Exlservice Holdings Inc (EXLS) 2016 Q3 法說會逐字稿

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

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

Thank you. Hello, and thanks to everyone for joining EXL's third quarter 2016 financial results conference call. I'm Steve Barlow, EXL's Vice President of Investor Relations. 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 earnings press release we issued this morning and the press release announcing the acquisition of Datasource. We've also updated our Investor Factsheet in the Investor Relations section of EXL's website.

As you know, some of the matters we'll discuss in this call are forward-looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include, but are not limited to, general economic conditions, those factors set forth in today's press release, discussed in the Company's periodic reports and other documents filed with the Securities and Exchange Commission from time-to-time. EXL assumes no obligation to update the information presented on this conference call.

During our call today, we may reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of these measures to GAAP can be found in our press release, as well as on the Investor Factsheet.

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

Thank you, Steve. Good morning, everyone, and welcome to our third quarter 2016 earnings call. We generated $171.2 million in revenues, up 6.2% year-over-year on a constant currency basis. Adjusted EPS increased to $0.61 compared to $0.58 a year ago. While our earnings growth was on track, revenues were below our expectation. We faced significant headwinds in our consulting and platform businesses, both of which are dependent on client discretion when it comes to spend and timing. These businesses include revenues from short-term projects, volume linked engagements and new license sales. This makes them susceptible to volatility in business performance.

On the other hand, our operations management business, excluding consulting and platform and our analytics business, continued to do very well and remained fundamentally strong. Operations management excluding consulting and platform grew by 9% year-over-year on a constant currency basis. This is in line with our goal to grow this business between 8% to 10% per annum. Our Analytics business continued to deliver market-leading growth of 20% year-over-year on a constant currency basis. I am confident that the reasons for the revenue softness in 2016 are short-term in nature and will not impact our growth prospects.

Now let me provide some color on the actions we are taking to mitigate the impact of volatility associated with these businesses. We have pivoted our consulting business around two pillars. First, we have developed market-specific solutions that help clients address strategic and regulatory issues that are urgent and high priority. For example, we are helping clients design their digital transformation roadmaps using our proprietary Cognitive Corporation and BluePrints Framework. Additionally, we have developed robotic and advanced automation solutions, which help our clients drive efficiency and effectiveness in their existing operating model. We are also helping clients respond to changes in the business environment by providing solutions to manage cyber risk, adopt new revenue recognition standards and help comply with new regulatory standards applicable to the financial services institution.

Second, in order to sharpen focus, we have reorganized our consulting business into specific service offerings in the areas of digital consulting, finance transformation and operations consulting. In addition, we have aligned our consulting resources by industry verticals to enhance domain expertise and position EXL as a thought leader. And finally, we have hired a new head of consulting, who will join us later this quarter. We are committed to reorienting and growing our consulting business. Our strategic intent is for consulting to act as the tip of the spear to help grow our downstream operations management and analytics businesses.

Moving on to our platform businesses, softness in the property survey business in insurance was the primary driver of its underperformance. This was due to a shift in the market to lower complexity and less expensive surveys that resulted in lower volumes for EXL in the high value personal home segment. In order to mitigate the impact, we have introduced new offering and expanded our addressable market by increasing focus on the commercial survey segment, a large market with lower priced elasticity. In addition, we are differentiating our value proposition by embedding analytics and data visualization into our survey offerings.

The second reason for softness in our platform businesses was the delay in new license sales, the timing of which is difficult to predict. We are mitigating the impact of these delays by adopting an aggressive sales approach, including selling adjacent services, while continuing to upgrade the functionality of our platforms by embedding automation, analytics and data visualization. We are confident that our platform businesses will get back on track and the current pipeline looks solid. This is especially true in LifePRO, where the acquisition of LISS has already boosted demand. I want to emphasize that our platform businesses are important differentiators for EXL, particularly in the insurance and healthcare industry verticals. They help us win large strategic deals, drive non-linear growth and allow EXL to play a key role in our clients' innovation and digital transformation agendas.

Over the past few months we have successfully executed on our M&A strategy. We have acquired two companies to bolster our market leading Analytics business and added one company to enhance our digital capability.

This morning we announced the acquisition of Datasource. Datasource helps clients design data management strategies, architect and implement their data infrastructure and manage their data assets. This acquisition expands EXL's addressable market within analytics and allows us to compete in the larger and growing enterprise data management and business intelligence space. Their expertise will allow EXL to engage with clients early in their analytics lifecycle and enable us to get a greater share of follow-through analytics work. In addition, Datasource's strong client relationships will provide us access to a new set of analytics buyers in the CIO's office. When combined with our existing capabilities in predictive modeling and insight generation, this acquisition will allow EXL to provide end-to-end data analytics solutions. I'm excited to welcome Datasource's US-based team of talented professionals, who are experienced in diverse technology environments and have a passion for data.

In September, we acquired IQR. This acquisition in our Analytics business strengthens our banking and financial services verticals by helping us extend our solutions to super-regional banks and credit unions in the US. While IQR focuses on marketing analytics, we have the opportunity to expand their existing client relationships by cross-selling EXL's proven risk analytics capability. In an industry where talent is a key differentiator, IQR brings us a team of trained and experienced data scientists, in addition to diversifying our delivery footprint in India.

Last quarter, we announced the acquisition of LISS. You will recall that LISS provides front-end technology capabilities, which help clients interact with their customers in a digital format. I'm pleased to share that the integration is going better than expected with two wins in the first 100 days; a cross-sell to a US insurance client and a new UK client. The win in the US validated our acquisition thesis that LISS' capabilities would be portable to the US market. LISS helps provide renewed impetus to LifePRO, our policy administration platform business. We believe that our market opportunity has expanded with LISS, adding digital new business acquisition capabilities to our policy administration services.

The best indicator of the health of our business is EXL's continued success in winning new clients and expanding existing relationships. This quarter we won nine new clients, five in operations management and four in analytics, for a total of 27 wins in 2016. The wins this quarter were in insurance and banking and financial services, including our second win in the Australian market. In operations management, over the past 21 months, not only have we won multiple deals at new and existing clients, but the quality of wins has been excellent. We have won deals across our four domains of insurance, healthcare, banking and financial services and travel, transportation and logistics. Many of these wins are multiservice line solutions. We are excited by the fact that some of these have the potential to become top 10 clients for EXL and will drive our long-term growth.

I would also like to highlight that our finance and accounting business had multiple new logo wins and meaningful expansions at existing clients in 2016. In analytics, we continued to strengthen our position as a market leader in banking and financial services. We added a digital bank, a large global payments company and a large investment management firm to our client portfolio. Our Retail & Media segment, which I spoke about previously, continues to see strong traction with the addition of a large North American retailer this quarter.

Today, EXL Analytics wins large annuity mandates versus small project-based discretionary work. For example, a leading global bank engaged with EXL to enhance the maturity of their analytics processes. Initially, our work will involve driving greater customer centricity through insightful business intelligence solutions. Next, we will support them to upgrade their data infrastructure by integrating new and real-time data flows. And lastly, we will design and embed analytical models in their fraud and underwriting processes. In order to help them achieve these objectives, EXL is setting up a Center of Excellence for the bank with a team of over 50 data scientists. We won this mandate because of our ability to provide analytics talent at scale in conjunction with our advanced analytics methodologies and deep domain expertise.

In addition to winning new deals, we continued to focus on excellent service delivery to exceed client expectations. In this regard, I'm happy to share that the results of our annual NPS survey were very encouraging and that our overall NPS score improved by over 9 percentage points.

Now let me provide some color on our pipeline. We continue to have a healthy pipeline across Operations Management and Analytics, including new logos and existing client expansions. The pipeline is strong in insurance, healthcare and banking with many deals in advanced stages of discussion.

In insurance, our Business EXLerator driven solutions that combine deep domain expertise with analytics and our suite of technology platforms offer a differentiated value proposition for prospects and clients.

Our Healthcare business continues to grow and we've seen heightened demand from payers in the complex Medicaid and Medicare space. EXL's healthcare integrated solution that combines clinical care management, analytics and medical cost management capabilities helps clients reduce the cost of care, increase end customer engagement, close care gaps and drive behavioral change.

The pipeline for Analytics continues to be robust with companies looking to EXL to help them deliver on their twin objectives of: A, scaling up their analytics team with top talent; and B, incorporating sophisticated models and methodologies into their processes in an agile and cost effective manner.

To summarize, the demand environment for our solutions continues to be strong and EXL is well positioned to capitalize on this demand.

While I've said this before, let me reiterate why I feel excited about the future. In today's business environment, most companies are challenged to grow revenues and improve profitability in the face of a sluggish global economy. In such a scenario, the decision to choose EXL as a strategic partner whose operations management and analytics capabilities quickly deliver tangible business benefits is very, very compelling. Additionally, almost all our clients are looking to digitally transform their business models and are following a dual-part strategy to achieve this objective. On the one hand, they are focusing on transforming the as is by improving the efficiency and lowering costs of their existing operating models and then simultaneously, they are focused on transforming for the future by building a customer-centric business model. EXL is well positioned to take advantage of both these trends, due to our early and significant investments in domain expertise, data analytics and technology. Given our strong track record in innovation, we are confident that clients will partner with us and expand their relationships across our broad suite of solutions.

And, finally, I want to share that we celebrated our 10th year as a public company last week at NASDAQ. I would like to thank our employees, clients and shareholders for their support in making this day possible. While the last 10 years have been a fantastic journey and we are very proud of our achievements, we remain extremely excited about the next 10.

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 insight into our financial performance for the third quarter, followed by guidance for the year. Revenues for the quarter were $171.2 million, up 4.7% year-over-year or 6.2% on a constant currency basis. Sequentially, we grew 0.4%, or 0.8% on a constant currency basis.

Operations Management revenues grew 1.2% year-over-year, or 2.4% on a constant currency basis. Excluding consulting and platforms, Operations Management grew 7.6% year-over-year, or 8.9% on a constant currency basis. This growth was led by clients from our healthcare, insurance and travel and transportation logistics verticals. Sequentially, Operations Management revenues declined by 1%. However, excluding consulting and platform, Operations Management grew by 1.1% on a constant currency basis.

Analytics, which is 24% of our total revenues, continued its strong growth momentum with revenues up 17.4% year-over-year, or 19.7% on a constant currency basis. This growth was led by clients from our banking and financial services, and healthcare verticals. Sequentially, Analytics revenues grew 6% on a constant currency basis.

For the nine-month period ended September 30, our revenues grew by 11.7% year-over-year on a constant currency basis, to $508.7 million. This growth was driven by a combination of new deal wins, expansion of existing client relationship across our verticals and inorganic growth. For the nine month through September 27 -- September, we have won 27 new clients; 15 in Operations Management and 12 in Analytics. Organically, year-over-year on a YTD constant currency basis, our revenues grew 8.9%, with Operations Management revenues growing by 4.6% and Analytics by 34.9%. Excluding consulting and platforms, Operations Management grew 10.1% on a year-over-year basis.

Gross margin for the quarter declined year-over-year by 220 basis points to 34.7%. This was driven by softness in consulting and platform businesses, with an impact of 160 basis points, investments in new geographies, impact of 30 basis points, and lower utilization as a result of advanced hiring in analytics, 30 basis points. Sequentially, gross margin improved by 40 basis points, as a result of improved utilization in Analytics, impact of 90 basis points, which were partially offset by softness in our consulting and platform businesses, and FX headwind impact of 50 basis points.

SG&A expenses increased by 30 basis points year-over-year to 19.6% of revenues. This was primarily driven by [deal rate] expenses and investment in new geographies, which were partially offset by operating leverage. Sequentially, SG&A improved by 30 basis points, primarily as a result of lower discretionary spend and operating leverage.

Our adjusted operating margins declined by 260 basis points to 14.4%, from 17% year-over-year. This decline was driven by gross margins impact of 220 basis points as mentioned earlier, SG&A impact of 30 basis points and 40 basis points due to higher depreciation for capital expenditures, partially offset by operating leverage of 30 basis points.

Sequentially, adjusted operating margins improved by 70 basis points, driven by, as a result of gross margin improvement of 40 basis points and lower discretionary spend, coupled with operating leverage of 30 basis points.

The tax rate for the quarter was 26%. The sequential improvement in tax rate was driven by impact of discrete items in Q2, [17], higher tax exemptions and income from lower tax jurisdictions. Adjusted EPS for the third quarter was $0.61, up 5.2% year-over-year. On a YTD basis, diluted EPS is up 17% to $1.72.

Turning to other financial metrics, DSO for the quarter was 57 days, an improvement of one day from the last quarter. Our balance sheet remains strong with $214 million of cash. Our net cash position as of September 30 was a healthy $169 million, after spending $20.3 million on capital expenditures, $15.2 million on repurchasing of our shares and $9.4 million on acquisitions of LISS and IQR, for the first nine months.

Capital expenditures for the third quarter were $5.5 million, primarily driven on our new facilities and lease-hold improvements, telecom equipment and computer hardware and software. We expect capital expenditures to be in the range of $25million to $28 million for the year.

Our cash flow from operations were $29.1 million, up from $27.4 million in Q3 2015, as a result of higher net income, better working capital management and improved DSO.

Now, let me comment on our updated guidance for the year 2016. Based on our current visibility and US dollar to the Indian rupee exchange rate of INR67, the British pound to US dollar exchange rate of $1.23, US dollar to Philippine peso at an exchange rate of PHP48.5, and other currencies at current exchange rates, we are updating our revenue guidance to $680 million to $688 million, representing an annual growth of 10% to 11% on a constant currency basis. The change to our revenue guidance is due to softness in our consulting and platform businesses and includes the impact of revenue from acquisitions this year.

We have narrowed our adjusted EPS guidance to $2.30 to $2.35, representing an annual increase of 13% to 16%. For 2016, our FX gains would be in the range of $5 million to $6 million and the tax rate is expected to be approximately 29%.

Our priorities of free cash flow remain, to one, make acquisitions that enhance our capability set; two, invest in our business and operations to support our growth strategy; and three, continue to repurchase shares under our Board approved plan.

In conclusion, for the nine-month period, our business grew at an healthy rate of 12% on a constant currency basis and recorded an adjusted EPS growth of 17%. The market for our Operations Management and Analytics services remains strong and we believe our new client wins, coupled with the growth from our existing clients as a result of deeper account mining and cross-selling in 2016 gives us the momentum to finish the year on a strong note and positions us well for 2017.

Lastly, we are very excited about our recent acquisition, as they help us deepen our domain knowledge and provide new capabilities to offer to our clients.

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

(Operator Instructions) Joseph Foresi, Cantor Fitzgerald.

I wondered if we could hone in on the weaknesses. Where exactly did you see the weakness, was it a couple of clients or do you think those businesses were poorly positioned and I'm talking about consulting and platforming? And then maybe you could just give us a percentage of revenue or margin contribution from each of those businesses and any ideas on what amount of risk is left in there?

So Joe, for us, as we mentioned the impact was really in two parts of our business, one is our consulting business and the second is our platform business. The consulting business was sluggish because of the discretionary spend associated with this business and the impact was isolated to a couple of clients within our consulting practice, where there was a significant freeze in expenses associated with consulting.

On the platform side, as we mentioned, the issue was in our property survey business that we undertake within the insurance industry vertical and there it was a shift in market conditions. So there it was much more broad-based across our clients.

Now the thing to keep in mind in terms of margins is, on both these businesses, consulting and platforms, when our revenue declines, it has a significant impact to the profitability of these businesses, because the underlying cost structure is largely fixed and therefore, it has a material impact to the profitability of these businesses. And therefore, the utilization of the consulting business is important and the ability to generate revenue for our platform businesses that have a fixed cost structure of technology and people and resources, that remains constant. I hope that provides you with a greater color on this.

Sure. And then just, I guess, maybe a confusing point in the market. So you're seeing weaknesses in discretionary spending in certain verticals, and in certain areas, but your pipeline sounds like it's very, very good. How do we reconcile those two data points and maybe you could give us any idea on how you think about that versus growth in 2017? Thanks.

So let me just try and address this for everybody, so that you get the correct picture on this. The way in which we break out our business is into two segments, Operations Management and Analytics. Analytics, today is about 24% of our revenues and Operations Management is the balance 76% of our revenues. Our Analytics business, we've been focusing on that in terms of building it very, very strongly, competitively and creating a market leading position on Analytics. For us that business continues to perform exceptionally well and there is strong growth, strong client adoption and the demand dynamics in that operating segment remains very, very good. So for us, that's something which we have been able to demonstrate and we continue to move forward quite nicely out there.

In Operations Management, we would basically break up the Operations Management business into three buckets. We have the traditional operations management work that we do, we have a small piece of work that we do around consulting and then over the past five years, we've been trying to build out a platform business, which is more driven towards generating BPaaS revenue streams. Both the consulting and the BPaaS platform based businesses are going to be volatile and that's where there is an impact of the discretionary spend. The underlying core operations management business, which is the bulk of the Operations Management segment, actually is performing really, really well. We have won significant new client relationships in that particular segment and therefore, the backlog of work that we have is very, very significant and we are confident about the growth of that business as we go forward. However, the consulting business and the platform business, by their very nature, will be volatile and will experience changes to the revenue growth rate or a deceleration of growth rate, and that's what we're seeing in the marketplace. I think the part to understand also is the consulting business is extremely important for us to win the downstream Operations Management and Analytics business. And the platform business is strategically important, again, for us to win our core Operations Management business, because it provides our clients with the confidence that we can embed technology along with the operations. And that's why these two businesses are strategic and critical, and we need to have a balance between our portfolios.

. And just for clarification purposes, how big is consulting and platform as a percentage of revenue? Thanks.

So, Joseph, consulting business for us is 6% of revenues and the platform businesses for us are 17% of revenues.

Ed Caso, Wells Fargo.

It's Rick Eskelsen on for Ed. I was hoping to first just drill into the organic constant currency growth rates that you saw this quarter, and what you're assuming for guidance?

Yeah. Hi, Rick, this is Vishal. For this quarter, our organic constant currency growth was 5.5% year-over-year. And when we look at for our guidance, we are assuming that at the midpoint of our guidance, our organic constant currency growth rate would be about 8%.

And then just staying on that topic, two questions on M&A. First, what's the expected contribution from the two acquisitions that you have talked about today, the two new ones? And then just on what you were talking about just before to Joe's question on platforms, does the discretionary weakness that you're seeing cause you to rethink or change your platform M&A strategy and maybe focus on more core or maybe less discretionary areas for platforms to look at? Thank you.

So in terms of the acquisitions, this year we've done three acquisitions LISS, IQR and Datasource. All three of these acquisitions are small tuck-in acquisitions for us. And the total contribution of revenue that we expect across the three acquisitions that we've done for the full year is $4.4 million.

In terms of our strategic response to the discretionary elements of our business model, our strategic viewpoint is that we wanted to have a business model that would be 60%, 20%, 20% business model. We wanted 20% of our business to be in analytics, we wanted 20% of our business to be in platforms and we wanted 60% of our business to be in traditional ops management capabilities. Where we have ended up today is we have analytics at 24%, we have our platform businesses at 17%, and our traditional ops management business is about 59% or 60%. So, frankly, we are at our optimal structure in terms of portfolio composition. We think that this is the right level for us. Clearly, analytics has exceeded that weightage and we are not very concerned about that and we will continue to build and strengthen on analytics, because that's something which is resonating very strongly in the marketplace and we think we can take advantage of the market opportunity, as well as the capability set that we've got within EXL. So for us, our goal is going to be to continue to push on our analytics business and then keep balancing out our growth in our traditional ops management and platform businesses.

Anil Doradla, William Blair.

A couple of clarifications digging in on these issues. Now, Rohit, consulting has been a little bit of a headwind over the last quarter or two. Did you see a further deterioration, or was it pretty much consistent with the headwinds in terms of magnitudes over the last quarter or two? And also the platforming and consulting, is that with the same set of clients or there are two distinct set of events taking place?

So, the consulting business, we have been reporting throughout this year, where we've seen weakness in that consulting business and we saw that in the first half of 2016 as well. Traditionally, Q3 is the strongest quarter for us on consulting. And if you take a look at our historical financials, typically our third quarter revenue goes up significantly and it is driven in substantial part by the change in revenue that takes place in consulting.

For us, in the third quarter of 2016, our consulting revenue actually declined from the second quarter of 2016. So it was very different to what our previous historical experience was, what our expectation set was, and this happened fairly quickly.

In terms of the overlap between our consulting clients and our platform clients, there really isn't any overlap between the clients that we've got. Most of our consulting clients, typically will end up being clients that will do work with us on the operations management side and most of our platform clients are clients which will do work with us on the BPaaS business model and they tend to be very different clients. So we are seeing this discretionary spend take place with a few clients in consulting and a broad-based shift in one of the platform businesses that we have, which is the property survey business across the board there.

So Rohit, this leads me to the next question. If consulting has been a headwind over a multi-quarter period and you see a -- I don't know, whether I should use the word paradigm shift in the way the survey business is going on, how do I reconcile these two comments with your aspirations that this is a short-term headwind?

First of all, the consulting business for us provides a headwind of approximately 2 percentage points for the full year 2016, as compared to 2015. So there has been a decline in that business and that's the impact of the consulting business. The reason we are confident about the consulting business bouncing back is because of the change in service lines and service offerings that we have made, which are very necessary for clients to be able to engage in and implement as they think about changes to their business models. So I think what we're going to see is a shift in terms of the kind of work that we did in the past versus the kind of work that we are going to do in the future in the consulting line of business.

In the property survey business, we were impacted in the personal segment and what we've decided to do is to enter the commercial segment, which is much less price sensitive and it's much better suited to our domain expertise, our ability to manage complex transactions and provide incremental value to our clients and therefore, again, that shift is something which we think will work well for our clients and for us.

So if you don't mind me squeezing in one final one. So given what you've spoken, going forward, obviously, it won't be fixed overnight, do you think these issues get resolved, say, two quarters out from now or even one quarter out from now? How are you thinking about these headwinds?

So I think you're right, it will take us some time to fix both of these businesses. But I think the good part about this is, because they are short-term discretionary work in nature and it can impact us quite quickly on the downside, the bounce-back also can be very, very quick. So, I think we're going to fix this as quickly as possible, but we would expect that over the next few quarters that these businesses will bottom out and will start to generate growth.

Ashwin Shirvaikar, Citi.

So, my question is, the kind of work that you do in consulting, so in answer to the previous question you said that you're changing the nature of work in the service lines you're providing. Can you provide further details on what is it that's not been working and what are you adding that you expect to work? And if it's 6% of overall revenues, and you saw 200 basis point impact, that does imply that basically this has been a really significant -- can't even call it a down-tick. I mean, basically demand seems to have just vanished in existing service lines. Would that be a fair comment, and is there anything you can do to -- so could you have seen this coming?

So, the kind of work that we did in the past in consulting was traditional operational consulting work. We did work around SOX testing, and helping our clients review that controls. And the new service lines that we have introduced, number one is a digital transformation roadmap, which uses our proprietary Cognitive Corporation and BluePrints frameworks. We now have capability of helping our clients adopt robotics and advanced automation. And we are shifting away from the traditional finance transformation work that we did around SOX and now working on helping them comply with the new revenue recognition standards, and the new standards that are applicable for financial services institutions. So these service lines are very different from the service lines that we had previously.

In terms of the magnitude of impact by the consulting business, yes, the impact is quite significant in a small portion of our business. But that's why we are confident that this is something, which has bottomed out and will allow us to be able to get growth into 2017, as we reorient these businesses. So there is a short-term impact here, but I think it is a short-term impact and it should not impact us in 2017 and beyond.

And in terms of -- you mentioned consulting for RPA, consulting for automation. Our checks show as well that client seems to be moving beyond pilots and proofs of concept into real sized implementations. This is something that you offer for a few years. Any commentary with regards to the magnitude of productivity improvements that client seek nowadays versus what they used to seek in the past?

So Robotic Process Automation, or RPA, that's been something which has been a hot topic for the past couple of years. EXL has built up very strong capabilities around this with our own robotic bots, which are proprietary in nature, as well as several partnerships that we've created. I think one of the things which we are seeing, which is really strong and positive is that our clients are now recognizing that the best partner to help them move on this journey on Robotics Process Automation is actually service providers like EXL, which have got deep domain expertise, we understand their back office operations and their processes, we understand technology and we understand how to implement and execute and get them the productivity benefits. Many of our clients did try out pilots on their own, or they tried out pilots with just the pure play automation service providers and I think it's becoming clearer and clearer that the best business model for them is really to work with providers like EXL that can deliver the productivity benefits and can ensure the implementation of these robotics bots into their operations. I think clients are certainly looking for a higher level of productivity benefits than they did in the past and many of these tools and capabilities can generate productivity benefits of 15% to 20% over the applicable processes. The challenge really is where all robotics can be applied, because you need to have standardized processes in order to be able to apply robotics to those processes and you need that in volume. Whenever you have fragmented processes, which are very complex, there there is limited applicability of robotics. So it just depends on the type of work that you're doing and the kind of productivity benefit that you can provide to your clients.

One last question with regards to -- when you think of ops management and you've provided the breakout between traditional ops and consulting and platform, BPaaS type work. You've signed a number of contracts over the last two, three quarters. Is it fair to say they're probably more geared towards traditional ops management, leaving aside the analytics side, which is doing quite well, but traditional ops management. Just to clarify, when you say 8% to 10% expectation, are you talking about the overall ops management business, or you're talking about the sub-part that's traditional, while consulting and platform BPaaS continue to grow slower?

So let me just clarify once again in terms of our operating business model from a growth perspective. Our expectation is that our operations management segment grow at 8% to 10% and our expectation is that our Analytics business will grow at 20% plus year-on-year. The Operations Management segment for us is the traditional operations management business, it includes consulting and it includes platform and that is our expectation over a long-term period. There will be volatility associated with some of these sub-segments, quarter-on-quarter, and we'll deal with that volatility.

I think the other important element which you touched upon is, in 2015 and in 2016, we have won several large strategic operations management clients, which are the traditional operations management clients and the implementation of work associated with these new wins that we have had in the last 21 months is going to take place this year and next year and the year beyond. So that is what gives us confidence in terms of growing our business year-on-year and that is what gives us confidence in the fundamental strength of our business. I think that's a critical part. Quarter-on-quarter, there will be volatility and that's something to be expected, as we make this shift towards a business model, which is 60%, 20%, 20%.

Dave Koning, Baird.

And I guess, first of all, obviously the Q3 and Q4 are a little lighter than usual and look more like mid-single digit growth, but what's the level of confidence. I know, there is some volatility to the revenue streams. So what's the level of confidence that you can kind of get back in the reasonable near term, like 2017, to 10% plus revenue growth?

I guess, let me just try and give you some color around that. Traditionally, from a consulting perspective, Q3 is our strongest quarter. And then in Q4, our consulting business goes down, because of the holidays, as well as the lesser number of working business days, as well as year-end, most of our clients will not commit to additional work towards year-end. So, that's what we normally see. This year what we've seen is that the third quarter on consulting was soft and we have factored in the traditional decline in business that takes place from Q3 to Q4 in terms of our consulting business. So that's something which is factored in into our guidance and is very much in place.

I think the part that we want to emphasize is despite the softness, our overall business for the first nine months has grown at 12% on a constant currency basis on our topline. And our EPS has grown at 17% for the first nine months on a year-on-year basis. So we are actually growing our business quite nicely, both on the topline and on the bottom line.

And then I guess secondly, just on margins, I know early in the year you expected decent margin expansion this year and is there any change to kind of how you're thinking of margins being flat to up a little bit, I guess, this year and then over time kind of that same -- what is it -- 20 bps, 30 bps of margin expansion per year, something like that?

Hi, Dave this is Vishal. I think our margins this quarter, actually as we've mentioned in the script, we improved on the adjusted operating margin by 70 bps. The margin would have been much better had we not had the impact of the softness in consulting and platform businesses, which have a fixed cost structure and if the revenue doesn't come, it does impact our bottom line. So over the next few years, as we recover, we do expect that the margins will improve in the 2017 and beyond.

And then finally, the tax rate is quite a bit lower, 26% this quarter. I know over time you've said 30% seems to be about right. Do you still think 30% is the right number or did something change a little here?

We expect the tax rate to be in the 29% to 30% range.

And for going forward as well?

Yes.

Frank Atkins, SunTrust.

Wanted to ask about banking and financial services. On the IT side, there's been some areas of weakness in discretionary spend. You guys didn't see that; some of the BPM related peers have not seen that. What are you seeing from clients in that vertical?

A large portion of the work that we do with the banking and financial services industry vertical is around data analytics. Banks and financial institutions have actually been stepping up their usage of data analytics, and therefore, we are benefiting from that trend that is taking place. As we announced, we've added on a number of different banks and financial institutions as new clients. In the past, they had traditionally used some of the big four accounting firms, or they had used some of the global consulting firms to provide them these services. As they get more mature, and as they get into larger, more complex relationships, they're finding that providers like EXL which have the domain expertise, a global delivery model on data analytics and a deep understanding of both data and predictive modeling that works much better for them. So we are actually benefiting from the shift that's taking place. And what's happening on the IT services side with banks and financial services doesn't seem to be impacting us at all.

And then, wanted to ask real quickly, Europe or United Kingdom held very steady, it looks like not a lot of impact from Brexit. But just let me know in terms of your thoughts for -- would you expect there to be any shifts towards cost optimization and using you as a partner of that going forward?

As we have stated in the past, Brexit really hasn't had much of an impact, either in terms of our existing clients or in terms of our business pipeline. It pretty much remains steady. What we have also said is that from a FX perspective, we are very well hedged, associated with the pound to dollar exchange rate, and therefore, we really haven't seen any impact out there. We continue to win new clients in the UK market, and that's something which is great for us. And we do hope to increase our presence in UK and continue to expand out there.

And last one from me, Datasource Consulting, a nice old strategic tuck-in there. Can you talk about the impact of those type of tuck-ins on win rates?

For us to do some of these tuck-in acquisitions actually expands our service offerings that we can take to market to our clients. So with IQR, we can go deeper into the banking and financial services market by going to super-regional banks and going to credit unions. With Datasource, actually we can go much earlier into our clients and help them in terms of their data management strategies and then position ourselves for work when they think about predictive modeling and using analytical services. So I think what you're going to see is the area of our playing field will expand with both these acquisitions.

Jason Kupferberg, Jefferies.

Just wanted to get a sense on your EPS guidance. Actually the midpoint is going up slightly despite the revenue cut. I think you did shave a point off the tax rate outlook for the year. What is the delta in terms of your margin assumptions for 2016? I just want to make sure we understand what the pieces are and how you are protecting the bottom line here, because I know the areas of revenue softness are higher margin businesses.

Hi, Jason, this is Vishal. So one of the reasons why our EPS is slightly better is, one, because we have been able to get a better yield on our funds in India, by having a better investment strategy. We had a better tax rate, which gave us some advantage from that. And also we have been able to get some expense control on our SG&A side, which is helping to improve the EPS and get to a higher end, despite the revenue being lower.

So what is the specific operating margin expectation for full-year 2016?

So for this year, we would expect the operating -- adjusted operating margins to be around 14.4% to 14.5%.

And can you just quantify for us how much the consulting business and the platform businesses were down year-over-year in the quarter?

From a year-over-year basis or--?

Yes.

We don't break that out in terms of our segment, we'll just give the segment reporting of our ops management as a total.

And then just last thing quickly, how much of the softness is decision making on new contracts as opposed to the pace of ramp on existing contracts or projects that you've already won?

So, Jason, for us the consulting business is based on each consulting engagement, which is short term in nature. That takes place with existing clients, as well as new clients. And like I said, there were a couple of clients where we had a significant change in terms of their discretionary spend. On the property survey business, that is a volume linked transaction engagement business, which means clients engage us to do property surveys and they pay us for each property survey that we do on a transaction based pricing model. And therefore if the volumes come down, our revenues on that will come down and because of the shift towards less complex and higher thresholds that the clients adopted in that market space, our volumes were impacted by that and that's why our revenues were down in the property survey business.

Vincent Colicchio, Barrington Research.

Rohit, I'm curious, are there any other platform businesses where you're considering change in positioning?

We are changing our positioning, like we mentioned, in LifePRO business, which was a traditional policy administration platform. And with the acquisition of LISS, we've now got a digital customer acquisition engine on top of that. We are also embedding intelligence and analytics into the customer acquisition engine. So that is a multi-year change that we are going to be making and we are seeing good positive results in terms of that change. Our population health management business, which is CareRadius, again that's something which we are finding can work really well for the healthcare business, but it also works well for workers compensation for insurance in the P&C space. And therefore, we are making changes to how we can adopt that platform for workers' compensation work for insurance. So there are going to be ongoing innovations and changes that we will make to the platform businesses. By their very nature, the technology businesses and platforms are something which are going to change over a period of time and we are going to continue to invest in terms of making those changes.

And one last question, any changes in the pricing environment?

No, we haven't seen any real change on the pricing environment. Our traditional ops management business, as we said, continues to do well and we've won several deals, and the pipeline is strong, the pricing has been fairly stable out there. I think, what clients are looking for is the productivity uplift and the benefit associated with productivity. And when you use platforms and tools, when you use robotics that's how you can give them that productivity benefits and that becomes a differentiating capability. So that's why these businesses are so important to us.

David Grossman, Stifel.

So, if I look back on just kind of the year, including the third quarter results, about 23% of your revenue, right, is in transition. And historically, at least you have reasonably good visibility on your business even if there are cyclical elements, or if you hit speed bumps, like you did this quarter. So Rohit, as you think about the next few quarters, I guess into 2017 and towards even the back half of 2017, you should have a pretty good look at least as to how that business is shaping out and laying out. So are there any tools or insights you can give us into how to think about that 23% of revenue as we go through the next several quarters?

Look, you're absolutely right, that when we get impacted by negative volatility associated with these businesses, the impact is immediately visible. But the same thing is true for the volatility on the upside, when these businesses surprise us on the upside. And I think for 2017 the baseline for these businesses are going to be very, very good comps for 2017. So that's one thing which will naturally play out.

The second is, like I said, the services changes that we've made and the product changes that we've made, we are very confident that that's going to resonate nicely in the marketplace and we are already seeing signs of that adoption and traction take place. So we remain confident that that is going to help us improve our business as we go forward.

But, again, if we go back and think about whether some of the headwinds; one is this fundamental change and one is your business lines and the other is -- like you said is more cyclical, related to a couple of customers. So I guess, as we're thinking about those two issues, granted you may have seen some traction, but you still have the headwind coming from those two dynamics. So is there any reason we should think that there would be any significant change in trajectory of those businesses over the next three or four quarters?

No, look, I think the discretionary spend in consulting, the discretion is applied to those projects which are lower in priority for our clients, but at the same time, there are some other areas that they need to work on, which are high priority and particularly those that are impacted by the regulatory environment. We are positioning ourselves to work on those areas where the impetus for clients to make those investments is high priority and critical and that's something which I think fundamentally changes how clients will view the kind of work that we're doing.

The second part of it is, most of the consulting work that we're doing is following a strategy of the tip of the spear. So it's really to help clients think about how they can make their cost structure a lot more competitive and think about outsourcing and leveraging a global competitive cost structure. And again, that is something which is absolutely necessary and a precursor for them to outsource any part of their work. So that's going to be changing.

On the platform businesses, we have spoken about moving towards a BPaaS business model and there is a secular shift that is taking place with clients, where for certain services they would like to adopt a Pay-as-you-Go business format. And again, the shift towards that Pay-as-you-Go business format will have volatility, but if you think about it over a longer time period, there is a secular shift that's taking place and I think EXL is very well positioned to benefit from that secular shift.

Puneet Jain, JPMorgan.

So, Rohit, how much of your overall platform business stems from license sales versus a recurring processing revenue, on top of those platforms?

So, Puneet, for us the license sale is a small part of our platform business. Let me just provide you some broad breakup of our platform business. In our platform business, we've got work that we do on BPaaS, where we use the technology, and provide the service together and our customers pay us by the drink. And that is the predominant part of our platform business. In the remaining part of our platform business, where it is just associated with the technology or the platform that we have, there are three buckets. There is a software license sales, there is modification and services work that goes along with the sale of that license, and then there is an annuity based annual maintenance contract that we have for an installed base of that technology platform. The new revenue from license sale is less than a couple of percentage points for our overall platform business. So it does not impact our overall revenues very significantly. Does that help?

Yes. It does. No, it's helpful. And with respect to the Datasource acquisition, are you seeing increasing competition from IT services firms in analytics and need for technology capabilities in that area?

Well, yes. Analytics, as you all know, is a white hot space. There are multiple new entrants coming into that space every day. There are some larger organizations, whether they be global organizations or IT organizations that are trying to pivot themselves and get into the analytic space. EXL has actually made this play early, and I think we have taken up a market leadership position out there. So our view is that we are going to continue to broaden our service capabilities, expand both horizontally, as well as vertically in terms of our service offerings in analytics, and continue to capitalize on the market opportunity and the capability set that we've got.

And last question, last quarter you had mentioned reversal of earn-outs in RPM. Can you give us an update there? And were there any surprises in Analytics relative to your expectations?

The RPM earn-out which we reversed last quarter of $3.8 million was what we had already accrued for and there is nothing else which is there in the earn-out, which is we have to reverse. So, in terms of the expectations how the business is performing. I think it is -- in analytics, including RPM, as Rohit mentioned earlier, the business is performing as per expectations.

I meant, how did RPM do this quarter relative to your expectations?

RPM for us is performing in line with our expectations, Puneet. What you should know is that our hypothesis when we acquired RPM was that it is going to be a slower growing business than our Analytics Services business and that's been true for the last six quarters that we've had RPM as part of our portfolio. But it's pretty much performing as per expectations.

Bryan Bergin, Cowen & Company.

On the Analytics business, what you consider to be the market rate of growth there? And then if you could just expand on the IT investments and your product development that you have talked about previously, and the banks', I guess, appetite for those products you are developing.

So in Analytics, our viewpoint is that many of the providers in the market seems to be growing at about 15% or so and our targeted growth rate is 20% plus and that's why we think we are growing faster than the market is growing.

In terms of IT products and capabilities, we do have some technology platforms that we've invested in and we do license out these technology platforms independently and we also use it as part of our core operations management capabilities and provide that to our clients in a BPaaS format, so Business Process-as-a-Service, as we go. There are investments that we've also made in terms of creating analytical products and those products we would bring to the market as those get developed and they get industrial strength. And I think that will give us a non-linear growth curve associated with our analytical products.

And just on headcount, any major differences between growth within Operations Management versus the Analytics business?

No real difference out there. What you should notice is that our headcount did increase quite significantly in Q3 as compared to Q2 and that is us just hiring people in advance of fulfilling the needs that we have for our Operations Management business.

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

Well, I just want to thank everybody for being here on this call and joining us for the third quarter call. I do want to reemphasize, our portfolio is actually very well structured. Strategically we have been making the shift towards increasing the amount of work that we do around analytics and around platforms. We do think, in terms of our portfolio composition, it is much advanced in terms of our strategic priorities and while there has been some short-term volatility, our long-term growth prospects remain intact. We look forward to talking to you again when we announce our year-end earnings and provide guidance for 2017 in the first quarter of 2017. Thank you all for joining.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.