Exlservice Holdings Inc (EXLS) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the ExlService Holdings second-quarter 2015 earnings conference call. (Operator Instructions). I would now like to turn the call over to your host for today's conference, Mr. Steven Barlow, Vice President of Investor Relations. Sir, you may begin.

Thank you, Bridget. Hello and thanks to everyone for joining EXL's second-quarter 2015 financial results conference call. 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 that you have had an opportunity to review our quarterly press release we issued this morning. We've 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 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 in our press release as well as the investor fact sheet. I will now turn the call over to Rohit, EXL's Chief Executive Officer.

Thank you, Steve. Good morning, everyone, and welcome to our second-quarter 2015 earnings call. 2015 is shaping up to be a very good year for EXL as we delivered excellent results for the second quarter and continue to build on the momentum from the first quarter. I am particularly pleased that our second-quarter performance was broad-based and that we have made good progress on the execution of our five key strategic priorities.

In the second quarter we delivered revenues of $155.6 million representing a year-on-year growth of 26% excluding reimbursement of disentanglement costs on a constant currency basis. This is our highest growth rate over the past 12 quarters. On a year-on-year basis, excluding disentanglement costs and transitioning clients, our organic revenues grew a healthy 14.2% on a constant currency basis.

We continue to accelerate growth in our operations management business with revenues growing 12% organically on a constant currency basis excluding transitioning clients and disentanglement costs. Analytics & Business Transformation had another terrific quarter and revenues grew organically by 21.6% year over year on a constant currency basis excluding transitioning clients. The growth was 71.7% including acquisitions on a constant currency basis.

I would now like to share the progress we have made on our strategic priorities for 2015. To recap EXL's five strategic priorities that I had shared with you last quarter were: number one, win strategic deals across our chosen domain leveraging the business EXLerator framework and our differentiated business process as a service that is BPaaS solutions.

Number two, strengthen our leadership position in Analytics and accelerate growth in healthcare. Number three, successfully integrate our new acquisition. Number four, diversify our geographic footprint to help support the global expansion of our clients' operations. And number five, expand our margins and improve profitability.

First, we continue to win strategic deals in our chosen domains. We won seven new clients in the second quarter of 2015. These wins were in our insurance, healthcare and financial accounting businesses.

A few key highlights are: one, two of these new client wins leveraged Overland Solutions' differentiated business process as a service, or BPaaS solutions. Number two, we entered the Australian market by leveraging senior client relationships and the business EXLerator framework to provide finance and accounting services to the Australian subsidiary of a large global enterprise. And number three, we won significant deals with a large healthcare payer and a large insurance company.

As we mentioned during our Investor Day, deepening and expanding relationships with our existing Global 1000 clients and leveraging cross sell is a key engine of growth for EXL. We made good progress on this front and expanded multiple client relationships by winning new strategic mandates at existing operations management clients in travel, transportation and logistics, healthcare, insurance, and finance and accounting businesses. Overall our existing clients awarded us 34 new processes in the second quarter.

I am also happy to share that in addition to helping us win deals, our differentiated operations management capabilities continue to be recognized by industry experts. The business EXLerator framework, which integrates operations management, benchmarking, analytics and technology to drive superior business impact for clients was recognized with four industry innovation awards by the consulting firm [Acus]. The awards were for technology and analytics driven high business impact solutions in the utilities, insurance and travel transportation and logistics industry.

For the second year in a row EXL was placed in the leader's quadrant in Gartner's Magic Quadrant for Finance and Accounting BPO. EXL was also placed in the leader's group in IDC's first MarketScape report on Finance and Accounting BPO Services.

Recognition by two of the biggest analyst research firms is an affirmation of our strategy to integrate business EXLerator, robotic process automation and BPaaS into our F&A solutions to significantly improve the performance of our clients' finance operations.

Next I would like to discuss our Analytics business where we continue to experience very strong growth. Year on year our Analytics business grew 38.2% organically excluding transitioning clients on a constant currency basis. Analytics including acquisitions on a constant currency basis grew 104.7% year over year. Including the RPM Direct acquisition our Analytics business now represents 20% of our total revenues in Q2 of 2015 compared to just 8.4% for all of 2012.

You would recall that during the Investor Day we mentioned that our goal for the Analytics business was to contribute 20% of EXL's revenues in the long-term. With an annualized revenue run rate of approximately $125 million in Analytics, we are on track to becoming one of the few large and differentiated players in the global analytics market.

The integration of our RPM Direct business is progressing well and the teams are focused on cross-selling our end-to-end customer acquisition capability to existing clients in insurance, healthcare, banking and utilities. We are also expanding the RPM Direct business internationally by targeting our global customers.

We are very excited by the opportunity to leverage RPM's rich database of over 235 million prospects to drive both top-line and bottom-line impact for our clients. Our long-term plan is to expand this data asset to include more detailed business data, include new industries and open up new geographies including Europe.

As I mentioned previously, RPM's non-linear revenue model provides us the ability to grow without significantly increasing headcount and provides us an opportunity to expand margins while continuing to scale this business.

Overall we continue to execute on the two pillars of our analytic strategy. The first pillar is to industrialize analytic services by: number one, leveraging our methodology for and depository of analytic techniques and algorithms for faster and more effective delivery of robust predictive analytical models.

Number two, build a pool of trained analysts and data scientists using our strong recruitment brand and proprietary training methodology and approach.

Number three, developing domain experts that can embed statistical predictive models within client processes in our chosen vertical.

Number four, building analytics migration and quality monitoring methodologies for faster and more reliable transitions.

And number five, creating a dedicated sales force and pool of onshore consultants that can rapidly design analytical solutions working closely with chief marketing officers and chief risk officers.

One recent example of all of these capabilities coming together is a strategic one at a large global insurer. We won a competitive bid to set up their analytic center of excellence because we were able to combine our expertise in predictive modeling with insurance domain expertise that would embed statistical models into their processes. They were also impressed with our talent and our ability to scale quickly without sacrificing service quality.

As for the second pillar, we continue to focus on building new products for the end-to-end analytics value chain that is from data to business outcome. The three key areas that we are focused on are: number one, leverage RPM capabilities to create new products for insurance, healthcare and banking across marketing and risk. Number two, productize and embed algorithms into select business processes to drive higher automation. And number three, built data visualization products leveraging partner platforms.

Our industry-leading analytics capabilities were recently recognized when EXL received a special award for its analytic solution on preventive hospitalization at the NASSCOM Big Data and Analytics Summit in Heidelberg. Our solution helps healthcare providers identify patients at risk for hospital admission. It enables healthcare providers to anticipate or predict the needs of a patient and intervene through proactive care plans before the patient faces an emergency that necessitates hospital admission.

Moving onto our healthcare business. We continue to experience strong growth in this vertical. In our previous call we mentioned we are close to signing a significant deal with a large healthcare payer where we would be assisting with provider engagement. The deal is now closed and we are focused on seamless transition and flawless service delivery.

Recently there has been quite a bit of consolidation activity in the healthcare sector as payers and providers have been looking to gain more scale in the markets they serve. These newly merged companies will have a strong need for cost optimization and innovation to make the mergers pay off strategically and financially. We believe that EXL Health Care is well-positioned to support these companies in driving out costs and managing the change.

We are focused on developing and providing innovative services across total population health management, payment integrity, revenue optimization and customer engagement -- areas where transformation in the industry is much needed. We continue to invest in healthcare in multiple ways including investing in clinical and management talent, investing in our best-of-breed healthcare platform, which is CareRadius, and expanding our healthcare academy and expanding our healthcare delivery footprint globally.

We made good progress on our third strategic priority to seamlessly integrate our new acquisitions. At Blue Slate we are building a new innovative process design methodology by combining their blueprint methodology with our business EXLerator framework.

This powerful combination of Blue Slate's BPM capabilities and our business EXLerator framework will offer end-to-end enterprise-level process transformation, significantly accelerating the business impact delivered to our clients.

The teams are also working on leveraging Overland Solutions' capabilities to build new product and business process as a service solutions for the P&C insurance market.

In order to continue making the right investments and monitor progress we have established a product development council internally that will have the dual mandate of: number one, expanding our portfolio of products and BPaaS pollutions; and number two, ensuring consistency of product development methodology, go-to-market strategy and return on investment.

Our fourth priority was to expand our global delivery footprint in order to support the geographic expansion of our client operations. We have made excellent progress with our Spanish and bilingual language center in Bogota, Colombia which will start to generate revenues in the second half of the year as we service a large health insurance payer.

Additionally, in July we opened a new delivery center in Cape Town, South Africa and will soon start providing English language customer service capabilities from there for one of our large UK clients. South Africa is a very attractive destination as the cost structure is competitive with other geographies and it is an ideal location for UK-based clients who are in the same time zone.

Our fifth priority was to expand our margins and improve profitability. We have started executing on a comprehensive plan to enhance margins using multiple levers. These include, rationalizing our cost structure, optimizing our pricing, fixing geographic specific issues, achieving planned synergies from acquisitions and driving non-linear revenue growth using our BPaaS solutions and products.

We are very encouraged by our initial results with the second-quarter gross margins increasing to 35.4%, 30 basis points higher than the first quarter despite salary increments being implemented in Q2. We remain confident of continued expansion of margins in the second half of the year.

Lastly, I am very pleased to inform all of you that EXL was recognized among the 100 most trustworthy companies in America for the year 2015 by Forbes magazine. EXL was ranked 36th in this list.

According to Forbes the 100 companies identified on the list have most consistently demonstrated transparent accounting practices and solid corporate governance. The 100 companies that made it to the list were selected from more than 5,500 publicly traded North American companies.

In closing, I would like to say that we are pleased with our strong performance in Q2 and the first half of 2015. I am happy with the way we are executing on our strategic priorities for 2015. Seamless service delivery and successful ramp ups at our recent strategic deal wins, together with expanding margins, will enable us to have a strong finish in 2015 and to carry strong momentum into 2016.

While the demand environment remains positive and we continue to have a robust pipeline we are also outpacing the growth in the market and improving our competitive position. Our investments in differentiated operations management capabilities, healthcare, analytics and a global delivery footprint are helping us win in the marketplace and are being recognized by industry experts.

These achievements and the outlook to continue expanding our margins make us excited about our future. With that I will turn the call over to Vishal.

Thank you, Rohit, and thanks, everyone, for joining us this morning. Unless otherwise stated, all 2014 amounts mentioned are excluding disentanglement costs for our transitioning clients which were fully accounted for in 2014. There are no disentanglement costs in 2015.

In the second quarter EXL reported revenues of $155.6 million, up 24% year over year or 26% on a constant currency basis. Organically revenue was up 14.2% year over year on a constant currency basis excluding transitioning clients. Sequentially we grew 8.7% on a constant currency basis.

EXL's revenue growth was broad-based across all business segments. Operations management grew -- revenues grew 14.3% year over year on a constant currency basis including impact of an acquisition. Organically revenues were up 12% year over year on a constant currency basis excluding transitioning clients.

This organic revenue growth coupled with tailwind from the impact of the acquisition offset the headwind of approximately $13.5 million from transitioning clients in 2014. Sequentially operations management revenues increased 2.3% organically on a constant currency basis.

Analytics & Business Transformation revenues grew 71.7% year over year on a constant currency basis including the impact of acquisitions. Organically the segment grew 21.6% year over year on a constant currency basis excluding transitioning clients. Sequentially Analytics & Business Transformation revenues increased 2.7% organically on a constant currency basis.

The core Analytics business revenues grew 38.2% year on year on a constant currency basis excluding transitioning clients. This Analytics revenue achievement marks the sixth quarter in a row where revenues have grown more than 35% year over year.

The revenue growth was [net] by banking and financial service lines, increases in healthcare and insurance. Sequentially Analytics revenues grew 9.1% organically on a constant currency basis.

For the first half of 2015 EXL revenues increased by 19.8% to $299.1 million from $249.7 million, and grew 21.2% on a constant currency basis. Our organic constant currency revenue growth, excluding transitioning clients, was 14.4% for the first half of the year.

This was driven by new strategic deal wins, expansion of existing client relationships across all verticals as a result of strong sales efforts. Organically operation management revenues grew 10% and Analytics & Business Transformation revenues grew [30.9%] on a constant currency basis excluding prior transitioning clients year over year.

Our client concentration of top 10 clients dropped 900 basis points from 53% in Q2 2014 to 44% in this quarter. This demonstrates that our key strategic priorities are helping us to win new clients, expand existing relationships thus broadening our client base.

Gross margins increased by 20 basis points year over year to 35.4%. Excluding the impact of transitioning clients and the lower gross margin profile of all in solutions, our gross margins improved 300 basis points year over year, which was driven by FX impact of [150] basis points, improvement in utilization of resources and Analytics & Business Transformation impact of 100 basis points and productivity improvement in operations management of 70 basis points.

Sequentially gross margins increased by 30 basis points driven by improved utilization in Analytics & Business Transformation with an impact of 100 basis points, foreign currency impact of 40 basis points and improved productivity and operations management impact of 20 basis points, which was offset by the wage increment which had an impact of negative 150 basis points.

We continue to generate operating leverage through productivity and cost optimization measures. As a result our G&A expenses decreased 10 basis points year over year to 12.8% of revenues. Sequentially G&A expenses were down 20 basis points.

Depreciation and amortization expense decreased 10 basis points year over year to 5.2%. Sequentially the depreciation and amortization expense increased by 30 basis points [owing to] amortization of intangibles related to the RPM acquisition.

Adjusted operating margins increased 170 basis points year over year driven by FX impact and improvements in the gross margin profile and operating leverage. Sequentially adjusted operating margins improved by 10 basis points.

As mentioned in our last earnings call, we do see that our (inaudible) operating margins will continue to improve in the second half of 2015 driven by the improvement in gross margin profile and better operating leverage.

For the financial year 2015 we expect adjusted operating margins of [14.2%] to 14.4% despite investments in integration of RPM and geographic expansion into South Africa and Colombia.

Foreign exchange income for the quarter was $1 million. We expect a foreign-exchange gain of approximately $4 million to $4.5 million for the fiscal year 2015 at a dollar/Rupee exchange rate of 64.

The tax rate for second quarter was 31.4% sequentially. The effective tax rate decreased from 39.4% to 31.4% due to certain one-time provisions of $1.7 million in Q1, as was explained in the last earnings call.

For the first six months our [nominal] tax rate is approximately 31%, up from 2014 primarily owing to a higher US income and partial expiration of tax [relief] for some of our operating centers in India and Philippines. We forecast our tax rate to be approximately 31% for the second half of the year.

Capital expenditure for the second quarter was $5.5 million, which was primarily spent on facilities, hardware, software and telecommunication equipment. Our capital spend in the first half was $14.4 million. We expect CapEx for the full year to be in the range of $22 million to $25 million.

Adjusted EPS for the second quarter was $0.48, up $0.07 year over year and sequentially, driven by strong revenue growth and improved margins.

Our balance sheet remains strong. At the end of the quarter we had cash and short-term investments of approximately $173 million compared to $166 million as of March 31, 2015. During the quarter we began our previously announced [stock] buyback program by repurchasing approximately 134,000 shares for approximately $4.7 million.

In addition to our CapEx and share repurchases we also reduced our outstanding revolver balance by $10 million to $70 million. Therefore as of June 30, we have a net cash position of $103 million.

Now let me comment on our revised guidance for 2015. We are raising our revenue guidance to $610 million to $625 million from $600 million to $620 million, representing an increase to our revenue guidance of $7.5 million at the midpoint.

This midpoint raise is due to the strong revenue performance in the first half including contributions from our recent acquisitions and our confidence into the second half of the year. EXL's revised guidance represents strong annual revenue growth of 16% to 19% including acquisitions despite a currency headwind of 1% and an organic revenue growth of 11% to 14%.

We are raising EPS guidance to $1.88 to $1.98 range from $1.85 to $1.90 as previously given. This revised guidance is due to strong first-half performance in 2015 and revenue growth across our verticals partially offset by investments in Colombia and South Africa geographies as mentioned by Rohit.

To provide some commentary around our expectations for the third quarter, we expect continued sequential revenue growth from momentum in the business, but not at the same level of growth as this quarter which will include -- which included a full quarter impact on the acquisition of RPM Direct.

In the third quarter we would expect our adjusted operating margins to continue to increase from the second quarter driven by an improving gross margin profile and continued operating leverage.

In conclusion, we had a strong revenue growth across all our verticals in the first half of the year, achieved a 14.4% organic revenue growth on a constant currency basis, excluding the transitioning clients.

The current midpoint of our revised guidance at $617.5 million represents a 17.5% increase year over year despite currency headwinds of 1% and a 12.5% annual organic revenue growth on a constant currency basis excluding transitioning clients.

We are pleased with this growth acceleration from last year's pace and we believe is indicative of the EXL's momentum in the marketplace. And now we would be happy to take your questions.

(Operator Instructions). Joseph Foresi, Janney.

My first question here is just on the deal announcements. It sounds like you are seeing a lot of large deals. Maybe you could talk about what is causing those to come back into the market? And if so, why now.

Thanks, Joe. Yes, we are seeing strong demand for our services in the marketplace and we are seeing substantial deals coming into the pipeline. I think the primary driver of that is twofold, number one the model is working and clients are seeing the benefit of using operations management and outsourcing analytical capabilities in business transformation with providers like EXL.

And number two they are looking at optimizing their cost structure because the opportunities for increasing their revenues are fairly limited.

So we are seeing more and more companies rationalizing their cost structure and optimizing their cost structure in this environment. I would imagine that as they continue to -- there continues to be more consolidation that activity will continue to keep pace with the market.

And then in the past, the way the BPO model has worked is when you see larger deals you have to take on some costs associated with those and there is a delay in margin expansion. But clearly it sounds like you have got margins going in the right direction. So maybe you could just explain how you are going to balance those two going forward.

Absolutely. I think we are in the cycle right now where we won a number of new clients going back to the second half of 2014. We started to implement and execute on those in the first half of 2015 and they are going to continue to ramp up in the second half of 2015. And at the same time we are adding on new clients.

So as the older, new clients mature in their relationships with us and in their journeys with us we will be able to get better margins on those client relationships, while at the same time investing in taking on new client relationships that we are signing up right now. And therefore there seems to be a good balance between how our older generation new clients are maturing and some of the new clients that we are signing up.

We are also investing in creating new capabilities in multiple new geographies. And like Vishal mentioned, we are investing in South Africa and in Colombia and that is also a drag on our margins. But we feel confident about the margin improvement plan that we put into place for the last nine months or so and that is giving us good results.

Got it, okay. And last one from me. Could you just talk about the pipeline going forward? I know you mentioned in your remarks that it was getting better. And the deals that you are seeing, are they people who are -- or companies that are new to outsourcing or are they takeaways? Thanks.

Yes, Joe, I think the pipeline continues to be attractive. I think what we are encouraged by is that the pipeline is much more broad-based, it is across multiple industries and across multiple geographies. So that for us is a very good indicator of the demand pipeline.

I think the size of the deals is become a bit larger and that is great. And we think we are well-positioned to be able to participate in this growth cycle.

Thank you.

Anil Doradla, William Blair. (Operator Instructions). And please only ask one question with a follow up. Thank you.

Congrats on the great results and the outlook for the year. A couple of questions, Rohit, I mean clearly analytics is witnessing a breakout. Now granted you are benefiting some from your recent acquisitions too.

If I recall at the Analyst Day you were talking about getting to about 20% of revenues over a certain amount of time. Clearly you are getting close to that. So when you look at 2017-2018 how do you look at the composition of the Company? I know it is a little longer term, but is analytics going to be part of 30% to 40% of your business or you think it would be even higher?

So, thanks, Anil. For us the way we have thought about our business model in the long range is that we would like to have analytics be a strong part of our business. And we had put a marker out there of -- representing at least 20% of our total revenues and we seem to have achieved that in the second quarter of 2015.

As we continue to grow at a much faster pace in analytics we do think that that percentage can shift to a higher number. However, please keep in mind that we will be doing acquisitions as we go forward. And our viewpoint is that it will probably be easier for us to do acquisitions in the Operations Management business segment and acquisitions in analytics are going to be somewhat at a slower pace, I would imagine.

So depending on the balance of how we do acquisitions and in which segment we do those acquisitions, the percentage [weightage] of the Analytics business to our overall portfolio is difficult to give you an estimate of where we will be in 2017 on Analytics.

Certainly if Analytics starts to represent a larger percentage of our business we will be thrilled with that. And we will continue to make more progress on that. But as I said, as we expand geographically, as we think about other acquisitions and capabilities to be acquired in Operations Management, Analytics may continue to be closer to 20% of our business.

Great. And, Rohit, can you talk about the visibility in your business? Because clearly now you've got Analytics as a bigger composition. Does that reduce the overall visibility for the year or does that improve the visibility for the year given that when you have operations management, I mean the longevity and the yearly visibility might be may be slightly better than what you have on the Analytics?

Sure. So on the visibility front, I think the way we think about it is our operations management business is largely annuity-based and we have strong visibility into our current year forecasts and our future year forecasts.

The Analytics business for us, two-thirds of that business is on an annuity basis and a third of that business is on a project basis. So the visibility is much stronger on the annuity side. And then for the Business Transformation business, that is largely on a project basis.

So as we continue to increase the percentage contribution of Analytics and business transformation there will be a slight reduction in our visibility. And at the same time keep in mind that our BPaaS solutions, that is something which is going to be volume driven and it is going to be much more stickier.

So it's going to provide us with hopefully, once we have size and scale achieved in BPaaS, much better visibility into our numbers there. So on an overall basis we think the visibility and the confidence level into our future revenue streams is still going to be high. And certainly for 2015 our visibility into our numbers is very high.

Great. And if you don't mind me sneaking in one final one. Given that the overall demand environment in this industry seems to be improving, there is more willingness for clients to use companies like yours.

What is the impact of that outlook having on inflationary pressures on salaries? I mean employees see that there are more opportunities, they can switch jobs. Are you seeing the impacts of the macro -- improving macro environment percolating down to employee salaries and inflationary pressures?

Anil, I don't think we are seeing that as yet. However, we are concerned about the attrition rates. And the attrition rate in the second quarter certainly inched up for us; and for the market also it seems to have inched up as well. And as we get stronger growth in our industry and in our businesses I would imagine that managing attrition will become an even higher priority.

And so, that is something which we are going to be focusing in on. I think the inflationary wage inflation pressures continue to be stable and I think also the pricing environment continues to be stable.

Very good. Thanks a lot, guys, and congrats on the great results.

Frank Atkins, SunTrust.

In your prepared remarks you talked about healthcare M&A as an opportunity. Could you outline kind of what areas you think will be affected most by this? And have you seen this effect in the past? And just any color you could give on the effect of that.

Sure. So what we mentioned in the prepared remarks is that there is a consolidation taking place in the healthcare industry amongst our payers and amongst our providers. As that consolidation takes place there certainly will be opportunities to create larger and stronger relationships with these entities. And as they think about cost optimization and innovation I think companies like EXL will benefit strongly from that consequence.

We think we have got a good positioning in the healthcare space where we are doing work with a multitude of payers and providers. And therefore it really does not matter as to who is acquiring whom because we have got relationships that have been built up with both sides.

And we think the movement towards utilizing clinical offshore outsourcing in healthcare, looking at population health management, looking at payment integrity solutions, these are areas that clients will continue to use us.

All right, thanks, that is helpful. And also wanted to get any client feedback on the LifePRO release, initial thoughts and how that is going?

Yes, I think the LifePRO release has gone off very well. We are seeing our clients responding favorably to that release being put out. We are also seeing a fair amount of new business traction for LifePRO with a number of new clients that are coming into the pipeline.

So, for us that is a business that we want to continue to invest in and make sure that we stay innovative and stay ahead of the curve. And I think the initial results that we are seeing from our clients there is very positive and we continue to see growth in that business.

All right, great, thank you very much.

Ashwin Shirvaikar, Citi.

Congratulations on a pretty solid quarter here. So my first question is with regards to the payer provider industry consolidation that you mentioned. And I completely agree that the longer-term, once the consolidation happens and is completed, is a positive story.

But are you seeing any sign of near-term work stoppages or any kind of pressure while these companies internally grapple with what the ongoing strategy is while they await regulatory approvals, things like that, can you comment on that?

Yes, Ashwin. I think what we are seeing is where we have got established relationships the pace of activity continues to be fairly normal.

But where clients are on the cusp of decision-making and on the cusp of deciding who to partner with and who to go with, there the programs do get held up until the time of the consolidation actually is actually consummated. So we do see that in certain situations our clients will hold back their decision until the closing takes place.

And your guidance obviously takes into account -- account these sorts of [events related or I imagine], right?

That is correct.

Okay. At Investor Day you had mentioned on margins and the long-term margin trajectory going to the upper teens and so on. And since then it looks like you guys have done some internal work with regards to how to get there.

Could you share any further granular comments with regards to what are going to be the biggest things you can do with regards to having -- setting up a multi-year trajectory to get to a significantly higher margin (inaudible)?

Ashwin, this is Vishal. I think you are right and Rohit alluded that in his prepared remarks also that we are looking at multiple levers for improving the margins on a sustainable basis over the long-term.

The levers we are going to use are: number one, we are going to look at price optimization in areas where we think there is potential to increase price. And that is something which we have already experienced.

Number two, we are looking at our cost structure in terms of our operations delivery across businesses and also improving our utilization in Analytics & Business Transformation businesses. Some of that benefit you have seen coming through our numbers in this quarter and we think that it will continue to happen for a longer period as we continue to optimize the business models of delivery.

Number three, some of our acquisitions which have been a little bit of a drag, we think that as we integrate well with them there would be opportunities to improve the margins from the time when we acquired those businesses. And over a longer period we should be able to gradually improve that.

And number four, on our SG&A front I think there is opportunity to continue providing the operating leverage as we grow and have economies of scale. And there also we are looking at doing more internal benchmarking and improving our productivity. So those levers will help us to have a continued sustained (inaudible) operating margin improvement profile over the longer (inaudible).

That is great. And I think it is healthy for every player in the industry has sort of a similar looking margin. One question if I can sneak in, what is the go forward FX impact that you were assuming for the rest of the year?

So we have assumed the FX rate of [64 to dollar] right now for the rest of the year. I think for the first half, as you can see, we had a year-over-year impact of about [230] basis points. But if the rupee remains stable at 64 I think that is what our guidance is based on as now, so --.

Okay, thank you very much. Congratulations.

S.K. Prasad Borra, Goldman Sachs.

Hi, this is Jordan Fox on for S.K. Just a quick one from our side. I was wondering whether you can provide an update on cross-selling opportunities, how those are trending with regards to your latest acquisitions?

Sure, Jordan. I think the cross-selling is pretty much underway. Right now what we can see is that the pipeline for cross-selling activities is actually quite robust. We are seeing a lot of traction for RPM Direct capabilities for customer acquisitions and we have taken that to a number of our clients in insurance and in healthcare. And we have got a very strong pipeline associated with that.

There is also opportunity for us to cross sell operations management services to our clients in Overland Solutions and that is something which we have started to build up upon.

And lastly, with Blue Slate we are not only doing a cross sell but we are also integrating their blueprint methodologies along with the business EXLerator framework and that is creating a much better business outcome for our clients and that seems to be resonating quite nicely as well.

So I think it is still early for us to claim victory on the cross sell, but the pipeline for cross-selling to existing clients with the new capabilities that we have acquired through the acquisitions seems to be in a good place.

Okay, that is helpful. And just a follow up. What portion of your customer base is still taking the full suite of BPO solutions? And then (inaudible) the customer base that just rely on more Analytics revenue. Thank you.

So, we have got -- we have got a number of our operations management clients which typically will use the full breadth of our services in finance and accounting, in Analytics and in Business Transformation. And the penetration rate for us to cross sell these services to our clients in Operations Management is very high and it is very strong. I would say it is somewhere in the neighborhood of 90% or so.

On the flipside, the clients that we have in Analytics or in RPM Direct, we haven't yet cross sold fully the Operations Management services and there is a greater opportunity for us to be able to do so. And we use these relationships with a single line of service and we are looking to expand that to multiple lines of service and we think we'll be able to achieve that over the next couple of years.

Thank you.

Dave Koning, Baird.

Great job. I guess my first question just looking at Analytics, there has been a great growth pattern and very sequential, like steady sequential improvement. Obviously this quarter much bigger with the acquisition.

But basically I am wondering is that almost 100% recurring revenue so that you know every quarter that you are going to get the base business to continue plus you are layering on new revenue so we should just have a nice stair step function going forward of just study sequential growth?

Or what is the potential for lumpiness? We have just seen so much steady pattern that I am just wondering is that just continually sustainable sequential growth?

So, thanks, David. I think for us in the Analytics business we think about the lifecycle of a customer journey in Analytics as initially starting out with a small project, then expanding to a much larger project, and then over a period of time converting over into an annuity format.

So for us to what is really important is: number one, to sign up new logos, have high customer satisfaction and therefore broad-base our relationship with these clients, and then eventually switch over to annuity format which provides the client the benefit of a lower-cost (technical difficulty) a much more predictable business outcome.

And as long as that journey continues to be on track we think the growth in the Analytics business is going to be pretty solid and pretty predictable.

So right now we are seeing broad acceptance of us being able to sign up new clients and convert them over from a project to an annuity-based format. And that seems to be -- that model seems to be working nicely. That gives us confidence that this is going to be a sustainable growth story for us.

And what potential right now is -- it is about two-thirds -- you said two-thirds annuity-based. So mostly recurring fortunately.

That is right. What happens is once a client converts over into an annuity format then the scaling up is much more rapid and much easier.

Yes, okay. And then I guess just on the overall business, how much growth is from existing clients? I know that has historically been where a lot of your growth is. And how much from new? And has that changed at all the last couple years? And do you expect it to change much over the next few years, just that mix?

It is true that for us in any given calendar year the growth from existing clients is almost 80% to 90% of the total growth and only 10% to 20% of the growth comes in from new clients. But it also depends on the type of new clients that you sign up and the kind of growth that that will generate in the following subsequent year.

And typically what we see is that when we sign up large strategic clients, they will start out small with us in year one, but then in year two their revenues are 3 to 5 times the revenue in year one and in year three they can be 10 to 15 times the revenue of year one.

So that scaling up effect really takes place over a multi-year period and not over a single year. And therefore I think the right metric to look at is the type of client relationships that we are signing up and how they are scaling up and their potential to scale up in future and subsequent years.

Also, Rohit, just to add to that, we do have a much larger client base now with the acquisition. So as was earlier asked in a question about the cross sell, I think the opportunity to cross sell to our existing client base because we have over 600 plus clients now. That also changes the equation between existing client and new client percentages.

Got you, great. Well thanks, good job.

Puneet Jain, JPMorgan.

Vishal, what has been like the margin impact of some of the recent acquisitions you have done this year? And what will be the prime drivers of expansion in second half?

Yes, Puneet, hi. So as I said earlier, the RPM acquisition actually had the same margin profile as EXL in terms of the corporate gross margin. RPM also has a neutral impact. Overland Solutions where we have a mid-20s gross margin profile and in the first half that had an impact of about 100 basis points negative to the gross margin.

But as we go forward, as I had outlined earlier, we would continue to look at expanding our margins in our Analytics & [Job] Solutions business. Our operating -- Operations Management business we will have productivity gains. And we think based on our operating leverage on the SG&A side we should be able to expand in the second half getting to a full-year operating -- adjusted operating margin of 14.2% to 14.4%.

Understood. And how does your Analytics business compare with similar businesses at peers or private companies that are out there in terms of capabilities, ability to hire in colleges?

So, Puneet, for us our ability to hire from senior colleges in India is -- and in the US is actually very, very strong. We just completed the recruitment cycle for this year and we have hired close to 350 new associates in our Analytics practice that will be joining us in the third quarter.

We are -- our hiring position in each of these colleges is day zero or day one company positioning. So we get to take a look at everybody that is applying for jobs and we are placed very well as compared to other companies that participate out here.

I would say that from a capability standpoint we are actually building up our capabilities in Analytics and that seems to be the big driver of the growth rate for the business as such. And we seem to be outpacing the growth rate of many of our competitors and growing much faster than them. So that capability is clearly coming through.

From a margin perspective, our Analytics business still has potential to improve its margins and that is going to be one of the levers that we will be focused on as we try to create a greater margin in this business over the next couple of years.

Understood. Last one, quickly, how much cash was in the US segment at the end of the second quarter and what is your view on current leverage?

So we have our overall total cash position yearly about 35%, 36% is in US. About 50%-plus is in India and the rest in the rest of the world geographies. And we think in terms of cash usage we will continue with our share buyback program and opportunistically, as we have already stated, look at M&A opportunity.

And in terms of leverage, right now our revolver is at $70 million, the total line we have is about $100 million. So if required we can always raise that revolver line. And also if it's a smaller acquisition, extend it up to the $100 million revolver line already in place.

Understood. Thanks.

Vincent Colicchio, Barrington.

Does the Company have any particularly large contracts that will come up for renewal in the second half that we should know about?

No, there is nothing that -- which is out of the ordinary in terms of client renewals, it is a normal renewal cycle that we have. And particularly as we have scaled up our business and as we have diversified our client base [for us], now the risk of that client renewal has diminished very significantly.

And, Vishal, what was the revenue contribution of acquisitions in the quarter? I'm sorry if you said that, I missed it.

No, okay. So for the second quarter RPM contributed about $10 million, Overland had a contribution about $17 million, and RPM -- and Blue Slate from a year-over-year basis had a contribution of $2.5 million.

Okay, thanks, guys. Nice (multiple speakers).

$30 million, yes.

Nice quarter. That is it for me.

(Operator Instructions). And I am not showing any further questions. Rohit, please proceed with any further comments.

Thank you. I just want to thank everyone for joining this call. I think EXL had a great second quarter and first half. We look forward to executing on the second half of the year. I think for us the story is basically about growth and improving our margins and we are really excited about that. We look forward to talking to you again at the end of the third quarter. Thank you so much.

Ladies and gentlemen, this does conclude the program and you may all disconnect. Everyone have a great day.