ExlService Holdings, Inc. (EXLS) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to EXL's First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now like introduce our host for today, Mr. Charlie Murphy, Head of Investor Relations. Sir, please go ahead.

Thank you, Karen. Greetings, and thanks to everyone for joining our first quarter 2013 financial results conference call. With us today are Rohit Kapoor, our Vice Chairman and Chief Executive Officer; and Vishal Chhibbar, our Chief Financial Officer. We hope you've had an opportunity to review the first quarter financial results press release we issued last night. We have also updated our investor fact sheet on the Investor Relations section of EXL's website. 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 report and other documents filed with the Securities and Exchange Commission from time to time. EXL assumes no obligations 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. Reconciliations of those measures to GAAP can be found on the press release. Now I will turn the call over to Rohit.

Thank you, Charlie. And welcome, everyone, to our first quarter earnings conference call. The agenda for this call will be as follows: first, I will discuss this quarter's results and our outlook for the remainder of 2013. Second, I will review highlights from our strategic investments in healthcare and analytics. Third, I will comment on our demand environment. Then I will turn the call over to Vishal for a more detailed financial discussion, following which, we would be happy to take your questions. In the first quarter, our revenues grew 11% year-over-year or 13% on a constant-currency basis. This growth was driven by a steady and consistent growth in our outsourcing and annuity-based transformation services businesses. Much like in the first quarter of 2012, we saw project-based transformation services revenue come off. As previously disclosed, we did face some client transitions during Q1, which had a negative impact on our revenue growth. These client transitions are expected to be completed by the end of the third quarter this year. In the second half of this year, we expect growth to accelerate meaningfully for several reasons. First, in our outsourcing business, volumes from large existing clients should increase and new business from mid-sized new clients should come online. Our Philippines and Eastern European delivery centers should grow rapidly, driven by this new work. Second, our annuity-based analytics business should continue growing strongly. In fact, that is one major reason why we have hired skilled resources over the last few months in advance of revenue. Companies are aggressively turning to trusted partners like us to use analytics to find and exploit correlations deep in their operations and enable a more adept enterprise. We believe we are in an excellent position to capture this powerful demand, given our sterling client list, proven methodologies and highly specialized workforce around the world. Finally, the third quarter is the strongest seasonal period for project-based revenue in our transformation business. As we said in our March investor day call, there are a number of areas in which we are making strategic investments. Two of the most significant are healthcare and analytics. Both healthcare and analytics have seen a strong year-to-date acceptance in the marketplace. We have recently been selected to provide utilization management to a leading healthcare payor, which we hope will represent the foundation of a large and long-term partnership. In analytics, we signed new healthcare relationships, servicing both payors and providers. And we are encouraged by growth from the Landacorp care management business we acquired in the fourth quarter of 2012, including same clients who have moved away from Landacorp many years ago, coming back for new relationships. We have also invested in our healthcare and analytics workforces aggressively. In April, we completed a successful recruiting season in India for our analytics business, hiring approximately 160 people from some of the finest educational institutions in the country, such as the Indian Institute of Management, Indian Institute of Technology and the National Institute of Technology. This is a meaningful increase from approximately 850 personnel we closed 2012 with. Such analytics talent is in short supply globally. The supply/demand imbalance for this talent is expected to grow more pronounced in coming years. These future EXL analytics leaders will drive the strong secular growth we see in this service line. We have also expanded our delivery locations, which specialize in healthcare and analytics. In February, we commenced analytics delivery in Bangalore, India, opening up our franchise to a new talent pool. In April, we opened an operation center in Cebu, our second city in the Philippines, which is our second largest delivery country. This center has over 100 employees today, with a target of over 400 by the end of the year. This center will specialize in healthcare business process management, as well as in insurance and banking. It will further diversify our global delivery system and our brand in healthcare. As you may remember, we also have approximately 2,000 employees in our Manila facilities, one of which has been accredited by URAC for their top-tier quality standards in healthcare business process management. Looking out at our demand environment. We enjoy a strong and growing pipeline across our businesses, particularly in insurance and healthcare and banking and financial services. Pipelines for both new and existing clients are increasing. Consistent with our last update, we are competing on several large BPO prospects in life and health insurance, as well as in banking and financial services, and we have received positive early signs. In utilities, we have seen an uptick in large deals for the first time, for which we are well-positioned. We have noticed new types of deals enter our pipeline, such as platform-based BPO contracts, as well as large transactions involving taking over responsibility for significant operations of our client. Competition for deals remains fierce. And while we continue to see the large technology services there investing in BPO, we remain highly confident in the strength of our franchise in our chosen focus verticals. We believe that our concentration on a few key domains is a competitive differentiator and that being a leading vertical-focused operator is far superior to being horizontal-based. We have built a leading brand in these focus verticals, driven by years of proven operational excellence with mission-critical business functions for industry leaders. We are pleased to see that in the first quarter, key focus verticals, such as insurance and healthcare, utilities and banking and financial services posted year-over-year revenue growth of 23%, 14% and 42%, respectively, well above our corporate average. The previously announced low-margin client transitions temporarily impacting our revenue growth this quarter are not in our focus verticals. Looking ahead, we remain quite optimistic on the strong secular growth outlook for our business. Our markets are underpenetrated, our client relationships are strong and growing and our process expertise is highly differentiated. Our professionals are experienced and engaged, as evidenced by multi-year low 24% attrition figure in the first quarter. BPO and analytics both enjoy ever-increasing acceptance, and we believe we have been effectively enhancing our franchise as a leading pure-play provider of industry-focused operations excellence and transformation services. Now, I will turn it over to Vishal.

Thank you, Rohit, and thank you, everyone, for joining us this morning. In the first quarter, EXL reported revenues of $116 million, up 11% year-over-year and down 1% quarter-over-quarter. On a constant-currency basis and excluding previously announced client transitions, revenue grew 18% year-over-year and was flat quarter-over-quarter. Foreign exchange had an impact -- negative impact of 2.6% on our year-over-year revenue growth, as the Indian rupee depreciated against the U.S. dollar and had a negligible impact sequentially. In our Outsourcing business, revenues grew 9% year-over-year and 70% on a constant-currency basis, excluding client transitions. Driving year-over-year growth was the acquisition of Landacorp in October 2012, as well as client expansions with existing customers in our Insurance and Healthcare and Utilities verticals. On a sequential basis, revenue grew 3% excluding client transitions, driven by Landacorp acquisition, growth in Insurance, Healthcare and Utility verticals and partially offset by the client transition impact of 1%. In transformation services, revenue grew 24% year-over-year and declined 14% sequentially. Year-over-year growth was propelled by strong growth in our decision analytics and risk and financial management businesses. The sequential decline was largely due to the rolloff of project-based engagement in our banking and financial services analytics practice and a few delays in planned project ramp-ups. As mentioned in our fourth quarter 2012 earnings call in March, we expected a muted Q1 for our transmission business. We anticipate that our transformation business will accelerate in the second half of the year due to new client wins in analytics, as well as execution on delayed projects. I want to provide an update on the client transitions happening this year on our noncore verticals. We continue to believe such transitions will represent 5% to 6% headwind to revenue growth in 2013. This amount primarily emanates from 2 clients. The first of these clients fully transitioned off by the end of this quarter. The second of these clients, we expect to transition by the end of third quarter. We continue to believe that transitioning these low-margin clients in noncore industry verticals is the best outcome for EXL's long-term profit margin. In the first quarter, gross margin of 37.1% was up 80 basis points year-over-year driven by rupee depreciation. Gross margin fell 300 basis points sequentially driven by FX impact, lower utilization in our transformation business as a result of advance hiring for future engagement and slightly lower revenue. Outsourcing gross margin of 39% rose 190 basis points year-over-year, fueled by foreign exchange and our Landacorp acquisition and fell 250 basis points sequentially driven by FX appreciation, higher employee costs from the headcount additions and lower revenue run rate. Transformation services' gross margins of 27.1% fell 430 basis points year-over-year and 650 basis points sequentially, driven by lower utilization, advance hiring in our analytics business for future engagement and drop in project-based revenue. We anticipate gross margin of our transformation services business to improve through the year as our utilization increases, driven by new project ramp-ups. G&A margin of 13% was up 20 basis points year-over-year and down 80 points sequentially. Driving sequential improvement was slightly slower discretionary spend and lower professional fees. Sales and marketing margin of 8.4% was up 90 basis points year-over-year and 120 basis points sequentially. Driving the sequential increase for new hires, as we continue to expand our front end domain expertise. In fact, this quarter, we added 10 new people into onshore sales and marketing function. Foreign exchange was less -- loss was less than $100,000 and the balance sheet having gains were offset by cash flow losses. Going forward, we expect foreign exchange losses to increase. For 2013, we now expect a foreign exchange loss of approximately $2 million to $2.5 million. Interest and other income was $1 million, up approximately $300,000 sequentially, driven by onetime employment incentive program benefit. In the first quarter, our tax rate was 23.5%, down 180 basis points year-over-year, due to primarily -- to a onetime benefit on account of reversals of some tax provisions no longer required. For 2013, we will continue to expect a tax rate of -- in the high 20s, which implies a significant step up in the tax rate for the coming quarters. Adjusted EBITDA margin was 18.9%, up 20 basis points year-over-year and down 190 basis points, driven by margin decline. Net income was $9.8 million, up 10% year-over-year and 20% quarter-on-quarter. Adjusted net income was $13.5 million, up 14% year-over-year and down 10% sequentially, driven by factors as outlined before. Diluted EPS was $0.29, up from $0.27 in the last year quarter, but down from $0.36 from the last year's fourth quarter. Adjusted EPS was $0.40, up $0.36 from the $0.36 in Q1 2012 and down from $0.44 in 4000 -- Q4 of 2012. Adjusted EPS year-over-year growth was driven by revenue growth. We continue to enjoy a strong balance sheet with over $108 million in cash and equivalents and no debt. DSO was 59 days in the first quarter, up 3 days sequentially, driven by March end falling on a weekend. Adjusting for this DSO would have been 57 in the first quarter. For 2013, we are maintaining our guidance of $495 million to $505 million and adjusted EPS guidance of $1.77 to $1.85 using an Indian rupee to U.S. dollar exchange rate of 54. Given temporary delays in our project transformation work and lengthening ramp-ups from new clients, we believe our second quarter revenue may be flattish sequentially. In the second quarter, we will recognize annual to mid-high single-digit salary increase and also do not expect to enjoy the one [ph] tax benefits we saw the first quarter, thereby impacting our adjusted EPS in Q2. While we are maintaining our guidance for 2013, we anticipate most of our growth will occur in the second half of the year. Stepping back from the fourth quarter results, we remain extremely bullish about the long-term prospects in business process outsourcing and in Decision Analytics. We are in a robust growth market, have healthy deal prospects and enjoy a blue chip client base, with whom we are deeply incent. We are making the right investment to best position ourselves for the multi-year growth we see in our business. And now, we would be happy to take your questions.

[Operator Instructions] Our first question comes from the line of Ashman Shirvaikar from Citibank.

My question is partly a clarification on -- in the press release, obviously, you had this line, which said that you anticipate most of the growth to occur in the second half of the year. Were you talking about revenue ramp? Or was it related more to EPS impact? And, yes, I mean, given the performance in 1Q, which is, generally speaking, a little bit ahead of certainly where we expected, is it -- I mean, does it kind of imply that there is potential upside in the back half to numbers? I mean, is that what you're kind of getting at here? In other words, can I ask you about the pace of the ramp?

Sure. This is Rohit, and I'll take that question. What we are saying is that we would expect our second quarter revenue to be flattish compared to our first quarter, and then the second half of the year for our revenues to increase progressively for us to be able to get to the midpoint of our guidance range on revenue. In terms of our EPS, there are certain benefits that we got in the first quarter. There will be an impact in terms of a salary increments that we've given to our entire workforce, effective 1st of April, which will have a full quarter impact, as well as with the tax rate going up. Our EPS will get negatively impacted by these factors in Q2. And consistent with the revenue growth that takes place in the third and fourth quarter, we would expect our EPS to go up significantly in the third and fourth quarter of the year. I hope that clarifies how we see this playing out for others.

Yes. No, that's very useful. The other question I had was on Landacorp and what the initial traction is. Is the entire portfolio of clients that you acquired there at a satisfactory margin level? And what's the interest that you see, particularly given healthcare reform and so on?

So with the Landacorp acquisition, we've been really delighted with the acquisition that we have done for a number of reasons. Number one, the strategic fits that we had talked about what Landacorp will provide to us. That vision is being realized and we are seeing that resonate very well with our clients and with our prospects. The existing client portfolio of Landacorp, I think the combination with Landacorp and EXL strengthens the support that we can provide to their existing customers. And again, that just positively reinforces the work that we are doing and the revenue streams that we have with existing clients. The one area of positive surprise for us has been that some of the clients, which have actually moved away from Landacorp from their old legacy platform to other competitor platforms, now seem to be coming back to Landacorp's new platform, which is the CareRadius platform. And particularly, given all the changes that are taking place in the healthcare industry and the timelines that are associated out there, these revenue streams are coming back on into our portfolio, and we are delighted by that. So I would characterize the acquisition and the integration as having worked really well. And we are very, very pleased with the combination of Landacorp and EXL.

Last thing, just because there's a lot of interest on it. With regards to immigration reform and the impact on EXL, I don't think there should be much, but I just want to clarify.

I think that's a question that must be on several people's minds and let me clarify and confirm. There is no impact of the proposed immigration bill to EXL. The levels of visa-based resources that we use in the U.S. is significantly below the thresholds that have been stipulated in that bill. And of the total employee base that we have in the U.S., which is approximately 700 employees, we -- the visa -- the employees which use the H1B visa and the L visas are well below 15%.

And our next question comes from the line of Joseph Foresi from Janney Montgomery Scott.

My first question, just on the transformation business. We've seen some lumpiness in that business before. Maybe you could -- if you could go into greater detail about what you're seeing in the pipeline and what gives you comfort that this is a 2-quarter thing? I know, at the beginning of last year, we saw sort of the same situation.

Certainly. That -- this is obviously a repeat of the movie that we saw in 2012. And let me try and clarify what we think is happening in this business line. First off, in our transformation business, we think there are 2 parts. One is a core annuity base of revenue and recurring revenue that we get from our clients. And the second is a project-based revenue stream that we get from our clients, which is discretionary-based. The second part of the revenue, which is the project-based discretionary is the volatile part and it is difficult to predict as to which quarter we would get the revenue from that discretionary element. And in this quarter we will see a spurt take place and next quarter, it will drain off. Clearly, it did come off very significantly in the first quarter of 2012, and again in the first quarter of 2013. For the core business that we have, in terms of our analytics and annuity-based and recurring-based revenue streams and transformation, we have seen extremely strong demand in the market environment and our solutions are resonating extremely well with our clients and prospects. We continue to grow our business, both with existing clients, and we continue to add on new clients at a very significant pace. And therefore, we would expect this business to continue to grow significantly year-over-year and the long-term trajectory of this business line is going to be upwards.

Okay. Secondly, I think -- and I just wanted to get some clarity on this point as well. I think you talked a little bit about some issues on that discretionary spending side, but it sounds like from your prepared remarks that the pipeline continues to be very, very strong. I know you've been seeing larger deals. Can you help us reconcile those 2 from a demand perspective? Why would discretionary spending be a little bit lighter pockets of issues while the pipeline remains very strong?

I think that's a great question also. Let me try and address that. In terms of the discretionary spend, we saw several of our clients engage with us in the third quarter and fourth quarter of 2012 and exhaust their budgets in calendar year 2012. They seem to have started off very cautiously in the first quarter of 2013, and that's why we've seen a ramp off of the discretionary spend in the first quarter. At the same time, the large deals that we are seeing, both in outsourcing and in transformation, these are annuity-based, recurring revenue streams and these are structural changes that our clients are making to their business operations, and we continue to see some very large deals and a very strong demand for these types of opportunities. So to us, the secular trend and the more fundamental and core basic tenets of our business remain fundamentally intact. However, there is volatility associated with the project-based and the discretionary spend.

Okay. Last one from my end. Have you seen a pickup in the discretionary spend since, heading into the second quarter? And then, finally, what is your visibility like towards the back half of the year, now that you have maybe a little bit more analytics in the business revenue base?

So on the analytics piece and on the annuity-based piece, we continue to see a good traction and there the visibility is high. But the project-based revenue, we have not yet seen an uptick that is taking place. Keep in mind that this uptick could happen very quickly. But as of now, we have not yet seen that uptick take place.

And our next question comes from the line of Manish Hemrajani from Oppenheimer. Manish Hemrajani - Oppenheimer & Co. Inc., Research Division: Given that your revenue in 1Q, where it is, and flattish revenue guidance in 2Q, you would need a significant exploration in growth in the second half of the year to get to the midpoint of the range. What's your confidence level to get to that midpoint range for the year?

Manish, you're absolutely correct in your assessment. And I think, for us, the second half has become a much more critical half. I think the reason for our confidence is the fact that we can see some of the client pipeline and the client demand that's in front of us and therefore, afford us the visibility and the confidence level remains the same, as what we had in previous years or what we had at the beginning of the year. And there certainly is risk associated with our guidance, but it will largely depend upon how the discretionary-based, project-based revenue comes in. If we do see that kick in early, I think the risk will be mitigated. If, however, we don't see that come in, I think the risk will be there. So right now we feel good about the guidance that we've given. But there certainly is risk associated with the discretionary-based project spend. Manish Hemrajani - Oppenheimer & Co. Inc., Research Division: Got it. And then on your attrition rate, we haven't seen this low an attrition rate since '09. Can you comment on that? Why was it so low, and do you expect that level to continue?

So we were delighted with the attrition rate coming off so significantly in the first quarter. And we do think that the number of steps that we have taken to improve employee engagement and our attempts to become employer of choice seems to have paid off quite well. But at the same time, we remain cautious because this is only a single-quarter data point and we would much rather see several quarters and sustained levels of low attrition in order to be more definitive about our statement. The other factor that you should keep in mind is, typically we payout bonuses at the end of the first quarter and we also have a salary increments that take place on the 1st of April. So many times, employees will wait for these payments to be made out. And sometimes, we can see a dip in attrition rates in the first quarter because of these reasons.

And our next question comes from the line of Edward Caso from Wells Fargo Securities.

Can you quantify or at least put a box around the percent of your total year's revenue that is this discretionary, project-based work?

Let me try and address that question as transparently as I possibly can. First off, is our outsourcing revenue, which is largely annuity-based and recurring. 20% of our revenue stream is in transformation, which has got annuity components to it, as well as it's got a project-based components to it. We would estimate that 1/3 of our business in transformation is annuity-based and 2/3 of our business is still project-based. So close to about 7% or so would be this project-based revenue. So let me just clarify, 1/3 will be annuity-based, 1/3 will be recurring and 1/3 will be discretionary project-based revenue, and that's how we've come to about 6% to 7% of our revenue being project-based.

Okay, so we really are focusing on 6% to 7% of your total revenue pie for the year that we need to sort of see come in sort of biased to the second half. Is that right?

That's correct.

My other question is on the acquisition sort of -- obviously, you have a lot of cash. You always have a very healthy balance sheet. Is there a minimum level of cash you'd like to hold? Would you go on a net debt position? Why would you do that? And maybe what kind of acquisitions would you be looking for? I just want to make sure Jarrod is doing some work here.

I personally hope he is. I will say that the market environment for doing acquisitions remains very attractive and we do have several targets in our pipeline. And we would hope that we would be able to do some acquisitions in the calendar year.

But what type? I mean, are you trying to capture IP? Are you trying to capture clients? Are you trying to capture geography? Give us sort of a framework where you're looking, please.

Sure. First off, our entire business model is based off a vertically-driven, industry-focused business services business model. So we would continue to look at acquisitions that can beef up some of our core industry verticals. And clearly, for us, Banking and Financial Services remains a high priority area that we'd like to beef up. We already made some investments in the healthcare industry vertical and we would continue to look at expanding our presence out there. And within insurance, we think we have a dominant presence, but anything that will enhance our capability within the insurance vertical will also be attractive. So the #1 priority for us would be to deepen our capabilities within the industry-focused leading verticals that we've got. The second area of focus for us is going to be geographic expansion, and if we can expand geographically, that gives us a much broader geographical delivery footprint. That would be very attractive to us. And the last area is actually an area in analytics. We think we've got a very strong capability in analytical services, but it is a high-growth area and there are multiple service lines within analytics, which a service provider like us can participate in, and anything to expand the breadth of service offerings in analytics would be attractive. Let me also address your question about the capital. We do like to keep a certain amount of cash on our balance sheet, but we are also very, very prudent in terms of going ahead and doing acquisitions that make strategic business sense for us. So if we had to take on debt to do a larger acquisition, we absolutely would do so. We do have banking lines that are committed to us and we have the capability of using leverage, should the right opportunity arise.

Our next question comes from the line of Tien-Tsin Huang from JPMorgan. Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division: Just a couple clarification questions. I guess, on transformation, I know year we saw a nice 2Q ramp. Here, we're talking about the second half. I heard some of the reasons. But what's the key difference here? I mean, because shouldn't seasonality still play a role with project ramps, when all is said and done? Just trying to better understand the difference between this year and last year on transformation.

On transformation, we certainly would expect to see our revenues go up from our first quarter levels, and so we certainly are factoring that in. But that is going to be because of our core annuity-based and recurring revenue streams within transformation. What we are not sure about as yet is about the transformation business, which is project-based and which includes the discretionary spend. It does seem and feel a little bit different as compared to last year. But as I said, we are uncertain about it at this stage and we'll know it when we see it or we don't see it, and that uncertainty will be lifted at that point of time. Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division: Tien-Tsin Huan Right. I'm just trying to remember back, last year, at this time, when you were talking about it, I mean, we were a month into the quarter and -- does it -- can it change that quickly, I guess, within the last couple of months of the quarter to see a benefit there or not necessarily? Just try to understand the...

Yes. I think the one thing that you should be cognizant of is for project-based revenue, most of the work is done onshore. We already have the resources onshore, which are there, so we have the capacity to take on that pretty quickly. And the discretionary spend, when our clients decide to engage with us, the lead time for us to engage is a couple of weeks. So actually, the revenue on that can be realized pretty quickly. Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division: Okay, that's good to know. And just, again another clarification, the transitions, is the overall impact still around $20 million this year over the prior year, and what's the magnitude of the third quarter transition that you're referring to? Is that different from what you were thinking before?

No. The client transitions are exactly at the same pace as we have thought previously when we have given out guidance and also when we had shared with you at the end of the third quarter last year. They continue to represent between 5% to 6% of revenue headwind growth for us. And we think that the transitions would be fully completed by the end of the third quarter this year.

And our next question comes from the line of David Grossman from Stifel. David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: I missed a piece of what you just talked about, so sorry if this is a little bit repetitive, but can I go back to the mechanics of what happened sequentially? Could you perhaps help us understand how much of the flatness in revenue is a function of the OPI customers coming off and what the impact is sequentially? And then secondly, the expectation for the transformation business. Would we expect that to be flattish sequentially, with most of the decline coming in the BPO business from the OPI transition?

Sure. So for us, as I said, the client transitions represent a 5% to 6% impact on our revenue. It is pretty much evenly spread, with perhaps a slightly higher amount in the third quarter of this year. So that's how we would anticipate the transition of client revenue playing out. In the first quarter of the year, we did see some project-based discretionary spend come off, and that's the reason for our transformation service business line actually declining in value from the fourth quarter of last year. We continue to see acceleration of our annuity-based and recurring revenue streams within transformation. We continue to see acceleration of our outsourcing business and we would expect that, that trend would continue throughout the year. Does that help? David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Yes. So the 5% to 6% is just year-over-year impact on overall revenue growth and all that would be in the BPO segment, right?

That is correct.

That is correct. David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Right, okay. And then, I'm wondering, Vishal, can you break out how much of the margin compression was FX versus some of the other factors that you talked about?

Yes, so on quarter-on-quarter basis, the FX impact is about 40 bips from Q4 to Q1. And on a year-to-year basis, actually, FX was a benefit of over 1%. David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And the 40 basis points, is that sequential impact?

Sequential impact, yes. Q4 to Q1. David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And I guess, going back to some of the comments you made about the pipeline, Rohit, and these larger deals, what is your expectation of the timing of when some of these deals may get awarded? And I was wondering if you could maybe help us better understand the size of these deals, and whether they're similar to what you have in your existing portfolio or whether they look different.

So David, let me try and give you as much color on this as I possibly can because frankly, this is a big question that we struggled with ourselves, since the timing of the decision of these large deals is highly uncertain and it does tend to move from quarter-to-quarter and sometimes from year-to-year as well. But we have today in our pipeline, at least 4 deals, which are a thousand FTEs or higher in terms of outsourcing opportunity. And so that represents huge deals for us, each of which could eventually end up being $20 million to $30 million of annual contract value. We also have multiple deals, which are platform-based services deals, and again, these deals tend to be large deals. However, these deals do require an upfront investment for a couple of years to -- in order to enable the conversion from existing platform. And then, we also have a some large sole platform deals in our pipeline, particularly in healthcare, which are large deals, which are standalone platform deals. These deals do not require an upfront investment and these would actually be accretive from day 1. So it's a broad cross-section of deals that we've got in our pipeline. But certainly, there are a number of them, which are large and substantive and the timing of the decision-making of these deals continues to remain uncertain. David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: So if I think about those 3 buckets then, is -- these platform deals that don't require upfront investment, that's relatively new for you, right? And I'm assuming that comes with the Landacorp acquisition. And if that's an accurate assumption, should those come at much higher margin than the other 2 buckets?

That is correct, David. It does come with the Landacorp platform acquisition in the healthcare vertical and those would be higher-margin deals. David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And just one last question. You talked about ramping up the hiring levels, particularly in analytics. And then, on the same token, you've talked about some uncertainty and the discretionary spend ramping in the back half of the year, although you're confident in the overall pipeline. Could you help us reconcile those 2? Is the hiring specific to contracts that are in hand where you actually have worked scheduled to start, where those people will be deployed? Or are you just hiring in anticipation of the demand ramping in the second half of the year?

So again, let me try and provide you with color. The hiring that we have undertaken is largely in India, and this is -- it basically means that's its for work that would be annuity-based or recurring work that we would expect to do in an offshore location. The hiring that we've undertaken also requires close to about 3 to 4 months of training of these resources before they can be productive. And therefore, hiring these resources in advance of the demand allows us to train these resources and have them be productive at the point of time when we will get the revenue from our clients. The discretionary project-based spend that has come off, as I said earlier, is serviced by our employees, which are largely onshore-based here in the U.S. or in U.K. And there, our staff trends remains the same, but because we've kept our staff trends the same, our margins have been impacted because when that revenue drops off, our margins get impacted. So that's how we are thinking about our business, and that's why we feel confident and good about the core annuity and recurring base of our business, and that's why we are hiring ahead of time. But on the project-based revenue, we have excess capacity right now and we are carrying that staff trends onshore.

And our next question comes from the line of David Koning from Baird. David J. Koning - Robert W. Baird & Co. Incorporated, Research Division: My first question, just -- I know in the last 2 quarters of the year, as somebody else mentioned, growth will probably have to be, probably in the high single-digits sequentially, each of Q3 and Q4 to kind of get to around the midpoint of the full year guidance. Was that similar growth in both the BPO and transformation segment? Do you expect both to be kind of around the same levels for those 2 quarters?

Yes, David. We would expect growth in all of our segments in Q3 and Q4. So this includes transformation, it includes our platform and it includes our outsourcing segment. David J. Koning - Robert W. Baird & Co. Incorporated, Research Division: Okay, good. And then the second quarter EPS, when we look at that component, I think you said flat revenue sequentially. Tax rate will go up, so that puts a little pressure on EPS. But do margins also go up? I know transformation margins are pretty low in Q1, do we get margins to go up so that EPS is also pretty flat sequentially?

David, this is Vishal. The margins will go up in the transformation business. But bear in mind, we also have salary increments, which will offset -- more than offset that margin increase. So we expect that from a onetime benefit, which we had in Q1, the Q2 EPS actually will decline. David J. Koning - Robert W. Baird & Co. Incorporated, Research Division: Okay. Yes, that makes sense. And then, finally, just how big was Landacorp in Q2? How much revenue -- or I'm sorry, in Q1. How much revenue did it contribute?

David, we don't break up the revenue by platform. It's all included in our outsourcing revenue segment. And it basically performed as per plan. As we have shared with you earlier that we expected Landacorp to end up doing close to about $20 million for the year and it's performing as per that expectation.

And our next question comes from the line of Paul Thomas from Goldman Sachs.

Are the decision-making cycles for large deals slower at this point in the year compared with a year ago? I'm just wondering with respect to your commentary about the start of the year looking similar to last year. Are the cycle times about the same or slower?

Paul, this is Rohit. So I would say that the cycle times for large deals generally ends up being longer than smaller-size or mid-size deals, and that's how I would think about it. I don't think there's been any change in terms of the cycle time this year versus last year. These are large, complex deals, and because they are complex and large, the decision cycles will remain vague. What we are seeing is not only are we seeing large deals come into our pipeline from new clients, we are also seeing large deal opportunities come from our existing clients. And we are seeing that there is a bunching up of activity that is taking place, which has got nothing to do with, I guess, independent decision-making or the cycle times, but it just so happens that, that's how it's playing out.

Okay, that's helpful. And then you talked earlier about the potential for 4 deals worth a 1000 FTEs or higher. Could you refresh us on how many of those -- or deals of that size you closed last year?

Last year, we did not close any such deal, Paul. We would typically expect to close 1 or 2 of such types of deals, and that would be a good win rate for us.

And our next question comes from the line of Mayank Tandon from Needham & Company. Mayank Tandon - Needham & Company, LLC, Research Division: Rohit, just sorry to beat a dead horse here, but just doing the math here. The discretionary spending clearly is key to hit the guidance numbers, but how much of the revenue also is contingent on some of those big deals you mentioned converting into revenue in the back half of the year?

Mayank, this is Rohit. We won't factor in any of those big deals and the revenue from those big deals for the current calendar year. Those deals, if we win them, will really have an impact for us for 2014 and beyond. But there are a number of smaller deals that we have won last year. Those ramp-ups continue to take place. And then there are ramp-ups from our existing clients, which are taking place, which will have an impact on our revenue in the second half of the year. And we certainly expect our transformation business to continue to grow aggressively into the back half of the year. Mayank Tandon - Needham & Company, LLC, Research Division: Okay. So just to be clear, so it is that 6% to 7% of revenue, which is project-based that is a swing factor in terms of where you fall versus your guidance range?

Yes. Keep in mind one thing, that our guidance is very, very narrow. And between the bottom end of our guidance range to the top end of our guidance range is a 2% differential. So a 7% project-based revenue can have a meaningful impact when our guidance range is so sharp. So that's how -- it does have a material impact on our guidance. Mayank Tandon - Needham & Company, LLC, Research Division: Got it. That helps. And also, just on a broader note, Rohit, you talked about competition from the big IT services firms. Could you give us a sense of what your win rate has been, especially in going head-to-head against some of these large players? If you have any evidence in terms of how you're doing, that would be very helpful.

So the data points that we have, Mayank, are basically the mid-sized deals where we've competed against large IT players. And there, our win rate has been pretty much the same as in previous years. And particularly, in our core industry verticals, we continue to win deals as per expectations. On these large deals, we are yet to see as to how these will play out. And we think we are well-positioned. We think these deals are progressing well. We think the value proposition that we bring to these prospects is compelling. And -- but I think the proof will be included in there when we get to see what the decisions are with these large deals. Mayank Tandon - Needham & Company, LLC, Research Division: And just one final question, you talked about your value proposition. What are the big IT services firms selling in terms of their value proposition when they're going head-to-head against you?

So the big firms are selling their size and scale. They're selling a combination of IT services and BPO services. And they're basically talking about the relationships that they have with these clients on the IT side as being a strong motivating factor for these clients and prospects to decide in their favor. From our perspective, it is the industry expertise. It is the operations management and the operation's excellent capability. It is also the analytical services capability and our ability to embed in analytics along with the operations management capability. And it is our unique platform that we've got, which we think makes it a compelling value proposition for these clients. And then particularly for some of these clients, the level of attention that we can give to them as a large client of ours is certainly far, far more valuable to them than being one of a thousand clients there with some of the larger players. Mayank Tandon - Needham & Company, LLC, Research Division: And Rohit, I didn't hear you mention price, but I would imagine that they are also trying to undercut you on price in some of these opportunities?

I think pricing is something which the clients are pretty careful about. And while pricing remains competitive, I don't think our clients make the decision solely based on price. And they do look at a long-term relationship. They do look at the value proposition playing out, and the pricing is a factor, but it's not a dominant factor.

And our next question comes from the line of Vincent Colicchio from Noble Financial.

Rohit, do you have any large contracts coming up for renewal in the 2Q that we should be concerned about?

So we don't really have large contracts that are coming up for renewal that you should be concerned about. I think we did have a few contracts this year, which we have been able to renew successfully. And there is nothing this year that is significant that should pose a concern or [indiscernible].

And our next question is a follow-up from the line of Ashwin Shirvaikar from Citibank.

This may -- Rohit, this might seem like a strange question, but we use the word discretionary off and on. I just wanted to kind of understand if -- how discretionary is analytics work? I mean, ultimately, are banks basically going to say, I don't want to do work around fraud or -- how discretionary is it?

So Ashwin, I think analytics is not that discretionary because the value that a client receives is anywhere between 5 to 20x the amount that they're investing with us in terms of the return. And in today's economic environment, that makes it a compelling investment for them to make. The part that is discretionary is particularly the part associated with process reengineering and redesign or the part associated with any structural change that they want to make or a onetime initiative that they want to launch, which they could decide to do in one quarter versus another. Those types of projects are discretionary and depends upon the funding and the availability that clients have in terms of their budgets. Analytics is an area where everybody is allocating more and more capital to. And with the benefit and the return that they get on analytics, it actually makes it far more compelling than discretionary.

So would you be able to break out the work as analytics versus process reengineering and all those other things? Or is that too granular?

We don't break that out as such. But just in terms of rough math for us, analytics ends up being close to half of our total transformation business. And the other 2 elements are operations and process excellence and our finance transformation business line.

And Ashwin, just to keep you in perspective, the decision analytics business has over 55% of the revenue with that entity.

Got it. Yes, okay. Last thing is a clarification. The 2 clients that are going away from OPI, is that a steady ramp down or is that kind of lumpy that one day you have some set of revenues and then a cutover and you don't have it?

Well, as we mentioned to you, Ashwin, one client has fully ramped down as of the first quarter of this year. So that one is done and over with. And the second client will ramp down by the end of the third quarter. There will be some trail off in the second quarter and some trail off in the third quarter. And it will be in a 2-step format, but it'll both be within the quarter.

And I have no further questions in the queue. I would like to turn the conference back over to Rohit Kapoor for concluding remarks.

Thank you, operator, and thank you, everyone, for joining our EXL first quarter earnings call. We are in a transitionary period at this point of time, but we remain very optimistic about the demand environment and about our current positioning in the marketplace. We look forward to continuing to execute on our business plan and delivering on our guidance. Thank you, all, for joining, and we will you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.