Good day, ladies and gentlemen, and welcome to the ExlService Holdings Q2 2016 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to turn the call over to Mr. Steven Barlow. Mr. Barlow, Vice President of Investor Relations. Sir, you may begin.

Thank you, Chelsea. Hello, and thanks to everyone for joining EXL's second quarter 2016 financial results conference call. I'm Steve Barlow, EXL's Vice President, 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 quarterly press release we issued this morning. We've also updated our Investor Factsheet 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 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 on the Investor Factsheet. Now, I'll turn over the call to Rohit Kapoor, EXL's Chief Executive Officer. Rohit?

Thank you, Steve. Good morning, everyone, and welcome to our second quarter 2016 earnings call. Our performance in the second quarter was good. We made progress on execution of key strategic priorities and remained on-track to meet our goals for 2016. We delivered a $170.5 million in revenue in the quarter, up 11.4% year-over-year on a constant currency basis. Our Analytics business continued to deliver market-leading growth of over 30% year-on-year on a constant currency basis. Adjusted EPS increased 14.6% to $0.55 per share. We won 7 new engagements in the quarter, 2 in Operations Management and 5 in Analytics for a total of 18 wins so far in 2016. In addition, we received multiple recognitions from industry analysts and advisors for our Insurance, Healthcare, Finance and Accounting and Analytics business. We also good progress on expanding client relationships in the first half of 2016 with our top 10 clients growing by over 18% year-on-year on a constant currency basis. Overall, I am pleased that our business model continues to deliver double-digit top line and bottom line growth even though we operate in a challenging business environment. The strategic pivots we made over the last few years have enabled us to build a robust bud model that generates increasing free cash flow and mitigate the impact of macroeconomic events like the Brexit vote. Brexit had minimal impact on our financials due to our longstanding policy of sharing the FX gain and risk with our clients. Almost all of our long-term UK contracts are covered by FX clauses that mitigate our exposure to currency fluctuations. While it is too early to predict all possible implications of Brexit on our business, most of our existing work is protected due to the annuity nature of our contract and because the work we do…

Thank you, Rohit. And thanks everyone for joining us this morning. I would like to start off by providing insight into EXL's financial performance for the second quarter, followed by guidance for the year. Revenues for the quarter were $170.5 million, up 9.5% year-over-year or 11.4% on a constant currency basis. Sequentially, we grew 2.1% or 1.9% on a constant currency basis. This marks the sixth consecutive quarter of sequential quarter-over-quarter constant currency growth. Operations Management revenues grew 4.7% year-over-year or 6.6% on a constant currency basis, despite continued softness in our consulting business, as a result of cautious spending by our clients. Excluding consulting, Operations Management grew 7.7% year-over-year on a constant currency basis. This growth was led by clients from our banking and financial services and healthcare verticals. Sequentially, Operations Management grew 2.2%. Analytics, which is 23% of our total revenue, continued its strong growth momentum with revenues up 29.6% year-over-year or 31.2% on a constant currency basis. This growth was led by clients from our banking and financial services, insurance and healthcare verticals. Sequentially, Analytics revenues grew 1.7% showcasing a strong core analytics growth despite RPM seasonality. For the first half of 2016, EXL's revenues grew 12.8% year-over-year to $357.5 million or a 14.8% on a constant currency basis. This growth was driven by a combination of new strategic deal wins, expansion of existing client relationships across our verticals and inorganic growth. Organically by segment Operations Management revenues grew 6.1% and Analytics grew 40.5% on a constant currency basis year-over-year. Our top 10 client concentration continue to decline as a percentage of total revenue and was 40.2% in Q2, 2016 compared to 42% in Q2, 2015, indicating our broadened client and revenue base. Gross margins for the second quarter were 34.3% compared to 35.4% a year ago.…

[Operator Instructions] And our first question comes from the line of Anil Doradla with William Blair. Your line is now open.

Hey, guys. And good job on continued execution. So, Rohit I had a couple of questions. So you talked about UK you talked about Brexit and sounds like the nature of conversations tend to be a little bit more positive, from your perspective. Is that a fair way to assess it? Given that, near term maybe there might be some uncertainty you talked about, annuity like business model obviously. So do I gather in a nutshell that, you are perhaps maybe incrementally positive with the ongoing issues from your perspective?

Thanks, Anil. I think the way I would characterize it is, in fact that Brexit is likely to have on our clients, we will only get to know that as things unfold and as things play out and there is relatively high level of uncertainty associated with that. There is you know, decision making, which we think might slowdown because of the uncertainty. But for our business we seem to be very well protected. We are well protected because of the FX strategy that we have adopted and the way in which we contract with our clients and that protects us adequately. We are also well positioned because of the nature of our business, which is annuity IN nature and it’s a long-term contracts doing you know, work that is more to their – that business. I think the opportunity areas for us with Brexit is anytime there is regulatory change that takes place, anytime there is disruption that takes place where companies have to shift operations from one geography to another geography or consolidate or decentralize or there is movement that takes place, that presents us with a significant opportunity. That presents us with an ability to go in into these clients and actually help them optimize their operating delivery capabilities, whether onshore or offshore and we can advice them and we can implement and execute this for them. So to us this is a situation where I think we are well protected and longer term it can present us with a great opportunity.

Great. And as a follow-up Vishal, we've seen some compression on gross margins, you talked about investments in this one particular client, but when we look at the last three, four quarters, we've seen some compression there. So help us understand how we should be looking at the gross margin trends from this point onwards, not necessarily on the quarter-by-quarter basis, but can over multiple quarters. And can you also share with us, what were these investments in particular in this quarter with that one customer? Thank you, very much.

Yes. Thanks, Anil. So on the gross margin side, the compression which we are experiencing is on the investment we are making in - for example you know, the expansion on our platform the work which we are doing with one or two clients where we have to do integration and bringing that work on to our platform. That is going much ahead where we had anticipated that the work should be completed by the end of quarter one, but now that will get completed at the end of Q3. But long-term I think this is a one-time impact, long-term we think the gross margins should improve for us as we are able to get behind this one time issue.

Very good. Thanks a lot guys.

Thank you. And our next question comes from the line of Edward Caso with Wells Fargo. Your line is now open.

Good morning. This is actually Tyler Scott, on for Ed. Thank you for taking my question and congrats on the quarter. First, I was just hoping you could expand a little bit on consulting weakness. I know it was also weak last quarter, is that being driven by - is there a geographical exposure there or is that a vertical or a specific client any, any color would be appreciated?

Sure, Tyler. Yes, the consulting business for us has been soft, and it is soft across geographies. Its not, you know, soft in one geography versus the other or industry versus the other. I think it’s largely to do with two things. One is, the consulting is discretionary in nature and currently we are finding some of our clients feeling the squeeze in terms of their profitability and their budgets and therefore that’s been soft for us. And the second is most of the spend on consulting is not so much on operations reengineering or on working on operations redesigned, but its really focusing on the work that they need to do on digital transformation. And as we position ourselves to play a much stronger game on the digital side, that’s where we see the pick up take place on our consulting business. So frankly, for now it is soft across the board. But with these new capital that we are investing and building out, I think we will be able to engage with our clients and help them move on the transformation journey and improve our business set.

Great and then just as my follow up, I know in the past you've talked about acquisitions being a key priority, maybe if you could just touch on the pipeline there, the size of the deals that you're looking at and how that sort of ties into your digital strategy moving forward? Thank you.

Sure. So the good news is, we did an acquisition, and we are really glad that we found LISS and we think LISS is a real gem that we'll integrate in beautifully with EXL. We are very excited by the LISS acquisition. We do have a strong pipeline of acquisitions behind that, and we are finding that valuation and terms and our ability to negotiate the appropriate deal, the environment is actually becoming a little bit better. So frankly, our ability to deploy our capital and to do acquisitions, I think that is just been enhanced a bit and we fully expect to continue to do acquisitions as we go forward. Typically for us our sweet spot in terms of size and scale is to do an acquisition that will add on revenues anywhere between $25 million $50 million. However, we are not shy about doing deals which are much bigger in size. We certainly have the balance sheet and the capital available to do larger size transactions. But this clearly have to be strategic in nature and fit in with our business model. Our focus is to look at acquisitions in insurance and healthcare and in analytics. We are also looking at doing some more acquisitions in UK and Europe to further diversify our geographic footprint. So we would be looking at a number of these areas to add on additional capabilities.

Great. Thank you very much.

Thank you. And our next question comes from the line of Frank Atkins with SunTrust. Your line is now open.

Thanks for taking my questions. I wanted to ask a little bit about the hiring environment attrition in wage increment, any color you could give us on those it would be great?

Sure. So first, the hiring environment remains quire attractive in India, particularly for back office resources. For Analytics resources, hiring is something that requires a deep amount of investment and brand presence to be created. And again EXL is in the fortunate position of having made these investments, not just last year but over the last seven to eight years. And so we've got a tremendous amount of capital goodwill with some of the premier engineering colleges and business management schools to be able to source and attract talent. We've just - in fact, our on-boarding this year is hiring from the colleges and campuses that’s taking place over the summer, and we are very pleased with our ability to attract the best talent there. From an attrition standpoint, the attrition rate in Q2 historically always goes up, and the reason for that is we provide a salary increment on 1st of April across the company and typically in Q1 people wait for the bonuses to be paid and wait for the salary increment cycle to go through. And quarter two is always the period where - that there is a fair amount of churn that takes place. We also have young employees who are looking at higher education and think about those options in the second quarter. So the attrition rate for us went up from Q2 to Q1, but if you compare it on a year-on-year basis, as compared to 2015, both for Q1 and for Q2 our attrition rates are actually well below what they were last year. So we are actually encouraged by the trend about being able to manage our attrition in the right direction and that seems to be playing out well. And lastly, from a wage increment perspective, the wage increment this year were pretty much the same and in line with last years salary increment that took place.

Okay, great. That’s helpful. And from my follow up, I wanted to ask a little bit more about the LISS acquisition, any client overlap there in terms of existing clients or is it a cross-selling opportunity to all the clients. And secondly, can you give us any sizing of revenue impact.

Sure. So LISS has some very large UK and European clients. There are few clients which we've disclosed in the press release that LISS has. So LISS works with Aviva, AIG and Generali, and those are the three names that have been disclosed. The ability for us to cross-sell LISS's capabilities to our base of insurance plans that’s tremendous, and I think that’s the exciting opportunity for us. Presently the revenue from LISS is small and our expectation is that in the second half of 2016 we will pick up about $1 million of revenue from LISS this year.

Okay, great. Thank you very much.

Thank you. And our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Your line is now open.

Hi, guys. This is Mike Reid on for Joe. Thanks for taking the question. I was just wondering, are you seeing anything, could you kind of give more color on what you're seeing in insurance and was the quarterly results just more of a tougher comp from 2Q of last year?

Mike, first Q2 actually performed exactly in line with our expectations. We had guided to this level of revenue and profitability, and actually we think we hit the number right on the nose. So it performed as per plan. On the insurance business, and the investments – insurance industry vertical, we continue to see a fair amount of activity take place in the insurance vertical. For us the insurance industry vertical is also broadening out. And so in the past our focus would have been primarily in the US, but now we are now seeing a lot of activity in insurance in UK and Europe, as well as in Australia. And therefore from a geographic standpoint the vertical has broadened out for us. Also in terms of lines of business, in the past we would do some of the more traditional lines of business of life and annuity and property and casualty. But now we are seeing that expand towards workers compensation, towards disability, towards retirement and towards reinsurance. So frankly our ability to serve clients in the insurance industry is becoming much, much more stronger and predominant and our differentiation out here is becoming more pronounced. So we are quire excited by where we are in the insurance industry and where the future is for us with the insurance industry.

All right, great. Thanks for the update and color on the insurance. Appreciate it.

Thank you. And our next question comes from the line of Puneet Jain with JPMorgan. Your line is now open.

Yes, hi. Thanks for taking my question. So Rohit, given new opportunities from Brexit you talked about in the areas of regulatory compliance, what does that mean for your investment plans in that reason?

Yes, Puneet, look I think, this is something which we will have to play out as things evolve in that region, and as decisions get made. I think the initial part is for companies to build out different types of scenarios to operate in and to consider different structures that they might adopt for their go to market and to serve their go to market strategies. And so we will initially help them out in terms of thinking through some of these strategies and then as the regulatory environment evolves and gets firmed up, we will align ourselves to position our clients to comply with these regulatory requirements.

Okay, understood. And nice to see LISS acquisition and CTO hiring, but just to be clear, the strategy is to develop technology solutions that you can offer along with BPO and how do you compete with IT services firms in those technology capabilities?

Sure. I think we have always believed in taking a fundamental approach where understanding the domain and our clients business is the foremost driver of the way in which we try and add value to our client relationships. Our differentiation vis-à-vis the IT players is built around that domain and business knowledge and business expertise and using that domain and business knowledge to drive the strategy for IT. And we've been doing that consciously for the last five years, where we invested in technology platforms, where we could provide our clients with platform as a service and integrate that along with our service. We have got capabilities of integrating in Analytics, which is much better than what the IT players have got. And then we will focus in on key technologies that we can own and which we can offer to our clients in a modular format which is non-inclusive. And I think the key, I would say really is, we are able to do a plug and play with our clients, which typically most IT firms are not really interested in. They are much more interested in making big massive changes to the underlying technology platforms which are multiple year change management program and where the investment is high and the risk is high and the return is uncertain. Whereas for us we are much focused on actually helping our clients solve their business problem and do that in a manner which is a plug and play format. So this digital customer acquisition engine that we now have the capability of is going to be in a plug and play format. And our clients don’t need to do any change to their underlying technology platform and they can test it out and see how powerful it is and they compare with their internal solutions or with any other third party solutions.

Got you. Make sense. Last one, is there any change in your outlook for Analytics business, specifically in the UK based banking area?

At present we are not seeing any, you know, impact or change in the UK banking world. For us as you know banking represents about 40% of our Analytics business. It is a strong component of the work that we do and we work with a number of significant and large sized banks. We expect to continue to work with our clients and in fact add new clients in the UK market. And frankly, with this regulatory change it might actually accelerate our ability to acquire newer clients there.

Understood. Thank you.

Thank you. [Operator Instructions] And our next question comes from the line of Bryan Bergin with Cowen. Your line is now open.

Hi, thank you. I just wanted to touch on the new clients that you took this quarter, any larger strategic wins there. And then as well any particular verticals that stand out of the four types of projects that are standing up?

Sure, Bryan. Yes, for us we have signed up seven new clients this quarter and we do think that there are a couple that have the potential to actually scale up very, very nicely out there. Two of them are in Ops Management and five in Analytics. The industry vertical for us you know, is in banking and financial services, in insurance and in healthcare. Those are the three vertical where we signed up these clients.

Okay. And then as far as - you obviously touched on acquiring the first CTO, it sounds like BPaaS will continue to be a growing emphasis for the company. Can you remind us where that business stands now as a percentage of revenue?

Sure. So for us BPaaS is about 16% to 17% of our revenue and it is a core part of our strategy that we would continue to invest in. What we have currently is we've got multiple technology platform and multiple offerings for our clients to use our services in a BPaaS format. We re now looking at ways in which we can unify these diverse offerings that we've got and bring them together under a single common technology architecture. And therefore we are going to be making investments and Mike is actually going to be helping us think through how we should be investing further in these technology platform and continuing to remain competitive as far as all our platforms are concerned.

Okay. And just last one housekeeping, something within other income, like another game? Can you say what that's related to?

Yes. Hi, Bryan. This is Vishal. So the other income went up this quarter because on account of reversal for the RPM earn-out, every quarter we do fair valuation of the RPM earn-out liability. Based on their full year projection and compare to the earn-out thresholds, we came to a conclusion that the earn-out will not be payable, hence we reversed out $3.8 million of the RMP earn-out liability this quarter.

Okay. Thank you very much…

That is shown in our other income, but we don’t take into account while calculating the adjusted EPS.

Okay. Yes, I see that. Okay.

Thank you. And our next question comes from the line of Mayank Tandon with Needham & Company. Your line is now open.

Thank you. Good morning, Rohit and Vishal, a few questions. Vishal, sorry to make you repeat yourself, but in terms of margins, I just wanted to understand both short term and long term, what are some of the levers you have to drive margin expansion, particularly around seat utilization. I know it's been fairly consistent, but would there be an opportunity there to actually improve that as you scale. And then, how should we think about margin trend longer term?

So Mayank, thanks for the question. As you know we measure our business on adjusted operating margin basis. And as I alluded earlier for the first half if you compare – compare to last year, our adjusted operating margins actually increased by 50 basis points. And you know there are few puts and takes which will happen during the quarters. But overall we do think that there is improving trend and we would be able to continue to improve our adjusted operating margins. There are few one-time fixes which we will have. There are few changes we are going to make on our pricing models which are going to help us as we move towards more transaction based pricing. We are going to change our operating model. We'll continue to have productivity improvement. We're going to leverage our SG&A line, and as you see this quarter we have improved our SG&A percentages. So I think there are several levels - levers we have we have across our businesses. There is some of investments we are going to make as we do some acquisitions, for example the acquisitions of LISS, there will be a little bit of short term impact as we integrate the acquisition. But the underlying core business, we think we'll be able to continue to improve the gross margins and adjusted operating margins over long run.

Sorry, just to make you repeat, I think you may have already said this. But for this year's guidance, does this still imply about 30 basis points of margin expansion year-on-year ex-currency, is that correct and how much currency benefit you still expect in terms of adjusted operating margins for fiscal 2016?

So the currency impact is around 20 to 25 basis points and roughly they are same as we have talked earlier. The core change in our adjusted operating margin will be around that 30 basis points. But some of that will get offset by the acquisition cost and the integration cost will come with the acquisition of LISS.

Got it. Thanks for answering those questions. And then one question for Rohit. Rohit, given some of the broader trends you talked about earlier on, do you think you have to do something transformative in terms of M&A or will it be mostly tuck-in deals going forward?

So Mayank, I think for us to execute on our long-term strategy, we can do that pretty much on an organic basis and with some tuck-in acquisitions. We don’t think there is a real burning need for us to do transformative acquisition. But you know, if we come across the right opportunity, we will certainly take a look at it.

Thank you. Good job on the numbers.

Thank you.

Thank you. And we do have a follow up question from the line of Frank Atkins with SunTrust. Your line is now open.

Thanks for taking my follow-up, just wanted to ask a little bit about the pricing environment, any color there?

Yes, Frank, I think the pricing environment to us seems very stable. We haven’t seen anything which is untoward or irrational coming. And there are a number of deals in the pipeline like I said we are seeing a fair amount of pricing input on that. I think it seems to be a fairly stable and predictable right now.

All right, great. Thank you so much.

Thank you. Ladies and gentlemen, that concludes today's question-and-answer session. Thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.