ExlService Holdings, Inc. Fourth Quarter Ahead of Expectations; Medium-Term Growth Headwinds Persist

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ExlService posted better-than-expected fourth-quarter results, delivering revenue of $124 million (above the consensus at $120 million) and non-GAAP earnings per share of $0.55 (also above consensus at $0.49). Strength in the quarter was driven by the transformation business, which delivered 10% growth year-over-year and 5% sequentially. Transformation growth continues to be led by decision analytics, which is benefiting from the addition of new annuity-based engagements (now 70% of analytics revenue, up from 55% in 2012). Growth across verticals was relatively broad-based, but was especially strong in healthcare and transportation/logistics, which grew 53% and 23% over the previous-year period, respectively.

While the loss of Travelers (TRV $83.18; Market Perform) presents a material headwind to growth over the medium term, we are more concerned by the potential damage to the company’s reputation from the misappropriation of the client’s confidential information. Despite the potentially damaging news media related to the loss of Travelers, we were pleased to hear that the pipeline remains strong and win rates steady. During the quarter, ExlService won three large deals (two in insurance and one in travel/logistics)—all in the outsourcing segment. While one quarter does not necessarily indicate a trend, we believe the new wins indicate that the company has taken the appropriate measures to communicate clearly with its customers and take measures to prevent the issue from occurring again.

Management issued full-year guidance that was in line with expectations. The company forecasts full-year revenue growth of 0%-5% (or $480 million-$500 million), versus the Street at $487 million. Non-GAAP EPS are expected to be $1.70-$1.80, versus consensus at $1.75. While we are pleased with the improved performance in the transformation business, we remain cautious on the company’s ability to reaccelerate outsourcing growth over the medium term given the significant client transitions over the next two years. The midpoint of guidance assumes organic growth that is well below the industry at 12%-14%. We believe ExlService is positioned well to capture the large outsourcing opportunities in healthcare and insurance (given its deep vertical expertise and robust capabilities), but given the aforementioned growth headwinds, we would remain on the sidelines.

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