Exlservice Holdings Inc (EXLS) 2014 Q4 法說會逐字稿

Welcome to the EXLService Holdings' fourth-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference may be recorded. I will now turn the call over to your host, Steve Barlow. Please go ahead.

Thank you, Stephanie. Hello. Thanks to everyone for joining EXL's fourth-quarter and full year 2014 financial results conference call. I'm Steve Barlow, EXL's Vice President of Investor Relations.

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've had an opportunity to review the three press releases we issued this morning: the quarterly and annual financial results; the release about our acquisition of RPM Direct, and the release on our share repurchase program. 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 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 forward 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 in our 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, Steve. Good morning, everyone. Welcome to our fourth-quarter 2014 earnings call.

The agenda for this morning's call is as follows. First, I will provide you with the highlights of 2014, and comment on our strong finish to the year. I will then spend some time talking about the three major strategic pivots that we have made at the start of 2014, and how that has helped us win and get recognition in the marketplace.

We will also discuss the acquisition of RPM Direct, a major analytics player, that was announced this morning, and how this will help us achieve our vision of being the leader in analytics. After that, I will talk briefly about our demand environment, and then close my prepared remarks with listing out our key priorities for 2015.

Then I will turn the call over to Vishal for a more detailed financial discussion, including insights into our annual guidance for 2015. Following that, we will be happy to take your questions.

EXL ended 2014 on an extremely strong note. In the fourth quarter, our revenues excluding disentanglement costs were a record $143.8 million, increasing 15.5% year-over-year and 8.9% sequentially. As a result of our strong revenue growth, we delivered adjusted diluted EPS for the fourth quarter of $0.48. Both our revenues and our earnings were well above the high-end of our guidance range.

We ended 2014 with revenues, excluding disentanglement costs of $525.6 million. On an annual basis, we grew 9.8%, while our core organic growth rate, excluding client transitions, at constant currency for 2014 was 12.4%. These numbers underscore the strong growth characteristics of EXL.

I would like to offer my sincere thanks to all of EXL's 23,000 employees for their hard work, collaboration and passion that ensured our success. I am proud of what we have been able to accomplish. I am delighted to be part of and to lead this great team.

Looking back at 2014, I am proud to say that our entire Company worked together seamlessly to pivot on our strategy, which enabled us to have a very strong second half of the year, and enter 2015 with terrific momentum. We pivoted our Company in three strategic ways.

Number one, we built new differentiated operations management capabilities that fundamentally changed our value proposition to our clients across all industries we operate in. Number two, we significantly increased our investments in insurance, healthcare and analytics, to propel us towards leadership positions in these large and rapidly growing markets. Three, we proactively executed on a capability enhancing M&A plan.

These changes have helped us win new Fortune 500 clients, grow existing relationships and get industry recognition. More importantly, this shift has helped position EXL as a long-term strategic partner for our clients.

Today, EXL not only delivers operations management and analytics capabilities with efficiency and effectiveness, but we also offer an ability to enhance end customer experience, and accelerate our client's top-line growth, while supporting them across global locations, including onshore locations. We do this by participating across the end-to-end value chain of our client's business.

While we will talk in more detail about this new EXL at our Investor Day on March 2, I will elaborate briefly on a few key changes and their impact. A, the first strategic pivot. We made a fundamental shift in our operations management value proposition by implementing the Business EXLerator Framework across all our operations, developing industry-specific business process as a service or BPaaS solutions and building proprietary technology-enabled products.

This shift was instrumental in helping us strengthen our existing client relationships and in acquiring new customers. At the end of 2014, EXL had 68 clients with revenues over $1 million, as compared to 51 in 2013 and 44 in 2012.

We also continued our fast pace of new client acquisitions, by adding 26 new clients in 2014. Importantly, the quality of the new clients added was particularly strong. We added 10 Fortune 500 clients in 2014, compared to 6 Fortune 500 clients in 2013.

By expanding our relationships and winning new clients, we were able to further reduce client concentration. EXL's top three clients generated 22% of revenues in 2014, verses 25% in 2013, and our top ten clients contributed 50% of revenues verses 58% last year.

Expansion of our client portfolio and deepening of our relationships, gives us confidence that the changes we made are resonating in the market and helping us win. This shift was implemented company-wide, and was a key differentiator in helping us win new deals across all verticals including utilities, banking and financial services, and travel, transportation and logistics businesses.

B, a second strategic pivot; significant investments in insurance, healthcare and analytics. We continue to maintain a dominant position in insurance across both property and casualty, and life and annuities businesses.

Our capabilities in insurance have been significantly enhanced with the acquisition of several new strategic client relationships and growth across almost all existing clients. We have also been able to have the deepest implementation of our Business EXLerator Framework in insurance.

We have introduced several BPaaS products and services that have been quickly adopted by our clients. We now look forward to scaling up these revenue streams.

Furthermore, our two recent acquisitions of OSI and RPM, solidify our franchise in the insurance vertical, and provide us access to a large cross section of new insurance clients. The transition of work from one of our clients in this vertical is now fully complete.

One key area where we are seeing great success as a result of our earlier investments is in our healthcare business. We invested in deepening our domain expertise by hiring a Chief Medical Officer and Chief Actuarial Officer, upgrading Care Radius, our care management platform and enhancing our clinical capabilities.

We are now recognized as having the broadest and deepest set of capabilities in clinical outsourcing, and work with three of the five major health plans in the US. We grew our clinical healthcare business by over 30% in 2014, and are confident of maintaining our strong growth trajectory going forward.

We also invested in scaling and enhancing our analytics capabilities. This business has emerged as one of the engines of growth for EXL. Our analytics business grew by 44% in 2014, to achieve $66 million of revenue and outpace the growth of many of our competitors. For the year, analytics represented 13% of EXL's total revenues verses 9.5% last year.

Going forward, including the contribution of our new acquisition RPM, our analytics business is expected to exceed $100 million in annual revenues. At this point, I would like to articulate our vision for the analytics business and why we are confident of becoming a leader in this large, growing but fragmented landscape.

Our vision for analytics is that, just like BPO industrialized the task of processing, analytics will industrialize decision-making in companies. This change will happen across the entire enterprise at a very rapid pace. Driving better decisions will also help us participate across the end-to-end value chain of our client's business, and enable EXL to drive top-line revenue growth, enhance customer experience, and create emerging digital businesses for our clients.

In line with this vision, we focused our 2014 analytics investment across three areas. A, deepening our domain expertise. B, entering new domains. C, setting up large analytics center of excellence, leveraging a large team of data scientists and proprietary tools and methodologies.

These investments helped EXL win six new analytics clients in 2014 across multiple domains, while growing our top five analytics clients by over 40%. I will provide a little more detail on these investments.

First, we have now established a clear leadership position in providing analytic solutions to retail banks, where we work with 7 of the top 10 US banks, as well as leading international and regional banks, that have found our domain expertise, pool of data scientists and proprietary tools crucial to helping them effectively manage their business models, and drive superior customer experience in a competitive industry.

We also continue to strengthen our analytics capabilities in healthcare and insurance, and are focused on effectively cross-selling into our large client portfolio in these verticals. Second, we made a strategic decision to make inroads into the retail and capital market domains, and are very excited by the potential for growth, given the huge amount of actionable data that these industries possess and generate.

Third, we are on course to establish several $10 million plus annual revenue clients in analytics by building large analytics centers of excellence. We are excited by the long-term annuity nature of these client relationships and the breadth of high impact work that we are doing.

C, the third strategic pivot; executing on capability enhancing acquisitions. This morning, we announced the acquisition of RPM, which significantly augments the scale, talent and capabilities of our analytics business.

From a strategic standpoint, RPM helps us make great progress towards our vision of helping clients drive top-line growth and improve customer experience, by transforming decision-making across marketing, digital and product development areas. More significantly, RPM allows EXL to be well-positioned to capture the large investments in direct-to-consumer marketing and digitalization.

I will now spend some time explaining what RPM does and giving more detail on the strategic fit and potential synergies. RPM specializes in analyzing large consumer data sets to segment populations, predict response rates, forecast customer lifetime value and design targeted multi-channel marketing campaigns.

RPM's capabilities compliment and complete EXL's analytic business in three ways. A, RPM's propriety database combined with EXL's data scientists, analytical tools and methodologies provide a great opportunity for us to create an end-to-end offering across the analytics value chain. B, their multiple productized solutions are delivered using a pay-per-use model, and will help generate higher value for clients and EXL.

C, their relationships with the Chief Marketing Officer, Chief Sales Officer, and Chief Digital Officer, will help us build solutions for a new segment of business value chain, where we did not play a significant role previously. Since the inception in 2001, the primary focus of RPM has been on the insurance industry including property and casualty, life and health. However, we believe that their capabilities are applicable across many other industries.

For example, one of the most exciting opportunities today is to capture the increase in direct-to-consumer marketing and customer engagement spend, that the healthcare industry is making, due to the advent of the Affordable Care Act and the consumerization of health insurance. RPM's great depth of experience in direct-to-consumer marketing, access to consumer and credit data and campaign management platforms, will allow us to more effectively capitalize on this opportunity in healthcare.

I would like to end this section by saying, we are delighted to welcome the RPM management team to EXL, including CEO Dave Denaci and his executive team, along with the deeply talented team of 65 data scientists and solution architects.

Two other key elements in making this strategic pivot were our acquisition of Overland Solutions and Blue Slate. I wanted to provide a brief update on both. Overland Solutions added to our portfolio of BPaaS offerings that serve the P&C industry with its dominant position in premium audit and real estate surveys. The integration plans are on track and cross-selling opportunities are in motion.

We purchased Overland Solutions in October. It has performed above our expectations by contributing $12.2 million of revenues in the fourth quarter. The team of domain specialist and operations experts at Blue Slate, have extensive knowledge on how to leverage business process management tools, and methodologies to drive process automation and build Best-In-Class operations.

In addition, the Blue Slate consultants have been working closely with our operation management teams, to implement the Business EXLerator Framework and generate higher value for our clients and for EXL. The Blue Slate team and their capabilities are now an integral part of our overall business transformation offering, that includes operations consulting and finance transformations.

A large part of our success is based on sound and consistent talent management practices. While our attrition rate increased in the early part of the year, as we executed on some of the client transitions that we have spoken about, I am extremely pleased to report a significant decline in attrition in the fourth quarter.

Our attrition rate in the fourth quarter declined to 33.5% from 38% in the third quarter. We believe that this is a much more normalized rate of attrition. We would expect this to remain stable or even trend downwards in the quarters to come.

In addition to successfully reducing attrition towards the end of the year, we also added several key members to our executive team, strengthening our ability to execute on our new strategy. We also strengthened our corporate governance and the ability to meet the evolving needs of our clients with the election of Deborah Kerr, currently EVP, Chief Product and Technology Officer at Sabre Corporation, to EXL's Board of Directors on January 1, 2015.

Lastly, I am pleased to share that EXL received several notable awards and recognitions from industry analysts and governing bodies. In the fourth quarter of 2014, for example, we made our first ever entrance into the Leader's Quadrant of Gartner's F&A BPO Magic Quadrant. Also, we were named a Leader in transportation management in 2014 HfS Blueprint Report Supply Chain Management BPO.

Two key EXL differentiators noted in the report were RevLift, a propriety analytics algorithm and EXL's freight invoice payment system, our robust work-flow technology that integrates customers, carriers and service providers into a single solution that analyzes freight costs.

Finally, I am pleased to share that in December 2014, we were recognized as an Industry Leader for Security In the Business Process Management Sector by NASSCOM and the Data Security Council of India. EXL was noted for major industry-first initiatives in information security, including the creation of an information life cycle management framework, certification on a business process solutions code of conduct framework for confidential information management, and the establishment of governance forums and cross-functional teams to drive security awareness across the Company.

Now, moving on to the demand environment. The demand for both operations management and analytics appears strong and healthy. In today's business environment, we see many of our clients focusing on investments they need to make to ensure their businesses not only run efficiently, but are also agile and highly customer-focused to meet the demands of the future.

We believe that EXL could help them across all of these needs, using the suite of capabilities I outlined earlier, and work across the end-to-end life cycle of their business to drive top-line growth, better customer management, in addition to lower costs and mitigated risks. In terms of the markets we operate in, as I mentioned, we continue to see high growth in analytics and healthcare, while we are excited about the opportunity in insurance, that we aim to capturing leveraging our leadership position.

While we will spend a fair amount of time on this in our Investor Day next week, I did want to leave all of you with our top five focus areas for 2015. Number one, winning our strategic operation management deals, leveraging the Business EXLerator Framework, BPaaS Solutions and technology-enabled products. Number two, growing our analytics business and obtaining a leadership position in this emerging high growth industry.

Number three, ensuring strong integration of our recent acquisitions, including servicing the new clients, which Overland Solutions, Blue Slate and RPM have brought to our portfolio. Number four, continuing to diversify our geographic footprint, and help support the global expansion of our client's operations. Number five, improving our margins, and delivering returns on the investments we have made.

In summary, I am pleased with the accelerating momentum we evidenced throughout 2014. Our importance in the markets we serve is increasing. We are making the right acquisitions and investments in people, capabilities, technology and infrastructure to remain leaders.

The market and clients are increasingly recognizing the value that EXL brings to the end-to-end value chain of their business. I believe we are responding to our client's needs and leading them as well, which has generated increased levels of business and customer satisfaction. We would like to thank all our clients for the trust that they have put in us, and feel privileged to have the opportunity to serve them in the future.

We are excited to have finished 2014 on such a high note and look forward to 2015 to be an exceptional year for EXL. With that, I will turn the call over to Vishal.

Thank you, Rohit. Thanks, everyone for joining us this morning. I would like to start off by providing insight into EXL's revenues and financial performance in the fourth quarter. I will then do a similar review of our annual performance. Unless otherwise stated, all the numbers mentioned are excluding disentanglement costs for our transitioning clients.

Revenue in the fourth quarter were a record $143.8 million, an increase of 15.5% year-over-year and 8.9% sequentially. Excluding transitioning clients and acquisition, on a constant currency basis, organic growth was 12% year-over-year and 3.3% sequentially. We are pleased with the double-digit organic revenue growth momentum that gathered through the end of the year.

You will notice in today's earnings release that we have changed our segment name. We're now labeling our supporting segment, operations management and analytics and business transformation, previously outsourcing and transformation respectively.

We believe these names better describe the nature of our engagement to the client. The business composition of each reporting segment remains unchanged and as such, these segments are fully comparable with their prior periods.

Driving a strong performance in the fourth quarter was higher revenues from -- have higher revenues than expected in our operations management segment. Operations management revenues of $111.6 million, including $12 million from the acquisition of Overland, an increase of 10.8% year-over-year and 10.8% sequentially. Operations management revenues excluding transitioning clients, acquisition and on a currency -- constant currency basis increased 7.4% year-over-year and 4.2% sequentially.

Growth was primarily driven by clients in utilities, healthcare, travel, transportation and logistics, as well as our BPaaS and traditional solutions for the insurance industry. Fourth-quarter analytics and business transformation revenues of $32.2 million grew 35.7% year-over-year and 2.8% sequentially. Analytics revenues on a constant currency basis increased 37.8% year-over-year and 7% sequentially.

Fourth-quarter gross margin was 36.5%, up 80 basis points sequentially. Operations management gross margins were up 30 basis points, with Overland Solutions tempering the gross margin increase. Analytics and business transformation gross margins, were up 210 basis points sequentially in the fourth quarter driven by improved utilization.

Fourth-quarter G&A was 12.8% of revenues, an increase of 70 basis points sequentially, owing to professional fees driven by deal costs related to acquisitions and key hirings. Sales and marketing costs increased to 7.3% from 6.9% in the third quarter due to key hiring.

In the fourth quarter, our effective tax rate was 23.5%. On a reported GAAP basis, our effective tax rate was 8.2% driven by reduced US income due to the disentanglement costs. Adjusted EPS in the fourth quarter was $0.48, compared to $0.56 a year ago and $0.44 in the third quarter. The sequential adjusted EPS increase was driven by strong revenue growth combined with stable adjusted operating margins.

Now, I will turn my discussions to annual performance for the calendar year 2014. For the year 2014, we delivered record revenues of $525.6 million, that exceeded our guidance. They were up 9.8% over 2013.

Excluding client transitions and acquisitions and on a constant currency basis, organic revenue growth was 12.4% indicating that the core growth engine of the Company is meeting our expectations of consistent double-digit organic revenue growth.

Operations management revenues increased 5% in 2013. Excluding transitioning clients, acquisitions and on a constant currency basis, year-over-year growth was 8.3%.

In analytics and business transformation revenues, which grew at 32.5% in 2014, with analytics revenues up 44%. For 2014, analytics and business transformation was 21% of October revenues verses 17% in 2013, showing how impactful analytics is becoming to EXL.

For the year, gross margins excluding disentanglements costs declined 250 basis points to 36.7%, driven by lower revenues and platform businesses, which had an impact of 60 basis points, higher growth in low margin businesses in Philippines and combined with analytics and business transformation lower utilization, 150 basis points impact. Acquisitions, client discounts and other impacts of 160 basis points, partially offset by the foreign exchange gain of 120 basis points.

G&A costs were flat year-over-year at 12.4% despite higher deal costs of acquisitions. Sales and marketing expenses were also flat 7.5%, inline with our target spending.

Despite approximately 4% depreciation of dollar to rupee in 2014, FX and gain losses -- FX gains and losses for 2014 were nil, as a result of our systematic cash flow hedging program protecting our pre-tax income. Tax expense for 2014 was $5.2 million, with an effective tax rate of 13.8% for the year.

Excluding impact of disentanglement costs, the tax rate was 23.8%, which included a discrete tax benefit of $2.2 million. Excluding that one-time tax benefit, our effective tax rate for 2014, would have been 27%, in line with our expectations.

Adjusted diluted EPS for the year was $1.82, $0.02 above the higher-end of our most recent guidance. DSOs for 2015 were at 50 days, an improvement of 5 days over last year's 55 days, driven by strong discipline around selections and lower DSOs at Overland Solutions. EXL capital expenditure was $27.7 million, which was in line with our expectations, and included the opening of four new operation centers, investment and technology and infrastructure.

As of December 31, 2014, our balance sheet remains strong with $188 million of cash and cash equivalents and short-term investments. We had drawn down of about -- we had drawn down $50 million of revolver, which we used to finance the acquisition of Overland Solutions. Our net cash position, as of the end of the year, was a healthy $158 million, despite spending $58 million on two strategic acquisitions, making the capital expenditures in operations and infrastructure, and completing our previous repurchase authorizations.

Concurrent with our result, we today announced a three-year annual share buyback program. We are authorized to repurchase up to $20 million of our common shares each year through December 31, 2017. The intent of the program is to offset dilution from annual employee equity grants.

Our strong net cash position and our business generating significant free cash flow allows EXL to repurchase shares, while also continuing to make tuck-in acquisitions, funding key strategic investments in technology and operations.

I will now provide some additional insight into our guidance for 2015. Based on our current visibility and the rupee/dollar exchange rate of 62, we are providing revenue guidance of $570 million to $590 million, excluding any impact of RPM, representing an annual growth rate of 8.5% to 12.5%. Implicit in our revenue guidance is continued strong organic growth momentum between 9% to 12%. The main drivers of our positive revenue outlook is driven by growth in healthcare, analytics and clear visibility on existing client ramps, and the strength of our new client pipeline.

The remaining processes from our transitioning clients were completed in the fourth quarter 2014. Therefore, the final disentanglement costs and transition revenue were booked in the fourth quarter of 2014.

In terms of tailwind's and headwinds impacting our growth in 2015, the acquisitions of Blue Slate, bought in July, 2014, Overland Solutions bought in late October 2014, will act as a tailwind of over $50 million to $55 million of incremental revenues. We also expect our analytics business and our healthcare industry verticals to grow well above our corporate average next year and contribute to our growth. By contrast, the transitioning client revenues create a headwind of approximately $7 million sequentially in the first quarter of 2015, and $49 million for the full year for 2015.

In terms of quarterly trends over the course of 2015, the first quarter revenues and the adjusted EPS will be down sequentially, due to the revenue headwind of the $7 million, from the client transitions that go picking up gradually over the course of the year.

Several factors will cause our core underlying gross margin to increase next year, including operation leverage in the Philippians, higher gross margins in our BPasS businesses and further margin expansion and analytics. However, the lower gross margin profile of the Overland Solution acquisition, will in our 2015 gross margin declining approximately 50 to 75 basis points in total.

If it were not for the acquisition of OSI, EXL's gross margin would have been up in 2015, due to the gross margin tailwind's I mentioned earlier. Despite the slight decline in gross margin, we do expect adjusted operating margin to be flat year-on-year, due to leverage in our operating expenses.

Amortization of intangibles is expected to increase to approximately $8 million, due to the recent acquisition. FX gains at the current exchange rate are expected to be in the range of $3 to $3.5 million.

Our 2015 effective tax rates would be approximately 30% to 31%, which is an increase over 2014, due to the increased income in US pointing to the acquisitions Blue Slate and Overland Solutions. The expiration of tax holidays in certain centers in India and Philippines.

In 2015, we expect capital expenditures to be slightly lower than last year in the range of $20 million to 25 million. Our priority for free cash flow in 2015 will be to invest in our business and operations to support our growth trajectory, look for tuck-in acquisitions that expand our capabilities set, to repurchase shares under our authorization, and then use the remaining excess cash for revolver repayment.

In view of our strong outlook for 2015, we are providing an adjusted diluted EPS guidance of $1.85 to $1.95, despite the headwind from the higher taxes having an adjusted EPS impact of $0.12 year-over-year. Our 2015 guidance does not include a recently announced acquisition of RPM. We will update our guidance on our first quarter earnings call to include RPM after the acquisition has been closed.

At a high-level, we do expect the acquisition to be accretive to our adjusted EPS. We will finance the acquisition using part of our $50 million expansion feature to our revolver to our facility.

To close, I am really excited that we ended 2014 with a great fourth quarter. We are confident that we will be able to drive revenue growth in 2015 from our existing clients, and win new client relationships. Our industry vertical approach is expanding their footprint with innovative solutions

We are excited that the acquisitions we have made, including today's announcement of the acquisition of RPM. We look forward to talking to you next week at our Investor Day, where we showcase several of our key investments we are making to truly differentiate in the market, and create a leadership position in the most attractive segments of the market.

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

(Operator Instructions)

Edward Caso, Wells Fargo Securities.

Congratulations. I had a question on your investments on the ops management side. What pace you're adopting automation? What the cost of that is? Whether that's an offensive or a defensive move on your part? Thank you.

Thanks, Ed. So the investments that we are making in operations management are around the Business EXLerator Framework, BPaaS as well as technology-enabled products that we are launching there. This does include a fair amount of automation and elimination of manual work that we do. The Business EXLerator Framework really integrates our strong operations expertise, our domain expertise, Lean Six Sigma, benchmarking, analytics and our technology solutions. The BPaaS offering actually creates a flexible and a variable cost structure for our clients where they can pay by the drink. Our technology-enabled products allow us to be able to create non-linear revenue streams with our clients.

We're also looking at a number of other ways of approaching automation, including robotics as well as the introduction of a number of technology solutions. We think that our play out here is a lot more offensive. It is structured at some of the processes that we handle that can provide incremental value and differentiation to our clients. We are confident about how these mechanisms are resonating in the marketplace. We think that this positions us strongly for the future.

Clearly, you're focused on analytics and having success so far. Can you talk a little bit about your large deal pursuit here? Whether you're going after some of the larger competitors? Or are you still pursuing work maybe below the size of deals that, say, an Accenture might be pursuing?

So analytics clearly has been a strong success story for EXL. We've been able to add many new client relationships as well as expand our client relationships out here. Today, we've got several deals which are $10 million plus on an annual basis. These are the large deals that we are working on with our clients creating centers of excellence on analytics.

There are a number of large scale strategic deals that we are bidding on with clients, particularly as they look to build out a dual shore strategy of developing this capability. We find that the size and scale that EXL has, along with the breadth of service offerings that we have in analytics, that's resonating extremely well with the requirements from the marketplace. We seem to be well-positioned on some of these deals.

Okay. Thank you.

Ashwin Shirvaikar, Citibank.

Good quarter. Congratulations on the acquisition; both of you. I guess my first question is with regards to the headwind of the $49 million that you mentioned. That number imply that the clients that are being rolled off are sort of rolling off at maybe a slower than expected rate? I would have expected that number to be smaller at this stage.

So, Ashwin, the number is actually a comparison between 2014 and 2015. We basically have one-fourth of our clients who have transitioned out completely by the end of 2014. So there is no revenue that we would expect from these transitioning clients in 2015. That is why the number is what it is.

Oh, I see. I understand now, okay.

So you see from the two transitioning clients. There's no other impact in that.

Okay, got it. So in the future, we're not going to get the disentanglement costs and all that stuff. It's all behind us.

Yes, our expectation is that the disentanglement costs are behind us.

Okay. That's good. I guess on the analytics side, first of all, quite impressive growth and the acquisition seems a good one. But can you talk maybe more about the cost and business model implications of creating all these centers of excellence? Eventually, as you look at your Company, let's just say two or three years out. How big is analytics going to be? How big is transformation going to be versus the operations management side?

Sure. So, we will talk a lot about this at our Investor Day, but at a high level for us, analytics represents a very large and growing market space where there isn't any clear leadership that's been established by anybody. Therefore, it's a huge white space where we think we've got a great shot of propelling ourselves into that leadership position. We think that the analytics' growth rate can be sustained for several years; therefore, this business can become fairly big and very large.

What this business requires is a huge amount of investment in terms of developing propriety tools and methodologies, investments in domain expertise, investments in talent across multiple geographies and an ability to participate across the various segments off the industry -- off the analytics industry. We are consciously making those investments. We have also, as you know, invested in a dedicated sales force for analytics alone. We've invested in strong leadership in this area.

With the acquisition of RPM, we have actually made a further investment in terms of diversifying our service offerings in the analytic space and have sort of doubled down in this playing field. So we think that's the right strategy for us at this stage. Our margins in this business today are not at appropriate levels. We do think there's an opportunity for us to be able to bring up and drive up the margins in the future. Right now, we are focused in on the growth. We think on a go-forward basis, we can get both growth as well as improved margins in this business.

Understood. With regards to M&A? Obviously, a big acquisition here. Any thoughts or color on the M&A pipeline as it stands today? Or are you going to take a bit of a breather between Overland and RPM and integrate them?

I would address that question in two ways. Number one is the capacity and the balance sheet strength of EXL remains strong. So our ability to continue to do acquisitions remains fundamentally strong. If we come across acquisitions which are attractive, we will consummate them. We have a very good pipeline of acquisitions in place.

Having said that, with the fact that we have done three acquisitions over the last nine months or so, we are going to focus in on integrating these acquisitions in and making sure that the business models work in an integrated format. So our focus really for the next six months is going to be to consolidate and integrate in these acquisitions so that we can scale up these acquisitions along with the rest of our business.

Got it. Thank you, guys. See you next week.

Anil Doradla, William Blair.

Congrats from my side too. On the RPM side, it sounded, in very simplistic terms, that the area of expertise is centered around a proprietary database. So how scalable is this business model across markets beyond insurance?

Thanks, Anil. We actually think that the capabilities that RPM has and the database that they have created is a tremendous asset that can be leveraged not only for insurance but for other industry verticals and not only for the US market but for other geographies as well. So our plan would be to take RPM's capabilities and it's a strong data asset and leverage that in the industry verticals of healthcare, leverage that in industry verticals of banking and financial services, utilities, travel, transportation and logistics.

Similarly we would expect to take RPM's capabilities from the US and expand that into UK and to Europe. The data asset that RPM possesses is unique. It actually positions us with the unique capability of bringing analytical strength and prowess and combining that with a data asset and offering that to the client on a combined basis.

So is this something, Rohit, you think you could do this in the next 12 months, 24 months? Or is it more of a longer term thing?

I think the sales cycle out here is likely to be much shorter than the operations management cycle. But the adoption of it will certainly take time. We're going to be deliberate about this. So my sense is that this would pay out over the next 24 to 36 months.

Great. Now on the analytics side, clearly you're emphasizing on this. Your peers are emphasizing. If you step back and look at the overall industry, beyond the XLS, what do you think is the BPO growth rate now? Or what do you think would be long-term BPO growth rate, given the move towards these businesses?

I think if you break out BPO and analytics, the BPO growth rate would be close to a double-digit growth rate. So it may be high single-digits or close to a double-digit growth rate. That is what things seem to be stabilizing around.

But don't you think there should be a pick-up, given that analytics would become more and more of a greater contributor not only to you but to the rest of the industry?

Absolutely. So when you combine analytics and BPO, I think the combined growth rate is going to be in the double-digits. You will see growth rates which are 10% to 12%.

Great. Finally, Rohit, if I understand your language, you said you believed that there is not going to be any disentanglement costs in 2015. Is there still an element of uncertainty in there? Or you're pretty sure that there's no disentanglement costs in 2015?

I think on the disentanglement costs, we have shared the data with you as we have incurred those disentanglement costs. At this stage, we do not expect there to be any further disentanglement fees going into 2015.

Great. Congrats once again, guys.

SK Prasad Borra, Goldman Sachs.

First, probably on the demand environment, the commentary from IT Sales' vendors and BPO vendors continues to be positive. Is it a general improvement in demand because of the macro? Or is it more vertical driven strength, what you're seeing in the market?

I think for us, we are seeing it in two different ways. One is, we're seeing demand for services that were previously not traditionally outsourced. Particularly as clients think about more complex processes, they're getting more comfortable around outsourcing some of the more complex processes.

The second is particularly as we have started to embed analytics into our operations, there seems to be a greater propensity to outsource processes around customer experience and customer acquisition; therefore, our ability to participate not only on the cost structure of our clients but also our ability to enhance their revenue. That's become a lot more end-to-end capability offering that seems to be taking place. So from our perspective, those trends are playing well. We see more clients engaging it. We see EXL well-positioned to take advantage of that.

Probably a question around analytic space. When you think about acquisitions in an analytic sense, you have done now a couple of decent-sized acquisitions. Is the focus from your point, is it more on the strength of the platform? Or are you primarily acquiring them for clients?

We've actually looked at it from multiple dimensions. We've looked at it from a capability standpoint, so it includes, if somebody has a data asset and a technology platform in analytics that is proprietary, we think that is going to be extremely valuable going forward into the future. We also think that an assembled workforce of data scientists and analytics resources, who have got deep domain knowledge and subject matter expertise.

That's a great capability to acquire. Certainly, expanding client relationships in this growing market is an advantage. So a number of elements that go into that mix. Of course, it's quite difficult to do acquisitions in analytics. But I think we have been able to be patient about it. We've structured the deal in an appropriate way where it makes sense for everybody.

Okay. Probably just the last one from my end. Just for the gross margins for 2015. You are saying you will see some headwinds. Can you elaborate on that a bit more? Heading into, say, 2016, should we expect that to improve?

Hi, SK, this is Vishal. As I said, the gross margins are getting impacted by the lower gross margin profile of the Overland Solutions, which is a large revenue impact in -- full-year impact in 2015. So on our core business, we expect the gross margins will be improving 50 to 70 basis points, but will get offset by lower gross margin impact to the Overland acquisitions by about 140 basis points. So, net-net, the gross margins will decline between 50 to 70. But that is primarily driven by the impact of the acquisition of Overland, though on the core business we would be expanding and growing the gross margins year-over-year.

Heading into 2016, you would say that some of those are --

I think over 2016 and 2017, I mean, over the long run, we do expect the gross margins to tick up and the distributor operating margins also to tick up.

Okay. That's clear. Thank you.

Joe Foresi, Janney.

This is Robert Simmons for Joe. Can you quantify how much your business is now from digital work, given the acquisitions?

So, Robert, we will be sharing the details of the RPM acquisition once the acquisition is closed. We will be updating our guidance at that point of time. We can provide you with more color at that stage.

But could you give it, given also just the other ones you've actually closed though?

Basically, is your question in how much of our revenue that's platform and -- driven?

Digital.

Or just need -- what do you mean by digital? Because I think what we are doing --

Like Mac.

Mac, okay.

We actually do not break out our revenues on that basis. As you know, most of our revenues are around operations management and analytics and business transformation. The analytics revenue certainly touches upon a number of different elements that the clients are working on social, mobile and on the cloud. But it cuts across a number of those streams. We don't measure it in that manner.

All right. Great. Thanks.

Vincent Colicchio, Noble.

Rohit, your first quarter tends to be seasonally weak. Could you give us some help in terms of, should we expect the low sequential growth rate?

Yes, Vincent. As Vishal mentioned in his prepared remarks, we do expect there to be a $7 million headwind quarter-on-quarter in the first quarter of 2015. Therefore, we would expect the first quarter to be weaker than the fourth quarter of 2014. That would certainly impact our numbers on a go-forward basis.

In terms of adding retail and capital markets as important areas to your analytics business, do you have a large pipeline or existing clients asking for this? What does that look like? Any color would be helpful.

Sure. So these are new industry verticals for us. What we have done is that we have basically removed any constraints on the growth of the analytics business. In 2014, we were particularly successful in entering the retail and the capital market spaces. We acquired several customers in each one of these industry verticals and now look to use that as a foundational basis for acquiring more customers and growing with the franchise that we have created.

Our pipeline in these two segments is strong. Our dedicated sales force for analytics consciously pursues multiple new industry verticals to enable us to grow at a much faster pace.

Are there any large contracts coming up for renewal in 2015 we should be abreast of?

There is nothing which is particularly outside of normal. As you know, our client concentration continues to get better and better; therefore, the renewal of client contracts is not such a huge factor in terms of our going-forward position.

Okay. Thank you.

(Operator Instructions)

David Grossman, Stifel.

Rohit, the sequential growth in outsourcing was certainly substantial in operations management. I think you maybe even referenced this in your prepared remarks. However, could you give us a little more color on where the sequential growth of the out-performance came from?

Was it existing customers that ran faster? Was it certain things that didn't go away that you anticipated would go away? Or what, in fact, were some of the details behind the upside to your initial expectations for the fourth quarter?

Sure, David. I think it was strength across a number of different areas. So, A, we did have our existing clients which ramped up in the fourth quarter of 2014. B, the OSI acquisition that we did is included as part of our operations management segment. That grew faster than expected, even. So that contributed to the growth rate to our segment. Then C, we did add some new clients as well. So it was actually a combination of existing clients, M&A and new clients. We are really pleased with the fact that the growth was very broad-based.

I may have missed it, but did you say what OSI contributed in the quarter?

David, the OSI contribution was about $12 million.

What was the run rate when you bought it?

The run rate we expected OSI for -- to be around $60 million per annum.

Yes. So $5 million per month run rate. OSI was part of EXL in the fourth quarter for 10 weeks.

10 weeks.

The exact contribution was $12.2 million.

Got it. Then just one other question I had was on the stock repurchase. I think you mentioned in the press release that it's offset dilutions from RSUs. Just curious, does it reflect -- is there some incremental component from wage increases that are going towards RSUs? Is this related to acquisitions? Or is there anything else we should glean from the need to buy incremental shares back to offset that dilution versus what you have done historically?

No, David. I think there's nothing unusual or anything that's different. I think it's just the fact that now that the Company is of a certain size and scale and there is a greater predictability in terms of our cash flow generating capabilities, we think it's the right strategy for us to be buying back some stock to offset the dilution. This still gives us the flexibility to continue to do more acquisitions on a go-forward basis.

Okay. Very good. Thank you. Congratulations.

Thanks, David.

Puneet Jain, JPMorgan. (technical difficulty)

Puneet, is that you? Is there a question? We can't really hear you.

Okay. Operator, are there any other questions on the line?

I'm showing no further questions in queue at this time.

Well, thanks, operator. Thank you, everyone, for joining EXL's fourth-quarter call. As we said earlier, we are going to host an Analyst Day on March 2 in New York. We look forward to all of you participating in that. We will be sharing further details of our strategy as well as our goals on a go-forward basis. Thank you so much.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect. Everyone, have a great day.