EXLSERVICE HOLDINGS, INC. You should read the following discussion in connection with our unaudited consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . Some of the statements in the following discussion are forward looking statements. Dollar amounts within Item 2 are presented as actual, rounded, dollar amounts. We have described in this Quarterly Report on Form 10-Q, the impact of the global Coronavirus Disease 2019 pandemic ("COVID-19") on our financial results for the quarter endedJune 30, 2020 . However, it remains difficult to predict at this time what impact, the spread of COVID-19 will have on our 2020 financial results. See "Cautionary Note Regarding Forward-Looking Statements" below and in Item 1A-"Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q for further information regarding risks and uncertainties relating to COVID-19. Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These statements often include words such as "may," "will," "should," "believe," "expect," "anticipate," "intend," "plan," "estimate" or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. Many of the following risks, uncertainties and other factors identified below are, and will be, amplified by COVID-19. These factors include but are not limited to: •our results of operations have been affected and could in the future be adversely impacted by COVID-19; •our dependence on a limited number of clients in a limited number of industries; •worldwide political, economic or business conditions; •negative public reaction in theU.S. or elsewhere to offshore outsourcing; •fluctuations in our earnings; •our ability to attract and retain clients including in a timely manner; •our ability to successfully consummate or integrate strategic acquisitions; •our ability to accurately estimate and/or manage the costs and/or timing of winding down businesses; •restrictions on immigration; •our ability to hire and retain enough sufficiently trained employees to support our operations; •our ability to grow our business or effectively manage growth and international operations; •any changes in the senior management team; •increasing competition in our industry; •telecommunications or technology disruptions; •our ability to withstand the loss of a significant customer; •our ability to realize the entire book value of goodwill and other intangible assets from acquisitions; 41 -------------------------------------------------------------------------------- Table of Contents •regulatory, legislative and judicial developments, including changes to or the withdrawal of governmental fiscal incentives; •changes in tax laws or decisions regarding repatriation of funds held abroad; •ability to service debt or obtain additional financing on favorable terms; •legal liability arising out of customer contracts; •technological innovation; •political or economic instability in the geographies in which we operate; •operational and information security failures arising as a result of remote work solutions adopted due to COVID-19; •cyber security incidents, data breaches, or other unauthorized disclosure of sensitive or confidential client and customer data; and •adverse outcome of our disputes with the Indian tax authorities These and other factors are more fully discussed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . These and other risks could cause actual results to differ materially from those implied by forward-looking statements in this Quarterly Report on Form 10-Q. The forward-looking statements made by us in this Quarterly Report on Form 10-Q, or elsewhere, speak only as of the date on which they were made. New risks and uncertainties come up from time to time, and it is impossible for us to predict those events or how they may affect us. We have no obligation to update any forward-looking statements in this Quarterly Report on Form 10-Q after the date of this Quarterly Report on Form 10-Q, except as required by federal securities laws. Executive Overview We are a leading operations management and analytics company that helps our clients build and grow sustainable businesses. By orchestrating our domain expertise, data, analytics and digital technology, we look deeper to design and manage agile, customer-centric operating models to improve global operations, drive profitability, enhance customer satisfaction, increase data-driven insights, and manage risk and compliance. We serve customers in multiple industries, including insurance, healthcare, banking and financial services, utilities, travel, transportation and logistics, media and retail, among others. We operate in the business process management ("BPM") industry and we provide operations management and analytics services. EffectiveJanuary 1, 2020 , we made certain operational and structural changes to more closely integrate our businesses and to simplify our organizational structure. We now manage and report financial information through our four strategic business units, Insurance, Healthcare, Analytics and Emerging Business, which reflects how management will review financial information and make operating decisions. These business units develop client specific solutions, build capabilities, maintain a unified go-to-market approach and are integrally responsible for service delivery, customer satisfaction, growth and profitability. In line with our strategy of vertical integration and focus on domain expertise, we have integrated our Finance & Accounting and Consulting operating segments within each of the Insurance and Healthcare operating segments based on the corresponding industry-specific clients. Finance & Accounting and Consulting services provided to clients outside of the Insurance and Healthcare industries is now the part of our newly formed business unit and reportable segment, Emerging Business. In addition, we integrated our former Travel, Transportation and Logistics, Banking and Financial Services, and Utilities operating segments under Emerging Business to further leverage and optimize the operating scale in providing operations management services. 42 -------------------------------------------------------------------------------- Table of Contents Our new reportable segments are as follows: •Insurance, •Healthcare, •Analytics, and •Emerging Business In conjunction with the new reporting structure, we recasted our segment disclosures for all prior periods presented to conform to the way we internally manage and monitor segment performance. Our global delivery network, which includes highly trained industry and process specialists acrossthe United States ,Latin America ,South Africa ,Europe andAsia (primarilyIndia andthe Philippines ), is a key asset. We have operations centers inIndia , theU.S. ,the Philippines ,Bulgaria ,Colombia ,South Africa ,Romania and theCzech Republic .
Impact of COVID-19 on Our Business
The global COVID-19 pandemic continues to materially impact worldwide economic activity and levels of business confidence and has had widespread, rapidly-evolving and unpredictable impacts on global societies, economies, financial markets and business practices. During the first fiscal quarter endedMarch 31, 2020 , COVID-19 did not have a significant impact on our business, however during the second fiscal quarter endedJune 30, 2020 , COVID-19 materially impacted us and our customers, employees, contractors, suppliers, and other partners, who were prevented from conducting business activities as usual, including due to the health and safety measures in response to COVID-19, such as shutdowns, which have been requested or mandated by governmental authorities. The shutdown measures disrupted our ability to provide our services and solutions and resulted in, among other things, loss of revenue, increased costs and the possibility of enhanced credit risk on our accounts receivable. The continued spread of COVID-19 and the measures taken by the governments of countries affected has disrupted the continuity of our provision of services to our customers and adversely impacted our business, financial condition or results of operations. In the second quarter of 2020, we took actions in response to the pandemic that focused on maintaining business continuity and helping our employees and our customers, as well as on preparing for the future and the long-term success of our business. These actions included disseminating guidance and information to our employees, periodic CEO messaging, various programs aimed at employee wellness and facilitating work from home, including a global wellness program, enhanced awareness towards information security, cyber security and data privacy policies and practices for employees while working from home among others. There continues to be significant volatility and economic and geopolitical uncertainty in many markets around the world. Several states inthe United States , includingNew York , where we are headquartered, declared states of emergency, some of which are now being slowly lifted in a piecemeal manner through multi-step reopening policies, while others are being reinstated in response to new outbreaks. Several countries around the world, includingthe United States , have significantly restricted travel. We are actively managing our business to respond to the impact. Given the unprecedented uncertainty of this situation, including the unknown duration, scope and severity of the pandemic and the current and future health and safety measures implemented in response to the pandemic, and the unknown overall impact on our services, it makes it difficult to forecast the full impact on our business or the duration of such impact; however, we expect that the impacts from COVID-19 and the related economic disruption will have an adverse impact on our consolidated results of operations, consolidated financial position and consolidated cash flow in fiscal 2020. However we do not expect COVID-19 and its related economic impact to materially adversely affect our liquidity position in the foreseeable future. Due to the above circumstances and as described generally in this Quarterly Report on Form 10-Q, our results of operations for the three and six months ended period endedJune 30, 2020 are not necessarily indicative of the results to be expected for the full fiscal year and such impact may not be directly comparable to any historical period. We continue to monitor the implications of COVID-19 on our business, as well as our customers' and suppliers' businesses. In response to certain anticipated impacts from COVID-19, we have also implemented a series of temporary cost reduction measures to further preserve financial flexibility. These actions include the postponement of certain discretionary spending and capital expenditures, deferring scheduled increases in base salaries and temporarily reducing the base salaries of our executive officers and certain other groups of employees. 43 -------------------------------------------------------------------------------- Table of Contents We have also taken certain precautionary measures to maintain financial flexibility during this time, including drawing$100.0 million from our line of credit under our existing Credit Agreement onMarch 12, 2020 , the proceeds of which were available for working capital, general corporate or other purposes as needed, however it was repaid in full onApril 20, 2020 . We also temporarily suspended our stock repurchase program during the first and second quarter of 2020, which was resumed as ofJuly 1, 2020 . As ofJune 30, 2020 , due to the macroeconomic conditions arising from COVID-19, we performed a goodwill impairment test for any potential impairment and concluded that there was no impairment. However, there can be no assurances that goodwill will not be impaired in future periods. Estimating the fair value of goodwill requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. These estimates and judgments may not be within the control of us and accordingly it is reasonably possible that the judgments and estimates could change in future periods. As public health protocols begin to accommodate returning to work at our facilities, we are implementing additional safety measures at all of our facilities, including increased frequency in cleaning and disinfecting as well as hygiene and social distancing practices. However there is a risk that if jurisdictions in which we operate re-instate prior restrictions, our operations and business will be materially impacted.
For additional information and risks related to COVID-19, see Item 1A- "Risk Factors" below.
Revenues For the three months endedJune 30, 2020 , we had revenues of$222.5 million compared to revenues of$243.5 million for the three months endedJune 30, 2019 , a decrease of$21.0 million , or 8.6%. For the six months endedJune 30, 2020 , we had revenues of$468.5 million compared to revenues of$483.1 million for the six months endedJune 30, 2019 , a decrease of$14.6 million , or 3.0%. We serve clients mainly inthe United States and theUnited Kingdom , with these two regions generating 85.0% and 8.5%, respectively, of our total revenues for the three months endedJune 30, 2020 , and 81.3% and 12.4%, respectively, of our total revenues for the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , these two regions generated 84.7% and 9.0%, respectively, of our total revenues and 81.6% and 12.3%, respectively, of our total revenues for the six months endedJune 30, 2019 . For the three months endedJune 30, 2020 and 2019, our total revenues from our top ten clients accounted for 38.7% and 36.5% of our total revenues, respectively. For the six months endedJune 30, 2020 and 2019, our total revenues from our top ten clients accounted for 37.1% and 36.5% of our total revenues, respectively. Our revenue concentration with our top clients remains largely consistent year-over-year and we continue to develop relationships with new clients to diversify our client base. We believe that the loss of any of our top ten clients could have a material adverse effect on our financial performance. Our Business We provide operations management and analytics services. We market our services to our existing and prospective clients through our sales and client management teams, which are aligned by key industry verticals and cross-industry domains such as finance and accounting. Our sales and client management teams operate from theU.S. ,Europe andAustralia . Operations Management Services: We provide our clients with a range of operations management services from our Insurance, Healthcare and Emerging Business operating segments, which typically involve the transfer to EXL business operations of a client such as claims processing, clinical operations, or financial transaction processing, after which we administer and manage those operations for our client on an ongoing basis. As part of this transfer, we hire and train employees to work at our operations centers on the relevant business operations, implement a process migration to these operations centers and then provide services either to the client or directly to the client's customers. Each client contract has different terms based on the scope, deliverables and complexity of the engagement. We also provide consulting services related to operations management that include industry-specific digital transformational services as well as cross-industry finance and accounting services as part of the Emerging Business operating segment. 44 -------------------------------------------------------------------------------- Table of Contents We continue to observe a shift in industry pricing models toward transaction-based pricing, outcome-based pricing and other alternative pricing models. We believe this trend will continue and we use such alternative pricing models with some of our current clients and are seeking to move certain other clients from a billing rate model to a transaction-based or other alternative pricing model. These alternative pricing models place the focus on operating efficiency in order to maintain our gross margins. In addition, we have also observed that prospective larger clients are entering into multi-vendor relationships with regard to their outsourcing needs. We believe that the trend toward multi-vendor relationships will continue. A multi-vendor relationship allows a client to seek more favorable pricing and other contract terms from each vendor, which can result in significantly reduced gross margins from the provision of services to such client for each vendor. To the extent our large clients expand their use of multi-vendor relationships and are able to extract more favorable contract terms from other vendors, our gross margins and revenues may be reduced with regard to such clients if we are required to modify the terms of our relationships with such clients to meet competition. Our existing agreements with original terms of three or more years provide us with a relatively predictable revenue base for a substantial portion of our operations management business, however, we have a long selling cycle for our services and the budget and approval processes of prospective clients make it difficult to predict the timing of entering into definitive agreements with new clients. Similarly, new license sales and implementation projects for our technology service platforms and other software-based services have a long selling cycle, however ongoing annual maintenance and support contracts for existing arrangements provide us with a relatively predictable revenue base. Analytics: Our analytics services focus on driving improved business outcomes for our customers by generating data-driven insights across all parts of our customers' business. We also provide care optimization and reimbursement optimization services, for our clients through our healthcare analytics solutions and services. We also offer integrated solutions to help our clients in cost containment by leveraging technology platforms, customizable and configurable analytics and expertise in healthcare reimbursements to help clients enhance their claim payment accuracy. Our teams deliver predictive and prescriptive analytics in the areas of customer acquisition and lifecycle management, risk underwriting and pricing, operational effectiveness, credit and operational risk monitoring and governance, regulatory reporting, payment integrity and care management and data management. We actively cross-sell and, where appropriate, integrate our Analytics services with other operations management services as part of a comprehensive offering for our clients.
We anticipate that revenues from our analytics services will grow as we expand our service offerings and client base, both organically and through acquisitions.
We expect that the growth of our operations management and analytics services will continue to be impacted throughout 2020 by the COVID-19 pandemic and subsequent global recovery. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of COVID-19 on Our Business" and to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
For a description of our critical accounting policies and estimates, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" and Note 2 - Summary of Significant Accounting Policies to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 In addition, due to outbreak of COVID-19, we have reassessed those of our accounting policies whose application places the most significant demands on management's judgment, for instance, revenue recognition, allowance for expected credit losses, business combinations, goodwill, intangibles and long-lived assets, stock-based compensation, derivative instruments and hedging activity, borrowings, assumptions related to ROU assets, lease cost, income taxes and assets and obligations related to employee benefit plans. Such reassessments did not have a significant impact on our results of operations and cash flows for the periods presented. 45 --------------------------------------------------------------------------------
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Results of Operations The following table summarizes our results of operations for the three months endedJune 30, 2020 and 2019: Six months ended June Three months ended June 30, 30, 2020 2019 2020 2019 (dollars in millions) Revenues, net$ 222.5 $ 243.5 $ 468.5 $ 483.1 Cost of revenues(1) 158.4 162.4 321.1 319.7 Gross profit(1) 64.1 81.1 147.4 163.4 Operating expenses: General and administrative expenses 28.8 31.2 57.7 63.8 Selling and marketing expenses 13.0 17.6 27.5 35.7 Depreciation and amortization expense 12.4 12.8 24.9 26.4 Impairment and restructuring charges - 5.6 - 6.8 Total operating expenses 54.2 67.2 110.1 132.7 Income from operations 9.9 13.9 37.3 30.7 Foreign exchange gain, net 1.4 1.2 2.7 2.5 Interest expense (2.9) (3.9) (6.0) (7.4) Other income, net 4.2 4.1 6.8 8.5
Income before income tax expense and earnings from equity affiliates
12.6 15.3 40.8 34.3
Income tax expense 4.1 2.7 9.9 6.9
Income before earnings from equity affiliates 8.5 12.6 30.9 27.4
Loss from equity-method investment 0.1 0.1 0.1 0.1
Net income attributable to ExlService Holdings, Inc.
stockholders $ 8.4 $ 12.5 $ 30.8 $ 27.3 (1) Exclusive of depreciation and amortization expense.
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Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Revenues.
The following table summarizes our revenues by reportable segments for the three
months ended
Three months ended June 30, Percentage
2020 2019 Change change
(dollars in millions)
Insurance $ 81.3 $ 85.6 $ (4.3) (5.0) %
Healthcare 25.0 21.7 3.3 14.9 %
Emerging Business 34.5 48.3 (13.8) (28.5) %
Analytics 81.7 87.9 (6.2) (7.0) %
Total revenues, net $ 222.5 $ 243.5 $ (21.0) (8.6) %
Revenues for the three months ended
Revenue decline in Insurance of$4.3 million was primarily driven by lower volumes due to the impact of COVID-19, partially offset by expansion of business from certain existing clients aggregating to$3.6 million and$0.7 million mainly attributable to the depreciation of the Australian dollar, Indian rupee,U.K. pound sterling and South African ZAR against theU.S. dollar during the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 . Insurance revenues were 36.5% and 35.1% of our total revenues in the three months endedJune 30, 2020 andJune 30, 2019 , respectively. Revenue growth in Healthcare of$3.3 million was primarily driven by expansion of business from our existing clients of$6.2 million , partially offset by ourDecember 2019 wind-down of Health Integrated business revenues of$2.9 million during the three months endedJune 30, 2019 . Healthcare revenues were 11.2% and 8.9% of our total revenues in the three months endedJune 30, 2020 andJune 30, 2019 , respectively. Revenue decline in Emerging Business of$13.8 million was primarily driven by lower volumes due to the impact of COVID-19 and ramp down in certain client contracts aggregating to$13.0 million and$0.8 million attributable to the depreciation of the Indian rupee against theU.S. dollar during the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 . Emerging Business revenues were 15.5% and 19.8% of our total revenues in the three months endedJune 30, 2020 andJune 30, 2019 , respectively. Revenue decline in Analytics of$6.2 million was primarily driven by lower revenues from our recurring and project-based engagements due to the impact of COVID-19 aggregating to$6.0 million , and$0.2 million attributable to the depreciation of theU.K. pound sterling and Indian rupee against theU.S. dollar during the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 . Analytics revenues were 36.7% and 36.1% of our total revenues in the three months endedJune 30, 2020 andJune 30, 2019 , respectively. 47 --------------------------------------------------------------------------------
Table of Contents Cost of Revenues and Gross Margin: The following table sets forth cost of revenues and gross margin of our reportable segments.
Cost of Revenues Gross Margin
Three months ended June 30, Change Percentage Three months ended June 30, Change
2020 2019 change 2020 2019
(dollars in millions)
Insurance $ 59.1 $ 59.4 $ (0.3) (0.5) % 27.3 % 30.6 % (3.3) %
Healthcare 19.6 17.7 1.9 10.7 % 21.4 % 18.3 % 3.1 %
Emerging Business 22.5 27.9 (5.4) (19.5) % 35.1 % 42.4 % (7.3) %
Analytics 57.2 57.4 (0.2) (0.3) % 29.9 % 34.6 % (4.7) %
Total $ 158.4 $ 162.4 $ (4.0) (2.5) % 28.8 % 33.3 % (4.5) %
For the three months ended June 30, 2020 , cost of revenues was $158.4 million
compared to $162.4 million for the three months ended June 30, 2019 , a decrease
of $4.0 million , or 2.5%. Our gross margin for the three months ended June 30,
2020 was 28.8% compared to 33.3% for the three months ended June 30, 2019 , a
decrease of 450 basis points ("bps").
The decrease in cost of revenues in Insurance of $0.3 million was primarily due
to decrease in employee-related costs of $1.3 million and currency movements,
net of hedging of $0.8 million . This was offset by higher infrastructure,
technology and other operating costs of $1.8 million . Gross margin in Insurance
decreased by 330 bps during the three months ended June 30, 2020 compared to the
three months ended June 30, 2019 , primarily due to lower revenues and impact of
COVID-19 related expenses during the three months ended June 30, 2020 .
The increase in cost of revenues in Healthcare of $1.9 million was primarily due
to an increase in employee-related costs of $1.6 million and other operating
costs of $0.5 million . This was partially offset by currency movements, net of
hedging of $0.2 million . Gross margin in Healthcare increased by 310 bps during
the three months ended June 30, 2020 , compared to the three months ended
June 30, 2019 , primarily due to lower margin in the Heath Integrated business
during the three months ended June 30, 2019 and higher revenues during the three
months ended June 30, 2020 .
The decrease in cost of revenues in Emerging Business of $5.4 million was
primarily due to a decrease in employee-related costs of $3.5 million , lower
travel costs of $0.9 million , lower other operating costs of $0.4 million and
currency movements, net of hedging of $0.6 million . Gross margin in Emerging
Business decreased by 730 bps during the three months ended June 30, 2020 ,
compared to the three months ended June 30, 2019 , primarily due to lower
revenues during the three months ended June 30, 2020 .
The decrease in cost of revenues in Analytics of $0.2 million was primarily due
to lower travel costs of $2.2 million and currency movements, net of hedging of
$0.7 million . This was partially offset by an increase in employee-related costs
of $2.2 million and higher other operating costs of $0.5 million . Gross margin
in Analytics decreased by 470 bps during the three months ended June 30, 2020 ,
compared to the three months ended June 30, 2019 , primarily due to lower
revenues and higher operating expenses.
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Selling, General and Administrative ("SG&A") Expenses.
Three months ended June 30, Change Percentage
2020 2019 change
(dollars in millions)
General and administrative expenses $ 28.8 $ 31.2 $ (2.4) (7.9) %
Selling and marketing expenses 13.0 17.6 (4.6) (26.0) %
Selling, general and administrative expenses $ 41.8 $ 48.8 $ (7.0) (14.5) %
As a percentage of revenues 18.8 % 20.1 %
The decrease in SG&A expenses of $7.0 million was primarily due to COVID-19 cost
reduction measures including the temporary reduction of the base salaries of our
executive officers and certain other groups of employees. This was driven by
lower employee-related costs of $4.5 million , lower infrastructure and travel
costs of $1.9 million and currency movements, net of hedging of $0.6 million .
Depreciation and Amortization.
Three months ended June 30, Change Percentage
2020 2019 change
(dollars in millions)
Depreciation expense $ 9.0 $ 7.2 $ 1.8 24.7 %
Intangible amortization expense 3.4 5.6 (2.2) (38.2) %
Depreciation and amortization expense $ 12.4 $ 12.8 $ (0.4) (2.7) %
As a percentage of revenues 5.6 % 5.2 %
The decrease in intangibles amortization expense of$2.2 million was primarily due to end of useful lives for certain intangible assets during the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The increase in depreciation expense of$1.8 million was due to depreciation related to our investments in new operating centers to support our business growth.
Impairment and Restructuring Charges.
Three months ended June 30,
2020 2019 Change Percentage change
(dollars in millions)
Impairment and restructuring charges $ - $ 5.6 $ (5.6) (100.0) %
As a percentage of revenues - % 2.3 %
During the three months endedJune 30, 2019 , we recorded an impairment charge of$1.9 million and restructuring charges of$3.7 million in connection with the wind-down of our Health Integrated business. Income from Operations. Income from operations decreased by$4.0 million , or 28.8%, from$13.9 million for the three months endedJune 30, 2019 to$9.9 million for the three months endedJune 30, 2020 . As a percentage of revenues, income from operations decreased from 5.7% for the three months endedJune 30, 2019 to 4.4% for the three months endedJune 30, 2020 . Foreign Exchange Gain/(Loss). Net foreign exchange gains and losses are primarily attributable to movement of theU.S. dollar against the Indian rupee, theU.K. pound sterling and the Philippine peso during the three months endedJune 30, 2020 . 49 -------------------------------------------------------------------------------- Table of Contents The average exchange rate of theU.S. dollar against the Indian rupee increased from 69.42 during the three months endedJune 30, 2019 to 75.41 during the three months endedJune 30, 2020 . The average exchange rate of theU.K. pound sterling against theU.S. dollar decreased from 1.28 during the three months endedJune 30, 2019 to 1.24 during the three months endedJune 30, 2020 . The average exchange rate of theU.S. dollar against the Philippine peso decreased from 51.84 during the three months endedJune 30, 2019 to 50.28 during the three months endedJune 30, 2020 . We recorded a net foreign exchange gain of$1.4 million for the three months endedJune 30, 2020 compared to the net foreign exchange gain of$1.2 million for the three months endedJune 30, 2019 . Interest expense. Interest expense decreased from$3.9 million for the three months endedJune 30, 2019 to$2.9 million for the three months endedJune 30, 2020 primarily due to lower borrowings and lower effective interest rates under our Credit Facility (as defined below) during the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . Other Income, net. Three months ended June 30, Percentage 2020 2019 Change change (dollars in millions) Gain on sale and mark-to-market of mutual funds$ 3.1 $ 3.3 $ (0.2) (6.3) % Interest income 0.6 0.7 (0.1) (9.3) % Other, net 0.5 0.1 0.4 456.3 % Other income, net$ 4.2 $ 4.1 $ 0.1 3.0 % Other income, net increased by$0.1 million , from$4.1 million for the three months endedJune 30, 2019 to$4.2 million for the three months endedJune 30, 2020 , primarily due to recognition of non-recurring benefits of$0.5 million related to wind-down of the Health Integrated business during the three months endedJune 30, 2020 . This was partially offset by lower return on mutual fund investments and interest income of$0.3 million during the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . Income Tax Expense. We recorded income tax expense of$4.1 million and$2.7 million for the three months endedJune 30, 2020 and 2019, respectively. The effective tax rate increased from 17.5% during the three months endedJune 30, 2019 to 32.4% during the three months endedJune 30, 2020 , primarily as a result of recording a one-time tax expense of$1.3 million due to electing a new tax regime for two of our Indian subsidiaries which provides for a lower tax rate on earnings in exchange for foregoing certain tax credits, including minimum alternative tax credits during the three months endedJune 30, 2020 . Net Income. Net income decreased from$12.5 million for the three months endedJune 30, 2019 to$8.4 million for the three months endedJune 30, 2020 , primarily due to decrease in income from operations of$4.0 million , and higher income tax expense of$1.4 million . This was partially offset by lower interest expense of$1.0 million , higher foreign exchange gain, net of$0.2 million , higher other income, net of$0.1 million . As a percentage of revenues, net income decreased from 5.2% for the three months endedJune 30, 2019 to 3.8% for the three months endedJune 30, 2020 . 50 --------------------------------------------------------------------------------
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Six Months Ended
Revenues.
The following table summarizes our revenues by reportable segments for the six
months ended
Six months ended June 30, Percentage
2020 2019 Change change
(dollars in millions)
Insurance $ 165.0 $ 166.9 $ (1.9) (1.1) %
Healthcare 52.0 44.0 8.0 18.3 %
Emerging Business 77.4 97.4 (20.0) (20.6) %
Analytics 174.1 174.8 (0.7) (0.4) %
Total revenues, net $ 468.5 $ 483.1 $ (14.6) (3.0) %
Revenues for the six months ended
Revenue decline in Insurance of$1.9 million was primarily driven by lower volumes due to the impact of COVID-19, partially offset by expansion of business from certain existing clients aggregating to$0.3 million and$1.6 million mainly attributable to the depreciation of the Australian dollar, Indian rupee,U.K. pound sterling and South African ZAR against theU.S. dollar during the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . Insurance revenues were 35.2% and 34.5% of our total revenues in the six months endedJune 30, 2020 andJune 30, 2019 , respectively. Revenue growth in Healthcare of$8.0 million was primarily driven by expansion of business from our existing clients and new wins aggregating to$14.9 million , partially offset by ourDecember 2019 wind-down of Health Integrated business revenues of$6.9 million during the six months endedJune 30, 2019 . Healthcare revenues were 11.1% and 9.1% of our total revenues in the six months endedJune 30, 2020 andJune 30, 2019 , respectively. Revenue decline in Emerging Business of$20.0 million was primarily driven by lower volumes due to the impact of COVID-19 and ramp down in certain client contracts aggregating to$18.7 million , and$1.3 million attributable to the depreciation of the Indian rupee against theU.S. dollar during the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . Emerging Business revenues were 16.5% and 20.2% of our total revenues in the six months endedJune 30, 2020 andJune 30, 2019 , respectively. Revenue decline in Analytics of$0.7 million was primarily driven by lower revenues from our recurring and project based engagements due to the impact of COVID-19 aggregating to$0.2 million and$0.5 million attributable to the depreciation of theU.K. pound sterling and Indian rupee against theU.S. dollar during the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . Analytics revenues were 37.2% and 36.2% of our total revenues in the six months endedJune 30, 2020 andJune 30, 2019 , respectively. 51 --------------------------------------------------------------------------------
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Cost of Revenues and Gross Margin: The following table sets forth cost of revenues and gross margin of our reportable segments.
Cost of Revenues Gross Margin
Six months ended June 30, Six months ended June 30,
2020 2019 Change Percentage change 2020 2019 Change
(dollars in millions)
Insurance $ 118.1 $ 114.7 $ 3.4 3.0 % 28.4 % 31.3 % (2.9) %
Healthcare 39.2 35.6 3.6 10.4 % 24.6 % 19.2 % 5.4 %
Emerging Business 48.0 55.1 (7.1) (13.1) % 38.1 % 43.4 % (5.3) %
Analytics 115.8 114.3 1.5 1.3 % 33.5 % 34.6 % (1.1) %
Total $ 321.1 $ 319.7 $ 1.4 0.4 % 31.5 % 33.8 % (2.3) %
For the six months ended June 30, 2020 , cost of revenues was $321.1 million
compared to $319.7 million for the six months ended June 30, 2019 , an increase
of $1.4 million , or 0.4%. Our gross margin for the six months ended June 30,
2020 was 31.5% compared to 33.8% for six months ended June 30, 2019 , a decrease
of 230 bps.
The increase in cost of revenues in Insurance of $3.4 million was primarily due
to an increase in employee-related costs of $1.7 million , higher infrastructure
and technology costs of $2.4 million , and other operating costs of $0.8 million .
This was partially offset by currency movements, net of hedging of $1.5 million .
Gross margin in Insurance decreased by 290 bps during the six months ended
June 30, 2020 compared to the six months ended June 30, 2019 , primarily due to
higher operating expenses.
The increase in cost of revenues in Healthcare of $3.6 million was primarily due
to an increase in employee-related costs of $3.3 million and other operating
costs of $0.9 million . This was partially offset by lower technology costs of
$0.3 million and currency movements, net of hedging of $0.3 million . Gross
margin in Healthcare increased by 540 bps during the six months ended June 30,
2020 compared to the six months ended June 30, 2019 , primarily due to lower
margin in the Heath Integrated business during the six months ended June 30,
2019 and higher revenues during the six months ended June 30, 2020 .
The decrease in cost of revenues in Emerging Business of $7.1 million was
primarily due to a decrease in employee-related costs of $4.8 million , lower
infrastructure and technology cost of $1.2 million , currency movements, net of
hedging of $0.9 million and lower travel costs of $0.8 million , partially offset
by higher other operating costs of $0.6 million . Gross margin in Emerging
Business decreased by 530 bps during the six months ended June 30, 2020 ,
compared to the six months ended June 30, 2019 , primarily due to lower revenues.
The increase in cost of revenues in Analytics of $1.5 million was primarily due
to an increase in employee-related costs of $4.0 million . This was partially
offset by lower other operating costs of $1.4 million and currency movements,
net of hedging of $1.1 million . Gross margin in Analytics decreased by 110 bps
during the six months ended June 30, 2020 , compared to the six months ended
June 30, 2019 , primarily due to higher operating expenses.
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Selling, General and Administrative ("SG&A") Expenses.
Six months ended June 30,
2020 2019 Change Percentage change
(dollars in millions)
General and administrative expenses $ 57.7 $ 63.8 $ (6.1) (9.5) %
Selling and marketing expenses 27.5 35.7 (8.2) (22.9) %
Selling, general and administrative
expenses $ 85.2 $ 99.5 $ (14.3) (14.3) %
As a percentage of revenues 18.2 % 20.6 %
The decrease in SG&A expenses of $14.3 million was primarily due to COVID-19
cost reduction measures including the temporary reduction of the base salaries
of our executive officers and certain other groups of employees. This was driven
by lower employee-related costs of $7.7 million , a decrease in stock-based
compensation expense of $2.0 million mostly due to revision in estimates related
to revenue linked performance based restricted stock units due to COVID-19,
lower infrastructure and travel costs of $2.6 million , lower other operating
costs of $1.0 million and currency movements, net of hedging of $1.0 million .
Depreciation and Amortization.
Six months ended June 30,
2020 2019 Change Percentage change
(dollars in millions)
Depreciation expense $ 17.3 $ 15.3 $ 2.0 12.6 %
Intangible amortization expense 7.6 11.1 (3.5) (31.6) %
Depreciation and amortization expense $ 24.9 $ 26.4 $ (1.5) (5.9) %
As a percentage of revenues 5.3 % 5.5 %
The decrease in intangibles amortization expense of $3.5 million was primarily
due to end of useful lives for certain intangible assets during the six months
ended June 30, 2020 compared to the six months ended June 30, 2019 . The increase
in depreciation expense of $2.0 million was due to depreciation related to our
investments in new operating centers to support our business growth.
Impairment and Restructuring Charges.
Six months ended June 30,
2020 2019 Change Percentage change
(dollars in millions)
Impairment and restructuring charges $ - $ 6.8 $ (6.8) (100.0) %
As a percentage of revenues - % 1.4 %
During the six months ended June 30, 2019 , we recorded impairment charges of
$3.2 million and restructuring charges of $3.6 million in connection with the
wind-down of our Health Integrated business.
Income from Operations. Income from operations increased by $6.6 million , or
21.6%, from $30.7 million for the six months ended June 30, 2019 to $37.4
million for the six months ended June 30, 2020 . As a percentage of revenues,
income from operations increased from 6.4% for the six months ended June 30,
2019 to 8.0% for the six months ended June 30, 2020 .
Foreign Exchange Gain/(Loss). Net foreign exchange gains and losses are
primarily attributable to movement of the U.S. dollar against the Indian rupee,
the U.K. pound sterling and the Philippine peso during the six months ended
June 30, 2020 . The average exchange rate of the U.S. dollar against the Indian
rupee increased from 69.87 during the six months ended June 30, 2019 to 74.25
during the six months ended June 30, 2020 . The average exchange rate of the U.K.
pound sterling against the U.S. dollar decreased from 1.30 during the six months
ended June 30, 2019 to 1.26 during the six months ended June 30, 2020 . The
average exchange rate of the U.S. dollar against the Philippine peso decreased
from 51.97 during the six months ended June 30, 2019 to 50.55 during the six
months ended June 30, 2020 .
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We recorded a net foreign exchange gain of$2.7 million for the six months endedJune 30, 2020 compared to the net foreign exchange gain of$2.5 million for the six months endedJune 30, 2019 . Interest expense. Interest expense decreased from$7.4 million for the six months endedJune 30, 2019 to$6.0 million for the six months endedJune 30, 2020 primarily due to lower borrowings and lower effective interest rates under our Credit Facility during the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 . Other Income, net. Six months ended June 30, 2020 2019 Change Percentage change Gain on sale and mark-to-market of mutual funds$ 5.2 $ 6.8 $ (1.6) (24.5) % Interest income 1.2 1.5 (0.3) (22.0) % Other, net 0.4 0.2 0.2 125.5 % Other income, net$ 6.8 $ 8.5 $ (1.7) (20.8) % Other income, net decreased by$1.7 million , from$8.5 million for the six months endedJune 30, 2019 to$6.8 million for the six months endedJune 30, 2020 , primarily due to lower return on mutual fund investments of$1.6 million during the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . Income Tax Expense. We recorded income tax expense of$9.9 million and$6.9 million for the six months endedJune 30, 2020 and 2019, respectively. The effective tax rate increased from 20.1% during the six months endedJune 30, 2019 to 24.3% during the six months endedJune 30, 2020 , primarily as a result of (i) recording of a one-time tax expense of$1.3 million due to electing a new tax regime for two of our Indian subsidiaries which provides for a lower tax rate on earnings in exchange for foregoing certain tax credits, including minimum alternative tax credits during the six months endedJune 30, 2020 , compared to a benefit of$1.5 million recorded during the six months endedJune 30, 2019 and (ii) recording of excess tax benefits related to stock awards of$1.8 million pursuant to ASU No. 2016-09 during the six months endedJune 30, 2020 compared to$1.1 million during the six months endedJune 30, 2019 . See Note 21 - Income Taxes to our unaudited consolidated financial statements. Net Income. Net income increased from$27.3 million for the six months endedJune 30, 2019 to$30.8 million for the six months endedJune 30, 2020 , primarily due to increase in income from operations of$6.6 million , lower interest expense of$1.4 million and higher foreign exchange gain, net of$0.2 million . This was partially offset by lower other income, net of$1.7 million and higher income tax expense of$3.0 million . As a percentage of revenues, net income increased from 5.6% for the six months endedJune 30, 2019 to 6.6% for the six months endedJune 30, 2020 . 54 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Six months ended June 30, 2020 2019 (dollars in millions) Opening cash, cash equivalents and restricted cash$ 127.0 $ 104.1 Net cash provided by operating activities 58.9 47.7 Net cash provided by investing activities 1.1 0.9 Net cash used for financing activities (13.4) (61.1) Effect of exchange rate changes (2.8) (0.2) Closing cash, cash equivalents and restricted cash$ 170.8 $ 91.4 As ofJune 30, 2020 and 2019, we had$335.6 million and$253.0 million , respectively, in cash, cash equivalents and short-term investments, of which$275.5 million , and$214.8 million , respectively, is located in foreign jurisdictions that upon distribution may be subject to withholding and other taxes and we do not currently intend to distribute such amounts. If, in the future, we change our intention regarding distributions, additional taxes may be required and would be recorded in the period the intention changes. Operating Activities: Cash flows provided by operating activities were$58.9 million for the six months endedJune 30, 2020 as compared to cash flows provided by operating activities of$47.7 million during the six months endedJune 30, 2019 . Generally, factors that affect our earnings, for instance, pricing, volume of services, costs and productivity, affect our cash flows used or provided from operations in a similar manner. However, while management of working capital, including timing of collections and payments affects operating results only indirectly, the impact on the working capital requirements and cash flows provided by operating activities can be significant. Cash flows provided by operating activities for the six months endedJune 30, 2020 were$58.9 million . This comprised of net income plus the net effect of non-cash items, such as depreciation and amortization expense, stock-based compensation expense, amortization of operating lease right-of-use assets, unrealized gains on short-term investment, deferred income taxes, and others aggregating to$75.6 million . The primary working capital use of cash of$41.6 million during the six months endedJune 30, 2020 was driven by decrease in accrued employee costs, operating lease liabilities, accrued expenses and other liabilities and increase in other current assets. The primary working capital sources of cash of$24.9 million was driven by decrease in accounts receivables, advance income tax, net, other assets, increase in deferred revenues and accounts payable.
Investing Activities: Cash flows provided by investing activities were
Financing Activities: Cash flows used for financing activities were$13.4 million during the six months endedJune 30, 2020 as compared to cash flows used for financing activities of$61.1 million during the six months endedJune 30, 2019 . The decrease in cash flows used for financing activities was primarily due to higher repayment of$33.6 million (net of proceeds) under our Credit Facility (as described below in "Financing Arrangements (Debt Facility)") during the six months endedJune 30, 2019 as compared to net repayments of$0.2 million during the six months endedJune 30, 2020 and lower purchases of treasury stock by$13.5 million under our share repurchase program during the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 . We expect to use cash from operating activities to maintain and expand our business by making investments primarily related to new facilities and capital expenditures associated with leasehold improvements to build our facilities, digital capabilities and purchase telecommunications equipment and computer hardware and software in connection with managing client operations.
We incurred
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additions to our facilities as well as investments in technology applications,
product development, digital technology, advanced automation, robotics and
infrastructure.
In connection with any tax assessment orders that have been issued or may be
issued against us or our subsidiaries, we may be required to deposit additional
amounts with respect to such assessment orders (see Note 24 - Commitments and
Contingencies to our unaudited consolidated financial statements herein for
further details). We anticipate that we will continue to rely upon cash from
operating activities to finance our smaller acquisitions, capital expenditures
and working capital needs. If we have significant growth through acquisitions,
we may need to obtain additional financing.
During the six months ended June 30, 2020 , to enhance our liquidity position in
response to COVID-19, management has taken certain precautionary measures,
including: drawing $100.0 million from our line of credit under our existing
Credit Agreement on March 12, 2020 , the proceeds of which were available for
working capital, general corporate or other purposes as needed, and which was
repaid in full on April 20, 2020 ; and electing to temporarily suspend share
repurchases under our 2019 Repurchase Program, and other cost reduction measures
related to employee and vendor expenses and capital expenditure plans. The 2019
Repurchase Program remains authorized by the Board of Directors and the
management using its discretion has resumed share repurchases effective July 1,
2020 , considering improved market conditions, our capital needs and other
factors.
The Coronavirus Aid, Relief, and Economic Security Act, (the "CARES Act") allows
employers to defer the payment of the employer share of Federal Insurance
Contributions Act ("FICA") taxes for the period from April 1, 2020 and ending
December 31, 2020 . During the six months ended June 30, 2020 , we deferred FICA
payments of $2.4 million under the CARES Act and will continue to defer FICA
payments through December 31, 2020 . The deferred amount will be payable as
follows: (1) 50% of the deferred amount will be paid on December 31, 2021 and
(2) the remaining 50% of the deferred amount will be paid on December 31, 2022 .
Financing Arrangements (Debt Facility)
The following tables summarizes our Debt balances as of June 30, 2020 and
December 31, 2019 .
As of June 30, 2020
(dollars in millions)
Revolver Credit Structured Total
Facility Payables Notes
Current portion of long-term borrowings $ 20.0 $ 0.7 $ - $ 20.7
Long-term borrowings 79.0 - 150.0 229.0
Unamortized debt discount - - (12.6) (12.6)
Unamortized debt issuance costs* - - (0.9) (0.9)
Long-term borrowings 79.0 - 136.5 215.5
Total borrowings $ 99.0 $ 0.7 $ 136.5 $ 236.2
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As of December 31, 2019
(dollars in millions)
Revolver Credit Structured
Facility Payables Notes Total
Current portion of long-term borrowings $ 40.0 $ 0.9 $ - $ 40.9
Long-term borrowings 59.0 - 150.0 209.0
Unamortized debt discount - - (13.9) (13.9)
Unamortized debt issuance costs* - - (1.0) (1.0)
Long-term borrowings 59.0 $ - $ 135.1 $ 194.1
Total borrowings $ 99.0 $ 0.9 $ 135.1 $ 235.0 *Unamortized debt issuance costs for our revolver credit facility of
See Note 17- Borrowings to our unaudited consolidated financial statements herein for further details on our debt facilities. Off-Balance Sheet Arrangements In the ordinary course of business, we provide standby letters of credit to third parties primarily for facility leases. As ofJune 30, 2020 andDecember 31, 2019 , we had outstanding letters of credit of$0.5 million each, respectively, that were not recognized in our unaudited and audited consolidated balance sheets, respectively. These are not reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We had no other off balance sheet arrangements or obligations. 57 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations The following table sets forth our contractual obligations as ofJune 30, 2020 : Payment Due by Period Less than 1-3 4-5 After 1 year years years 5 years Total (dollars in millions) Finance leases$ 0.3 $ 0.3 $ 0.1 $ -$ 0.7 Operating leases(a) 25.7 46.3 32.3 38.5 142.8 Purchase obligations 9.9 - - - 9.9 Other obligations(b) 2.4 4.2 3.4 5.7 15.7 Borrowings: Principal payments 20.7 79.0 150.0 - 249.7 Interest payments(c) 6.4 11.5 7.9 - 25.8
Total contractual cash obligations(d)
(a)Represents lease liabilities payable for the expected lease term. (b) Represents estimated payments under the Gratuity Plan. (c)Interest on borrowings is calculated based on the interest rate on the outstanding borrowings as ofJune 30, 2020 . (d)Excludes$1.0 million related to uncertain tax positions, since the extent of the amount and timing of payment is currently not reliably estimable or determinable. Certain units of our Indian subsidiaries were established as 100% Export-Oriented units under the Software Technology Parks ofIndia ("STPI") orSpecial Economic Zone ("SEZ") scheme promulgated by theGovernment of India . These units are exempt from customs, central excise duties, and levies on imported and indigenous capital goods, stores, and spares. We have undertaken to pay custom duties, service taxes, levies, and liquidated damages payable, if any, in respect of imported and indigenous capital goods, stores, and spares consumed duty free, in the event that certain terms and conditions are not fulfilled. We believe, however, that these units have in the past satisfied and will continue to satisfy the required conditions. Our operations centers inthe Philippines are registered with thePhilippine Economic Zone Authority ("PEZA"). The registration provides us with certain fiscal incentives on the import of capital goods and local purchase of services and materials and requires thatExlService Philippines, Inc. to meet certain performance and investment criteria. We believe that these centers have in the past satisfied and will continue to satisfy the required criteria. Recent Accounting Pronouncements For a description of recent accounting pronouncements, see Note 2-"Recent Accounting Pronouncements" to the unaudited consolidated financial statements contained herein. 58 --------------------------------------------------------------------------------
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