Exlservice Holdings Inc (EXLS) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EXL second-quarter earnings call. (Operator Instructions). As a reminder, today's conference call is being recorded.

I would now like to turn the call over to Mr. Steve Barlow. Sir, you may begin.

Thank you, Candace. Hello and thanks to everyone for joining EXL's second-quarter 2014 financial results conference call. I am Steve Barlow, EXL's Vice President of Investor Relations. I recently joined EXL based here in New York and am very much looking forward to working with the investor and analyst community at the various functions we have over the next year or so.

With us here today in New York 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 quarterly financial results in the press release we issued this morning. We have also updated our investor fact sheet in the Investor Relations section of EXL's website.

As you know, some of the matters we will discuss in this call this morning 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 these measures to GAAP can be found on our press release as well as in the investor fact sheet.

Now I will turn the call over to Rohit Kapoor, EXL's CEO. Rohit?

Thank you, Steve, and a very warm welcome to everyone joining us on our second-quarter earnings conference call.

The agenda for this call will be as follows: first, I will discuss this quarter's results and describe some of the investments we are making in people and infrastructure to support the business growth EXL is experiencing; second, I will comment on our pipeline and some of the areas of opportunity we are seeing in the market; third, I will comment on our recent acquisition of Blue Slate and the [MOU] with Carvajal we just announced.

I will then turn the call over to Vishal for a more detailed financial discussion following which we would be happy to take your questions.

In the second quarter, our revenues grew 13.6% year over year to $125.5 million on a constant currency basis excluding disentanglement costs and client conversions taking place. The strong double-digit revenue growth was driven across all business lines with our outsourcing business growing 8.5% and our transformation business increasing 36% year-over-year on the same basis.

Adjusted EPS increased by 12% year on year to $0.41 versus $0.37 a year ago. Our ability to obtain new work from our clients beyond the initial mandate is extremely important. And our success is evidenced in the quarterly migration of 49 new processes across domains. EXL had seven new clients wins in the second quarter, four in transformation and three in outsourcing. Importantly, for the first half of 2014, EXL signed 12 new clients compared to 10 in the first half of 2013.

Looking ahead at our sales pipeline in outsourcing, I am pleased to report that it is strong across our core domains with a diverse group of strategic transactions, any one of which would be impactful for EXL. We continue to see strong activity amongst our existing client portfolio where there is tremendous room for growth.

At the same time, the pipeline for new prospective deals in our transformation business is also very robust and we continue to make good progress.

This quarter, our decision analytics revenue within the transformation segment grew 48%, leading the growth of all business lines at EXL. Decision analytics grew to 12% of revenue in the second quarter from 9% of revenue in the second quarter of last year. To provide a sense of the resources we are adding to support this growth, our headcount and decision analytics has increased by 20% sequentially from the last quarter with significant increases in both onshore data scientists in the US as well as in India.

The decision analytics business needs highly skilled people to provide deep insights and analysis for our clients. In order to do so, we have further committed to hire an additional 350 people from university campuses for the full year, and are hiring very aggressively to service the demand that we are seeing. As a result of us making aggressive hires both onshore and offshore, these investments have caused an uptick in our cost structure. But once fully productive, will enable us to return to higher gross margin in the transformation segment that we exhibited this quarter.

We see higher demand across the spectrum of services we offer and are making infrastructure investments to support our growth plans. To support our growth and decision analytics in the first quarter, we opened our Mumbai operations center and are hiring in Johannesburg. In the second quarter, to support the growth of our healthcare clinical operations, we opened a 300 seat operation center in Cebu, making it our third operations facility in the Philippines.

Our growth in the Philippines has been led by our healthcare vertical would travel, transportation and logistics, and banking and financial services also contributing to the growth.

In addition, we will be opening a fourth operations center in Alabang, with 570 seats, in the third quarter of 2014. The net effect of this infrastructure growth is that it does create a short-term impact on gross margins until the infrastructure is fully utilized.

EXL's attrition rate increased to 34% from 29% in the first quarter of 2014. We will remain vigilant in ensuring that we maintain our service delivery quality and do not believe this increase in attrition is a cause for concern. We believe that this attrition will start to decrease once we are done completing some off the client transitions that are currently in progress.

Our headcount increased this quarter by approximately 300 professionals, despite known client headwinds we are experiencing. Client concentration is declining as we grow our business. At present no client now represents more than 10% of revenue and the top 10 clients represented 53% of revenue in the second quarter, compared to 60% a year ago.

Looking at revenue by vertical, we continue to develop industry verticals where we want to become a category killer. Each of EXL's focused verticals now represent at least 10% of total revenues.

It is not only our clients who believe we add value to their bottom line, but we have recently been recognized by a variety of industry park leaders. In the second quarter, a Gartner study published in May positioned EXL in the Leaders Quadrant of the Magic Quadrant for finance and accounting BPO. In addition, EXL was positioned as a major player in IDC marketscape worldwide business analytics BPO services 2014 vendor assessment survey.

EXL also received an innovation award from the international consulting firm, Alsbridge, Inc., for the use of analytics and automation to improve receivables management processing off a leading UK energy supplier. EXL was the first provider to be certified in [Everest's] marketing framework for protecting client confidential information and adopting new process, business process solutions code of conduct.

In previous calls, we have discussed how we continue to invest in EXL's proprietary business EXL rate of framework which brings together analytics, technology, and operations management. Building on that notion, we recognized a need to help our clients optimize processes using leading technologies and process automation tools available in the market.

After an extended search, we acquired Blue Slate Solutions on July 1 for $7.6 million. Blue Slate is a 14-year-old company that will be a great addition to our business process, automation component of our business EXL rate of framework. Blue Slate combines the technology expertise with business acumen to transform client operations. In particular its people have extensive knowledge of how to leverage best in class, business process management platforms as integral elements of process automation and improvement.

Blue Slate works directly on clients' core mission-critical applications inside their IT environments to fundamentally transform their business processes. Blue Slate's client list includes Fortune 500 firms. Namely, four of the largest commercial healthcares and several global money center banks and 11 Blue Cross, Blue Shield organizations.

Blue Slate's clients align well with EXL's client roster and create potential new opportunities for EXL. Additionally, Blue Slate's industry experience blends well with our focus domain.

An example of a Blue Slate success story is how it helped a Midwest Blue Cross Blue Shield plan significantly reduce administrative costs to continue to be competitive in their core markets through business process automation.

The health insurer had a 64% first pass rate, translating into a higher than industry standard cost per claim process. This was impacting their bottom line and their ability to retain and attract new clients. Blue Slate designed and program managed the implementation of new technologies to optimize the games process.

The first pass rate went up to 80%, making the health insurer more competitive and with increased profitability.

In addition, the solution went several steps further and added a business process automation set of tools to allow management to easily obtain and analyze processing statistics to assist them in determining if they need to change or enhance their workflow in the future.

This morning, we also issued a press release on another important strategic development for EXL. We announced that EXL and Carvajal have signed a memorandum of understanding to establish an operations management joint venture in Latin America. The joint venture will address the growing demand for Spanish language-based operations management solutions delivered from Latin America.

The solutions provided will include finance and accounting, complex customer service, and clinical services. Carvajal is expected to contribute its existing finance and accounting outsourcing operations to the joint venture in which EXL will acquire a 51% stake.

The joint venture will combine Carvajal's local knowledge and brand with EXL's business process expertise and global best practices to service clients from world-class Latin American facilities. The joint venture will be headquartered in Colombia and launch with over 500 skilled and experienced employees working from multiple delivery centers.

The joint venture gives EXL the opportunity to tap into the Latin American end client market where we are not present today without the need to make significant investments in sales and marketing. For Carvajal, partnering with EXL will allow them to expand their business at an even faster pace and take advantage of our global delivery footprint and scale in business pursuits.

We think this is a great opportunity for both companies and are confident we will have additional details to share with our shareholders and employees on our next conference call.

Overall, the first half of the year has shown good momentum with organic revenue growth at 13.3% on a constant currency basis and excluding [client] transitions. We are pleased to increase our guidance at this point in the year to account for the business momentum we are experiencing and also pleased to have executed two strategic transactions that should benefit our business for many years to come.

We remain confident that the remainder of the year will continue to move along our growth trajectory as we work with our clients and pipeline prospects to provide market-leading performance and services.

With that, I turn it over to Vishal.

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

In the second quarter EXL reported revenues of $119.7 million, which includes a $5.7 million reimbursement for disentanglement cost. Excluding these reimbursements, our revenues were $125.5 million, up 8% year over year and up 1% quarter over quarter. Foreign exchange had a negative impact of approximately 1% on our year-over-year revenue growth. On a constant currency basis and excluding previously announced disentanglement cost and impact of transitioning client revenue, our revenues grew 13.6% year-over-year. On the same business for the first half of 2014, EXL revenue grew by [13].3% to $249.7 million.

In our outsourcing business year-over-year revenues declined 3.1% on reported business and increased 8.5% on a constant currency business excluding disentanglement costs and transitioning clients' impact. On a sequential basis, outsourcing revenues fell 5.8% or 2.3% on a constant currency basis and excluding disentanglement costs and transitioning clients' impact.

For the first half, outsourcing revenues grew 10.3% on the same basis. In [transformation] services revenue grew 36% year-over-year and increased 17% sequentially. Year-over-year growth and sequential growth was fueled by strong growth, primarily in our decision analytics business, which grew 48%. And our operations, consulting and finance [transmission] business also experienced healthy growth.

As mentioned in our last two calls, we are seeing strong momentum in our analytics business which will drive sequential growth and transformation for the rest of the year.

In my discussion in subsequent matters, I will be discussing [adding] margins excluding the impact of disentanglement costs. In the second quarter, gross margins were 35.2%, down 110 basis points year over year and [450] business points sequentially. The sequential gross margin decline was driven by expected (inaudible) increments and additional capacity and people we have added to support our revenue growth.

The year-over-year margin decline was driven by setting up of new facility centers, some one-time expenses and a change in business mix. offset by a benefit of weakness of the Indian rupee.

Our sourcing gross margins were 37.5%. Gross margin fell [130 business points] year over year for the reasons mentioned above. Gross margins quarter over quarter fell 510 business points driven by a 3% decline in rupee, which accounted for about 100 basis points impact, continued investments in our platform business which caused a 120 basis point drop. In addition, wage increments hurt margins by 120 basis points and the remainder was due to facility expenses and new plant ramp-ups.

Transformation services gross margin of 36.2% rose 350 basis points year-over-year and were flat sequentially. The year-over-year increase was due to improved utilization which more than offset the wage increase. We anticipate a gross margin of our transformation services business to continue to improve through the year as our utilization increase is driven by new business.

G&A expenses were 12.9% of revenue. (technical difficulty) was up 100 basis points year over year and sequentially, due to the M&A activity. Sales and marketing were 7.5% of revenue flat year-over-year. We expect both G&A and sales and marketing spend and as a percentage of revenues to be largely stable for the remainder of the year.

Foreign exchange loss was $100,000 in this quarter. We expect foreign exchange to be favorable by about $1.5 million to $1.8 million in the second half of 2014. Interest and other income was $0.9 million up $300,000 year over year, driven by our higher cash balances.

In the second quarter, our tax rate was a negative 13.8% owing to a one-time tax discreet item reversal and a lower income attributable to our US entity. Excluding the one-time tax impact, our effective tax rate for the second quarter would have been 17.2%. We anticipate our full-year tax rate to be in the mid-20s. We would still expect that tax rate for the next several years to -- beyond 2014 to be in the high 20s as per our prior expectations.

CapEx spend for the second quarter was $5.9 million and $16.6 million in the first six months. CapEx spending in this year is front end loaded owing to opening up new facilities and the required investment in computer, software, network equipment. For the full year, we expect CapEx to be in the range of $25 million to $30 million which will include a fourth operations center to be opened in Alabang, in the Philippines in the third quarter, providing an additional 570 seats of capacity and continued spending and product development and expanding in our business [accelerator] framework.

Adjusted EPS was $0.41, up from $0.37 in the second quarter last year and down from $0.50 in the first quarter of 2014. As outlined earlier, quarterly adjusted EPS was impacted by our infrastructure expansion, wage increments, certain one-time professional fees and the advanced hiring of (inaudible) which negatively impacted our margin and was positively impacted by the one-time tax benefit experienced in this quarter.

We continue to enjoy a strong balance sheet with over $168 million in cash and short-term investments and no debt. M&A is strategic to our growth plan and we plan on using our cash primarily for strategic acquisitions. We have a healthy pipeline of acquisition opportunities which could give us a decisive advantage in the market place in our chosen verticals.

DSO was 55 days in the second quarter, down two days sequentially. On back of our strong performance in the first half of 2014, we are raising our revenue guidance to $490 million to $503 million -- from $480 million to $500 million. Our high revenue guidance includes the acquisition of Blue Slate we closed at the beginning of July which had a $3 million of revenue in the first half of 2014. As well as increased confidence that our fast-growing analytics business will grow sequentially in the second half of the year.

We are maintaining our adjusted EPS guidance of $1.70 to $1.80 using and Indian rupee exchange rate of 60. Both revenue and adjusted EPS guidance excludes disentanglement -- entanglement cost impact.

Stepping back from the second-quarter results, we remain extremely bullish about the short-term and long-term prospects in all areas of the business and especially in operational management and decision analytics. We are continuing to invest in new operation centers and are taking on additional capacity in terms of talent and physical infrastructure to support the visible growth.

We are looking to make additional acquisitions if they meet our strict requirements and, today, we do see a good pipeline for actionable opportunities.

Demand from our current plans remain healthy and is rising and we are well-positioned to take advantage of new opportunities.

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

(Operator Instructions). Edward Caso, Wells Fargo.

I was wondering if you could talk a little bit about the Indian budget proposal, and if there is anything in there that might impact the Company positively or negatively?

We have reviewed the Indian budget proposal and, at the present moment, there isn't anything in that budget that would impact us in any kind of a significant way. I think we basically remain very, very optimistic about the new administration and some of the changes which directionally seem to be going in the right way.

So we are hopeful that the changes that the new government will bring about will strengthen the Indian economy, will improve the confidence of investing in India, and that should actually be a positive for our business in the medium to long term.

The short-term proposals and some of the changes that were proposed in the budget that was announced this month really do not have any impact to our business right now.

I was hoping you could clarify a little bit about the market for me. I think you said three outsourcing wins this quarter, but I think you also said that there were some large ones in the pipeline. So I assume the three wins weren't very big. Could you just make it clear for us what your sense is for the outsourcing side of your business?

Sure. For us, the pipeline continues to remain very active and strong, both across the new clients and existing clients. And we do have a number of deals in the pipeline and the pipeline has broadened out as well as the pipelines got a number of strategic deals in the pipeline as well.

A few quarters ago, we stopped commenting on the winning of strategic deals; and we will continue to follow that practice as we move along. But we continue to believe that there is a tremendous opportunity in the marketplace. EXL continues to remain very well-positioned to participate in that opportunity, and we continue to add new clients into our business. And we are pleased with the pace of progress that we are making this year.

I probably missed it, but can you just -- final question, what were the latest estimates on the cost of the travelers' rampdown? How much is left?

The travelers' rampdown as we had mentioned previously is a rampdown that would take place over an 18-month period. We expect the travelers' rampdown to be completed by the end of first-quarter 2015. We expected for calendar year 2014 the rampdown to have an impact of between $12 million to $20 million in terms of revenue for us this year.

In addition to this, there are certain disentanglement costs that we pay, associated with this contract.

In the second quarter the payment that we made was $5.7 million. We do not have any estimate of what the disentanglement cost would be and we will be reporting out what that number is at the end of each quarter as we incur that expense.

So, just to be clear, the 12, the 20 runoff in the revenue run rate, that is included in your pro forma numbers, but the disentanglement costs are not. Is that right?

That's correct.

Great. Thank you.

Joe Foresi, Janney Montgomery Scott.

Good morning. This is Jeff Rosetti on for Joe. I was just wondering if you could comment on the -- your ability to find talent for the transformation business?

Certainly, Jeff. I think the transformation business for us is a very exciting business because it is growing at a very rapid pace. For us, transformation includes decision analytics, operations management and operations consulting, as well as finance transformation work that we do out here.

Across the three business lines, we basically hire highly skilled professionals. In data analytics, it is data scientists that we hire. In operations consulting it is folks who have got a consulting background and experience, and who understand a number of the Lean Six Sigma methodologies. And within finance transformation, we typically hire from the Big Four other than accounting practices where they understand risks, compliance, and governance.

We have been consciously investing in creating a very strong presence within the universities and college campuses, so that we can have a direct recruitment program. And as we announced this year, we intend to hire close to about 350 professionals directly from universities and college campuses in India and in the US.

In addition to this, we also do some lateral hiring and that hiring takes place throughout the year. And we are very, very fortunate that we have built up a very strong presence with this talent community. And our ability to attract, retain, and develop talent in this area is becoming a big differentiator for us in the marketplace.

Okay, great. And so would be safe to assume that as you invest that short- and near-term the gross margin might see a little bit of pressure or be in that mid-20s range that it has been in the past couple of quarters?

Yes, Jeff. I think that that is fair. Because when we hire from college campuses, it is typically the hiring is done between the second quarter and third quarter. That is when we get fresh graduates who come in and join us. And, therefore, there is an uptick in the number of resources that we have hired. We invest in their training and their development and as they become productive, we start to recognize the benefits of revenue and utilization. And therefore, the gross margins would increase as these individuals become more productive.

And, Jeff, as I mentioned in my script we do anticipate that growth margins will improve for both our transformation and our sourcing business in the second half as we have better utilization of our infrastructure and people. We think -- we anticipate that gross margins will improve in the second half.

Okay, great. Finally on the transformation side, last question. You called out by vertical financial services and healthcare. Any other commentary that you are regarding demand for transformation for the other verticals? Thanks.

Certainly. For us, within decision analytics, we saw clients across multiple verticals. We do see strength in banking and financial services as well as in healthcare.

But we are also establishing a good presence in new verticals and, recently, we have signed up some new clients in the retail industry vertical. And we are really happy that we can leverage our skill sets across industry verticals and participate in the growth that is taking place across business verticals.

Sashi Tanuku, Citigroup.

So just a few questions on the revenue guidance. When you are raising the guidance, is it fair -- are you assuming that the first-half base is $242 million or the $249 million with the disentanglement costs there?

The revenue guidance is excluding the disentanglement cost impact. So we are assuming that the first half is $249.7 million and that is factored into the guidance for $490 million to $503 million.

Okay. And I think you guys commented on this. What was the impact from Blue Slate and, in terms of the guidance as well, what's the impact from Blue Slate going forward as well?

All right. So the first-half revenue of Blue Slate was $3 million and we assumed the same run rate in our guidance.

Okay. And one more question. In terms of the impact of the disentanglement costs, can you comment on the impact there to margins and the tax rate?

Sure. So the impact of disentanglement costs on the gross margin is about 3.1%. The impact of disentanglement costs on our G&A line is about 0.6%. On sales and marketing 0.4% and on D&A 0.3%.

On the tax rate as the disentanglement costs reduces our US income, the tax rate would be better for us as we make less income in the US. And that is why, when we give our full-year guidance, we expect the tax rate to be in the mid-20s which is lower than what our previously guided number was.

Anil Doradla, William Blair.

I had a couple of questions. You talked about giving more color on the Carvajal in the next earnings. But it sounds like Carvajal is more IT-centric and the deal is nonbinding. So can you give us a little bit of color what was the catalyst for this deal? Was it any particular in market or set of customers and I had a follow-up.

Sure. So, the joint venture MOU that we have signed with the Carvajal Group is only for the operations management and outsourcing business segment. And as we mentioned in the call this is for finance and accounting of complex customer service and clinical work that we intend to do within this joint venture.

Carvajal will be contributing its own internal set of people, which is approximately 500 FTEs that will be part of this joint venture. And we would have a 51% stake in this joint venture.

Right now, this MOU is nonbinding and we would work with the Carvajal group to get to final definitive documents and the signing of this agreement over the next few months.

Okay. And analytics is now about 12% solid trajectory. Going forward, do you foresee a situation where you maybe give a little bit more color breakdown, the transformation part of your business where you break down analytics as a separate line item? And big picture, clearly the trend of BPO plus analytics is influencing not only you but many of your peers. But stepping back would love to hear why you are winning deals with your analytics solutions and how you are differentiating yourself. Thanks a lot.

Sure, Anil. I think that is a great question. Let me just give you our perspective on decision analytics.

So from the bigger picture, I think there's suddenly seems to be a lot of interest in the marketplace on analytics. The demand for a local services is exploding and everybody seems to be moving towards adopting analytics in every part of their business. I think a couple of years ago, decision analytics and the size of analytics used to be adopted by clients as a discrete projects (sic) in their work. And now they are making it part of their business. And it is being integrated into their business across every function, every division, every operation and I think that is what is driving the growth out here.

I think for EXL, clearly, our decision analytics business is resonating extremely well with our client base and with the marketplace. And there are a couple of reasons why we think we are succeeding in decision analytics and why that is becoming a much more stronger business line for us.

First of all, I think our positioning within decision analytics is strong. The work that we do is largely in the area of creating business models and in insight generation. And I think that is an area where we can add tremendous amount of value to our customers and, again, the need for these types of services is very high. We are also positioned to do a lot of work around risk management as well as payment integrity and solutions. And, again, particularly within the banking and financial services and healthcare. These are core areas of need amongst our client base.

We have also invested in a dedicated salesforce for analytics and that seems to be playing out well. The quality of talent that we have within the decision analytics business is very, very good and we have got top-notch professionals who are data scientists and client managers who are engaged in these businesses with our clients.

And I think we have perfected the art of the dual shore operations in decision analytics, which allows us to deliver a lower cost structure and a much better benefit to our customers.

So I think this is all playing out well and I will also say, in closing, that I think for us decision analytics plays out two ways. It plays out by the fact that we have started to embed analytics into our operations management business. And within the business EXL [rate of] framework as well as we are able to go to our clients, offer them the insights and then take the insights to execution.

So, the ability for us to offer end-to-end services and combine BPO and outsourcing, along with analytics, becomes a very powerful tool for us to leverage the opportunity in the marketplace.

Manish Hemrajani, Oppenheimer.

A follow-up question on the analytics. You have talked about real urgency among analytic clients to get deployed last quarter and you certainly saw that come through in your results. Was the ramp-up faster that you had expected and how do you see the rest of the year shaping up on the analytics side?

I think the visibility for us on the analytics business is becoming better and better as we move towards more annuity-based contracts. And a greater proportion of our decision analytics business is now done from offshore under an annuity contract format. And so that allows us to get greater visibility.

We have tremendous confidence in the growth of this business; and that is why we are hiring 350 additional resources from the colleges and campuses. This is, by far, the largest set of hirings that we have done in any year. And we continue to expand our investment in our people, in our training methodologies, in our infrastructure, and in our ability to create proprietary tools that we can leverage in our decision analytics business.

So, it definitely is an area of growth and investment for us and we are very confident about the growth that we expect to see in the second half of the year.

So, Manish, as I mentioned earlier, we do expect the [deal] business to have sequential growth in the second half of the -- for both the quarters.

Okay. Got it. Then, you had talked about [DA] headcount being up 20% sequentially. So your analytics headcount would be around 1450. Is that correct?

Yes. I think that is correct.

Okay. Got it. Your attrition rate over the last couple of quarters has risen by 900 bps. Can you throw some more color on that and what steps are you taking to (inaudible)?

Well, we think the attrition rate has ticked up, a couple of reasons. One is there is some of the client transitions that are taking place right now and that is certainly causing an increase in the attrition rate. Second is, typically, we give out salary increments in April and post-April we do see some amount of churn that takes place.

The part that we have been very careful on and we monitor very closely is how is the attrition tracking for mid-and senior level management within the Company. As well as how is the attrition tracking for our high potential employees. And I think, for us, the fact that the attrition rate for our mid-management and for our senior management as well as our high potential employees, that continues to remain very stable. So we are very confident that this attrition rate will turn down, once the transitions are over, and we will return back to the normalized rates of attrition that we had previously.

Jason Kupferberg, Jefferies.

This is Amit Singh for Jason Kupferberg. Just to come back on the disentanglement cost again. I know you don't provide an actual dollar guidance on this, but in the first quarter, you had an expense of around $2.5 million. And the second quarter it was $5.7 million.

So just to give the general idea of the trend is that -- is that supposed to go up from here or has it more or less plateaued, or should we expect it to come down over the next two quarters?

On this subject, we really have no comment because we really do not know where this number will end up. And this is something which is extremely difficult for us to estimate or analyze. And that is why we have consciously chosen to stay away from making any guesses on it. Unfortunately, we can't provide you with any further color on this.

All right, fair enough. And on the travelers' contract, out of the $12 million to $20 million impact that you were expecting in fiscal 2014, how much of that has already gone to your P&L? And also on the [OPI] client transition. I think earlier you had said that would impact your fiscal 2014 revenues by 2.5% to 3%. So, any update over there?

The only updates that we have provided are the annual updates on what we expect the impact to be and those continue to remain consistent with what we had previously shared. And as I said earlier, the travelers transition will take place over an 18-month period. And it is going to continue to take place through the end of this year and into the first quarter of next year.

We do not break out the client transition revenue impact by quarter. And we just know what the annual estimate would be and we have shared that with you.

[Adam Doms], Baird.

Good morning. Thanks for taking my question. One quick one on the revenue guidance.

It looks like at the midpoint you took it up about $6 million to $7 million and it seems like about half of that comes from your expectations for -- from the Blue Slate acquisition. Of that remaining $3 million to $4 million, how much of that is coming from that new joint venture? And how much from core operations?

Adam, this is Rohit. We have not factored any revenue increase on account of the joint venture right now. So this is all the increase that is taking place is on the basis of the strength of the revenue that we have seen in the first half. And it is the organic growth rate that we experienced both in the outsourcing and the transformation business.

Once the joint venture is signed, we will provide additional color on the revenue impact on to our guidance.

That makes sense. Thanks. And then one quick follow-up. Margins from the Blue Slate acquisition, is that similar to your overall business right now? Is there anything to point out there?

I think the margin profile would be similar to our corporate profile as is now.

Tien-tsin Huang, JPMorgan.

This is Puneet filling in for Tien-tsin. So to go back to different development costs. Understand it is difficult to predict such expenses. But was [$5.7 million] in these expenses (technical difficulty) were they all related to transitions that have happened until second quarter or they also include some expense [you had picked up from transitions]?

So, Puneet, the disentanglement costs that we have referenced and provided color to in our second quarter are the payments we have made to our client associated with the transition and the disentanglement. It basically represents a reduction of our revenue and our profitability by that amount. And it is entirely due to the transitions that are taking place.

But are these payments related to the transitions that have already happened? Or are there payments related, say, for preparing and [profession] for future transitions?

It will be both.

(Operator Instructions). David Grossman, Stifel.

I wonder if I could just get a couple of details. I'm sorry if I missed these. I think you said that the travelers' piece would be a $12 million to $20 million year-over-year impact this year. When you added OPI, could you just remind us where we are in terms of total dollars year-over-year impact in 2014 and what your expectation is for 2015 as well?

As we had mentioned in the prior earning call, the travelers' impact is $12 million to $20 million and the OPI client transition impact is about $8 million to $10 million.

And is that all -- that's 2014 right, Vishal?

Yes.

And how about for 2015?

2015, we can't comment about it right now.

So, David, the way to think about it is that the reduction in revenue in travelers, that big space, we would expect all of that to go away after Q1 of 2015. So it just depends on what the residual number is for Q1. And at this point of time we don't have a good estimate of that.

And the second, just another detail. I think you mentioned, but I didn't catch it, was on the FX impact. Was that for the year or for the second half only, Vishal? Or maybe you could just share with us again what your expectations are for FX in the back half of the year in terms of dollar impact.

Are you talking about, David, you are talking about the FX gain or loss?

Yes.

Yes the $1.5 million to $1.8 million was the second-half impact we expect for the FX gain or loss. So it would be a gain -- expectation of a gain of $1.5 million to 8 -- $1.8 million. And we will have to then add the first-half loss to get to the full year number.

Thank you and I am showing no further questions at this time. I would now like to turn the call back over to Rohit Kapoor for any closing remarks.

Thank you, operator. And thanks, everyone, for joining this call. We continue to make good progress this year as we build up our business lines across our various segments. We look forward to continuing to grow and build EXL and we look forward to you joining our next conference call for the next quarter. Thank you.

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