Exlservice Holdings Inc (EXLS) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter Two 2016 ExlService Holdings Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)

I would now like to turn the call over to Mr. Steven Barlow, Vice President of Investor Relations. Sir, you may begin.

Thank you, Chelsea. Hello and thanks to everyone for joining EXL's second quarter 2016 financial results conference call. I'm Steve Barlow, EXL's Vice President of Investor Relation. With us here today in New York is Rohit Kapoor, our Vice Chairman and Chief Executive Officer; and Vishal Chhibbar, our Chief Financial Officer. We hope that you've had an opportunity to review our quarterly press release we issued this morning. We've also updated our Investor Factsheet in the Investor Relations section of the EXL's website.

As you know, some of the matters we'll discuss in this call are forward-looking, please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include but are not limited to, general economic conditions. Those factors are 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 Factsheet.

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

Thank you, Steve. Good morning everyone and welcome to our second quarter 2016 earnings call. Our performance in the second quarter was good. We made progress on the execution of key strategic priorities and remain on track to meet our goals for 2016. We delivered $170.5 million in revenue in the quarter, up 11.4% year-over-year on a constant currency basis.

Our Analytics business continued to deliver market-leading growth of over 30% year-on-year on a constant currency basis. Adjusted EPS increased 14.6% to $0.55 per share. We've won seven new engagements in the quarter, two in Operations Management and five in Analytics for a total of 18 wins so far in 2016. In addition, we received multiple recognitions from industry analysts and advisors for our insurance, healthcare, finance and accounting and Analytics business. We also made good progress on expanding client relationships in the first half of 2016 with our top 10 clients growing by over 18% year-on-year on a constant currency basis.

Overall, I'm pleased that our business model continues to deliver double-digit top line and bottom line growth, even though we operate in a challenging business environment. The strategic pivots we've made over the last few years have enabled us to build a robust business model that generates increasing free cash flow and mitigates the impact of macroeconomic events like the Brexit vote. Brexit had minimal impact on our financials due to our long-standing policy of sharing the FX gain and risk with our client.

Almost all of our long-term UK contracts are covered by FX clauses that mitigate our exposure to currency fluctuations. While it is too early to predict all possible implications of Brexit on our business, most of our existing work is protected due to the annuity nature of our contracts and because the work we do for our clients is not discretionary in nature. We have had numerous discussions with our clients, including at our recent client event in London, and while there was some uncertainty about the short-term, the long-term value proposition of operations management and analytics remains attractive.

The demand environment for our services remains strong. I want to highlight my observations on three broad shifts that are taking place. First, our clients are challenged to achieve growth in revenue and profitability in the face of a sluggish global economy. In such an environment, the decision to outsource to a strategic partner who can quickly deliver real benefits while simultaneously providing access to domain-specific talent and technology is very compelling. We expect this shift to significantly increase the adoption of outsourcing over the next three to five years.

Second, while every client has a different definition of digital, they all agree that their business models are being disrupted by emerging technologies, a digitally savvy customer and new competition. Most of them are pursuing a dual part strategy to address this challenge. The first part focuses on improving the efficiency and effectiveness of their legacy platforms and process. The second part, leverages design thinking, digital technologies and sophisticated analytics to build a customer-centric and competitive business model. EXL is well positioned to take advantage of this shift due to our early and significant investments in domain expertise, analytics and technology. I will talk about this in more detail later on when I outline our digital strategy.

Third, they have emerged a new breed of born in the cloud companies with disruptive business models. These companies are looking to run lean and agile operations while generating key data driven insights about their customers. In addition, they have now reached a size and scale where strategic outsourcing makes tremendous sense. Our strength in operations management and analytics are therefore very relevant for them as they look to drive the next phase of hyper-growth. We are seeing many of these companies enter our pipeline. We are excited by the opportunities that these shifts present for EXL and here is why.

One, due to the current low penetration of outsourcing a significant increase in adoption with many first-time outsourcers provides EXL a long runway for sustainable and high growth. Two, the needs to navigate digital disruption will cause existing clients to partner with EXL at a more strategic level. Given our strong track record in innovation and building new capabilities, we are confident that clients will partner with the EXL to help them become more customer-centric and competitive in the digital world. This will lead to existing clients expanding their relationships with the EXL across a deeper and broader spectrum of offerings.

As I mentioned earlier, we need to continue focusing on innovation and building new capabilities that are relevant in a fast changing digital world. In this context, I will briefly outline our digital strategy and the two-pronged approach that we're taking. First, we will redesign and digitize the front, middle, and back office operations that we manage for our clients. Our solutions will leverage the Business EXLerator Framework, robotics, proprietary technology platforms and our digital technology assets to deliver superior customer and business outcomes for our clients.

For example, we have recently redesigned the underwriter assignment process for an insurance carrier. Underwriter capacity is limited and very expensive and therefore it becomes a key constraint to growth for carriers. Our solution decreases the time spent by an underwriter on routine task and increases the time spent doing what they do best, that is assess and price risk for issuance of new policy.

The solution delivered 25% increase in first time correct underwriter assignment, and 50% reduction in field escalations, leading to an improvement in underwriter utilization. Our ability to combine deep knowledge of the underwriting process with robotic process automation and text mining algorithms helped us create a powerful solution that seamlessly integrated with the clients operating infrastructure.

Second, we will help clients become ultra-customer centric by enabling them to interact with their clients in a targeted and digital manner. We will build solutions that leverage smart customer targeting, user friendly digital interfaces, and customer experience roadmaps to deliver superior customer and business outcomes for our clients. For example, we are doing innovative work with one of our brick and mortar retail client to create a differentiated online plus offline experience for the customers. We are helping them leverage analytics and technology to drive two strategic objectives.

One is to create a digital environment where they can deploy analytics on data from sensors, and mobiles to create customer experience journeys in the physical world similar to what customers experience in the online world. The idea is to track the customers' time spent and activity in different sections of the physical retail environment to enable smart decisioning around customer and product related interactions.

Second is to develop a solution that combines these customer insights, with Wi-Fi pings, online customer profiles and mobile apps to allow retailers to provide a unified online plus offline experience to their customers.

In order to execute on our digital strategy, we have made two key investments in the last quarter. The first was the acquisition of LISS Systems Limited and the second was the hiring of EXL's first Chief Technology Officer, Mike Toma. LISS is a leading provider of digital customer acquisition and policy administration solutions for the insurance industry. It will provide EXL with front-end technology capabilities, which can be offered to our clients to help them interact with their customers in a digital format.

I am very excited by the opportunity to offer LISS to our insurance clients to help them acquire more new business and drive higher revenue growth. LISS has a highly experienced team of insurance and software professionals, who work with major insurance carriers in UK and Europe, and are pioneers in the digital insurance world. They were among the first to create a straight through processing platform and a web based direct-to-customer solutions for insurance companies.

The strength of LISS's platform is their flexible and user-friendly digital interfaces, modular architecture, embedded visualization tools and the ability to integrate big data feeds into their work floor. Combining LISS's capabilities with our domain expertise, smart targeting algorithms and proprietary technology platforms such as LifePRO, will help EXL to build a fully digital, end-to-end new business acquisition engine. We expect LISS to strengthen our leadership position in the insurance industry. While their platforms are built for insurance, they are largely industry agnostic and EXL has a great opportunity to extend them to other businesses and other markets.

And lastly, as I mentioned, we have strengthened our technology leadership and sharpened our focus by hiring Mike Toma as our Chief Technology Officer. Mike will focus on enhancing and executing on our digital strategy, develop products, which will create non-linear revenue streams, build an ecosystem of technology partnerships and leverage technology development capabilities across the organization to generate higher returns on our technology investments.

Now turning to our pipeline. In Operations Management, we have a strong pipeline in insurance, healthcare and finance and accounting with many large deals in advanced stages of discussions. The pipeline is strong across all markets, that is the US, UK, Europe and Australia, with broad based interest in all our global delivery centers. In addition, the multiple strategic clients that we've won over the last 12 months to 18 months continue to ramp up as per expectation, and we remain confident about their potential to be our engines of growth over the long term.

Moving to Analytics, we're focused on improving data driven decision making in order to help clients drive revenue growth, lower costs, and ensure regulatory compliance. Overall, our analytics pipeline is extremely healthy across multiple industries with financial services, healthcare and retail being among the strongest. I want to call out the strong growth and demand in our retail analytics practice which was until now a small part of our portfolio.

The demand is being driven by digital disruption and intense competition faced by retailers, online as well as brick and mortar. Leveraging our digital consumer analytics methodologies, we will help clients understand their customer needs to target their offerings better. We curate customer journeys to maximize conversion, and we help them build digital relationships to maximize lifetime value of their customers. Our ability to deliver an Analytics powered end-to-end marketing solution is an important differentiator and we're seeing strong demand for these solutions in our insurance, healthcare and financial services client base.

Overall, I feel very positive about our Analytics business. A steady stream of new wins, additional business from existing clients, new innovative capabilities and a strong pipeline continue to differentiate and position EXL as a leader in the global Analytics market. To conclude, the relevance of our services continues to increase, our pipeline remains healthy with multiple large deals. We continue to build and acquire capabilities that differentiate us in our chosen domains. And we solve problems that are core to our clients' strategy and to their end customer. We are focused on executing our strategic priorities for 2016 and remain confident of achieving our strategic and financial goals for the year. Achieving these goals will put EXL in an excellent position to continue on our growth trajectory over the long term.

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

Thank you Rohit and thanks everyone for joining us this morning. I would like to start off by providing insights into EXL's financial performance for the second quarter followed by a guidance for the year.

Revenues for the quarter were $170.5 million, up 9.5% year-over-year or 11.4% on a constant currency basis. Sequentially, we grew 2.1% or 1.9% on a constant currency basis. This marks the sixth consecutive quarter of sequential quarter-over-quarter constant currency growth.

Operations Management revenues grew 4.7% year-over-year or 6.6% on a constant currency basis despite continued softness in our consulting business as a result of cautious spending by our clients. Excluding consulting, Operations Management grew 7.7% year-over-year on a constant currency basis. This growth was led by clients from our banking and financial services and healthcare verticals. Sequentially, Operations Management grew 2.2%.

Analytics, which is 23% of our total revenues continued its strong growth momentum with revenues up 29.6% year-over-year or 31.2% on a constant currency basis. This growth was led by clients from our banking and financial services, insurance and healthcare verticals. Sequentially, Analytics revenues grew 1.7% showcasing our strong core Analytics growth despite RPM seasonality.

For the first half of 2016, EXL's revenues grew 12.8% year-over-year to $337.5 million or 14.8% on a constant currency basis. This growth was driven by a combination of new strategic deal wins, expansion of existing client relationships across the vertical and inorganic growth. Organically, by segment, Operations Management revenues grew 6.1% and Analytics grew 40.5% on a constant currency basis year-over-year.

Our top 10 client concentration continues to decline as a percentage of total revenue and was 40.2% in Q2, 2016, compared to 42% in Q2, 2015, indicating our broadened client and revenue base.

Gross margins for the second quarter were 34.3% compared to 35.4% a year ago. This decline of 110 basis points was driven by investments in platforms, new clients ramp up with an impact of 100 basis point, investment and new geography expansions with an impact of 40 basis points, and which was partially offset by FX tailwind. Sequentially, gross margins declined by 80 basis point primarily due to the wage increments given in Q2.

We continue to generate operating leverage through our productivity and cost optimization measures, as a result, our G&A expenses decreased 40 basis points year-over-year to 12.4% of revenues. And sales and marketing expenses decreased by 10 basis points to 7.5% of revenues. Adjusted operating margins declined by 20 basis point to 13.7% from 13.9% year-over-year. Driven by the gross margin impact, as mentioned earlier, which was partially offset by operating leverage and FX tailwinds. Sequentially, adjusted operating margins declined by 130 basis points, primarily due to the wage increments.

For the first half of 2016, our adjusted operating margins improved by 50 basis points year-over-year to 14.3%. Our adjusted EBITDA for the quarter was $29 million, up 7.8% compared to $26.9 million a year ago. The tax rate for the second quarter was 30% and 29.9% for the first six months. Free cash flow from operations was $37 million, up 37% from the same time last year due to improved net income and better working capital management.

Capital expenditure for the second quarter were $6.4 million, primarily spent on facilities expansion with new operation center opened in Philippines and Noida and investments in our technology, infrastructure enhancement. Our capital spending for the first half of the year was $14.9 million and we expect the CapEx to be in the range of $25 million to $30 million for the full year of 2016. Adjusted EPS for the second quarter was $0.55, up 14.6% year-over-year, driven by strong revenue growth.

Turning to other financial metrics, DSO remained at 58 days, same as the last quarter. FX gain were $1.4 million for the quarter. Our balance sheet remains strong with $200.7 million of cash. Our net cash position as of June 30 was a healthy $155.7 million after repaying $25 million of revolver, repurchasing $9.7 million of our shares and spending $14.6 million on capital expenditure for the first six months of the year. Our average share repurchase price is $46 per share. Subsequent to the end of the quarter, on July 1, we acquired this for a total consideration of GBP5.5 million, of which GBP4.3 million was paid in cash and GBP1.2 million in restricted stock.

Now, let me comment on our revised guidance for the year 2016. Based on current visibility and a rupee to US dollar exchange rate of $7.5, GBP to US dollar exchange rate of $1.32, Philippine peso to US dollar exchange rate of $47, and other currencies at current exchange rates, we are updating our revenue guidance to $691 million to $703 million, representing an annual growth of 12% to 14% on a constant currency basis or 10% to 12% on a reported basis.

We are modestly adjusting both the top and the bottom-end of our range for a midpoint of $697 million. The change in guidance is primarily driven due to the FX impact. We maintained our adjusted EPS guidance range of $2.25 to $2.35, representing an increase of 11% to 16%. This guidance factors in incremental revenue of LISS of approximately $1 million for the second half of the year and a dilutive impact of $0.01 on adjusted EPS on account of integration of the LISS acquisition.

For 2016, our FX gain will be in the range of $3 million to $4 million and our tax rate is forecasted to be 30%. Our first priority for free cash flow remains to make acquisitions that enhance our capability set and invest in our business and operations to support our growth trajectory. We will continue to repurchase shares under our Board approved plan.

In conclusion, we had a good first half of the year, with year-over-year revenue growth of 15% on a constant currency basis; adjusted operating margin improvement of 50 basis points and adjusted EPS growth of 25%. We are pleased with our positioning in the market and we believe our momentum in Operations Management and Analytics will continue for the rest of the year.

And now, Rohit and I will be happy to take your questions.

(Operator Instructions) Anil Doradla, William Blair.

Hey guys and good job on continued execution. So, Rohit, I had a couple of questions. So you talked about UK, you talked about Brexit, and sounds like the nature of conversations tend to be a little bit more positive from your perspective. Is that a fair way to assess it? Given that, near term, maybe there might be some uncertainty, you talked about annuity-like business model obviously. So, do I gather in a nutshell that you are perhaps maybe incrementally positive with the ongoing issues from your perspective?

Thanks, Anil. I think the way I would characterize it is, the impact that Brexit is likely to have on our clients, we will only get to know that as things unfold and as things play out and there is a relatively high level of uncertainty associated with that. There is decision making, which we think might slow down because of the uncertainty. But for our business, we seem to be very well protected, we are well protected because of the FX strategy that we have adopted and the way in which we contract with our clients and that protects us adequately. We are also well positioned because of the nature of our business, which is annuity in nature and it's a long-term contracts doing work that is [more] to their business.

I think the opportunity areas for us with Brexit is, anytime there is regulatory change that takes place. Any time there is disruption that takes place where companies have to shift operations from one geography to another geography or consolidate or decentralize or there is movement that takes place. That presents us with a significant opportunity, that presents us with an ability to go in into these clients and actually help them optimize their operating delivery capabilities, whether onshore or offshore and we can advise them, and we can implement and execute this for them. So, to us, this is a situation where I think we are well protected and longer term it can present us with a great opportunity.

Great. And as a follow-up, Vishal, we've seen some compression on gross margins. You talked about investments in this one particular client, but when we look at the last three, four quarters, we've seen some compression there. So help us understand how we should be looking at the gross margin trends from this point onwards, not necessarily on a quarter-by-quarter basis, but kind of over multiple quarters. And can you also share with us, what were these investments in particular in this quarter with that one customer? Thank you, very much.

Yes. Thanks, Anil. So on the gross margin side, the compression which we are experiencing is on the investments we are making in, for example, the expansion on our platforms, the work which we are doing with one or two clients where we have to do integration and bringing that work on to our platform that is going much ahead where we had anticipated that the work should be completed by the end of quarter one, but now that will get completed at the end of Q3. But long term, I think this is a one-time impact. Long term, we think the gross margins should improve for us as we are able to get behind this one-time issue.

Very good, thanks a lot guys.

Tyler Scott, Wells Fargo.

Good morning. This is actually Tyler Scott on for Ed. Thank you for taking my question and congrats on the quarter. First, I was just hoping you could expand a little bit on consulting weakness. I know it was also weak last quarter, is that being driven by -- is there a geographical exposure there or is that a vertical or a specific client, any color would be appreciated.

Sure, Tyler. Yes, the consulting business for us has been soft and it is soft across geographies, it's not soft in one geography versus the other or industry versus the other. I think it's largely to do with two things, one is, the consulting work is discretionary in nature and currently we are finding some of our clients feeling the squeeze in terms of their profitability and their budgets and therefore that's been soft for us.

And the second is, most of the spend on consulting is not so much on operations reengineering or on working on operations redesigned, but it's really focusing on the work that they need to do on digital transformation and as we position ourselves to play a much stronger game on the digital side, that's where we see the pickup take place on our consulting business. So, frankly, for now it is soft across the board, but with these new capabilities that we are investing in and building out, I think we would be able to engage with our clients and help them move on the transformation journey and improve our business set.

Great and then just as my follow-up, I know in the past you've talked about acquisitions being a key priority. Maybe if you could just touch on the pipeline there, the size of the deals that you're looking at and how that sort of ties into your digital strategy moving forward. Thank you.

Sure. So, the good news is, we did an acquisition and we're really glad that we found this and we think this is a real gem that we'll integrate it beautifully with EXL and we're very excited by the LISS acquisition.

We do have a strong pipeline of acquisitions behind that. And we are finding that valuations and terms and our ability to negotiate the appropriate views. The environment is actually becoming a little bit better, so frankly, our ability to deploy our capital and to do acquisitions, I think that has just been enhanced a bit and we fully expect to continue to do acquisitions as we go forward.

Typically for us our sweet spot in terms of size and scale is do an acquisition that will add on revenues anywhere between $25 million to $50 million. However, we're not shy about doing deals which are much bigger in size. We certainly have the balance sheet and the capital available to do larger sized transactions. But these clearly have to be strategic in nature and fit in with our business model.

Our focus is to look at acquisitions in insurance, in healthcare and in analytics. We are also looking at doing some more acquisitions in UK and Europe to further diversify our geographic footprint. So we would be looking at a number of these areas to add on additional capabilities.

Great, thank you very much.

Frank Atkins, SunTrust.

Thanks for taking my question. Wanted to ask a little bit about the hiring environment, attrition and the wage increment, any color you could give us on those would be great.

Sure. So for us the hiring environment remains quite attractive in India, particularly for back-office resources. For Analytics resources, hiring is something that requires a deep amount of investment and brand presence to be created. And again, EXL is in the fortunate position of having made these investments not just last year, but over the last seven years to eight years. And so we've got a tremendous amount of capital goodwill with some of the premier engineering colleges and business management schools to be able to source and attract talent.

We've just, in fact our on-boarding, this year's hiring from the colleges and campuses that's taking place over the summer and we are very pleased with our ability to attract the best talent there.

From an attrition standpoint, the attrition rate in Q2 historically always goes up, and the reason for that is, we provide a salary increment on April 1 across the Company and typically in Q1 people wait for the bonuses to be paid and they wait for the salary increment cycle to go through. And quarter two is always the period where, say, there is a fair amount of churn that takes place.

We also have young employees who are looking at higher education and they think about those options in the second quarter. So the attrition rate for us went up from Q2 to Q1, but if you compare it on a year-on-year basis, as compared to 2015, both for Q1 and for Q2, our attrition rates are actually well below what they were last year. So we are actually encouraged by the trend about being able to manage our attrition in the right direction and that seems to be playing out well.

And lastly, from a wage increment perspective, the wage increment this year were pretty much the same and in line with last year's salary increments that took place.

Okay, great, that's helpful. And for my follow-up, wanted to ask a little bit more about the LISS acquisition. Any client overlap there in terms of existing clients or is it a cross-selling opportunity to all the clients. And secondly, can you give us any sizing a revenue impact?

Sure. So, LISS has some very large UK and European clients, there are few client which we've disclosed in the press release that LISS has. So, LISS works with Aviva, AIG and Generali, and those are three names that have been disclosed. The ability for us to cross-sell LISS's capabilities to our base of insurance clients that's tremendous and I think that's the exciting opportunity for us. Presently, the revenue from LISS is small and our expectation is that in the second half of 2016 we will pick up about $1 million of revenue from LISS this year.

Mike Reid, Cantor Fitzgerald.

Hey guys, this is Mike Reid on for Joe. Thanks for taking the question. I was just wondering, are you seeing anything -- because (inaudible) kind of what you're seeing in insurance and was the quarterly results just more of a tougher comp from 2Q of last year?

Mike, for us, Q2 actually performed exactly in line with our expectation. We had guided to this level of revenue and profitability and actually we think we hit the number right on the nose, so it performed as per plan. On the insurance business and insurance industry vertical, we continue to see a fair amount of activity take place in the insurance vertical. For us, the insurance industry vertical is also broadening out. So, in the past our focus would have been primarily in the US, but now we are seeing a lot of activity in insurance in UK and Europe, as well as in Australia. And therefore, from geographic standpoint, the vertical has broadened out for us.

Also in terms of lines of business, in the past we would do some of the more traditional lines of business of life and annuity and property and casualty, but now we have seen that expand towards workers compensation, towards disability, towards retirement, and towards reinsurance. So frankly, our ability to serve clients in the insurance industry is becoming much, much more stronger and predominant and our differentiation out here is becoming more pronounced. So we're quite excited by where we are in the insurance industry and where the future is for us in the insurance industry.

All right, great, thanks for the update and color on the insurance, I appreciate it.

Puneet Jain, JPMorgan.

Hi, thanks for taking my question. So Rohit, given new opportunities from Brexit, you talked about in the areas of regulatory compliance, what does that mean for your investment plan in that region?

Yes, Puneet, look, I think this is something which we will have to pay out as things evolve in that region and as decisions get made. I think the initial part is for companies to build out different types of scenarios to operate in and to consider different structures that they might adopt for their go-to-market and to serve their go-to-market strategy. And so we will initially help them out in terms of thinking through some of these strategies. And then, as the regulatory environment evolves and gets firmed up, we will align ourselves to position our clients to comply with these regulatory requirements.

Right, understood. And nice to see LISS acquisition and CTO hiring. But just to be clear, the strategy is to develop technology solutions that you can offer along with BPO. And how do you compete with IT services firms in those technology capabilities then?

Sure. I think we have always believed in taking a fundamental approach where understanding the domain and our clients' business is the foremost driver of the way in which we try and add value to our client relationships. Our differentiation vis-a-vis the IT players is built around that domain and business knowledge and business expertise, and using that domain and business knowledge to drive the strategy for IT, and we've been doing that consciously for the last five years, where we invested in technology platforms where we could provide our clients with platforms-as-a-service and integrate that along with our service.

We have got capabilities of integrating in Analytics, which is much better than what the IT players have got. And then we will focus in on key technologies that we can own and which we can offer to our clients in a modular format, which is non-intrusive and I think the key out here really is, we are able to do a plug-and-play with our clients, which typically most IT firms are not really interested in. They are much more interested in making big massive changes to the underlying technology platforms, which are multiple year change management program and where the investment is high and the risk is high and the return is uncertain.

Whereas for us, we are much more focused on actually helping our clients solve their business problems and do that in a manner which is in a plug-and-play format. So this digital customer acquisition engine that we now have the capability of is going to be in a plug-and-play format, and our [client growing] technology platforms and they can test it out and see how powerful it is and they can compare it with their internal solutions or with any other third-party solutions.

Got you, it makes sense, makes sense. Last one from me, is there any changing your outlook for Analytics business, specifically in the UK based banking area?

At present we are not seeing any impact or change in the UK banking world. For us, as you know, banking represents about 40% of our Analytics business and a strong component of the work that we do and we work with a number of significant and large sized banks. We expect to continue to work with our clients and in fact add new clients in the UK market and frankly with this regulatory change, it might actually accelerate our ability to acquire newer clients.

Understood, thank you.

(Operator Instructions) Brian Bergin, Cowen & Company.

Hi, thank you. I just wanted to touch on the new clients that you took this quarter, any larger strategic wins there? And then as well any particular verticals that stand out or types of projects that are standing out?

Sure Brian. Yes, for us, we have signed up seven new clients this quarter and we do think that there are a couple that have the potential to actually scale up very, very nicely out there; two of them are in Ops Management and five in Analytics. The industry verticals for us is in banking and financial services, in insurance, and in healthcare. Those are the three verticals where we signed up these clients.

Okay and then as far as, you obviously touched on hiring the first CTO. It sounds like BPaaS will continue to be a growing emphasis for the Company, can you remind us where that business stands now as a percentage of revenue?

Sure. So, for us, BPaaS is about 16% to 17% of our revenue. And it is a core part of our strategy that we would continue to invest in. What we have currently is, we've got technology platforms and multiple offerings for our clients to use our services in a BPaaS format. We're now looking at ways in which we can unify these diverse offerings that we've got and bring them together under a single common technology architecture. And therefore, we are going to be making investments and Mike is actually going to be helping us think through how we should be investing further in these technology platforms and continuing to remain competitive as far as all our platforms are concerned.

Okay and just last one on housekeeping. Something within other income, like another game? Can you say what that's related to?

Yes. Hi, Brian, this is Vishal. So the other income went up this quarter, because on account of a reversal for the RPM earn-out. Every quarter we do a fair valuation of the RPM earn-out liability. Based on their full-year projections and compared to the earn-out thresholds, we came to a conclusion that the earn-out will not be payable. Hence, we reversed out $3.8 million of the RPM earn-out liability this quarter. That is shown in our other income, but we don't take into account while calculating the adjusted EPS.

Okay. Yes, I see that, okay.

Mayank Tandon, Needham & Company.

Thank you. Good morning, Rohit and Vishal, a few questions. Vishal, sorry to make you repeat yourself, but in terms of margins, I just wanted to understand both short term and long term, what are some of the levers you have to drive margin expansion, particularly around seat utilization. I know it's been fairly consistent, but would there be an opportunity there to actually improve that as you scale. And then, how should we think about margin trend longer term?

So, Mayank, thanks for the question. As you know, we measure our business on an adjusted operating margin basis. And as I alluded earlier, for the first half, if you compare to last year, our adjusted operating margins actually increased by 50 basis points. And there are few puts and takes which will happen during the quarters, but overall, we do think that there is an improving trend and we would be able to continue to improve our adjusted operating margins.

There are few one-time fixes which we will have. There are few changes we are going to make on our pricing models, which are going to help us as we move towards more transaction-based pricing. We are going to change our operating model and continue to have productivity improvements. We're going to leverage our SG&A line and as you see this quarter, we have improved our SG&A, our percentages. So, I think there are several levers we have across our businesses. There is some investment we're going to make as we do some acquisitions, for example, with the acquisition of LISS there will be a little bit of short-term impact as we integrate the acquisition, but the underlying core business we think we'll be able to continue to improve the gross margins and adjusted operating margins over the long run.

Sorry, just to make you repeat, I think you may have already said this, but for this year's guidance, does this still imply about 30 basis points of margin expansion year-on-year ex-currency, is that correct and how much currency benefit you still expect in terms of adjusted operating margins for fiscal 2016?

So the currency impact is around 20 basis points to 25 basis points and roughly the same as we had talked earlier. The core change in our adjusted operating margin will be around that 30 basis points, but some of that will get offset by the acquisition costs and the integration costs which will come with the acquisition of LISS.

Got it. Thanks for answering those questions. And then one question for Rohit. Rohit, given some of the broader trends you talked about earlier on, do you think you have to do something transformative in terms of M&A or will it be mostly tuck-in deals going forward?

Mayank, I think for us to execute on our long-term strategy, we can do that pretty much on an organic basis and with some tuck-in acquisitions, we don't think there is a real burning need for us to do a transformative acquisition, but if we come across the right opportunity, we will certainly take a look at it.

Thank you. Good job on the numbers.

Frank Atkins, SunTrust.

Thanks for taking my follow-up. Just wanted to ask a little bit about the pricing environment, any color there?

Yes, Frank, I think the pricing environment to us seems fairly stable. We haven't seen anything which is untoward or irrational coming. And there are a number of deals in the pipeline like I said, so we are seeing fair amount of pricing input on that. I think it seems to be fairly stable and predictable right now.

Great. Thank you so much.

Thank you. Ladies and gentlemen, that concludes today's question-and-answer session. Thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.