EXL reports 2006 Q4 & full year results

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ExlService Holdings, Inc. (NASDAQ: EXLS), a recognized provider of offshore solutions including business process outsourcing, research and analytics and risk advisory services, today announced its financial results for the fourth quarter ended December 31, 2006.

The Company's fourth quarter highlights include:

·         Revenues for the quarter increased 97% to $39.3 million from $20.0 million in the fourth quarter of 2005 comprised of 63% organic revenue growth and 34% acquisition related growth.

·         Gross margin for the quarter was 42.9% compared to 37.5% in the fourth quarter of 2005.

·         Operating margin for the quarter was 16.4% compared to 10.6% in the fourth quarter of 2005; adjusted operating margin for the quarter, excluding the impact of stock-based compensation expense and amortization of intangibles, was 19.7% compared to 10.6% in the fourth quarter of 2005.

·         Net income to common stock holders for the quarter was $5.9 million compared to $3.0 million in the fourth quarter of 2005; net income to common stockholders for the quarter includes stock-based compensation expense and amortization of intangibles of $1.3 million and $0.0 million in the fourth quarter of 2006 and 2005, respectively.

Reconciliations of adjusted financial measures from GAAP are included at the end of this release.

Vikram Talwar, CEO and Vice-Chairman of EXL commented:  "We are extremely pleased with both our financial and operating performance during the quarter as well as our continued execution of our strategic objectives to sustain long-term growth. EXL's fourth quarter results showed strong revenue growth and a significant expansion in gross margin as well as operating margin. Our fourth quarter results were driven by strong performance across all three of our business lines and increasing acceptance of EXL's solutions that are focused on providing clients a competitive edge by transforming and outsourcing their business processes.

Attrition continues to be a significant issue facing our industry. EXL's attrition rate for billable employees during the fourth quarter was 41.9%.  During calendar year 2006, our attrition rate was 38.8% as compared to 55.4% during calendar year 2005.  We believe that our continued investment in employee retention, training and development, as well as our changing business mix, will decrease attrition over time and ensure that we continue to deliver to our own and our clients' expectations. We believe that these investments will enable us to deploy the right resources and deliver high quality solutions that meet the business needs of our clients long into the future and that these are the right investments to make for EXL for the long-term.

We are happy to report that we have continued to build on the strength of our management team and have hired Matt Appel to become our Chief Financial Officer after the filing of our annual report on Form 10-K for fiscal year 2006.  Matt is exceptionally qualified to become our CFO and brings to us a unique blend of functional experience, a deep background in BPO and a strong familiarity with India. Matt has over 30 years of experience in finance and BPO and was most recently Vice President, BPO Product Management at Electronic Data Systems where he was responsible for strategy and business plan development and investment prioritization for EDS' BPO product portfolio", concluded Mr. Talwar.

Rohit Kapoor, President and Chief Financial Officer of EXL noted: "As we progress in 2007, EXL will be making several key investments that will increase our expenses and decrease our gross margin and operating margin as compared to previous quarters. EXL's sales and marketing expenses will continue to increase as we invest heavily in our front-end sales and client relationship management functions to better serve our clients.  With a view to enabling us to scale more effectively, we will continue to strengthen our back-end support and enabling functions, add additional physical infrastructure, and drive additional management development programs and training initiatives. We will also continue to focus on reducing attrition and increasing our recruitment capabilities through various programs.

Our strong fourth quarter results reflect a confluence of several factors - a number of which are not expected to continue in the first quarter of 2007 or subsequent periods. Factors that are not expected to continue include a favorable foreign exchange rate environment, unexpected strength of the Risk Advisory business during the historically slow fourth quarter, higher utilization of our existing physical infrastructure, strong performance in our Research and Analytics business line that is project-based and a voluntary bonus reduction by select senior individuals in our Research and Analytics business line."

Financial Highlights - Fourth Quarter 2006 and Fiscal Year Ended December 31, 2006

·         Revenues for the quarter ended December 31, 2006 increased 97% to $39.3 million from $20.0 million in the quarter ended December 31, 2005. Revenues for the year ended December 31, 2006 increased 65% to $121.8 million from $74.0 million in the year ended December 31, 2005.

·         Gross margin for the quarter ended December 31, 2006 was 42.9% and increased 540 basis points from 37.5% in the quarter ended December 31, 2005. Gross margins expanded primarily as a result of an increased pace of ramp ups from existing clients in our BPO business line, favorable exchange rate movements, higher utilization of the Company's existing infrastructure and continued strong demand for services from the Risk Advisory Services and Research and Analytics business lines. Gross margin for the year ended December 31, 2006 was 39.4% compared to 35.6% in the year ended December 31, 2005.

·         Operating margin for the quarter ended December 31, 2006 was 16.4%, compared to 10.6% in the quarter ended December 31, 2005. Adjusted operating margin, excluding the impact of stock-based compensation expense and amortization of intangibles, for the quarter ended December 31, 2006 was 19.7% compared to 10.6% in the quarter ended December 31, 2005. Operating margin benefited from continued growth in our business, a lag in our hiring of senior personnel, and a voluntary bonus reduction of $0.6 million during the fourth quarter of 2006 pertaining to select senior individuals in our Research and Analytics business line permitted under the terms of the Inductis merger agreement in order to achieve the earnout amounts set forth in such agreement. Operating margin for the year ended December 31, 2006 was 12.4% compared to 7.5% in the year ended December 31, 2005. Adjusted operating margin, excluding the impact of stock-based compensation expense and amortization of intangibles, for the year ended December 31, 2006 was 15.0% compared to 7.6% in the year ended December 31, 2005.

·         Net income to common stockholders for the quarter ended December 31, 2006 was $5.9 million compared to $3.0 million in the quarter ended December 31, 2005; net income to common stockholders for the quarter includes stock-based compensation expense and amortization of intangibles of $1.3 million and $0.0 million in the fourth quarter of 2006 and 2005, respectively. Net income to common stockholders for the year ended December 31, 2006 was $13.4 million compared to $6.8 million in the year ended December 31, 2005; net income to common stockholders for the year ended December 31, 2006 includes stock-based compensation expense and amortization of intangibles of $3.2 million and $0.1 million in the year ended December 31, 2006 and 2005, respectively.

·         Revenues generated from the Company's largest client was 27% for the quarter ended December 31, 2006 compared to 44% for the quarter ended December 31, 2005. Revenues generated from the Company's three largest clients was 58% for the quarter ended December 31, 2006 compared to 64% for the quarter ended December 31, 2005. Revenues generated from the Company's largest client was 34% for the year ended December 31, 2006 compared to 49% for the year ended December 31, 2005. Revenues generated from the Company's three largest clients was 59% for the year ended December 31, 2006 compared to 74% for the year ended December 31, 2005.

Note: Results may not be comparable due to the inclusion of the financial results of Inductis, Inc. in our consolidated financial statements from July 1, 2006.

Recent Business Highlights

·         Strong growth and further penetration of our existing client base through significant expansion in both new and existing BPO processes. Revenue generated from the Company's five largest clients grew 11% sequentially from the third quarter of 2006 to the fourth quarter of 2006. 

·         Further cross-sell examples within our Research and Analytics business line as a result of our acquisition of Inductis. EXL's BPO clients continued to transform their businesses by combining higher-value analytical solutions and knowledge process outsourcing with BPO.

·         Hiring of Matt Appel to become our Chief Financial Officer after the filing of our annual report on Form 10-K for fiscal year 2006. Matt has over 30 years of experience in finance and business process outsourcing and was most recently Vice President, BPO Product Management at Electronic Data Systems where he was responsible for strategy and business plan development and investment prioritization for EDS' BPO product portfolio.

·         Hiring of Sridhar Kadaba as Vice President, Risk Advisory Services. Sridhar has over 25 years of experience in financial services and consulting industries.  Prior to joining EXL, Sridhar served as a global financial services practice leader at Parson Consulting, a Principal with Ernst & Young and a Partner within the financial services division of Unisys Corporation.  Sridhar will work in developing new value-added service offerings within EXL's Risk Advisory Services business line.

·         Signing of a definitive agreement for the provision of services with a leading U.S. life insurance company to provide a range of BPO services. During its previous earnings call, EXL had announced its entry into a letter of agreement with this company.

·         Construction of a new facility in Noida to accommodate an additional 1,200 seats of capacity with its scheduled opening in the first quarter of 2007.

As of December 31, 2006, EXL had total employees of approximately 8,200, an increase of 49% from approximately 5,500 total employees at December 31, 2005. The Company's headcount during the fourth quarter increased by approximately 300 employees.  The attrition rate for billable employees during the fourth quarter was 41.9% as compared to 39.8% in the third quarter of 2006.  For calendar year 2006, EXL's attrition rate for billable employees was 38.8% as compared to 55.4% in calendar year 2005.

2007 Outlook

The Company is providing the following guidance:

·         Calendar year 2007 revenue range of $160 to $170 million.

·         Calendar year 2007 adjusted operating margin range, excluding the impact of stock-based compensation expense and amortization of intangibles, of 12%.

First quarter of 2007 expectation of slight decline in revenue and significant reduction in margins compared to the fourth quarter of 2006 in line with normal seasonal factors.

 

Sourced From: Hanmer & Partners Communications Pvt. Ltd