Exlservice Holdings Inc (EXLS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2011 EXL Service Holdings Inc. Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Jarrod Yahes, EXL Treasurer. Mr. Yahes, you may begin.

Thank you, Jen. Greetings, and thanks to everyone for joining EXL's second quarter 2011 earnings announcement. Joining us today from our corporate headquarters in New York are Rohit Kapoor, our President and Chief Executive Officer, and Vishal Chhibbar, our Chief Financial Officer. We hope you've had an opportunity to review the second-quarter earnings press release we issued last evening after the market closed on EXL's second quarter of 2011 financial results, as well as the 8-KA including the pro forma analysis for the OPI acquisition. We have also made available the updated investor fact sheet on the Investor Relations section on EXL's website.

On the agenda for today's call, Rohit will provide a business update for the quarter, talk about some of the newer service offerings where we are seeing strong demand and how we're making investments in our professionals and global infrastructure to continue to support our client requirements. He will also discuss our recent acquisition and provide some early color on how the integration is proceeding and how EXL's market positioning is evolving. Vishal will then take you through the financial details of the second quarter, discuss our profitability and balance sheet, as well as provide additional color on our updated guidance for 2011. We'll then take questions at that point in time.

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 SEC 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 on the press release.

Now I'll turn the call over to Rohit, our President and Chief Executive Officer.

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 second-quarter 2011 earnings results.

I will start by providing you an update on our quarterly results and business momentum followed by an update on our recent acquisition of OPI. I am extremely pleased to report that for the second quarter EXL delivered strong results for both revenue growth and profitability. Revenues grew over 40% on an annual basis and 16.6% sequentially. Revenues in outsourcing had another record quarter and led our growth. This growth was broad based across new clients and existing clients. Areas of particular demand included finance and accounting across industry verticals, decision analytics in the retail banking and insurance verticals, as well as clinical services where we are seeing a significant demand in the insurance vertical.

For our existing clients, serving them with the best quality service is of utmost importance to us. I am proud to announce that EXL's client, Centrica, has won the European Outsourcing Association Award for BPO Contract of the Year. The criteria used to determine this award was based on delivery of initial and ongoing business benefits, incorporation of best practices, and ongoing service innovation.

In transformation, revenues grew 16% year on year and grew slightly sequentially. EXL's transformation service lines remain a unique and competitive differentiator due to the way we couple and integrate the service offering with outsourcing. Both decision analytics and operations and process excellence continue to exhibit strong demand and are growing above the corporate average. EXL now has over 500 professionals in the decision analytics service line and it continues to grow rapidly.

In decision analytics, EXL has particularly strong domain expertise in retail banking and across the insurance vertical in health, P&C, and life insurance. We are also starting to see good demand for solvency to work with our clients in Europe. This work is particularly well suited to EXL because it combines all of the skill sets in our transformation business in the areas of analytics, risk, and regulatory compliance, and process change.

On the strategic deal front, of the two deals we discussed last quarter, I am optimistic we will have something positive to report in the next few weeks. We are currently in exclusive negotiations for winning a strategic deal in the insurance vertical. More generally in the pipeline we have seen a larger number of smaller deals from global prospects, a strong pipeline in finance and accounting, and an emerging pipeline in the banking and financial services vertical, which has enormous potential to accelerate the pace of outsourcing initiatives. We are seeing particular strength in analytics where we now have a dedicated sales team and a large scale delivery organization to service our clients' needs.

From an operational perspective, we provided wage increments to our employees this quarter which impacted our gross margins. For our employee population in the newly acquired OPI business, wage increments took place in July and therefore we expect those increments to negatively impact our gross margins in the third quarter. Keeping up with market based wage increments is extremely important to retain and motivate our most talented employees and ensure the best quality of service delivery for our clients. Competition for talent remains quite strong and reducing attrition remains a challenge for us. At present, EXL's attrition rates are stable and in line with historical precedent.

We are moving ahead with the significant build out of infrastructure we announced last quarter. We are reaching appropriate utilization in the first 900 seat phase of our SEZ facility in Noida and are therefore moving ahead with phase two of adding an additional 1,300 seats. We have also taken a decision to immediately add 300 seats of additional capacity in our existing Philippines facility with plans to add a second facility in the Philippines in the beginning of 2012.

This growth is largely coming from leading edge work we are doing in our clinical services center of excellence for insurance providers and the unique capabilities we have in that rapidly growing market. Lastly, we have added 400 seats in Gurgaon to accommodate the growth we are experiencing in decision analytics and we are making a new investment in a dedicated learning and development center for our professionals.

We will also over the course of the year further expand in other locations as necessary to meet our growing client demands. We continue to invest in our people and add to our front end with a focus in client relationship management and sales and marketing. In the past several months we have made a half a dozen key hires with new professionals added in the US and UK as well as in our LifePRO business. The profile of the individuals we have hired has become even more specialized with significant domain and technology expertise in key industry verticals that EXL serves.

I would now like to spend a few minutes on OPI. As you know, we closed the acquisition on June 1 per our expected timeline. OPI's financial performance thus far has been strong and our confidence in the future is even brighter than at the time of transaction signing. OPI contributed over $7 million of revenue for the month of June and is growing. Profitability is in line with our expectations and while lower than EXL's corporate average, has the opportunity to expand over the course of the next several years.

From an integration perspective, on the front end we have seen excellent cooperation between our combined relationship management teams. Existing clients of OPI are pleased with the approach to the integration that we have adopted. We are delighted to announce that we have been able to achieve our first cross sell win in F&A with an existing top five client of ours. While small, we believe this win demonstrates the appetite for the skill sets that OPI brings to EXL within the industry verticals we service.

We are also actively engaged in developing new F&A solutions for clients that leverage our combined capabilities and skill sets. We are focused on executing on the four key strategic objectives with respect to the acquisition that we had articulated last quarter.

Number one, using our combined F&A domain capability to continue to accelerate our growth trajectory in our chosen verticals. Number two, leveraging our risk and financial management or RFM business to win more downstream F&A business. Number three, capitalizing on linkages between the vertically focused work we do in industry specific processes where there are often strong linkages between the COO's and the CFO's organization. And number four, enhancing EXL's ability to leverage intellectual property, platforms, and technology to accelerate our non-linear revenue growth initiatives.

Before I hand the call over to Vishal, I would like to emphasize that we at EXL are really excited about the momentum that EXL has built in the market and the strong competitive position we enjoy. Our market reach and brand equity has taken a significant step up. EXL now has close to 18,000 employees globally across seven countries. We believe EXL's increased size and scale are already positively impacting our ability to succeed in the market. We enjoy enhanced brand equity and visibility which helps with both employee retention and new client acquisition.

Our extremely strong financial position allows us to make the right investments in people and infrastructure in order to succeed in the market. And lastly, our client's concentration risk has diminished significantly, allowing us to grow faster alongside our existing strategic clients and meet their needs for outsourcing and transformation services. I would now like to hand the call over to Vishal to discuss our financial results and guidance.

Thanks, Rohit, and thanks, everyone, for joining us this morning.

EXL enjoyed strong second-quarter growth. Revenues were $85 million, an increase of 40.2% over $60.6 million for the same quarter last year and up 16.6% sequentially. Our organic growth was approximately 27%. Please note that this revenue growth included onetime client revenues of $2.2 million that were received in this quarter. We complemented our organic growth by adding approximately $7.4 million of revenues for one month in the quarter from our recent OPI acquisition, which marginally exceeded our expectations.

Outsourcing services revenue for this quarter was at $68.7 million, including one month of OPI revenues, compared to $46.6 million for the second quarter last year, an increase of 47.6%. Sequential outsourcing organic growth including the onetime client fees was approximately 9%. We migrated 33 new processes this quarter, including 15 in our new F&A Center of Excellence and 14 in the insurance vertical and continued new ramping in new and existing client relationships.

Transformation services revenues increased approximately 16% to $16.3 million compared to $14.1 million in the same period last year and marginally up on a sequential basis. Demand for our decision analytics business has been particularly robust. The business line continues to grow strongly and now has over 500 employees.

Gross margin this quarter was higher than expected at 38.8% but down sequentially by 50 basis points mainly due to the wage increments with an impact of 140 BPs which are effective 1 April, lower gross margins in our OPI business, an impact of 90 BPs, which was primarily offset by onetime client revenue that I mentioned earlier, for which there was no associated cost during this quarter but which had an impact of about 160 BPs.

Going into the third quarter we expect gross margins to be lower, attributable to a full-quarter impact of lower gross margins of OPI as well as the fact that the wage increments for OPI are given in the third quarter as opposed to the second quarter for EXL.

We continue to gain operational leverage from G&A. This quarter, G&A expenses were down to 14.6% compared to 15.6% in the second quarter of the prior year, an increase in leverage by 100 basis points. Sales and marketing expenses for the second quarter was $6.1 million or 7.2% of revenue, up approximately 33% from the same period last year. Consistently redeploying operating leverage into sales and marketing is in line with EXL's strategy of capitalizing on growth we see in the outsourcing market while maintaining focus on profitability.

Depreciation and amortization expense was lower this quarter at 6% of revenues compared to 6.7% of revenues in the prior quarter, which is attributable to increased leverage of our infrastructure and partially offset by additional amortization of intangibles. We expect depreciation to rise as a percentage of revenues in future quarters as we expand our infrastructure in multiple facilities around the world. The additional expense for amortization of acquisition-related intangibles for OPI should be approximately $3.3 million per year, raising EXL's total acquisition-related intangibles expense to approximately $5.8 million annually.

Adjusted operating margin which excludes the impact of stock comp expenses and amortization of intangibles for this quarter was 15.5% compared to 14.3% for the previous quarters. We received a positive benefit of the onetime client payment of approximately 220 basis points as well as an increase in leverage in G&A and depreciation expense as a percent of revenue of 140 basis points. This was partially offset by the wage increments which negatively impacted our adjusted operating margins by 160 basis points and a negative impact of foreign exchange of 50 basis points and a one month impact of OPI of 30 basis points on our adjusted operating margin.

Our adjusted EBITDA for the quarter was $17.4 million or 20.5% of revenues, an increase of 50.9% year over year. Cash flow from operations this quarter was $19 million. With the growth investments we are making in infrastructure as well as to include the requirements of OPI, our capital expenditure now would be between $25 million to $50 million. EXL is generating significant additional cash to cover these capital investments and we are maintaining a tight control of cash.

DSOs are down to 50 days from 56 days last quarter due to steady improvements in EXL's collection as well as the strong collection management practices at OPI that positively impacted our DSOs.

As of June 30, our cash and short-term investment balance was $83.9 million after closing the OPI acquisition and growing $30 million of revolver which was outstanding as of June. After the second quarter we proceeded to pay down $10 million of the revolver and expect to pay down the rest before the close of 2011 with our free cash flows. Our net cash position remains significant and is growing.

Our disciplined foreign exchange hedging strategy to mitigate the currency volatility and to protect our bottom line net income and adjusted EPS, resulted in gains related to cash flow hedging of $1.8 million this quarter compared to a gain of $1.6 million in the prior quarter. At current exchange rates we expect foreign exchange gains for the full year to be at least $6 million which is a $1 million increase from the prior quarter's guidance.

The effective tax rate for this quarter was 28.5%. For 2011, we continue to expect the tax rate to be in the mid-20s. Net income this quarter increased by 74% to $8.5 million compared to $4.9 million from the same period last year. Adjusted diluted earnings per share was $0.35 as compared to $0.23 for the same period last year, an increase of 52%.

Please note that we have filed an 8-KA with pro forma financials for EXL and OPI for the calendar year 2010 and the first quarter ending March 31, 2011. The pro forma analysis is important for investors to understand the EPS accretion for the OPI transaction. However, we would like to point out that the tax rate of EXL used for the March quarter pro forma financials of 12% is significantly lower than our full-year tax rate guidance in the mid-20s. This has the effect of overstating the adjusted and GAAP EPS for the March quarter pro forma disclosure. We still believe that on a steady basis that this acquisition will be at least $0.10 accretive to the adjusted EPS for the full year.

Based on our strong year to date results, we are raising our revenue guidance. Last quarter we had raised our revenue guidance to $347 million to $355 million to take into account the recent acquisition, our strong performance in the first quarter, and greater confidence in our business. We are further increasing that guidance to take into account our Q2 performance, the expected organic growth in our core business and increased level of confidence with respect to the growth at OPI. We now expect revenues for 2011 to be between $354 million and $358 million, representing an annual growth of 40% to 42%.

We are increasing our adjusted operating margin guidance by increasing the lower end by 50 BPs to factor in the first half performance. We now expect the adjusted operating margin to be 13.5% to 14% based on prevailing exchange rates. Please note that we are comfortable increasing the bottom end of our guidance despite the fact that OPI has appreciated approximately 1% from the time we last reported.

Our margin guidance does imply lower profitability in the second half of 2011 as compared to the first half, primarily due to three factors -- number one, the inclusion of two full quarters of our recent acquisition which operates at slightly lower margins, as well as the integration costs we expect to incur over the remainder of 2011; the wage increments for OPI which was less in Q3; and also the fact that there will be no onetime client revenues compared to those received in Q2.

The guidance does fully factor in the impact of Q3 wage increments as well as the significant investments we are making in the infrastructure expansion in Noida, Gurgaon, and the Philippines. We expect to be largely complete with several of our growth investments and integration expenses by the end of 2011.

In closing, we are extremely pleased with the momentum EXL continues to exhibit. We feel confident on delivering the same high quality of services to our clients, and we will aggressively invest in our people and infrastructure to serve our clients' needs.

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

(Operator Instructions) Our first question comes from Ashwin Shirvaikar from Citibank.

Hi. Congratulations, guys, on the excellent quarter and guidance. My first question is with regards to the pipeline. Rohit, if you could comment perhaps on the pipeline by sort of focus area if you will? What are you seeing there and what necessary domain-specific investments you might need to make going forward? Do you feel comfortable with the domain knowledge that's resident in the business today?

Sure, Ashwin. The pipeline for our prospects remains strong as we see good demand for our services across both outsourcing and transformation. Talking about specific industry verticals and domains that we operate in, the insurance industry vertical remains strong as clients are looking to reduce costs and improve quality and we are seeing particular strength in the need from some of the health insurance providers while looking to outsource for clinical services and we are very well-positioned to respond to that because we built up tremendous capability in that specific area.

We're also seeing a great deal of interest now emerging from the banking and financial services sector and this industry vertical as you know previously relied principally on setting up captive operations and they are now contemplating using a hybrid strategy that would continue to use those captive operations but they're also considering using third-party service providers such as EXL. In the first quarter we had announced a strategic win with a major banking line in the US and that is actually helping us gain traction in terms of reaching out to additional clients within the banking and financial services industry.

Third, we're seeing a tremendous of strength in analytics and across the board, clients are looking at decision analytics as one way of gaining competitive advantage in the marketplace. And again the kind of capabilities that EXL has built are particularly centered around industry specific solutions, particularly in insurance and banking and financial services.

Lastly, the acquisition that we just did with OPI has given us a tremendous boost in the marketplace and our pipeline for finance and accounting deals has increased quite significantly, both in terms of the cross sell opportunity within our existing customer base as well as new prospects that we wouldn't have tapped into otherwise. So, we're really encouraged by this acquisition and we think our ability to become a broader player of services in finance and accounting is going to become much more helpful to the Company.

The second part of that question was with regards to ongoing investments, specifically with regards to domain that you might need to make going forward in those areas.

Yes. We as a Company believe very strongly that the strategic focus of the Company has got to be to continue to invest in domain capability. As you know we are very sharply focused on a few industry verticals and domains and we continue to makes investments to bolster our position in the various verticals that we serve and the horizontal functional capabilities of finance and accounting that we've got.

We've invested quite heavily in the insurance industry vertical where we now have domain capability and subject matter experts in insurance and in healthcare. We have hired a number of specialized professionals for the healthcare industry that broadens our capability in this area as well as we continue to invest in developing actuarial talent to serve the needs of our clients in the insurance industry vertical.

We also are targeting to focus on developing a learning academy for finance and accounting and therefore go deeper into that practice along with our risk and financial management advisory practice that we already have in place so that we can bolster our expertise in finance and accounting. And these are areas where we will continue to invest and we continue to hire our subject matter experts, invest in training and development, invest in getting regulatory approvals, and continuing to specialize in these industry verticals and domains.

Just to follow-up, the investments are in your guidance, right? I mean the financial impact?

The guidance, Ashwin, includes all the investments that I've spoken about which includes the investment in infrastructure, includes the investments in the hiring of subject matter experts, includes the investments in the learning and development training programs that we have created internally, as well as the creation of internally developed technologies and tools that we can leverage in our industry verticals and domains.

Great. Fabulous quarter again. Thanks. Bye.

Thank you.

Thank you. Our next question comes from Joseph Foresi from Janney Montgomery Scott.

Nice quarter. My first question is just on the macro environment. I wonder if you could walk us through any changes you're seeing on either deal size, pricing, or decision making and what your assumptions are from a macro perspective for guidance?

Sure, Joe. From a macro environment, I think the demand environment continues to remain pretty strong and broad based. However, at the same time, the decision cycles for making a decision for outsourcing remain long and the decision for outsourcing remains an emotional decision. However, I think we benefit from the fact that the penetration rate in outsourcing and transformation continues to be low.

The acceptance of the value and the business impact that organizations like EXL are creating for its clients is becoming better accepted and better known. And as that visibility permeates through the client organizations, our ability to gain new clients and newer revenue streams becomes that much better.

We're also seeing another trend amongst our client base where they're thinking about carving out existing operations both onshore and offshore and I think that's something which the entire industry is witnessing as the clients look towards us for better process and operational expertise and domain expertise to manage the back end of their operations.

Okay. And then in guidance itself, maybe you could just give us sort of what assumptions you're making for organic growth, what assumptions are made on the revised guidance, what assumptions are made for the acquisition and then what your macro backdrop assumptions are?

Sure. In terms of our guidance, we had disclosed earlier that we expected to have revenues from OPI which would be somewhere between $50 million to $51 million. Our confidence level in that has increased. We also guided towards a longer-term objective of being able to sustain our organic growth rate of between 15% to 20% on an annual basis. And our current guidance fully reflects our ability to be towards the top end of that range in terms of organic growth rate for the Company.

I think as you know our business is a business which is fairly lumpy where when we do win a strategic client it can have an impact on our revenues for a particular quarter or a particular half and as such we don't focus on each quarter's revenue but rather focus on annual revenue growth and we are pretty consistent in terms of the growth that we're seeing and the forecasted guidance that we've provided to The Street.

On the macro front you're just assuming that the present status of the economy, right?

Yes. We are. Absolutely.

Thank you.

Thank you. Our next question is from [Kunal Tayal] from Bank of America-Merrill Lynch.

Hi. Thanks for taking my question. Firstly, I just want to understand that based on the three deal wins this quarter in addition to I think two deals you won last quarter, how does that place EXL in terms of achieving 15% to 20% organic revenue growth for next year?

Sure, Kunal. It is our expectation that in order to deliver 15% to 20% organic growth rate we should win three strategic clients in a year and some additional clients both in outsourcing and transformation which need not necessarily be strategic clients. So far we've announced that we've won one strategic client in the first quarter and we think we are very close to winning a second strategic deal over the next couple of weeks. And we are hopeful that we would get towards our goal of winning three strategic clients by the end of the year.

The other deals that we've announced as incremental clients are smaller deals and these smaller clients that we have won as customers basically takes some time over which they will expand their business with us and enable organic growth for the Company. So I would really focus in on the strategic deals alongside with broad based momentum with other transactions and other clients that we are requiring.

Sure. Thanks. Just one more from my end. I think in your initial remarks you did mention that there is some scope of increasing gross margins for the OPI part of the business. If you could help us understand the [quantum] you would look at in the short-term that would be useful.

Hi, Kunal. This is Vishal. In the short-term you know the ability to increase the gross margin would be limited as it would depend on when the client contracts are renewed -- coming up for renewal, what new business pricing we are able to implement. And so it would be a longer-term impact. In the short-term I think it will continue on the historical basis.

Right. And is the longer-term momentum more a function of increasing the offshore endeavors or relative based on better pricing, et cetera?

I think there are several levers we can adopt to improve the margins. It is better utilization of their overall utilization of their infrastructure, pricing for new deals, and for renewals, and also from the fact that we can improve their pricing with the combined capabilities where we can go to clients on the existing portfolio. So it will be a combination of these levers.

Sure. Thank you. Good quarter.

Thank you. Our next question is from David Koning from Baird.

Hi, guys. Great job. I'm just wondering -- it looks like with the momentum that's clearly building in the business that the second-half guidance basically assumes quarters very similar to Q2 the rest of the year other than the additional OPI revenue that comes on. So is it fair to basically say that within the rest of your guidance you're really not assuming much growth in the core business? And if you do continue to win new deals, there could be potential upside to that?

Yes. This is Rohit. Our 2011 guidance of $354 million to $358 million actually represents a year-over-year growth rate which is very sharp at 40% to 42%. We have had strong first-half organic growth rate of about 24%. And even if you back out the OPI acquisition and the onetime client revenue that we have got, our growth in the second half would again be quite significant over 2010.

Fundamentally, we think our business continues to expand quite nicely. And if we do have significant client wins in the second half of the year, typically that will result in revenue coming on stream in 2012 and not having immediate impact to our business.

Okay. Okay, great. Is it fair though to say that sequentially -- on the OPI acquisition it was $7 million this quarter. To hit your $50 million to $51 million for the year it should add about $15 million sequentially. In that case you'd be doing about $100 million the next two quarters which is basically just like what Q2 was. I guess the great thing in my mind is that the way you're guiding now is really not much sequential improvement the rest of the year but great year-over-year growth continuing.

Yes. I think the growth rate is great. I think we are very, very pleased with the acquisition and the combination with OPI. I think their business on a standalone basis has some momentum that we can accelerate for them and I think there's an opportunity for us to cross sell and to gain additional revenue. But as I said, most of that would kick in for our growth in 2012.

Okay, great. And then just two real quick, small ones. Appetite for acquisitions now that the cash has built a lot? And then the other one is that $2.2 million onetime revenue in Q2, did that come out of abnormally high margins or was that pretty much normal corporate margins?

The onetime client revenue that we had had no associated costs with it, and it was pure flow through. So it resulted in $2.2 million of revenue and direct pass through in terms of our margins. In terms of acquisitions, we continue to take a look at inorganic growth in our business and adding on specific capability to our business. We've got adequate cash balances and adequate ability to borrow and therefore our pipeline for doing acquisitions remains quite healthy and strong. However, we will look at smaller tuck-in deals that add in capability to the Company as we've always done. And we'll be very focused on the type of acquisitions that we do.

Great. Thank you.

Our next question is from Tien-Tsin Huang from JPMorgan.

Hi. This is Puneet sitting in for Tien-Tsin. It appears that activity in your insurance verticals remains high. Can you talk about the share shift you're seeing in the vertical and who you might be taking share away from?

Hi, Puneet. This is Rohit. In the insurance industry vertical, the activity is strong. Most of the work, as you know, that we get in terms of work being outsourced to us is actually work that is done in-house and therefore it's not so much about us gaining share from competition as it is about clients adopting outsourcing and off shoring much more aggressively and using EXL as their strategic partner for these services.

We are seeing greater activity in the banking and financial services industry vertical. And there, it is again work that is currently being done in-house by these companies. And they're looking for better operational control and management of their processes, and they're looking for better value associated with their back office operations.

Thanks. That's helpful. Second, can you share more details on this onetime client payment, like -- details such as who that client was, why there was this onetime payment? And was this included in your previous guidance?

I'm trying to be as helpful as I can. As you know our clients do not like their names to be disclosed. Therefore, we are restrained in terms of our agreements with our clients not to talk about specific client situations. The onetime client revenue and profit we received from this particular client was related to some milestone achievements associated with their business and it just materialized in the second quarter. It is something which was something that we would've expected to come through but we weren't sure as to when it might have come through. And we weren't certain about the timing of the [effort].

So, it was included in your fiscal '11 guidance, just that you were not sure -- ?

For the calendar year, yes.

Thanks.

Our next question is from David Grossman from Stifel Nicolaus.

Thanks. Good morning. Rohit, actually -- you obviously had a very strong June quarter result and it feels like the fundamental momentum in the business is quite good as well. So I guess getting back to a question that was asked earlier about the revenue guidance in the second half of the year, what kind of assumptions do you make that would underlie flattish revenues sequentially in both the third and the fourth quarter?

Hi, David. As I said before, we take a look at our business on an annual basis and the business is a business which is fairly lumpy and it can have an impact depending on when a strategic client begins to do work with us and we start to recognize revenue associated with those strategic clients.

In calendar year 2011, we had basically some strategic clients that we had signed up in 2010 who began the revenue with us in the early part of this year and therefore the increase in revenue took place in the first half of the year. And our full-year guidance of organic growth rate remains in our expectation range, which is 15% to 20% organic growth rate year on year.

Between quarter to quarter or first half to second half, there obviously can be different numbers associated with the growth rate. But if you back out the one time revenue that we received in the second quarter of the year, I think you'll see that our organic growth rate continues to be strong. And with the new strategic client wins that we've had this year, our momentum going into 2012 is also expected to be strong.

On the transformation side of the business, it seems to be lagging the growth of the BPO business. Is there timing elements, seasonal elements to that? Or is it a capacity issue? Or is there something else that may be impacting the relative growth rates of those two businesses?

Sure. The transformation business as you know is a project-based business. We had a growth spurts take place in our transformation business in 2010, where there was pent up discretionary demand for transformation services and that business expanded very significantly in 2010. We continue to see growth in that business across the service lines in 2011. However, we are converting more and more of our transformation work towards annuity based offshore business that can be a sustainable business for us in the long run.

As we convert our project-based work into annuity-based offshore work in analytics, the billing rates are of course much lower in terms of doing annuity-based offshore work. And therefore some of it is the cannibalization from a higher-priced project book getting converted into an offshore-based annuity work.

The one thing which you should notice about the transformation business is our headcount in that business is going up pretty significantly and, therefore, the volume of work that we are doing with our clients in transformation is actually increasing quite rapidly. Therefore, I think once this plays out towards a stable level of annuity based work, I think you'll see a greater growth rate in the transformation business line as well.

Great. Thanks. Just one other question, Rohit. In terms of capacity, I think you guys gave some metrics in terms of when capacity is coming on. So should we expect the incremental 1,300 seats come on by the end of the fiscal year, and similarly, the capacity additions in the Philippines would be on by the end of the year as well?

Hi, David. This is Vishal. The capacity related to the second phase will get completed by the end of this year, beginning of Q1 2012, and the utilization of that may begin after that. In terms of the capacity at Philippines, it's got the same timeframe. We expect the capacity expansion in Philippines to finish by December of this year and utilization to start in 2012.

Just to clarify, David, the expansion in the Philippines is in two parts. One is an increase of 300 seats to our existing facility which will take place in Q3 itself and the second is the build out of a second site in the Philippines. The second site is what Vishal is talking about which will be there by the beginning of next year.

Very good. Thank you.

Our next question is from Manish Hemrajani from Oppenheimer.

Good morning, Rohit and Vishal. Congrats on the results. Two questions from my end. What kind of top-line contribution should we expect from OPI in the September quarter? Is the contribution expected to be [pretty even] for the rest of the year?

Hi, Manish. Thanks for the comments. I think the OPI business, as we've shown and we've also shared the pro forma financials for the OPI business, which we filed along with our earnings report, basically we would expect them to remain at the current levels and, therefore, there to be a sequential growth year on year to that business.

We think we can have an effective growth rate which over the period of time will be in line with EXL's growth rate of 15% to 20% over the next couple of years. And therefore for calendar year 2011 our guidance for the OPI business was $50 million to $51 million of revenue in 2011.

Okay, got it. Also, are you accounting for any contribution from possible near-term strategic deal wins in your guidance?

We have factored in the revenue from the strategic wins that we had last year which got started off in the beginning of this year, as well as the revenue that will kick in from the strategic banking deal that we won in the first quarter of this year.

Got it. And can you provide us the geographic mix of OPI employees that came onboard?

We, Manish, do not provide the geographic mix but it's fair to say that most of the employee base is in India with the operation in Bulgaria contributing to a number of employees as well as they've got employees in the US as well servicing onshore clients. But largely the employee base is almost all in India.

Got it. Last one from my end, can you give us some color around the dip in [seat] utilization this quarter to the 1.13 level? We haven't seen that lower number over the past several years.

The utilization has gone down primarily because of the fact that the OPI acquisition had lower utilization. And as they came onboard, obviously, the total number has gone down but the EXL standalone utilization remains at a higher level. And our plan is to improve the utilization at the OPI. So, we should see some improvements in the utilization rate as we go forward.

Got it. Thanks and congrats again.

(Operator Instructions) Our next question is from Vincent Lin from Goldman Sachs.

Thanks. I just wanted to follow up on the transformation side of the business. I think typically we see some -- a bit of a stronger seasonality in the back half of this year. I'm just wondering if that's still the expectation or if there's anything we should factor in terms of the outlook for the second half? And also, Rohit, you mentioned that I think you're in the middle of the journey in terms of converting the higher priced project based work into annuity based but lower billing rate kind of work. I'm just wondering how far we -- in terms of into a journey and when should we expect the transition to be mostly completed? Thanks.

Sure, Vincent. For our transformation business line, in one particular area which is the risk and financial management practice, that tends to have the third quarter as its seasonal high quarter. But also the fourth quarter for the transformation business tends to be a weaker quarter because of the holidays and the lesser number of working days that are there, particularly towards Thanksgiving and the holidays. And therefore, when you take a look at the transformation business for the second half it basically evens out between a stronger third quarter and a less strong fourth quarter.

In terms of the conversion of the work from project-based higher building rate onshore to annuity-based offshore at lower billing rates, that is a continuous process for us because we are constantly looking at gaining new clients and doing incremental work with our clients onshore and then converting that into downstream annuity-based work that can be performed offshore.

It just so happened that in 2010 when the growth spurts took place in our transformation business, the amount of work we did onshore was significantly higher as a proportion of the total work. And therefore, in 2011 we are converting more of that work to offshore annuity-based work. Our expectation is that by the end of 2011 that this will return back to normal levels and we will continue to grow and build this business going forward in 2012.

Maybe just to follow up in terms of the two strategic deals that you and Vishal listed, are both of them clients who are looking to outsource for the first time or just outsource a specific functions for first time or are we talking about there's already an incumbent third party and then we are in the middle of kind of a new procurement situation here? Thanks.

Sure. Both these strategic wins are clients looking to outsource work that is currently being performed in-house and therefore it's not got a transition from an existing provider. However, whenever a client signs up a relationship, they may decide to expand that scope of work by giving some incremental pieces that might've been performed by other providers. But in large part it is work that is done in-house that these strategic prospects are looking to outsource.

Got it. That's very helpful. Thanks.

Our next question is from Joseph Vafi from Jefferies.

Hey, guys. Good results. Most everything's been asked but just a couple quick ones. Number one, I know it's a little early with OPI but if you could give us a feel for cross selling sales cycles versus a normal sales cycle, if you think they may be shorter on OPI cross sell? And then secondly on the existing business and growth there in the quarter, if you could give us a feel for a breakdown of growth between adding new processes versus more volumes on existing processes that you've been working on for awhile, just to get a feel for GDP growth and into your model versus actually bringing on new business? Thanks.

Sure. In terms of OPI and the cross sell opportunity that we have, we think that there's a tremendous opportunity for us to cross sell because the cross sell can actually work both ways where we can sell some of the EXL services of transformation into the OPI existing customer base, and we can also cross sell finance and accounting into the existing EXL customer base. And as you know, between our combined companies we now have close to about 200 clients and, therefore, the opportunity set for us is tremendous.

I think in terms of the sales cycle, the sales cycle is definitely shorter because the cross sell to an existing client doesn't require as much lead time as when you're trying to pitch to a new customer. However, the opportunity set for selling F&A is slightly smaller in size as compared to a traditional deal in outsourcing that might be much larger. Therefore, I think we'll have a higher number of clients to sell into, a shorter sales cycle, and perhaps a smaller piece of business to begin with which can grow over a period of time and therefore the nature of this cross sell is going to be quite different but the opportunity is tremendous.

In terms of our expansion and growth with existing customers, we are really seeing a balanced growth between existing processes, increase in volume, and new processes getting added on. There are a number of our clients where we've started pilots and we've started new processes for them. And based on the success of these processes, we expect to get additional incremental volume.

And there are other clients where we're starting absolutely brand new processes with them, and we hope to scale up and expand our relationship and expand the width of our relationship with these clients. So I would say it's pretty evenly split between the two.

Thank you.

I'm showing no further questions at this time. I'd like to turn the call back over to Rohit Kapoor for any closing remarks.

I just want to close by thanking everybody for joining the call. We look forward to hosting our third-quarter call in early November, and we also have our annual investor day at that point of time, and we look forward to seeing you then. Thank you so much.

Ladies and gentlemen, this does conclude your conference. You may all disconnect and have a wonderful day.