Exlservice Holdings Inc (EXLS) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the EXL Q1 2012 Earnings 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 turn the conference over to your host, Mr. Charlie Murphy. You may begin.

Thank you, operator. Welcome and thanks to everyone for joining our first quarter 2012 earnings call. I'm Charlie Murphy, head of investor relations. With us today in New York are Rohit Kapoor, our Vice Chairman and Chief Executive Officer, and Vishal Chhibbar, our Chief Financial Officer.

We hope you've had an opportunity to review the first quarter earnings press release we issued last evening after the market closed. We've 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 that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include, but are not limited to, general economic conditions, those factors set forth in today's press release, discussed in the Company's periodic reports and other documents filed with the Securities and Exchange Commission from time to time.

EXL assumes no obligations to update the information presented on this conference call. During the 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, everyone, to our first quarter earnings call. The agenda for today's call is as follows. I will begin by discussing first quarter performance and comment on the demand environment. Then, I will review some key recent addition to EXL's management team and discuss our expectations for 2012.

After that, I will turn it to Vishal for a more in-depth review of first quarter financials and our guidance. And finally, we'll open it up to your questions.

In the first quarter, EXL reported revenue of $104.6 million up 43% year-over-year and in line with our expectations. Year-over-year growth was driven both by acquisitions and organic growth. A major portion of our sequential revenue growth came from strategic outsourcing clients. Expanding relationships with our existing strategic clients remains one of our most important growth drivers.

We see robust opportunity to magnify many of our strategic relationships to multiples of their current size. While our outsourcing business was in line with our projections and showed strong growth, our transformation business performed slightly below our expectations. In transformation, start dates for a few key projects were pushed back. This led to lower revenue, utilization and gross margin versus the fourth quarter.

In addition, during the quarter, we were hiring for several new projects which begin later this year. As many of you are aware, the transformation business has a relatively high degree of fixed costs as our most critical assets here are our industry-focused professionals. When there is a temporary pause between project engagements, this business sees negative operating leverage in the short-term. However, when utilization picks back up, the business should show strong margin expansion.

I am very optimistic we will see clear improvement in both revenue and gross margin in transformation over the course of the year. My optimism is driven by substantial new client additions year-to-date and a robust new deal pipeline especially for decision analytics.

In the first quarter, we signed five new transformation clients including four in decision analytics. This represents the largest number of new transformation client's wins in any quarter for nearly two years. In April, we additionally saw three incremental impressive contract wins in decision analytics.

Now, turning to the demand environment, we are encouraged to see a growing pipeline of opportunities in the marketplace, again, characterized by an increasing number of small deals. Our strategic deal pipeline remains at three prospects and we expect to reach decisions on all of these over the next couple of quarters.

The sales cycle for such deal remains extended, but they represent exceptional growth opportunities for EXL. We also anticipate adding more strategic deal prospects to the pipeline this year.

The increasing attractiveness of the BPO market is drawing the attention of large services companies. Competition for new deals and renewals is more aggressive than a year ago. Pricing is competitive, but we remain disciplined in our approach and have not diluted our focus on profitability.

Although pricing remains an important criteria that clients are using to determine their preferred service provider, clients are increasingly engaging in discussions about how we can improve their processes and deliver sustained business impact and long-term financial value. We believe that our domain focus approach to capability building and transformational skills have positioned us strongly to leverage on this strength.

It is important to mention the aggressive investment we are making in our people. We believe a key factor in maintaining EXL as an industry leader is hiring, developing and rewarding outstanding professionals.

In April, we implemented average annual wage increments to our employees in the high single digits. EXL's high employee satisfaction, low attrition and rising enrollment in our domain training programs are three indicators illustrating how we are developing and rewarding current and future leaders in our industry.

We are investing heavily in our Philippine operations and continue to be excited about the growth opportunity there. Our second center in Manila, which we opened last quarter, is now running at nearly 50% occupancy and we expect it to be at full occupancy by the end of the year.

Recently, we added two new vice presidents in operations in Manila and our clinical center received accreditation from URAC. This accreditation clearly distinguishes the quality of our medical review and clinical service offerings which are among our fastest growing business lines.

Turning to EXL Management, we have recently added two outstanding leaders to our executive committee. I am thrilled to welcome Doney Largey as our new head of our finance and accounting center of excellence and Mohan A.V.K. as our new global head of human resources. Both Doney and Mohan will play critical roles in helping EXL take full advantage of the exciting growth opportunity before us.

In addition, in April, the board appointed Chief Operating Officer, Pavan Bagai, and Executive Vice President of Global Client Services, Bill Bloom, the additional title of president. Pavan and Bill have been pivotal in designing and implementing EXL strategy for years now. I'm proud to have them on the team and congratulate them on this appointment.

Finally, looking out to the balance of 2012, the dollar-rupee exchange rate environment is quite volatile and may affect our revenues this year either positively or negatively. Because we have chosen a strategy of sharing foreign exchange risk with some of our customers, EXL's clients benefit over time when the rupee depreciates and experience lower operating costs.

We believe that this ultimately results in our customers deriving incremental business benefit from outsourcing and can drive additional revenues for EXL over the long-term. We compliment this with a prudent hedging strategy that further mitigates any impact to our adjusted diluted earnings per share enabling us to successfully navigate a volatile foreign exchange environment.

We are continuing to see attractive assets in the marketplace for potential acquisitions. These acquisitions would add additional process capability to EXL and would expand our capabilities set for our clients and prospects.

As we have demonstrated in the past, we will continue to leverage our strong balance sheet and look for acquisitions that assist in achieving our strategic objectives in our focus verticals. Again, I am enthusiastic about the continued strong growth EXL is experiencing, the demand environment and EXL's strategic domain-centric positioning in the marketplace and with our clients.

I will now hand the call over to Vishal to discuss our first quarter in more detail as well as our 2012 financial guidance.

Thank you, Rohit, and good morning, everyone. In the first quarter, EXL reported revenue of $104.6 million, up 43% year-over-year and 2% sequentially, meeting our expectations. Year-over-year revenue growth was driven both by acquisition, as well as strong revenue increases from new and existing clients. Outsourcing segment reported revenue of $89.7 million, up 58% year-over-year and 5% sequentially.

The sequential growth was driven by growth from existing clients in insurance, including an impressive initial quarter of platform BPO revenue from a global retirement services provider. Transformation reported revenues of $14.9 million in the first quarter, down year-over-year and sequentially.

Start bids for a few new project wins were pushed back into the next quarter affecting our top line. While the annuity revenue represents approximately one-third of our transformation business, approximately two-thirds is short-term project-based revenue which is more volatile and difficult to predict quarter-on-quarter.

As Rohit outlined, we are encouraged by a strong recent client wins and the pipelines for rest of the year in this business. I remain optimistic about the transformation showing solid revenue growth for this year.

In the first quarter, our gross margins were 33.6%, down approximately 300 basis points sequentially driven by three drivers. First, 150 basis points from low utilization and advanced hiring in our transformation business and new capacity added in the Philippines. Second, 80 basis points from foreign exchange headwinds from -- and depreciating rupee which was [INR51.4] in Q4 of '11 versus an average of [INR49.8] in Q1 of 2012. Third, 70 basis points from investments in our BPO platform business.

We addressed the gross margin challenge early. As the quarter went on, we saw a pickup in our transformation revenues coupled with better utilization. With better utilization and transformation in coming quarters along with our ramp-ups in our Manila and SEZ facilities and tighter operating cost controls, we expect to improve the gross margins in the second half of the year except in Q2 where we will absorb the impact of employee compensation increments.

In the first quarter, G&A cost as a percentage of revenue was 12.8%, down 160 basis points year-over-year, and 140 basis points quarter-on-quarter, while the sales and marketing as a percentage of revenue was at [7.5%], which was down 60 basis points year-over-year and 100 basis points sequentially.

This improvement in SG&A margins of approximately 220 basis points year-over-year helped us to offset our declining gross margins, thereby maintaining our operating margins year-over-year.

In the first quarter, DSO of 50 days improved from the 56 days in the prior quart -- in a year ago quarter driven by improvements in collection management. This resulted in a strong balance sheet with approximately $90 million of cash and equivalence as of March 31st, 2012, even after we paid out the bonuses in first quarter and no debt outstanding.

In the first quarter, our tax rate was 25.3%, stable quarter-on-quarter, but up from 11.8% a year ago driven by a -- primarily by one of timed release of our valuation allowance related to expiry of the CPI tax holiday in India in Q1 of last year. In 2012, we continue to expect our tax rate to be in the mid-20s as we expand in SEZ facilities in India and [SM] facilities in the Philippines.

First quarter net income was $8.9 million versus $8.4 million in a year ago quarter despite our EBITDA increasing from 11.8% to 25.3%. Diluted earnings per share were $0.27 even with the year ago quarter and adjusted earnings per share were $0.36 versus $0.33 a year ago.

Now, turning to 2012 guidance. As Rohit mentioned, and as was highlighted by us previously, approximately 25% of our client portfolio, we passed the foreign exchange risk to our clients which in turn subjects our revenue forecast to the volatility of dollar-rupee exchange rate.

The dollar-rupee exchange rate has moved significantly by about 8% versus our last guidance. This negatively impacts our revenue forecast for the year to the tune of approximately $6 million where current rates of INR53 to the dollar were to persist for the balance of the year.

Recently we have seen some delays in decision-making on larger outsourcing projects which were -- we were anticipating closing in the near term. Long sales cycles are a natural part of the BPO business and these long sales cycles when finished drive multi-year high visible revenue contracts.

These long cycles also highlight how critical the process we manage for clients are. We continue to see a robust pipeline for new business and I am enthusiastic that we are making the right investment to win these decisions when they occur.

Taking these two factors together, we are guiding to the bottom of our 2012 revenue guidance [to $445 million to $445 million] representing 24% growth year-over-year excluding one-time [increment] in 2011 which translates to an organic growth rate of about 13% growth or a 16% organic growth on a constant currency business.

This guidance assumes the rupee stays at current rates of INR53 to the dollar for the balance of the year. At this exchange rate, we expect foreign exchange losses for the year to be approximately between $3.5 million to $4 million pre-tax.

Though the depreciating Indian rupee negatively impacts our revenue forecast, our effective foreign exchange hedging program will continue to protect our bottom line. As such, we are reiterating our 2012 adjusted earnings for share guidance of $1.50, $1.52, $1.55.

Should the rupee change or if there is change in the pace of decision-making on part of our clients, we will adjust our revenue guidance accordingly. However, we are not anticipating a change in our EPS guidance as mentioned above.

We remain energized to seize the opportunity of growth ahead of us. Recent contract wins tell us we have a differentiated set of services of best in class global work force and are making the right investment to post continued strong growth in the quarters and years ahead.

Now, we would be happy to take your questions. Thank you.

Thank you. (Operator Instructions). Our first question comes from Joseph Foresi of Janney Montgomery. Your line is open.

Hi, gentlemen. I wonder if you could give us some color around the reasoning for the delays in the transformation and it sounds like outsourcing business, how they've progressed and any color around their number and the quality of the pipeline at this point.

Sure, Joe. So I think, I would like to kind of break up the delays into two parts. One is the delays that we saw in the transformation line of business. In that particular instance, we think the delay was only a shift from one quarter to the next quarter and the delay took place between Q1 and Q2.

We've already seen a pickup in activity on the transformation business and we don't think that there was anything substantive behind that in terms of a significant trend that we could point to. It was essentially a couple of our clients pushing back their decisions because of internal factors as they've heard about that business.

On the outsourcing side, I guess we would, again, split into two buckets. Bucket one is the smaller sized deal which we are seeing a fair amount of, you know -- in the recent past. I think the decision-making on the smaller sized deals continues to remain at the same pace as what it was previously.

However, with the strategic prospects that we've got and the strategic deals that we are seeing, we are seeing a delay in the decision-making and we would have expected that we -- some decision on the qualified strategic prospects that we have in the pipeline by sometime around now. That has not taken place.

We've tried to evaluate as to why that decision has been pushed out and please keep in mind these three strategic prospects, which are qualified, have simply not taken a decision. It's -- it's not that we've lost the business to a competitor or it's not as if they've decided not to outsource. Just the decision cycles are getting elongated out here.

We really can't point to anything in particular as to what might be the reason for that delay. The only area which we think could be a possible cause for this is as we engage with clients doing more complex in-house processes for them, all of the opportunities that we are now seeing fall into that category of more complex processes. And perhaps for outsourcing of these more complex processes, clients need to prepare their organizations internally and it does take, a much longer lead time for them to take the decision.

From a pipeline standpoint, I think our pipeline is actually very robust and full and there are a number of deals behind the qualified strategic prospects that we've got as well as some smaller deals in the pipeline.

And therefore, our confidence in the demand environment remains very strong and our confidence in our ability of the frontage to execute on winning deals continues to remain very strong.

Okay. And my follow-up question is that, help us reconcile the confidence in the pipeline. I imagine those three strategic deals would be more of a 2013 event. Help me -- help us reconcile that with the decision to guide to the lower end of guidance, one quarter into the year.

It seems to be a -- maybe a little bit on the mixed side of a message. Maybe you can help us understand, why -- I know part of it's currency, but outside of the currency, why would you take that step this early if you still have confidence in the pipeline?

Sure. I think the reason for us to guide at the bottom end of the range is as follows. Number one is the fact that, the transformation business for us in Q1 was soft and that's something which we experienced.

Number two, the decisions that we expected from our strategic qualified prospects are not materializing in the manner that we had taught them to, but all of these are, as you know, have small impacts to our revenue in the current year and the biggest impact and the most predominant impact is the impact on account of the foreign exchange rate movement.

As we've articulated in our press release as well as in my comments and Vishal's comments, based on the dollar-rupee exchange rate being at INR53 to the dollar today, and if that currency rate remains the same for the rest of the year, we think there is a $6 million headwind to our revenues for the calendar year 2012 and that's the predominant part why we're pointing everybody towards the bottom end of our range.

Please keep in mind that the foreign exchange rate impacts to our revenues has no bearing on the volume of business that we do with our customers. And as Vishal articulated, on a constant currency basis, we still would expect to grow our business organically at 16% even at the bottom end of the range.

Okay. Just one more numerical question. What was the organic growth rate in the BPO practice this quarter? Thanks.

Yes, the organic growth rate on our outsourcing business for first quarter was about 12%, but on a constant currency basis, it was about 15%.

All right. Thank you.

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

Hi. Thanks. So I guess my question is with regards to the existing clients, but my impression from your comments, Rohit, was that there are some existing clients or clients whom you have just signed who are not ramping according to your plans. First of all is that a correct assumption? And if so, why would a client go through a 12to 18 month sales process and then not do what they're supposed to do on their side?

Actually, with our existing clients, we continue to see their decision-making phase to be in line with historical precedent. It's only in a few existing clients in the transformation line of business that they pushed back their decision from Q1 to Q2, but otherwise there is no delay that's taking place with our existing clients. And you're absolutely right that after such a long sales cycle, they pretty much move ahead with determination and certainty in terms of their outsourcing plans.

Got it. So the existing client piece was on the transformation side? And I know you don't have very long-term visibility on the transformation business, but would you say that given the five clients you assign and the existing base of business do you think we can get back to a $17 million, $18 million per quarter run rate on the transformation side?

Yes. Let me share some -- shed some color on the transformation wins that we have seen and what we are seeing with our existing clients' decision-making in transformation in particular.

Firstly, we have signed up eight clients between January to April of this year in transformation. Not only have we signed eight, which represents the highest number that we've ever signed in the last two years, but also the quality of the customer base is a global blue chip client base.

Many of these contracts that we have signed are actually much larger value than what we typically would sign up as a first engagement within transformation. And many of these are also annuity-based contracts that we have signed up.

So we have a tremendous amount of confidence that we will be able to grow our transformation line of business very, very significantly. Within transformation, decision analytics continues to outpace the growth rate not only amongst other service lines within transformation, but also across the Company and we would expect that on decision analytics, our growth rate year-over-year will end up being somewhere close to 40% to 50% year-on-year.

Okay. The overall growth rate of 15% to 20%, is that a constant currency, just a clarification?

So Ashwin, yes, I think the 15% to 20% growth rate that we -- have typically said that our company is capable of performing over long-term would be on a constant currency basis and that is something which, we've tracked to and, we think, over a long period of time that that's the right growth rate for our company and that's where our current trajectory would be at.

Got it. Thank you. All the best.

Thank you. Our next question comes from Tien-Tsin Huang of JPMorgan. Your line is open.

Thanks. Vishal, can you go through the expense management? There's some of the key messages there again I missed because I was curious how quickly you were able to get the expenses in line given you did report a little bit later in the quarter. So maybe if you just go through that again, I apologize.

Yes, Tien-Tsin. On the expense management for Q1, there are some discretionary spend on our travel and T&E expenses, which we were able to clamp down, we had other discretionary expenses on professional services, which we were able to clamp down, and that helped us.

And obviously, bear in mind that there are some one-off expenses in Q4 which don't reoccur, which also helped us to reduce expenses quarter-on-quarter. And, I think that is the reason why we were able to reduce the G&A dramatically in Q1, but for the rest of the year, we expect the G&A run rate to be in line, maybe a slight improvement on that 20 basis points, 30 basis points.

Okay. Understood. Just the -- I guess on the transformation side, just the timing. I understand the delays and they've come on since, but it sounds like they're actually relatively recent. So should we assume that the full run rate of some of those, whatever the nine projects come on really in Q -- more full quarter based on Q3 and you just get half of the benefit in Q2? I'm just trying to understand the timing of when some of these things will come on.

Yes, I think it will be towards the end of Q2 and for all of Q3. Absolutely.

Okay. That makes sense. Thank you.

Thank you. Our next question comes from David Koning of Baird. Your line is open.

Yes, hey, guys. I think you mentioned that gross margin would come down a little bit sequentially in Q2 given the wage hike has started in April. And then it sounds like you've got a pretty good insight that costs are going to stay a little lower rates here on a percent basis at least, but does that suggest really that EPS should be down sequentially if gross margins stay under a little bit of pressure?

So I couldn't clearly hear you, David. What was your question at the end?

Yes, sure. I guess the main question was just gross margins are going to come down sequentially due to the wage hikes.

Right.

And then G&A expenses were very low in Q1. It seems like they'll probably stay low, but it's hard to have them come down much more. So net, it seems like EPS might be down a bit sequentially in Q2.

Yes, Q2, bear in mind, we will also get a little bit of bump up on the gross margins from the improved utilization and transformation business. So, you're right that there might be a sequential decline in the EPS because of the increments we're giving out, but on the gross margin line, we may have impact of the increments, but some of that will get offset by the improved utilization also.

Yes. I guess, David, the best way to think about it are the various elements that would have an impact on our gross margin in the second quarter. Number one is -- would be rupee depreciating. It will actually increase our gross margins quarter-on-quarter sequentially.

Number two, as Vishal mentioned, as our utilization of the transformation business improves, that could actually help us in terms of our gross margins. The offset to that is the salary increments that come into play in Q2 which would basically take that down. As such, we would expect gross margins for the year to increase from where we are in first quarter, however, we will not see that kind of an increase in Q2.

Okay. Great. That's good color on that. And then just one vertical. Transportation, it's been running revenue at about $4 million a quarter now for, I think, nine quarters in a row, but this quarter it stepped down to about $3 million. Maybe just a little color on that?

Transportation revenues were actually down by about 9% and what I'll do -- overall quarter-on-quarter decline was about $300,000 only so it's not much and some of that is attributable to the seasonality of the volume perking up in Q4.

Okay.

I think the rounding out of the percentages might be causing you to think that that number is quite different because the percentage goes from 4% to 3%. However, that's because of the rounding out of those percentages. In actual dollar terms, there hasn't been too much of a shift in the revenues from that vertical and there isn't anything significant that's changing as far as that vertical is concerned.

Got you. That's a great point on the rounding. Yes, thanks for that. Appreciate it.

Thank you. Our next question comes from Ed Caso of Wells Fargo. Your line is open.

Hi. Thank you. I was wondering if you could talk a little bit about the political environment particularly on the decision cycle of your clients. Are you seeing them asking more about rural sourcing or US-based sourcing? Are they trying to encourage you maybe to set up sites here in the United States? Has it caused them to set a pause on their decisions until after the November elections? Any thoughts would be appreciated.

Sure, Ed. I think that's a very good point that you raised. It is something that comes up often times in our conversations with our customers and, what we are seeing is our clients react in a number of different ways.

In some situations, we have seen our clients push back the decision and, they want to wait until the process is completed. In other situations, we have seen them ask for a combination of onshore and offshore processing capability and, in other situations, they're still trying to evaluate and understand as to how this might play and have an impact in terms of their operating business as such.

We don't see any one single trend playing out, but it's rather multiple options that clients are taking. By the way, we also see some clients just pushing forward with the economic agenda and the business value agenda and moving forward with their decision-making.

Can you just remind us of your exposure to Visa's H's, L's and the B's or any others that we don't know about? Have they impacted your business given all the noise in the market at the moment and particularly with the emphasis situation getting closer to the trial date?

Sure. So, for us within the outsourcing business, all the work that we do within outsourcing is either done offshore or it is done onshore with onshore resources that we've hired.

On the transformation side of our business, which is about 20% of our revenues, but obviously a much lesser headcount, we do the work predominantly with offshore base resources, but we do have some onshore resources. And within the onshore resources, we have a combination of people who we have hired locally as well as India-based professionals who are either relocated or who travel to the US for performing the work.

However, for EXL, the number of individuals that rely upon Visa for doing work within transformation is a very small number and as such, we are not really impacted by the Visa situation which some of the IT services companies might be getting impacted with.

Thank you.

Thank you. Our next question comes from Manish Hemrajani of Oppenheimer. Your line is open.

Thanks for taking my question. A question on the overall environment, if I may, last quarter you talked about a strong pipeline and, in fact, an uptick in the demand environment in the beginning of 2012. What have you seen transpire between then and now to impact the demand environment especially on the larger deals?

So, our assessment of this is that the demand continues to be strong and the pipeline continues to be strong. It's, you know -- that I don't think has changed in our assessment. Typically, if you go back in terms of historical precedent, if we would win some smaller deals, it would actually diminish the size of the pipeline, but what we have seen is that our pipeline has been constantly replenished and the size of our pipeline has not declined. In fact, it continues to remain at similar levels.

The only change that has taken place for us which we are pointing out too is in our qualified strategic prospects for outsourcing there is a delay in the decision-making and we're not sure as to why that is there, but we would have expected to sign up a strategic prospect by now.

But the decision has not been made -- has not been taken. Now, we don't know what the real reason for that is, you know? In each situation, I guess the reason is different. We continue to work with these strategic prospects and we do think that over the next couple of quarters decisions will be taken and we do think EXL is favorably positioned in these strategic prospects that we've got in the pipeline.

As a follow-up, could you comment on the pricing environment and competitive landscape? Are you seeing any pressure on the pricing front?

Yes, from a competitor landscape standpoint, we continue to see a greater prevalence of India-based IT services companies competing for business in BPO. There is always been pricing pressure within our environment, however, we continue to be very, very disciplined in terms of how we approach our customers because we are establishing long-term relationships for our clients and pricing is just one lever.

We've got multiple levers of being able to add value to our clients and typically the clients that choose us choose us for the overall package and the value that we can create for them using our domain-focused capabilities, our transformational skill sets, our operational execution and our focus on our clients' objectives.

Got it. One last one from me. What is your wage inflation expectation for next quarter?

So as we mentioned, we've implemented salary increments across the board in various geographies, you know? We've gone ahead with a wage increment which is in the high single digits in India, which is where the bulk of our employee population is.

Got it. Thank you.

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

Thank you. Maybe if just for a minute if we go back to some of the questions on the gross margin, if you look back three months, how much of the gross margin compression had been anticipated going into the quarter and how much of that was incremental based on some of the issues you discussed?

Hey, David. Hi. This is Vishal. In terms of what came to us as a surprise, I think, was the fact that the low utilization and transformation about -- the impact was about 150 bps was something which we had not anticipated.

Obviously, the currency movement we didn't predict. We, you know --we had thought when we were looking at -- that the currency would be more, like, [INR51], but the currency actually quarter-on-quarter has strengthened, but the BPO platform conversion costs were known to us and we had, you know -- that was in our projections.

Okay. And could you repeat what those BPO and basis points are? I missed that one.

Sorry?

Could you repeat what the impact was from the BPO -- the platform conversion?

About 70 basis points.

Okay. And then secondly, looking at the transformation business and the business that you signed and the ramp rates, when do we get back to a more normalized revenue run rate for that business?

David, I think the revenue run rate for that business picks up in Q2 and I think Q3 we would be back on track as far as that business is concerned.

So should we see -- expect year-over-year growth in the third quarter, Rohit?

Yes, you absolutely should.

Okay. And then in terms of the -- someone was asking earlier about the June quarter. I would assume based on what you're saying about the transformation business that you would see sequential increases in revenue in the June quarter, but perhaps some modest compression in gross margin as the wage increase goes in.

When you net all that stuff out, can you grow EPS sequentially or should we anticipate a modest decline in EPS sequentially?

David, I think it would be prudent to assume that the EPS would decline quarter-on-quarter, but only for Q2.

Only for Q2.

Q3 and Q4, our EPS would sequentially increase and, we would expect if you took it for the full four quarters that our EPS would increase in Q3 and Q4 above where we are in Q1.

Okay. So Rohit, based on what you're seeing now, do you have pretty good visibility on that EPS for the second half of the year?

Yes, David, I think, we feel confident about the growth in the transformation business. The outsourcing business, as you know is fairly predictable and stable. And based upon what we can see in terms of some of the other factors that are playing in, we feel good and confident about the guidance that we've given up.

Okay. And that was with $3.5million to $4 million of FX gains assumed with the rupee at INR53, is that correct?

David, not FX gains, but FX losses for the year.

Okay. I'm sorry. I misspoke. Okay. And should that be pretty evenly distributed across the three quarters?

Yes, with the exchange rate where it is today and assuming that remains that for the remainder of the year that will be the case.

Okay. And just one last question, I guess, for you, Rohit. You brought up the competition. Somebody just asked that in the last question, but is your sense of the IT service companies with gross flowing are getting more focused on this market or is there some other dynamic that may be driving a more competitive landscape, if you will, for some of these BPO deals? Or perhaps it's just that you're going after larger deals and that'd be maybe part of it.

But perhaps could you help us better understand why you think the competitive environment is getting more intense than it's been historically?

Yes, I think, there are two fundamental reasons why we see more IT service companies that compete for the BPO business. Number one, as you point out, perhaps the growth rate in their core business in IT services may not be as attractive as it was previously and number two, I think they've started to recognize the value of the BPO business and the annuity nature and the margin profile of the BPO business and they find this to be an attractive business segment to focus their energy and effort on.

Okay. And, just one last question just going back to the BPO business itself and the delayed decision-making, at what point do we start thinking about if these deals -- at what point do they have to close, if you will, for us to kind of think about your ability to maintain your growth trajectory or your target, if you will, next year?

As long as, you know -- is it still the three to four deals closed by the end of the calendar year and you've still at this revenue rate can still grow organically at your target rate or, has that number gone up or help us frame how we should look at bookings over the balance of the year and how it may impact growth next year?

Yes, David, I think, for us to win the three to four strategic lines for the remaining part of this year would be adequate for us to be on the growth trajectory. I think, for these three clients that we've got in the pipeline, we would expect them to take their decision over the next couple of quarters and I think you'll clearly get a sense of that as we disclose how those decisions were taken.

Great. Thanks very much.

Thank you.

Thank you. Our next question comes from Mayank Tandon of Needham. Your line is open.

Thank you. Good morning. Rohit, I had one question regarding competition. So I think in the past we've talked about the synergy between IT and BPO and I was just wondering is that becoming more relevant and that might be one of the reasons why clients are taking longer and you're seeing more competition from the bigger IT services players?

Sure, Mayank. That's a subject which we internally continuously debate and try and understand as well as we can. Our sense continues to remain that there is little synergy between IT services and BPO services.

There is a fair amount of synergy between owning a platform, which is proprietary, and performing services on top of that. And so far, we've not seen the major IT services companies demonstrate synergy between their knowledge of doing application development on the systems that our clients work on and the processing capability that's required to manage the business operationally.

I think our view continues to remain that in order to be efficient and effective processor for our clients, you need to have domain focus and knowledge, you need to have an understanding of operational management and skill sets for manage -- for process management as opposed to project management, and that we continue to remain a better choice for our customers.

We also haven't seen very many examples of clients choosing to go with our competition in that regard. So I think the jury's still out on that and we'll wait and watch and see what happens.

Okay. So just to be clear, the decision-making is generally very different when people are considering outsourcing BPO work versus ADM work, is that fair?

Yes.

Okay. Got it. And I also wanted to just ask you a little bit in terms of the model mix. How much of this revenue is now FTE driven versus transaction driven today and where is that trending?

So, Mayank, on the new mix right now, I think primarily we have a majority of our revenues still on FTE base and I would say roughly about 20% of our revenues would be on transaction-based pricing for the overall portfolio.

Okay. And is that going to change as you wrap up some of these larger deals or is that dynamic going to remain pretty much the same?

I think our long-term [interval] is to increase that transaction-based pricing percentage for the overall business as we do more complex work and get more history of some of our existing bigger clients and we hope that that number will increase over the period -- in the next few years to more 30%.

What is the margin differential typically on FTE driven work versus transaction driven work?

I think, there is no particular trend as such you can demonstrate. I think it works -- depends on what work you're doing for the client and over a period of time, you do carry a risk, so I -- in transaction-based pricing. But typically, I think you do get a boost in your gross margins over the longer period.

Okay. And Rohit, finally, in terms of the large strategic deals that you talk about, can you just remind us what is the typical size of these engagements annually?

Sure Mayank. The way we characterize a strategic prospect is that it would generate revenues of between $5 million to $10 million on an annual basis once it's fully ramped up.

And how long does it take for a deal to ramp up typically?

Typically, it would take us between six to 12 months.

Got it. Excellent. Thank you very much.

Thank you.

Thank you. Our next question comes from Jason Kupferberg of Jefferies. Your line is open.

Hi. This is Amit Singh for Jason Kupferberg. I have a quick question regarding, first of all, your -- the geographies of the new client additions. If you could just provide a little bit more color on, if you can, about where these clients are located geographically.

And just relating to that, is there any particular geography that is where you're witnessing more headwind than others in this client decision-making delays?

Sure, Amit. For us, as you know, 70% of our revenue comes in from clients which are based in the US and 30% or so comes in from clients that are based in UK and Europe. In terms of our new customer wins, it's broadly spread in equal proportion to that revenue base that we've got. We don't see different decision-making cycles as of now between the two regions.

For us, it looks pretty much the same and consistent across both the geographies.

All right. Perfect. And quick question on -- you mentioned that your pipeline is strong, but do you foresee any sort of upcoming investments that you need to make in any of the verticals?

We constantly make investments in our chosen verticals and domains and as you know we've got five industry verticals and one horizontal domain that we're focusing on.

We've now got business leaders for heading up each one of these industry verticals and domains and we will continue to make investments on this each year. For us, the areas where we make these investments are in the areas of acquiring subject matter expertise, setting up training academies to be able to train our employee work force in these areas, acquiring platforms and tools so that we can serve our clients with these platforms in truth creating greater efficiency and effectiveness, continuing to focus in on transformational skill sets that would be relevant for these domains.

So we make those investments across the board and in addition to that, we will look at making some acquisitions that will add to our capability set for enhancing our status within these domains.

All right. Thank you.

Thank you. Our next question comes from Vincent Colicchio of Noble Financial. Your line is open.

Yes. Rohit, how did your finance and accounting business perform in the quarter and have you exhausted the cross-selling opportunities from the acquisition?

Sure. I think our finance and accounting business performed as per planned in the first quarter. In terms of cross-selling, we think there is much more opportunity for us to cross-sell. And so far, what we've had is we've got a number of conversations going for cross-selling outsourcing services to our finance and accounting clients as well as selling cross-selling transformation to our finance and accounting clients and vice versa.

We've seen a few examples of this cross-sell materialize, but I think we've got a huge opportunity and leg room for us to continue to mine the existing customer base.

And given the increased competition from the IT services firms, have your win rates changed since that's been occurring?

No, our win rates continue to remain the same and as I mentioned previously on the call, we just haven't seen a decision being taken by our strategic clients. And so our win rate continues to be the same. It's just that the sales cycle has gotten elongated.

And could you remind us what verticals are represented by the client, the prospects and the pipeline -- the strategic pipeline?

Sure. We've got one, which is in the travel vertical, and we've got two, which is in the insurance and health care vertical.

Okay. Thanks for answering my questions.

Thank you. Our next question comes from Kunal Tayal of BofA Merrill Lynch. Your line is open.

Hi. Thanks. In terms of some of the push-outs on the transformation side, Rohit, was there any particular vertical that saw brand of the impact? I know insurance is your largest vertical, but, outside of insurance also did you see any delays?

No, actually, we did not. The delay took place in a couple of specific lines, but it wasn't all focusing any one industry vertical.

And in terms of the eight new wins that you have had, how does that split by industry?

Again, the eight new wins that we've had is broad based across the industry verticals. I would say that we have seen some greater activity in the banking and financial services industry vertical for these eight transformation services wins.

Sure. And have you identified the two clients that caused delay, which verticals are they from?

No, we've not disclosed that and, these are existing clients and, they take decisions based on their internal budgeting and operating needs, and as I mentioned earlier, they've just shifted their work from one quarter to the next.

Got it. Thanks, Rohit.

Thanks, Kunal.

Thank you. I'm showing no further questions in the cue at this time. I'll hand the call back over to Rohit Kapoor for closing comments.

Thanks, operator. Thank you all for joining EXL's first quarter call. We continue to remain focused on execution and making sure that we deliver to our guidance in 2012. We look forward to joining you again at our second quarter's call possibly end of July, beginning of August. Thank you.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.