Exlservice Holdings Inc (EXLS) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to EXL's conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Jarrod Yahes, EXL Treasurer. You may begin.

Thank you, operator. Greetings, and thanks to everyone for joining EXL's first quarter 2014 financial results conference call. I'm Jarrod Yahes, EXL's Treasurer.

With us here today in New York this morning 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 financial results press release we issued this morning. We've also updated our Investor Fact Sheet on the Investor Relations section of EXL's website.

As you know, 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 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. Reconciliation of those measures to GAAP can be found on the press release as well as the Investor Fact Sheet.

Now I'll turn the call over to Rohit Kapoor, EXL's Chief Executive Officer. Rohit?

Thank you, Jarrod, and a very warm welcome to everyone joining us on 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 2014. Second, I will give color on new wins and provide an update on progress made in executing our key priorities for 2014. 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 we exceeded expectations in terms of our revenue growth and our profit growth. Our revenue grew 5% year over year, despite a negative impact of 2.8% due to foreign exchange fluctuations. Q1 2014 revenue included a $2.5 million reimbursement to a client for transition and disentanglement costs.

On a constant currency basis, our revenue, excluding client transitions and reimbursements, grew 12.9% year over year. This strong double-digit growth was primarily driven by our analytics and platform businesses, in addition to expansion of key existing clients in insurance, healthcare and travel, transportation and logistics.

While previously mentioned client transitions will continue to negatively impact revenues, we expect our underlying growth momentum to sustain through the second half of the year such that we meet our full-year guidance. There are multiple factors that give us this confidence.

First, in our outsourcing business volumes will increase as we aggressively ramp up wins at new and existing clients that we announced last year. In addition, we continue to see good growth momentum in some of our large existing clients in insurance, healthcare, and travel, transportation and logistics.

Second, we renewed two of our largest analytics clients to long-term annuity contracts. These are big wins for us, as they have the potential to grow into $10 million plus annual revenue accounts, and, more importantly, they validate the business impact that we create for our clients.

The reduction in volatility of analytics revenues by converting a larger proportion of revenue from project-based to annuity-based revenues was one of the strategic priorities for our analytics business over the last 12 months. I am very pleased to note that we have made good progress in achieving this goal.

Based on our aggressive growth projections for the analytics business and the 39% year-over-year growth we experienced in the first quarter, we established a new facility in Mumbai, India, and an entity in Johannesburg, South Africa, to help service our analytics clients better and work closely with their regional teams. We are very bullish about this business, and as the demand for sophisticated analytics increases in our key verticals, companies increasingly turn to us to provide data-based insights.

Thirdly, we started investing in productizing some of our operations management offerings towards the end of 2012, and we have had good success with the launch and implementation of the MedConnection product at some of our key insurance lines. MedConnection is a product for managing medical data that makes the claim process more efficient. It delivers five times greater return on investment through improved consistency and time savings that increases the caseload staff can handle. It also results in indemnity improvements, better file documentation and a centralized data warehouse of valuable claims information.

Our MedConnection product is gaining significant traction in the market. We have already received a go-ahead for implementation at two large insurance clients and have seen strong interest from another. One of the go-ahead mandates is a multimillion dollar integrated deal where we will implement our platform and provide servicing on top of our platform. Our pipeline for this product is strong, and we expect several other insurance clients to follow suit.

Finally, as we have previously observed, the second half of 2014 will add several project-based engagements in our transformation business, especially finance transformation, which got off to a slow start this year.

Overall, we have begun 2014 highly encouraged. In addition to the new strategic large deal wins that we announced in our last earnings call, EXL has signed three significant transformation deals.

The first is an integrated operations consulting, analytics and transaction processing deal with a Fortune 500 client. The second is an analytics win with a regional US bank. And the third deal is with a global provider of retail analytics. Also, we won a new deal to implement our LifePRO platform.

In our last earnings call I had mentioned multiple key strategic priorities for EXL in 2014. I am pleased with the progress and would like to provide an update.

First, we continue to invest in our Business EXLerator Framework, and we have set aggressive goals for its implementation. Initial feedback from our clients has been very positive, and I would like to talk about two examples to outline the value that this framework can deliver.

First, for a large utilities client, implementation of our analytical models and technology tools resulted in a 70% reduction in the value of unbilled receivables. The ability of this framework to provide an exponential increase in the value we can deliver makes EXL a much more trusted partner for our clients and provides us with an opportunity to win additional business.

The second example is where we partnered with one of our large insurance clients to transform their new business acquisition engine using a mix of workflow management tools and analytical models. The client developed tremendous confidence on the ability of EXL to deliver quality work and is discussing a 50% increase in the number of FTEs in the second half of 2014.

Second, we continue to strengthen our information lifecycle management capabilities and have engaged a third-party specialist firm to develop the right set of policies and tools. In Q1 we partnered with Everest Consulting Group to jointly develop an industry code of conduct and a marketing framework which we will deploy across all our existing and new businesses. This is a first in our industry and demonstrates our commitment to safeguard our clients' information assets and intellectual property.

Third, we are expanding our delivery footprint, especially in the Philippines. We are establishing new facilities in Cebu and Alabang which are expected to go live within the next few quarters. We have also bolstered our leadership and delivery teams in the Philippines with some senior new hires.

Fourth, as I mentioned previously, we remain focused on building IP and products and are seeing good traction in our MedConnection product. This strategy will not only help us significantly increase the value that we can deliver to our clients but will also increase the stickiness of our business model.

Moreover, it is becoming increasingly clear that clients are moving towards an as-a-service business model in order to remain nimble, agile and responsive to a dynamic marketplace. Therefore, they are increasingly turning to service providers like EXL to deliver business process as a service solutions. This market demand fits nicely with our stated strategy of providing integrated platform plus servicing solutions to clients in our chosen domains.

Fifth, we continue to invest in upgrading our talent. We hired a chief actuarial officer as the demand for complex data analytical services increases in our insurance and healthcare businesses.

I'm also pleased to share that we hired Nancy Saltzman as our new General Counsel and Corporate Secretary, effective April 21, 2014. She will be a great addition to our management team and will significantly bolster our compliance and controls while mitigating any new business risks that may arise as we charter an aggressive growth path.

Finally, M&A is going to be a key driver of growth for EXL in the next couple of years. With our strong cash and balance sheet position, we continue to pursue multiple inorganic opportunities to expand our multilingual delivery capabilities, deepen our industry-leading insurance capabilities and enhance our healthcare and analytics businesses.

Our commitment to remain ahead of the industry curve in our chosen domains has received good coverage from leading industry analysts. We were mentioned in the Winner's Circle in the HfS Insurance BPO Blueprint and were positioned in the Leaders' Quadrant in the NelsonHall Insurance P&C BPO NEAT Matrix Report.

Turning to our demand environment, the business pipeline remains strong, both amongst potentially new clients and existing customers. We are seeing strong prospects across all our service lines, including operations management for insurance, healthcare and travel, transportation and logistics; analytics engagements in banking, healthcare and insurance; and platform deals across insurance and healthcare.

Although competition continues to remain high in our deals with large technology players investing in BPO, we are confident that our Business EXLerator Framework-led solutions, domain expertise and focus on providing high business impact to clients will help us drive growth in our chosen domains.

Overall, we remain optimistic on our future outlook, as our client relationships and pipeline continue to remain strong while our servicing capabilities continue to constantly evolve to be market leading.

With that, I will turn the call over to Vishal.

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

In the first quarter, EXL reported revenues of $121.8 million, and net of $2.5 million reimbursement to a previously disclosed client for transition and disentanglement costs our revenues were $124.3 million, up 7% year over year and flat quarter on quarter. The (inaudible) depreciation had a negative impact of 2.8% on our year-over-year revenue growth and had a negligible impact sequentially. On a constant currency basis, and excluding previously announced transitioning clients and disentanglement costs, revenues grew 13% year over year and were flat quarter over quarter.

In our outsourcing business, revenues grew 3% year over year and flat sequentially. Foreign exchange had a negative impact of 3.8% on outsourcing business year-over-year growth. On constant currency basis, and excluding transitioning clients and disentanglement costs, this translated to 12% growth year over year and 2% sequentially.

In transformation business revenues grew 18% year over year and declined 8% sequentially. As mentioned by Rohit, year-over-year growth was propelled by strong growth of over 29% in our decision analytics business. The sequential decline was primarily in the finance transformation business, which tends to be more project based and experiences a weak seasonal first quarter. As mentioned in our fourth quarter 2000 earnings call, we are seeing strong momentum in our analytics business, coupled with pickup in project-based revenues, which will drive sequential growth in transformation business for the rest of the year.

In the first quarter our gross margins were 38.5%, up 140 basis points year over year, driven by the impact of rupee depreciation, partially offset by disentanglement costs. Gross margins fell 350 basis points sequentially, driven by lower utilization in transformation business and the disentanglement cost impact. Excluding the disentanglement cost, our gross margins were 39.7% for the quarter, 260 basis points higher year on year and (inaudible) basis points down sequentially.

Outsourcing gross margins were 41.2%, up 210 basis points year over year, driven by the FX impact and improved margins in platform business. Sequentially, margins declined 230 basis points, driven by the disentanglement cost impact.

Transformation business gross margins were 26.2%, declining 90 basis points year over year and declining 950 basis points sequentially. This decline was driven by lower utilization in our transformation business due to drop in project-based revenue and increase in people cost due to onshore hiring as we prepare for the growth in the second half of the year. We anticipate gross margins for transformation services business to improve through the year as our utilization increases, driven by the new business [group].

G&A margin of 12.2% was down 50 basis points year over year, driven by operating leverage, and up 50 basis points sequentially due to investment in strategic initiatives like Business EXLerator Framework and M&A projects.

Sales and marketing margin was 8.4%, flat year over year and up 160 basis points sequentially, driven by investment in new hires as we continue to expand our (inaudible) domain expertise.

Foreign exchange loss was about $800,000, and for the full year we expect foreign exchange loss of approximately $1.5 million to $2 million.

Interest and other income was at $1 million, up $300,000 year over year, driven by one-time benefit of income tax refund and better use on cash balances.

In the first quarter our tax rate was 28.6%, up 510 basis points year over year, primarily due to our one-time benefit on account of discrete tax items in Q1 2013. For 2014 we will continue to expect a tax rate in the high 20s.

Adjusted EBITDA margin was 22.9%, up 370 basis points year over year and down 260 basis points sequentially, driven by the decline in our gross margin.

CapEx spend for the first quarter was $10.7 million, against $6.6 million in the same quarter last year. This increase was primarily due to various license payments and new facilities in the Philippines and a new analytics center in Mumbai. For 2014 we expect CapEx to be within the $25 million to $50 million range, driven by growth in investments in infrastructure as well as developing our business capabilities.

Net income was $11.1 million, up 14% year over year and down 30% quarter on quarter. Adjusted EPS was $0.50, up 25% from $0.40 in first quarter last year, driven by our revenue growth and operating leverage.

We continue to enjoy a strong balance sheet, with over $150 million in cash and equivalents and no debt.

M&A is strategic to our growth plans, and we will plan to use our cash on accretive M&A deals. We have a healthy pipeline of M&A opportunities which could give us a decisive advantage in the market space in our chosen verticals.

DSOs stood at 57 days in the first quarter, up 2 days sequentially.

For 2014 we are maintaining our guidance of $480 million to $500 million and adjusted EPS guidance of $1.70 to $1.80, using an Indian rupee/US dollar exchange rate of 61. Guidance excludes the impact of reimbursement of transition and disentanglement costs for the disclosed client previously.

We expect our second quarter revenues to be flat to down, driven by the ramp-downs expected with the previously disclosed transitioning clients. In the second quarter, we will also recognize annual mid- to high single digit salary increments for our offshore professionals, thereby impacting our adjusted EPS in Q2.

We are encouraged by our quarter results, and we remain extremely bullish about the long-term prospects in our operations management and decision analytics business. We are in a robust growth market, we have healthy deal prospects and enjoy a blue chip client base. We're making the right investments to best position ourselves for the multiyear growth we see in our business.

And now we will be happy to take your questions. Thank you.

(Operator Instructions)

Joseph Foresi, Janney Montgomery Scott.

I apologize. Our first question comes from the line of Ashwin Shirvaikar, of Citi.

Thank you guys. Can you hear me?

Yes, Ashwin, we can hear you.

Oh, okay. So congratulations. Good quarter here. The question I had was with regards to the timing and ramp of -- you announced and you talked about a lot of traction, several deals, including on the annuity side for analytics. Can you talk a little bit more about the timing with regards to how the revenues flow through? And a related question would be are you seeing any kind of ramp delays or any update on what clients are doing with existing -- are they ramping as planned?

Sure. So, Ashwin, let me respond to your question in two parts. One is what we are seeing with our analytics clients, particularly in annuity-based services that we provide to them, and then talk about the broader operations management and BPO service lines that we provide to our customers.

On analytics, we continue to see extremely strong demand for services and a real urgency to get deployed in terms of providing services to our clients. We're seeing good traction in terms of our existing clients who are scaling up and ramping up their operations with us.

And we are also seeing a very strong signing of new deals take place, which previously would start out as much smaller engagements, and now we are seeing them actually start out with much larger engagements. And there seems to be a greater confidence amongst clients to engage with providers such as EXL to service them on analytics. So we are really very pleased with the demand, our ability to execute and the ramp-up that's taking place in our analytics line of business.

On the broader operations management work that we do, I think the ramp-ups are pretty consistent with our previous experience, and there certainly continues to be some choppiness in terms of how clients ramp up. There are always some pushes and pulls as far as those ramp-ups are concerned. But it's very consistent with our experience in the past.

Some of the new clients that we've signed up and some of our existing client ramp-ups continue to be on track. And as we build out a much more broadly diversified client portfolio we are seeing traction across multiple industry verticals and domains and clients, and therefore it sort of tends to balance itself out.

Okay. One question I had was with regards to the client transition charge, the $2.5 million. Is that one time or is this something that happens -- this is, I think, going to be a multi-quarter transition, so is this something that will come up each quarter until the transition is complete?

So the transition is expected to take place, as we had previously announced, over an 18-month period, and the disentanglement and transition costs will take place during the duration of the transition, and it will be across multiple quarters.

So should we model in -- what should we model in with regards to those kind of costs? Is this going to be a consistent occurrence through the 18-month period?

Unfortunately, Ashwin, we have very little visibility into these costs, and we are not in the position to forecast these costs at all. We will be providing you with an update at the end of each quarter as we report as to what these costs have been for that quarter. But we just do not have any ability to forecast these costs.

Okay, got it. My last question, if I can, is you tend to normally have a pretty strong second half with regards to both revenues and with margins ramping, so should we expect something similarly strong off of the first quarter that you just reported?

Hi, Ashwin, this is Vishal. Typically our second half is more stronger as the transformation business goes and also the ramps in our outsourcing business go up, and we would expect the second half to be stronger both in revenue growth and in terms of margin and EPS.

Okay, got it. Thank you.

Just to -- also, just to add to what Vishal just said, please keep in mind that the ramp-downs that are going to take place are going to negatively impact our overall reported revenue numbers. So the ramp-down that we have previously disclosed to you, that will be taking place over the next three quarters. And the underlying core business, that will continue to scale up and ramp up during the balance of the year. So it really -- there will be an offset to the increase in revenues that will be taking place.

Understood. Fair enough. Thank you.

Edward Caso, Wells Fargo.

Yes, hi, good morning. It's actually Rick Eskelsen on for Ed. My first question was just on the industry competition. Rohit, I believe you talked about seeing that the larger offshore providers more on the analytics side, so I was wondering if maybe you could segment out what you're seeing across your business among the typical BPO competitors, any of the offshore providers that are moving more into BPO, and then the multinationals?

Sure, Rick. So, first, on the analytics line of business we actually see a wide variety of competitors, and in particular we end up competing with some smaller niche players in the analytics space. But the competition there seems to be very, very varied and is all over the board. There is not any clear pattern of competitors out there.

For our operations management business, we have been seeing increased competition from the traditional offshore IT-centric players which are investing in BPO and building up their BPO capabilities. We continue to see that competition compete for deals in our business. And I think with our Business EXLerator Framework, our domain focus and our ability to add value to our customers we are able to effectively compete against much larger players.

The bigger global players, we don't see much of them, much competition from them, because they tend to play a lot more on large-scale transformational projects, and in those types of situations EXL is -- EXL plays only in select industry verticals. So I think the competition for us on operations management is that other pure-play BPO companies and with offshore-centric IT players which are trying to build up their BPO capabilities.

Has there been much change in the pricing environment? I believe the last time you talked about it there was -- it was relatively stable.

So the pricing environment, it does tend to be fairly stable. We have seen in some isolated cases that for strategic reasons competition may adopt some very aggressive pricing. But that still seems to be in a few cases where they are strategically trying to acquire a footprint. On the broader spectrum and in terms of a longer term outlook, the pricing environment is competitive but fairly stable.

Thanks. Then just the last one for me, I'm wondering if you could sort of update us on the platform businesses, and particularly with Landa. I know when you had bought it you talked about making some investments and trying to transition their model to one that was maybe more annuity based, as your base business was at the time. So maybe you can talk about sort of the platform business as a whole and what you're doing in Landa to move to sort of the as-a-service model that you talked about. Thank you.

Sure. So, three years back we started to acquire platform businesses in an effort to move towards business process-as-a-service business model, and we've done that with LifePRO, which is a policy administration platform for life and annuities. We've done that with Trumbull, with is a subrogation platform. And we've done that with Landacorp, which is a healthcare platform.

What we have found is that this transition is a multi-year transition that takes place in a fairly gradual format. But we are continuing to make aggressive investments in terms of trying to get to our end goal of providing these products and services to our clients as a service.

On Landacorp in particular, there seems to be a fair amount of transition taking place in the healthcare industry vertical, so there is a unique opportunity for us to leverage the platform and provide our operations management capability on top of that as a service. There are a number of clients where the Landacorp CareRadius platform has been implemented, and we are working with these clients to try and see if we can provide them the service on top of the platform.

We are also taking the platform into a hosted form format, and that will, again, allow us to offer these services with much greater ease and for clients to engage with us on a per-transaction basis. However, the journey is going to be a long journey, and I would expect that the change will happen gradually over a period of time.

Thank you very much.

Joseph Foresi, Janney Montgomery Scott.

Hi. My first question here, have you seen any change in the timing on the sales cycles either on smaller or larger deals?

Hi, Joe. No, not really. I don't think we've seen any real shift take place in the sales cycle. I think the outsourcing deals continue to be a long sales cycle, and some of the analytics deals do tend to be a shorter sales cycle. But that used to be the case previously, as well.

Okay. And to your credit I think the last two quarters you've -- it seems like your pipeline has either refilled or gotten incrementally better. Is that the case? And what's causing that? Is that a secular uptick in maybe bookings, or the amount of business out there, or do you feel like you're gaining market share? It just seems like the tone has improved at least on the demand side over the last couple of quarters.

Well, I think from our perspective a few of our strategies seem to be resonating well with the market demand and the environment, Joe. Number one, we continue to remain very sharply focused on select industry verticals and domains, and as we become better and better in understanding the subject matter expertise of the industry verticals and the business of our clients we are becoming a much more valuable and a meaningful partner to them.

The second is the investment that we made in our Business EXLerator Framework. That seems to be resonating very nicely with our prospects and with our clients, and we are going to be making a very strong push to embracing that framework across the enterprise on a global basis and delivering value to our customers.

And the third is the investment that we've made in the platform businesses, those are long-gestation investments. But we continue to have very exciting conversations with our clients as to how we can leverage our platform and provide that as a service to them.

Great. And just lastly for me, is it safe to say that your pipeline's increased over the last two quarters? And then I think on the transition business, are we still expecting I think it was a $12 million to $20 million impact this year? So is the pipeline numerically increasing, and is that still the expectation on the transition?

Sure. So the pipeline certainly continues to mature and develop, and we've seen new deals come into our pipeline. We've seen our existing deals mature. And we've seen good progress in our pipeline pretty much across industry verticals. It's also a reflection of the investment that we've made in our sales and marketing engine, and that's something which seems to be bearing fruit now.

On our -- on the transition of the disclosed client, the estimate that we had previously provided was that we expected a $12 million to $20 million revenue ramp-down in 2014, and our expectation is that that ramp-down number will be in line with our previously provided estimate.

So, there are two transitioning clients. The $12 million to $20 million is for one client, and the second client will also have $8 million to $10 million of impact.

Got it. Great. Thank you.

Manish Hemrajani, Oppenheimer.

Hi. Thanks for taking my call. Can you talk a little bit more on demand, why do you think it's getting better, and if you could add to that as it pertains to decisionmaking for new versus existing clients?

So, I think demand for us has continued to be strong throughout. It's something which we've shared with you that we see a fair amount of opportunity and engagement and interaction with our existing clients and our prospects. I think what we've now started to see is some very specific opportunities that are opening up which fit in with our capabilities, and they fit in with what our clients are seeking. So by virtue of us tweaking our business model and by virtue of what the prospects are looking for, I think the fit seems to be a bit better than what it was previously.

And then can you talk about decisionmaking for new versus existing clients?

So the decisionmaking cycles continue to be long, but I think for us we are able to show the business impact that we can create and the value that we can deliver upfront to our clients and prospects. And based on that I think we are seeing a greater engagement by our prospects, and we are seeing them engage with us with greater confidence in doing business with us.

You saw pretty good [deal wins] in analytics. What would you attribute that to? You've seen this pick up industry-wide and globally. And then how many folks do you have currently doing analytics at EXL with the addition of the Mumbai center?

So, Manish, I think what we are seeing in analytics is extremely strong demand. We positioned ourselves for the analytics business a couple of years ago by starting to invest in dedicated salespeople only for analytics. Today we've got seven salespeople who are fully dedicated just to selling analytical services, and this is done on a global basis. So, in addition to our regular sales force cross-selling analytics, we have a few salespeople who are solely dedicated into selling analytics.

We've also for analytics broadened out the industry verticals where we would serve clients, and therefore our spectrum of industry verticals is a lot wider than the rest of our business for analytics. So I think that's what's been driving the demand and the engagement in analytics.

And overall I think [in the year] we have over 1,200-plus people now who are in that analytics business.

Got it. A couple of housekeeping questions. How should we model the impact on revenue for the next five quarters or so from the transition costs (inaudible)? Is it going to be -- I know this was asked before, but is it going to be every quarter a fixed amount, or is it variable?

So, Manish, unfortunately, we really cannot provide you any more color than what we have shared. We just don't have any ability to forecast that number, and we are unable to share any detail with you on this.

Okay, got it. And then how do we -- how much stock comp for the year should we model out?

Manish, hi, this is Vishal. So stock comp, we estimate the stock comp for the year to be between the range of $12 million to $13 million.

Okay, got it. That's all I have. Thanks.

Jason Kupferberg, Jefferies.

Hi. This is Amit Singh, for Jason. Just wanted to quickly speak about your guidance, which was reiterated. So the first quarter itself, both the top line and the bottom line were strong, much above expectations, I would say, and then your pipeline remains strong, and then all the expectations related to the client transition were sort of reiterated, as well. So I'm trying to understand the reasoning behind why guidance was not increased. Is it just FX, or it's just the timing of the impact of transition is more back-end loaded now?

Yes, hi, Amit. This is Rohit. I think that's a fair question. I think we certainly have seen a couple of months of performance in calendar year 2014, and we have greater confidence in our guidance as we go into the balance part of the year. However, there are two factors which I think are unknown to us at this point of time.

Number one is the ramp-up that takes place in the second half of the year in our transformation line of business is largely project-based revenue that increases, and that project-based revenue can be quite volatile, and there is uncertainty associated with that.

The second is we are also uncertain about the ramp-downs of the previously disclosed clients. And there is a broad range that we have provided out there, and that provides a fair amount of uncertainty.

The underlying business for the rest of our client portfolio, that continues to be quite strong. And since we are only 60 days from the time that we first gave guidance on March 1, we have chosen to stay with our current guidance. As we get a greater amount of visibility and confidence, we will update our guidance accordingly.

Fair enough. And just quickly want to speak about the overall hiring environment. I see that your net headcount has increased by around 600 since last quarter. So I just wanted to get a sense that you guys are -- even though you're in the process of sort of reassigning a lot of people who are working on the large client that is transitioning, so what is the reasoning behind continuing to aggressively hire? And then on top of that I wanted to just check on your attrition rate. I think it increased to around 29% from 25% last quarter, so if you could provide a little bit more color on that.

Sure. So I think the hiring for us basically shows the underlying business demand for our services and the growth in our existing portfolio. The transitioning client portfolio ramp-downs are not really a factor right now in Q1, so most of these are for the increase in our underlying growth of our businesses.

I think the other area that we continue to hire strongly in is in analytics, and we will be making a significant investment in hiring additional workforce for our analytics business through the second quarter and the third quarter of this year. And so that's something which we are excited about, and we think it's a great time for us to be continuing to build up our capabilities out there.

From an attrition standpoint, attrition did move up in Q1. We think that this attrition increase is a combination of the market environment in India as well as certain seasonal factors which do impact attrition in the market there. But there isn't anything else that we are seeing by way of attrition.

I think our employee engagement, our ability to manage our workforce, all those continue to be pretty much on track. And we -- there may be some quarters where there may be a slightly higher attrition, but in general we would target mid-20s type of an attrition rate, and we would expect that to stabilize at that level.

The important element on attrition is year on year our attrition rate continues to keep coming down, and we are seeing that not only in India, but we are also seeing that in the Philippines, and that's a good thing for us to be able to monitor.

Great. Thank you, guys.

Puneet Jain, JPMorgan.

Hey, this is (inaudible). So, Rohit, it appears like clients are trying to get more efficient in their core and maintenance spending, and they are increasingly adopting automation. So what does that mean for your business? It is mostly FTE based.

Sure. So, Puneet, first of all, we do have a fair amount of our business which is now on a transaction-based pricing model. But the balance of it continues to be on an FTE-based pricing model.

The entire effort that we are making on the Business EXLerator Framework actually incorporates the use of business process automation as a core ingredient and a tool to provide efficiency and productivity benefits to our customers. So we are seeing our clients demand that of us. We ourselves are investing in that.

And we think that that's a win-win value proposition for us to make that investment, deliver the benefit to our customers and get greater confidence and acceptance from our customers and hence get greater volumes of business from them. So I think it does act as a short-term detractor of revenue, but longer term I think it'll help us build our revenues and build our business with our clients.

Okay. Understood. And, Vishal, I think you mentioned that you expect revenue to be flat to down in 2Q. And also what was transition impact on revenue in this quarter and what do you expect in 2Q?

Yes, so in this quarter the transitioning impact was minimal in terms of the client which we've announced. Majority of that will start in Q2, and we -- that's the reason we think that the revenues will decline in Q2.

Okay. Thank you.

Vincent Colicchio, Noble Financial.

Yes, I'm just curious, is there anything the Company has done or that you reasonably can do internally to better safeguard against further client problems?

We've actually taken a number of steps to try and do that. Number one is we continue to make much stronger investments in information lifecycle management. We've invested in technologies and tools. We've beefed up our processes.

We've made investments with our partners in terms of defining appropriate industry standards as well as policies and procedures that we can all adhere to. We've invested in greater amount of training to our employees and created a much better awareness. And that's an area that we will continue to invest in very strongly, because it's such an important element of our relationship with our clients.

We also continue to make investments in our Business EXLerator Framework, which provides a greater value to our customers. And then we continue to make investments in our platforms and analytics businesses so that we can improve the stickiness of our services. And I think a number of these measures across the board should help us manage our client portfolio in a much more stable format.

Okay. That's it for me. Thank you.

Thank you. And I'm showing no further questions at this time. I'd like to hand the call back over to Rohit Kapoor for any closing remarks.

I just want to thank everybody for joining this call.

EXL continues to execute very strongly, and I think for us the next couple of quarters will be very critical as we ramp up on our existing clients and the new client wins that we've had, and we have transitions which might offset the growth that's taking place. But there seems to be a greater validation of our business model in the marketplace, and we will continue to strive to meet our guidance and continue to deliver on our numbers.

Thanks for joining the call, and we look forward to hosting another good call next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.