Exlservice Holdings Inc (EXLS) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EXL's fourth quarter earnings 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, Charlie Murphy, Head of Investor Relations.

Thank you, Operator. Greetings and thanks to everyone for joining our fourth quarter 2011 earnings announcement and 2012 guidance call. I'm Charlie Murphy and I recently joined EXL as Head of Investor Relations. While I have met some of you from my prior career as an equity analyst on the buy and sell side, I look forward to meeting and working closely with all of you in the coming days and months.

With 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 have had an opportunity to review the fourth quarter earnings press release we issued last evening after the market closed. We have also made available the updated investor fact sheet on the Investor Relations section of EXL's website.

Some of the matters we'll discuss in this call are forward-looking. Please keep in mind, 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.

Now I will turn the call over to Rohit.

Thank you, Charlie, and welcome to EXL. Welcome, everyone, to our fourth quarter earnings call.

The agenda for today's call is, first, I will review some of our successes and key investments from 2011; I will also provide thoughts on 2012, and what we are seeing in terms of the demand environment. I will then turn it over to Vishal for a more in-depth financial discussion of 2011 results and our 2012 guidance. Finally, we'll open it up to your questions.

I'm delighted to report that 2011 was a year of strong growth for EXL. We are excited to be at the forefront of growth in the rapidly expanding BPO industry. Our 43% year-over-year revenue growth was broad-based, and the result of new client wins, increased volumes with existing customers, and complementary acquisitions. Adjusted EPS rose 29% versus year-ago, fueled by robust revenue growth and strong G&A leverage.

In 2011, we continued to improve our capabilities in order to generate substantial business impact for our clients. We expanded our expertise in analytics, finance and accounting, and middle office processes, such as clinical services and legal support services. Through our acquisition of OPI, we greatly enhanced our portfolio of services in our core finance and accounting outsourcing practice. Following this acquisition, we created the Finance and Accounting Center of Excellence, which now houses our F&A, Outsourcing and Finance Transformation units. As Finance and Accounting is EXL's second largest domain, we are thrilled to have a powerful combined organization to serve as a meaningful partner for our clients across industry verticals.

We continued to win new business in 2011. We signed two strategic new client agreements, one in banking and one in insurance, including our first platform deal. These two deals represent robust growth opportunities in themselves, but will also serve as proof points for future prospects. We are focused on winning new platform deals which leverage EXL's proprietary assets, and our recent acquisition of Trumbull Services will help us in this mission. In total, we won 17 new client logos in 2011.

Meanwhile, we continued to produce differentiated value for our existing clients. This resulted in excellent client satisfaction scores across our domain, particularly in Outsourcing, our largest service offering. Existing clients provided the majority of EXL's organic growth in 2011 and will continue to do so in 2012. On this topic, I'm thrilled to announce that EXL has renewed and expanded its agreement with Centrica, one of our most significant strategic clients. This expanded agreement is a strong validation of the value clients see in EXL's business model.

We continued to shift our business mix from FTE-based models to transaction-based pricing, which now represents approximately one-third of Outsourcing revenues. Moving gradually to this model creates better alignment between client objectives and EXL's objectives. It provides greater incentive for EXL to exceed client expectations and deliver highly differentiated business impact. And over time, it can benefit our margins.

A key factor in EXL's current and future performance is our aggressive investment in people, and infrastructure. In 2011, we executed well on this front. We built a SEZ facility in Noida, India, with approximately 2,600 production seats, which is now complete. We opened our second outsourcing center in the Philippines, and see tremendous growth, both in this facility and our Clinical Center of Excellence, where we are performing complex functions by highly educated professionals in insurance and healthcare. We began managing multiple onshore centers in the US as a result of new client wins and acquisitions. These will help fuel new sales for EXL, as many RFPs specifically request onshore presence. In our Global Client Services scene, we made several important hires, particularly industry experts who enhance our domain expertise and can direct our associates to the highest potential areas of future business impact. We also initiated a systematic investment in marketing and brand building, and have hired a team to invest in this key lever for long-term growth.

Our employee attrition decreased to 27.8% for the fourth quarter of 2011, down from 35.5% in the fourth quarter of 2010, and from 30% in the third quarter of 2011. And in our annual survey of employee satisfaction, EXL finished in the 88th percentile of global IT and IT-enabled service companies. These two measures signal that EXL employees are excited, engaged, and making a difference in their daily pursuits. This, in turn, translates into delighted clients.

As I mentioned, we completed two acquisitions in 2011, OPI and Trumbull Services, and have integrated them into our operations. Both groups are seeing more robust demand prospects than prior to being part of the EXL family. We deployed close to $80 million of capital into accretive acquisitions in 2011, and our strong balance sheet provides us the fire power to do more this year.

Finally, 2011 was a year of strategic evolution for the Company. We completed an end-to-end alignment of our Client Services Organization, focusing our selling efforts along key industry and service domains. Our most satisfied clients understand that EXL is a best-of-breed provider in these domains. This new structure will refine our go-to-market strategy so that existing and future clients understand our specific capabilities better, and we provide value to their organizations even faster.

Now, looking ahead to 2012, as I survey the demand environment, I continue to see BPO enjoying increasing market acceptance. Despite global economic uncertainty, companies remain hungry for domain experts who can demonstrate differentiated business impact to their [funds]. EXL delivers this business impact through rigorously-tested business process strategies for accelerating revenue growth, as well as proven capacity for optimizing client cost. 2012 year-to-date, we have already won several new client logos. Consistent with many industry analyst predictions, we are seeing an increasing amount of prospects, starting out with smaller deals.

In order to capture this demand, we will maintain our focus on our five core industry domains, as well as finance and accounting. But in addition, we are rapidly building our proficiency in healthcare, and we consider this to be a particularly interesting future field for growth. We have started to see deal flow from our marketing efforts, but we are proceeding cautiously on these deals, in order to ensure precise scope on both our side and the client's side, adequate pricing, and the development of a strong base of trust necessary to form a lasting multi-year strategic relationship.

In 2012, we anticipate making more acquisitions. We think our ability to integrate and grow acquisitions is an important competitive advantage for the Company. We continue to look primarily for platforms, technology, and intellectual property assets to facilitate our considerable processing volume and to differentiate our industry and delivery expertise. We maintain significant balance sheet and financial capacity, and will continue to execute deals that make sense and boost shareholder value.

Finally, we will continue to invest aggressively in people and infrastructure. In 2012, we will build new centers in Special Economic Zones in Pune and Cochin, which we expect to scale up quickly. We anticipate hiring more front-end industry experts to win new business, enhance existing relationships, and further improve the value of our associate's work product.

And finally, we will again invest strongly in learning and training for our people. Just this month, we opened the EXL Center for Talent in Noida, the Company's first facility exclusively dedicated to recruitment, capability enhancement, and talent development. With this launch, EXL has taken a giant step in strengthening the intellectual capital of the Organization. In a world where knowledge is a key differentiator, I feel that there could not have been a better time for setting up an infrastructure dedicated to attracting the best talent, enhancing knowledge, and developing leaders.

In sum, 2011 was a great year of advances for EXL, and we are looking forward to another year of strong growth in 2012. I would like to thank the entire EXL team for a job well done. Their dedication and hard work makes EXL stand out in the marketplace.

I will now turn over the call to Vishal.

Thanks, Rohit. And thanks to everyone for joining us today.

EXL results for 2011 mark another year of strong performance. Our full year revenues were $360.5 million, up 42.6% year-over-year. We exceeded the top end of our guidance range of $354 million to $358 million due to a combination of budget flush and transformation in Q4, some project work from our recent acquisitions, as well as higher volumes and ramps from -- with some of our existing clients in Q4. I would like to reiterate that we have significantly reduced our client concentration risk this year. Our top three clients comprised of 27% of revenues in fourth quarter of 2011, down from 41% in fourth quarter of 2010.

Outsourcing revenues grew by over 53% in 2011 to $294.4 million, of which organic revenue growth was over 20%. In 2011, we migrated approximately 150 new processes, including 30 processes migrated in the fourth quarter.

Our Transformation business grew 9% in 2011 to $66.2 million. The underlying volume growth in Transformation during this period was significantly higher than the growth in revenues. However, since most of this volume growth was in offshore energy (inaudible ) Business, we did not see the revenues grow at the same rate. We view this shift in our revenue mix positively, as the increasing volume of offshore energy contracts sets up for our margin improvement in the future years. The growth in our Transformation Business in 2011 was primarily driven by our Decision Analytics and Operation and Process Excellent Practices, which continued to expand across new and existing clients.

The combined revenues from these two businesses grew at over 24% on an organic basis. The Decision Analytics Business continues to experience high demand, as clients increasingly recognize the strong business impact such engagements can produce. We recently created a dedicated field team of three senior professionals to capitalize on this a month. As you are aware, Q1 is a slow quarter for our Transformation Business, so as in the past year, we expect to see growth in this Business for the second half of the year.

From a service delivery location perspective, I would like to highlight key developments of 2011 in our Business. Number one, we significantly enhanced our presence in Philippines. Philippines revenues grew over 49% in 2011, and we expect the growth momentum to continue in 2012. As you know, we have inaugurated a second center in Philippines with a capacity of approximately 500 seats. We significantly increased our capacity in Noida SEZ by adding an incremental capacity of approximately 1,400 seats in the Phase II, which got completed in December 2011, thereby taking the total production seats to approximately 2,600. We are also adding additional capacity of approximately 500 seats in a new center in Pune SEZ, and expanding our existing SEZ center in Cochin by over 200 seats in 2012. In 2011, we developed delivery capabilities in five US on-shore operation centers, for a combination of acquisitions and strategic client wins. On-shore US business revenues have grown to 7% in 2011.

In the fourth quarter of 2011, we grew revenues by 47% year-over-year, to $102.8 million. This growth was a combination of organic revenue growth and our acquisitions. On a sequential basis, we grew revenues by approximately 3%, despite a headwind from foreign exchange. Outsourcing revenues for the quarter grew 60% year-over-year, while Transformation revenues rose 3% year-over-year.

Gross margin for 2011 was 39%, down 110 basis points versus last year. As we have stated earlier, this was primarily due to the seven month impact of the lower margin profile of the OPI business, and partially offset by the depreciation of the Indian rupees versus the US dollar. In 2012, the full-year impact of OPI business and our investment in our platform [built] deal will negatively impact our gross margins. D&A costs as a percentage of revenue fell 188 basis points year-over-year to 14.1%, primarily due to the lower G&A spend on the OPI business.

Since 2009 we have generated over 260 basis points of operating leverage. As stated by us earlier, we will continue to invest a significant portion of these gains into our sales and marketing function and other strategic investments. Our sales and marketing expense for 2011 was $25.6 million, up 36% year-over-year, but down 40 basis points as a percentage of revenue. This is primarily because of our new acquired companies were underinvested in this area.

For the last 18 months, we have significantly enhanced the quality of our front-end team, and through 2012, we will continue to strengthen this team with the subject matter experts from our industry focus -- industry domain. We currently have 64 experienced professionals in our front-end team and we plan to expand this team over 2012.

Adjusted EBITDA for 2011 was $73.8 million or 20.5% of all revenues, up 45% year-over-year. We generated $56.3 million cash from operations in 2011, and spent close to $100 million on accretive acquisitions and capital expenditures. Our balance sheet remains strong, with over $90 million of cash and short-term investments as of December 31, and with no debt. DSOs as the end of 2011 were 49 days, down from 57 days at the end of last year, driven by continuous improvement in selections management.

In 2011, our capital expenditure was approximately $20 million. For 2012, we expect capital expenditure of between $25 million to $30 million, which we plan to use towards further expansion of our delivery centers and other business enablement projects.

Our adjusted operating margins improved 60 basis points year-over-year to 15.3%, aided by a one-time planned revenue of $2.2 million, operating leverage gain, and the depreciation of the Indian rupee during this period. And it was offset by lower margin profile of OPI business and the capacity expansion in Noida SEZ. Tax expense for 2011 was $11.9 million or 25.4% of pre-tax income, in line with our expectation against a tax rate of 17.1% in 2010. Driving the higher tax rate was the expiry of STPI holidays in delivery centers in Gurgaon and Pune, and the higher tax rate on onshore US income, which was offset by a growth in tax-advantaged delivery locations in Philippines and India SEZ. For 2012, we expect our tax rate to be in the mid-20%s, as we will continue to expand in SEZ facilities in India and Philippines.

Ledger income in 2011 was $34.8 million, compared to $26.6 million in 2010, a growth of 31%. Despite the higher tax rate in 2011, the diluted EPS for the year increased 25% to $1.10 and adjusted EPS for the year increased 29% to $1.39 compared to $1.08 in 2010.

Turning to 2012, based on current visibility and exchange rates -- in 2012, we are projecting revenues of $445 million to $455 million, a year-over-year growth of 24% to 27%, excluding the one-time planned payment $2.2 million we received in 2011. Implicit in our guidance is a combination of additional months of revenues from our acquisition in 2011 and a steady organic growth. Typically, Q1 is our softest quarter, and as such we expect the growth to be weighted towards the back half of 2012.

In terms of EXL's profitability, we are shifting from guiding on our adjusted operating margin to adjusted earnings per share. Our rationale for this change is as follows -- as EXL scales up in size, we believe that the adjusted EPS is a better metric to guide the investment community, as it is the metric on which we should be valued as a Company. Number two, adjusted EPS is a foreign exchange-neutral metric, as any movement in the exchange rate is offset by a corresponding gain or loss from our hedging program. Number three, our ability to forecast our full-year taxes has matured, and as such, adjusted EPS will create more transparency, as it removes any volatility associated with the above factors.

For 2012, we see EXL achieving an adjusted earnings per share of $1.50 to $1.55. I would like to provide some incremental detail on our 2012 expectations to provide adequate transparency. Number one, for 2012, investors should include an additional 1 million shares to the share count due to our equity offering this past September. Number two, at current foreign exchange rates, we expect approximately $0.5 million gain on foreign exchange hedges in 2012. Number three, guidance assumes stock comp expense of approximately $11 million and amortization of intangibles of approximately $6 million in 2012.

In conclusion, 2011 was another year of strong growth and execution for EXL. We delivered another year of profitable growth backed by multiple planned wins, scope expansion at existing clients, and complementary acquisitions; and we look forward to a continued growth and strong performance in 2012.

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

(Operator Instructions) And first in line we have Edward Caso with Wells Fargo.

Hi, thanks for taking my question. We were at the IAOP outsourcing conference last week and though there was a lot of chatter about outcome-based pricing models, when you talk to the buyers offline, they still feel much more comfortable with FTE models. It sounded like you were having more traction. Are you doing something different here to get an uptick in your outcome-based pricing?

Hello Ed, this is Rohit. I think what we are seeing more traction on is transaction-based pricing, and not really so much of outcome-based pricing. I think outcome-based pricing for our industry and the kind of work that we do for our clients is something which is difficult to monitor and measure and to contractually agree to between our clients and ourselves. And therefore, I think there is very little of fixed price or outcome-based pricing that we end up doing with our clients or our clients end up asking for us. The transaction-based pricing, however, is something that gives our clients much more flexibility in their cost structure and it variablizes their cost structure completely and from our perspective, it allows us to, across a diversified base of clients, allows us to focus in on productibility improvements, so that we can improve on margin profile. So at the end of the day, the transaction-based pricing works well for our clients and for us and that is what we are focusing in on.

My second question is on analytics, big data. Just trying to understand where you are positioned in this opportunity, and also maybe the sensitivity to discretionary spending, which we understand got off to a slower start this year? Thank you.

Sure, Ed. I think analytics and big data remains a very, very attractive market environment for us and I think EXL is positioned really well to capitalize on that opportunity. We have built-up significant capability both onshore and offshore, in terms of being able to do work in analytics across multiple platforms, across multiple different types of processes, and in multiple domains and we continue to build up our capability in this area. Our growth rate in analytics and big data continues to be above the Company average and we think that this is going to be a strong area of growth for the Company. What we are focused on is developing annuity-based contracts in analytics, handled principally from offshore locations, so that this business model remains a sustainable and a valuable business model for us, as well as for our clients.

Thank you.

Our next question comes from the line of Joseph Foresi with Janney Montgomery.

Hello. My first question here is on the demand environment, Rohit, how would you compare the environment heading into 2012 versus 2011? And why are deal sizes getting smaller, and how do you handle that?

Sure. Joe, I think from our perspective the demand environment continues to remain very strong. We have seen, in fact, a slight uptick in demand and the pipeline that we have has actually picked up a little bit in the first quarter of 2012. We think that companies now understand the leverage that they get -- of the strategic benefit that they get by outsourcing, and therefore they are engaging in this business model quite actively. However, at the same time, I think this business is a business that has an impact to the employee base of our clients. And therefore, they would like to move forward in a slow and deliberate manner, which pushes the size of the deals to -- starting out with smaller deal sizes and then growing over a period of time. If you take a look at the kind of companies that we are signing up, we are signing up some very large companies, which oftentimes will start out with small pilots and engagements and gradually ramp up their business with us, as they gain more confidence with us, and, at the same time, creating minimum disruption at their end from an employee standpoint.

Okay and then, if you could, is there a way to separate out in the guidance what your growth expectations are for OPI, and for the organic growth?

Joe, so, actually that's become quite difficult for us because we have combined the OPI business along with EXL's business and added on also our finance transformation business to it and that's become a combined Finance and Accounting Center of Excellence. So it becomes very difficult for us to track the OPI growth rate and we won't be able to report that out. What we will be looking at is how this business develops for us on a combined base.

Okay, so let me ask a different one then. Maybe you could give us your thoughts on what you think the long-term margin profile for the business is? You know the BPO, and the consolidated side?

You are talking about our entire business or the OPI business?

The entire business.

Yes, so I think the margin profile of our business is now becoming more and more stable. And I think it's a business where we think long-term, we should be able to drive gross margins in the 40% range. And we should be able to have adjusted operating margins, which are in the mid to high teens. We continue to think that the margin profile of our business is becoming much, much more visible to us, as well as to many of the other players that are looking at this industry. And I think it continues to remain attractive.

Thank you.

Our next question comes from the line of David Koning with Robert W. Baird.

Hello guys, this is actually Nathan Novak on the line for Dave. Along the lines of your strategic pipeline, could you give any color on what's in that, how long you are in discussions? And in similar, with the discussion on smaller deal sizes, you've previously mentioned that the strategic deals may have to be two or three wins a year to keep with organic growth expectations. Is that now going to have to be maybe three, four, five, with these smaller deals? Or any color you could provide on that would be great.

Sure. On the strategic prospect pipeline, at the end of the last quarter, we had announced that we have two strategic prospects in the pipeline. Our current position is that strategic prospect pipeline of qualified strategic prospects has expanded to three. We currently have one strategic client, which is actually beginning to do a small pilot with us, and we will see how that gains traction and we do think that that decision will get made sometime this year. So our strategic prospects have expanded to three prospects at this stage. I think from a growth perspective, we will continue to focus in on bringing in new clients. Some of these may be large-name companies, which could be strategic, but may choose to start out with smaller deal sizes with us, and then, over a period of time, we would grow these accounts and relationships. At the end of the day, EXL today has close to about more than 180 customer relationships and we think our ability to grow our business with these clients, as well as to cross-sell new services to these clients is tremendous. And therefore, we'd get a fair amount of business growth coming in from this existing client base as well.

Got you. And more just a follow-up, housekeeping-type question. I know you can't specifically break out OPI revenues implied in 2012 guidance, but you expect to make additional acquisitions as they come available through 2012. You are not assuming any of that revenue, other than OPI, into 2012 guidance, correct?

That's correct. For 2012 guidance we are not assuming any revenue from acquisitions that we have not yet announced.

Awesome. Thanks a lot.

Our next question comes from the line of Bhavan Suri with William Blair & Company

Hello. It is actually Rahul Bhangare in for Bhavan. Just a quick question on the competitive fronts, particularly in the insurance vertical, has anything changed there? Are you going up against any particular players more often, over the last quarter or so?

Rahul, I think on the insurance industry vertical, one of the things that's changed for us is that we have acquired two new platforms -- the EXL LifePRO as well as with Trumbull. And when we pitch for a platform-based deal, the set of competitors is quite different as compared to the set of competitors that we have for the outsourcing business. And for the platform-based deals, I think the competition really ends up being other companies that have similar platforms, and which can provide that capability set to clients. Other than that, nothing else has changed as such.

Okay, and then you mentioned that the volumes in the transformation business were far higher than were reflected in the revenue growth. Can you give us a sense of the actual growth in volumes in that transformation business?

I guess, we don't break out the volume growth very explicitly, and we are unable to provide that data to you. I will say this, that the 9% growth rate of the transformation business does under-represent the volume growth that's taken place and the strength of that business that we are seeing. And we expect to see more growth in that business coming in 2012.

Great. That is all for me. Thank you.

Our next question comes from the line of Manish Hemrajani with Oppenheimer.

Hello. Thanks for taking my call. Good job, guys. If you look at your guidance for 2012, what kind of organic growth are you factoring in?

Thanks, Manish. I think if you look at our guidance for 2012, at the midpoint of our guidance range for revenue, it would imply an organic growth rate of approximately 15%.

Okay. Got it. And then, at NASSCOM a couple of weeks ago there was a lot of talk about opportunity in healthcare for BPOs, and you mentioned, you alluded to that a little bit at the beginning of the call. Can you talk about what kind of opportunities are you seeing in healthcare? And if there is any benefit that you are seeing from the transition from ICD-9 to ICD-10?

Yes, we are seeing a very active pipeline and a fair amount of activity taking place in the healthcare industry vertical, both on the payer side as well as on the provider side. I think with all the changes that are being brought about by Obamacare, companies are looking at ways in which they can manage their cost structure in a much more optimal and efficient fashion and as they think about reworking their business models, the opportunity for companies like EXL to partner with them becomes really strong. We are fortunate that we have signed up a couple of healthcare providers on the payer side where we have got very meaningful relationships with them and that gives us a strong base to build up our revenue in this particular area.

Got it. Thanks, that is all for me.

Our next question comes from the line of Tien-Tsin Huang with JP Morgan.

Thanks. It's Tien-Tsin. Good quarter here in outlook. I just wanted to ask a couple of questions. On the renewal with Centrica, any surprise there in terms of price or I guess, terms that might impact our model [a la Sequel]?

Hello, Tien-Tsin. On Centrica, this is our second renewal that is taking place on the contract.

Right.

And as such, I think we've gotten into a very good understanding between Centrica and EXL and we renewed this contract -- very, I would say, very comfortably on both sides and there wasn't any real changes for the terms that took place. I think it was much more about aligning and making sure that the alignment in a few areas was towards the same objective that Centrica wants to pursue as well as to focus in on some expanded services that Centrica would like to engage with us on.

Okay. Okay, good. And then you talked about attrition obviously being down. I'm curious if it is sustainable? I mean, obviously the employee statistics sound good but I'm curious if we could actually see that trend higher or do you expect it to stay low, Rohit?

Well there are two or three things that are happening on the employee attrition side. Number one is in India, the growth rate in India itself is slowing down.

Right.

And therefore that basically is creating less of a demand on the labor market in India and I think that is an improving fundamental dynamic for us. But more specifically for EXL itself, I think our investment in learning and development, our investment in building up strong people practices, and being focused on the well-being and career development of our employees is resulting in a much better brand image of EXL as becoming an employer of choice in the marketplace. And I think that's also contributing to a lower attrition rate. And I would foresee that as long as the economic environment remains the same, that we would continue to have stable attrition rates and hopefully sub 30% attrition rates in 2012.

Good. No, that would be great. That would be great. If I can sneak in one more and I'll jump off. The margin progression for the year, first half versus second half, anything unusual we should be aware of? Especially with some of the conversions that might be coming on? Thank you.

Hello, Tien-Tsin. This is Vishal.

Hello, Vishal.

On the margin side, I think because there is so much of play, because where the effect stands up, I think we are, we are not giving any guidance on the margin. Though in terms of the margin profile, I think as the volume ramp up in the second half, as I mentioned, the margin profile should improve in the second half.

Okay. So weighted more towards the second half? Okay.

I would just add that as is normal with our business, the second quarter ends up being a lower margin because of the salary increments that we give out in the second quarter. And that's something you should factor into your model.

Very good. Thank you.

Our next question comes from the line of David Grossman with Stifel Nicolaus.

Thank you. Rohit, could you talk a little bit more about Centrica and the expansion of scope and whether or not we should expect the growth profile of that customer to change at all as a result of the new agreement?

Sure, David. For us, the Centrica renewal was an important step in terms of the Company's relationship with Centrica as a client. I think there are a number of different areas which we had not yet serviced Centrica in, and Centrica is now looking at some of the additional areas where they could leverage our capabilities and strengthen. So we do expect a slight increase in the revenue that we get from Centrica. And so we'd expect that to expand.

Okay, and then secondly, on the margin side, I think I understand your reluctance to provide a look at that, because of the fluctuations in currency. That said, if I look at it on a constant currency basis, it looks like the margin guidance is, in fact, down year-over-year, even after you exclude the two one-time items that would have impacted the margins in 2011. So number one, am I looking at it the right way and if so, what would be the factors that would lead to a year-over-year decline on a constant currency basis excluding those items?

Yes. David, hello, this is Vishal. Just to give a bit of color on the margin, I would say that the margin for 2012 is marginally down, and though there is a tail wind from our operating leverage and the foreign exchange, as you mentioned, but it is also offset by the one-timers we had in 2011, as you alluded, plus the OPI full 12 month impact in 2012 and the investment we are making in our platform BPO deal would make that margin slightly lower in 2012.

Okay, I'm sorry. What was -- I didn't catch the last thing of the investment in which platform?

It's the platform deal we won, which we announced last quarter.

Right.

That has an initial investment into building up that, and during the transition of the work from the client to our platform.

I see. And then, just one thing you didn't mention, Vishal, was the tax rate assumption that you are making for 2012. Could you share that with us?

Yes. The tax rate assumptions, as I mentioned on my script, it will remain in the mid-20%s, in line with where we ended up in 2011.

Okay, great.

In that range.

All right. Thank you very much.

Our next question comes from Ashwin Shirvaikar with Citi. Ashwin, your line is open.

Hello, good quarter, guys, and very good guidance here. So my question is, are you at a scale yet where setting up new centers should really not affect short-term margins materially? Can you comment on that?

Thanks, Ashwin. I think you are right. As we scale up the volatility of the impact to our margins, based on the capacity increases that take place, should come down. And I think that that is particularly true if we are setting up smaller size centers, which have typically a seat capacity of about 500 seats. However, if we do invest in a large-sized, campus-type infrastructure like we did in 2011, where we expanded 2,600 seats in a single center, that certainly still will have an impact. But smaller sized centers of 500 seats or so will not really have much volatility with our margin profile.

And Rohit, just to add, the large center, the impact would also be marginally lower than it would have been when we were smaller scale. So--

Okay. That makes sense. So what I am really trying to get to is, what are the margin variability factors on a shorter term basis? You know, if there isn't that much margin variability from the delivery side, is it really finding large platform deals that can give us variability, that and currency, basically. Can you lay that out?

Sure. I think there are a couple of factors. Number one is if we were to sign up large platform-based deals or structured deals that require upfront investments, that can still have a material impact to our margin profile. Number two is the transformation business. While we have converted a significant portion of that into annuity-based format, if there is a pull back or increase in the transformation business in any quarter, that can have an impact on our margin profile. And I think from a currency standpoint, we've been able to protect ourselves adequately, both through the structuring of the contracts, as well as through our hedging program, whereby the volatility in the foreign exchange rates doesn't really have a significant impact on the margin profile of the Company.

Okay, so it sounds like you are becoming more and more of a stable growth company, compared to before?

I would certainly hope so.

Okay. Thank you, guys.

Our next question comes from the line of Kunal Tayal with Bank of America Merrill Lynch.

Hello, thanks. Firstly, Rohit, you mentioned the deal pipeline has seen an uptick in the starting months of 2012. So if you could tell us what verticals have these been in? And more specifically are there any changes in terms of your growth expectations from the banking vertical?

Sure. Kunal, for us the deal pipeline has actually picked up across industry verticals. We do see strength in healthcare, in insurance, and we are also seeing a lot of strength in terms of prospects in the banking vertical for analytics. So those are areas where I think there is a much greater sense of opportunity for us. I think we are also hopeful that we'll see greater amount of deal prospects coming in from continental Europe and that is an area that we'd like of kind of push forward and invest in. Because our share of revenue in that area continues to be small and we'd like to diversify and build out our deal pipeline in that region.

Right, and what would you have built in, in terms of your expectations for growth in transformation services. Would that be higher than the 15% number you mentioned as your organic growth for 2012?

We don't really break out the growth rate of the different business segments. But in general, our growth rate should be similar to the Company average.

Got it. Thank you.

Our next question comes from Jason Kupferberg with Jefferies.

Hello, this is Amit Singh for Jason Kupferberg. I actually wanted to dig a little bit more on the sales and marketing efforts. You mentioned that into 2012, you would be significantly expanding the efforts in that area. Could you give a little bit more details on that? And also if you could provide some -- what type of dollar impact we should see as compared to expenses this year?

Sure. Amit, for us, we continue to believe that at this stage of our growth cycle of the Company, we should continue to invest in the front end capability of the Company. And as such, we target a spend of close to 7.5% of revenues on sales and marketing and the front end. For us, the areas that we want to continue to invest in is in acquiring sales professionals, as well as account management teams. We've just -- as we have announced -- made a significant investment in marketing, and creating greater brand awareness, as well as reaching out in a much more stronger fashion to the advisory community. And I think each one of these investments, hopefully, would have a payoff. However, the results of this will only come after a period of time, given the long sales cycle in our business.

Okay. And just on the macro front, I know that you said you are actually seeing the demand environment to be pretty stable. But the general macro volatility stays and generally even the macro environment is volatile. The BPO sales cycles tend to elongate a little. Are you seeing any of that?

Yes. We have seen a few situations where the decision cycles have actually gotten extended and the decision making has gotten pushed back. And I think that continues to be an area of concern, if prospects decide to push back their decision making. I think existing clients tend to make quicker decisions because they've got a strong experience set, as well as their ability to transition work doesn't create that much of a dislocation in their own operating environment.

Okay. Great, and then just one last question on the diversification of the client base. You've obviously done very well in reducing the revenue dependence from the top two clients. Do you have any goals or targets in that regard? Acquiring new clients and reducing your dependence from your top clients?

Well, we'd love to be able to grow our top clients, as well, and continue to reduce our dependence on them simultaneously. We don't have any fixed metrics or goals, but directionally, we are going to continue to push forward to diversify our client base while growing all of our clients at the same time.

All right. Thank you very much.

Our next question comes from the line of Vincent Colicchio with Noble Financial.

Yes. Are there any other large contracts up for renewal in the near future?

In terms of large contracts that are up for renewal, there is nothing which is significantly bunched up, there in 2012. I think we do have some staggered contracts that are up for renewal that happen throughout the year. So there is nothing that is out of cycle or nothing that would bunch up these contracts into a particular calendar year or a quarter.

Okay, and then, Vishal, what was capital spending and cash from operations in the quarter? I apologize if I missed that.

So capital expenditure in 2011 was approximately $20 million. And in 2012 we expect that to be in the range of $25 million to $30 million.

And then cash from operations?

Cash from operations for the year of 2011 was about $56 million.

Okay. My other questions were answered, thanks guys.

Our next question comes from the line of Vincent Lin with Goldman Sachs.

Great. Thanks. Given all the factors you talk about that you just renewed with Centrica, seeing a slight uptick in terms of pipeline, and the recent strategic client win, is it fair to characterize that your revenue visibility for, in terms of a 2012 target versus say a year ago, is slightly higher?

Hello, Vincent. I would say that the revenue visibility is about the same as it's been in the previous years. For us, the guidance that we've given of $445 million to $455 million is our best estimate of what the eventual revenue will end up being. We think the midpoint of that range is dead center, of where we see our revenues coming out to be at.

Good. That makes sense. And then, Rohit, I think you made a comment about competition and the profile of the competition being a little bit different in the slap-on based deals versus the traditional, the area that you guys compete in. Could you provide a little bit more color in terms of a competitive profile?

Sure. So number one, we continue to see a greater amount of competitive activity from the IT services companies, which continue to invest in the BPO industry to make inroads in our vertical and continue to offer the value proposition of combining IT and BPO services. On the platform-based deals that we are pitching for, there are a number of larger companies which own platforms, as well as independent platform companies which have platform offerings. And therefore these are niche companies which we would end up competing against. So the competitive profile ends up being either some very large companies which own platforms or niche companies that have platforms, and that is the competition profile there.

Got it. And then lastly, for Vishal, I think last quarter, your assumption was that on a sequential basis fourth quarter margin will be slightly down relative to third quarter. I think the actual result actually turned out to be a little bit higher. Can you just remind us what were the factors that contributed to the margin outperformance relative to your original expectations?

Yes, Vincent. I think there were two reasons. One, I think when we give our guidance, the rupee was at $49. Whereas the actual average rate for the quarter ended up close to $51.40. That gave us a big boost in our margins and particularly, we also got a few small other incomes like we had negative goodwill associated with our Trumbull acquisition of about $0.5 million. Plus, some gains on the FX line on our balance sheet hedging, which boosted our margin profile.

Great. Thanks.

And these were one-timers in Q4.

Thank you.

And at this time, I would turn it back over to Rohit Kapoor for closing remarks.

I just want to thank everybody for joining our fourth quarter earnings call. As we've stated, I think the Company continues to progress nicely and is positioned very well to take advantage of the opportunity in the marketplace. We look forward to a strong 2012, and continuing to execute on our business plans. We look forward to seeing you on our next earnings call, which will be for the first quarter of 2012 results. Thank you all for attending.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.