Exlservice Holdings Inc (EXLS) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ExlService Holdings, Inc. Q3 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 be given at that time. (Operator Instructions). As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Charles Murphy, Head of Investor Relations. Please go ahead.

Thank you, Ali. Greetings and thanks to everyone for joining our third-quarter 2012 earnings call. With us today are Rohit Kapoor, our Vice Chairman and Chief Executive Officer, and Vishal Chhibbar, our Chief Financial Officer.

We hope you have had an opportunity to review the third-quarter earnings press release we issued this morning. We have also made available the updated investor fact sheet on the investor relations section of EXL's website.

Some of the matters we will 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 obligation 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. Welcome, everyone, to our third-quarter earnings call.

First of all, I want to extend our concerns and sympathies to our colleagues and neighbors dealing with the aftermath of Hurricane Sandy over the last several days. We greatly admire how everyone has pulled together in this difficult time including here at EXL, where we are fortunate to have all our employees safe and focused on delivering differentiated value to our clients.

The agenda for the morning's call will be as follows. First, I will discuss recent business highlights including our strategic account win. Second, I will discuss two of our fastest growing businesses, healthcare and analytics. Third, I will discuss our updated 2012 guidance. Fourth, I will comment on the demand environment.

I will then turn the call to Vishal, who will discuss the third-quarter financials and our outlook in more detail. Following Vishal's comments, we would be happy to take your questions.

EXL generated solid growth in the third quarter. Revenue increased 17.5% year-over-year on a constant currency basis driven by robust growth in our outsourcing and transformation businesses. Key drivers of year-over-year growth were increasing relationships with large existing clients in our insurance, healthcare, and utilities outsourcing practices, new and expanded analytics relationships with global banks and our Trumbull acquisition.

Revenue growth, operating efficiencies, and operating leverage fueled 21% year-over-year adjusted EPS growth.

I am pleased to announce that we won a new strategic account for Finance & Accounting, or F&A Outsourcing Services with a leading specialty insurer. This win is important for several reasons. First, it validates and extends our F&A capabilities, which we enhanced last year through the acquisition of OPI.

Second, it strengthens our dominant position in insurance operations management which remains our single largest business and a key driver of our growth. Third, it was won against significant competition validating our business model and competitive position. Fourth, it starts a large relationship with a top-tier customer with attractive opportunities for future growth.

Healthcare is a strategic domain for EXL and we are actively investing in this vertical. Three weeks ago we acquired Landacorp, a leading provider of healthcare solutions and technology, significantly expanding our capabilities in the healthcare domain. Integration is already well underway and we are thrilled to have Landacorp's team join us as we together capture the robust growth opportunity in healthcare.

As we said on our October 16 conference call announcing this acquisition, we will capture this growth opportunity both by leveraging Landacorp's leading market position amongst payers, as well as by expanding our clinical resource.

In our key healthcare client markets, clinical talent remains scarce. Simultaneously, demand for differentiated healthcare operations management and analytics is robust and increasing rapidly. To address this opportunity, in October we launched the EXL Healthcare Academy in Manila. Our new Academy will ensure we are adequately training highly qualified EXL employees to meet the demand for clinical talent, bolstering our position as a leading provider of healthcare operations, analytics, and technology solutions.

Our analytics franchise continues to grow in importance for EXL. Our analytics business has tripled in the last three years and is now driving a meaningful portion of the EXL's overall growth. In the third quarter for example, over 20% of our year-over-year topline growth was driven by analytics and the majority of our analytics business is recovering, enhancing our revenue and earnings visibility. We have acquired 13 new analytics clients year-to-date and the business sales pipeline is amongst the strongest at EXL.

At a macro level, the analytics market is growing rapidly. A recent NASSCOM study forecasted the global big data market to grow at a 45% compounded annual growth rate over the next three years.

Our analytics business is differentiated by a few factors. First of all by domain expertise, which is valued very highly by our clients. We have built a world-class banking analytics practice with five of the top global banks as clients. The current regulatory environment and our recent wins have helped us initiate new business discussions with some of the world's largest financial institutions for high-end analytics relationships.

We have also built a rapidly growing analytics team specializing in healthcare, performing sophisticated analysis such as medical cost analytics and claims overpayment identification.

Finally, we have built a top-tier insurance analytics team providing critical operations and marketing analytics for some of the largest US property and casualty insurers.

We are also differentiated in analytics by our intellectual property. Over the last few years, we have made strong investments in our methodologies and product teams, which are now generating attractive returns. As an example, EXL is currently ranked number one out of 1400 competitors in the Heritage Health Price competition, a two-year project challenging analytics teams globally to create an algorithm based on historical claims data that best predicts future hospital patient volumes.

EXL has created proprietary tools and techniques for this project which are now being leveraged across key accounts to create significant business impact. Across our analytics business, we utilize EXL's patent pending microacrylics methodology. Microanalytics is a compilation of continually updated best practices and cutting-edge thinking designed to enhance efficiency and quality at each stage of the analytics lifecycle from data collection and preparation to model evaluation and stabilization.

Finally, we are differentiated by the quality and size of our analytics team. EXL now employs one of the largest and most talented analytics teams in India as well as analytics professionals in the US, Europe, and Asia Pacific. We are recruiting aggressively and have built a leading presence at many of the finest global educational institutions in order to find and hire the world's next premier data scientists and engineers. In fact, in 2012, we recruited our largest class ever from the Indian Institutes of Technology and the Indian Institutes of Management in India.

In summary, there is a robust secular growth opportunity in analytics and we are extremely well-positioned due to our domain expertise, intellectual property, talent, and leadership position. We remain confident of growing this business significantly.

Turning to our updated 2012 annual guidance, we see revenue of between $442 million and $444 million and adjusted earnings per share $1.52 and $1.57. Partially offsetting the positive incremental effects of an appreciating rupee, third-quarter results, and our Landacorp acquisition, we have experienced some client transitions based on commercial considerations in the OPI portfolio we acquired last year.

Some clients transitioning is a natural part of integrating a deal as large as OPI. These transitioning clients are low margin, onshore heavy contracts in non-focused verticals. In 2013, these client transitions will impact our revenue growth rate by 5 to 6 percentage points, but will have only a marginal impact on our adjusted earnings per share growth.

On the demand environment, we continue to see strong demand for smaller deals as our 23 new client wins to date prove. Lately we have noticed a pickup in demand for large deals in finance and accounting, healthcare, banking, and analytics. We are seeing more large deals than we have in the past and competition for these large outsourcing deals remains aggressive.

Meanwhile opportunities to expand with our existing client base continue to be strong. This is being driven by three factors. First, increasing client satisfaction versus last year. Second, our strong investment over the last two years in growing and improving our front-end personnel. Third, from delivering superior business impacts to our clients just this year through our proprietary operations management framework.

I remain optimistic about EXL's revenue and earnings growth prospects over the coming years and look forward to executing on this exciting and unique growth opportunities ahead.

Now I will turn the call over to Vishal.

Thank you, Rohit, and good morning, everyone. In the third quarter, EXL reported revenue of $112.6 million, up 12.6% year-over-year and 4.3% sequentially. On a cost to currency basis, revenue rose 17.5% year-over-year and 4.1% sequentially. In the third quarter, our sourcing business revenue was $92 million, an increase of [15.4]% year-over-year on a constant currency basis. On a reported basis, revenue rose 10.6% year-over-year and 3.4% sequentially. Bear in mind that for the first full quarter after our OPI acquisition anniversary in May.

Year-over-year reported revenue growth was driven by additional business from large existing clients in our insurance and healthcare, utilities [domain] and (inaudible) acquisitions.

Sequential growth was driven by contract expansion in insurance and healthcare in particular over the last healthcare (inaudible). Sequential growth was also driven by our utilities domain in particular by our and recently renewed and expanded contract with a major UK retail energy distributor.

Meanwhile, the transformation business reported a record revenue of $20.7 million, up 22.6% year-over-year and 8.1% sequentially. Driving year-over-year growth was analytics, which generated 34% revenue growth fueled by new analytics related to the large global banks across (inaudible) and other consumer operations.

Driving sequential growth were (inaudible) gains in all three of our consultation businesses -- analytics, process re-engineering, and finance transformation services.

Foreign currency movement had a negative effect on our revenue growth of 5% year-over-year and (inaudible) significant sequentially. As highlighted before, approximately 25% of our revenue base is shared (inaudible) with our clients which in turn subjects these revenues to volatility in the rupee to US dollar exchange but has no material effect on our bottom line.

During the quarter, the rupee averaged [54.7] even with the second quarter. In September, the rupee appreciated and our current guidance is updated using an exchange rate of INR53.5 to -- to rupee to the dollar.

In the third quarter, consolidated gross margins were 39.1%, up 80 basis points year-over-year and 20 basis points sequentially. Driving year-over-year margin expansion were operating efficiencies of 80 basis points and 400 basis points due to the foreign exchange movement, which was mostly offset by one-time service sector funds in the year ago which had an impact of 300 basis points. (inaudible) revenue due to large platform conversions we are performing in our outsourcing business had an impact of 70 basis points and the Trumbull acquisition had a negative impact of 30 basis points.

In our outsourcing business, gross margin was 39.5% and was up 80 basis points both year-over-year and sequentially. Year-over-year improvements were driven by factors I have already described earlier. Sequential improvement was driven by operating efficiencies.

In our transformation business, gross margin of 37.1% was up [130] basis points year-over-year and down [250] basis points sequentially. Driving year-over-year margin expansion was foreign exchange impacts partially offset by rate increases and advanced hiring in analytics.

Sequential margin [deceleration] was driven by advanced hiring in our analytics business and compares new investments in our new business [deliveries].

Our G&A costs were down to 1.2 percent of revenue, down 100 basis points year-over-year and 60 basis points sequentially. The year-over-year improvement was driven by operating leverage of 110 basis points and foreign exchange benefit of 40 basis points and partially offset by acquisition-related expenses of 50 basis points. The sequential decline was driven by operating leverage.

Sales and marketing expenses were down to 6.2% of revenue, down 70 basis points year-over-year and 90 basis points sequentially. Driving year-over-year improvement again was operating leverage and delayed hiring which will catch up in Q4. We expect G&A and sales and marketing expenses to return slightly to higher levels as a percentage of revenues Q4 in line with our historical results.

In the third quarter, we reported a net foreign exchange loss of $1.4 million driven by the hedge losses following the depreciating rupee. For 2012, we anticipate foreign exchange losses of approximately $3 million to $3.5 million. Our hedging program ensures that we are not affected by foreign exchange movements on a fee income -- pretax income basis and protecting our EPS and increasing our investment in the business.

In the third quarter, our taxes was 27%, down 600 basis points year-over-year and 160 basis points quarter-over-quarter. The lower tax rate this quarter versus last year and last quarter was due to a drop in the year-to-date tax provisioning. For 2012, we expect a tax rate in the mid to high 20s.

DSO in the third quarter was [52] even with the year-ago quarter. We continue to focus on (inaudible). For the first nine months of 2012, our capital expenditure stood at $17 million, versus $12 million a year ago driven by our facilities expansion. For 2012, we expect approximately $22 million in capital expenditures.

Our balance sheet remains strong and as at September 30, we had over $125 million in cash and short-term investments and no debt outstanding. In October, we acquired Landacorp using $37.5 million of our US-based cash, which has been earning less than 50 basis points annually.

Net income for the quarter was at $11.7 million, up 39% year-over-year and 29% sequentially. Diluted EPS for the third quarter was $0.35, up 32% year-over-year and 29% sequentially while adjusted and diluted EPS was $0.42, up 21% year-over-year and 17% sequentially. Adjusted diluted EPS year-over-year growth was driven by revenue growth, operating efficiencies, and operating leverage.

Turning to our 2012 annual guidance, we are updating our revenue profile to $442 million to $444 million from $438 million to $442 million earlier and updating our adjusted earnings per share total to $1.54 to $1.57 from the earlier $1.50 to $1.55. Driving this increase are third-quarter results, our rupee to dollar exchange rate of 53.5 versus 55 in our last call, and our Landacorp acquisition which should add approximately $3.5 million to our fourth-quarter results.

Partially offsetting this increase are a slight transition based on commercial consideration of some low-margin accounts in the OPI portfolio that Rohit had outlined earlier. We intend to focus on generating strong sustainable growth, profit growth. We are making the right investments and decisions to produce this growth.

We would now be happy to take your questions. Thank you.

(Operator Instructions). Bhavan Suri, William Blair & Company.

Just a couple questions on the client transitions at OPI. Could you just give us some sense of what exactly that is? And then you sort of said that impacts revenue growth 4% to 5% next year. I guess one question would also be, is it possible to transition some of that work offshore to drive better margin or is it effectively work you don't want?

Sure, this is Rohit. I think the client transitions that we spoke about are largely being driven by commercial considerations and obviously not related to the service delivery. This will have an impact to our business for 2013 by 5 to 6 percentage points.

As we tried to articulate in the past, what we have tried to do in our business model is to try and build up sustainable revenue streams which are also profitable for the Company and we focus equally on revenue as well as the profitability of our business. Those situations where we acquired portfolios and they do not meet these requirements of the Company, we are forced to take steps along with our clients to try and better manage our portfolio.

We have tried to work on this portfolio and we think that these are the right prudent steps from our perspective and from our clients' perspective and therefore some of these decisions have been taken.

I guess what we would like to add is the acquisition that we did of OPI continues to perform really well. Strategically the fit of having a capability in finance and accounting for EXL has been validated because of the new strategic win that we had in Finance & Accounting as well as a number of our existing clients in our core industry verticals, we have now been able to cross sell F&A services to those clients.

So we feel actually very good about the acquisition but at the same time some of these transitions are taking place and we wanted to advise you of these transitions as there were taking place.

Okay, that's helpful. I guess two quick follow-ups, just one on this, so could you give us some sense of sort of what that margin improvement expectation would be for, say, every one of those percentage points of revenue growth coming off? Does that sort of settle better long-term margin profile for the business 2013 and 2014?

Yes, absolutely. I think if you take a look at our gross margins, when we acquired OPI, the gross margins of OPI were significantly below the gross margins of EXL and with these client transitions, I think we would expect the OPI portfolio to trend towards the corporate average of EXL's gross margins.

Also as we mentioned, we do not expect these transitions to have any material impact to our earnings per share growth for next year. So I think on a margin basis, we are well protected. However on the topline, there certainly will be an impact.

Great. Thanks for taking my questions, guys.

Joseph Foresi, Janney Montgomery Scott.

First question just really to finish off our conversation on OPI, where are these clients going? Are they being asked to leave or have they gone to another vendor? I understand the methodology behind it but I think I just want to sort of close the case on it.

Sure, Joe. I think in terms of the transitioning of these clients, in some situations the clients are moving some of the work in-house and in other situations, they are moving it to other providers who want to have this business at contractual terms which don't seem very attractive to us.

Great, I appreciate that color. Just my second question here, I wonder if we could just talk -- what was the organic growth rate in the quarter and maybe you could talk about your thoughts on that growth rate going forward?

Sure, the organic growth rate for the third quarter was 15.3% year on year and we think the organic growth rate continues to hold well. I think from a Company perspective, our growth rate continues to be above industry average and we continue to think that we have a business model that will allow us to sustain a growth rate above industry average.

Okay, then just finally from me, maybe you could update us on the pipeline and give us any color on any changes in either pricing and/or decision-making. Thanks.

Sure, I think the pipeline continues to be strong. As I indicated in my prepared remarks, we have started to see actually some larger sized deals come into the pipeline towards the third quarter and I think that's encouraging because companies are looking at outsourcing again I guess with a renewed perspective as they do their budgeting and they're planning for 2013. We think we are well positioned in order to capitalize on the demand environment and the demand environment is particularly strong in healthcare, in banking, in analytics, and in insurance and those are the areas where we are extremely well-positioned and we continue to bolster our position in healthcare because we think that there's a tremendous opportunity for us to be able to grab new clients out there.

Okay, thanks.

Ashwin Shirvaikar, Citi.

Thanks. So just back to the client transitions, could you go through sort of the timing of the transition in terms of are they happening all at once or does it happen over the next few quarters? Just the timing and also just trying to get the pieces of how you get to the new revenue guidance, $3.5 million from Landacorp if you could remind us of what the currency impact is in dollar terms? Thank you.

Sure, Ashwin, so for us the way we would think about the timing of these client transitions is that some of these client transitions will begin to happen in Q4 of 2012 itself and going into 2013. Obviously the client transitions take place over several quarters and this is not something that happens all of a sudden.

In terms of the guidance that we've provided for the fourth quarter, Landacorp, the acquisition was completed on October 12 and the $3.5 million of revenue from Landacorp is for the period from mid-October to the rest of the year.

In terms of the impact on the currency, any time the rupee appreciates, our revenues are likely to go upwards without having any impact on our EPS.

I will ask Vishal to give you the metric on that for the fourth quarter.

Yes, so, Ashwin, the guidance is based on INR53.5 and compared to our earlier guidance of INR55, so it is an improvement of about INR1.5 rupee. For the Q4, the impact would be about $700,000 to $800,000 on that effects something to INR53.15.

Okay, so those are largely offsetting. One question I had came up when one of your competitors called yesterday. They announced an F&A contract with Centrica, which I know is also one of your clients. Is this sort of the last opportunity for you guys? Or it hopefully does not take away from your revenue growth in the future at that client.

Sure, the work that we do for Centrica is on the operations management side and work is totally unaffected by the decision of Centrica to move the F&A work to another provider. Our understanding is that the F&A work that is being given to the competitor is relatively small in size and scale compared to the size and scale of work that we do, so we do not see that to be any threat or any -- have any impact to our business.

Okay, just last one building on Bhavan's earlier question. You answered it in gross margin terms. Could you do the same in operating margin terms?

I think when you kind of take a look at any client transition that takes place, it's very easy for us to manage our cost structure up to the gross margin level and below the gross margin obviously there is an impact from a volume perspective. So while our gross margins will actually increase based upon these client transitions that are taking place because the client transitions are off lower gross margin contracts on an adjusted EPS basis, we expect a minimal impact and the same would really be true on an adjusted operating margin basis.

I was asking more on a sustainable go forward basis because ideally it's 5 percent of revenues but does this in general, does the portfolio pruning improve your overall full Company expectations down the road?

I think certainly, Ashwin, the core business obviously becomes much more of a solid franchise with little risk associated with it and there certainly is an opportunity for us to build and grow on top of this portfolio. From an adjusted operating margin standpoint, I would think that we would have the same opportunities that we had previously and there wouldn't be any real change from an adjusted operating margin perspective.

From a risk perspective, that's a good way to put it. Thank you.

Dave Koning, Baird.

My first question, is there any termination fee with any of the clients in OPI that might hit in the next couple quarters?

Dave, there is termination fees associated with certain contracts, not with all contracts. In some situations, there are expenses and fees associated with the dislocation of the infrastructure as well as the employees. And some of that will play out for next year.

Okay, so that will be in next year's numbers. Okay. Then the second question just expenses were quite low and you kind of walked through that, the selling and marketing expenses were way on the lower end of where they have historically been, same thing with G&A. Are those things that as Landacorp comes in and as we go into next year, do those bounce back a little bit on -- as a percentage of revenue?

(multiple speakers) Go ahead, Vishal.

So I think sales and marketing, we have already stated that we expect sales and marketing centers to be in the range of 7% to 7.5% and we expect that next year we will be back to that level including the Landacorp acquisition.

Okay, great. The final thing is just on the tax rate, you've been running right around 26%, 27% now for several quarters. Is that about as good of a guess as we can go next year or does the acquisition change those dynamics too?

Good question. I think because Landacorp is clearly an onshore based income generating business, which would get taxed at a higher tax rate in US, there will be a slightly marginal impact on our tax rate for next year and so we would be in that range of high 20s.

Okay, thanks. Nice quarter.

Manish Hemrajani, Oppenheimer.

Thanks for taking my call. A question on outsourcing in general, if I look at your outsourcing revenue growth, it was just over 10% year-over-year in the September quarter, slowest growth since 2009. Any chosen color on that and maybe highlight some of those challenges there?

Sure, Manish. I think a couple of things which we would like to point out is in terms of our outsourcing revenues, first of all, we have been doing a number of acquisitions of platforms and those revenues get included within the outsourcing revenue bucket. We also have onshore revenues that we have acquired and the revenue streams with the onshore work that's being done, those do not grow at the same pace at which the offshore revenues are growing. So I think there is a shift in the portfolio and the composition of revenues that takes place here as well.

And then I think you've got to take a look at the revenue growth rate over a longer period rather than just on a quarter period and I think if you take a look at the average growth rate of the business, that has been pretty healthy.

And the last piece is our revenues have also been impacted when you compare it year on year by the currency and as the currency has depreciated, we have certainly had impact of close to about 5 percentage points from the currency as well.

Okay, can you help me understand your updated guidance so $3.5 million comes from Landacorp for fiscal 2012. How much -- what's the FX benefit there?

That benefit would be about $700,000.

$700,000, and then so basically you lowered guidance a bit if you ex out Landacorp and FX. Is that all due to the larger contract on the OPI side?

Yes, that's true. That impact is because of the condition of the contract which we had mentioned.

Then can you comment on the pricing environment and competitive landscape? Are you seeing any pressures on the pricing front?

Let me comment on the pricing environment. As the rupee continues to remain at INR53.50, INR54 level, certainly our clients are looking for us to be able to provide them with competitive pricing associated with these new levels on the rupee. And certainly competition is using this from a pricing perspective, so we are working with our clients to provide them with much more stability associated with the pricing as well as shifting some of the contracts that we have where we were taking the FX risk where we now have started to share that FX risk with our clients and therefore in exchange for greater volume of business as well as a greater sharing of the FX risk. There is -- there are client contracts where we have to price accordingly.

From a competition standpoint, the competitive pressure continues to remain quite intense and some of the larger players are certainly playing in the BPO space a lot more aggressively and trying to build up their capabilities in this space and competition continues to remain fairly intense.

Okay, got it. That's all I had. Thank you.

David Grossman, Stifel Nicolaus.

Thank you, good morning. maybe if you could just follow up some elements of the last question. Rohit, it looks like you are tracking overall perhaps constant currency organic growth somewhere in the mid teens, maybe even slightly below that. So if you factor in what you are thinking about the transition within OPI, is it fair to say and I know it's early but for next year, should we be thinking about kind of 10%-ish type of topline growth for next year on a relatively stable perhaps modestly increasing margin base given the transitions within OPI?

Sure, David, let me try and address this as clearly as possible. I think for us the client transition is a one-time activity. It is something that will impact our numbers and our growth rate for 2013. At the same time, the long-term trajectory of the Company and our business continues to remain healthy and strong and we continue to expect to be able to grow our business at faster than the industry growth rate.

In terms of calendar year 2013, we will certainly provide guidance once we have our fourth-quarter results and we can provide a much more -- a better outlook on our guidance for 2013. Right now we are saying that because of the client transitioning there will be a 5 to 6 percentage point impact on the growth rate for next year.

Okay, perhaps you can talk a little bit about -- you talked about the pipeline being extremely healthy particularly in three or four areas. I think going into the third quarter, you had -- I think it was three strategics in the pipeline or in advanced stages I guess of the pipeline of which you signed one.

Can you give us an update on where you are if you were at 3, that nets down to 2, where are you now in terms of strategics in more advanced stages?

Sure, David, let me try and address that question. First as you know, we have decided to move away from talking about strategic prospects only because we don't think that there is a good correlation between the strategic prospects in our pipeline and the revenue growth rate. Having said that, since this is the first quarter where we are not providing you with much color on this, let me just address the question that you raised on the three strategic prospects that we did have in the pipeline at the end of the second quarter.

So one of the strategic prospects that we had in the pipeline we won, which was the announcement that we made today. One of our strategic prospects we lost and we did not win that business. And the third strategic prospect continues to be in the pipeline and it was -- has moved to the final stages of that decision-making process. We think we will get a result on that over the next 90 to 120 days.

So that's just to kind of provide you with color on what happened with our existing strategic pipeline. But as mentioned before on a go forward basis, we will provide you with color on the number of new clients we are signing. We will provide you with color on anything unique and particular about these clients as we sign them up so that you can factor that into your business models. But at the same time, we are dropping the practice of sharing the number of strategic client prospects that we have in our pipeline because it just does not correlate to the revenue growth rate of the Company.

Great, that's fair enough, and thanks for that. One other thing, Rohit. In terms of if you look at -- there's a lot of changes going on in the composition of your business as well as the type of business that you are signing. Is there any difference in the time at which this new business ramps or the time to profitability in terms of transition costs, etc. and the new business that you are signing versus what we may have been accustomed to historically?

Sure, let me try and address that. So our core outsourcing and transformation business characteristics continue to remain the same and there is no change to that. On the platforms that we have acquired and when we make a sale for any one of these platforms, if it is a licensed sale, it adds to our topline and bottom-line immediately and it provides for incremental amount of revenue from a modification or an implementation standpoint which is much more longer-term.

The last piece is when we sign up clients which utilize our platform and our servicing capability, if there is a conversion of an existing platform from a clients to our platform, then in that type of a contract, we will have an upfront cost associated with it and the margin on that business is going to be much lower in the first one or two years and we will pick up the margin over the next five to seven years.

So yes, I think the portfolio has changed and the type of deals that we do win is going to have an impact on the way in which our revenue growth and our profitability growth takes place.

Great, thank you.

Jason Kupferberg, Jefferies.

This is Amit Singh for Jason Kupferberg. Just coming back to the 2013 growth again, Landacorp contributed you said $3.5 million this quarter. Could you give us some sort of sense of what type of contribution you are expecting for next year? Any general idea would be great.

Sure, Amit. As we mentioned in our call on October 16, we expect Landacorp to contribute approximately $20 million for 2013.

All right, perfect. You still have significant amount of cash on your balance sheet and now with strengthening your healthcare practice recently, is there any other specific area that you're looking at now to utilize that cash for M&A?

Yes, absolutely. A core part of our strategy is to continue to use inorganic growth to complement our organic growth rate and we continue to look for assets where we can deploy the cash in a meaningful way. Keep in mind that our business is a business that generates a fair amount of free cash flow each year so as we progress through each year, their surplus cash that is generated, there are a number of areas that are of strategic importance to us as we build out our portfolio.

Number one is analytics. Number two is banking and financial services, and number three we still think we can add on to capabilities within the healthcare industry vertical. So these would be some of the priority areas that we would be focusing on.

Perfect, just one last. I know last quarter you had mentioned that you are witnessing a trend from larger deals to smaller deals and as we look at your cost structure going forward, are you still witnessing that type of trend? Is that affecting your cost structure in any way?

No, I don't think it's impacting our cost structure in any way. We are seeing a number of smaller deals and we are seeing a number of larger companies sign up with smaller deals. This quarter we did see some larger deals also come into the pipeline so we are actually quite encouraged by that and we think we have the capacity to be able to manage these new client acquisitions whether they start out small or they start out in a big way. We can manage both of these transitions quite well.

Thank you.

Kunal Tayal, Bank of America.

Thanks, just one follow-up related to the client transitions. How many clients are we speaking of here because 5% of revenues could be a good 15% of the OPI base? Secondly, if you could help understand the reasons as to why these clients had low profitability? Is it commerciality or is it also service mix? Thanks.

Sure, so the clients we are talking about are few in number. It's not very large in number and at the same time, the client profitability was low as we mentioned because a significant portion of the work was being done onshore where the margins are low for most contracts. And from my perspective an onshore contract has to fit in strategically meaning that it has to add to capability that can be leveraged with other clients but it has to be a necessary component of us doing work on an end to end basis using our offshore delivery locations. And it has got be off of a certain margin profile.

In some of these situations, some of those characteristics just do not fit in well and I think basically we ended up in a situation where there is a transition that's going to take place.

Got it, thank you.

(Operator Instructions). Ashwin Shirvaikar, Citi.

Rohit, I just wanted to ask you about something other than client transitions. With the transformational business, 22% growth here, is that sustainable? I know the character of the business has changed over time to become more visible so to speak, on a multi-quarter basis. Can you talk about whether that's sustainable?

Sure, Ashwin, and thanks for asking me a question on transformation. I think the tranformation business for us continues to grow very nicely and the opportunity set for us for that line of business is very, very positive and very strong.

We have three lines of business within transformation, first being decision analytics, second being operations and process excellence, which is process reengineering and redesign and the last is finance transformation and risk and compliance-based advisory work that we do for our clients. All three lines of work continue to perform very well. I think the reason why we are bullish about this particular segment for the next several years is because as clients start to use data analytics in a much more significant way to take more meaningful decisions, as the regulatory environment forces companies to look at ways of introducing a greater amount of control and risk management -- sophisticated risk management techniques into their operating processes, and as we think about reengineering their operating structure, we are extremely well-positioned to help them with this type of work.

And our capability and our experience set in offering them a dual shore business model using some proprietary methodologies and intellectual property is also being validated. So we feel very good and strong about the opportunity for our transformation business to continue to grow at a fast pace for the next several years.

Okay, thanks.

I am showing no further questions at this time. I would like to turn the conference back over to Mr. Rohit Kapoor for any closing remarks.

Thanks, Ali. I just would like to conclude by saying that EXL had a very strong third quarter. We remain on track and are confident of being able to accomplish and deliver to our guidance for calendar year 2012. We also are very optimistic about our future growth of the business not only for 2013 but for several years beyond that and we think that the opportunity in the marketplace and EXL's positioning are very well suited for each other.

Thank you for attending this call and we look forward to seeing you on the next earnings call where we'll be providing you with our 2013 guidance.

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