basis, we have to focus on revenue growth, and, therefore, we will continue to make investments on the front end of our company to continue to secure the growth and capture a greater share of the market. We provide you with added guidance towards the end -- beginning of 2012, for our margins for 2012.

Okay. That's great. And I guess the one other thing I was wondering about, just in terms of revenue synergies, do you think there's more opportunity to sell EXL-type services to some of the OPI clients, or vice versa, selling some of the OPI services to EXL clients?

We actually think that there are at least four different avenues for us to get revenue synergies. Number one, for us to sell F&A services to our existing customer base. Number two, for us to sell outsourcing services to OPI's client base. Number three, for us to be able to get downstream work from our RFM clients on F&A. And number four, to combine our capabilities and OPI's capabilities and use their technologies to be able to further benefit particularly into the mid-market segment and to be able to do engagement in F&A with the larger size clients.

Great. That's encouraging. And I guess one last quick one. Is the tax rate you said, mid-20%, or 25% for the -- was that for the full year or for the remaining quarters of this year?

That's a full-year guidance, David. For the remaining quarter, as I said, we will have an up-tick compared to what we had experienced in Q1, which was at 11.8%. And for the full year, the tax rate will be in the mid-20s.

Our next question comes from Ashwin Shirvaikar of Citi. Your line is open.

Thank you. Well, congratulations, guys on the very good quarter and also on the OPI deal. My question, I guess the first one is about retention of both key employees as well as clients on the OPI front, if you could talk about what's in place to ensure that happens. And then the quick follow-on to that is with regards to specific demand for F&A-type work amongst your client base, your existing client base, would you provide some comment today on what level of demand is there do you view for F&A-type work that we could potentially see as add-on work in this year?

Sure, Ashwin. And thanks a lot for your wishes. Let me address the retention issue first. First off, the -- let me talk about the employees. [Sure] we are looking at this combination and we are putting together our two businesses and creating a finance and accounting center of excellence. And this finance and accounting center of excellence will be led by the two founders and leaders of OPI, Clarence and Kishore.

Number two is, the employee overlap is absolutely minimal, and, therefore, we don't expect there to be any real issue in terms of employee retention. For the senior management team of OPI, we have [plans] for an equity linked retention which we are giving out at the time of closing of this transaction. And then we will [forward in] the OPI employees into EXL's overall long-term equity incentive plan, and, therefore, we will fully expect to align all OPI employees with the same method of incentivization as we have currently within EXL.

As far as the clients are concerned, number one, we carried out diligence with some of our -- some of the key clients of OPI. And based upon that diligence, we believe that clients will find this transaction to be highly valuable for them as they get access to a broader range of service offerings, they get an expansion of [their] geographical footprint, they get a stable and secure company in a [transparent] financial reporting platform, and they look to a deeper bench trend of the combined organization.

We will be seeking out and trying to meet with every single client within the EXL network, as well as the OPI network over the next few weeks. And the one thing which we want to assure them is that their service delivery is going to remain the same, their client relationship management is going to remain the same, and what they can expect is incremental and additional benefits through added offerings and capabilities by the combination of the two organizations. So we fully expect to be able to not only retain customers, but, in fact, grow the customer base.

Your second question on the demand for F&A type of services from our existing clients, the color that I'd like to provide you out there is most of our clients actually initially start out by outsourcing some of their operations work. And once they are happy and satisfied with the outsourcing of their operations, then they look at other areas that they can outsource. And typically F&A ends up being one of them.

And so we have many clients who have started out on the operations part of outsourcing and then over a period of time they start taking a look at F&A. We want to be able to be the strategic partner for these clients at the point of time that they start looking out for outsourcing finance and accounting processes. We believe that within our existing customer set, there are a number of clients that will be looking for these types of services and we think the [sale] cycle is going to be still quite long, but their relationship with us is going to shorten the sale cycle somewhat. So we hope to be able to penetrate into the segment over the next 12 to 18 months or so.

That all sounds very good. One quick question on guidance. The new strategic client, is that in guidance? And then Vishal, I just wanted to confirm, you said at least $0.10 accretion, correct? Because that's the number I was getting.

Yes.

Okay.

Yes, and so in our guidance, the new strategic client is included. The new client's impact in the first year is limited. And so we do have that in our guidance.

Number two, your question on the at least $0.10, yes, that is for the -- assuming that on a [30-day], full-year basis we will have $0.10, at least.

Our next question comes from --

Does that answer your question?

Our next question comes from Joseph Foresi of Janney Montgomery Scott. Your line is open.

Hi, gentlemen, and congratulations. I'd like to start just by asking about the demand environment in general. We've been hearing and picking up data points that the pipeline for BPO is building. I wonder if you could update us on just what your views are beginning this year versus what they were last year. And then also maybe you could talk about pricing, deal sizes, and realization.

Thanks, Joe. From our perspective, the demand environment continues to remain strong. We [felt that it was] strong last year and it continues to remain so right now.

What we do see is that there is a tremendous amount of interest from clients and prospects in terms of thinking about outsourcing. However, we do believe that the BPO industry is industry that builds up over a period of time. And this is something where clients adopt outsourcing in a deliberate manner and they ramp up their operations over a period of time.

What we are seeing as far as pricing is concerned is in certain situations we do see pricing pressure and some competitive elements coming in where the pricing does become hugely competitive. The deal sizes, we have begun to see some larger size deals now being put on the table, and we are also seeing some deals where clients are looking for a complete outsource solution for some of the businesses that they run. And, therefore, the deal sizes tend to be a little bit larger in those specific areas.

Rohit, could you talk a little bit about where the pricing pressure is coming from? And do you expect it to subside? And can you pick up anything on the wage side? Maybe you can talk about what absorbs the wage increases.

Sure. So the pricing pressure actually can come from a number of different types of competitors. It just depends upon what competitor wants to aggressively build up capability in a particular area. What we find is competitors which are trying to build up a capability in a new vertical or in a new domain, they will typically price very aggressively in order to secure a foundational base of business that they can build up on.

And from our perspective, we try and remain very, very disciplined in terms of pricing because we focus on few industry verticals and a few horizontals, and we want to be able to be long-term sustainable partners for our clients.

Okay. And then just lastly on the guidance, what is your organic growth assumptions there and what assumptions are you making from the acquisitions? And then I have just one quick follow-up.

Joe, our growth rate that we have guided to previously is that we expect to grow our business on an organic basis at a rate of between 15% to 20%. We expect that with this combination, that growth rate projectory remains the same and that there will be no change to that.

Also, in terms of margin guidance, for this year, we've guided to our guidance and adjusted operating margin of 13% to 14%, and we expect that to remain unchanged as well. We think the combination of these two businesses is our saying us being able to build our business at a fast pace, and continue to maintain our margins.

Our next question comes from Tien-Tsin Huang of JP Morgan. Your line is open.

Great. Thank you. Rohit, I want to ask about the OPI acquisition. Bringing on more F&A [assets] makes a ton of sense. But I'm curious about the decision to go in that direction as opposed to what [JemPak] did, which is going in more of the IT services domain side. Can you just help us with your thought process in taking this approach?

Sure. So first of all, our strategy is to become a [category killer] in every domain that we choose to participate in. And we've chosen to participate in a few limited domains, and these are five industry verticals and two horizontals. And that's where we want to deepen our domain capability and understanding and become much more valuable partners for our clients.

We also intend to provide transformation and outsourcing in an integrated fashion to our customer base. And, plus, transformation includes decision analytics, operations and [focus] reengineering, and risk and financial management. And we will [lever] on top of that certain technologies, applications, and tools, that can provide additional value to our clients.

The acquisition of OPI actually was tremendous in the sense that it gave us the domain specific capability in F&A, but it also gave us access to certain tools and technologies and applications that were relevant for the CFO in finance and accounting that we could offer in an integrated way to our customers. And, therefore, it satisfied both the needs of going deeper and deeper into the domain, as well as an ability to use technology and offer that to the customer in an integrated fashion.

Got it. It makes sense. Just a couple clarifications then. Just on the -- any customer concentration issues on OPI? It sounds like there shouldn't be. And then your guidance that you had set in the prior quarter, did it contemplate acquisitions in your margin outlook? I couldn't remember if that was the case.

So I think in terms of our guidance, we [assumed] that we will have the (inaudible) before June. And we [took the seven] months of revenues from the acquisition. Although the other point I --

In your question about the expenses being included in the margin guidance, so we provided the guidance in the beginning of the year.

Yes, exactly. I was just trying to understand that a little bit better because I had heard different answers earlier. I was just curious if that was the case or not.

At that point of time, we did factor in some amount of expenses pertaining to the transaction, but not the full setoff expenses that we incurred on the full-blown transaction, which has got consummated.

Yes.

So some amount of that was factored in.

Understood. Okay. Great. And then on the customer concentration side, on OPI. And then I'll jump off the call. Anything to [call] out there?

Yes, sure. No. On the customer concentration side, actually they're really pleased. On an overall combined basis, clearly our customer concentration will drop even further. And as far as OPI is concerned, they do have a few significant customer relationships, but none of them will create any customer concentration issues for us. And I think for us, we will treat them just like we treat our strategic lines, by offering them a high-touch, on-the-ground customer relationship business model and be very, very attentive to their needs.

Our next question comes from Tim Fox of Deutsche Bank. Your line is open.

Hi. Thanks for taking my question. And let me offer my congrats on the quarter and the deal. Just a question on an OPI. It's been a few years since I've looked at the company. Can you just help us frame their vertical exposure relative to EXL's? And is there one of the revenue synergy opportunities is to actually expand it to some verticals you may not have as big a footprint in today?

Sure, Tim. Thanks for your kind words. OPI, as you know, has got 80 clients. These 80 clients are from our diversified set of industry verticals and [groups]. They have a number of large-size clients and mid-size clients. They also have clients which have got different types of contractual arrangements in terms of either a fixed price contract or a cost-plus contract or a (inaudible) contract. The overlap between the industry verticals right now is not that significant. However, we believe over a period of time we should be able to increase the amount of verticalization associated with OPI's business.

Great. And just a follow-up on the tax question. Given OPI's revenue concentration I think in the US and the UK, is there -- what's the expectation, I guess, longer term for your overall combined tax rate? Is there any risk that that increases because of the OPI acquisition? Or how do we help think about that in longer term?

Thanks, Tim. Well, over longer term, I think on a combined basis, we still think that as we move our EXL's core business into the SEZ facilities and we will be able to still have the marginal reduction for ETR on a combined basis. And we don't see any issues with the income concentration in the UK and US, and we will be able to factor that in.

Okay. Great. That's it for me. Thank you.

Thank you. Our next question comes from Joseph Vafi of Jefferies and Company. Your line is open.

Hey, guys. Good morning. Good results. The insurance article obviously really is important to EXL. A lot of the IT players, a lot of the ITS [this] quarter have shown somewhat weak results here in the insurance vertical. Obviously I don't think that that was the case for you. But any color on maybe some of the dynamics that may be going on in that vertical, kind of to explain some of the divergences between IT and BPO?

Yes. Thanks, Joe. From our perspective, the insurance vertical continues to be very strong. And we are seeing increased strength in the insurance market actually from the healthcare fairs which are increasingly looking at outsourcing off some of their processes, as well as [some of the] clinical processes like I discussed in my prepared remarks.

What we are also seeing is, as we announced, our strategic prospect has moved into our pipeline, and we think we actively, amongst insurance clients remains quite strong and healthy. And we continue to see the benefit from that.

I think the difference between us and IT is principally associated with a penetration of IT within the insurance industry vertical versus the penetration of BPO within the insurance vertical. And that's why we believe that there is a long runway for the BPO market to continue to grow sequentially year over year. And there is a tremendous opportunity for us if we position ourselves [for that].

Okay. That's helpful. And then on the OPI deal, just curious, was that a shopped or a auction business or was that a deal that you -- that you consummated outside of maybe a process?

OPI did retain a [self-side] banker for marketing the transaction, and we participated in the process.

Okay. Great. Thanks a lot, guys.

Thank you. Our next question comes from David Grossman of Stifel Nicolaus. Your line is open.

Hi. This is actually [Nicole Conway] in for David Grossman. Just a quick question. For your organic guidance of 15% to 20% gross, I was curious, just looking forward into 2012, given your current client base, and you defined a strategic client, do you feel pretty comfortable with that guidance now? Or would you -- do you need to sign more clients, any other strategic clients?

Nicole, hi. This is Vishal. Thanks for your question. We don't provide focused guidance on 2012. And as Rohit mentioned earlier, on the long-term basis, we do expect our (inaudible) to be in that 15% to 20%.

Okay. Can you also just talk a little bit about current client volumes, if they've been trending up or down recently?

Nicole, this is Rohit. Our current client volumes have been steady. In some situations, we have seen them actually go up a little bit, and so we are quite encouraged by the activity that's taking place with our existing customers.

Great. Thank you.

Thank you. Our next question comes from Vincent Lin of Goldman Sachs. Your line is open.

Thanks. First, on OPI, I'm just curious, out of the 3,700 employees, what are the, sort of the rough mix in terms of geographic - are most of the people in India versus US, rest of Asia, et cetera?

Hi, Vincent. This is Vishal. Right now we don't provide the guidance on where the makeup of the employee base is. And --

Okay. That's fine. And then just -- and this is probably kind of a higher level question. In terms of just given your position in [covenant] insurance side and also now the extended presence in the F&A, I'm just curious if you can elaborate on kind of the implications for (inaudible) service from both the financial regulatory reform, as well as the healthcare reform side. What kind of benefits are you seeing from a demand perspective? And what are -- we can see the kind of a demand benefit, and then start -- continuing into 2011, and then even longer term. Thanks.

Sure, Vincent, and that's a great question. I think for us, the way we view it is for our insurance industry vertical, for our banking and financial services vertical, and for our finance and accounting horizontal factors.

Some of the changes that are taking place in the regulation environment are actually going to be net positive for the company. They're going to be net positive because some of the solutions that we provide in the advisory space are directly linked to the changes that organizations have to [go with] in order to comply with these enhanced financial regulations that are being imposed upon them.

The same thing is also true for the healthcare fair space where by 2014 there's going to be a change that's going to be introduced, and, therefore, we are helping these clients out in terms of managing their cost structures so that they can comply with the financial and the regulatory requirements.

I think all of these play up nicely to the strengths of EXL, and these will be very encouraging demand signals for us.

Okay. Thanks.

Thank you. Our next question comes from Kunal Tayal of Bank of America. Your line is open.

Hi. Congratulations to the management [who] worked with the acquisition, and a good quarter. Just a couple of questions on the acquisition on the guidance side, in fact. Firstly, on the margin front, the net revenue have maintained your 13 to 14 adjusted EBIT margin guidance. But in terms of the impact of the [two or three] parameters either -- if you can break that down from acquisition costs [for FX], and then back from indicating the OPI business.

Yes. Hi, Kunal, this is Vishal. Two factors we've taken into account, the FX impact, which has about 40 to 50 basis impact on the guidance compared to our prior guidance, and the impact of acquisition cost and the integration cost has another 30 to 50 basis points impact, which we have been able to offset by better margins on our business due to better utilization and better run rate on our G&A productivity, which will help us to offset that and maintain our guidance between 13% to 14%.

Sure. Thanks, Vishal. Just one more. Would it be fair to assume that the entire change in the revenue guidance is from the acquisition and there is no change on the organic side?

No. I think from our previous guidance of $295 to $305 million, we have taken into account the high run rate we had in Q1 and the core strength in our business on the core EXL business, where we have improved the bottom end of our guidance to $297 to $305 million. And we have resumed the balance (inaudible - technical difficulty) come from all makeup for OPI. It's 298. Sorry. 298 to 305.

Got it. Thank you.

(Operator Instructions) Our next question comes from Bryan Keane of Credit Suisse. Your line is open.

Hi. This is [Ashi Shabaza] calling on behalf of Bryan Keane. Congratulations on an excellent quarter.

Thanks.

Yes. I had a quick question on the insurance. Insurance pretty good jump there. You gave some rationale, reasoning -- or sorry -- gave some demand drivers. And I was wondering was LifePRO also one of the reasons for the growth and how much growth do you see because of LifePRO and other drivers?

Sure. LifePRO for us continues to perform well. However, as you're aware, LifePRO for us is a relatively small revenue stream. We expect to see continued organic growth take place in our LifePRO business line. And we're really looking forward to engaging with clients where we can leverage our platform capability along with our servicing capability and offer that to our clients in an integrated fashion.

Okay. I had a quick question on the BFS and the [top three] segment received, the revenue getting distributed among more clients and the revenue for the top three clients was lower and the BFS was slightly lower. I was wondering if you could just provide some color on if it was one particular client. And do you see that up-tick in demand?

So, Ashi, hi. This is Vishal. On that BFS, particularly that's where some of our transformation project work happens, and typically that [had some more ability as] some project work gets completed. But we continue to see strong demand in that vertical for our project work and demand for our transformation services.

Okay. So we should see demand coming back again in the next half or towards in the next three quarters?

That is correct. And keep in mind that on the banking and financial services vertical, we just announced that we've acquired a strategic client out there. So we absolutely will expect that to go up.

Our next question comes from Robert Riggs of William Blair and Company. Your line is open.

Hi. Congratulations on the results and the transaction. Rohit, you mentioned that acquisitions will continue to be a part of the strategy going forward. I guess from a timing perspective, how quickly would you feel comfortable being back in the market looking at deals either from a financial standpoint or an operational standpoint? And then in terms of the things that you would be looking at, should we think about maybe more technology-focused deals would be a focus? Or are there particular geographies where you think you still need to beef up your presence? Thanks?

Sure. For us, the OPI acquisition is a significant acquisition, but clearly it's an acquisition that we feel very comfortable with because we now have a track record of acquiring and integrating companies over the last two and a half years.

We look forward to the integration of OPI, and it certainly will be a transaction which will require an extra effort on our parts to integrate both the organizations and to be able to go to market to our customers with a combined offering that will add additional value to our existing and future customer relationships. We think the integration exercise should be completed largely by the end of this year. And what this means is it allows us to be able to look at other acquisitions that we can do from a (inaudible) perspective.

But it is unlikely that we will do a significant acquisition this year again. We'd much rather focus on making sure that the integrators like they have been before.

In terms of the types of acquisitions that would make sense, we continue to look for acquisitions that add on strong capability to the combined organization. We continue to look at companies that have got a presence onshore. We continue to look at companies which have got unique skill sets and domain expertise in our chosen verticals and horizontals. And that's where we will focus in on.

From a technology perspective, we will continue to look at beefing up our enabling technologies and picking up point solutions that can assist our clients in terms of their backend processes, and that will be a focus for us. We are not interested in providing IT services or application development and maintenance, and that is all for a lower priority for us.

And I'm showing no additional questions at this time.

Well, I just want to say a couple things in closing. From our perspective at EXL, this is a really exciting time. We think that our strategy is clear and it is something which resonates very well in the marketplace. We continue to look forward to building on our company and executing on our strategic growth plan.

Thank you so much for attending this call, and we look forward to talking to you over the next few weeks and for you joining us on our next quarterly earnings call in August. Thank you.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.