Exlservice Holdings Inc (EXLS) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the ExlService Holdings, Inc., Q2 2013 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. Charlie Murphy, Head of Investor Relations. Please go ahead.

Thank you, Alley. Greetings and thanks to everyone for joining our second quarter 2013 financial results conference call. I am Charlie Murphy, Head of Investor Relations. With us today 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 second quarter financial results press release we issued this morning. We have also updated our investor fact sheet on the Investor Relations section of the 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 thank you everyone for joining us on our second quarter earnings call. The agenda for this call will be as follows. First, I will discuss our second-quarter performance and a few recent business highlights. Second, I will provide an overview of the demand environment across our businesses and give color on our updated outlook for the second half of this year. I will then turn the call to Vishal for more detailed commentary on our financial results and outlook. Following this, we will be happy to take your questions.

Second-quarter results were slightly better than expected on a constant currency basis with constant currency revenues being $1 million higher than on a reported basis. As expected, revenues were flattish sequentially. Modestly better than forecasted volume growth in our outsourcing business was offset by a sharp depreciation in the Indian rupee versus the US dollar and weaker than expected project-based revenue in transformation services.

In the second quarter, EXL expanded its capabilities in several key delivery locations. We added clinical operations management delivery capability in Kochi, India, supplementing our strong clinical presence in the Philippines. Our new center in Cebu in the Philippines had a solid start and adding to our existing and rapidly growing delivery centers in Manila.

While the growth of our transformation business was somewhat subdued in the second quarter, we are encouraged by the fact that our decision analytics business grew 5% sequentially. This sequential growth was driven by new client relationships in healthcare and growth in existing client relationships in banking and financial services, particularly some of the large relationships we won last year. We are encouraged by the momentum we see in this business in the second half of the year.

Since our earnings call EXL has had several accomplishments in the marketplace validating our domain expertise in our targeted verticals. I would like to mention three in life insurance and three in healthcare. In life insurance, we were presented with the Excellence in Education Award from Life Office Management Association, or LOMA, pertaining to training we provide our employees. This award, typically given to insurers, demonstrates our intellectual property in educating our employees and getting them certified on insurance industry standards. To date EXL's in-house Insurance Academy has trained over 400 LOMA certified professionals and over 8,500 employees since its inception.

Additionally, we were honored to be named Genworth Financial's Supplier of the Year for Value Creation for our management of their variable annuity business, including transitioning all variable annuity servicing during 2012 within committed timelines and with no negative service impact.

Leveraging an onshore and offshore model to deliver the highest quality operations management services on a complex insurance product like variable annuities is a testament to our disciplined process management capabilities and domain expertise in this vertical.

Finally, in the second quarter Gartner positioned EXL's LifePRO platform in the Leaders quadrant in their report Magic Quadrant for North American Life Insurance Policy Administration Systems published in June. We see a bright future ahead for LifePRO as insurance firms look to trusted providers to handle administration of policies in a range of products from term and whole life, to annuities, to disability insurance, to long-term care.

Turning to healthcare, first, EXL finished second out of over 1,500 participants in the Heritage Health Challenge, a global predictive modeling competition designed to develop analytics based solutions to decrease the number of avoidable hospital visits in the United States. The highly proprietary algorithms and models we develop here demonstrate our thought leadership in healthcare. Second, during this quarter EXL was named a High Performer in Healthcare Payer BPO by Horses for Sources. Third, we were recently selected by a leading Blue Cross Blue Shield health insurance provider to implement EXL Landa's CareRadius medical management platform.

This substantial deals not only adds millions of members to CareRadius but also validates our acquisition of Landacorp last year and is a strong indicator of EXL's leadership in the healthcare domain. Our leadership position in insurance and healthcare continues to be strong and I am pleased with how we are performing in the market in these verticals.

Turning to EXL's demand environment, during the second quarter the pipeline in finance and accounting was the most active by far. We recently won a good sized F&A deal and are in an excellent position on a number of other F&A deals across a range of verticals with marquee clients. Our strategy in F&A is paying off well.

Over the past two years, we acquired OPI and added deep skill sets and referenceable client relationships. Today, we are a major player in this business and the share of F&A deals in our overall deal pipeline has increased substantially.

In the last month, we signed two material long-term contract expansions in our outsourcing business which will begin ramping up later this year. One is in our travel domain and one is in healthcare. Both are for highly complex industry-specific operations management services. We won these deals because of our strong client relationships, focused domain expertise and tangible business impact that we make for our clients.

Looking ahead, our pipeline remains strong across our businesses. Among our existing clients [we fuel] the majority of our revenue growth in a particular year. Our deal pipelines are particularly strong in operations management for insurance, healthcare and banking and financial services as well as in decision analytics. Among new prospects in our pipeline demand for finance and accounting, insurance and healthcare and decision analytics is strong. Our pipeline continues to include very large deals from both new and existing clients across industry verticals.

In the next several years, we see product management, operations consulting and partnerships playing a larger role in how we go to markets. Over the last year, we have invested heavily in our capabilities here including in a dedicated products and partnerships group. A recent success from this team comes from our insurance business.

EXL's medical records and attending physician summarization solution was launched in the second quarter. This tool designed for insurance claims adjustors and customer specialists synthesizes the many disparate medical records an insurance claims department uses into a highly usable centralized tool with embedded analytics. It provides actionable insights to claims adjustors and all key information in one single place to drive better productivity, accuracy and efficiency.

In the next several quarters, we expect to expand EXL's ecosystem through several more partnerships with best-of-breed technology providers. In the second quarter, we announced a partnership with GT Nexus to provide comprehensive services to the global supply chain industry.

Now turning to our expectations for the second half of this year, as you would have read in our earnings press release, we are revising our 2013 revenue forecast to $475 million to $483 million and our 2013 adjusted diluted EPS forecast to $1.71 to $1.79 per share. This revision is driven by three factors. First, recent rupee depreciation caused a $6 million forecast change to the portion of our revenues were clients assume foreign exchange risk. EXL's profit before tax is neutral to changes in FX which is the goal of our hedging strategy. Second, project-based spending remains cautious. This is the largest reason for the decline in our guidance. As you all know, even though project-based revenue is a small percentage of EXL's revenue, it is highly volatile. Such spending was subdued in the first half of the year and we now expect it to be subdued in the second half of the year as well. Third, we have seen slower than expected business ramp-up. The slower than expected business ramp-ups are due both to delayed decision making and clients preferring to start relationships with smaller value pilots than we previously anticipated. For example, recently we have engaged four marquee clients on small pilots. Each one of these pilots has the potential to lead to substantial long-term relationships down the road. However, in the current year they'll contribute little revenue.

Looking ahead, our key secular growth engines remain healthy. Our client relationships are large and growing with the leaders in our industry and in our targeted industries. Many of these relationships are highly underpenetrated with EXL in the best position to expand. We continue to enjoy a robust pipeline of future business. Both the number of deals we are seeing and the average size of deals is increasing nicely.

Operations are turning in unprecedented fashion to industry expert service providers like EXL who can apply tested operations management expertise using a global network of professionals to capitalize a competitive edge.

Our analytics and platform technology businesses are highly differentiated and leaders in our targeted industries. Coupled with our heritage of operations management leadership, these new businesses make us an attractive alternate for clients as a strategic partner. We look forward to acceleration in the second half of this year driven by our expectation for broad based volume increases across our businesses.

Now I will turn the call to Vishal.

Thank you, Rohit and thank you everyone for joining us this morning. In the second quarter, EXL reported revenues of $116 million, up 7% year-over-year and flat sequentially.

On a constant basis and excluding previously announced low-margin client transitions, revenue grew 11% year-over-year and 1% sequentially. Foreign currency translation had a negative 1% impact on year-over-year and sequential revenue growth.

For the first half of the year, we have generated solid revenue growth in both of our business lines on a constant currency basis and excluding client transitions. The outsourcing business grew approximately 16% and transformation services grew approximately 10% with an overall growth rate of approximately 15%.

In our outsourcing business revenues grew 10% year-over-year and 14% on a constant currency basis excluding client transitions. Year-over-year growth was driven by expanded relationships with existing clients in insurance, healthcare and utilities operations management as well as by the acquisition of Landacorp. We continue to penetrate our key relationships with new service offerings.

Outsourcing revenues are flat sequentially as negative foreign currency translation offset expansion with existing healthcare customers in our URAC accredited facilities in Philippines.

In transformation services revenue was down 2% year-over-year and up 1% quarter-over-quarter.

Year-over-year growth was negatively impacted by delays in project-based spending, particularly in process reengineering consulting and finance transformation. Modest sequential growth in transformation services was driven by a 5% sequential growth in decision analytics fueled by new clients in healthcare and business services and existing clients in banking and insurance. Offsetting sequential growth were delays in project-based spending in our finance transformation practice.

In the second quarter gross margin of 36.3% was down to 60 basis points year-over-year and 80 basis points sequentially. Year-over-year margin decline was driven by annual wage increments, capacity under utilization in our transformation services business and setting up of new facility centers. These factors more than offset margin benefits from rupee depreciation and the addition of higher margin Landacorp revenue.

Outsourcing gross margin of 38.9% was up 20 basis points year-over-year driven by foreign exchange. Sequentially, outsourcing gross margin was flat as margin benefit from FX were offset by annual wage increments and facilities expansion as mentioned by Rohit.

Transformation services gross margin was 22.7%, down approximately 17% year-over-year. This decline in gross margin was due to capacity under utilization which was in turn as a result of delay in project-based spending coupled with the advance hiring. We expect gross margin in transformation services to improve substantially in the second half of the year due to accelerating revenue growth and utilization, particularly in the decision analytics which enjoys a robust near and long-term growth outlook.

Our G&A expense were 11.9% of revenues, down 100 basis points year-over-year and 80 basis points quarter-on-quarter. The year-on-year improvement was driven by expense management of professionals, general and specific costs as well as the reclassification of one-time benefit of business employment incentive previously recorded as other income. We will continue to focus on our expense base to drive operational efficiencies.

Sales and marketing expenses were 7.9% of revenues, up 80 basis points year-over-year and down 50 basis points sequentially. The year-over-year increase was fueled by our Landacorp acquisition, a critical piece of a rapidly-growing healthcare business. We continue to build our focused sales force across our targeted geographies and domains. In the second half we expect sales and marketing expenses to comprise approximately 7% to [7.5%] of revenue in line with our long-term range.

In the second quarter, we had an FX loss of $0.6 million, driven by our hedging program in response to a depreciating Indian rupee. With the rupee now at -- assumed at INR59, we are updating our expectations for the second half of the year to an FX loss of $3.5 million to $4 million.

In the second quarter, the tax rate was 28.1%, down 50 basis points year-over-year and up 460 basis points quarter-on-quarter due to a one-time gain realized in the first quarter. On a first-half basis, our tax rate was at 25.8%. For 2013 we now estimate our tax rate to be in mid 20%s due to factors including slightly higher than expected revenues from tax advantaged geographies and certain one-time benefits.

Adjusted EBITDA was $22.1 million in the second quarter, down 5% year-over-year and 1% sequentially. Annual wage increment, capacity under utilization of transformation business and advance hiring in analytics rose the a year-over-year decline more than offsetting the benefits of foreign exchange and operating expense leverage. Year-to-date we generated $25 million in cash from operations and spent $10 million on CapEx. For the rest of the year, we expect CapEx spend of between $10 million to $12 million.

Net income was $9.2 million, up 2% year-over-year and down 5% sequentially. Adjusted net income was $12.4 million, up 5% year-over-year and down 8% sequentially.

Diluted EPS was $0.27 flat year-over-year and versus $0.29 in the first quarter. Adjusted diluted EPS was $0.37, up from $0.36 year-over-year and down from $0.40 in the first quarter. DSO stood at 59 days, even with the March 31 quarter.

We enjoy a strong balance sheet with over $120 million in cash and equivalent and no debt. We are well positioned to focus on the right acquisition opportunities.

Turning to 2013 guidance, as Rohit outlined we are revising our guidance for revenues to $475 million to $483 million and for adjusted diluted EPS to $1.71 to $1.79 based on a Rupee to Dollar exchange rate of INR59 for the rest of the year. At this exchange rate, Rupee depreciation will impact our revenue forecast by approximately $6 million or 1.4% on an annual basis. This is a mechanical adjustment on the portion of our revenues where our clients bear a foreign exchange risk. While our revenues get affected by this FX movement, it is neutral to our pre-tax income as gross margin is protected on this portion of our portfolio. For the rest of the portfolio, our hedging program is working effectively to protect our pre-tax income.

Delays in project-based spending and slower than expected business ramp comprise the balance of the revised guidance. We're tightly managing expenses and generating operating efficiencies which will result in our adjusted diluted EPS growing at 8% to 13% faster than revenue. Our guidance does not include any large new unsigned client wins or acquisitions.

As outlined earlier, we expect our transformation business to ramp up in the second half coupled with strong growth in our operations management and platform businesses. Our markets remain strong and we are confident in our position. The strong long-term growth drivers of our business are intact, our pipeline is healthy and our core businesses are performing well.

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

(Operator Instructions) Edward Caso, Wells Fargo.

Hi. Good morning or good evening. I'll be curious how your approach is on utilization, both in the outsourcing side and in the more people-oriented, the transaction-oriented or the transformation side of your business. What are the decision factors in either adding capacity or adjusting your people count, which I guess on the discretionary side is more sort of in the local market? Thank you.

Sure, Ed. This is Rohit. In the outsourcing business, typically we have a very strong visibility into our revenues many months in advance, and we typically will plan to onboard physical capacity infrastructure as well as employee capacity pretty much to meet the requirements of the demand as it gets finalized and there the process is pretty much done on a just-in-time basis. However, on the transformation side of our business the market demand for our services is volatile. The engagement pattern requires us to be agile and flexible to be able to ramp up or ramp down at short notice. And therefore, we do maintain surplus capacity both in terms of physical infrastructure as well as in terms of our available talent pool to be able to address client demand opportunities.

As you would know, for us in our transformation business we have been making investments both in our physical infrastructure as well as the fact that in the first half of the year, we actually added incremental people resources to cater to the demand that we would expect to get from our clients in transformation. That demand in transformation did not materialize in the second quarter which is why we had a lower utilization in the transformation business and that led to lower gross margins of our transformation business.

We do expect that the demand in the transformation business will pick up in the second half of the year and our utilization rates will improve in the second half of the year and also improve our gross margins in the transformation business.

To add to that just in terms of our utilization rates from Q4 of 2012 the decline was about 10%, and we expect that that will be made up in the second half, that we expect that utilization rates will go up in the second half.

Is the utilization issue isolated to a few accounts in the transformation side, so is it movement by a few accounts or is it more broad based than that?

The project-based revenue in transformation, let me give you a better color on it. As you know, we've got three service lines within our transformation business. We've got decision analytics, we've got operations and process excellence, we've got finance transformation, which constitute an entirety of the transformation business. For us, the operations and process excellence business lines as well as finance transformation are entirely project-based revenue and there the utilization will go up or down based on the demand for our services. The subdued demand that we saw in Q2 was across multiple clients that we saw and it wasn't concentrated with a few client relationships.

In decision analytics, we are converting more and more of our revenue streams to annuity-based revenue stream and there the annuity portion continues to grow nicely. And the decision analytics business, as we said in our prepared remarks, actually grew 5% quarter-on-quarter which is a nice healthy trend, and we'd expect that trend to continue into the second half of the year.

Final question, a little bit bigger question, we're hearing some chatter that maybe the opportunity to outsource IT now is getting more mature and therefore clients are looking to other parts of their SG&A to see cost savings and then this in turn would therefore drive BPO business in general. Is that a fair view of the world and is that good news for you guys?

Yes, Ed, certainly. When you take a look at the pipeline and the level of activity from prospective clients and existing clients that certainly seems to have stepped up over the last 12 months or so. And I think some of that may be driven by the fact that clients are looking for additional cost and economic levers and therefore are looking at business process outsourcing in a much more strategic and significant way.

I do think the demand environment is terrific for companies like EXL and we hope to benefit from the demand that is out there.

Thank you.

David Grossman, Stifel.

Thank you. Rohit, perhaps could you just go back to the revision to revenue, can you help us understand how much of that relates to contracts that are already in hand that may be ramping at slower rates versus new business wins that just didn't materialize during the quarter or materialize, at least in your view, and this won't materialize in the second half of the year?

Sure, David. As you know that we have revised our revenue guidance down to $475 million to $483 million. At the midpoint of that guidance range, which is $479 million, we would be approximately $16 million lower than the low point of our guidance range previously. $6 million of that is due to foreign exchange entirely and $10 million is on account of slower ramp-up as well as a decrease in project-based revenue.

We would attribute the majority of that to project-based revenue declining. And the slower ramp-ups, we did not expect that number to be very significant and the impact in terms of our guidance is only $1 million to $2 million on account of slower ramp-ups. The balance, $8 million to $9 million, is entirely due to project-based revenue.

And you can see that in our transformation revenues that have been reported in Q2, they continue to be weaker than what we would have expected and we also expect them to be weak in the second half of the year.

So can I ask you, as we think about what has to happen in the second half of the year, as we look into 2014 given the ramp rates for BPO et cetera, in terms of the -- I understand the transformation business is going to be more difficult to predict given its project-based kind of characteristic, but in terms of the BPO business do we need to see -- what should we think about in terms of bookings in the second half of the year to sustain that targeted growth rate of kind of 15%-plus organic growth, if you will, in the BPO business?

David, I guess there are two parts to my answer to your question. One is, pertaining to the second half of 2013. For that we think based on the guidance that we've given, we don't really factor in any incremental new client wins that are necessary for us to meet the guidance that we've provided for the second half of the year. What we have is already the existing wins that we have got, the ramp-ups with our clients that are taking place, the new client relationship that we won with EXL -- Landacorp using the CareRadius platform and growth in our transformation business in the third quarter, which is basically our strongest quarter seasonally. And based on that we would expect to meet our guidance for the second half of the year.

For 2014, it will be critical for us to win some more new clients, particularly in outsourcing, and that's something which we would be continuing to look at and focus on.

We think we've got a strong pipeline. We are well positioned in a number of these pursuits, but we do need to convert some more of these in order to have the same level of growth rates that we've enjoyed in the past.

[As I] recall there perhaps were three or four fairly substantial deals in the pipeline at the end the March quarter. Could you give us perhaps a few more details on kind of the progress of those contracts as well as any other new contracts that may have come into the pipeline since then?

Yes. I think, first off it was good news that we had these large deals in the pipeline. And even today on an ongoing basis, we continue to have several large deals in our pipeline even today. The progress on those deals that we spoke about in the last quarter, they have been deals with an existing client which we have won and that's something which will ramp up. However, it will ramp up slower than what we had previously thought. And so some of that ramp-up will take place in the second half of this year and the rest of it will take place in 2014.

We have lost a couple of those deals and we have replaced them with additional new deals where we are in the final stages of decision making by the clients. There has been one deal where the client decided not to move ahead with that particular opportunity. And therefore, if you take a look at the broad mix, we won one deal, one deal was taken out by the client themselves and was now given to any service provider and two deals we lost. And at the same time we've replaced those two deals that we lost with two other large and substantial deals into the pipeline.

Okay. Thank you for that. And then perhaps, Vishal, I just want to make sure I am clear on some of the below the line adjustments. I think you said that [you used to] have about $3.5 million to $4 million FX losses in the second half of the year. Did I hear that right?

Yes, $3.5 million to $4 million for the second half at the exchange rate of INR59. That is correct, David.

Right. And a mid 20%s tax rate?

Yes, mid 20%s tax rate would be our expectation now.

Right. And can you give us some color, perhaps on the stock-based comp and amortization as well?

Stock-based compensation would be in line with what we have in the first two quarters and the amortizations will also be in line with the numbers which we have in the first two quarters.

Okay, great. Thanks very much.

Joseph Foresi, Janney Montgomery.

Hi. Good morning. I wonder if you could talk about what has changed on the part of clients as far as decision making that caused the lack of a pickup? And then [do you have a] new growth rate you need to start thinking about for this business heading into 2013 or 2014, in other words if growth rates moderated or is this just a timing issue?

Joseph, I think on the project-based revenue, it is an area which will always remain volatile. It will be based on clients' agendas for transforming their operating processes and their back-end systems and processes and it's tied to that. It's difficult for us to be able to provide color on when that will pick up or when that will go down because it just depends on the industry verticals, the type of clients that we service and based on the individual decision making of each of those clients.

The fundamental core business for us which is our outsourcing operations management business, the annuity based analytics services that we provide and the technology platform businesses that we have, I think those continue to perform well and those are well positioned. These are stable businesses which have recurring revenues and they grow on an annual basis, and I think the demand environment, as I characterized before, continues to be strong out here.

I think in order for us to be able to get any upside, certainly the project-based revenue will need to pick up quite substantially or if there is an acceleration in some of the large platform-based deals, I think that's another area that could result in the revenue growth rate accelerating.

I mean, what was the change in the project-based stuff? Do you believe that it was based on general macro trends or is it more customer specific? I am just trying to get what we should be looking at in order to kind of figure out whether there'll be a pickup there or whether they will stay kind of where you put in on the guidance side.

Joe, our sense is because this was across multiple clients that it was not customer specific but rather how clients are choosing to address some of these opportunities themselves. There does seem to be a much tighter control over discretionary spending and certainly clients are choosing to cut back at this point of time on some of that discretionary project-based spending.

I think the other aspect is typically a new regulatory change would prompt some of these decisions, and in the last few quarters we haven't seen any further regulatory changes take place. So I think some of this is getting back into a more stable mode of operation.

Okay. And on the pipeline, can you put that in historical perspective for us because it seems like the hiring is increasing which is usually linked to demand? Are we just talking about timing and how large is that from a historical perspective?

Our pipeline today is probably the largest that it's ever been and from a historical perspective it's grown substantially. As compared to 12 months ago or 24 months ago, the size of the pipeline is up by at least a 100% and that's very, very meaningful for our business.

And the last quick question for me, just building on that, any change in win rates or pricing? Are you seeing more competition from the larger players? I am just trying to gauge what your probabilities are converting that pipeline?

The competition from other peer group companies as well as from some of the IT players continues to remain high. There hasn't been much change to the competitive landscape and the competitive index over the last 12 months or so. I think in some deals we have seen pricing pressure and we've seen competitors price aggressively. But it's been pretty much the same story for the last two quarters and no real change out there.

In terms of our win rate, if you take a look at the win rate over the last 12 months, we are pleased with our win rate in some of the deals that are with our existing clients. With new clients, we are again very happy with the deals on the smaller-size deals. And on the large-size deals, there are very few data points. So it's difficult to take a look at that and we'd have to assess that over a longer-term period.

Thank you.

Manish Hemrajani, Oppenheimer.

Hi. Thanks for taking my question. Just digging a little bit deeper into the pipeline, can you probably give us a little bit more color on the pipeline between project-based versus outsourcing?

Sure. The pipeline for us, Manish, is strong across both outsourcing and transformation so that includes annuity based revenue as well as project-based revenue. For us the annuity based revenue is far more important because that's a much more critical determinant of future growth rates of our business and that continues to progress well. It's well diversified across industry verticals. It has got significantly enhanced in size and scale, and we are delighted to see some larger-sized deals coming to the pipeline on an ongoing basis.

The project-based revenue pipeline also is strong, but the conversion rate out there by clients is not that high. And sometimes clients put out those deals but don't really go ahead with those projects and that's I think what's happening in today's environment.

What is your win rate on the project-based pipeline?

Our win rate where clients take decisions is pretty much in line with our win rate across the portfolio and it ends up being between 25% to 33%.

Got it.

Most of the slowness of our project-based revenue is because of clients deciding not to go ahead with their projects.

And of the [8 million to 9 million shares] that you have on the top line for the year on project-based revenue, is any of that pushed out or most of the that is largely canceled?

With the project-based revenue, most of these have a sales cycle of 60 to 90 days and a project duration of again 60 to 90 days. There can be a slippage from one quarter to the other quarter but I think now that we've seen this happen with us for two quarters our expectation is pretty much that it's not a backup of demand that's taking place but rather it's a permanent removal of these deals from the pipeline. And we have to get new deals which are in the project-based pipeline to [satisfy] in order for us to be able to build up this revenue again.

Compared to the last three years, revenue growth obviously has been challenged of late. What longer-term trend you have in place to get your revenue growth back on track?

I think there are a number of things for us. There are new industry verticals and horizontals that we've consciously made investments in which we think will provide opportunities for future growth. The finance and accounting horizontal is one large area where we specifically took actions and we've experienced volatility in this particular horizontal.

We did the acquisition of OPI, as you know, two years ago, and we have had some client transitions take place in this particular horizontal. But at the same time our skill sets and our capability and our relationships have been significantly enhanced, and we think strategically despite the client transitions this positions us really, really well for future finance and accounting opportunities and that's a big part of the market that we'd like to play in. So I think we are well positioned but we certainly have experienced volatility with this vertical.

The same thing is true with the project-based revenue in our transformation line of business. As you know, we typically lead in with our transformation line of business to get entry into new clients and expect to get follow-through revenue with these clients in outsourcing and in operations management. I think for us the transformation business, even though it's project-based, is a small percentage of our overall portfolio, but provides us the critical entry point into our client relationship. So even though it's volatile, it is a necessary part of our overall business model and we continue to make progress out there.

Got it. Last one from me. Attrition rate ticked up this quarter. Is there something you should be reading into that or is it a typical rise [plus the] wage hike?

On the attrition rate, as we mentioned at the end of our first quarter earnings call, we would have expected to see an uptick in attrition. Typically for us Q2 has a higher attrition than Q1 only because of the wage increments that take place on April 1 typically in India and the Philippines. And because of the rate cycle there normally is an uptick in attrition. There's nothing that we would read into the attrition rates.

If you take a look at our attrition rates year-over-year, they've been coming down and we are really happy with the fact that the attrition rates are down in 2013 as compared to 2012 and previous years.

[That's all]. Thanks.

Rahul Bhangare, William Blair.

Hi. Just one question from me. Rohit, over the last couple of quarters you had spoken about adding sales people. Could you just talk about how those sales people are ramping (inaudible)?

Sure, Rahul. As you can see from our sales and marketing expense we've actually been investing and increasing our investments in sales and marketing over the last several quarters. We've invested much more significantly in our marketing function in order to be able to reach out to many more insurances, advisors, analysts and expand the pipeline. At the same time we've also invested in hiring more sales people and client executives to manage both the acquisition of new customers and manage our existing accounts.

I think the new people that we've brought on board are actually performing quite well. We have made investments in sales people, particularly in the healthcare industry vertical, in decision analytics and in finance and accounting, and we can see that the pipeline has improved in these verticals quite significantly and substantially. We now look forward to these sales people converting and closing some of these deals and we will hopefully get to see that over the next couple of quarters.

That's it.

Paul Thomas, Goldman Sachs.

Hi, guys. Thanks for taking my question. Could you reconcile your commentary that you expect stronger volumes in the second half and the slower business ramp during the same time frame, just trying to gauge what the risk is to the second half guidance?

Sure, Paul. For us, the ramps that we would expect in the second half of the year pertain to the deals that we won with our existing clients in the first half of the year as well as some new client wins that we've had where they are going to start out with the smaller-sized projects -- pilots. For us, we also expect the transformation business to increase in the third and fourth quarter.

Typically, the third quarter is the strongest quarter for us, for our transformation line of business, and we would expect that seasonality to play out for the second half of the year. So most of what we are guiding to for the second half of the year is something which is visible to us and we have a high level of visibility into our revenues and into our guidance.

Okay. Then on the contract ramp downs, any change to which you had anticipated previously? Is the timing still the same?

On the client transition that we had previously announced, as we mentioned earlier, one of our clients had transitioned out in the first half of the year. We were expecting the second client to transition out by the end of the third quarter. With the second client there has been a partial ramp down in the third quarter, but we now expect the final and full ramp down to take place only by end of the year.

Okay. Thanks a lot, guys.

(Operator Instructions). Tim Wojs, Baird.

Hey, guys. Just I guess one just a housekeeping question, how much was Landacorp in terms of revenue in the quarter?

Landacorp was about $4.5 million -- $4.4 million in this quarter.

Okay.

Tim, the Landacorp revenues were about the same as in Q1.

Okay.

Which is about $4.4 million.

Okay. That's helpful. Thanks. And then just I guess you guys have historically used the cash for acquisitions on your balance sheet. Have you guys thought about maybe doing some sort of buyback or are you guys still really just focused on acquisitions for cash usage?

So, our fundamental belief is that we can better use the cash by doing acquisitions and we continue to take a look at target companies that we can acquire and integrate into our service offerings and add to our capability set. We've got a pretty strong pipeline of target candidates in our M&A pipeline and are actively pursuing that. We do think there is a tremendous opportunity. At the same time, in certain pockets where we've got a strong interest the valuations have run up and some of these acquisitions have become very expensive. So we want to be able to get the right company at the right valuation and make sure that we do a well thought-out transaction and use the cash judiciously. But we would be looking at doing M&A rather than stock buybacks at this stage.

Okay. And then just on the existing volumes, I know you're talking about some slower ramps, but just in terms of almost like a same-store volume metric, how are existing volumes trending with just your core client base?

Our existing client portfolio continues to perform very well and we certainly do see a rotation in the growth rates among some of our existing clients but they continue to perform very well. Keep in mind also that most of -- not most, but a fair portion of our existing clients have taken on the FX risk themselves and therefore on a reported basis the revenue actually comes down when the rupees depreciate. However, the underlying volume of the client business has actually been increasing quite nicely.

Great. Thanks.

Kunal Tayal, Merrill Lynch.

Hi. Thanks. My first question is what percentage of your cost base today is denominated in the Indian rupee and how much are you hedged for?

Hi. Nearly, I think, 48% to 50% of our cost base is in Indian rupees and we hedge our cost base on a progressive basis. So on the short-term basis nearly 80% to 90% of that cost base is hedged.

Understood. And what would the quantum be let's say going out a little bit ahead FY -- calendar 2014 and 2015?

I think for 2014 and 2015 we hedge around 65% to 70%. For 2014 and 2015 it would be around 55% to 60%.

Got it. Second question, Rohit, on the two new deals that have entered your pipe, the large ones. Could you talk about the nature of the work here? Is it substantially different than some of the other large deals that you have had in the pipe so far?

No, it's pretty much the same. We have had a large deal enter the pipeline in finance and accounting and at the same time we've got deals there in our core verticals of insurance and travel. And I think it's pretty much the same kind of clients that we would target on a traditional basis.

Thank you.

Mayank Tandon, Needham.

Thank you. Most of my questions have been answered. But, Rohit, just to probe the competition a little bit further, could you talk about the competitive landscape between pure plays on one hand and then from the large IT integrators who might be now are dabbling more in BPO given the lower growth rates for the core IT business?

Yes, Mayank. So, I guess, as we've been saying for the last couple of years now the IT players have been playing a lot more aggressively in the BPO space and have been competing particularly with their existing client relationships. I think what clients and prospects are understanding is they understand the differentiation between the value proposition of an IT player versus a pure play BPO player. And depending upon what their priorities are and what type of transaction they are looking to do, they quickly gravitate to which side they'd like to have this business placed in.

Typically the BPO business, they'd like to have that placed with a pure play BPO provider and we are seeing validation of that with some of the decisions that are being taken where we see pure play BPO service providers continuing to win a large majority of these deals.

In a relatively fewer number of deals where there is a strong technology component they do prefer to go with the IT provider and we see that decision making take place in their favor.

When the companies think about BPO do they also think in terms of a multi-vendor program like they do on the IT side or they tend to focus more on exclusive players as they consider outsourcing?

I think in BPO it's a lot more exclusive than it is in IT. In IT it may be typical for the clients to have three or four large-size providers and a couple of niche providers as well on the IT side. Whereas on BPO it typically is either one or at most two players that they might go with and it's far more concentrated in terms of the number of providers that they will use than it is in IT.

And Rohit, finally on Europe, do you see opportunities in that market now coming up? I think on the IT side, it seems to be picking up. I am just wondering if on the BPO side as well there is some pent-up demand given some of the challenges in the region?

We're certainly seeing a lot of demand in Europe. However, what we see is the European operations of our UK and US based clients taking the lead in terms of outsourcing some of the European operations. We see less opportunity and demand from traditional European companies. That is changing but I think that change is happening slowly and gradually but for all US and UK-based multinationals operating in Europe, they certainly seem to be looking at that portfolio on a very active basis.

Thank you.

And with no further questions, I'd now like to turn the conference back over to Mr. Rohit Kapoor for any closing remarks.

Thank you, operator and thank you everyone for joining today's call. As said previously, we think our business is well positioned. We think we would accelerate our revenue growth in the second half of the year. We look forward to our execution in the second half and building into a strong momentum going into 2014. Thank you all and we will see you at the next earnings call.

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