Exlservice Holdings Inc (EXLS) 2013 Q1 法說會逐字稿

Good day ladies, and gentlemen, and thank you for standing by. Welcome to EXL's first quarter 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, this conference call may be recorded. I would now like to introduce your host for today, Mr. Charlie Murphy, Head of Investor Relations. Sir, please go ahead.

Thanks you, Karen. Greetings, and thanks to everyone for joining our first quarter 2013 financial results conference 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 first quarter financial results press release we issued last night. We have also updated our 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 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 everyone to our first quarter earnings conference call. The agenda for this call will be as follows. First, I will discuss this quarter's results and our outlook for the remainder of 2013. Second, I will review highlights from our strategic investments in healthcare and analytics. Third, I will comment on our demand environment. Then I will turn the call over to Vishal for a more detailed financial discussion, following which we will be happy to take your questions.

In the first quarter, our revenues grew 11% year over year or 13% on a constant currency basis. This growth was driven by steady and consistent growth in our outsourcing and annuity-based transformation services businesses. Much like in the first quarter of 2012, we saw project-based transformation services revenue come off. As previously disclosed, we did face some client transitions during Q1, which had a negative impact on our revenue growth. These client transitions are expected to be completed by the end of the third quarter this year.

In the second half of this year, we expect growth to accelerate meaningfully for several reasons. First, in our outsourcing business, volumes from large existing clients should increase and new business from midsized new clients should come online. Our Philippines and Eastern European delivery centers should grow rapidly, driven by this new work.

Second, our annuity based analytics business should continue growing strongly. In fact, that is one major reason why we have hired skilled resources over the last few months in advance of revenue. Companies are aggressively turning to trusted partners like us to use analytics to find and exploit correlations, deepen their operations, and enable a more adept enterprise. We believe we are in an excellent position to capture this powerful demand given our sterling client list, proven methodologies, and highly specialized workforce around the world.

Finally, the third quarter is the strongest seasonal period for project-based revenue in our transformation business. As we said in our March Investor Day call, there are a number of areas in which we are making strategic investments. Two of the most significant are healthcare and analytics. Both healthcare and analytics have seen strong year to date acceptance in the marketplace. We have recently been selected to provide utilization management to a leading healthcare payor, which we hope will represent the foundation of a large and long-term partnership.

In analytics, we signed new healthcare relationships servicing both payors and providers. And we are encouraged by growth from the Landacorp care management business we acquired in the fourth quarter of 2012, including seeing clients who had moved away from Landacorp many years ago coming back for new relationships.

We have also invested in our healthcare and analytics workforces aggressively. In April, we completed a successful recruiting season in India for our analytics business, hiring approximately 160 people from some of the finest educational institutions in the country, such as the Indian Institutes of Management, Indian Institutes of Technology, and the National Institutes of Technology. This is a meaningful increase from approximately 850 personnel we closed 2012 with. Such analytics talent is in short supply globally. The supply/demand imbalance for this talent is expected to grow more pronounced in coming years. These future EXL analytics leaders will drive the strong secular growth we see in this service line.

We have also expanded our delivery locations, which specialize in healthcare and analytics. In February, we commenced analytics delivery in Bangalore, India, opening up our franchise to a new talent pool. In April, we opened an operations center in Sebu, our second city in the Philippines, which is our second largest delivery country. This center has over 100 employees today with a target of over 400 by the end of the year. This center will specialize in healthcare business process management as well as in insurance and banking. It will further diversify our global delivery system and our brand in healthcare. As you may remember, we also have approximately 2,000 employees in our Manila facilities, one of which has been accredited by URAC for their top tier quality standards in healthcare business process management.

Looking out at our demand environment, we enjoy a strong and growing pipeline across our businesses, particularly in insurance and healthcare, and banking and financial services. Pipelines for both new and existing clients are increasing. Consistent with our last update, we are competing on several large BPO prospects in life and health insurance, as well as in banking and financial services, and we have received positive early signs.

In utilities, we have seen an uptick in large deals for the first time, for which we are well positioned. We have noticed new types of deals enter our pipeline, such as platform-based BPO contracts, as well as large transactions involving taking over responsibility for significant operations of our clients. Competition for deals remains fierce and while we continue to see the large technology services players investing in BPO, we remain highly confident in the strength of our franchise in our chosen focus vertical. We believe that our concentration on a few key domains is a competitive differentiator and that being a leading vertical-focused operator is far superior to being horizontal-based. We have built a leading brand in these focused verticals, driven by years of proven operational excellence with mission critical business functions for industry leaders.

We are pleased to see that in the first quarter key focus verticals such as insurance and healthcare, utilities, and banking and financial services posted year-over-year revenue growth of 23%, 14%, and 42%, respectively, well above our corporate average. The previously announced low margin client transitions temporarily impacting our revenue growth this quarter are not in our focus vertical.

Looking ahead, we remain quite optimistic on the strong secular growth outlook for our business. Our markets are underpenetrated. Our client relationships are strong and growing, and our process expertise is highly differentiated. Our professionals are experienced and engaged as evidenced by multiyear low 24% attrition figure in the first quarter. BPO and analytics both enjoy ever-increasing acceptance and we believe we have been effectively enhancing our franchise as a leading pure play provider of industry focused operations excellence and transformation services.

Now, I will turn it over to Vishal.

Thank you, Rohit, and thank you everyone for joining us this morning.

In the first quarter, EXL reported revenues of $116 million, up 11% year over year and down 1% quarter over quarter. On a constant currency basis, and excluding previously announced client transitions, revenue grew 18% year over year and were flat quarter over quarter. Foreign exchange had a negative impact of 2.6% on our year-over-year revenue growth as the Indian rupee depreciated against the US dollar and had a negligible impact sequentially.

In our outsourcing business, revenues grew 9% year over year and 17% on a constant currency basis, excluding client transitions. Driving year-over-year growth were the acquisitions of Landacorp in October 2012, as well as client expansions with existing customers in our insurance and healthcare, and utilities verticals. On a sequential basis, revenue grew 3% excluding client transitions, driven by Landacorp acquisition, growth in insurance, healthcare, and utility verticals, and partially offset by the client transition impact of 1%.

In transformation services, revenues grew 24% year over year and declined 14% sequentially. Year-over-year growth was propelled by strong growth in our decision analytics and [risk] and financial management businesses. The sequential decline was largely due to the [rollout] of project-based engagement in our banking and financial services analytics practice, and a few delays in planned project ramp up. As mentioned in our fourth quarter 2012 earnings call in March, we expected a muted Q1 for our transformation business. We anticipate that our transformation business will accelerate in the second half of the year due to new client wins in analytics, as well as execution on delayed projects.

I wamt to provide an update on the client transition occurring this year on our noncore verticals. We continue to believe such transitions will represent 5% to 6% headwind to revenue growth in 2013. This amount primarily emanates from two clients. The first of these clients will be transitioned off by the end of this quarter. The second of these clients, we expect to transition by the end of third quarter. We continue to believe that transitioning these low-margin clients in noncore industry verticals is the best outcome for EXL's long-term profit margin.

In the first quarter, gross margin of 37.1% was up 80 basis points year over year, driven by rupee depreciation. Gross margin fell 300 basis points sequentially, driven by FX impact, lower utilization in our transformation business as a result of advanced hiring for future engagements, and slightly lower revenue. Our outsourcing gross margin of 39% rose 190 basis points year over year, fueled by foreign exchange and our Landacorp acquisition, and fell 250 basis points sequentially, driven by FX appreciation], higher employee costs from headcount additions and lower revenue run rate.

Transformation services gross margin of 27.1% fell [440] basis points year over year and 650 basis points sequentially, driven by lower utilization, advance hiring in our analytics business for future engagements, and [drop in] project-based revenue. We anticipate gross margin of our transformation services business to improve through the year as our utilization increases, driven by new project ramp-ups.

G&A margin of 13% was up 20 basis points year over year and down [80] basis points sequentially. Driving sequential improvement was slightly lower discretionary spend and lower professional fees. Sales and marketing margin of 8.4% was up 90 basis points year over year and 120 basis points sequentially. Driving the sequential increase were new hires as we continue to expand our front-end domain expert team. In fact, this quarter we added 10 new people in the onshore sales and marketing function.

Foreign exchange loss was less than $100,000 as balance sheet hedging gains were offset by cash flow losses. Going forward, we expect foreign exchange losses to increase. For 2013, we now expect a foreign exchange loss of approximately $2 million to $2.5 million.

Interest and other income was $1 million, up approximately $300,000 sequentially, driven by one-time employment incentive program benefit.

In the first quarter, our tax rate was 23.5%, down 180 basis points year over year due primarily to a one-time benefit on account of reversal of some tax provisions no longer required. For 2013, we continue to expect a tax rate in the high 20s, which implies a significant step up in the tax rate for coming quarters.

Adjusted EBITDA margin was 18.9%, up 20 basis points year over year and down 190 basis points, driven by margin declines. Net income was $9.8 million, up 10% year over year and 20% quarter on quarter. Adjusted net income was $13.5 million, up 14% year over year and down 10% sequentially, driven by factors as I explained before.

Diluted EPS was $0.29, up from $0.27 in the last year's quarter, but down from $0.36 from the last year's fourth quarter. Adjusted EPS was $0.40, up $0.36 -- from the $0.36 in Q1 2012 and down from $0.44 in Q4 of 2012. Adjusted EPS year-over-year growth was driven by revenue growth.

We continue to enjoy a strong balance sheet with over $108 million in cash, and equivalents, and no debt. DSO was 59 days in the first quarter, up 3 days sequentially, driven by March end falling on a weekend. Adjusting for this, DSO would have been 57 in the first quarter.

For 2013, we are maintaining our guidance of $495 million to $505 million and adjusted EPS guidance of $1.77 to $1.85 using an Indian rupee to US dollar exchange rate of 54.

Given temporary delays in our project transformation work and lengthening ramp-ups from new clients, we believe our second quarter revenue may be flattish sequentially. In the second quarter, we will recognize annual (inaudible) single digit salary increase and also do not expect to enjoy the one (inaudible) tax benefit we saw in the first quarter, thereby impacting our adjusted EPS in Q2. While we are maintaining our guidance for 2013, we anticipate most of our growth will occur in the second half of the year.

Stepping back from the first quarter results, we remain extremely bullish about the long-term prospects in the business, both in outsourcing and in decision analytics. We are in robust growth markets, have healthy deal prospects, and enjoy a blue chip client list, with whom we are deeply entrenched. We are making the right investments to best position ourselves for the multiyear growth we see in our business.

And now, we would be happy to take your questions.

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

Thank you. My question is partly a clarification. In the press release, obviously you had this line which said that you anticipate most of the growth to occur in the second half of the year. Were you talking about revenue ramp or was it related more to EPS impact? And I mean given the performance in 1Q, which is generally speaking a little bit ahead of certainly where we expected, does it kind of imply that there is potential upside in the back half to numbers? Is that what you're kind of getting at here? (Inaudible) in the case of the ramp.

Sure, Ashwin this is Rohit and I'll take that question. What we are saying is that we would expect our second quarter revenue to be flattish compared to our first quarter and then the second half of the year for our revenues to increase progressively for us to be able to get to the midpoint of our guidance range on revenue.

In terms of our EPS, there are certain benefits that we got in the first quarter that will be an impact in terms of a salary increment that we've given to our entire work force effective 1st of April, which will have a full quarter impact, as well as with the tax rate going up, our EPS will get negatively impacted by these factors in Q2. And consistent with the revenue growth that takes place in the third and fourth quarters, we would expect our EPS to go up significantly in the third and fourth quarter of the year.

I hope that clarifies how we see this playing out for our business.

That's very useful. The other question I had was on Landacorp and what the initial traction is. Is the entire portfolio of clients that you acquired there at a satisfactory margin level? And what's the interest that you see, particularly given healthcare reform and so on?

So with the Landacorp acquisition we've been really delighted with the acquisition that we have done for a number of reasons. Number one, the strategic fit that we had thought about what Landacorp would provide to us, that vision is being realized and we are seeing that resonate very well with our clients and with our prospects. The existing client portfolio of Landacorp, I think the combination with Landacorp and EXL strengthens the support that we can provide to their existing customers, and again, that just positively reinforces the work that we are doing and the revenue stream that we have with existing clients.

The one area of positive surprise for us has been that some of the clients, which had actually moved away from Landacorp, from their old legacy platform to other competitor platforms, now seem to be coming back to Landacorp's new platform, which is the CareRadius platform. And particularly given all the changes that are taking place in the healthcare industry and the timelines that are associated out there, these revenue streams are coming back into our portfolio and we are delighted by that.

So I would characterize the acquisition and the integration as having worked really well and we are very, very pleased with the combination of Landacorp and EXL.

Thanks. Last thing, just to -- and just because there's a lot of interest on it with regards to immigration reform and the impact on EXL. I don't think there should be much, but I just want to clarify. Thank you.

I think that's a question that must be on several people's minds and let me clarify and confirm. There is no impact of the proposed immigration bill to EXL. The levels of visa-based resources that we use in the US is significantly below the thresholds that have been stipulated in that bill. And of the total employee base that we have in the US, which is approximately 700 employees, the visa -- the employees which use the H1-B visa and the L visas are well below 15%.

Thank you.

Thank you. And our next question comes from the line of Joseph Foresi from Janney, Montgomery, Scott.

My first question just on the transformation business, we've been some lumpiness in that business before. Maybe if you could go into greater detail about what you're seeing in the pipeline and what gives you comfort that this is a two-quarter thing. I know at the beginning of last year we saw sort of the same situation.

Certainly. This is obviously a repeat of the movie that we saw in 2012 and let me try and clarify what we think is happening in this business line. First off, in our transformation business, we think there are two parts. One is a core annuity base of revenue and recurring revenue that we get from our clients. And the second is a project-based revenue stream that we get from our clients, which is discretionary based. The second part of the revenue, which is the project-based discretionary is the volatile part and it is difficult to predict as to which quarter we will get the revenue from that discretionary element and in which quarter we will see a spurt take place and which quarter it will wane off. Clearly, it did come off very significantly in the first quarter of 2012 and again in the first quarter of 2013.

For the core business that we have in terms of our analytics and annuity based and recurring based revenue streams and transformation, we are seeing extremely strong demand in the market environment and our solutions are resonating extremely well with our clients and prospects. We continue to grow our business both with existing clients and we continue to add on new clients at a very significant pace.

And therefore, we would expect this business to continue to grow significantly year over year and the long-term trajectory of this business line is going to be upwards.

Okay. And secondly, I think -- and I just wanted to get some clarity on this point as well, I think you had talked a little bit about some issues on the discretionary spending side. But it sounds like from your prepared remarks that the pipeline continues to be very, very strong and you're even seeing larger deals. Can you help us reconcile those two from a demand perspective? Why would discretionary spending be a little bit lighter pockets of issues while the pipeline remains really strong?

So I think that's a great question, Joseph. Let me try and address that. In terms of the discretionary spend, we saw several of our clients engage with us in the third quarter and fourth quarter of 2012 and exhaust their budgets in calendar year 2012. They seem to have started off very cautiously in the first quarter of 2013 and that's why we've seen a ramp [off] of the discretionary spend in the first quarter. At the same time, the large deals that we are seeing both in outsourcing and in transformation, these are annuity based, recurring revenue streams and these are structural changes that our clients are making to their business operations. And we continue to see some very large deals and a very strong demand for these types of opportunities.

So to us the secular trend and the more fundamental and core basic tenets of our business remain fundamentally intact. However, there is volatility associated with the project base and the discretionary spend.

Last one from my end. Have you seen a pick-up in the discretionary spend since heading into the second quarter? And then finally, what is your visibility like towards the back half of the year now that you have maybe a little bit more analytics in the business revenue base?

So on the analytics piece and on the annuity-based piece we continue to see good traction and there the visibility is high. But on the project-based revenue, we have not yet seen an uptick that has taken place. Keep in mind that this uptick could happen very quickly, but as of now, we have not yet seen that uptick take place.

Thank you.

And our next question comes from line of Manish Hemrajani from Oppenheimer.

Hi, thanks for taking my call. Given that your revenue in 1Q, where it is, and flattish revenue guidance in 2Q, you would need a significant acceleration in growth in the second half of the year to get to the midpoint of the range. What's your confidence level to get to that midpoint of the range for the year?

Manish, you're absolutely correct in your assessment and I think for us the second half does become a much more critical half. I think the reason for our confidence is the fact that we can see some of the client pipeline and the client demand in front of us. And therefore, for us, the visibility and the confidence level remains the same as what we had in previous years or what we had at the beginning of the year. And there certainly is risk associated with our guidance, but it will largely depend upon how the discretionary-based, project-based revenue comes in. If we do see that kick in early, I think the risk will be mitigated. If, however, we don't see that come in, I think the risk will be there.

So right now, we feel good about the guidance that we've given, but there certainly is risk associated with the discretionary-based project spend.

Got it. And then on your attrition rate, we haven't seen this low an attrition rate since '09. Can you comment on that? Why was it so low and do you expect that level to continue?

We were delighted with the attrition rate coming off so significantly in the first quarter and we do think there's a number of steps that we've taken to improve employee engagement and our attempts to become employer of choice seems to have paid off quite well. But at the same time, we remain cautious because this is only a single quarter data point and we would much rather see several quarters and sustained levels of low attrition in order to be more definitive about our statement.

The other factor that you should keep in mind is typically we pay out bonuses at the end of the first quarter and we also have salary increments that take place on the 1st of April. So many times, employees will wait for these payments to be made out and sometimes we can see a dip in attrition rates in the first quarter because of these reasons.

Thanks. I'll jump back in queue.

Thank you. And our next question comes from the line of Edward Caso from Wells Fargo Securities.

Hi, good morning, good evening. Can you quantify or at least put a box around the percent of your total year's revenue that is discretionary project-based work?

Ed, let me try and address that question as transparently as I possibly can. First off is our outsourcing revenue, which is largely annuity-based and recurring. 20% of our revenue stream is in transformation, which has got annuity components to it, as well as it's got a project-based component to it. We would estimate that a third of our business in transformation is annuity-based and two-thirds of our business is still project-based. So close to about 7% or so would be this project based revenue.

So let me just clarify. A third would be annuity-based, a third would be recurring, and a third would be discretionary project-based revenue and that's how we come to about 6% to 7% of our revenue being project-based.

Okay, so we really are focusing on 6% to 7% of your total revenue pie for the year that we need to sort of see come in, sort of biased to the second half, is that right?

That's correct.

My other question is on the acquisition. You obviously have a lot of cash. You always have a very healthy balance sheet. Is there a minimal level of cash you'd like to hold? Would you go in a net debt position? Why would you do that and maybe what kind of acquisitions would you be looking for? I just want to make sure Jared is doing some work here.

I certainly hope he is. I would say that the market environment for doing acquisitions remains very attractive and we do have several targets in our pipeline. And we would hope that we would be able to do some acquisitions in the calendar year.

What type? Are you trying to capture IP? Are you trying to capture clients? Are you trying to capture geography? Give us sort of a framework where you're looking, please.

Sure. First off, our entire business model is based off of vertically-driven, industry-focused business services, business model. So we would continue to look at acquisitions that can beef up some of our core industry verticals and clearly, for us, banking and financial services remains a high priority area that we'd like to beef up. We've already made some investments in the healthcare industry vertical and we would continue to look at expanding our presence out there. And within insurance, we think we have a dominant presence, but anything that could enhance our capability within the insurance vertical would also be attractive. So the number one priority for us would be to deepen our capabilities within the industry focused leading verticals that we've got.

The second area of focus for us is going to be geographic expansion and if we can expand geographically, that gives us a much more broader geographical delivery footprint. That would be very attractive to us.

And the last area is actually an area in analytics. We think we've got a very strong capability in analytical services, but it is a high growth area and there are multiple service lines within analytics, which a service provider like us can participate in. And anything to expand the breadth of service offerings in analytics would be attractive.

Let me also address your question about the capital. We do like to keep a certain amount of cash on our balance sheet, but we are also very, very prudent in terms of going ahead and doing acquisitions that make strategic business sense for us. So if we had to take on debt to do a larger acquisition we absolutely would do so. We do have banking lines that are committed to us and we have the capability of using leverage should the right opportunity arise.

Thank you.

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

Hi, thanks. Just a couple of clarification questions I guess on transformation, I know last year we saw a nice 2Q ramp. Here we're talking about second half. I heard some of the reasons, but what's the key difference here? Because shouldn't seasonality still play a role with project ramps when all is said and done? Trying to better understand the difference between this year and last year on transformation.

On transformation, we certainly would expect to see our revenues go up from our first quarter level and so we certainly are factoring that in. But that is going to be because of our core annuity base and recurring revenue streams within transformation. What we are not sure about as yet is about the transformation business, which is project based and which includes a discretionary spend. It does seem and feel a little bit different as compared to last year. But as I said, we are uncertain about it at this stage and we'll know it when we see it or we don't see it and that uncertainty will be lifted at that point in time.

I'm just trying to remember back this time last year when you were talking about it. I mean we're a month into the quarter. Can things change that quickly I guess within the last couple months of the quarter to see a benefit there or not necessarily? Just trying to understand the --

Yes, I think the one thing which you should be cognizant of is for project-based revenue, most of the work is done onshore. We already have the resources onshore, which are there. So we have the capacity to take on work pretty quickly. And the discretionary spend, when our clients decide to engage with us, the lead time for us to engage is a couple of weeks. So actually, the revenue on that can be realized pretty quickly.

That's good to know. And again just another clarification, the transitions, is the overall impact still around $20 million this year over the prior year? And what's the magnitude of the third quarter transition that you were referring to? Is that different from what you were thinking before?

No, the client transitions are exactly in the same place as we had thought previously when we had given out guidance and also when we had shared with you at the end of the third quarter last year. They continue to represent between 5% to 6% of revenue headwind growth for us and we think that the transitions would be fully completed by the end of the third quarter this year.

Okay, terrific. That's all I had. Thank you.

Thank you. And our next question comes from the line of David Grossman from Stifel.

Thank you. I missed a piece of what you just talked about, Rohit, so sorry if this is a little bit repetitive. But can I go back to the mechanics of what happens sequentially? Could you perhaps help us understand how much of the flatness in revenue is a function of the OPI customers coming off and what the impact is sequentially? And then secondly, the expectation for the transformation business, would we expect that to be flattish sequentially with most of the decline coming in the BPO business from the OPI transition?

Sure. So for us, as I said, the client transitions represent a 5% to 6% impact on our revenue. It is pretty much evenly spread with perhaps a slightly higher amount in the third quarter of this year. So that's how we would anticipate the transition of client revenue playing out. In the first quarter of the year we did see some project based discretionary spend come off and that's the reason for our transformation service business line actually declining in value from the fourth quarter of last year. We continue to see acceleration of our annuity base and recurring revenue streams within transformation. We continue to see acceleration of our outsourcing business and we would expect that that trend would continue throughout the year.

Does that help?

Yes. So the 5% to 6% is just year-over-year impact on overall revenue growth and all of that would be in the BPO segment, right?

That is correct.

Right, okay. And then I'm wondering, Vishal, can you break out how much of the margin compression was FX versus some of the other factors that you talked about?

Yes, so from a quarter-on-quarter basis, the FX impact is about 40 BPs from Q4 to Q1 and on the year-to-year basis, actually, FX was a benefit of over 1%.

Okay. And the 40 basis points, is that sequential impact?

Sequential impact, yes, Q4 to Q1.

Okay. And I guess going back to some of the comments you made about the pipeline, Rohit, and these larger deals, what is your expectation of the timing of when some of these deals may get awarded? And I'm wondering if you could maybe help us better understand the size of these deals and whether they're similar to what you have in your existing portfolio or whether they look different?

So David, let me try and give you as much color on this as I possibly can because, frankly, this is a big question that we struggle with ourselves since the timing of the decision of these large deals is highly uncertain and it does tend to move from quarter to quarter and sometimes from year to year as well. But we have, today, in our pipeline at least four deals, which are 1,000 FTEs or higher in terms of outsourcing opportunity. And so that represents huge deals for us, each of which could eventually end up being $20 million to $30 million of annual contract value.

We also have multiple deals, which are platform-based services deals, and again these deals tend to be large deals. However, these deals do require an upfront investment for a couple of years in order to enable the conversion from existing platforms.

And then we also have some large [sole] platform deals in our pipeline, particularly in healthcare, which are large deals, which are standalone platform deals. These deals do not require an upfront investment and these would actually be accretive from day one.

So it's a broad cross section of deals that we've got in our pipeline, but certainly, there are a number of them which are large and substantive and the timing of the decision making of these deals continues to remain uncertain.

So if I think about those three buckets, then, these platform deals that don't require upfront investment, that's relatively new for you, right? I'm assuming that comes with the Landacorp acquisition. And if that's an accurate assumption, should those come at much higher margins than the other two buckets?

That is correct, David. It does come with the Landacorp platform acquisition in the healthcare vertical and those would be higher margin deals.

Okay, and just one last question. You talked about ramping up the hiring levels, particularly in analytics. And then on the same token you talked about some uncertainty in the discretionary spend, ramping in the back half of the year, although you are confident in the overall pipeline. Could you help us reconcile those two? Is the hiring specific to contracts that are in hand? Will you actually have work scheduled to start where those people will be deployed? Or are you just hiring in anticipation of the demand ramping in the second half of the year?

Well, again, let me try and provide you with color. The hiring that we have undertaken is largely in India and this is basically means it's for work that would be annuity-based or recurring work that we would expect to do in an offshore location. The hiring that we've undertaken also requires close to about three to four months of training of these resources before they can be productive. And therefore hiring these resources in advance of the demand allows us to train these resources and have them be productive at the point of time when we will get the revenue from our clients.

The discretionary project based spend that has come off, as I said earlier, is serviced by our employees, which are largely onshore based here in the US or in the UK. And there, our staff strength remains the same. But because we've kept our staff strength the same, our margins have been impacted because when that revenue drops off, our margins get impacted. So that's how we're thinking about our business and that's why we feel confident and good about the core annuity and recurring base of our business and that's why we are hiring ahead of time. But on the project-based revenue, we have excess capacity right now and we are carrying that staff strength onshore.

Okay, very good. Thank you.

And our next question comes from the line of David Koning from Baird.

My first question, I know in the last two quarters of the year, as somebody else mentioned, growth will probably have to be probably in the high-single digits sequentially each of Q3 and Q4 to kind of get to around the midpoint of the full year guidance. Would that be similar growth in both the BPO and transformation segment? Do you expect both to be kind of around the same levels those two quarters?

Yes, David, we would expect growth in all of our segments in Q3 and Q4. So this includes transformation. It includes our platforms and it includes our outsourcing segment.

Okay, good. And then in the second quarter EPS, when we look at the components, I think you said flat revenue sequentially. The tax rate will go up so that puts a little pressure on EPS. But do margins also go up? I know transformation margins were pretty low in Q1. Do we get margins to go up so that EPS is also pretty flat sequentially?

David, hi, this is Vishal. The margins will go up in the transformation business, but bear in mind we also have salary increments, which will more than offset that margin increase. So we expect that from one-time benefits, which we had in Q1, the Q2 EPS actually will decline.

Okay. Yes, that makes sense. And then just finally, how big was Landacorp in Q1? How much revenue did it contribute?

David, we don't break up the revenue by platform. It's all included in our outsourcing revenue segment. And it basically performs as per plan as we had shared with you earlier that we had expected Landacorp to end up going closer, about $20 million for the year, and it's performing as per that expectation.

That sounds great. Thank you.

Thank you. And our next question comes from the line of Paul Thomas from Goldman Sachs.

Are the decision-making cycles for large deals slower at this point in the year compared with the year ago? I'm just wondering with respect to your commentary about the start of the year looking similar to last year. Are the cycle times about the same or slower?

Hi, Paul. This is Rohit. I would say that the cycle times for large deals generally ends up being longer than smaller size or midsize deals. And that's how I would think about it. I don't think there's been any change in terms of the cycle time this year versus last year. These are large complex deals and because they are complex and large, the decision cycles will remain big. What we are seeing is not only are we seeing large deals come into our pipeline from new clients, we are also seeing large deal opportunities from our existing clients.

And we are seeing that there is a bunching up of activity that is taking place, which has got nothing to do with I guess independent decision making or the cycle times, but it just so happens that that's how it's playing out.

That's helpful. And then you talked earlier about the potential for four deals with 1,000 FTs or higher. Could you refresh us on how many of those -- or deals of that size you closed last year?

Last year, we did not close any such deal, Paul. We would typically expect to close one or two of such types of deals and that would be a good win rate for us.

Okay. Thanks a lot, guys.

Thank you. And our next question comes from the line of Mayank Tandon from Needham and Company.

Thank you, good morning. Rohit, sorry to beat a dead horse here, but just doing the math here. So discretionary spending clearly is key to hit the guidance numbers. But how much of the revenue also is contingent on some of those big deals you mentioned converting into revenue in the back half of the year?

Hi, Mayank. This is Rohit. We wouldn't factor in any of those big deals and the revenue from those big deals for the current calendar year. Those deals, if we win them, will really have an impact for us for 2014 and beyond. But there are a number of smaller deals that we had won last year. Those ramp-ups continue to take place and then there are ramp-ups from our existing clients which are taking place, which would have an impact on our revenue in the second half of the year. And we certainly expect our transformation business to continue to grow aggressively into the back half of the year.

So just to be clear, so it is a 6% to 7% of revenue, which is project-based that is a swing factor in terms of where you fall versus your guidance range?

Yes. Keep in mind one thing, that our guidance is very, very narrow and between the bottom end of our guidance range to the top end of our guidance range is a 2% differential. So a 7% project-based revenue can have a meaningful impact when our guidance range is so sharp. So that's how it does have a material impact on our guidance.

Got it. That helps. And also, just on a broader note, Rohit, you talked about competition from the big IT services firms. Could you give us a sense of what your win rate has been, especially in going head to head against some of these large players? If you have any evidence in terms of how you're doing that would be very helpful.

So the data points that we have, Mayank, are basically the midsized deals where we've competed against the large IT players and there our win rate has been pretty much the same as in previous years. And particularly in our core industry verticals, we continue to win deals as per expectation. On these large deals, we are yet to see as to how these will play out. We think we are well positioned. We think these deals are progressing well. We think the value proposition that we bring to these prospects is compelling. But I think the proof will be in the pudding when we get to see what the decisions are with these large deals.

And just one final question. You talked about your value proposition. What are the big IT services firms selling in terms of their value proposition when they're going head to head against you?

So the big firms are selling their size and scale. They're selling a combination of IT services and BPO services and they are basically talking about their relationships that they have with these clients on the IT side as being a strong motivating factor for these clients and prospects to decide in their favor.

From our perspective, it is the industry expertise. It is the operations management and the operations excellence capability. It is also the analytical services capability and our ability to embed in analytics along with the operations management capability. And it is our unique platforms that we've got, which we think makes it a compelling value proposition for these clients. And then particularly for some of these clients, the level of attention that we can give to them as a large client of ours is certainly far, far more valuable to them than being one of 1,000 clients with some of the larger players.

And Rohit, I didn't hear you mention price, but I would imagine that they're also trying to undercut you on price in some of these opportunities?

I think pricing is something which the clients are pretty careful about. And while pricing remains competitive, I don't think our clients make the decision solely based on price. And they do look at a long-term relationship. They do look at the value proposition playing out. And the pricing is a factor, but it's not a dominant factor.

Okay, thank you, Rohit.

Thank you. And our next question comes from the line of Vincent Colicchio from Noble Financial.

Rohit, do you have any large contracts coming up for renewal in the 2Q that we should be concerned about?

So we don't really have large contracts that are coming up for renewal that you should be concerned about. I think we did have a few contracts this year which we have been able to renew successfully and there is nothing this year that is significant that should pose a concern or worry.

Okay. My other questions were answered. Thank you.

Thank you. And our next question is a follow-up from the line of Ashwin Shirvaikar from Citibank.

Hi. So, Rohit, this may seem like a strange question, but we use the word discretionary off and on. I just wanted to kind of understand if -- how discretionary is analytics work ultimately? Are banks basically going to say I don't want to do work-around fraud, or how discretionary is it?

So Ashwin, I think analytics is not that discretionary because the value that a client receives is anywhere between 5 to 20 times the amount that they're investing with us in terms of the return. And then in today's economic environment that makes it a compelling investment for them to make.

The part that is discretionary is particularly the part associated with process re-engineering and redesign or the part associated with any structural change that they want to make, or a one-time initiative that they want to launch, which they could decide to do in one quarter versus another. Those types of projects are discretionary and depend upon the funding and the availability that clients have in terms of their budgets. Analytics is an area where everybody is allocating more and more capital to and with the benefit and the return that they get on analytics, it actually makes it far more compelling than discretionary.

So would you be able to break out the work as analytics versus process re-engineering and all those other things or is that too granular?

We don't break that out as such. But just in terms of rough math for us, analytics ends up being close to half of our total transformation business. And the other two elements are our operations and process excellence and our finance transformation business line.

And Ashwin, just to keep in perspective, the decision analytics business has over 55% of the revenue (inaudible).

Got it, yes. Last thing is a clarification. The two clients that are going away from PI, is that a steady ramp down or is that kind of lumpy that one day you have some [set of] revenues and then there's a cutaway and you don't have it?

Well, as we mentioned to you, Ashwin, one client has fully ramped down as of the first quarter of this year. So that one is done and over with. And the second client will ramp down by the end of the third quarter. There will be some tail off in the second quarter and some tail off in the third quarter and it will be in a two-step format, but it will both be within the quarter.

Got it. Thank you.

Thank you and I have no further questions in the queue. I would like to turn the conference back over to Rohit Kapoor for concluding remarks.

Thank you, operator, and thank you everyone for joining EXL's first quarter earnings call. We are in a transitionary period at this point of time, but we remain very optimistic about the demand environment and about our current positioning in the marketplace. We look forward to continuing to execute on our business plan and delivering on our guidance. Thank you all for joining and we will see you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.