Exlservice Holdings Inc (EXLS) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2017 ExlService Holdings, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded. I would like to introduce your host for today's conference, Steven Barlow. You may begin.

Thank you, Glenda. Good morning. Thanks for everyone who joined the call this morning, this is our Third Quarter 2017 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 you've had an opportunity to review our quarterly press release we issued this morning. We've also updated our investor fact sheet in the Investor Relations section of EXL's website.

As you know, some of the matters we'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 the investor fact sheet.

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

Thank you, Steve. Good morning, and welcome, everyone, to our third quarter 2017 earnings call. I'm happy to report that our third quarter was strong and sustained the momentum seen during the first half of the year. During the quarter, we generated revenues of $192.3 million, a 12.4% increase year-on-year on a reported basis and 11.8% on a constant currency basis. Adjusted EPS increased 11.5% year-on-year to $0.68 per share. Revenue growth was strong across Analytics and our core domains, with notable performance in Insurance, Healthcare and Finance and Accounting. This was a good quarter in terms of new client wins. We won 11 new clients in the quarter, 5 in Operations Management and 6 in Analytics, bringing our total for the year to 35, which is higher than the number of new clients won in all of 2016.

Across the industries we serve, companies remained focused on digital transformation. This strategic imperative presents EXL with numerous opportunities to help clients transform their businesses across the front, middle and back offices. We are fast gaining recognition as a strategic digital transformation partner on the strength of our ability to execute. We can deliver the tangible business benefits of digital transformation because of our deep understanding of our clients' industries and our ability to leverage advanced automation and Analytics.

I'd like to discuss 2 areas that allow us to differentiate ourselves from the competition and allow us to act as a strategic partner for our clients. One, our focus on advanced automation and robotics from strategy to implementation; and two, investments that allow us to manage end-to-end operations for our clients. First, we're seeing that clients want to scale advanced automation and robotics initiatives out of the pilot stage to broader implementation across the enterprise. Automation is an important component of intelligent operations and can make transactions seamless and touchless in a digital environment. For EXL, advanced automation and robotics represents a great opportunity. We take a dual approach of both partnering with robotics, software vendors and building our own proprietary bots. Our proprietary bots leverage our deep understanding of client domains and are specific to an industry process, such as underwriting or claims. In addition to our domain knowledge, clients select EXL because we can customize bots to deliver specific business outcome, and we are willing to commit to the outcomes. Another differentiated capability is our ability to combine Analytics with advanced automation to create more powerful business benefits. One example is a large U.S. insurer who selected EXL to lead their enterprise automation and robotics initiative from strategy to implementation. The insurer saw automation as a way to alleviate cost pressures and also needed a partner to help them build, customize, deploy and maintain these solutions at scale. We won the initial engagement because of our strong existing client relationship and were able to quickly scale up our automation efforts by delivering strong business benefits through our successful proof-of-concept. Another example is our work with a large commercial insurer to implement robotics in the underwriting and claims processes. In both areas, through the combination of analytics and robotics, we have seen significant improvements in productivity and cycle time, which has led to getting quotes faster to market and enhancing revenues. Our success has led the client to look at several more opportunities across processes that are managed by EXL as well as those managed by the client. In both examples, we're not simply operating as an implementation team but as a true strategic partner. We have now won several advanced automation and robotics deals across our existing client base, and this capability is allowing us to acquire new clients at a faster pace.

Next, I wanted to discuss our investments in the management of end-to-end business processes for our clients. In the past quarter, we expanded U.S. delivery operations in Richmond, Virginia as well as in Kansas City, Missouri. Our Richmond Center was established to support digital customer acquisition in Insurance and Healthcare. We've talked in the past about our digital customer acquisition engine, which integrates technology, our proprietary customer database and customer targeting analytics. The Richmond Center supports this process with licensed agents, who help close sales transactions, thereby allowing us to own the process end-to-end. The Richmond operation opened this month, and we are pleased with its early traction in the market. In an effort to more closely collaborate with clients, we're now able to better showcase the transformative capabilities of our global centers through our Digital Experience Center in Jersey City, New Jersey. The center has quickly become a great place to collaborate with our clients on solutions that improve customer experience, operational performance and enterprise cost structures. Taken together, these trends are helping our Operations Management business grow at a healthy pace. This is reflected in our performance in the third quarter, where Operations Management had revenues of $138.6 million. This represents an increase of 7% year-over-year on a reported basis and 6.4% on a constant currency basis. Growth was led by Healthcare and Insurance, at 18.3% and 12.9%, respectively.

Moving to Analytics. We continue to deliver market-leading growth. Analytics revenue grew 29.1% year-over-year on a reported basis and 28.6% on a constant currency basis. We're seeing healthy demand from both existing and new clients. Existing client growth is driven by the continued expansion of Analytics across their global footprint and the support of their innovation programs. In one example, we are working with a large insurer to develop a new analytics-driven commercial offering for its global client base. At the same time, we are expanding our offerings to new disruptive entrants in our core business verticals. We have made significant inroads into the fast-growing FinTech sector, where companies are using our modeling expertise in risk management and customer acquisition. We acquired 2 new clients in the FinTech space this quarter and have several more in the pipeline. We also significantly grew revenues from newer verticals that are infusing advanced analytics into a wider set of business processes. In Retail, a large U.K. franchise operator is leveraging our team to detect and prevent fraud at the point of sale. And finally, we are seeing a stronger demand across our clients to help them understand and influence their digital customers. These capabilities are needed across the entire customer life cycle, including branding, acquisition, ongoing servicing and loyalty. As an example, our digital revenue from Healthcare clients has nearly doubled this quarter. We are helping a large Healthcare payer identify, educate and acquire qualified customers through digital channels for one of their consumer offerings. I'm very pleased with how our Analytics business has grown its footprint this year and more expansive engagements from our long-term clients and several new innovative projects across verticals.

Next, I would like to provide an update on M&A. You might have seen in our earnings release, our agreement to acquire Health Integrated, a care management company based in Tampa, Florida. Health Integrated works on behalf of U.S. health plans and currently serves 5 million individuals in the Medicare, Medicaid and dual-eligible populations. While these members typically make up only a small portion of the population, the cost of care for this group represents up to 50% of total medical costs, owing to multiple chronic conditions. Health Integrated is known for its focus on improving member health outcomes through behavioral change. The company uses technology and analytics to identify high-risk members and combines that with a highly engaged and personalized approach to influence outcomes.

We are excited about the potential of this acquisition for several strategic reasons. First, it will expand our addressable opportunity in Healthcare by enabling EXL to support plans who manage the large, growing Medicare and Medicaid market segments. Second, Health Integrated will give us the IP and credentials in behavioral health that can further differentiate us in the marketplace. Third, the acquisition will add a talented and experienced team of clinicians and health care workers to our existing clinical operations. Fourth, it will add Operations Management capabilities in the U.S. to serve our clients -- to service our clients' growing demand for U.S.-based operations. And fifth, Health Integrated is accredited by both NCQA and URAC, which are important certifications to perform end-to-end clinical work in government-sponsored segments as well as the commercial segment. As we mentioned in the press release, this will be an asset purchase and will, therefore, require several steps before we close the acquisition. The transaction is expected to close in the first quarter of next year.

M&A remains a key focus area for the company. In line with this, we've also hired a new Head of Global Corporate Development, PJ Kaputa, to lead our M&A practice. PJ will execute on our M&A strategy by evaluating the current M&A pipeline and sourcing new opportunities.

Finally, I'd like to close by saying that our market environment is strong, and I'm excited about the prospects in our pipeline. Our investments in analytics, advanced automation and digital capabilities have resulted in a growing number of deals in the pipeline. At the same time, the size of deals has expanded significantly. There are several large deals that will be awarded over the next 12 to 18 months, which indicates that the marketplace demand is robust. We are happy with a good quarter and our performance in the first 9 months of the year. We look forward to closing 2017 on a strong note.

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

Thank you, Rohit. And thanks for joining us this morning. I would like to start off by providing insight into our financial performance for the third quarter and 9 months of 2017, followed by guidance for the year. Revenues for the quarter were $192.3 million, up 12.4% year-over-year on a reported basis or 11.8% on a constant currency basis. This is the highest growth rate we have achieved since the first quarter of 2016. Sequentially, we grew 1.6% on a constant currency basis. For the quarter, revenues for Operations Management businesses, as defined by 5 reportable segments, excluding Analytics, grew 7% year-over-year or 6.4% on a constant currency basis. These are the highest growth rates since the second quarter of 2016. Our growth was primarily driven by clients from our Healthcare, Insurance and Finance and Accounting reporting segments. Healthcare grew by 18.3% year-over-year on a constant currency basis, driven by expansion in our existing clients and the operations were delivered from Philippines and Colombia. Insurance grew 12.1% year-over-year on a constant currency basis. This growth was driven by ramp-ups of 2016 wins and expansion in existing clients. Finance and Accounting grew 7.9% year-over-year on a constant currency basis, driven by expansion in new client wins of 2016 and 2017. The All Other segment declined by 14.7% on a reported basis and 16% year-over-year on a constant currency basis. Sequentially, Operations Management grew 0.8% or 0.6% on a constant currency basis. This growth was driven by expansion in existing clients in Travel, Transportation and Logistics, Finance and Accounting and Insurance.

Analytics continued its strong performance with revenues of $53.7 million, up 29.1% year-over-year or 28.6% on a constant currency basis. This growth was broad based, and now Analytics constitutes 28% of our total revenues. This quarter, acquisitions contributed $6.4 million. Sequentially, Analytics grew -- revenues grew 4.2%, both on a reported and a constant currency basis.

For the 9-month period ended September 30, revenues were $564.4 million, up 11% year-over-year on a reported basis or 10.9% on a constant currency basis. This growth was driven by a combination of new strategic client wins, expansion of existing client relationships across our verticals and inorganic growth. Operations Management revenues grew 5.4% and Analytics 28.6% year-over-year on a constant currency basis.

Gross margin for the quarter increased 40 basis points year-over-year to 35.1% due to improved productivity of 120 basis points, despite an acquisition headwind of 80 basis points. This is the highest gross margin we've achieved since the first quarter of 2016. Sequentially, gross margins improved 150 basis points due to improved productivity of 90 basis points, higher volumes contributed 40 basis points and FX tailwind of 20 basis points.

SG&A expenses were up 70 basis points year-over-year at 20.3% of our revenues. As mentioned by Rohit, this increase was driven by our continued investments and expanding capabilities in advanced automation, robotics, product development and onshore delivery development, totaling 70 basis points; the impact of acquisitions, 30 basis points; and FX headwind of 10 basis points, partly offset by operating leverage of 40 basis points.

Adjusted operating margin for the quarter was 14.5%, an increase of 10 basis points year-over-year. This increase was driven by gross margin expansion, partially offset by the impact of acquisitions. Sequentially, adjusted operating margins improved by 140 basis points, driven by improved gross margin.

The tax rate for the quarter was 11.8%. Similar to the first 2 quarters, we had a tax benefit of $3.5 million due to the adoption of the new stock compensation accounting standard, which did not impact our adjusted EPS calculation. Excluding the impact of the discrete item mentioned above, the normalized tax rate for Q3 was 26.4%. Adjusted diluted EPS for the third quarter was $0.68, up 11.5% year-over-year.

Now talking about other financial metrics. Our balance sheet remains strong with $249.4 million of cash and short-term investments. Our net cash position at the end of the quarter was $204.4 million, after $26.8 million of capital expenditure and $29.3 million for share repurchases at an average price of [$50.20] in the first 9 months of the year. We expect capital spending to be between $30 million to $35 million in 2017. Cash flow from operations was $25 million for the third quarter and was $72 million for the first 9 months of the year, up 29% compared to the $56 million for the first 9 months of 2016.

As Rohit mentioned, we have signed an agreement to purchase Health Integrated. It is a tuck-in acquisition that will enhance our capabilities in Healthcare. We expect the transaction to close in the first quarter of 2018 and expect to provide a financial update in our fourth quarter earnings call.

Now moving to our guidance. We are updating our revenue guidance for the year to be in the range of $754 million to $762 million compared to our previous guidance of $748 million, $762 million, owing to the strong results we have generated year-to-date. This revenue guidance represents a growth rate of 10% to 11% year-over-year on a constant currency basis. The main drivers of our revenue growth outlook are expansion of 2016 and 2017 wins and ramps in existing client portfolios in Insurance, Healthcare, Finance and Accounting and continued momentum across our Analytics value chain and the 2016 acquisitions. Our guidance does not factor in any impact from the acquisition of Health Integrated, which is expected to close in the first quarter of 2018. Below the operating line, we expect foreign exchange gain for the year to be between $10 million to $11 million. We expect the tax rate for the year to be between the 23% to 24%, excluding the tax benefit impact due to the adoption of new stock compensation accounting standard.

In terms of Q4, we expect revenue growth to be flattish due to the seasonality in our project-based work in Analytics and Consulting as well as lower volume due to -- owing to fewer working days in the quarter. In addition, we expect increased hiring owing to campus ramp -- owing to ramp-ups in new client wins, additional investments in advanced automation, robotics, onshore delivery centers. Therefore, we expect our adjusted EPS to marginally decline sequentially. Based on these factors, our adjusted diluted EPS guidance for the year is in the range of $2.60 to $2.64, a growth of 12% to 13% year-over-year.

In conclusion, we had a strong 9-month performance. We generated revenue growth of 10.9% year-over-year on a constant currency basis and achieved a 15.1% adjusted EPS growth. We're confident that we can achieve our goals for the year.

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

(Operator Instructions) And our first question comes from the line of Anil Doradla from William Blair.

I got a couple of questions, Rohit. So clearly, you've got a secular trend with Analytics, but you talked about robotics and automation. So could you give us an update on the deflationary aspects of that? How much of the business was impacted by deflationary pressures from the robotics and automation?

So you're absolutely right. I think, for us, Analytics represents a great secular growth opportunity, and we continue to enjoy a leadership position in that segment and continue to build out our capabilities and stay ahead of the curve. In our Operations Management business, robotics and advanced automation certainly has an impact in terms of cannibalizing revenues and acting as a deflationary revenue growth element. At the same time, robotics and advanced automation is also a growth opportunity for us because the percentage of business that is currently outsourced to us still remains at low levels of 20% to 25%. And therefore, we have an opportunity to implement robotics and advanced automation on the portions of the business that our clients manage themselves or have other service providers managing for them. To give you a better sense of the impact on our revenues, today, close to about 28% of our total revenues are derived from Analytics, approximately 17% is from BPaaS solutions that we provide to our clients on our own technology platforms that are already optimized from a technology and an automation perspective. So it's really the balance business, which is susceptible to further automation and the use of robotics. Our estimate is that by the introduction of robotics and advanced automation, we should be able to provide productivity gains to our clients, which, in general, will be in the range of about 20% to 25% over the next 3 years. And that part is applicable to the business that is non-Analytics and non-BPaaS. So I hope that gives you a good sense of what that impact might be.

Definitely. And as a follow-up, Vishal, we've talked about the low double digits, 20, 30, 40 bps of margin expansion. Clearly the trends are proving out some margin expansion, you had some FX tailwinds, too, but can you revisit your margin expansion commentary that you've given in the past, especially in the context of maybe next year and the next couple of years?

Thanks, Anil. As we had outlined at the beginning of the year, that on a constant currency basis, we expect the adjusted operating margin to be in the range of 14% to 14.4%. We are in line to deliver that this year. And we think that as we continue to look at our business expansions, while making investments into the areas which we have highlighted in our prepared remarks, we will still be able to expand our margin on the long-term basis by 20 to 30 basis points.

And our next question comes from the line of Ashwin Shirvaikar from Citi.

I guess, my first question is with regards to the high number of wins this year, including this quarter. And the question I have is, what exactly has changed with regards to -- is it a wider range of offerings? Is it some sort of turn in demand, economy? If you could breakdown, sort of, what you think the reasons are? And do you expect the momentum to sustain?

Sure, Ashwin. So I think the high win rate is certainly driven by the fact that we've got multiple service lines and multiple offerings to make to our clients and our prospects. So today, when we offer them Operations Management, it includes our ability to provide industry-specific Operations Management service offerings, it includes Finance and Accounting services, it includes technology platform-based services, it includes consulting services, and then lastly, we've also got the strong capability of offering Analytical services. So that broadened-out service offering for us seems to be resonating very strongly in the marketplace, and it also allows us to deepen our relationships with our clients. The second thing is the integration of Analytics, consulting, F&A and Operations Management and technology. That creates a very, very powerful offering, and it allows us to deliver much higher business benefits to our clients. So clients are gradually moving towards us as opposed to moving to other providers in terms of these service offerings. And the last piece is, over the last several years, we've now demonstrated to all of our clients a very strong ability to execute and deliver the business benefits to them. And that's helping us in terms of our wins. And finally, we've got a very focused and a dedicated way of thinking about our account management and client management along with our sales teams and targeting specific clients in our core industry verticals, and I think that play seems to be resonating quite nicely as well.

Got it. And I'll ask my second question, but if you could address on the first question, the issue of sustainability of pipeline and wins? But the second question is on Healthcare. As you look at your overall Healthcare business, I mean, there's been, obviously, a lot of ACA-related uncertainty. How much impact you really have from that uncertainty? And if you don't mind including the acquisition just announced because that seems to have some Medicaid and Medicare exposure, which might be affected?

Sure. So let me just quickly address the first part, which was on the sustainability of the wins and the pipeline. Our pipeline remains strong and has actually grown in size over the year. As I mentioned in my prepared remarks, we've now seen several deals enter the pipeline, which are large and significant and allow us to play at a much more global scale. So we think that the opportunity set for us is going to be sustained for a period of time. Obviously, our ability to win will be determined as we go along, but we feel very confident about the opportunity and the pipeline and our ability to execute and deliver to that pipeline. On Healthcare, actually ACA or any of the other changes that might be proposed, all of them, regardless of whether it were health care changes proposed by the previous administration or the new administration, everything is designed towards providing better health care at a lower cost. And that's exactly what we do in terms of helping our clients achieve. For us, Healthcare is a hugely important industry vertical. That's the reason why we made an acquisition in the Healthcare space. We've expanded our opportunity set in Healthcare by being able to do work onshore as well as do work for government-sponsored medical plans. And our ability to leverage Analytics and Operations Management with clinical resources is what creates the differentiation in Healthcare. So we're very excited by that opportunity set for us.

Got it. And if I could squeak one last one in. Any impact from hurricanes? Any higher volumes that -- in your work?

So certainly, the hurricanes and the weather patterns had an impact on our clients' businesses. As you're all aware, we get about 42% of our business from insurance carriers. There was a volume increase associated with these natural disasters that took place, but it wasn't anything material that shows up in our financial numbers. So we did see some pockets of increase, but nothing, which is material in our numbers.

And our next question comes from the line of Frank Atkins from SunTrust.

Wanted to ask first about the new delivery centers in Richmond and Kansas City. Could you just give us an update about where you are in the larger context in terms of the global delivery model? And where you are delivering services from? And how that's impacting revenue and margins and shifts in the mix on that front?

Sure, Frank. So as we've stated previously, our global ambitions are to have service delivery centers across the globe, including onshore delivery centers. We already had a few onshore delivery centers, and we've added on to that capability by opening new centers in Richmond and in Kansas City. What this does for us is, it allows us to provide services that we could have targeted on an end-to-end basis. So it allows us to complete the loop in terms of providing these services to our clients. From a margin standpoint, certainly the gross margin percentage is going to be lower for our centers which are onshore, but in terms of absolute dollar profit per employee that we can make, we hope to be able to have an increase in our absolute dollar per employee metric on a go-forward basis. So for us, these remain attractive opportunities.

Okay, great. That's helpful. And then wanted to ask specifically around the Travel and Transportation vertical. Some strong gross margins there this quarter. How sustainable is that going forward? And were there any onetime issues?

Yes, I think the Travel, Transportation and Logistics business is a very good and strong vertical for us. I think that's a onetime increase in margins that took place. We do have a number of contracts in that vertical, which are on a transaction-based pricing model and an outcome-based pricing model. So I wouldn't read too much into a quarterly blip in margins in that vertical. I think we would expect to have normalized margins in that vertical on a go-forward basis.

And our next question comes from the line of Bryan Bergin from Cowen.

I want to talk about the pipeline. You mentioned the deal sizes have expanded significantly or, at least, the deal potential over the next 12 months. Can you just give us a sense of the size of this increase that you're seeing across the potential deals?

Sure, Bryan. I think one of the reasons for the increase in size is because of our clients wanting to digitally transform themselves as they think about passing on work to providers like EXL. And I think in the past, the thinking was that they would outsource a piece of work and they would retain the majority of work onshore and manage it themselves. When it comes to effecting digital transformation and business model transformation, clients are quickly figuring out that it is better for them to transition entire blocks of business and pieces of business. And that's what they're entrusting us to do. So we are seeing some significantly larger size deals entering the pipeline. These are clearly a lot bigger in size. So these are -- in general, they could be anywhere between 2x to 5x the size of the deals that we might have seen previously. And it involves a fair amount of productivity benefits to be delivered through digital transformation. So we're excited about that opportunity, and we think that that's a great trend for us to capitalize on.

And then just on the automation -- the implementation mix. Can you just talk about how much of the mix is utilizing your own proprietary solutions versus third-party vendors? And then just a sense on how the profitability compares across those different engagements for the cannibalization levels?

Okay. Bryan, I think, for us, the advanced automation and robotics implementation of our partners' bots and our own proprietary bots, that's in the early stages of its evolution. And any metric that I give you from the initial engagements may not be representative of the longer term deployment of these bots. So I think, it's something which, over a long period of time, I think we would expect this to be a sort of an equal mix to take place. But we will see how these play out and specifically in the industry verticals, which are core industry verticals for us, that's how I think it will pan out. In terms of profitability and the level of cannibalization, certainly, in terms of the profitability metric, it's driven largely by the amount of productivity benefit that we commit and then what we can drive for the client. These are engagements where we commit to the benefit being provided. So it's on an outcome-based pricing model as well as in terms of a transaction-based pricing model that we are deploying these initiatives. So we'll see as we go along as to how the profitability of this emerges. From our internal business models, the profitability on this line of service should be about the same as the company average for us. And the piece on the cannibalization, I'd already mentioned earlier when I'd responded to Anil's comment that we think that this can result in about a 20% to 25% productivity benefit on the legacy business.

Okay, that's fair. If I could just squeeze one last one in. The gross margin on the Analytics business a little bit lighter than our model this quarter. Anything to call out there?

Yes, Bryan. So the gross margin in Analytics business was down this quarter from year-over-year. And there were 3 reasons for that: One is that, as we have grown and expanded our acquisitions revenues, the margin has, as we had mentioned when we did this acquisition, that the -- these acquisitions are at a lower margin versus our Analytic Services business. So that has impacted it by 310 basis points. Typically, in Q3, we hire a large number of college graduates in India and that has -- and this year that number was at about 450 plus. So that had an impact of about 180 basis points, as we hired those people and the utilization rates went down. And then FX had an impact of 50 basis points. Going forward, we think that as we integrate and look at higher revenue scale of the combined business with the acquisitions and as we utilize our new hires, that we will be able to bring back the margin profile of the Analytics business.

And our next question comes from the line of Puneet Jain from JPMorgan.

To follow-up on prior question on bots, can you talk about how your proprietary bots are different from what RPA vendors offer? Like, are your bots more customized for a specific client or vertical-based processes and theirs is applicable to more generic processes like F&A?

Thanks, Puneet. Certainly for us, the proprietary bots that we've got, these are industry specific as well as process specific. So for example, we have a bot for an underwriting engine, we have a bot for claims engine, we have a bot for FNOL, which is first notice of loss. So these are specific industry processes in Insurance, in Healthcare, in TT&L, where we've got a customized capability of providing these bots and making these applicable to multiple carriers in that industry vertical. We think the process-specific bots deliver greater impact and greater value, as well as the fact that you can combine analytics with our proprietary bots in a lot easier way than you can with traditional horizontal or functional bots that exist in the marketplace. So that's something which we think is a great source of differentiation as well as a great way for us to add value to our client relationships, and we're seeing that resonate in the marketplace.

Got it. And 2 quick housekeeping questions. Was there any license sale component in the Healthcare vertical? You won like a CareRadius contract in the quarter. And then second, number of seats declined in the quarter, which is a little unusual. Can you talk about what drove that?

So we -- Puneet, in this quarter, we didn't have any license sale, both in Insurance or in -- and we had one in Healthcare.

How big was that?

That was a small amount. I think -- sorry, it was in Insurance, not in Healthcare.

Puneet, in Healthcare, there wasn't any license sale that was there in the third quarter. We did have a license sale in the Insurance business, which is our LifePRO business as such.

Got it. And number of seats declined in the quarter per our model, it seems like. What was the reason for that?

I think the workstation may be because of, as we've expanded in different geographies, we may have consolidated some facilities in some of the geographies.

And our next question comes from the line of Joseph Foresi from Cantor Fitzgerald.

This is Mike Reid for Joseph Foresi. I was wondering if you could give us some progress on the Consulting business. And if you think you've turned the corner and it's improving there?

Sure, Mike. So for us the Consulting business is still work in progress, and it's something, which we are very sharply focused on in terms of bringing that into a growth curve and helping us build our business out there. We've got several initiatives that are showing good traction with new engagements around digital redesign work, automation and robotics, and we've also started to do some work around new regulatory requirements, such as GDPR. Consulting is a huge priority for us, and that's something which we are acutely focused on. However, the revenue in the Consulting business in Q3 was marginally lower than Q2, and, obviously, on a year-on-year basis, there was a decline in the Consulting business. We think this business is on the mend and we will continue to work in terms of improving our business performance out here. If you exclude Consulting from our Operations Management business, our Operations Management revenues would have grown 8.5% year-on-year.

Okay, great. And then you called out you've had a couple of projects in FinTech and probably some more coming up. Could you tell us if there is anything that is new to those projects that you haven't been going before? Or would it be stuff that you've already been doing for a while?

Yes, Mike, I think, there is a lot of synergy between the work that we do currently around the risk management and around customer acquisition and loyalty models that we've build that we can leverage with these newer startups in FinTech. But there are also some new areas that we get into as we try and build out some of the new service offerings for these FinTech companies. So for us, it's a great way to leverage our existing capabilities and franchise and take that to the cutting edge and, at the same time, for us to learn and develop some new capabilities, as we create this relationship with the FinTech firms. The FinTech firms, as you know, leverage an entirely digital channel. And, therefore, most of the work that we do with them creates a strong digital capability for us.

And our next question comes from the line of Vincent Colicchio from Barrington Research.

Yes, Rohit, most of mine were asked. Just maybe if you can give us an update in terms your top 2 or 3 acquisition priorities going forward?

Sure. So for us, M&A is a huge priority, as you all know, and it's a part of our core growth strategy. I think for us, we continue to remain focused on acquiring some digital assets, and that's something which will help us build up our capabilities around digital transformation. We continue to remain focused of investing deeper into our core industry verticals of Insurance, Healthcare and Banking and Financial Services, and that's something, which is important for us. And we are also focused on trying to diversify out geographically, and we'd look at doing acquisitions in the U.K. and expanding our footprint out there. So those would be important areas for us to focus in on. Analytics continues to remain a great place for us to add on to capability, and that's another area that we will look at.

And our next question comes from the line of David Koning from Baird.

And I guess, first of all, as we think of the core Operations business, it's such a steady and good business over time. And lately, it's been growing -- that part of the business has been growing in the mid-single digits at a very stable pace. With some of the new wins, is this something that as we look forward the next couple of quarters and into next year, that you do expect to kind of drift into the organic growth range in the higher single or even double digits? Just -- I know your new wins have been pretty good.

Thanks, David. We really like the Operations Management business. And it's a steady, stable, annuity-based business that can continue to grow and provide a strong support to the organization. For us, think about it, a couple of years back, when robotics and advanced automation was introduced, at that point of time, it seemed like that could be more of a threat than an opportunity. And today, the way we've positioned the company and the capability that we've acquired and the kind of work that we do with our clients, we've actually converted that into much more of an opportunity than a threat. And therefore, that's something which gives us greater confidence of being able to drive this business at a nice growth rate. Also the service offerings that we have within Operations Management, those continue to expand. And therefore, we feel we are well positioned to drive revenue growth in 2018 as far as this is concerned.

Okay, great. And then -- I don't -- I can't remember if I heard you say this before, but the acquisition that you just made -- that's coming up soon, is that going to be in Operations or Analytics?

The acquisition is going to be in Operations, because it basically does care management onshore in the U.S., based out of Florida and will be part of the Operations Management...

Healthcare vertical.

Healthcare vertical.

Okay, great. And then just my last one. You spent a lot of time on margins and like some of the headwinds in Analytics and stuff. But your overall margin -- gross margin was up year-over-year for the first time in maybe 7 quarters or so. And is that sustainable now that gross margins can continue to be up year-over-year over the next several quarters?

So David, this is Vishal. I think 35% gross margin is a good result. But there are several pieces which drive our gross margin. But bear in mind that we are also investing in growth accounts and new account wins and typically when these wins are ramping up, the margins of those accounts are typically lower versus what our corporate average is. So while I think we have hit a good sweet point in Q3, as we look forward, we may be able to maintain the margins between that 34% to 35% range and gradually improve it towards -- as we scale up our business.

And our next question comes from the line of David Grossman from Stifel Financial.

I was just wondering if I could just follow up the margin question. First is, I didn't catch all of the foreign currency impacts by segment. Vishal, can you just repeat what the FX impact was on margins both sequentially and year-over-year?

Sure. So gross margin for the quarter increased 40 basis points. And the impact of FX was about 20 basis points on the year-over-year. And gross margins improved 150 basis points sequentially and the FX tailwind was about 20 basis points.

So 20 basis points both year-over-year and sequentially?

Yes.

Great. And you talked about margins sequentially. I assume they had some headwinds. I think you talked about ramping new contracts and new hires. Is there anything else in there that's impacting the margin sequentially in the fourth quarter?

Look, I think, in Q3, we had a license sale which typically also has a higher margin profile and that impacts and improved the margins in Q3. And in Q4, we are not expecting any license sale.

Okay. And how much of the sequential decline is ramp of new contract?

I think, as we look at our Q4 numbers, David, some of this will also be a factor of the mix of the business. So Analytics business margins will improve. But as we are investing in ramping up of and hiring more people, and you would have seen that in this quarter, at the end of the quarter, we had added about 1,000 people, those are ramping up for new clients, will impact our margins in the Operations Management business.

Okay, got it. And when do we anniversary the acquisition-related headwinds in Analytics?

The anniversary will happen in Q4 for Datasource and IQR. IQR is already anniversaried, but that was a smaller acquisition.

Okay, got it. And, I guess, just a bigger picture question on margins. And maybe, Rohit, if you could respond to this is that, one of the challenges in this industry, as you know, is kind of the cost of transitioning processes over to your platform at the front end of an engagement. Is there anything changing in the industry, whether it be contract structure or even the use of automation that can help alleviate some of that pressure at the front end of an engagement?

No, David. I think that's a real cost of doing the conversion and pretty much we have to work with our clients to help them get over that hurdle. And that's something where typically both we, as a service provider and our clients have to take the hit for that conversion. And that's a big piece. And it is an up-front hit that gets taken. And over a period of time, that should certainly provide much more benefit, but nothing we can do on the way in which that cycle works.

Okay. And just, lastly, I think this came up in a previous question about the Consulting business, and I think you said Operations Management, 8% to 9% growth, excluding Consulting. Do you have any visibility on when Consulting stops, as I heard, is no longer, at least, a headwind to growth?

Yes. So David, I think, look, the Consulting business for us, like I said, was marginally down quarter-on-quarter. It's not something which we expect that, that will provide a headwind for us on a go-forward basis. It's something -- we think we've got new service offerings out there. We've got a new team out there in our Consulting business. Some of the work that's there in the pipeline pertains directly to our consulting engagements. And these engagements are broadening out and becoming longer-cycle engagements as well as more enterprise-wide engagements. So we are quite confident of being able to turn the tide around our Consulting business. Keep in mind also that today the Consulting business is only a small fraction of our total revenue. So it's not such a big segment at current size and scale.

(Operator Instructions) And our next question comes from the line of Edward Caso from Wells Fargo.

It's Justin Donati on for Ed. Just one quick question for me. Saw that DSO ticked up to around 63 days, running a few days higher than normal. Was there anything abnormal in the quarter? Is that expected to come back down here over the next 1 or 2 quarters?

Ed (sic) [Justin], this is Vishal. I think the DSOs ticked up because the last day of the working day of the month was a weekend, and some of that increase in our DSO was driven by that fact. We do expect that by the end of the year, the DSOs will be on our normal scale of 59 to 60 days.

And I'm showing no further questions over the phone lines at this time. I would like to turn the call back over to Rohit for closing remarks.

Thanks, operator, and thank you, everyone, for joining today's call. We at EXL remain excited about our growth opportunities and the way EXL is positioned and look forward to a strong fourth quarter for a great performance in 2017. We'll talk to you after -- when we get together for our fourth quarter earnings call in the beginning of next year. Thank you all for joining.

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