Exlservice Holdings Inc (EXLS) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to EXL Service Holdings, Inc., third-quarter 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. As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Charles Murphy, head of Investor Relations. You may begin.

Thank you, Mercy. Greetings and thanks to everyone for joining our third-quarter 2013 earnings 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 have had an opportunity to review the third-quarter financial results press release we issued this morning. We have also updated our investor fact sheet on the investor relations section of EXL's website.

Some of the matters we will discuss in this call are forward looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, general economic conditions, those factors set forth in today's press release, discussed in the Company's periodic reports, and other documents filed with the Securities and Exchange Commission from time to time. EXL assumes no obligation to update the information presented on this conference call.

During our call today, we may reference certain non-GAAP financial measures which we believe provide useful information for investors. Reconciliations of those measures to GAAP can be found on the press release.

Now, I will turn the call over to Rohit.

Thank you, Charlie, and welcome, everyone, to our third-quarter earnings call.

The agenda for today's call will be as follows. First, I will provide an overview of our third-quarter results. Second, I will describe a few examples of strong new business activity over the last few months with both new and existing clients, and provide an update on ongoing contractual discussions with an existing client. Third, I will discuss our demand environment. Lastly, I will turn it to Vishal for more detailed commentary on our financial results and outlook. Then, we will be happy to take your questions.

In the third quarter, EXL achieved strong revenue and adjusted EPS growth, both year over year and quarter over quarter. As expected, transformation services accelerated quite significantly, posting 21% sequential revenue growth. This impressive sequential growth was driven by decision analytics due to expanded relationships with several key clients in healthcare and banking and financial services. This growth was also driven by our finance transformation business, which enjoyed both seasonal strength and expanded consulting engagements with a large client.

Concurrent with improving revenue growth, utilization and profitability increased in transformation services in the quarter in line with our expectations. The investment in decision analytics we made earlier this year in hiring over 160 graduates from top Indian universities is already paying off, with nearly all the new hires productively deployed by the end of the quarter.

Separately, our platform technology businesses, which are included in our outsourcing segment, showed strong growth in Q3. For example, our EXL Landa care management software business showed robust third-quarter revenue growth, driven by a new license sale to a large US health insurer.

Both decision analytics and our platform technology businesses, such as Landacorp, are key investment areas for EXL, and we are pleased to see them generating such strong returns. We believe both businesses enjoy a robust long-term growth outlook, driven by proprietary business process solutions in our targeted verticals.

Third-quarter total revenue from our banking and financial services vertical grew 17% year over year, while our insurance and healthcare vertical grew revenue 21% year over year. Healthcare remains a key growth opportunity for EXL across all our businesses and grew nicely above Company average.

In the third quarter, our outsourcing business as a whole grew 13% on a constant-currency year-over-year, driven by the acquisition of EXL Landa and growth from existing clients in insurance and healthcare, finance and accounting, and utilities. We're encouraged by the strong new business activity we generated over the last three months, both in signing new clients, implementing recently signed deals, and expanding with our existing client base.

I would like to discuss a few examples. We won three new deals with top-tier US insurers in the last few months. These wins demonstrate our position as the leading strategic partner for operations management and decision analytics to the global insurance industry. Our unmatched experience and capabilities make us an attractive partner for companies looking to offshore for the first time in this sector.

We believe these three new deals are the first step on a long runway of growth with all three companies. They also highlight the various ways we can deliver business impacts to an insurer's operations. One contract is for decision analytics, one is for operations management, and one is for finance transformation services.

We began an exciting new engagement with a major US bank during the third quarter, providing us an excellent opportunity to showcase our operations management expertise, specifically in legal support solutions in this case. In addition, this allows us to promote our services in other areas of banking and financial services, such as decision analytics, where we are among the leading providers of decision analytics for risk, marketing, and banking operations.

While the majority of our organic revenue growth in a given year is likely to emanate from expanding within our existing client base, these four new deals provide strong evidence of the diversity and the size of our market opportunity with new Global 1000 clients.

On last quarter's call, I mentioned that we won sizable new multiyear operations management contracts with two key existing clients, one in travel and one in insurance. Both contracts are ramping up impressively and will continue to grow well in the next year. Both are being delivered from the Philippines, where we have invested aggressively to build world-class delivery capabilities. For example, this past quarter we added incremental capacity to our facilities in Cebu, our second delivery location in the Philippines.

We are working to implement two large new contracts in our platform technology businesses. One was in our EXL Landa business, which is continuing to grow its leading position in care management software for health insurers. The other was for our LifePRO policy administration platform for life, health, and annuities with a leader in supplemental insurance.

In the third quarter, we signed three partnerships, an area we see as increasingly important to our growth and differentiation. We entered into an agreement with SunGard to distribute comprehensive receivable management services globally, leveraging their AvantGard GETPAID technology platform for order to cash management. We signed a joint marketing agreement with Ariba to provide integrated procure to pay services.

Both of these partnerships enhance our finance and accounting practices' ability to offer unique and powerful business process solutions to the finance organizations of EXL's clients.

Finally, we commenced a strategic relationship with Urban Lending Solutions to provide dual-shore business process management, operations consulting, and analytics solutions to the US mortgage industry.

Tempering the prospects of positive new business activity is uncertainty about future volumes and terms with a material client. As a matter of policy, due to confidentiality agreements we have in place with our clients, we do not disclose details of commercial arrangements with our clients. As discussions with this client are ongoing, we will be limited in the amount we can discuss on today's call and we'll provide further updates in due course.

Our new client pipeline remains strong across our businesses. In particular, demand is robust for operations management among our existing customers in insurance and healthcare. Demand remains strong for finance and accounting operations management, as well as for decision analytics, particularly in banking and financial services. More so for deals in finance and accounting and analytics tend to start relatively modestly, but the quality of the logos and the long-term business opportunity for expansion and value creation is exceptionally high.

We are continuing to see an increase in large transformational deals in our pipeline. Often, these are with first-time users of third-party operation managers. We believe this increase in large complex deals is good for our industry. It is evidence of the evolution to technology-enabled operations management with embedded analytics and of the ongoing shift away from FTE-based pricing. It is good for the growth and the long-term profitability of leading, focused, and innovative strategic partners like EXL.

In closing, the third quarter showed strong growth across EXL's businesses. We were pleased in particular to see transformation services accelerate as we expected and the strong growth in our platform technology businesses. Our business outlook remains robust, and we look forward to executing on the large and exciting growth opportunities ahead.

Now, I will turn the call to Vishal.

Thank you, Rohit, and thanks, everyone, for joining this morning.

In the third quarter, EXL reported revenues of $122 million, up 9% year over year and 5% sequentially. On a constant-currency basis and excluding previously announced low-margin planned transitions, revenues grew 16% year over year and 8% sequentially.

This quarter, average INR rate to dollar deeply depreciated by over 15% year over year, 11% quarter on quarter, and as a consequence, foreign currency translation had a negative 3.7% impact on year-over-year revenue growth and a negative 2.6% impact on sequential growth.

In outsourcing services, revenues grew 8% year over year and 17% on a constant-currency basis, excluding planned transitions. Year-over-year growth was driven by the addition of our EXL Landa platform technology business and expanded relationships with existing clients in insurance, healthcare, and finance and accounting.

Sequentially, outsourcing services revenues rose 2% on a reported basis and 6% on a constant-currency basis.

In transformation services, revenues were up 10% year over year and 21% quarter over quarter. Year-over-year growth was driven by strong growth in decision analytics, which was in turn fueled by several encouraging expansions with marquee clients in banking and financial services, insurance, and healthcare.

Sequential growth was driven by strong growth in decision analytics, as well as robust growth in finance transformation business due to seasonality and expansion with a large existing customer.

In the third quarter, gross margins of 41.1% were up 200 basis points year over year and 480 basis points sequentially. Year-over-year margin increase was driven by rupee depreciation and high-margin EXL Landa's software license revenue. Sequential margin increase was driven by similar factors, as well as higher utilization in our transformation business.

Outsourcing gross margin of 43.3% was up 380 basis points year over year and 440 basis points sequentially, driven by the EXL Landa acquisition and the rupee depreciation impact.

Transformation services gross margin was 31.5%, down 560 basis points year over year, driven by the advanced hiring in our decision analytics and finance transformation businesses, which more than offset margin benefits from rupee depreciation.

We continue to see excellent long-term growth potential in decision analytics and have been successful in recruiting data scientist talent for some of the best institutions, both on and offshore.

As expected, gross margin in transformation business improved substantially quarter over quarter, up 880 basis points, driven by strong acquisition and revenue and concurrently higher utilization, as well as the rupee depreciation. We expect gross margin in transformation services to continue to improve, driven by a strong growth outlook, particularly in decision analytics.

G&A expenses were 12.9% of revenues, up 70 basis points year over year and 100 basis points quarter over quarter. Driving the sequential increase was approximately $2 million of one-time client writeoff, which more than offset the benefit of rupee depreciation and operating leverage. We expect G&A as a percentage of revenue to decline sequentially in the fourth quarter.

Sales and marketing expenses were 7.4% of revenues, up 120 basis points year over year and down 50 basis points sequentially. The year-over-year increase was driven by higher headcount due to our focused investment in industry experts of our sales leadership, as well as by our EXL Landa acquisition.

In the third quarter, we had an FX loss of $2.5 million, driven by our hedging program in response to strong depreciation in the Indian rupee. Our hedging program once again ensured that our pretax income was unaffected by volatile foreign exchange, increasing our earnings visibility. At the current exchange rate, we are updating our expectation for the fourth quarter to a foreign-exchange loss of $2.8 million to $3.2 million.

In the third quarter, the tax rate was 24.2%, down 280 basis points year over year and 390 basis points quarter over quarter. Due to one-time deductions and credits, for the fourth quarter we estimate the tax rate in the high 20%s, with our full-year tax rate in the mid-20%s. Next year, we expect our tax rate to be in the high 20%s.

Adjusted EBITDA was $28.4 million in the third quarter, up 13% year over year and 29% sequentially. Strong revenue growth and expansion in gross margins drove the year-over-year increase. Year to date, we generated $44 million in cash from operations and spent $12 million on CapEx. For the year, we expect CapEx of $18 million to $20 million.

Net income was $13.2 million, up 13% year over year and 43% sequentially. Adjusted net income was $16.4 million, up 18% year over year and 32% sequentially. Diluted EPS was $0.39, up 11% year over year and 43% sequentially. Adjusted diluted EPS was $0.48, up 15% year over year and 32% sequentially.

This quarter, we had a record collections. DSO improved by five days to 54 days this quarter, down from 59 in the second quarter. As Rohit mentioned, we enjoy a strong balance sheet with over $158 million in cash and equivalents and no debt. We plan to use this cash accretively for M&A.

Our M&A pipeline remains active, particularly for tuck-in acquisitions, which would add proprietary technology or process expertise in our targeted verticals or delivery excellence in new geographies.

Turning to 2013 guidance, we project a rupee to dollar exchange rate of 61 for the fourth quarter, versus 59 for the second half at the time of our last earnings call. Based on this rate, we are taking our guidance for revenues to $473 million to $478 million. Adjusted for constant currency, the midpoint of our revenue guidance remains unchanged.

We are tightening our guidance for adjusted diluted EPS to $1.72 to $1.77 to account for our third-quarter results and current visibility. We are tightly managing our expenses and generating operating efficiencies, which will result in our 2013 adjusted diluted EPS growing at 9% to 12% year over year, which is faster than the revenue growth.

We are encouraged by our third-quarter results. In particular, we are pleased to see our transformation services business accelerate as we expected and for our platform technology businesses to reach such a strong growth. We have been aggressively investing in both decision analytics and platform technology for several years, and this quarter we saw substantial return from these investments.

We enjoy many extremely attractive opportunities for long-term growth in our core markets and we continue to invest aggressively. We are excited by our robust long-term growth outlook and look forward to capitalizing on many of the large opportunities ahead of us.

Now, we would be happy to take your questions.

(Operator Instructions). Edward Caso, Wells Fargo.

It's actually Rick Eskelsen on for Ed. My first question is just a clarification on the large deals. I believe through the second quarter, you said you had signed two, and I was curious on the deal wins you talked about this quarter, if any of these are in the large deal category, and then how your pipeline looks?

Hi, Rick. This is Rohit. So for EXL, we have now started to disclose the new client wins that we have, and we have actually done away with the practice of delineating between large strategic deals and other deals.

And the reason for that is as our business continues to grow and mature, we find that the differentiation between these two does not create a significant impact in terms of our growth rate of our business. So our focus is to provide color on the demand environment. Our execution on winning new deals.

In the third quarter, we won eight new deals, four in outsourcing and four in transformation services, and as we provided color in our call, we also signed up these four deals with leading companies, which are Global 1000 companies, where we would expect to have a long runway of growth. And I think that is the right way for us to be able to describe our new business activity.

Okay, and then just following up on that, you talked about seeing more and more large deals in the pipeline, and that's not a new phenomenon, but was it a change at all this quarter or just a continuation of the prior trend, and how are you seeing those deals turn into revenue and ramp up once you have won them?

So it does appear to be a continuation of a trend, which began approximately 12 months ago. And we continue to see some of the large customers who are outsourcing for the first time come into the deal pipeline.

I think the number of visits that we are seeing take place to India or the Philippines or Eastern Europe continue to increase. And the demand environment remains strong. I think not only are we seeing these deals come into the pipeline, I think we're also seeing decision making happening with these deals. And as we mentioned in the call, we expect for the deals that we've won, for these deals to ramp up nicely into next year. And even with our existing clients, we are seeing a fair amount of business volume activity, and that continues to progress very nicely.

Thanks, and then just the last question for me, one of your large clients, American Express Business Travel, had talked about a month ago about initial plans to sell 50% of the unit and create a JV. Now that it's been about a month since that announcement, I wonder if you have any thoughts on any impact that you might expect to that business. Thank you.

Sure, Rick. Rick, we will not be discussing specific clients by name, and so I will not be able to share any information about any client on the call.

Thanks.

Ashwin Shirvaikar, Citi.

I guess my question -- my first question is to ask you about the Indian rupee and the fluctuation in it. And quite simply, do you guys see a way out of these contracts or a way to minimize the fluctuation to your topline that has resulted because of these contracts?

This is Vishal. The way our contracts are structured for nearly about 30% of our clients, with 30% of our revenues with some clients, the FX risk is borne by the clients, and as the rupee moves up or down, the billing -- they take the benefit or they take the hit.

And in the long term, we think that is beneficial for the clients if the rupee depreciates and they get the benefit immediately. And we don't think there is any way to protect against that, and I think the volatility in the revenues would remain, but as we have explained, this is a mathematical impact to our revenues. The bottom line and the margins are protected.

This is Rohit. Let me elaborate a little further on what Vishal just commented. Number one is, as you are aware, most of the contracts that we have with our clients are long-term contracts, and therefore the contractual arrangements that we have with them are going to stay on for the life of the contracts.

The second is philosophically the Company has always tried to rely on the decision that we would like to share the foreign exchange rate risk with our clients. We intend to make money in terms of delivering operations management, decision analytics, platform businesses services, and on providing these types of services to our clients, and we do not intend to make money or lose money based on the volatility of the exchange rate.

This strategy of ours is somewhat unique in the industry. It does impact our revenue number and creates volatility with our revenue numbers, but our profitability is unimpacted by the strategy, and on a going-forward basis, we continue to believe that as long as we can build and grow our business, this volatility would dissipate and become smaller and smaller in magnitude over a period of time.

That's fair enough. Thank you, thank you for that. I guess shifting gears more to the operational side of things, good deal wins, good traction in the business. Are you seeing anything with regards to deal ramps either slowing or getting pushed out or any of that kind of thing that you think affects you into 2014?

No, I think we continue to see the same steady demand outlook for our services. There is nothing unusual that we are seeing across our client base, and our clients continue to ramp up deliberately and gradually, as is prevalent in our business. And we continue to see a number of migrations being in flight and continuing to work on expansion and acquisition of new clients.

Right, so just to be clear, on a normalized basis, you are still looking for that 15% to 20% growth rate?

I think the demand environment is strong. Our ability to execute is very good. And we would expect a growth rate commensurate with that. We certainly look forward to providing guidance for the next year when we report out our fourth-quarter numbers.

Okay, great. Thank you.

Manish Hemrajani, Oppenheimer.

(technical difficulty) was that all attributable to strength in decision analytics, and can you provide us with an outlook for the rest of the year and early read into 2014 for this business?

Hi, Manish, this is Rohit. The growth in transformation services was largely driven by decision analytics, but we also had growth in the other lines of businesses within transformation services, particularly finance transformation.

As you know, the third quarter is a seasonally high for that particular line of service, and on a go-forward basis, as we get more and more clients who use our services on an annuity base, we think the momentum is good and attractive as we go into next year.

Good. Did you see any marked change in client behavior and decision making that has caused a pickup in transformation deals, and should we expect that sentiment to flow through the rest of the year? And any -- are you seeing any kind of a budget flush in the fourth quarter?

Sure. So we were actually always seeing a strong demand environment for transformation services, particularly for decision analytics, and in the first half of the year, we did have some project-based revenue that came off, but we replaced that with annuity-based long-term contracts in decision analytics. And I think that trend continues to play out.

The good part about this is that now a greater portion of our portfolio in decision analytics is annuity based, and therefore is a lot more stable and something that we can -- which is a strong foundation that we can build upon.

On a go-forward basis, we would continue to see growth taking place in our finance transformation business, and I think that is something which we would continue down the path of.

Regarding the budget flush, we haven't seen anything of significance as yet. Most of that, if it happens, would happen more towards the end of next month, just prior to December. So we will see how that plays out, but right now we haven't seen any real signs of that.

Got it. And can you talk about your win rates as your deal sizes get larger, and a quick comment on pricing?

I think pricing in general is quite fluid right now, particularly given the volatility in the exchange rates. So I think that is something which does play in, but other than that, I think pricing is fairly stable, and I think what we're seeing in terms of larger deal sizes is our ability to win deals at the corporate margin level.

But given your comment on pricing, does that put you at an advantage versus your peers because you are letting the client bear FX risk? In an environment where the rupee keeps depreciating, does that put you at an advantage versus your peers?

Yes, most certainly. On 30% of our portfolio where our clients are taking the risk and benefiting from that 100%, certainly they see the advantage of that and they appreciate the transparency that EXL has with them in their relationship. And I think that certainly should be an advantage for us.

Last one for me. Any early read into 2014 budgets or is it still too premature to talk about it?

Manish, I think you know it's too premature to talk about it. We certainly will provide you color and guidance as soon as we have got strong visibility into that, and as you know, we historically will share that when we provide our fourth-quarter earnings, and that will be sometime in the beginning of next year.

Just thought it wouldn't hurt to try. A couple of housekeeping questions. Vishal, can you talk about the stock comp and amortization levels for Q4?

Stock comp for Q4 should be in line with what we had for last two quarters.

And amortization, be about the same, I guess?

Yes, so roughly around that $2.5 million to $2.6 million.

Okay, great. Thank you, guys.

David Grossman, Stifel.

Rohit, perhaps we could just step back. If we look at the BPO business, the core outsourcing business, it's probably been trending a little bit below your historical levels, even when you ex out the acquisition of Landa and the OPI customer transitions and currency. So given that backdrop, and I understand your reluctance to talk about large deals and your reluctance to get too far out about what's going to happen next year, but it's clearly top of mind for all of us what the bookings trends has been vis-a-vis the growth rate and how we should start thinking about growth perhaps over -- beyond the fourth quarter.

Is there anything you can tell us to give us some perspective, and you can leave out the large customer that you may have some uncertainty around, but if you just look at the core business, ex all the noise, can you give us some insight into how we should be thinking about this or some data points that would help us hone our own thinking in terms of what growth is going to be over the next year or so?

Sure, David. So let me try and address your question at a high level. Essentially, the way we see it is that the demand for outsourcing services continues to remain strong. We have seen, in fact, increased strength in the demand over the last 12 to 18 months, and that's very, very encouraging.

At the same time, the decision-making cycles of our clients for outsourcing seems to be long. It seems to be deliberate. And it seems to be gradual. So there isn't any client which takes a decision on this and moves forward in a hurry. Everything is done, as you know, because there is a fair amount of dislocation and impact and risk, it's done in a gradual and steady manner. So we continue to see that play out from a demand perspective.

You are right about EXL in terms of our own growth rate in the outsourcing business. And excluding some of the one-time issues that have taken place, there has been some amount of volatility in our portfolio. I think the way we see it is there are a number of factors which are impacting our industry. One is, of course, the exchange rate. The other is the development and the creation of new business models in terms of addressing and providing services to clients, switching away from FTE-based pricing to transaction-based pricing, as well as the impact of companies to be able to deliver incremental business impacts to their customers.

What we try and do is we try and be very, very disciplined to build up a strong foundational set for a client portfolio and a capability set so that we can continue to build the organization long term. And that's what we are focusing on. And I think if you take a look at this with a longer-term time horizon and viewpoint, I think the growth has been very, very good and we would expect it to be good on a go-forward basis.

So it would seem from your comments that there are a lot of different deals out there, and that at least your discipline around profitability and prospects for growth over a longer period of time is impacting the win rate, but over time should normalize, given the quality of what you're doing. Is that the right way to think of it, or did I misunderstand the comments about exchange rate, business models, new services, et cetera?

No, David, that is exactly what I was saying. Yes, you are absolutely right.

So I guess, then, just two quick follow-up questions. One is can you -- if the rupee begins to strengthen, does that theoretically help you in the sense that some of the things that are being done in the marketplace are no longer possible from a -- by your competitors? Or what should we be looking for that would help stabilize, if you will, the competitive environment so that some of these factors are no longer impacting win rates?

So I think you are absolutely right. If the rupee was to strengthen, I think EXL would benefit significantly as compared to its peers. Because firstly on the 30% portfolio where the clients take the FX risk, our revenues would increase immediately.

And at the same time, I think with an appreciating rupee, we don't need to go to our clients to ask them for a price increase. That is something which happens automatically with the portfolio where our clients are taking the risk.

And so, I think we will be better served in terms of our revenues increasing at a faster pace, as well as our margins still being protected. And I think competition in the peer group might have issues on both these dimensions in an appreciating currency environment.

Is there anything else we should be thinking about in terms of -- whether it be deal duration or any other things, and we know about anniversarying OPI, I believe. I assume that stabilizes after the fourth quarter at a lower level, though. Is there anything else we should be thinking about that may be impacting the growth rate that, just by virtue of time, goes away over the next couple of quarters?

No, David, there's nothing else that we can think of. I think you're right about the OPI client transitions. Our expectation is that would be complete by the end of the fourth quarter, but that's something which is a transition that will have taken place throughout 2013 and would not be there on a go-forward basis.

I think it is, isn't it? Doesn't it -- on a year-over-year basis, you're going to have to live with that throughout all of next year? Isn't that correct?

Yes, we would have to live with the decline in the revenue for the following year, but my point was that we would have everything completed as per expectations by the end of the fourth quarter.

I see. Okay, thank you very much.

Tien-Tsin Huang, JPMorgan.

Just a follow-up on OPI. Did you call out the revenue impact from the transition this quarter and what the implied impact would be in the fourth quarter? I'm just trying to better model that grow-over for next year.

Hi, this is Vishal. You are talking about the impact of the client transition in this quarter?

Yes, in this quarter, and then just what would be implied in the fourth quarter, as well, in your guidance.

So quarter on quarter, the impact was minimal because the majority of the client transition, as we mentioned, happened by Q3.

Right.

And then next quarter, I think also we expect some client transition to happen, but that would be not material.

Okay. Because I'm just trying to think about some of the -- I know it's been asked a lot -- just thinking about next year between the FX, the OPI, and then we will have to take a view on the large client loss. So just trying to get a sense on the year-on-year impacts.

I think that the impact of the OPI client would be more in 2014 as the client which was expected to transition in Q3 got delayed, and now the client transition will happen in the end of Q4 and the impact would be more in 2014. And we had said earlier that would be 3% to 4%.

3% to 4%, okay, understood now. So not much this year, so mostly it will hit next year just from a timing standpoint, okay. That's what I wanted to clarify. Thank you.

And I know you can't say much on the large client risk. I think you mentioned volume and terms under negotiation. Is there risk that there is a significant transition in general with this client? And if so, would that be a -- would that trigger a termination payment or are we more talking about scope? I am just trying to better understand what's on the table in terms of negotiation here.

As you know, we have got confidentiality agreements in place with all of our clients which preclude us from discussing anything specific, so we will not be able to give you any color on that on this call.

Okay, figured I would ask. I appreciate it. Thank you.

Paul Thomas, Goldman Sachs.

This is [Jack Charles] on behalf of Paul Thomas. Just a couple of questions for you. I know you haven't said much about the material client, but can you maybe give us some color on whether they might be considering moving the process in house or what the driver of volume uncertainty is? Is it potentially related to prior contract write-downs?

Jack, this is Rohit. As I have said previously and I have said in my call, we just would not be able to discuss anything on this subject.

All right, fair enough. And I guess another question, could you maybe give us some color on the project-based revenue, how that's looking as we go into 4Q? Will the strength we saw this quarter persist?

Jack, this is Vishal. I think we will continue to see the strong growth in our transformation business driven by both our energy line of business and project-based business, so we expect that in Q4 we should have sequential growth in the transformation business.

Okay, great. Thanks.

Dave Koning, Robert W. Baird.

I guess my first question, just, we can see you give the top client, which continued to grow pretty well year over year in Q3. You also give the top three clients, and when we see the top three client growth, we can back into the second and third largest clients, and that meaningfully deteriorated. I think it grew 7% in Q2 and declined 3% year over year in Q3.

So I am wondering if there is any correlation between that trend and what you're talking about with the big client, and maybe if it's already starting to hit revenue now. Maybe you can just talk through whether that's part of the impact or something else is happening.

Dave, this is Rohit. I think whatever we have disclosed in terms of our client revenues publicly is what we would be willing to share at this point of time. There is nothing else that we can add to that dimension.

Okay, okay. The second thing, just how big was the acquisition contribution in Q3. I think Landacorp still hasn't quite anniversaried until into Q4 at some point. Just wondering how much revenue that contributed.

Organic growth in Q3 was about 6%. Acquisitions contributed about 6.6%, offset by the foreign exchange impact.

Okay. And then, finally, if the rupee stays here around 61, what would be the year-over-year impact in 2014? I know you talked Tien-Tsin about the impact from OPI being 3% to 4% into next year. I'm just wondering what the rupee impact would be into 2014.

David, I think in terms of the rupee impact, looking at our current portfolio and the mix of the geographic business, I think the impact would be around $6 million to $7 million.

Okay, great. Thank you.

Joseph Foresi, Janney Capital Markets.

This is Jeff Rossetti on for Joe. Just a couple questions about gross margin. Vishal, I believe you mentioned on the outsourcing side that there was an improvement partially attributed to the software license revenue. I just wanted to see if you could break out the platform business growth and how you see gross margins for the outsourcing business as that business improves.

Hi, this is Vishal. I think the gross margin for our outsourcing business where the platform business is included would remain stable at the levels, current levels, for Q3 and I think that is a good way to look at even for Q4.

Okay, and then on the transformation side, you mentioned there was an impact on the margin side from advanced hiring, but I'm noticing in the quarter that, sequentially, headcount came down a little bit. Could you maybe just talk about some of your hiring plans going forward?

Yes, the headcount, which came down quarter on quarter, was because of the client transition we had talked about, so there was some headcount which went away on that planned transition of the whole PIA portfolio. But in terms of gross margin on the transformation business, I think as we expect the transformation business will continue to ramp up, even in Q4, and sequential growth, we expect sequential growth. The gross margin will slightly improve quarter on quarter.

Okay, and then any commentary about just hiring going forward?

I think we continue to hire in both transformation business and outsourcing business, depending on the ramp and the growth prospects. So we always want to have a good bench as we enter into the Q4 and also for the next year. So the headcount both in transformation business and outsourcing should increase.

Okay, thank you.

Rahul Bhangare, William Blair.

I was wondering if you could talk about what's driving some of the weakness in Europe and your other geographic segment?

This is Rohit. I think for us, Europe continues to also be a lot of opportunity, and we are seeing a fair amount of new client pipeline activity in Europe.

The reason for the geographic contribution to come down a little bit is only because we have had a spurt of growth take place in the US, and we have also had many of our acquisitions, which have all been largely US-centric clients, and that's basically resulted in the change in the portfolio mix.

But from a demand perspective in our business platform perspective, I think Europe continues to be an attractive market segment for us. We have got a strong pipeline out there. We have got a team that we have beefed up this year in Europe, and we would expect to build and grow our business out there at pretty much the same pace as we're building our global business.

Okay, thanks. And then, just coming back to the previous pricing questions, so for the non-FX part of the portfolio, so not the 30%, but the rest of the 70%, have you seen clients come back asking for any pricing concessions, given the rupee's movements?

I think the rest of the portfolio is actually split up into two parts. One is where we take the FX risk, and the other is where neither the client nor EXL takes the FX risk and our revenues and costs are in the same -- are denominated in the same currency.

So for the portion where we take the risk associated with the client contracts, we typically have a long-term hedging policy in place in order to protect against the volatility associated with the exchange rates. And our hedging goes out anywhere from 12 to 36 months. And since this is -- these are long-term hedges that we have got in place where our clients have chosen to pass on the risk to us and we have hedged out that risk, the changes associated with the pricing will only take place if exchange rates remain low for a relatively long period of time. And so, that's how the rest of the portfolio gets treated.

Okay, and then quickly on the competitive environment. Have you noticed any change in win rates, particularly in any of your core verticals and in the US?

No, I think we continue to be encouraged by our ability to attract new customers, and I think the pipeline remains strong. The maturity of the deals in the pipeline is progressively becoming better, and our ability to win new clients continues to remain attractive. So, no change there.

Okay, thank you.

Thank you. I am not showing any further questions in queue. I'll now like to turn the call over to Rohit Kapoor for any closing remarks.

Thanks, Operator. I just want to conclude by saying that we are really pleased with our third-quarter performance. We continue to see strong growth in our business lines and we continue to see strong demand. We have got a very, very strong franchise and a platform in place, and we look forward to exciting growth possibilities ahead. Thank you so much for attending the call and we look forward to seeing you at our next call.

Ladies and gentlemen, this does conclude today's call. You may now disconnect. Thank you.