Steven N. Barlow - ExlService Holdings, Inc. Rohit Kapoor - ExlService Holdings, Inc. Vishal Chhibbar - ExlService Holdings, Inc..

Rick M. Eskelsen - Wells Fargo Securities LLC Joseph Foresi - Cantor Fitzgerald Securities Anil Kumar Doradla - William Blair & Co. LLC Frank C. Atkins - SunTrust Robinson Humphrey, Inc. Bryan C. Bergin - Cowen & Co. LLC Puneet Jain - JPMorgan Securities LLC Vincent A. Colicchio - Barrington Research Associates, Inc. Eric Ciura - Robert W. Baird & Co., Inc.

(Broker) David Grossman - Stifel, Nicolaus & Co., Inc..

Good day, ladies and gentlemen, and welcome to the ExlService Holdings Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Steven Barlow, Vice President, Investor Relations. Sir, you may begin..

Thank you, Shannon. Good morning, and thanks to everyone for joining EXL's fourth quarter and full-year 2016 financial results conference call. I'm Steve Barlow, VP of Investor Relations. With us here today in New York is Rohit Kapoor, our Vice Chairman and Chief Executive Officer; and Vishal Chhibbar, our Chief Financial Officer.

We hope that you've had an opportunity to review our two press releases we issued this morning, the quarterly and annual financial results release and the release on our expanded share repurchase program. We've also updated our Investor Fact Sheet in the Investor Relations section of EXL's website.

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

Such risks and uncertainties include, but are not limited to, general economic conditions, those factors set forth in today's press release, discussed in the company's periodic reports and other documents filed with the Securities and Exchange Commission from time to time.

EXL assumes no obligation to update the information presented on this conference call. During our call today, we may reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of these measures to GAAP can be found in our press release, as well as the Investor Fact Sheet.

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

Rohit?.

Thank you, Steve. Good morning, everyone, and welcome to our 2016 year-end earnings call. I am pleased with our full year results. We delivered double-digit revenue growth of 11% year-on-year on a constant currency basis, grew our adjusted earnings per share by 15% year-on-year, and won multiple mandates with existing and new clients.

We generated revenues of $686 million and achieved an adjusted EPS of $2.33. Our Analytics business, which represents almost a quarter of our revenues, had another outstanding year and grew by 36% to end with revenues of $166 million.

The growth was driven by a healthy mix of expansion at existing clients, addition of new clients, and the impact of M&A.

Despite the challenging macroeconomic environment and the headwinds we face in our consulting business unit and the property survey business within our insurance business unit, our Operations Management business grew revenues by 3% year-on-year on a reported basis.

I am pleased to share that in Operations Management, our healthcare, travel, transportation and logistics and banking and financial services business units delivered double-digit revenue growth. And we won multiple new deals in our insurance and finance and accounting business units. 2016 was influenced by two primary factors.

One was the uncertainty in the macroeconomic environment and the second was the accelerated push towards digital transformation. As a result, companies have had to rethink the way they do business or risk being disrupted. In certain environment, we see three big theme across client conversation.

One, enhance customer experience across all touch points by making it contextual and personalized using digital technologies and analytics. Two, digitize middle and back office operations and execute on data-driven insights to deliver better business outcome.

And, three, optimize the core structure by implementing a lean, automated and global operating model. Our solutions, which integrate market leading capabilities in Operations Management and Analytics, help clients address all these three big themes.

In fact, one of the highlights of our performance in 2016 was our ability to proactively reach out to our clients to help them execute on their digital transformation road map and to enable them to navigate a tough business environment. Our integrated digital solutions helped us win new logos and drove strong growth at several top clients.

We added 14 new clients in 2016, 21 in Operations Management and 19 in Analytics. These new clients were added across our insurance, healthcare, banking and financial services and finance and accounting business units, with a few of them having the potential to be top 30 clients for EXL over the next three to five years.

Let me illustrate this with a few examples. We nearly doubled our relationship with a leading U.S. financial services company by helping them execute on their digital transformation road map.

Our Operations Management team implemented an integrated claims management solution that; A, help lower costs; B, digitize operations using robotics; and C, leverage our receivables management offering to make their subrogation process digital and more effective.

Additionally, our Analytics team deployed predictive analytics to drive a reduction in fraud and overpayments. We also expanded our relationship with a healthcare payer in 2016 by helping them implement an agile and more profitable operating model.

Our Operations Management and Analytics teams analyze their business model to benchmark and understand the root causes behind high medical spend. We found, for example, that the clients had higher hospitalization rates and that their pharmacy prices varied for the same drug.

We implemented an integrated solution where we leveraged EXL's healthcare domain experts from around the globe to drive behavioral change by helping physicians understand the benefit in adopting a value-base payment model. The business impact was seen within 30 days, as the payer saw a meaningful reduction in their claims expense.

Now, let me provide more detail on our performance in Analytics and Operations Management. In Analytics, as I mentioned earlier, our growth was driven by strong expansion at existing clients and through new wins.

We now have five analytic clients with $15 million or more of annual revenues with the majority of them growing by over 25% when compared to 2015. We won 19 new Analytics clients in 2016 versus 9 in 2015, including some marquee names in banking and financial services, healthcare, insurance and retail.

In addition, the recent acquisitions of IQR and Datasource have provided us with multiple cross-selling opportunity. I will now highlight three positive developments in our Analytics business. First, the analytics solutions we deliver are becoming more advanced.

We now use text mining, national language processing, machine learning, and sophisticated statistical techniques to deliver smarter and more real-time insights. Second, our analytics solutions are helping clients deliver superior customer experience.

For example, we are working with a large media network to help them adapt to changing customer behavior which is challenging the very fundamentals of traditional cable model. We analyze large volumes of unstructured data from social and digital platforms to derive insights on the consumption habits of their customers across multiple media platform.

Using these insights, we help them craft personalized user experiences which deliver the relevant content at the right time and at the optimal price point across multiple platforms, which includes cable, desktop and mobile.

The ability to support such evolving customer needs positions us well in the media space and also gives us a great opportunity to leverage this expertise in other industries like banking and financial services, insurance and healthcare.

Third, as a leader in this industry, clients expect EXL to provide solutions across the entire analytics value chain.

Today, we have expertise across all five parts of the value chain, which includes; A, access to customer data; B, managing large and complex data sets; C, building predictive models; D, generating insights; and E, executing and operationalizing the insight.

While predictive modeling and insight generation has been EXL's core strength, the acquisitions of RPM and Datasource have provided us a rich data asset and the ability to help clients manage their data. For example, one of our clients is embarking on a major transformation to reconfigure their data across legacy system.

We were engaged to implement a Master Data Management, that is MDM hub, that will manage data across multiple brands that the company owns. Our MDM solutions will support the client's ability to drive faster time to market for new initiatives and new products while lowering the cost of managing data across legacy system.

Additionally, we are partnering with our clients to convert the insights we generate into actionable steps that deliver tangible business impact. For example, we are working with a financial services company to embed intelligence into their credit evaluation process.

We are helping the client aggregate and analyze information from disparate data sources, including public websites, real-time business news, M&A activity, and regulatory filings.

EXL's content extraction solution will use natural language processing and machine learning to identify relevant information, extract it, and then organize it in an insightful manner for use by our credit evaluator. By embedding our solution into the credit process, our goal is to improve the effectiveness of the credit evaluator's decision.

Overall, I am extremely pleased with the growth and capabilities in our Analytics business and feel very excited about its future. Operations Management had a solid year in 2016. Our long-term strategy of building new and differentiated capabilities has enabled us to succeed.

Today, EXL is a strategic partner that helps clients grow their top and bottom line in a tough business environment by partnering with them to execute on their digital transformation road map. The Business EXLerator Framework remains a key differentiator for us.

Over the last three years, we have now worked with 75% of our Operations Management clients to help them transform their operations using domain expertise, Lean Six Sigma, analytics, robotics and advanced automation tool.

We have delivered approximately $150 million of savings to our clients over this time period, including cannibalizing some of our own revenues. We have made significant investments in building a proprietary team of robotics and automation experts in addition to partnering with multiple advanced technology providers.

We have developed our proprietary robotics implementation and change management capabilities which we can deploy in the outsource operations we manage or in our clients' in-house operation. Going forward, our focus is to make our robotic bots more intelligent by embedding analytics.

Our robotics capabilities are fast becoming a key differentiator for us and helping us win. For example, a leading insurance company chose EXL as a strategic partner to implement an integrated solution that will transform its finance and accounting operation.

Our solution, which integrates deep domain expertise with robotics, advanced automation and embedded analytics, will help the client move to a lean, customer-centric and agile operating model.

Our differentiated set of capabilities and success in the market has been acknowledged as we received multiple recognitions from industry analysts and achieved an improved Net Promoter Score in our clients' satisfaction survey.

Our clients highlighted our domain expertise, client-centricity and focus on trading tangible business impact as our key strength. Next, I will give some color on the demand environment. We continue to have a solid pipeline across Operations Management and Analytics, including new prospects and at existing clients.

In insurance, our property and casualty clients want to leverage robotics and advanced automation to achieve higher productivity in their outsourced and in-house operation. We are also looking to leverage EXL's global delivery capabilities to build a leaner and more agile operating model.

In life and annuities, we have embarked on an initiative to modernize our LifePRO platform, including the addition of a digital front-end capability leveraging list (16:28). These enhancements have led to improved market positioning, new wins and a stronger pipeline.

In healthcare, the payers' market remains underpenetrated as they look for innovative ways to reduce costs, while simultaneously looking to digitally transform their operating model.

The demand environment in healthcare remains strong, as payment integrity, fraud and abuse remain key focus areas for payers who are looking to optimize their medical cost loss ratios.

Our finance and accounting pipeline remains solid, as clients look for industry-specific solutions that integrate robotics, predictive analytics and global delivery capabilities to achieve a much leaner, faster and smarter operating model.

In banking and financial services, there continues to be solid demand for integrated Operations Management and analytic solutions that drive superior customer experience, manage enterprise and credit risk and ensure regulatory compliance. There are two key strategies that we are pursuing in 2017 which I want to speak about.

The first is that we have taken multiple actions to turn around our consulting business unit and our property survey business within insurance. While we are confident that we are on the right path, it will take some time before we see meaningful growth in both these businesses.

The second, as I mentioned earlier, is that the nature of demand is evolving. The increased focus on digital transformation, analytics and robotics implies a major change in the way clients do business today and, therefore, they are executing it in a very thoughtful and considerate manner.

As a result, we are seeing more complex and integrated deals that are taking a longer time to close and where the productivity benefits we deliver is much higher. We have positioned ourselves to help clients to think through their transformation strategy and are very well-placed to win additional business downstream.

Lastly, while uncertainty in the macroeconomic environment could impact the speed of decision-making or impact the nature of demand in the short term, we are confident that the underlying fundamentals and adaptability of our business model remains strong and positions us well for the future.

Before I end, I would like to share six key focus areas for EXL in 2017. One, win new strategic deals in Operations Management and Analytics, including expanding our presence in UK, Europe, and Australia. Two, grow our recent wins with excellent service delivery.

Three, build and leverage integrated solutions to play a major role in digital transformation journeys that our clients are undertaking. Four, invest and differentiate our capabilities in robotics, advanced automation, and analytics. Five, execute on M&A and structured deals to enhance capabilities and diversify geographic footprint.

And six, streamline our cost structure through improved profitability. The success of EXL is due to the hard work and dedication of our more than 26,000 global employees whom I would like to sincerely thank. We remain committed to helping our clients grow their top and bottom line and would like to thank them for the trust they've put in us.

We feel privileged to have the opportunity to serve them in the future. I look forward to 2017 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 off by providing insight into our financial performance for the fourth quarter and full-year 2016, followed by a guidance for 2017. Revenues for the quarter were $177.3 million, up 6.9% year-over-year or 8.4% on a constant-currency basis.

Sequentially, we grew 3.5% or 4.2% on a constant-currency basis. For the quarter, Operations Management revenues grew 1.8% year-over-year or 3.2% on a constant currency basis. Excluding consulting, Operations Management grew 7% on a constant currency basis. This growth was led by clients from our healthcare and insurance verticals.

Sequentially, Operations Management revenues grew by 2.5% on a constant currency basis. And excluding consulting, Operations Management grew 2% on a constant currency basis. The acquisition of LISS contributed $700,000 for the quarter.

Analytics continued its strong growth momentum with revenues up 24.9% year-over-year, but 27.1% on a constant currency basis. This includes revenues from acquisitions of IQR and Datasource of $5 million for the fourth quarter. This growth was led by clients from our healthcare and banking and financial service verticals.

Sequentially, Analytics revenues grew 9.7% on a constant currency basis. Gross margin for the quarter declined year-over-year by 130 basis points to 34.7%. This was driven by softness in consulting and property insurance business, coupled with lower utilization in Analytics as a result of advanced hiring and acquisitions impact.

Sequentially, gross margins remained flat at 34.7%. SG&A expenses increased 100 basis points year-over-year to 21.3%. This was driven primarily by deal-related expenses, senior leadership hiring and investment in technology and capability development. Adjusted operating margin for the quarter declined by 180 basis points year-over-year to 12.9%.

This decline was driven by lower gross margins and SG&A impact as explained earlier. Adjusted diluted EPS for the fourth quarter was $0.61, up 8.9% year-over-year. DSOs for the quarter remained flat at 57 days. Now, turning to our 2016 annual performance.

We delivered revenues of $686 million, an increase of 9.1% year-over-year, including a foreign exchange headwind of $10.8 million, resulting in a 10.9% revenue growth on a constant currency basis. On a reported basis, Operations Management revenues increased 2.7% or 4.4% on a constant currency basis.

Excluding consulting, Operations Management grew 7% on a constant currency basis. Our acquisition of LISS contributed $1.4 million for the year. Analytics revenues grew 35.7% including a $5.4 million contribution from our acquisitions of IQR and Datasource Consulting. On a constant currency basis, Analytics revenue were up 37.6% year-over-year.

For 2016, Analytics was 24.2% of our total revenues compared to 19.4% in 2015. Gross margins declined by 120 basis point to 34.7% for the year.

This was driven by softness in consulting and insurance survey revenues, impact of 100 basis points; investments in new client wins impact of 60 basis points; and the impact of acquisitions, 10 basis points, offset by a foreign exchange tailwind of 50 basis points. SG&A expenses marginally increased to 10 basis points year-over-year to 20.3%.

Adjusted operating margin declined by 90 basis points year-over-year to 14%, primarily driven by the gross margin impact as mentioned earlier. Adjusted EBITDA for the year was $118.6 million. The effective tax rate for 2016 was 26.4%. Our normalized rate excluding discrete items in 2015 was 28.8%.

This 240 basis points improvement was driven by structural changes in our taxes due to higher exemptions and benefits received on tax incentive in native geographies and higher earnings in lower tax jurisdictions. Adjusted EPS for the year was $2.33, up 14.8% year-over-year.

Our balance sheet remains strong with $227 million of cash and short-term investments, compared to $219 million in 2015.

Our net cash position at the end of year was a healthy $181.6 million, after spending $28.7 million on three acquisitions, $25.9 million on capital expenditures, and $18.2 million on share repurchases, and $25 million in debt repayment. Cash flow from operations less capital spending was $74.4 million and represents 121% of our net income.

I will now provide some insight into our guidance for 2017. We are providing revenue guidance of $735 million to $760 million which assumes an adverse foreign exchange impact of approximately $3 million to $4 million based on rupee-dollar exchange rate of INR 67 and other currencies at current exchange rate.

This guidance represents a growth of 8% to 11% on a constant currency basis. The main drivers of our revenue growth outlook are ramp-ups from 2016 wins in the insurance and healthcare verticals in Operations Management, a continued robust growth outlook across our Analytics value chain including our recent acquisitions and strong pipeline.

We expect our foreign exchange gains to be between $6 million and $7 million and our capital expenditures should be in the range of $30 million to $35 million. Our 2017 effective tax rate should be in the range of 25% to 26%.

Our priorities for free cash flow in 2017 will be to invest in our business and operation to support our growth trajectory and look for acquisitions that expand our capabilities and geographic reach.

As part of our commitment to deliver greater shareholder returns, we announced today a new share repurchase program to buy back an incremental $100 million of our shares. We intend to buy back up to $40 million annually in 2017, 2018 and 2019.

Based on these factors, we are providing adjusted diluted EPS guidance of $2.50 to $2.60 representing a growth of 7% to 12%. In terms of quarterly trends over the course of 2017, the first quarter revenues will be flattish sequentially on a constant currency basis and adjusted EPS will be marginally declining due to normalized tax rates in Q1.

Our revenue growth and margin improvement is expected to be second-half weighted. In conclusion, we had a strong 2016. We generated over $100 million of cash flow from operations, delivered adjusted EPS growth of approximately 15% and revenue growth of 11% on a constant currency basis. For 2017, we are confident that we can achieve our goals.

We have good revenue visibility across our segments from which we expect to achieve higher profitability in 2017. And now, Rohit and I would be happy to take your questions..

Thank you. Our first question comes from Rick Eskelsen with Wells Fargo. You may begin..

Good morning. Thank you for taking my question.

I guess, the first question, if we could go back to talking about some of the verticals, with the banking clients, what are you seeing there, where is the demand strongest, and particularly what are you seeing in some of the more discretionary areas?.

Hi, Rick. With the banking and financial services clients, we're actually seeing demand both in the Operations Management side, as well as in our Analytics reporting segment.

In Analytics, they're looking for a much enhanced customer experience for their retail banking clients and they're looking for more sophisticated modeling for their corporate and middle market clients.

In Operations Management, the effort is again to move towards a much more digitized transformation road map that can both enhance customer experience, and at the same time digitize their mid and back off.

We're seeing a tremendous opportunity in areas like know-your-customer and AML, and those areas continue to be very, very attractive areas for us to partner with our clients in banking and financial services..

Thank you for that. You also talked about some cannibalization of your revenue. I was wondering maybe if you can just expand on that.

How are you guys approaching that, how are you incentivizing your people out in the field and your sales people to pursue opportunities that could cannibalize your existing revenue, and how are your clients receiving it?.

Certainly. So, first of all, our mantra is that if there is an opportunity for cannibalization of our revenues, all of our managers are incentivized to go ahead and cannibalize the revenues because we believe that that's in the best interest of our clients.

And if we do implement and execute on productivity-yielding platform, that's going to result in incremental confidence of the client in us and incremental business with us.

The way we incentivize our managers on this is for any cannibalization that takes place during a calendar year, we do not disincentivize our managers for the revenue that is lost, but instead give them a credit for the amount of business impact and value that they've generated for the clients.

And, therefore, this is very well aligned to their personal goals, as well as what the company wants to do and what our clients wanted to see. As I mentioned, we have delivered over the last three years $150 million of business impact, a significant portion of which includes the cannibalization of revenues from us as well..

Thanks. Then, just the last one, on the Analytics clients, Rohit, you mentioned in your prepared remarks, you talked about a media client that was facing disruption.

Just wondering maybe if you could talk a little bit – more about what type of client your Analytics business is resonating with the most? Is it ones who, like this client, were facing disruption or do you see a lot more of the demand coming from leaders who are trying to maintain their position and view Analytics as a way of doing that? Thank you very much..

Sure. So, there are a few areas where our Analytics' predictive modeling capabilities are resonating very nicely.

Number one is in areas of risk management, whether that be credit risk, or market risk, or segment risk, I think we've developed very strong capabilities around risk management and we can help our clients manage their portfolio of assets a lot better, more intelligently and more smarter.

The second area is to help them with fraud, overpayment and abuse, and these are things associated with payment integrity or leakage on claims.

And particularly, when you think about clients in insurance, banking, healthcare, utilities, these are areas where we can help them prevent customer abuse and fraud abuse, and that's another very strong area that we've developed capabilities in.

The third area for us is actually around the retail segment and in the business-to-consumer side where we can help them provide personalized solutions and offerings to each individual end customer.

And because of our capabilities of managing large data sets in a real-time environment, we are able to help our clients offer a very contextual and personalized experience to the end customer. And again, we are able to do this in the retail industry, in media, across all of our industry verticals where we serve our clients..

Thank you very much..

Thank you. Our next question comes from Joseph Foresi with Cantor. You may begin..

Hi. I was wondering if we could get an update on the consulting and insurance platforms. I know you mentioned you're working on turning those businesses around or at least addressing the issues with them.

What actions are being taken? What's the timeframe around the turnaround? And can you size them at this point?.

Sure, Joe. For us – we've taken several actions on our book of (35:35) businesses. In the consulting business, number one is we've hired very strong leadership to help us turn around our consulting business. We've hired Srivatsan who is our Chief Growth Officer and he supervises and provides executive sponsorship to the consulting business.

And we've hired Suren who runs our consulting business on a direct basis. The second thing we've done is we are hiring domain and subject matter experts within our consulting practice. And this will allow us to engage with clients at a more strategic level and a more senior level.

The third thing is, we are working with our sales and account management teams to drive cross-selling of consulting services across all of our industry verticals and across all of our key client relationships.

And the last pieces that we are working in consulting to make that the tip of the spear to help our clients execute on their digital transformation journeys and as a result, engage with them early and position ourselves much better for getting downstream Operations Management and Analytics work.

I would say that our consulting business is currently in the midst of the turnaround. This, as we've said in our prepared remarks, will take us a couple of quarters to be able to get this to a growth phase.

But we are very confident about the actions that we are taking and some of the market acceptance of the steps that we've taken which have resulted in some very nice pilot and initial projects and engagements that we have won.

On the property survey business, we had mentioned that we would be launching a new express survey product and this product has now been launched earlier this year. And what this does is, it allows us to capture market share in the low-complexity and low-cost market survey business.

And that is something which we believe is at a lower price point and a lower cost structure and it will allow us to compete in this market much, much more effectively. The second thing we've done in our survey business is to diversify our market reach by expanding our presence in the commercial survey market.

And that again, due to the large relationships that we have in the commercial survey side, and with the commercial carriers, we believe gives us an added opportunity to help and build this business. Again, the initial signal that we are getting on both of these initiatives are very encouraging.

But we will have to see this play out over the next several quarters and derive the benefits of it. I hope that addresses your question..

Yes. Very much so.

On the growth – or on the 2017 outlook, can you talk about the growth rates for the individual businesses that you're expecting for 2017 and maybe some idea on what your margin assumptions are?.

Sure. So, on an overall basis, based on our guidance, we're looking at a revenue growth rate which is 8% to 11% on a constant currency basis.

If we were to split this up between Operations Management and Analytics, our expectation is that our Operations Management business will grow with – excluding consulting and property survey, at about 7% to 8% at the midpoint, and including consulting and property survey, it would grow at about 5%.

Our Analytics business, we expect that to grow above 20% on a combined basis, and that's pretty much in line with how we've been building and growing that business despite the fact that it's become now much larger in size and scale, and we've added on some assets through acquisitions and through M&A, which, as you know, are slower-growing assets.

I'll pass the call on to Vishal to talk about the margin expectations for 2017..

Yeah. Joe, thanks. As you know that in 2016, we had the impact of our lower revenues from consulting and property survey which has a fixed base impacting our revenues, plus we were winning and ramping up new clients.

We believe that after making these changes and, as Rohit outlined about the improvement in our consulting and survey businesses, which we expect in the second half, we think the margins will grow in 2017. Our expectation is that both the gross margins and the adjusted operating margins will improve.

And we expect the adjusted operating margin improvement to be in the range of 50 basis points to 70 basis points..

Okay. And then the last one from me, just on the robotics or the digital initiatives, is there any way to quantify how big a piece of your business that is at this point? And it sounds like it's actually changing the structure of the deals. Maybe there's a longer deal cycle.

Does that actually slow the growth and maybe result in sort of better margins over the long term? Thanks..

Sure, Joe. So, first, robotics, advanced automation and using some of the new technologies is a very exciting area that we think we can benefit from.

So, not only are we creating our own proprietary technologies in robotics and we have our own industry-specific bots that we've created, but we're also leveraging a much larger partner network to play in this space.

I think the fundamental change that is taking place by clients adopting robotics and advanced automation is that our playing field today is no longer limited to the work that our clients offshore to us in India, Philippines or in other geographies, but instead our playing field has expanded to the entire operations that our clients manage today, whether that be offshore or that be onshore.

And that's tremendous for us because, as you know, the penetration of work that is offshored is only about 20% to 25% today so it literally expands our market space from playing in a 20% to 25% market space to playing at the full 100% scale.

And I think the big shift that has taken place is that our clients now recognize that providers like EXL are the right players to help them in terms of this automation and robotics and the digital transformation journey. And I think we are very excited to partner with them and work with them across several fronts.

It does mean that there is going to be more discretionary elements associated with it. It does mean that there will be higher productivity benefits that we'll have to offer to our clients, and that is something which we are very confident of delivering.

So frankly for us, we think that this could be a great opportunity in terms of the shift that's taking place..

Got it. Thank you..

Thank you. Our next question comes from Anil Doradla with William Blair. You may begin..

Hey, guys. Congrats on the good results and client additions.

So, based on your commentary, both from Vishal and Rohit, it sounds like the March quarter might signify the bottom on the gross margins consulting and property business? Is that a fair assessment?.

So, Anil, I think for us right now we are in the business of fixing our consulting and our property survey business. We've taken a number of different action steps which we think are the right action steps for us to be taking. The initial signals that we are getting are very encouraging.

But, as you know, these businesses have a long sale cycle, and it does take some time for these businesses to turn around. I think we would expect that turnaround to be in place in the second half of the year, and we think that that's when this will reflect in our financials..

So, the 7% to 8% growth ex consulting and property survey versus a 5% growth, if you talk about a second half come back, so that should mean a steeper ramp, so to speak, in the second half for Operations Management..

That's correct..

Okay. And you exited the quarter with 13 clients, pretty impressive. Now, we're already into the March quarter.

Can you share some trends on the current quarter in terms of new design wins and new customers?.

For Q1, we continue to move forward pretty much the same as the previous quarter and the previous year that we've had. I think we are seeing a great amount of engagement with our existing clients as well as with prospects. And our pipeline is moving across very well.

We will be reporting our first quarter numbers sometime at the end of April, and we will share the client wins at that point..

So the trend that you saw over the last couple of quarters should persist into the March quarter too?.

Yes. There's nothing that we are seeing which is different, and we think that that should continue on a go-forward basis..

All right. Thanks a lot, and good job, guys..

Thank you. Our next question comes from Frank Atkins with SunTrust. You may begin..

Thanks for taking my question. Wanted to ask a little bit about Analytics' gross margin.

Can you talk a little bit about the seasonality there? And then, what are the levers to drive improvement over the course of 2017?.

Yeah. Hi, Frank, this is Vishal. As I was mentioning the – in Q3 and Q4, typically what happens is, we hire people from the institutes in the Analytics business, plus also the fact that we acquired two businesses in the second half of 2016 which also impacted the gross margins.

As we were simulating these businesses and also the advanced hiring coupled with that, the margins were impacted because of that.

We expect that will actually normalize and we will be able to improve as we have typically done that, as the advanced hiring, people we have got get deployed in 2017, and as we have assimilated these acquisitions, we have plans to improve some of that margin profile and some of that will happen in 2017..

Frank, if I can just add to that. As we mentioned, we now have five client relationships in Analytics which are more than $15 million of annual revenues. These clients we would consider to be as mature clients and, there, we are seeing the gross margin associated with that business to be much stronger.

So, one of the levers for us is going to be, as we sign up new clients and as they scale up in size and revenue with us, I think the profitability of those client relationships will increase.

It's also driven by the fact that the mix of business that we do, both onshore and offshore, in the Analytics space, as the client engagement matures and becomes more comprehensive, that allows us to optimize our margins as well.

And the last piece is, there are a few areas where we are creating analytical products and bringing those out to market, and there are areas where we have an outcome-based pricing model. And as we perfect those outcome-based pricing models, I think it gives us an opportunity to earn better margins..

All right. Great. That was very helpful. Thanks a lot.

Wanted to ask a little bit about your wage assumptions going into 2017 and what you're doing in the current labor market to kind of attract and retain good talent?.

Sure. So, Frank, as you would have seen now, first of all, we're very happy with the fact that our attrition rates have come down year-on-year, as well as quarter-on-quarter. We think that is an attribution to the company's strong performance, its brand and a very strong engagement with our employees.

We believe that the wage inflation metrics across all the markets that we operate in seem to be moderating down a bit. And as they moderate down a bit, we will take appropriate actions associated with that in terms of salary increments across the company.

We expect to take those decisions in the second quarter of the year, and that's typically when it impacts our business in terms of the annual increment cycle, but we are seeing a moderation of these salary increments and wages across geographies..

Then, last one for me, can you talk about the decision to ramp the repurchase plan in terms of your capital allocation?.

Yeah. So, as you know, Frank, that we have a revolver line in place for about $100 million. Also, when you look at our dilution with our share price going up, we are now looking at higher share count which we have to absorb in order to keep the share count flat.

So, we want to lever ourself up, use our revolver line if required and increase the share buyback to keep the share count neutral, and that's the intent and we will implement that in this year for $40 million till 2019..

All right. Great. Thank you very much..

Thank you. Our next question comes from Bryan Bergin with Cowen. You may begin..

Hi. Thank you. The commentary you had on large deal slowness (50:49) or ways that clients are engaging with some larger sales cycles, do you attribute that to changes in the behavior from just the policy uncertainty in the U.S.

currently or just overall disruption that they are seeing competitively?.

So, Bryan, we are seeing three broad trends play out. Certainly, there's been a shift in terms of the robotics and advanced automation and the use of these technologies. Second, clearly, there is secular shift towards digital transformation.

And third, I think the macroeconomic environment as well as the geopolitical environment, as that changes, that has impact on clients' decision making.

I think what we are seeing is a much more deliberate and thought-through decisions by our clients, and they are thinking about embarking on this digital transformation journey and making sure that they can enhance the customer experience, as well as digitalize their operations, and position themselves to benefit from the macroeconomic environment.

So it's driven by all three of these big factors that are impacting our clients. And I think we are in a great position to help them think through these strategies, help them with these strategies and implement and execute on these strategies..

Okay. So doesn't sound like any major changes from current policy. My follow-up, just trying to understand your current client base.

How many use both service lines, Operations Management and Analytics, just from a sense of cross-selling?.

Certainly. So, we have some very significant and large client relationships in our Operations Management practice, which are key accounts. We would say that the penetration rate of Analytics amongst these large strategic clients in Operations Management is very significant and quite high.

And our goal is to make sure that 100% of them are using our Analytics services as well. The reverse is not applicable currently, so we do have a number of new accounts and well-developed accounts in Analytics that currently do not use our Operations Management services.

And we think that there is a great opportunity because the integration of Operations Management and Analytics is becoming more and more important. Today, it's not good enough to just generate the insight for our clients using Analytics.

It's extremely important to take that insight and generate – and make that – operationalize that and make that real by creating real tangible business benefit by taking that insight and delivering the business benefit to the client. And our Operations Management practice helps to do that.

So, we think the business model that we've got, which integrates Analytics and Operations Management together, is extremely powerful. And we feel fortunate that we are one of the very few players that has the strong capability in the marketplace and that seems to be resonating very strongly..

Okay. That's helpful. Just one last one.

How should we think about Operations Management from a medium-term growth standpoint? You mentioned obviously this year you have the consulting and property insurance headwinds, but I guess, previously, this was an 8% to 10% type scale business and in this year, you're talking about 7% to 8% on the traditional Operations Management, so I'm trying to understand how should we think about that going forward..

Right. So, as we have said before, we think the Operations Management business segment for us is going to be a high-single digit growth number. And we think the penetration rate is low, the ability to provide services, the runway for that is large, both with existing clients, as well as with new clients.

And we think this is going to be a long-term secular trend that we can benefit from for a number of years. The decision-making in Operations Management typically is an emotional decision, is a slow decision, is a decision that gets made typically at the management team level and at the board level.

And therefore, it's got a lot of rigor associated with that selection and decision-making cycle. But we think it's a very strong, stable and a growth-oriented business for us, so we think that that's a great place for us to play in..

Okay. Thank you very much..

Thank you. Our next question comes from Puneet Jain with JPMorgan. You may begin..

Hi. Thanks for taking my question. So, if you look at last three or four years, your growth rates have slowed down, but margins have also stayed below 15% in each of those years.

And although you expect higher margins this year, but why should we expect like long-term margins to be much higher than 15% or so where you are right now? Do you have a need for investment – sort of remain high?.

Yes, Puneet. Thanks for that question. So, I think if you take a look at the growth rate of EXL over the past several years, including 2016, what we have been able to deliver is deliver consistent double-digit growth both on the top line and on the bottom line. And that is our focus, and that is what we have executed and delivered on.

And we think we can continue to deliver that going forward into 2017, and our guidance for 2017 reflects that. In terms of margins, we do think there a number of areas that we will continue to invest and position ourselves for long-term success.

So, whether that be in technology, and it be in robotics, and advanced automation, whether that be in sales and marketing, you will notice that our sales and marketing expense is a bit higher than our peer group, and we are consciously investing in that capability to have a much closer relationship with our customers.

And we will continue to diversify geographically and add on capabilities that makes us a very, very strong player. I think there are two very fundamental factors for our business as compared to others. Number one, we focus on domain expertise and we focus on a few industry segments where we've become experts at.

And number two is this integration of Operations Management and Analytics, which is critical to providing incremental business value to our clients, and that's something, which again, we've taken a very strong positioning on.

The margins and the growth rate we are committed to delivering and the margins I think will play out as we gain size and scale and we optimize our business model..

Understood. And what do you expect for acquisition contribution this year? Seems like IQR and Datasource came in well above our expectations at $5 million this quarter. I'm trying to think how should we think about organic growth for Analytics this year..

So the acquisition, Puneet, in 2016 contributed roughly about $6.8 billion. And we expect an incremental contribution of about $14 million to $18 million on the – from the acquisitions – three acquisitions we did in 2016..

So in 2017?.

Yes..

Understood. Yeah. Understood. So, around 2%, around 2%. Thank you..

Thank you. Our next question comes from Vincent Colicchio with Barrington Research. You may begin..

Yes.

Rohit, your UK business declined in the mix, I'm just curious if there's been any impact from Brexit and what your thoughts on Brexit are going forward?.

Certainly, Vincent. You're absolutely right. The UK business for us did shrink a bit, but most of that we would attribute to the currency and the FX fluctuations which caused an impact on our revenues and in terms of slightly reduced volumes that we had with one of our clients in that market.

We actually are not seeing any real impact of Brexit in terms of slower decision-making cycles or any changes in the market out there. We are going to be consciously investing in markets outside the U.S. and diversifying our geographic footprint. I think you've heard us talk about expanding our client presence in Australia.

We're going to continue to do that, as well as invest in expanding our client footprint in UK and in Europe as well. So, for us, these markets are attractive markets, and we will look at broadening out our footprints there.

I think one of the things which we've also said is from an acquisition perspective, historically we've just done acquisitions which are traditionally in the U.S. market, and we are now actively engaged in terms of looking at acquisitions which have got a much broader client geographic footprint.

And that will help us diversify the presence, as well as attract some leadership talent in these markets as well..

So, aside from your property survey platform business, are you considering any positioning changes with any of your other platforming business, any concerns with how they're approaching the market today?.

Well, with most of our technology and platform and BPaaS business model that we've got, we are investing in modernizing these technology platforms. So, like we've said, we are going to be modernizing our LifePRO policy administration platform.

We are investing and embedding data analytics into each one of our technology platforms because we're seeing the value that our clients derive from that combination of analytics and the technology. And we are taking these technology platforms on the cloud to offer these as a SaaS service offering. So, these are investments for us.

We do think these will play out, but the adoption rate of these technology solutions has certainly been a bit slower than what we previously anticipated..

Okay. Thanks for answering my questions..

Sure..

Thank you. Our next question comes from Eric Ciura with Baird. You may begin..

Hi, guys. Thanks for taking my question. My first question just is on revenue growth over time. Next year is going to be a little slower due to the hold-ups in spend and also the consulting and platform businesses.

But over time, is there anything changing in the industry that would prevent the overall business from growing in the double-digits organically over the next several years?.

Eric, we actually think the market demand and the need for our services in Operations Management and Analytics is very robust, and it will continue to play out for the next several years. I think from a revenue standpoint, our growth rate – our goal is to have that be a double-digit growth rate.

We think Analytics will grow a little bit – not little bit, but it will grow much faster than our Operations Management business, and the combination of the two really gets us to this kind of a growth rate. Even for 2017, our guidance on a constant currency basis is to grow our revenues between 8% to 11%.

And that's something which, just based on the existing assets that we have, we think we'll be able to grow. So we do feel very confident about being able to continue down this path of delivering double-digit growth in our top line as well as in our bottom line..

All right. Thank you. And then my second question will be the potential for any cross-border tax reform on services. Just wondering how you guys think about that and what potential, like, it could maybe have on your business and what you could potentially do to offset any tax reform..

So, Eric, as you know that there is lot of uncertainty in terms of what the border tax – whether that will come through, what shape and form will it come through. So as of now, we are watching the situation. We think that we are well aligned to deal with it. We have a lot of onshore operations which we have for our clients.

So, as and when we get more clarity, we should be able to comment about it in a much more detail..

Okay. Thanks, guys..

Thank you. Our last question is from David Grossman with Stifel. You may begin..

Thank you. Sorry, I got bounced from the call for a little while. So, I'm wondering if you could just repeat a couple of things on the margins, Vishal.

So, can you break down again what the margin decline in the quarter, how it broke down between the issues in consulting and property survey versus acquisitions and currency (01:05:35)?.

Yeah. So, I'll give you on a full-year basis. That's – in terms of what happened to our gross margin for the year, this was driven by softness in consulting and survey business, which had an impact of 100 basis points. The ramps and the new investment growth impact was about 60 basis points.

We had three acquisitions, which impacted our gross margins about 10 basis points, and then offset by a foreign exchange tailwind of about 50 basis points..

I'm sorry, Vishal, what was the last one?.

The foreign exchange tailwind..

Okay. And how much was that again? I'm sorry. You broke up..

The offset of foreign exchange tailwind was 50 basis points, but the impact of survey and the consulting business being soft was 100 basis points..

Yeah. I got that. That's good. Yeah. I got that, it's the FX. Okay. Thanks for that. And then, as you think about how 2017 will evolve relative to the margin, I think you had indicated that the consulting and survey initiatives should yield improvement towards the back half of the year.

Is there anything else we should think about in terms of the margins and how they (01:06:57) 2017?.

Now, as I said earlier, in Q4, one other impact which happened was the advanced hiring of our Analytics business, which typically brings down the gross margin in the second half or in Q4.

But as we deploy those people and as we get the deployment of the Analytics resources, plus we leverage our scale and growth in the Analytics business, the margins should improve in the Analytics business in 2017.

Also, I think if you look at some of the other events, which we are experiencing, which is the investment we've made in implementing the ramps for our new wins, some of that will also play out to our benefit in 2017. So apart from (01:07:43) in the consulting and property survey business, these are the other deals which will help us..

Right.

And then, you also mentioned what impact G&A – I'm sorry, I'm at an airport, so I couldn't hear it – what did you say about G&A in the quarter, why it was elevated?.

So, G&A for the quarter – I think that as G&A expenses increased by 100 basis points in the quarter, primarily driven by the fact that we had few acquisitions we did, so they were deal-related expenses.

As you also know, we hired a few people at the senior leadership and there was cost related to that, plus we invested in some technology and capability developments, which impacted our SG&A expenses. But for the year, our SG&A expenses were only up by about 10 basis points..

Okay. Great. And then just one last question for you, Rohit. So, you guided – I think someone did ask the survey at about 7% to 8%, growth in Operations Management ex consulting and the survey impact.

So, is that the mechanics that your high-single digit growth which essentially – you may be kind of at the lower end of that range, 7% -- 6% to 8% for the core Operations Management business, but consulting and some of these other pieces should drive you towards that high-single digit rate.

Is that the way to think about the mechanics as your kind of longer-term target?.

Yes, David. I think we do expect our consulting factors to build and start to grow towards the second half of the year.

And I think on a year-on-year basis, just given the fact that our clients are seeking more assistance using robotics and automation, as well as help with their digital transformation road map, we think there are huge opportunities for us to continue to help them with those kinds of changes and shifts.

And as that kicks back into gear, I think it will help us grow towards the top end of that range..

Right. And just one last thing, Rohit, on the consulting business.

So, as you ramp that business, would that be more of onsite kind of hire – local hiring versus offshore or is your expectation that you can build that kind of consulting practice offshore?.

I think it will be a balanced approach for us, David. I think there certainly is a need to have onshore resources and be very close to our customers and help and work with them out here, and so we will have onshore resources for that. But there are a number of areas where we can support these activities with offshore resources as well.

And particularly as some of these engagements get more productized, we'll be able to do some of the work from offshore. So, I think there's going to be a equal balance between onshore and offshore resources..

So, is the model more of a 50-50 model versus a 90-10 kind of model, something like that?.

Yeah, I think it's going to be a lot more balanced, David, and I think it's probably going to be a 60-40 model..

Got it. Okay, great. Thanks very much..

Thank you. I'd now like to turn the call back over to management for closing remarks..

Thank you, operator, and thank you, everyone, for joining our 2016 year-end earnings call. EXL is in a great position and we had a very strong performance in 2016. We remain excited about 2017 and executing on a go-forward basis. We look forward to our first quarter earnings call which would be sometime at the end of April this year.

Thank you very much..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day..