Exlservice Holdings Inc (EXLS) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 ExlService Holdings, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Steve Barlow, Vice President, Investor Relations. Please go ahead.

Thank you, Crystal. Hello, and thanks to everyone for joining EXL's Fourth Quarter and Full Year 2017 Financial Results Conference Call. I'm Steve Barlow. 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 the 2 press releases we issued this morning, our quarterly earnings release and 2017 full year, and our release related to our investment in Corridor Platforms. We have also updated our Investor Fact Sheet in the Investor Relations section of EXL's website.

As you know, some of the matters we'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 discussing the company's periodic reports and other documents filed with the SEC. 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. Reconciliations of those measures to GAAP can be found in our press release as well as on the Investor Fact Sheet.

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

Thank you, Steve. Good morning, everyone, and welcome to our 2017 year-end earnings call. I'm pleased with our full year results. We generated revenues of $762.3 million and an adjusted EPS of $2.65, both of which were above the high end of our guidance. These numbers represent year-on-year revenue growth of 11.1% on a reported basis, and a 13.7% increase in our adjusted EPS. Our growth in 2017 was broad-based across our core domains. Our Analytics business had another outstanding year, growing 26.7% to $210 million in revenues. Operations Management revenue growth accelerated from 2016 to 6.2%. For the year, we won 42 new clients, 20 in Operations Management and 22 in Analytics.

Today, I will focus primarily on 2 areas, the opportunities we see from our acquisition of Health Integrated and the great strides that we made in 2017 towards becoming a strategic digital transformation partner for our clients. In terms of the acquisition, Health Integrated provides multichronic care management, special needs programs, utilization management and other clinical services to several million Medicare and Medicaid members.

We're excited about the potential of this acquisition for several reasons. First, Health Integrated serves an important and growing market. Second, it has a unique differentiated capability with proprietary IP. Third, based in Tampa, Florida, Health Integrated gives us a talented clinical workforce in the U.S. And fourth, it provides opportunities for us to expand our digital CareRadius platform.

Health Integrated focuses on the Medicare, Medicaid and dual eligible populations, which are important and growing markets for health plans. Medicare membership is expected to nearly double by 2030. More than 68 million people were enrolled in Medicaid last year and more than 11 million people were enrolled in both programs according to government health data. Health Integrated uses proprietary methods to improve the health status of multichronic and special needs populations by focusing on behavioral change and effective member engagement.

Approaching the challenge through our behavioral health lens, improved health outcomes and generate a very significant ROI for health plans. The talent at Health Integrated will serve as the foundation for our U.S.-based clinical delivery, which will become increasingly important as we pursue end-to-end clinical work. We recently won a clinical operations engagement where our delivery capability from Tampa was a deciding factor. Finally, Health Integrated presents a great opportunity to expand our reach of our digital CareRadius platform. We plan to replace multiple care management systems across Health Integrated's client engagements with CareRadius, a move that will enhance the clinical and analytics capabilities delivered to clients as well as eliminate the needs to maintain multiple systems.

We knew prior to making this acquisition that Health Integrated was in the middle of client transitions and that the business required investment. We will bring in the same level of operations excellence, process rigor, technology upgrades and analytics leadership that we have across the rest of our organization and we will turn this business around. While it will take us a few quarters to achieve revenue and cost synergies from this acquisition, we are excited about how the proprietary capabilities of Health Integrated align to the needs of health plans today and in the future.

Next, I would like to discuss our progress on one of the most significant trends we see across all our client industries, digital transformation. Our clients see digital as a way to enhance customer experience, reconfigure cost structures and redefine business models. While these are clear opportunities, many companies struggle to generate business value from transformation efforts. We believe this is because companies are primarily focused on technology. In order to succeed in digital, companies must present contextual interactions to customers to deliver superior business outcomes using the combination of data and deep domain knowledge. In 2017, EXL made a strong pivot towards enhancing its digital transformation capabilities. This includes progress across advanced analytics, growth in our automation and robotics practice and the launch of new digital products.

The cornerstone of digital transformation is Analytics. We continue to grow our Analytics business and bolster our leadership position in Analytics, which now represents 28% of EXL's total revenues. In Analytics, we are supporting clients in new geographies and are increasingly helping our clients grow their top line revenue. Within banking, we continued to grow within our largest global banking clients by expanding outside the U.S. and U.K. markets. To support them, we have set up teams in Mexico, South Africa and Colombia. We have also developed digital marketing capabilities and customer experience products to help our clients acquire new customers and expand wallet share. We have expanded our client profiles within the FinTech space, super-regional banks and health care, where payers have embraced our customer acquisition solutions to increase their membership. To support this growth, we continue to add to our deep roster of 3,000 data scientists and analysts.

Next, our advanced automation and robotics practice has been tremendously successful within both new and existing clients. Last year, we won 11 stand-alone advanced automation and robotics engagements. One example of this type of work includes our efforts to help the finance function of a large insurance company to establish a robotics center of excellence. The client wanted to leverage automation to accelerate processing, reduce errors, improve auditing and boost employee performance by eliminating manual and redundant tasks. At the same time, they wanted to create a program management office to scale automation across the enterprise with consistent design, governance and development approaches. EXL competed for this business against large, well-known competitors but ultimately won the engagement due to our combined strength in the finance and insurance domains and our ability to apply advanced automation to deliver business outcomes.

We have also further integrated advanced automation and robotics into roughly 25% of our existing clients. And I'm excited to share that nearly half of all the bots that we today implement are EXL proprietary bots. This has a tremendous impact on the types of engagements we are winning in the market. One example includes a deal with a longtime utilities client to improve customer interactions across multiple functions, including billing, payments and collections. The client had an agreement with a leading automation software vendor, but transferred ownership of the end-to-end processes to EXL. We have now configured and deployed more than 100 bots and expect to double that over the term of the agreement.

We have also invested in 3 digital products that we expect to be growth engines for EXL. I've spoken about our digital customer acquisition engine in previous earnings calls. This product supports client revenue growth by integrating our proprietary customer database, customer-targeting analytics, digital engagement channels and licensed agents from our Richmond center. As announced in today's press release, we have also invested in a start-up, Corridor Platforms, to launch a digital credit risk management platform that enables banks and financial services companies to create credit strategies, enable real-time credit decisions, evaluate performance and recalibrate analytical models in a fully automated manner for managing investments in digital lending.

You have also heard me speak in the past about our proprietary deep learning-based information extraction engine, which collates unstructured data from complex documents. When coupled with our domain expertise, this product is applicable across multiple industries, including most recently in the health care space supporting clinical data abstracts. Finally, we have created a digital organization within EXL that reaches across the entire enterprise and reports directly to me. Organizational structures today cannot afford to be rigid, and our own approach to organizational design is based on agile delivery and collaboration. The new digital organization consists of our digital labs, our digital solutions center and our business unit digital needs who will work as one team with an agile cadence and an ambitious agenda.

You can see how this all comes together, and a great way to showcase that is the digital maturity of our insurance vertical. At the front end of insurance, we can enable digital customer journeys through our digital insurance agency and acquisition engine. We are also transforming policy administration and other processes through technology-led BPaaS solutions. We have embarked on an initiative to modernize our LifePRO policy administration platform and we successfully launched our first end-to-end third party administrative engagement in the variable annuity space.

Within our audit and survey BPaaS businesses, we have added a crowd sourcing capability and are using other digital technologies to lower the cost of premium audit and property surveys. Services we perform on these platforms also generate data that we can leverage elsewhere to improve insurance operations. We are able to support customer outcomes by increasing the quality and speed of business processes through our advanced automation and robotics capabilities. Finally, we continue to better help clients manage risk, grow revenues and personalize customer interactions through advanced analytics. Our digital capabilities in our insurance vertical are some of the most advanced examples of an integrated digital strategy in the industry.

I will end with a few comments on our demand environment. We continue to have a solid pipeline from existing clients and new prospects in both Operations Management and Analytics. As I mentioned last quarter, we have seen more large deals in the market than in previous years. Last year, we won new deals within strategic accounts against larger competitors by communicating a strong value proposition of domain expertise, analytics leadership and transformative digital solutions.

In closing, the success of EXL is due to the dedication of our more than 27,000 global employees. We continue to successfully navigate changes in our market and position ourselves to lead in this new environment. We remain committed to helping our clients grow their top and bottom lines, and I look forward to 2018 being another successful year for EXL.

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

Thank you, Rohit, and thanks, everyone, for joining us this morning. I would like to start by providing insight into our financial performance for the fourth quarter and full year 2017 followed by guidance for 2018.

We had a strong quarter with revenues of $197.9 million, up 11.6% year-over-year or 10.6% on a constant currency basis. Sequentially, we grew 2.9% on a reported and constant currency basis. For the quarter, revenues for our Operations Management business, as defined by 5 reportable segments excluding Analytics, grew 8% year-over-year or 6.9% on a constant currency basis. This is the fifth consecutive quarter of accelerating revenue growth in Operations Management year-on-year and was the highest growth rate since the third quarter of 2015. This growth was primarily driven by clients from our insurance, finance and accounting, health care reporting segments.

Insurance grew 11.7% on a year-over-year basis. This growth was driven by ramp-up of 2016 and '17 wins, expansion in existing clients and FX tailwinds. For the first time in past 2 years, finance and accounting recorded double-digit growth of 11.6% on a year-over-year basis. This growth was driven by ramp-up of large deals we won in 2016 and '17 and FX tailwinds.

Health care grew 7.5% on a year-over-year basis, driven by existing client expansions; Health Integrated, which contributed $700,000 for the quarter. All other segments declined by 2.5% on a year-over-year basis. However, consulting is now turning around, with revenues growing double-digit on a year-over-year basis. Sequentially, Operations Management grew 2.7% on a constant currency basis, due to expansion in existing clients in health care, finance and accounting, consulting and the impact of Health Integrated acquisition. Analytics continued its strong performance with revenues of $55.6 million, up 22.2% year-over-year, or 21.6% on a constant currency basis. This growth was driven by [DFS], health care and Datasource, and -- which contributed $5.3 million for the quarter. Analytics constituted 28% of our revenues. Sequentially, Analytics grew 3.5%, both on reporting and constant currency basis.

As I begin to talk about our expenses, I want to explain the implementation of an accounting change. We have early adopted ASU 2017-12 in Q4 2017, pursuant to which we have changed the way we report foreign exchange gains or losses. Any foreign exchange gains or losses related to our cash flow hedges are now included in their respective cost of revenues and operating expense line. This methodology will minimize our volatility related to foreign exchange movement impacting expenses and margins. Our gross margins and operating margin for prior quarters of 2017 have been revised to reflect this change and will be disclosed in our 10-K. We have updated our Fact Sheet to show -- provide financials for Q4 2016, full year 2016 and the first 3 quarters of 2017.

My comments here after expenses and margin will be based on the new methodology. We will continue to report net foreign exchange gains or loss below the operating income line that reflects our balance sheet hedging gains or losses. More importantly, our foreign exchange hedging strategy has not changed as we intend to be EPS neutral with our hedging program.

Now moving on to the expenses. SG&A increased by 20 basis points year-over-year to 21.4% of revenue driven by increased investment in digital technology, robotics platforms and marketing. Adjusted operating margin for the quarter was 13.1%, a decrease of 30 basis points year-over-year. This decrease was due to investments in ramp-up of large deals; higher onshore mix and lower utilization due to seasonality, impact about 40 basis points; and increased SG&A expansion as mentioned earlier, impact 20 basis points, partially offset of operating leverage of 30 basis points. Adjusted diluted EPS for the fourth quarter was $0.67, up 9.8% year-over-year. Our GAAP diluted EPS was a loss of $0.27 due to a $29.2 million or $0.83 per share charge due to a onetime transition tax on deemed repatriation of earnings of foreign subsidiaries and remeasurement of deferred tax balances necessitated by the enactment of the 2017 U.S. Tax Cuts and Jobs Act.

Now turning to our 2017 annual performance. We delivered revenues of $762.3 million, a growth of 11.1% year-over-year, and 10.8% on a constant currency basis. This growth was driven by new strategic client wins, expansion of existing client relationships across verticals and inorganic growth. Our revenue per employee continues to improve year-over-year, up 3.5% to approximately $28,300. Our Operations Management business accelerated growth to 6.2% on a reported basis, from 22.7% in 2016, driven by growth in insurance, health care and finance and accounting businesses. The LISS and Health Integrated acquisitions contributed $5.1 million and $700,000 for the year, respectively. Analytics grew 26.7% on a reported basis. Our IQR and Datasource acquisitions contributed $25.3 million for the year.

SG&A expenses increased by 20 basis points year-over-year to 20.5% of revenues due to our continued investment in digital technology, robotics and platforms, impact of 40 basis points; and the acquisitions impact of 20 basis points, partly offset by operating leverage of 40 basis points. Adjusted operating margins remained flat for the year at 14.3% of revenues, driven by dilutive gross margin impact of acquisitions, 30 basis points; increased SG&A spend, as mentioned earlier, 20 basis points; partially offset by operating efficiencies of 50 basis points. Our adjusted EBIT tracked our revenue growth and was $109.2 million compared to $98.3 million in 2016, up 11.1% year-over-year.

Our GAAP tax rate for the year was 42.5%. Excluding the benefit of $9.8 million due to adoption of new stock compensation accounting standard, $4.4 million of onetime benefit for certain discrete items booked in 2017, and the dilutive impact of the implementation of the U.S. transition tax of $29.2 million as stated earlier, our normalized tax rate for the year was 25%. Our adjusted diluted EPS was $2.65, up from $2.33 in 2016, a growth of 13.7% on a year-over-year basis.

Now looking at the other financial metrics. Our DSO was 60 days, an improvement of 2 days from Q3 despite the last 2 days of 2017 falling on a weekend. Our balance sheet remained strong, with $265 million of cash and short-term investments, compared to $227 million in 2016. Our net cash position at the year-end was $205 million after 35 point million -- after spending $35.1 million on capital expenditures to expand our digital capabilities, robotics, platforms and investment in technology and infrastructure to support our growth. In addition, we spent $26.3 million in business acquisitions and minority investments, $40 million for share repurchases at an average price of $52.80 and additional borrowing of $15 million. Our total debt as of 31st December was $60 million. With current undrawn debt commitments of $140 million and existing cash balances, we have ample capacity to execute our M&A and capital allocation plans.

Now moving to our guidance for 2018. We are providing revenue guidance of $830 million to $855 million, based on rupee-dollar exchange rate of INR 64.50, and other currencies at current exchange rates. This guidance represents growth of 9% to 12% on a constant currency basis. It takes into consideration the adoption of new revenue recognition standard, ASC 606, which will not have a material impact on our revenues.

The main drivers of our revenue growth outlook are wrap up from 2016 and 2017 when: expansion in existing client portfolios in insurance, health care, finance and accounting in Operations Management; and continued double-digit growth in Analytics. We also expect Health Integrated to contribute revenues in the range of $20 million to $22 million. As Rohit mentioned, we anticipate that volumes for the year will decline after client transition in the first quarter. We estimate revenues to be approximately $67 million for Q1. To capitalize on this potential, we will invest in operations and technology in Health Integrated acquisition and, as such, we shall -- we'll have a dilutive impact of $0.05 to $0.07 for the year on our adjusted EPS.

We expect Health Integrated to be accretive in 2019. We expect our adjusted operating margin to improve by 40 to 60 basis points in 2018, driven by improved cost structures, operating and SG&A leverage, while we continue to invest in business growth and next-generation digital technology, robotics, platforms and Health Integrated. Below the operating line, we expect foreign exchange gains to be between $2 million to $2.5 million.

Now I would like to comment briefly on our tax rate for 2018. As you know, tax rate is determined by a combination of factors like our geographic mix of earnings and related income tax rate in the jurisdictions we operate. We expect our normalized tax rate for 2018 to be approximately 29% to 31%, up from 25% in 2017. This increase in normalized tax rate is driven by increased profit in high tax jurisdictions, expiration of or reduction of tax incentives for some of our units and the net impact of various provisions of the U.S. Tax Cuts and Jobs Act. Our priorities for free cash flow in 2018 will be to look for acquisitions that expand our capabilities and geographic reach and invest in our operations with capital expenditure in the range of $35 million to $40 million. We also intend to repurchase up to 40 million in our shares.

Based on these factors, we are providing adjusted diluted EPS guidance of $2.70 to $2.80. However, on a normalized basis, excluding the impact of onetime discrete tax benefits and dilutive impact of Health Integrated, as mentioned earlier, our core adjusted diluted EPS is expected to grow between 10% to 13%. We expect first quarter revenues to increase sequentially on a constant currency basis and adjusted diluted EPS is expected to marginally decline due to the dilutive impact of Health Integrated. In conclusion, we had a strong 2017. We generated revenue growth of 11.1% year-over-year on a reported basis and achieved 13.7% adjusted diluted EPS growth. We are confident that we can achieve our financial goal for 2018.

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

(Operator Instructions) Our first question comes from Ashwin Shirvaikar from Citi.

I guess my first question is can you comment on the pipeline? You noted the presence of -- sort of the continued presence of large deals. But can you also comment on the pace of decision-making and the revenue conversion and if there's a greater urgency given the higher incidence of digital?

Sure, Ashwin. So we continue to see a very favorable demand environment with larger deals coming into the pipeline. The decision-making is deliberate. And the sales cycles continued to be the same that we've witnessed previously. Because the deals are larger in size, more complex, involved a greater amount of end-to-end interventions, utilizing digital technologies, analytics and other ways of making improvements to the operating processes, I think the implementation time of these deals is going to be a little bit more significant. The urgency on the part of clients to implement these changes is definitely much stronger than previously because they are not only trying to reduce the cost structure, but they are also trying to impact customer experience and remain competitive in the marketplace. I think with the tax act that has been enacted and the increase in profitability of most of our clients in the U.S., their ability to spend money on digital transformation is also likely to increase. And therefore, we see the demand environment to be very favorable.

Right. And on that last point, is that based on actual conversations that you've had, where clients have basically said, we now have more money to spend so we will spend it? Or is that basically -- you hope that, that will happen? And the add-on question to that is, you mentioned U.S. delivery was a deciding factor in a recent deal. That was specific to health care. And I wanted to just kind of confirm, is that becoming a more common occurrence?

Sure, I'll address both of your questions. I think with regard to our clients' propensity to spend on digital transformation, we have seen that in multiple ways in which that has been signaled to us. Number one, many of our clients have reported their earnings and they have very clearly articulated that they will be investing increased amounts in digital and in analytics. And therefore, we see that as a very strong signal that that's likely to increase. In the conversations that we are having with our clients, that's coming through. And they're looking at making these changes in a fairly quick and turnaround manner, so I think that, that pretty much stands out to us. The second part of your question, pertaining to onshore delivery, because we have decided to service clients in health care on the Medicare and Medicaid side and the dual eligible populations, onshore work is a critical component of that. Also, we find many clients prefer to have end-to-end solution and, therefore, they do require a piece of work to be performed onshore and the balance work can be performed offshore. And those companies that have got strong credentials of providing integrated global services, I think, are the ones which are going to succeed. And for us, we have been positioning ourselves to take advantage of that opportunity in the last year. And today, we have a very well-developed onshore delivery capability, not only in health care, but also in insurance as well as in some of our other industry verticals, including finance and accounting.

Our next question comes from Edward Caso from Wells Fargo Securities.

Lot of talk about investments in intellectual property, basically software. How much of your work now is linked into these investments you've made over the years? And how much of your work is sort of pure consulting or pure outsourcing that's not tied into the IP?

That's a great question, Ed. I do think that the balance has shifted quite significantly over the last 12 to 18 months. And we are consciously making greater investments in developing proprietary IP or acquiring proprietary IP. And for us, this also includes creating a capability of proprietary data assets. And therefore, it's the technology and the know-how, along with the data assets that's becoming a critical component. Since much of the work that we have now started to do is on an outcome-based pricing model, where EXL takes the risks associated with the input cost and the creation of that IP, we are being able to develop a fair amount of proprietary IP. I think I shared with you all on the call that we have created our proprietary bots for ourselves, and these are very domain-specific bots that can be applied across multiple industries and within industry verticals. We've developed proprietary capabilities within the analytics function. And then we are acquiring capabilities in health care where we've got IP pertaining to behavioral change, and that's something which we find of interest. So there is a shift taking place towards creating more proprietary IP. And we have been filing for patents as well to be able to protect that IP that we are creating for ourselves.

My other question is around Robotics Process Automation. We were at a conference last week, and the message was clear that it's -- that the adoption is accelerating but that it's really hard to scale RPA. And I was wondering how your efforts are going as far as the size of your RPA endeavors. And in addition to that, how are you deploying RPA internally to improve your margins?

Sure. So I think our viewpoint is that RPA is going to be a very important strategic lever to provide productivity improvements to clients and for us to be able to improve our own profitability on client operations. I think the scaling up of RPA is certainly a big issue, particularly when it comes to fragmented, complex processes, where it's difficult to implement RPA in a large size and a large scale, and it requires a deep expertise of not only understanding the robotic automation technology, but also understanding the practical aspects of how to apply that into a business operation and, therefore, you need to have deep domain knowledge in order to implement that and create the effectiveness of the implementation of RPA. We are seeing many of our clients partner with us and choose us because of our ability to straddle the technology part and the domain part and therefore, create a program management office or a center of excellence. And they're finding us to be the right trusted partner to not only implement the change, but also maintain the change on an ongoing basis through the creation of a program office or a center of excellence. And at the same time, because we can bring in proprietary bots in addition to third party bots, that gives a much wider array of capabilities to our clients. And we're finding that to be a very attractive value proposition for our clients. So I think in short, the opportunity in RPA is tremendous. But it will get implemented in a slow, gradual manner. I think the change has to be managed very carefully. And there are many pitfalls to bad implementations of RPA, and we are making sure that our clients don't experience that.

And our next question comes from Joseph Foresi from Cantor Fitzgerald.

Can you break down your growth expectations by segment for 2018? And then maybe give us some margin color as well, I mean Analytics versus Ops?

Joe, as I said in my remarks, we do expect accelerated growth in Operations Management and double-digit growth in Analytics. And on that basis, we have given our guidance of 9% to 12% growth rate. On your next question on margin, as I said that we expect the margins -- adjusted operating margins to improve by 40 to 60 basis points, that is after taking into account the negative impact of Health Integrated on our margins of about 40 basis points. So on the core, we are increasing our margin by 80 to 100 basis points. That is driven by our -- several factors: one is that our margins on onshore business, which we have won and implemented in the last 2 years, we expect that to have a better improving profile and that should have an impact of about [15] basis points. Our large deals which we have won, which we were implementing in '16 and '17 are ramping up to a more mature stage. And typically, that improves the margin profile. And also the geography investments we have made, those are going to improve some of the margin profile. That has an impact about 30 basis points. And then increase the margin in Analytics, which is driven by higher transaction-based pricing and improved realization, will have an impact of about 30 basis points. And as Rohit was mentioning and as we have shown in the year, we are delivering operating leverage in SG&A, driven by scale, operating efficiency, implementation of robotics, and that has a benefit of about 30 basis points. So overall, that will give us at the midpoint of our guidance improved margin profile of about 90 basis points. And the Health Integrated will have this year a dilutive impact of about 40 basis points. So net-net, we expect adjusted operating margin at the midpoint to increase by 50 basis points.

Got it. That's very helpful. And then my follow-up. What was organic growth in 2017? And what does it look like for 2018? And will that organic growth include Health Integrated?

So the organic growth rate for us in 2017 was 7.3%. And when we look at our guidance for 2018, the organic growth rate we expect is between 6% to 9%.

Got it. And does that include Health Integrated in '18?

No, Joe. The organic constant currency growth rate, based on our guidance, is 6% to 9%, with 8% at the midpoint. So frankly, we are expecting an acceleration of our organic growth rate from 7.3% in 2017 to 2018. Also, you had asked about the growth of each of our segments and typically, we expect our Operations Management business to grow between 7% to 10% on a year-on-year basis, and our Analytics business to grow at 15% plus. So the Analytics business will grow a little bit faster than our Operations Management business.

And our next question comes from Moshe Katri from Wedbush Securities.

In one of your presentations in -- at a competitor's conference, you've indicated that on an annual basis, roughly about 10% of revenues get cannibalized because of automation. Is there anything different in terms of what we should expect for 2018? Is there any change on that cannibalization front? And then as a follow-up, in terms of guidance, can you give us some color on what we should look for in Q1 that's coming up?

Sure. So the cannibalization that takes place primarily takes place at the lower end of work that we do in our Operations Management business. And as you know, 28% of our business is in Analytics and we have close to about 16% of our business, which is on BPaaS, which is on our own technology-based platforms. And therefore it's only, on the balance, 50% that cannibalization or productivity improvements take place. The growth rate that we've articulated of 7% to 10% a year in Operations Management is post taking into account the productivity benefits. So that's something which is already factored in. And I'm sorry, the second part of your question was?

Any color on Q1 that's coming up in terms of guidance?

So Moshe, the Q1, as I said in my prepared remarks, we do expect there will be incremental growth compared to Q4 because we will have the impact of $6 million to $7 million of revenues coming from Health Integrated, plus marginal incremental growth on the rest of the business.

Our next question comes from Bryan Bergin from Cowen and Company.

I wanted to ask a couple of questions around Health Integrated. Can you just comment on what you expect the long-term margin profile and growth of that business, whether you expect that to come in line with the company average? And then can you just go into some of the details of the investments you have to make in 2018 there?

Sure, Bryan. Look, I think Health Integrated for us is a strategic acquisition. We would absolutely expect to be able to leverage the capability that Health Integrated has for the vast business vertical within health care. We would expect the growth rate, the long-term growth rate of Health Integrated to mirror that of the rest of our health care business, which typically is growing a bit faster than the company average. So that's something which we think we'll continue to gain market share on and be able to increase our size of that business at a fast pace. There are a number of investments that we do need to make in 2018. The biggest investment that we really are making is about implementing our CareRadius platform and implementing that across customer engagements within Health Integrated. What that's going to do is it's going to simplify the technology stack within Health Integrated. It's going to allow for better business functionality and allow us to be able to deliver superior business outcomes to our clients. So we think it has an impact in terms of business outcomes for our clients, and it reduces our cost structure at the bottom line. We do think the synergy benefits of Health Integrated on the revenue side and on the cost side both are going to be significant, but this is going to play out over the next couple of years. And we would expect Health Integrated to be an accretive acquisition for us in 2019. And 2018 is a year of buildout for us as such.

Okay. And then just following on your commentary around proprietary bots. Anything -- can you give us a sense around profitability levels of those relative to your traditional engagements? Just trying to reconcile the net effect of increased adoption there on your financials.

Yes. The proprietary bots that we have are domain-specific bots that we've created, which are unique and differentiated. We are able to charge for these bots at a slightly higher price point than traditional third party bots that are available in the marketplace. In many cases, we do have bundled pricing. So wherever we have an outcome-based pricing model with our clients, we have bundled pricing, and this is included as part of the cost of service delivery. But in cases where we charge for them, they are able to charge a slight premium as compared to third party bots.

Our next question comes from Mayank Tandon from Needham & Company.

Rohit, given the focus on digital, can you just talk about the competitive landscape? Are you starting to run into some of the specialized IT services players who are focused on digital? Or is that still a different dynamic between IT services and the BTO providers?

Yes. Thanks, Mayank. Look, I think the game to be played on digital has certainly changed our competitor landscape. On the one hand, we started to now compete against the very largest of players in that space, which have got more mature digital capabilities that are end-to-end. The second thing is, because we have chosen to go so deep onto each one of our verticals, we compete in those verticals with specialized players associated with that particular industry. And we don't really end up doing design work in digital. So many of these specialized companies that are focused a lot more on design or on just on one element or a point solution, whether that be a customer interface or whether that be a point solution, we don't really end up competing against those because our client base really likes to engage with us on an end-to-end process or a function being outsourced and embedding digital into that across all elements of the value chain. So our competitor set tends to be the larger players, which are the global players that have got much more well-developed digital capabilities.

And Rohit, that's helpful. But in that context, when you do win, what is the differentiating factor in these situations when you're going up against these larger players in these type of deals?

It's very clearly the ability to demonstrate credible domain knowledge and the application of technology and analytics into the business process and deliver business outcomes. At the end of the day, that credibility on the combination of domain plus data is what we're seeing resonate in the marketplace. For us, the domain comes from the deep vertical expertise that we have within Operations Management, and the data management capability and the data manipulation capability comes from the Analytics credential that we've built up. And it's really the intersection of domain plus data which creates a contextual interaction for the client that creates the business outcome. So that's where we succeed and that's where we win.

Great. And then just one quick one for Vishal. Vishal, where is the acquisition revenue being included? Is that in Analytics or in Operations Management?

Health Integrated would be part of our Operations Management segment or part of the health care and within the Operations Management.

Our next question comes from Puneet Jain from JPMorgan.

When do you introduce bots at an existing relationship? Is it typically at renewal? Or you're also seeing contracts renegotiated for automation before their term expires?

Yes, Puneet. I think for us, introducing bots is an ongoing exercise and it doesn't need to wait for a renewal of a contract. Many of our clients will sign on addendum SOWs and contract with us for that to be implemented during the life of the contract or upon the expiry of the contract. It's got a lot to do with how much impact can be generated by the application of bots and not with the contracting life cycle.

Got it. And I think you said 25% of clients have bots. How does that compare with realistic addressable market for EXLS, given competition could also be trying to offer bots to same clients?

Yes, look, I think there is going to be an acceleration in the adoption of bots across all clients as well as prospects. For us, we've covered 25% of our existing client portfolio. But keep in mind that, that will be some of our largest client portfolios and the larger engagements where we would have implemented these bots. So the 25% penetration number is by number of clients. I think competition will also be doing that. The challenge really is in the implementation and in terms of delivering the business outcomes. We're seeing that the failure rate of implementing Robotic Process Automation is as high as 40% to 50%. And therefore, many clients are getting disillusioned by companies which claim to be able to implement bots into the processes but fail to deliver business outcomes. The reason why they are all gravitating towards EXL is because we understand the domain, we have a capability which is demonstrated of implementing bots, we've got proprietary bots as well as access to third party bots and we will underwrite the business outcome. So the clients are very keen to partner with us in terms of this transition that's taking place.

Got it. And one quick one for Vishal. How should we think about tax rate beyond this year when the beat tax rate will increase from 5% to 10%? And what levers you have to manage that exposure?

Yes, Puneet. When we look at our increase in tax rate, there's a benefit which we get from the U.S. tax rate plus there is a small impact because of the other implications from the tax act. We do expect that in 2019, our tax rate will be in the range of 29% to 31%. And as we build our profits -- higher profits in U.S. through building more onshore work and have a change in our mix, that might give us benefit in 2019 and beyond.

Our next question comes from Dave Koning from Robert W. Baird.

Can I just -- my first question, just the Health Integrated acquisition, if it's going to be $0.05 to $0.07 dilutive, it'll probably lose $2 million or so and have a 50 basis point impact on margins. When you say it's going to be accretive by '19, does that mean not only do you make up those 50 basis points, but it's also accretive? So that alone should make margins go up, say, 70 basis points or more in 2019 to just make it accretive?

Dave, as I mentioned to you, the Health Integrated impact on the margin, negative impact is about 40 basis points. And we do think that, some of that, we'll be able to recover after the investment cycle and in a more synergistic environment. So the turnaround would not mean that it will be entirely, at least from a margin perspective, recovering the entire 40 basis points. But we think majority of that 40 basis points will get recovered in 2019. And overall with the synergies and the revenue profile increasing, we will get accretive impact in 2019.

Yes, Dave, just add to that, Health Integrated does have some transitioning clients in 2018. And because of that reduction in volume and a higher amount of fixed cost that we've got, we've got a dilutive impact in 2018. As we fix the business and we bring it back onto a growth cycle, we expect 2018 revenues to be above the levels at which we would end up in 2018, and that will also contribute positively to the margins.

And when you say accretive in '19, do you mean basically less dilutive. So accretive to the $0.05 to $0.07 dilution, so just less dilutive? Or do you actually mean in absolute terms accretive, so you both make up the $0.05 to $0.07 dilution that it's actually positive on top of that?

Yes. Dave, we expect it to be absolute dollar accretive, not a turnaround from $0.04 to $0.05 -- $0.05 to $0.07 as a dilution this year. We will turn positive in terms of EPS contribution.

Okay, great. Great. And then, I guess the second thing, just to make sure I'm clear, the Q4 acquisition impact, I think you said $700,000 from the Health acquisition, and there was a little stub period yet from the, I think, that Analytics acquisition. How much was that again?

The IQR...

Datasource.

Sorry, Datasource. Datasource was $5.3 million. Let me just make sure I'm giving you the right number in Q4. Datasource contributed $5.3 million for the quarter.

Our next question comes from Vincent Colicchio from Barrington Research.

I've got a question on what portion of revenue was from outcome-based element contracts and how do you see that trending maybe in the next couple years?

Yes, Vincent, for us, our transaction-based pricing is roughly about 30% of our business. And the outcome-based pricing that we have is significantly lower than that. We do think rather on a go-forward basis, there's going to be an increase in both the transaction-based pricing model as well as in outcome-based pricing model. We would anticipate that over the next 2 or 3 years that, that number will move up closer towards 50%.

And then on the double-digit growth in consulting, can you give us more color, I assume the drivers were the likely areas, digital, et cetera, but a little more color would be helpful. And then is this growth -- strong growth sustainable or is it may be based on 1 or 2 big projects?

Sure. So our consulting business is showing signs of growth and strength. There are 3 areas that are resonating well in the marketplace. Number one is the work that we do around Robotic Process Automation and helping clients implement bots. The second is around digital transformation and helping our clients undertake digital transformation journeys and plan out the change. And the third is we are seeing a positive benefit from a regulatory change in Europe, which is all around GDPR. And there we are seeing some traction associated with that regulatory change. We think these 3 changes that have taken place are likely to be longer-term implementation cycles, which are multi-year as opposed to being seasonal changes on a quarterly basis. So we do think that there will be a greater amount of engagement in consulting, pretty much in the manner in which we had strategically thought about repositioning this business, such that it acts like a tip of the spear and allows us to be able to enter into client engagements and then deliver more Operations Management and Analytics businesses downstream.

Our next question comes from David Grossman from Stifel.

So Rohit, you have some very positive commentary about the industry backdrop as well as your own fundamentals. Yet your organic growth rate's kind of still trending in that 7% to 8% range or up modestly, I guess year-over-year. But if I do the math right, I think you'd land, based on your targets, to somewhere between 9% to 10%. So are there some unique things going on in the -- or unique headwinds maybe either specific to EXL or your customer base that may be impacting the current rate of revenue growth, or is there any other factors that can help us understand that dynamic?

Yes, sure, David. Look, I think we've said that our organic constant currency growth rate at the midpoint of guidance would be 8%. And the 8% organic constant currency growth rate would be post the productivity benefits and the cannibalization effect that takes place in our business. So we think actually that, that's a fairly healthy growth rate for our business. And we've always maintained that we think we should be at somewhere between 7% to 10% in terms of our overall growth rate. I think there are a few areas that we are positioning ourselves very nicely, and that is we've got a great positioning in insurance. We are building up a very strategic position around health care and we've got a strong position around Analytics. So these businesses for us contribute to the bulk of our revenues and contribute to our good growth. With the turnaround of our consulting business, we are hopeful that, that can help us act as a tailwind as well to our growth rate. So all in all, we feel good about the demand environment. We feel good about where our businesses are, positioned structurally right now, and we think we will accelerate our growth rate in 2018 over '17.

Can you just refresh us on how much of a headwind the consulting business was to your revenue growth rate in 2017?

Yes, our consulting business declined on a year-on-year basis in 2017 as compared to '16. And the decline was, I believe, in the mid-teens.

I think 15% was the decline in consulting.

15% was the decline.

Great. And then in terms of the margins, I think a big headwind in 2017 was acquisition-related headwinds. Can you just again refresh us on how much of a headwind it was in '17 and how much of that goes away in 2018?

Yes. So for the year, our margins were -- had an impact of about 50 basis points from acquisitions in 2017.

Okay. And does the vast majority of that go away in 2018?

Yes, some that we will be able to turn around, but Health Integrated will also have a negative impact of 40 basis points. So while we'll turn around the acquisitions we did in '16 and '17 and that impact will go away, as I mentioned earlier, Health Integrated will have an impact of about 40 basis points.

Got it. And then...

But bear in mind, that our margins will still improve despite the Health Integrated impact by 40 to 60 basis points.

Right, right. Okay, and then just last. On the pro forma adjustments that we made, can you just give us a sense for stock comp and, say, amortization in 2018?

Yes. So stock comp, we expect to be roughly around $27 million to $28 million. And amortization is -- I think that '17 to '18 -- you have the exact numbers, Steve?

I'm looking for that.

Maybe you can just send an e-mail if you don't have it handy, that's all right.

I'll give it to you later. $19 million is the impact of amortization of intangibles after Health Integrated, sorry.

And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Rohit Kapoor for any closing remarks.

Thank you. Thank you all for joining today's earnings call. As mentioned, our business is in a very, very good position structurally and we are making the necessary investments to make EXL future-proof ready and continue to remain very relevant for our clients and continue to build and grow our business. There are a few moving parts to our business that are impacting our bottom line results for 2018, which includes the acquisition as well as the changes to the tax rate. We think these are onetime changes that will impact us and that we will continue to be able to grow both our top line and bottom line very strongly in 2018. Thank you all for joining today's call. And we look forward to hosting you at our next earnings call at the end of the first quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.