Steven Barlow - VP, IR Rohit Kapoor - Vice Chairman and CEO Vishal Chhibbar - CFO and EVP.

David Grossman - Stifel Financial Anil Doradla - William Blair & Company Edward Caso - Wells Fargo Adam Dahms - Robert W. Baird Puneet Jain - JPMorgan S.K. Prasad Borra - Goldman Sachs.

Good day, ladies and gentlemen and welcome to the ExlService Holdings' First Quarter 2015 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference maybe recorded.

I would now like to introduce your host for today's conference Mr. Steven Barlow. Sir, please begin..

Thank you, Liz. Hello and thanks to everyone for joining EXL's First Quarter 2015 Financial Results Conference Call. I'm Steve Barlow, EXL's Vice President of Investor Relations. I'm in New York and Rohit Kapoor, our Vice Chairman and Chief Executive Officer and Vishal Chhibbar, our Chief Financial Officer are joining the call from Delhi.

We hope that you 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 will discuss in this call this morning 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 forward 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.

EXLS 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 on our press release, as well as the investor fact sheet.

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

Rohit?.

Population Health and Care Management Services.Only two other players were cited in this category. EXL was recognized by its clients both execution and for innovation. Our size, scale and capabilities in healthcare ensure that we have the right fundamentals in place to win market share in this high growth market.

In closing, I'm pleased with the good start to the year and the way in which we are executing on our priorities for 2015. The market dynamics and demand environment remain favorable. Our differentiated capabilities are resonating and we are getting recognized in the market.

We continue to accelerate growth in the high growth healthcare market and have strengthened our leadership position in analytics. These achievements and the ability to expand our margins make us confident and excited about the future. With that,I will turn the call over to Vishal. .

Thank you Rohit and thanks everyone for joining us this morning. Unless otherwise stated, all numbers mentioned are excluding disentanglement cost for our transitioning clients which was accounted for in 2014 and there were no disentanglement cost in this quarter.

In the first quarter EXL reported revenues of 143.5 million up year-over-year 15.5% of 16.5% on constant currency basis. Organically, revenues were up 14.6% year-over-year on a constant currency basis excluding transitioning clients. This growth represents a solid acceleration compared to 12.4% annual growth of 2014.

All segments of EXLs business are contributing to the revenue momentum. Operations management revenues increased 8.4% year-over-year, on a constant currency basis including the impact of acquisitions. Sequentially, organic revenue growth on a constant currency basis excluding transitioning clients in this segment was approximately 2%.

This organic or sequential growth coupled with the acquisition impact of Overland Solutions mostly mitigated headwind of approximately 7 million from the transitioning clients. There were no revenues from transitioning clients in this quarter.

Analytics and business transformation revenues grew 54.7% year-over-year on a constant currency basis including the impact of acquisitions.

Organically, on a constant currency basis excluding transitioning clients the segment grew 42% year-over-year driven by 43% growth in analytics, achieved across broad spectrum of clients in banking, financial services, healthcare verticals.

Sequentially, analytics and business transformation revenues grew 1.2% organically on a constant currency basis, which is very positive considering the fact that in prior years the segment experienced seasonal revenue decline in the first quarter. Analytics firm RPM added an additional 1.2 million of revenues to the segment during this quarter.

Gross margins declined by 460 basis points year-over-year to 35.1%. This decline was primarily driven by lower gross margin profile of Overland Solutions with an impact of 150 basis points transitioning clients impact of 200 basis points and 100 basis points due to investments we are making in our business and changing business mix.

Sequentially, gross margins declined by a 140 basis points due to the increased contribution of Overland Solutions with an impact of 60 basis points, the transitioning clients impact 60 basis points and 20 basis points due to unfavorable currency movement. G&A expenses were 13% of revenues compared to 11.9% a year ago.

This represents an increase of 3.8 million year-over-year driven by acquisitions impact of 2.2 million with a balance dollar $1.6 million coming from investments in products and tools and technologies and facilities expansion. Sequentially, our G&A expenses increased by 20 basis points.

Sales and marketing expenses were 7.8% of revenues compared to 8.2% a year ago or a decline of 40 basis points. Sequentially, sales and marketing expenses increased by 50 basis points as we proactively target our market opportunities including cross selling part in enhanced product portfolio.

Foreign exchange income for the quarter was $1.1 million gain. We expect foreign exchange gain of approximately 4.5 million to 5 million for 2015 at the rupee-dollar exchange rate of 63. Tax rate for the first quarter was 39.4%.

Sequentially, the effective tax rate increased from 28.6% to 39.4% due to certain tax positions for prior years related to the taxability of some foreign income and other items, which amounted to 1.7 million, the two up resulted in a 5-10 [ph] decline in our adjusted EPS for the quarter.

On a year-over-year basis, our normalized tax rate is approximately 31% up from the 2014, primarily owing to higher U.S. income and partial expiration of tax holiday for a few of our operating centers in India and Philippines. We expect that the tax rate to be approximately 31% in subsequent quarters of 2015 in line with our prior guidance.

Capital spending in the first quarter was 8.8 million which was primarily spent on facilities, hardware, software and telecom equipment. For the full year we expect CapEx to be in the range of 22-25 million.

Adjusted EPS for the first quarter was $0.41 after observing the $0.05 of onetime tax impact, this resulted in a decline of $0.09 year-over-year and $0.07 sequentially. At the end of the quarter, we had cash and short-term investments on a balance sheet of approximately 166 million compared to 188 million as of December 2014.

We used combination of cash on borrowing for revolver for the acquisition of RPM paid in cash for $47 million. As of 31 March, our outstanding revolver debt is $80 million, therefore we have a net cash position of 86 million. DSOs improved by 3 days to 53 days from 56 days a year ago. Now, let me comment on our revised guidance for the year 2015.

We are raising our revenue guidance to 600 million to 620 million from the prior 570 million to 590 million guidance, representing an increase to our revenue guidance of 30 million at the midpoint. This midpoint raise is due to two factors. Firstly, RPM is expected to add approximately 35 million of revenue at the midpoint.

Secondly, the strong revenue performance in the first quarter and our outlook for the remainder of the year gives us confidence to take up the top end and the bottom end of our range despite a 1% headwind of -- we're facing in with respect to foreign exchange.

EXLs revised guidance represents strong annual revenue growth of 14% to 18% including impact of acquisition and a core organic growth of 11% to 14%. We are maintaining our EPS guidance of $1.85 to $1.95 despite absorbing the onetime tax expense of $0.05 in the first quarter.

This revised guidance includes $0.03 to $0.05 of EPS accretion from RPM acquisition after taking into account certain investment and integration expenses of RPM business as eluded by Rohit. We expect RPM accretion to be stronger next year.

In summary, the potential to increase EPS guidance due to RPM acquisition and strong operating performance was offset by the onetime tax rate of $0.05 of this quarter.

To provide some commentary around our expectation for the second quarter, we expect continued sequential revenue growth due to strong core business momentum as well as the contribution of full quarter of the RPM acquisition.

In the second quarter, we will also expect our adjust operating margins to decline from the first quarter due to high single digit annual in salary increments that took place in April.

We do firmly expect our gross margins to, an adjusted open margins and adjusted earnings per share to increase in the second half of the year consistent with what Rohit has mentioned and with our prior year's spend.

In conclusion, we're quite pleased with the exploration of our constant organic revenue growth excluding transitioning clients of 14.6% in the first quarter. And with visibility we have in the rest of the year.

The current midpoint of our revised revenue guidance indicates 13% annual organic revenue growth excluding transitioning clients on a constant currency basis, which represents acceleration from last year's pace and we believe this is indicative of EXLs momentum in the market place. And now, we would be happy to take your questions. .

[Operator Instructions]. Our first question comes from the line of David Grossman with Stifel Financial. Your line is now open..

I am excited just go through a couple of things to that you had mentioned that I may not have acquired all the information, the first thing was the change in the gross margin year-over-year and sequentially.

Could you review Vishal perhaps the impact of currency and the acquisitions and how the gross margin should trend as we go through the balance of the year, I think you said that it should go up, but I just wanted to understand that progression?.

We had a gross margin decline of 460 business points year-over-year. Foreign exchange had no impact on the decline. This decline was primarily driven by, as I mentioned in my remarks, impact of Overland acquisition was 160 business points.

The two transitioning clients impact I mean the over those transitioning clients for the gross margin higher than our corporate average. That impact was about 200 business points.

100 basis points was due to the investments we are making in our business as Rohit was mentioning and also because of the changing mix of our business, and we have more business coming in from Philippines and also from onshore business in U.S.

In terms of our margin profile for this year, I think as we mentioned in our prepared remarks and Rohit also eluded, we expect the margins to improve, gross margins and our adjusted operating margins to improve in the second half of the year..

Okay. So if we look at the second quarter, would you expect a sequential decline and then improvement in the back half of year or -- do you think we're seeing the bottom, because you have wage increases coming in right in the second quarter.

So would you expect these margins?.

We expect margins to decline in second quarter because of the wage increment but the wage increment impact would be, which will to make margins decline by 30-40 business points in Q2. .

Okay, and then you mentioned a joint ventured down in South America. Is that reflected in guidance, the revised guidance or will that impact guidance again once that comes online..

We are actually -- we've shifted our model in Latin America more towards Greenfield operation which will be majority owned and controlled by EXL and we expect it to be able to add new client relationships to this operation of that over the year. We haven’t really factored in any revenue from this operation in into our guidance as such.

But we also don’t expect that number to be very significant either..

I see. And then just going back to the broader business, obviously the revenue performance in the first quarter was very good and you've raised your hands for the year beyond the RPM contribution.

So, I'm just curious when you look at sequentially how things changed for you, where would you say that the biggest surprise was due to the current with your expectations or going into the quarter in terms of the performance in the quarter as well as what now your expectations are for the year..

Absolutely, David and this is obviously something, which we reflected on ourselves. So our view is that the beat on the revenue numbers was actually very broad-based and there is a combination of four different factors.

Number one is there certainly is $1.2 million on account of the RPM acquisition, which closed on March 20th, which was not factored in earlier. Number two is our Overland Solutions acquisition performed very strongly and that gave us higher revenues.

But I think equally we were very, very strong in our organic revenue growth, both in analytics and business transformation as well as in operations management. Analytics and business transformation as well as in operations management.

Our analytics and business transformation business as you would recall, typically declines from the fourth quarter and it goes down in the first quarter as we get geared up with new clients and existing clients and the ramp-up on their businesses.

However because we have moved a large percentage of our business in analytics into an annuity format this year our analytics business as well as our business transformation business, both of these have actually remained constant as compared to our Q4, and did not decline.

And then, our operations management business which is a new client which we have signed up last year as well as some of the growth that we are seeing from our existing clients, that performs well. And we saw some early decision-making take place which gave us much better revenues in the first quarter.

And this is likely to sustain itself for the rest of the year..

So, Rohit, you mentioned, Overland, Overland in your comments about some of the upside in the quarter, and I think you actually mentioned that last quarter as well.

So I'm just curious what is it about that acquisition, where you're seeing outperformance relative to your expectations?.

I think the outperformance in Overland is driven by the market environment and a number of the economic factors. As you know, Overland's business model is pretty much a transaction-based model and they have a core technology solution, like we say offer to clients pretty much using a BPaaS construct.

So as the need for doing a premium audit and surveys increases, we are seeing a greater volume of work flow through the Overland solutions platform. And that's what has happened in the fourth quarter last year as well as in the first quarter this year..

[Operator Instructions] Our next question comes from Anil Doradla with William Blair & Company. Your line is now opened..

Couple of questions, the nine design wins or contracts, are they new logos or existing logos, and can you give a little bit more color on the total contract value? And I just had a follow-up. .

Anil, the nine new clients that we referenced there are all new clients. We don't currently do any work with them, and they are signed up as brand-new clients for us. Four of these are in operations management and five of these are in analytics and business transformation.

And this is certainly one of the highest numbers of new client wins that we have had in the last several quarters.

In terms of the annual contract value or the TCV, it is difficult to provide you with the number on that because sometimes we have seen situations when a client will start out with us with very small engagements and over the period of time as the proof of concept turn out to be positive they will expand their relationships with us very-very meaningfully and significantly.

And so it's difficult to give you a sense on the total contract value. But what people say is that the quality of these nine new customers that we have signed, these definitely include some of the very large and potential clients. And therefore we think that the opportunity set for us to gain revenue from these new clients is very significant..

As a follow-up, Rohit, you talked about the BPaaS competition is slightly different from your traditional competitive landscape, you talked about the smaller guys playing there.

Can you walk us through why that is the case, and who are you really bumping into and how much is that contributing, say even to your current nine new designs?.

Sure, so as we mentioned four clients out of the nine are in operations management and two out of those four are utilizing our BPaaS solution. So really 50% of our operation management wins were on the back of the BPaaS capabilities that we have got. In BPaaS the primary competition for us is really in-house work done by our clients onshore.

And that's the primary competition for us. We will see us scattered set of smaller players that might come in to contribute. The reason for that is you need to invest in the ownership of the underlying technology platform and be able to combine the service alongside with that in order to be able to make a BPaaS offering.

EXL has been investing in these capabilities for the last three years and therefore we have been able to build the underlying platform plus service delivery being integrated very nicely together and taken to market.

And as we commercialize this capability we are seeing that the traction for these types of services along with the underlying technology platform is very strong and therefore we feel very good and confident about being able to expand these relationships.

And we're actually very positively surprised that we are also winning accolades and awards associated with this kind of an offering because this is a very innovative way of creating a flexible and our variable cost structure for our clients and allowing our clients to compete with much larger players, with the same competitive and variable cost structure..

Our next question comes from the line of Edward Caso with Wells Fargo. Your line is opened. .

A point of clarification here on the organic growth rates that you quoted, are you capturing the organic growth rate of the companies you bought or have you excluded them from the total, because when we do our math, we come up with a lower number?.

I will take that. This is Vishal. The number we have calculated is only on the core basis without any impact on the acquisitions. But it does take into account the currency impact and also the transitional client's revenues from the prior years and those are excluded while calculating the core organic growth..

Can you reset us here on what your long-term organic growth expectations are? And for both top line and for the operating -- the adjusted operating margin sort of -- so where are you heading towards, where should we put that target out there?.

As we have stated earlier, we think on an overall basis we would be able to grow our top line at around 11% to 12% per annum. This includes both our operations management business as well as our analytics and business transformation business.

We think the growth rate in operations management is going to be in the high single digits and we think the analytics and some other business segments like healthcare will grow much faster and these will be in the 20% plus kind of a growth range. So on a combined basis we would typically look at about 11% to 12% off top line growth.

From a margin perspective, our margins are in terms of adjusted operating margins, currently are low. We think there is an opportunity for us to be able to increase our adjusted operating margin as we go forward into the second half of the year, and then certainly into 2016 and beyond.

So we would be looking to expanding our adjusted operating margins by about 100 basis points as we go into 2016 and beyond.

Did that help you?.

Is that an annual target to increase at a 100 basis points?.

We think we will be able to increase our margins for 2016 by 100 basis points..

Okay, last question is on automation. How much of -- I've noticed that your headcount numbers have been relatively flat here in recent quarters. I assume it's not a reflection of your growth, because you're growing nicely.

Is that a reflection of you're driving more automation?.

Yes, it's a factor of two things or three things that are kind of playing in. Number one, there's a fair amount of automation that is coming into play particularly using some of the BPaaS models that we have created. Number two, it is a fair amount of onshore work that we have now started to do.

And certainly in the Overland solutions, what we do is, largely onshore in the U.S. And number three, within analytics and within the RPM acquisition, it is giving us an ability to move towards nonlinear revenue models.

And that's creating an exciting opportunity for us to grow our top line without really expanding our headcount and being able to increase the revenue for headcount as such..

Our next question comes from the line of Adam Dahms with Robert W. Baird. Your line is now open..

Just a question on the acquisition contribution, I caught that RPM contributed $1.2 million, I think you said during the quarter, what did you guys say was the contribution from Overland and Blue Slate in the quarter?.

Overland and Blue Slate contributed about $18 million..

In total?.

Yes, approximately $18 million. [multiple speakers][indiscernible].

And then, you guys -- it seems like you guys still have a pretty solid net cash position even like post the RPM acquisition.

Can you just talk a little bit about what your priorities for cash usage are at this point? Are some more acquisitions possible or we're just kind of looking at kind of the investments you've been talking about?.

Sure, Adam, for us the cash on our balance sheet is a very strong cash position and it gives us great strengthen our balance sheet. We would look to deploy the cash for number one, doing more acquisitions, particularly as we generate increased cash flow in the second half of this year.

We also have stated that we will be doing smaller amount of spot buyback each year. And that's something which planned for and will be doing over the next three years. I think those are going to be the principal tool uses of cash.

The investments that we need to make for product development as well as for creating a new BPaaS and business EXL rated models, those are pretty much what we can fund from our ongoing operations. And we don't think there would be any depletion of cash due to that..

Our next question comes from the line of Puneet Jain with JPMorgan. Your line is now opened..

So your healthcare business increased a lot in this quarter like you talked about, I although understand there is seasonality, it is typically strong in Q1.

But was there any one time client payment in this quarter?.

Puneet, our healthcare business actually has been performing quite well in 2014 and continues to perform well, has great momentum in 2015. We did not have any one time client payments in the healthcare business. Instead we won a number of new client relationships in this segment and we got a very strong pipeline in healthcare.

We think there is a tremendous opportunity for us to be able to build and grow our healthcare practice and therefore we are investing very-very significantly in terms of the registered nurses that we have in the Philippines, the Healthcare Training Academy that we have invested in, some of the platforms that we have got on the state side in population management and analytical capabilities specifically for healthcare.

So this is a very-very strong vertical bay for us and it seems to be resonating quite nicely in the marketplace..

How should we think about incremental margins on the BPaaS deals, new BPaaS deals that you're winning, which got to be higher than your overall margins?.

You're absolutely right. BPaaS requires an upfront investment in technology, in the platform, in the integration of providing the network of services. Once that investment has been made, all incremental volume that we pick up on top of that is going to be at a much higher margin rate.

So as we think about products like MedConnection becoming industry utilities, we do think we'll be able to gain on margin from this. And the same thing is true also for leveraging the database asset of RPM.

So we're got a number of different capabilities within the organization which as we scale up these businesses, we think we can benefit in terms of our margin profile..

And last one from me, what do you expect for overall contribution from acquisitions like RPM, Blue Slate and Overland in fiscal 2015?.

Puneet, we are not disclosing that number, but as I mentioned in my remarks we expect that the midpoint of our guidance, the organic growth rates to be about 13%. And RPM, as I said RPM at the midpoint would be about $25 million..

And the other two -- last quarter you said $50 million to $55 million, does that still stand $50 million to $55 million from Overland and Blue Slate?.

Yes, slightly higher run rate in Q1, but that would be correct..

[Operator Instructions] Our next question comes from the line of S.K. Prasad Borra with Goldman Sachs. Your line is now open..

This is actually Jeff -- for S.K. Prasad. I have a quick one, if I may. As you gear for the next generation for BPO services, what are the key challenges that you're facing? Is it just execution or are there structural limits in our market landscape. And I have one follow-up..

Jeff, for us, I think the key challenges are definitely on the execution side, being a people driven business and that's certainly the ability to attract, retain and train talent is the key element of execution for our growth strategy.

But equally important is the ability to use technology in our business to integrate and there takes into our operations and really to be able to put together this trisector of domain expertise, technology and analytics and combine that together to be able to offer differentiated solutions to our clients.

So this needs to be done in each vertical and it needs to be done in each micro-vertical and we are deliberately and consciously building up those capabilities and investing in those capabilities and positioning ourselves in there for the future..

Thanks, that's very helpful.

And then as a follow-up, you highlighted levels of margin growth, can you provide a little bit of a finer split of what portion of the margin expansion there you expects to each contribute? For example, how much is coming from revenue growth, and what portion from cost optimization?.

This is Vishal. In terms of margin growth, our revenue growth which we are expecting is going to be at least, in the short term, in areas where we expect it to be at the corporate profile. So the margin improvement we expect, as Rohit had mentioned, will come from our operating efficiencies and also scaled as we get in some of our BPaaS businesses..

I guess, Jeff, let me just amplify that. For us, please keep in mind that if we grow faster than expected and we are adding on more new clients, typically the margin profile of new clients is much lower than those clients which are in steady-state and which are seasoned clients.

So it's actually a counterbalancing factor and we don't really think about how much of our margin increases going to come from revenue growth or from cost structure optimization.

It's really a combination of both, and like I said in my prepared remarks we have multiple levers that we are pulling on and beating the primary of improvement of margins is going to take place in the gross margin line. And that's where it's going to be showing up in our margins..

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

Thank you operator. And thanks everyone for joining EXL's first quarter call. We are really excited about how we have begun 2015 and we look forward to continuing to execute and to be able to build upon our business as we go forward. We look to see you next quarter. Thank you..

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..