ExlService Holdings, Inc. (EXLS) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the ExlService Holdings' Fourth Quarter 2014 Earnings 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 follow at that time. [Operator Instructions]. As a reminder this conference maybe recorded. I would now like to turn the call over to your host Steve Barlow. Please go ahead.

Thank you, Stephanie. Hello and thanks to everyone for joining EXL's Fourth Quarter and Full Year 2014 Financial Results Conference Call. I'm Steve Barlow, EXL's Vice President of Investor Relations. With us here today in New York are Rohit Kapoor, our Vice Chairman and Chief Executive Officer and Vishal Chhibbar, our Chief Financial Officer. We hope that you had an opportunity to review the three press releases we issued this morning, the quarterly and annual financial results, the release about our acquisition of RPM Direct, and the release on our share repurchase program. We've also updated our investor fact sheet in the Investor Relations section of EXL's website. As you know, some of the matters we'll discuss in this call are forward-looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, general economic conditions, those factors set forward in today's press release, discussed in the company's periodic reports, and other documents filed with the Securities and Exchange Commission from time to time. EXL assumes no obligation to update the information presented on this conference call. During our call today, we may reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of those measures to GAAP can be found on our press release, as well as the investor fact sheet. 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 fourth quarter 2014 earnings call. The agenda for this morning’s call is as follows; first, I will provide you with the highlights of 2014, and comment on our strong finish to the year. I will then spend some time talking about the three major strategic pivots that we have made at the start of 2014 and how that has helped us win and get recognition in the marketplace. We will also discuss the acquisition of RPM Direct a major analytics player that was announced this morning and how this will help us achieve our vision of being the leader in analytics. After that I will talk briefly about our demand environment and then close my prepared remarks with listing out our key priorities for 2015. Then I will turn the call over to Vishal for a more detailed financial discussion including insights into our annual guidance for 2015. Following that we would be happy to take your questions. EXL ended 2014 on an extremely strong note. In the fourth quarter, our revenues excluding disentanglement cost were a record $143.8 million increasing 15.5% year-over-year and 8.9% sequentially. As a result of our strong revenue growth we delivered adjusted diluted EPS for the fourth quarter of $0.48. Both our revenues and our earnings were well above the high end of our guidance range. We ended 2014, with revenues excluding disentanglement cost of $525.6 million. On an annual basis we grew 9.8% while our core organic growth rate excluding client transitions at constant currency for 2014 was 12.4%. These numbers underscore the strong growth characteristics of EXL. And I would like to offer my sincere thanks to all of EXL’s 23,000 employees for their hard work, collaboration, and passion that ensured our success. I am proud of what we have been able to accomplish and I’m delighted to be part of and to lead this great team. Looking back at 2014, I am proud to say that our entire company worked together seamlessly to pivot on our strategy which enabled us to have a very strong second half of the year and enter 2015 with terrific momentum. We pivoted our company in three strategic ways; number one, we built new differentiated operations management capabilities that fundamentally changed our value proposition to our clients across all industries we operate in. Number two, we significantly increased our investments in insurance, healthcare, and analytics to propel us towards leadership positions in these large and rapidly growing markets. And three, we proactively executed on a capability enhancing M&A plan. These changes have helped us win new Fortune 500 clients, grow existing relationships, and get industry recognition. More importantly, this shift has helped position EXL as a long-term strategic partner for our clients. Today EXL not only delivers operations management and analytics capabilities with efficiency and effectiveness, but we also offer an ability to enhance end customer experience and accelerate our client's top line growth while supporting them across global locations including on-shore locations. We do this by participating across the end-to-end value chain of our client's business. While we will talk in more detail about this new EXL at our Investor Day on March 2nd, I will elaborate briefly on a few key changes and their impact. A, the first strategic pivot. We made a fundamental shift in our operations management value proposition by implementing the business EXLerator Framework across all our operations developing industry specific business process as a service or BPaaS solutions and building proprietary technology enabled products. This shift was instrumental in helping us strengthen our existing client relationships and in acquiring new customers. At the end of 2014, EXL had 68 clients with revenues over $1 million as compared to 51 in 2013 and 44 in 2012. We also continued our fast pace of new client acquisitions by adding 26 new clients in 2014. Importantly, the quality of the new clients added was particularly strong and we added 10 Fortune 500 clients in 2014 compared to 6 Fortune 500 clients in 2013. By expanding our relationships and winning new clients we were able to further reduce client concentration. EXL's top three clients generated 22% of revenues in 2014 versus 25% in 2013 and our top 10 clients contributed 50% of revenues versus 58% last year. Expansion of our client portfolio and deepening of our relationships gives us confidence that the changes we made are resonating in the market and helping us win. This shift was implemented companywide and was a key differentiator in helping us win new deals across all verticals including utilities, banking and financial services, and travel, transportation, and logistics businesses. B, a second strategic pivot, significant investments in insurance, healthcare, and analytics. We continued to maintain a dominant position in insurance across both property and casualty and life and annuities businesses. Our capabilities in insurance have been significantly enhanced with the acquisition of several new strategic client relationships and growth across almost all existing clients. We have also been able to have the deepest implementation of our business EXLerator Framework in insurance. We have introduced several BPaaS products and services that have been quickly adopted by our clients. We now look forward to scaling up these revenue streams. Furthermore our two recent acquisitions of OSI and RPM solidify our franchise in the insurance verticals and provide us access to a large cross section of new insurance clients. The transition of work from one of our clients in this vertical is now fully complete. One key area where we are seeing great success as a result of our earlier investments is in our healthcare business. We invested in deepening our domain expertise by hiring a Chief Medical Officer and Chief Actuarial Officer, upgrading CareRadius, our care management platform and enhancing our clinical capabilities. We are now recognized as having the broadest and deepest set of capabilities in clinical outsourcing and work with three of the five major health plans in the U.S. We grew our clinical healthcare business by over 30% in 2014 and are confident of maintaining our strong growth trajectory going forward. We also invested in scaling and enhancing our analytics capabilities and this business has emerged as one of the engines of growth for EXL. Our analytics business grew by 44% in 2014 to achieve $66 million of revenue and outpaced the growth of many of our competitors. For the year, analytics represented 13% of EXL’s total revenues versus 9.5% last year. Going forward, including the contribution of our new acquisition RPM, our analytics business is expected to exceed $100 million in annual revenues. At this point I would like to articulate our vision for the analytics business and why we are confident of becoming a leader in this large, growing but fragmented landscape. Our vision for analytics is that just like BPO industrialized the task of processing, analytics will industrialize decision making in companies. This change will happen across the entire enterprise at a very rapid pace. Driving better decisions will also help us participate across the end-to-end value chain of our clients business and enable EXL to drive top line revenue growth, enhance customer experience, and create emerging digital businesses for our clients. In line with this vision we focused our 2014 analytics investments across three areas; A, deepening our domain expertise; B, entering new domains; and C, setting up large analytics center of excellence leveraging a large team of data scientists and proprietary tools and methodologies. These investments helped EXL wins 6 new analytics clients in 2014 across multiple domains while growing our top 5 analytics clients by over 40%. I will provide a little more detail on these investments. First, we have now established a clear leadership position in providing analytic solutions to retail banks where we worked with 7 of the top 10 U.S. banks as well as leading international and regional banks that have found our domain expertise pool of data scientists, and proprietary tools crucial to helping them effectively manage their business models and drive superior customer experience in a competitive industry. We also continue to strengthen our analytics capabilities in healthcare and insurance, and are focused on effectively cross selling into our large client portfolio in these verticals. Second, we made a strategic decision to make inroads into the retail and capital market domains and are very excited by the potential for growth given the huge amount of actionable data that these industries possess and generate. Third, we are on course to establish several $10 million plus annual revenue clients in analytics by building large analytics centers of excellence. We are excited by the long-term annuity nature of these client relationships and the breadth of high impact work that we are doing. C, the third strategic pivot, executing on capability enhancing acquisitions. This morning we announced the acquisition of RPM, which significantly augments the scale, talent and capabilities of our analytics business. From a strategic standpoint RPM helps us make great progress towards our vision of helping clients drive top line growth and improve customer experience by transforming decision making across marketing, digital, and product development areas. More significantly, RPM allows EXL to be well positioned to capture the large investments in direct-to-consumer marketing and digitalization. I will now spend some time explaining what RPM does and giving more detail on the strategic fit and potential synergies. RPM specializes in analyzing large consumer data sets to segment populations, predict response rates, forecast customer lifetime value, and design targeted multichannel marketing campaigns. RPMs capabilities compliment and complete EXL’s analytics business in three ways. A, RPMs proprietary database combined with EXL’s data scientists, analytical tools and methodologies provide a great opportunity for us to create an end-to-end offering across the analytics value chain. B, their multiple productized solutions are delivered using a pay per use model and will help generate higher value for clients and EXL. And C, their relationships with the Chief Marketing Officer, Chief Sales Officer, and Chief Digital Officer will help us build solutions for a new segment of business value chain where we did not play a significant role previously. Since inception in 2001, the primary focus of RPM has been on the insurance industry including property and casualty, life and health. However, we believe that their capabilities are applicable across many other industries. For example, one of the most exciting opportunities today is to capture the increase in direct-to-consumer marketing and customer engagement spend that the healthcare industry is making due to the advent of the Affordable Care Act and the consumerization of health insurance. RPMs great depth of experience in direct-to-consumer marketing, access to consumer and credit data, and campaign management platforms will allow us to more effectively capitalize on this opportunity in healthcare. I would like to end this section by saying we are delighted to welcome the RPM management team to EXL including CEO, Dave Denaci and his executive team along with the deeply talented team of 65 data scientists and solution architects. Two other key elements in making the strategic favorite were our acquisition of Overland Solutions and Blue Slate and I wanted to provide a brief update on both. Overland Solutions added to our portfolio of BPaaS offerings that served the P&C industry with its dominant position in premium audit and real estate surveys. The integration plans are on track and cross selling opportunities are in motion. We purchased Overland Solutions in October and it has performed above our expectations by contributing $12.2 million of revenues in the fourth quarter. The team of domain specialists and operations experts at Blue Slate have extensive knowledge on how to leverage business process management tools and methodologies to drive process automation and build best in class operations. In addition the Blue Slate consultants have been working closely with our operations management teams to implement the business EXLerator Framework and generate higher value for our clients and for EXL. The Blue Slate team and their capabilities are now an integral part of our overall business transformation offering that includes operations consulting and finance transformation. A large part of our success is based on sound and consistent talent management practices. While our attrition rate increased in the early part of the year as we executed on some of the client transitions that we have spoken about, I am extremely pleased to report a significant decline in attrition in the fourth quarter. Our attrition rate in the fourth quarter declined to 33.5% from 38% in the third quarter. We believe that this is a much more normalized rate of attrition and we would expect this to remain stable or even trend downwards in the quarters to come. In addition to successfully reducing attrition towards the end of the year, we also added several key members to our executive team strengthening our ability to execute on our new strategy. We also strengthened our corporate governance and the ability to meet the evolving needs of our clients with the election of Deborah Kerr, currently EVP, Chief Product and Technology Officer at Sabre Corporation to EXL's Board of Directors on January 1, 2015. And lastly I am pleased to share that EXL received several notable awards and recognitions from industry analysts and governing bodies. In the fourth quarter of 2014 for example, we made our first ever entrance into the Leaders Quadrant of Gartner's F&A BPO Magic Quadrant. Also we were named a leader in transportation management in 2014 HFS Blueprint report supply chain management BPO. Two key EXL differentiators noted in the report were Revlist a proprietary analytics algorithm and EXL’s freight invoice payment system, our robust workflow technology that integrates customers, carriers, and service providers into a single solution that analyzes freight cost. Finally, I am pleased to share that in December 2014 we were recognized as an industry leader for security in the business process management sector by NASSCOM and the data security council of India. EXL was noted for major industry first initiatives in information security, including the creation of an information life cycle management framework, certification on a business process solutions code of conduct framework for confidential information management, and the establishment of governance forums and cross functional teams to drive security awareness across the company. Now moving on to the demand environment, the demand for both operations management and analytics appears strong and healthy. In today’s business environment we see many of our clients focusing on investments they need to make to ensure their businesses not only run efficiently but are also agile and highly customer focused to meet the demands of the future. We believe that EXL can help them across all of these needs using the suite of capabilities I outlined earlier and work across the end-to-end life cycle of their business to drive top line growth, better customer management, in addition to lower cost and mitigated risk. In terms of the markets we operate in, as I mentioned we continued to see high growth in analytics and healthcare. While we are excited about the opportunity in insurance, that we aim to capture leveraging our leadership position. While we will spend a fair amount of time on this in our Investor Day next week, I did want to leave all of you with our top 5 focus areas for 2015. Number one, wining our strategic operation management deals, leveraging the business EXLerator Framework, BPaaS solutions, and technology enabled products. Number two, growing our analytics business and attaining a leadership position in this emerging high growth industry. Number three, ensuring strong integration of our recent acquisitions including servicing the new clients which Overland Solutions, Blue Slate, and RPM have brought to our portfolio. Number four, continuing to diversify our geographic footprint and help support the global expansion of our clients operations. And number five, improving our margins and delivering returns on the investments we have made. In summary I am pleased with the accelerating momentum we evidenced throughout 2014. Our importance in the markets we serve is increasing and we are making the right acquisitions and investments in people, capabilities, technology and infrastructure to remain leaders. The market and clients are increasingly recognizing the value that EXL brings to the end-to-end value chain of their business. I believe we are responding to our clients needs and leading them as well which has generated increased levels of business and customer satisfaction. We would like to thank all our clients for the trust that they have put in us and feel privilege to have the opportunity to serve them in the future. We are excited to have finished 2014 on such a high note and look forward to 2015 to be an exceptional year for EXL. With that I will turn the call over to Vishal.

Thank you Rohit and thanks everyone for joining us this morning. I would like to start off by providing insight into EXL’s revenues and financial performance in the fourth quarter. I will then do a similar review of our annual performance. Unless otherwise stated all the numbers mentioned are excluding disentanglement cost for our transitioning clients. Revenue in the fourth quarter was a record $143.8 million, an increase of 15.5% year-over-year and 8.9% sequentially. Excluding transitioning clients and acquisition, on a constant currency basis organic growth was 12% year-over-year and 3.3% sequentially. We are pleased with the double-digit organic revenue growth momentum that carried through the end of the year. You will notice in today's earnings release that we have changed our segment names. We’re now labeling our reporting segments, operations management and analytics and business transformation, previously outsourcing and transformation respectively. We believe these names better describe the nature of our engagements with our clients. The business composition of each reporting segment remains unchanged and as such these segments are fully compatible with their prior periods. Driving a strong performance in the fourth quarter was higher revenues than expected in our operations management segment. Operations management revenues of 111.6 million including 12 million from acquisition of Overland, an increase of 10.8% year-over-year and 10.8% sequentially. Operations management revenues excluding transitioning clients, acquisitions, and on a constant currency basis increased 7.4% year-over-year and 4.2% sequentially. Growth was primarily driven by clients in utilities, healthcare, travel, transportation and logistics as well as our BPaaS and traditional solutions for the insurance industry. Fourth quarter analytics and business transformation revenues of $32.2 million grew 35.7% year-over-year and 2.8% sequentially. Analytics revenues on a constant currency basis increased 37.8% year-over-year and 7% sequentially. Fourth quarter gross margin was 36.5% up 80 basis points sequentially. Operations management gross margins were up 30 basis points with Overland Solutions tempering the gross margin increase. Analytics and business transformation gross margins were up 210 basis points sequentially in the fourth quarter driven by improved utilization. Fourth G&A was 12.8% of revenues, an increase of 70 basis points sequentially owing to professional fees driven by deal cost related to acquisitions and key hirings. Sales and marketing costs increased to 7.3% from 7 -- 6.9% in the third quarter due to key hirings. In the fourth quarter our effective tax rate was 23.5% and on a reported GAAP basis our effective tax rate was 8.2% driven by reduced U.S. income due to the disentanglement costs. Adjusted EPS in the fourth quarter was $0.48 compared to $0.56 a year ago and $0.44 in the third quarter. The sequential adjusted EPS increase was driven by strong revenue growth combined with stable adjusted operating margins. Now I will turn my discussions to annual performance for the calendar year 2014. For the year 2014, we delivered record revenues of 525.6 million that exceeded our guidance and they were up 9.8% over 2013. Excluding client transitions and acquisitions and on a constant currency basis organic revenue growth was 12.4% indicating that the core growth engine of the company is meeting our expectations of consistent double-digit organic revenue growth. Operations management revenues increased 5% from 2013, excluding transitioning clients, acquisitions and on a constant currency basis year-over-year growth was 8.3%. In the analytics and business transformation revenues, which grew at 32.5% in 2014, with analytics revenues up 44%. For 2014 analytics and business transformation was 21% of our total revenues versus 17% in 2013 showing how impactful analytics is becoming to EXL. For the year, gross margins excluding disentanglement costs declined to 50 basis points to 36.7%. Driven by lower revenues in platform businesses which had an impact of 60 basis points, higher growth and low margin businesses in Philippines and combined with analytics and business transformation lower utilization 150 basis point impact, acquisitions, client discount, and other impacts of 160 basis points partially offset by the foreign exchange gain of 120 of basis points. G&A costs were flat year-over-year at 12.4% despite higher deal cost of acquisitions. Sales and marketing expenses were also flat at 7.5% in line with our target spending. Despite approximately 4% depreciation of dollar to rupee in 2014, FX gains and losses for 2014 were nil as a result of our systematic cash flow hedging program protecting our pretax income. Tax expense for 2014 was 5.2 million with an effective tax rate of 13.8% for the year. Excluding impact of disentanglement cost, the tax rate was 23.8% which included a discreet tax benefit of $2.2 million. And excluding that onetime tax benefit, our effective tax rate for 2014 would have been 27% in line with our expectations. Adjusted diluted EPS for the year was $1.82, $0.02 above the higher end of our most recent guidance. DSOs for 2015 were at 50 days an improvement of 5 days over last year’s 55 days driven by strong discipline around collections and lower DSOs at Overland Solutions. EXl’s capital expenditure was 27.7 million which was in line with our expectation and included opening of four new operation centers, investments in technology and infrastructure. As of December 31, 2014 our balance sheet remained strong with $188 million of cash and cash equivalents and short-term investments. We had drawn down of about -- we had drawn down $50 million of our revolver which we used to finance the acquisition of Overland Solutions. Our net cash position at the end of the year was a healthy $138 million despite spending $58 million on two strategic acquisitions making the capital expenditures in operations and infrastructure and completing our previous repurchase authorizations. Concurrent with our results we today announced the three year annual share buyback program. We are authorized to repurchase up to $20 million of our common shares each year through December 31, 2017. The intent of the program is to offset dilution from annual employee equity grants. Our strong net cash position and our business generating significant free cash flow allows EXL to repurchase shares while also continuing to make tuck-in acquisitions funding key strategic investments in technology and operations. I will now provide some additional insight into our guidance for 2015. Based on our current visibility and a rupee dollar exchange rate of 62 we are providing revenue guidance of $570 million to $590 million excluding any impact of RPM representing an annual growth rate of 8.5% to 12.5%. Implicit in our revenue guidance is continued strong organic growth momentum between 9% to 12%. The main drivers of our positive revenue outlook is driven by growth in healthcare, analytics, and clear visibility on existing client ramps and the strength of our new client pipeline. The remaining processes from our transitioning clients were completed in the fourth quarter of 2014. Therefore, the final disentanglement cost and transitioning revenue were booked in the fourth quarter of 2014. In terms of tailwinds and headwinds impacting our growth in 2015, the acquisitions of Blue Slate bought in July 2014, Overland Solutions bought in late October 2014 will act as a tailwind of over $50 million to $55 million of incremental revenues. We also expect our analytics business and our healthcare industry vertical to grow well above our corporate average next year and contribute to our growth. By contrast, the transitioning client revenues create a headwind of approximately $7 million sequentially in the first quarter of 2015 and $49 million for the full year for 2015. In terms of quarterly trends over the course of 2015 the first quarter revenues and the adjusted EPS will be down sequentially due to the revenue headwind of $7 million from the client transition, that growth picking up gradually over the course of the year. Several factors will cause our core underlying gross margin to increase next year including operational leverage in Philippines, higher gross margins in our BPaaS businesses, and further margin expansion in analytics. However, the lower gross margin profile of the Overland Solutions acquisitions will result in our 2015 gross margin declining approximately 50 to 75 basis points in total. If it were not for the acquisition of OSI, EXL’s gross margins would have been up in 2015 due to the gross margin tailwinds I mentioned earlier. Despite the slight decline in gross margins, we do expect adjusted operating margin to be flat year-on-year due to leverage in our operating expenses. Amortization of intangibles is expected to increase to approximately 8 million due to our recent acquisition. FX gains at the current exchange rate are expected to be in the range of 3 million to 3.5 million. Our 2015 effective tax rate should be approximately 30% to 31% which is an increase over 2014 due to the increased income in U.S. owing to the acquisitions of Blue Slate and Overland Solutions and the expiration of tax holidays in certain centers in India and Philippines. In 2015 we expect capital expenditures to be slightly lower than last years in the range of $20 million to $25 million. Our priorities for free cash flow in 2015 will be to invest in our business and operations to support our growth trajectory, look for tuck-in acquisitions that expand our capability set, to repurchase shares under our authorization, and then use remaining excess cash for revolver repayment. In view of our strong outlook for 2015 we are providing an adjusted diluted EPS guidance of $1.85 to $1.95 despite the headwinds from the higher taxes having an adjusted EPS impact of $0.12 year-over-year. Our 2015 guidance does not include the recently announced acquisition of RPM. We will update our guidance on our first quarter earnings call to include RPM after the acquisition has been closed. At a high level, we do expect the acquisition to be accretive to adjusted EPS and we will finance the acquisition using part of our $50 million expansion feature to our revolver facility. To close, I am really excited that we ended 2014 with a great fourth quarter. We are confident that we will be able to drive revenue growth in 2015 from our existing clients and win new client relationships. Our industry vertical approach is expanding their footprint with innovative solutions. We are excited that the acquisitions we have made including today's announcement of the acquisition of RPM and we look forward to talking to you next week at our Investor Day where we will showcase several of our key investments we are making to truly differentiate EXL in the market and create a leadership position in the most attractive segments of the market. Now we would be happy to take questions. Thank you.

Thank you. [Operator Instructions]. Our first question comes from Edward Caso with Wells Fargo Securities, your line is open.

Good morning and congratulations. I had a question on your investments on the ops management side and what pace you are adopting automation and what the cost of that is and whether that is an offensive or defensive move on your part? Thank you.

Thanks Ed. So, the investments that we are making in operations management are around the business EXLerator Framework, BPaaS, as well as technology enabled products that we are launching there. This does include a fair amount of automation and elimination of manual work that we do. The business EXLerator Framework really integrates our strong operations expertise, our domain expertise, lean Six Sigma, benchmarking, analytics, and technology solutions. The BPaaS offering actually creates a flexible and a variable cost structure for our clients where they can pay by the drink and our technology enabled products allow us to be able to create non-linear revenue streams with our clients. We are also looking at a number of other ways of approaching automation including robotics as well as the introduction of a number of technology solutions. And we think that our play out here is a lot more offensive and it is structured at some of the processes that we handle that can provide incremental value and differentiation to our clients. We are confident about how these mechanisms are resonating in the marketplace and we think that this positions us strongly for the future.

Clearly you are focused on analytics and having success so far, can you talk a little bit about your large deal pursuit here and whether you are going after some of the larger competitors or you are still pursuing work maybe below the size of deals that say an Accenture might be pursuing?

So analytics clearly has been a strong success story for EXL and we have been able to add many new client relationships as well as expand our client relationships out here. Today we’ve got several deals which are $10 million plus on an annual basis and these are the large deals that we are working on with our clients creating centers of excellence on analytics. There are a number of large scale strategic deals that we are bidding on with clients, particularly as they look to build out a dual shores strategy of developing this capability and we find that the size and scale that EXL has along with the breadth of service offerings that we have in analytics, that’s resonating extremely well with the requirements from the marketplace. And we seem to be well positioned on some of these deals.

Okay, thank you.

Our next question comes from Ashwin Shirvaikar with Citibank. Your line is open.

Thank you. Good quarter and congratulations on the acquisition both of you. I guess my first question is with regards to the headwind of the $49 million that you mentioned. That number imply that the client that’s are being rolled off are sort of rolling off at maybe a slower than expected rate, I would have expected that number to be smaller at this stage?

So, Ashwin the number is actually a comparison between 2014 and 2015. We basically have both of our clients who have transitioned out completely by the end of 2014. So there is no revenue that we would expect from these transitioning clients in 2015 and that is why the number is what it is.

Oh, I see, I understand now. Okay.

So you see from the two transitioning clients and there is no other impact in that.

Okay, got it. So in the future we are not going to get the disentanglement cost and all that stuff, it’s all behind us?

Yes, our expectation is that the disentanglement costs are behind us.

Okay, that’s good. I guess on the analytic side, first of all quite impressive growth and the acquisition seems a good one. But can you talk maybe more about the cost and business model implications of creating all these centers of excellence and eventually as you look at your company, let's just say two to three years out, how big is analytics going to be, how big is transformation going to be versus the operations management side?

Sure, so we will talk a lot about this at our Investor Day but at a high level for us, analytics represents a very large and growing market space where there isn’t any clear leadership that’s been established by anybody. And therefore it’s a huge wide space where we think we’ve got a great shot of propelling ourselves into that leadership position. We think that the analytics growth rate can be sustained for several years and therefore this business can become fairly big and very large. What this business requires is a huge amount of investment in terms of developing proprietary tools and methodologies, investments in domain expertise, investments in talent across multiple geographies, and an ability to participate across the various segments of the analytics industry. We are consciously making those investments. We’ve also as you know, invested in a dedicated sales force for analytics alone and we’ve invested in strong leadership in this area. With the acquisition of RPM, we’ve actually made further investments in terms of diversifying our service offerings in the analytics space and have sort of doubled down in this playing field. So we think that’s the right strategy for us at this stage. Our margins in this business today are not at appropriate levels and we do think there is an opportunity for us to be able to bring up and drive up the margins in the future. Right now we are focusing on the growth and we think on a go forward basis we can get both growths as well as improved margins in this business.

Understood, and with regards to M&A. Obviously a big acquisition here, any thoughts or more color on the M&A pipeline as it stands today or are you going to take a bit of a breather between Overland and RPM and integrate them?

Well, I would address that question in two ways, number one is the capacity and the balance sheet strength of EXL remains strong. So our ability to continue to do acquisitions remains fundamentally strong and if we come across acquisitions which are attractive, we will consummate them and we have a very good pipeline of acquisitions in place. Having said that, with the fact that we have done three acquisitions over the last nine months or so, we are going to focus in on integrating these acquisitions in and making sure that the business models work in an integrated format. So our focus really for the next six months is going to be to consolidate and integrate in these acquisitions so that we can scale up these acquisitions along with the rest of our business.

Got it, thank you guys, see you next week.

Our next question comes from Anil Doradla with William Blair. Your line is open.

Hey guys, congrats from my side too. On the RPM side, it sounded in very simplistic terms that the area of expertise is centered around the proprietary database. So, how scalable is this business model across markets beyond insurance?

Thanks Anil. We actually think that the capabilities that RPM has and the database that they have created is a tremendous asset that can be leveraged not only for insurance but for other industry verticals and not only for the U.S. market but for other geographies as well. So, our plan would be to take RPMs capabilities and its strong data asset and leverage that in the industry verticals of healthcare, leverage that in industry verticals of banking and financial services, utilities, travel, transportation, and logistics. And similarly we would expect to take RPMs capabilities from the U.S. and expand that into UK and to Europe. The data asset that RPM possesses is unique and it actually positions us with the unique capability of bringing analytical strength and prowess and combining that with the data asset and offering that to the client on a combined basis.

So, is this something Rohit, you think you could do this in the next 12 months, 24 months, or is it more of a longer term thing?

I think the sales cycle out here is likely to be much shorter than the operations management cycle but the adoption of it will certainly take time and we are going to be deliberate about this. So my sense is that this would play out over the next 24 to 36 months.

Great, now on the analytic side, I mean clearly you are emphasizing on this, your peers are emphasizing, I mean if you step back and look at the overall industry beyond EXLS, what do you think is the BPO growth rate now or what do you think would be kind of long-term BPO growth rate given the move towards these businesses?

I think if you breakout BPO and analytics, the BPO growth rate would be close to a double-digit growth rate. So it maybe high single-digits or close to a double-digit growth rate. And that's what things seem to be stabilizing around.

But, don’t you think there should be a pickup given that analytics would become more and more of a greater contributor not only to you but the rest of the industry?

Absolutely, so when you combine the analytics and BPO, I think the combined growth rate is going to be in the double-digit and so, you will see growth rates which are 10% to 12%.

Great, and finally Rohit, if I understand your language, you said you believed that there is not going to be any disentanglement cost in 2015. I mean is there still an element of uncertainty in there or you are pretty sure that there is no disentanglement cost in 2015?

I think on the disentanglement cost, we have shared the data with you as we have incurred those disentanglement cost. At this stage we do not expect there to be any further disentanglement fees going into 2015.

Okay, great. Congrats once again guys.

Our next question comes from SK Prasad Borra with Goldman Sachs your line is open.

Thanks for taking my questions. First probably on the demand environment, the commentary from ISO [ph] vendors and BPO vendors continues to be positive, is it general improvement in demand because of the macro or is it more vertical driven strength what you’re seeing in the market?

I think for us we’re seeing it in a two different ways, one is we’re seeing demand for services that were previously not traditionally outsourced. And particularly as clients think about more complex processes they are getting more comfortable around outsourcing some of the more complex processes. And the second is particularly as we have started to embed analytics into our operations, there seems to be a greater propensity to outsource processes around customer experience and customer acquisition, and therefore our ability to participate not only on the cost structure of our clients but also our ability to enhance their revenue, that’s become a lot more end to end capability offering that seems to be taking place. And so from our perspective those trends are playing well and we see more clients engaging in and we see EXL well positioned to take advantage of that.

Probably question around the analytic space, when you think about acquisitions in analytics and you have done now couple of decent size acquisitions, is the focus from your point is it more on the strength of the platform or are you primly acquiring them for clients?

We’ve actually looked at it from multiple dimensions. We’ve looked at it from a capability standpoint so it includes if somebody has a data asset and a technology platform in analytics that is proprietary, we think that is going to be extremely valuable going forward into the future. We also think that an assembled workforce of data scientists and analytics resources who got deep domain knowledge and subject matter expertise, that’s a great capability to acquire. And certainly expanding client relationships in this growing market is an advantage. So a number of elements that go into that mix. Of course it’s quite difficult to do acquisitions in analytics but I think we’ve been able to be patient about it and we’ve structured the deal in an appropriate way where it makes sense for everybody.

Okay, probably just a last one from my end, just for the gross margins for 2015, you’re saying you will see some headwinds, can you elaborate on that a bit more and heading into say 2016 should we expect that to improve?

Hi S.K., this is Vishal. As I said, the gross margins are getting impacted by the lower gross margin profile of the Overland Solutions which is a large revenue impact in -- full year impact in 2015. So on our core business we expect the gross margins will be improving 50 to 70 basis points but will get offset by a lower gross margin impact due to the Overland acquisitions by about 140 basis points. So net, net the gross margins will decline between 50 to 70 but that’s primarily driven by the impact of the acquisition of Overland though on the core business we would be expanding and growing our gross margins year-over-year.

And adding into 2016, you would say that --

Over 2016 and 2017, I mean over the long run we do expect the gross margins to pick up and adjusted floating [ph] margins also to pick up.

Okay, that’s clear, thank you.

Our next question comes from Joe Foresi with Janney. Your line is open.

Hi, thanks. This is Robert Simmons for Joe. Can you quantify how much of your business is now from digital world given the acquisitions?

Robert, we will be sharing the details of the RPM acquisition once the acquisition is closed and we will be updating our guidance at that point of time and we can provide you with more color at that stage.

But could you give it given also just the other ones you’ve actually closed though?

Basically is your question in how much of our revenues are at platform and driven? Or just what do you mean by digital, because I think what we are doing...

I mean Mac?

Mac, okay.

We actually do not break out our revenues on that basis. As you know most of our revenues are around operations management and analytics and business transformation. The analytics revenue certainly touches upon a number of different elements where clients are working on social, mobile, and on the cloud. But it cuts across a number of those streams and we don’t measure it in that manner.

Okay, great. Thanks.

Our next question comes from Vincent Krochio [ph] with Nobel. Your line is open.

Rohit, your first quarter tends to be seasonally weak, can you give us some help in terms of what should we expect the low sequential growth rate?

Yes Vincent, as Vishal mentioned in his prepared remarks we do expect there to be a $7 million headwind quarter-on-quarter in the first quarter of 2015 and therefore we would expect the first quarter to be weaker than the fourth quarter of 2014. And that could certainly impact our numbers on a go forward basis.

In terms of adding retail in capital markets as important areas to your analytics business, do you have a large pipeline or just in client asking for this, what does that look like any color will be helpful?

Sure, so these are new industry verticals for us and what we have done is that we have basically removed any constraints on the growth of the analytics business. And in 2014 we were particularly successful in entering the retail and the capital market spaces. We acquired several customers in each one of these industry verticals and now look to use that as a foundational basis for acquiring more customers and growing with the franchise that we have created. Our pipeline in these two segments is strong and our dedicated sales force for analytics consciously pursues multiple new industry verticals to enable us to grow at a much faster pace.

And are there any large contracts coming up for renewal in 2015 that we should be abreast of?

There is nothing which is particularly outside of normal. As you know our client concentration continues to get better and better and therefore the renewal of client contracts is not such a huge factor in terms of our going forward position.

Okay thank you.

[Operator Instructions]. Our next question comes from David Grossman with Stifel. Your line is open.

Thank you and good morning. Rohit, the sequential growth in outsourcing was fairly substantial on operations management and I think you made even references in your prepared remarks. However, could you give us a little more color on where the sequential growth of outperformance came from, was it existing customers that ran faster, was it certain things that didn’t go away that you anticipated would go away or what in fact were some of the details behind kind of the upside to your initial expectations for the fourth quarter?

So David I think it was strength across a number of different areas. So A, we did have our existing clients which ramped up in the fourth quarter of 2014. B, the OSI acquisition that we did is included as part of our operations management segment and that grew faster than expected even and so that contributed to the growth rate to our segment. And then C, we did add some new clients as well so it was actually a combination of existing clients, M&A, and new clients. And we are really pleased with the fact that the growth was very broad based.

You know I may have missed it, but could you say what OSI contributed in the quarter?

David, OSI contribution was about $12 million.

And what was the run rate when you bought it?

Run rate we expected the OSI to be around $60 million per annum.

So, $5 million per month run rate and OSI was part of EXL in the fourth quarter for 10 weeks and the exact contribution was $12.2 million.

Got it and then just one other question I had was on the stock repurchase, I think you mentioned in the press release that is offset [ph] solutions from RSU [ph] and just curious is the number -- there some incremental component from wage increases that are going towards RSUs, is this related to acquisitions or is there anything else we should glean from need to buy incremental shares back off -- solutions versus what you have done historically?

No, David. I think there is nothing unusual or anything that is different. I think it is just the fact that now that the company is of a certain size and scale and there is greater predictability in terms of our cash flow generating capabilities, we think it is the right strategy for us to be buying back some stock to offset the valuation. And this still gives us the flexibility to continue to do more acquisitions on a go forward basis.

Okay, very good. Thank you and congratulations.

Thanks David.

Our next question comes from Puneet Jain with JP Morgan. Your line is open.

Hi, Puneet is that you. Is that a question, we can't really hear you. Okay, operator are there any other questions on the line.

I am showing no further questions in queue at this time.

Well, thanks operator and thank you everyone for joining EXL's fourth quarter call. As we said earlier, we are going to host an Analyst Day on March 2nd in New York and we look forward to all of you participating in that and we would be sharing further details of our strategy as well as our goals on a go forward basis. Thank you so much.