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ExlService Holdings Inc (EXLS 0.17%)
Q3Â 2020 Earnings Call
Oct 29, 2020, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Thank you for standing by, and welcome to the Q3 2020 ExlService Holdings Earnings conference call. [Operator Instructions]. [Operator Instructions]
I'd now like to hand the conference over to your speaker today, Mr. Steve Barlow. Thank you. Please go ahead, sir.
Steven Barlow -- Vice President of Investor Relations
Thank you, Anthony. Hello, and thanks to everyone for joining EXL's third quarter 2020 Financial Results Conference Call. I'm Steve Barlow, Exl's Vice President of Investor Relations. With me today by telephone are Rohit Kapoor, our Vice Chairman and Chief Executive Officer; and Maurizio Nicolelli, our Chief Financial Officer. We hope you've had an opportunity to review our Q3 2020 earnings release we issued this morning. 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 forth in today's press release discussed in the company's periodic reports and other documents filed with the Securities and Exchange Commission from time to time. EXL assumes no obligation to update the information presented on this conference call. During our call today, we may reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of these measures to GAAP can be found in our press release as well as the investor fact sheet.
I'll now turn the call over to Rohit Kapoor, Exl's Chief Executive Officer. Rohit?
Rohit Kapoor -- Vice Chairman and Chief Executive Officer
Thank you, Steve. Good morning, everyone. Welcome to our third quarter 2020 earnings call. I hope you and your families are all safe and healthy. As shared in our interim update, our third quarter performance was much better than we originally expected. Both our analytics and our operation management businesses saw a strong bounce back from the second quarter. Our investments in virtual transition capabilities have enabled us to expand relationships with existing clients as well as ramp-up on deals 21 earlier this year. For the third quarter 2020, we generated revenues of $241 million, which represents an 8.3% sequential increase on a reported basis and a 7.7% increase on a constant currency basis. Adjusted EPS for the quarter increased 97% quarter-over-quarter to $1.04. The key drivers for the EPS growth are the strong revenue rebound and the full impact of the cost actions taken earlier this year. Our operations management business reported $150.5 million in revenue, up 6.9% sequentially.
The key driver was revenue growth in insurance, due largely to the ramp-up of large deals won in the first half of 2020 and late 2019. We also saw some recovery in client volumes across our other business verticals. Our analytics business saw significant growth from the second quarter and was up by 10.8% sequentially to $90.5 million. Our clients' focus has now shifted from crisis response to winning and growing in the new normal. This includes: one, being able to identify and rapidly shift gears to address changes in economic sentiment and consumer behavior; and two, greater adoption of data-enabled decision-making to better predict and respond to these changes. As a result, our clients' data and analytics agenda has expanded, and we are seeing robust growth in this space. Today, I want to highlight two key growth trends we are seeing in the market: number one, accelerated demand for data and analytics in the new normal; and two, expansion within strategic clients due to established credibility.
First, our significant investment in building out our data and analytics capabilities over the past several years has positioned us well to capitalize on the increased market demand for analytics across industry verticals and markets. Our clients' business models are shifting to digital and greater use of cloud based platforms. This shift has led to an increased demand for end-to-end data and analytics capabilities. It requires our clients to modernize their data infrastructure, maintain clean and readily usable data assets and leverage cloud-based platforms to deploy advanced analytics solutions. Our clients need to embed data insights into real-time decision-making. With our proprietary data assets, strong data management capabilities and deep domain expertise, we are helping our clients make this transition, take more informed decisions and run intelligent and resilient operations. A noteworthy example is a strategic win with a top 10 U.S. bank to overall their cyber and fraud prevention capability, leveraging data, artificial intelligence and machine learning solutions.
The client selected us over a diverse set of competitors to deliver a strategic capability that will enable the bank to secure its digital transactions, increase automation, reduce operational staff and bring new digital products faster to market. Banks are increasingly leveraging AI and ML to develop real-time cyber threat detection solutions. Our capability in this rapidly growing space is resonating very well with our clients, and we have developed a strong pipeline. Our capabilities in analytics have always been differentiated, and we are now being increasingly recognized both by our clients as well as industry analysts. EXL is honored to be named the customer's choice in the 2020 Gartner Peer Insights for data and analytics. We are thrilled to be the only company with this distinction from a group of 60-plus data and analytics providers from across the world. This distinction directly represents the voice of our customers, and we are proud of this endorsement by our clients.
The second area that I want to highlight is our expansion within strategic clients. Given continued economic uncertainty, the focus on supply chain resiliency has become paramount. Clients are prioritizing partners that are stable, strategic and flexible. Clients want partners with credibility to execute along with the right capabilities and commitment to the partnership. Our ability to deliver sustained performance during the pandemic, speed of remote enablement and transparency of communication has positioned us well to expand our engagements with our strategic clients. An example of this is the growth we are witnessing with a leading Insurtech, which is part of a large life carrier that has been a strategic client of EXL for over 15 years. We were selected to support their client acquisition efforts during the annual and open enrollment periods. Our agile operating model and ability to ramp up quickly in multiple geographies, especially across South Africa and Philippines was one of the key differentiators.
This win is a great example of our ability to penetrate new buying centers in our strategic clients and expand our share of wallet. We are pleased with the pace and trajectory of our recovery and remain cautiously optimistic on growth going forward. We see strong demand for our offerings, particularly our full stack of data and analytics services. Within operations management, we are seeing a healthy pipeline of large deals with aggressive digital transformation agendas as clients prepare for growth and resiliency in the new normal. At the same time, despite the overall positive sentiment, we are seeing decisions in some deals being delayed. With continued economic, geopolitical and pandemic related uncertainty, we anticipate some volatility in the near term. Despite unprecedented global challenges, we continue to enjoy the trust and confidence of our clients as their strategic partners. We are humbled by the endorsement we have seen from our clients and the commitment from our own teams here at EXL.
We continue to invest in our capabilities to win new business, support large-scale transitions and enhance cybersecurity to grow and develop our business in a work from anywhere business model. I feel confident that our teams are prepared to continue to innovate and execute through an uneven recovery. I want to thank the employees at DXL for their commitment, Grit and determination, and I feel very proud to be part of this team. Our colleagues have shown innovation and creativity in the face of crisis and demonstrated a sense of purpose that brings us all together as an organization.
With that, I will hand it over to Maurizio.
Maurizio Nicolelli -- Executive Vice President and Chief Financial Officer
Thank you, Rohit, and thanks, everyone, for joining us this morning. I will provide insights into our financial performance for the third quarter and the first nine months of 2020, followed by our outlook for the business. As Rohit mentioned, our quarter was better than we expected as revenue was $241 million, up 7.7% sequentially on a constant currency basis. Adjusted EPS was $1.04 compared to $0.53 in the second quarter. All revenue growth numbers mentioned hereafter are on a constant currency basis. My discussion on year-over-year growth percentages or improvements will be excluding health integrated for 2019 for a true comparison with 2020 performance unless mentioned otherwise. For the quarter, we generated revenue of $241 million, down 3.1% year-over-year. This includes onetime COVID related pass-through revenue of $4.4 million. Sequentially, from the second quarter, revenue was up 7.7%. Revenue for the quarter was higher than the interim guidance we provided in September, as we were able to fulfill almost 100% of demand.
Revenue from our operations management business as defined by three reportable segments, excluding analytics, was $150.5 million, down 5.7% year-over-year. Sequentially, from the second quarter, revenue was up 6.1%. Insurance generated revenue of $87.8 million, down 3.9% year-over-year. This decline was driven largely by supply constraints in our field service business. Compared to Q2 of 2020, insurance revenue was up 7.1%. Healthcare continued its growth momentum with revenue of $25.1 million, up 10.5% year-over-year. This growth was driven by the ramp-up of new client wins in 2019 in the area of clinical services. Emerging reported revenue of $37.6 million, which was a year-over-year decline of 17.3% due to the reduction in travel, transportation and logistics volumes, offset by increases in all other categories. Revenue was up 8% when comparing to the second quarter of this year. Analytics had revenue of $90.5 million, up 1.6% year-over-year. This growth was driven by higher volumes in the healthcare and insurance industry verticals. Sequentially from the second quarter of this year, revenue was up 10.4%.
Our SG&A expenses declined by 130 basis points year-over-year to 17.5% of revenue, driven by cost initiatives we announced in May and lower discretionary spending. Our adjusted operating margin for the quarter was 19.2%, up 390 basis points year-over-year, driven by lower cost due to cost control measures, lower infrastructure expenses and reduced discretionary spending. Our GAAP income tax rate for the quarter was 24.3%. Our adjusted EPS for the quarter was $1.04, up 23.8% year-over-year on a reported basis. During this pandemic period, liquidity and cash conservation remains a key priority. We exited the quarter with a very strong balance sheet. Our cash flow from operations for the quarter was $67.4 million, up from $58.2 million from the third quarter last year. Our DSO for the quarter was 57 days, down six days from the previous quarter and the lowest level during the past five years. We ended September with $363 million of cash and short-term investments and borrowings of $239 million, resulting in a net cash position of $124 million, up from $87 million at the end of the second quarter of this year.
Now moving to our nine month performance. Our revenue for the period was $709.5 million, down 1.7% year-over-year. This decline was driven by COVID related supply and demand constraints, as mentioned earlier. Our adjusted operating margin for the period was 14.6%, down 20 basis points year-over-year, driven by lower revenues and net COVID related expense, partially offset by cost optimization initiatives. Adjusted EPS for the period was $2.39, up 3.9% year-over-year on a reported basis. In the first nine months of the year, we generated cash flow from operations of $126.3 million compared to $106 million for the same period last year. This reflects an effective implementation of our cash conservation strategy and efficient working capital management. During the first nine months of the year, we spent $34.6 million on capital expenditures as we continue to invest in the business for the long term. We expect our capital expenditures to be between $36 million and $38 million in 2020. Our effective tax rate for the first nine months of the year was 25%, and we expect the 2020 effective tax rate to be between 24.5% and 25%.
We announced in mid-September that we intend to repurchase up to $80 million of our stock in 2020. During the first quarter, we repurchased $12 million of our shares. And in the third quarter, we repurchased $24.9 million of shares. Thus, we have repurchased 565,000 shares at an average purchase price of $65.25 during the first nine months of 2020. Now moving on to the outlook for the year. The economic environment remains unclear and business sentiment shifts given the nature of the pandemic. Thus, there are number of factors that we may not be able to predict accurately, but we feel more confident that our business model is resilient with better visibility into the fourth quarter and 2021. We are updating our revenue guidance for the year to be in the range of $950 million to $958 million, which is a $4 million increase at the midpoint, driven by better performance and increased visibility for the remainder of the year. Our updated guidance represents a year-over-year decline between 2% to 3% on a constant currency basis, excluding health integrated. Based on our updated guidance, we expect our fourth quarter revenue to range between $241 million and $249 million.
Analytics should have a higher growth rate than operations management as the pipeline for expansions and new work can be implemented quicker to benefit fourth quarter revenue. Our updated guidance for adjusted EPS is for a range of $3.40 to $3.48, up $0.04 at the midpoint from previous guidance driven by better third quarter performance. Based on our updated guidance, our fourth quarter adjusted EPS is expected to range between $1.01 and $1.09. In conclusion, we are pleased with our third quarter performance and our outlook for the remainder of the year. Our ability to quickly adapt to the economic changes brought about by the pandemic has benefited revenue growth since the trough in the second quarter, and our efforts to manage our cost has resulted in a significant EPS improvement from a year ago on a lower revenue base. In the current uncertain economic environment, we feel we have the ability to quickly anticipate and adapt and can grow the business during this period.
Now Rohit and I would be happy to take your questions.
Questions and Answers:
Operator
[Operator Instructions] And your first question comes from the line of Maggie Nolan from William Blair. Your line is now open.
Maggie Nolan -- William Blair -- Analyst
-- you. So you're obviously seeing the benefit of the cost actions that you've implemented. I'm wondering how long you can operate in this kind of more lean structure? And then can you give us some longer-term thoughts around modeling margins when you expect some of those costs may start fading back in?
Maurizio Nicolelli -- Executive Vice President and Chief Financial Officer
Sure, Maggie. This is Maurizio. Thanks for the question. Look, we benefited in a few different areas on the cost side, which has really helped our adjusted operating margins. We've seen two real benefits, one being -- the work from home environment has really reduced our cost base in some specific areas. And we're seeing lower costs in our transportation costs in T&E in facilities, which has really benefited us. And then we've also had the benefit of our cost actions that we put in place back in the second quarter. And that is really helping out our margins in the third quarter, and we're seeing that benefit also rolling to the fourth quarter. When we get to 2021, a few items will come back into our P&L.
One, some of these cost measures are temporary in nature. And so we're going to start to see those costs come back specifically in the employee comp area and a few other areas. And then also, in this new environment, we will have to spend additional money on technology costs. So when we get to our margins in 2021, we will see some costs creep back into our P&L. And so you'll see a little bit of a change in 2021. But right now, we're really seeing those two significant benefits really helping out our margins.
Maggie Nolan -- William Blair -- Analyst
Great, thank you. And then on the analytics work, it's been a little bit more tied to the COVID response. How long do you expect to benefit from that and generate revenue from that kind of COVID specific work? And then do you feel that clients are receptive to the idea that, that need for real-time insights is going to extend beyond the kind of significant and unusual events that COVID is?
Rohit Kapoor -- Vice Chairman and Chief Executive Officer
Yeah. Hi Maggie, this is Rohit. So our data and analytics business has certainly benefited because of the COVID response. But the shift that has taken place to digital and the shift that is taking place, where our clients are shifting most of their platforms to become cloud-based platforms and the adoption of digital by end consumers that seems to be a much more of a permanent shift that is taking place. We've done some research on this, and we find that 75% of end consumers, once they try out a digital means of communicating with their providers of services and products, intend to continue to use digital. So there's been a big shift in terms of the use of digital. And as that shift becomes more permanent, more deeply penetrated, the need for data and analytics services is just going to increase dramatically. So we think while there is a catalyst in the COVID environment that is forcing end consumers to shift to digital.
It's forcing our clients to offer digital mechanisms and channels to engage with the end clients. A large part of this shift is actually permanent and is a step function change that is taking place. And in this new environment with the shift on to digital and cloud based platforms, the need for data and analytics has suddenly become much, much more important and much, much more necessary. So we think the benefit on our data and analytics business is likely to continue for a much longer period and the ability to grow this business significantly, is going to be there for several years going forward. And this is not just a temporary phenomenon that we are witnessing.
Maggie Nolan -- William Blair -- Analyst
Thank you. Well, and -- congrats, nice work.
Rohit Kapoor -- Vice Chairman and Chief Executive Officer
Thank you.
Operator
And your next question comes from the line of Bryan Bergin from Cowen. Your line is now open.
Bryan Bergin -- Cowen -- Analyst
I heard some of the commentary around uneven recovery. And I see the 4Q implied revenue contraction is somewhat similar to what you did in 3Q. But as we start to think about 2021 recovery potential, can you give us a sense of the type of trajectory we should expect based on what you're seeing in client decision-making and then your pipeline activity?
Rohit Kapoor -- Vice Chairman and Chief Executive Officer
Yes, Brian. So -- right now, at the end of the third quarter, the pipeline has actually grown significantly in size. So we are very actually happy with the way in which we are seeing customers make decisions and the kind of changes that they need to make. Because as they think about modernizing their business models, engaging a lot more in digital, using a lot more technology and embedding a lot more intelligence into their operating and business processes. EXL is a perfect partner to help them make that transition. So that change, and that shift has been very positive for us. However, the recovery will be uneven because with the virus, there are going to be fits and starts. There are going to be geographic impacts that are going to be very uneven. So we might see certain states and certain countries recover quickly or not recover so quickly.
And that is going to create some uncertainty, and there might be a decision-making that gets impacted because of that. So it's very difficult to predict which way this would go. Our best guess at this point of time is that the need for our services, both in data and analytics as well as operations management has just gone up. And because of that, we would expect that we'd be able to help our clients and be able to build our business back on to a growth path as we get into Q4 and as we get into 2021.
Bryan Bergin -- Cowen -- Analyst
Okay. And Maurizio, I wanted to follow-up on Maggie's question on margin. Can you quantify some of the key margin outperformance drivers, particularly within gross margin, the strong level you had there, what type of mix of cost savings are lasting versus short-term discretionary, like T&E type items within 3Q?
Maurizio Nicolelli -- Executive Vice President and Chief Financial Officer
So when you look at the benefit in Q3, there's benefit from the work from home environment and then also our cost actions. The benefits from the work from home environment is slightly higher than our cost actions, just in terms of looking at the overall benefit. It's a little bit more of a 60-40 benefit, meaning the work from home environment has a bigger benefit. And a lot of that benefit fits in our gross margin. And that's why you see our gross margin at a fairly high end of 36.9% during the quarter. Going forward, I did talk a little bit before about certain amount of technology costs that we're going to have to spend going forward in 2021 and also some of the additional costs that are going to come back into the P&L.
In terms of trying to get to a margin in 2021, we'll be giving guidance when we do our fourth quarter earnings release on 2021. But I would take a look to see -- go back to the first quarter, you see our margins right around 15.6%. And without any cohort expenses and really build off that -- going forward. And it's our desire to really start to grow margins. But -- if you need something to really go back to, that's the best measure right now to go back to.
Bryan Bergin -- Cowen -- Analyst
Okay, thanks for that call.
Operator
And your next question from the line of Vincent Colicchio from Barrington Research. Your line is now open.
Vincent Colicchio -- Barrington Research -- Analyst
Yes. Ron, could you give us some color on the new logos that in the quarter? Maybe -- or any of them potentially strategic over the next number of years?
Rohit Kapoor -- Vice Chairman and Chief Executive Officer
Sure, Vincent. So first of all, we are seeing new logos come in both in operations management as well as in analytics. That is very encouraging to us. We've seen some pretty quick decision-making on the operations management side. And particularly in those situations where some of the clients are challenged in terms of being able to deliver and execute to their end customers. They are embracing operations management very, very actively and very holistically, which is, again, very encouraging. We do see some of these new logos are ramping up actually much quicker and being able to provide our clients the benefit much faster. So that's actually going to be very positive for us.
We also see new names in this list of customers that we've acquired, which can become strategic clients for us and contribute significant value. On the analytics side, our engagement with new clients typically starts off small. And over a period of time, it builds up and gets to size and scale. So we would expect the same trend to follow through on the analytics side.
Vincent Colicchio -- Barrington Research -- Analyst
And then strategically, with an uneven recovery, what are your thoughts on doing an acquisition of supplement growth?
Rohit Kapoor -- Vice Chairman and Chief Executive Officer
Yes. So look, any kind of volatility will create opportunity for an ability to acquire and to an ability to add capability. We are in a fortunate position that we've got a very healthy balance sheet, and we've got a fair amount of capital at our disposable to be able to use for acquisitions. So we are in the market, and we've got a fairly active pipeline on M&A. But at the same time, this is a period where you have to be extremely careful of the type of assets that you acquire and the valuations at which you acquire them. So we're going to be very disciplined in our approach and be thoughtful in terms of our ability to do M&A, but we would expect to be active in M&A at this point of time. And we think that there is an advantage for us to be able to take -- make benefit of the market environment and the volatility that exists.
Vincent Colicchio -- Barrington Research -- Analyst
Thank you, nice quarter.
Rohit Kapoor -- Vice Chairman and Chief Executive Officer
Thank you.
Operator
[Operator Instructions] Your next question comes from the line of Mayank Tandon from Needham. Your line is now open.
Mayank Tandon -- Needham -- Analyst
Thank you -- good morning. Rohit, given the adoption of digital across verticals, what are the conversations around pricing these days? Do you think that the move to digital could actually accelerate the shift to outcome-based pricing? So just maybe general commentary on pricing trends and the shift that you might see given the adoption of all these different technologies? Thanks.
Rohit Kapoor -- Vice Chairman and Chief Executive Officer
Yes, Mayank, I think that's a great question. And what we are seeing in the discussions with our clients and prospects is actually very encouraging. So first of all, some of the hard held beliefs and assumptions that clients and prospects used to have in the past they've been thrown out of the window. So we've got a totally new set of assumptions coming in, which basically means starting from a plain white piece of paper and taking a look at what is we are to a possible. And that, to your point, means the commercial models will be outcome based, and there's a greater propensity for clients to completely outsource end-to-end work and get to a much better level of operational execution and delivery and resiliency because that's become the number one priority. And in order to do that, if it requires an outcome-based pricing model, that's certainly something which -- that conversation, that dialogue is a much more open dialogue at this point of time. We're also seeing a big shift to take place toward execution, resiliency and value as opposed to pricing.
And therefore, it is about who is a stable, secure and dependable partner as opposed to who is the lowest cost provider that we can work with for the next three months or six months. The conversation has shifted to thinking about this a lot more strategically, thinking about it for a much longer time period. And therefore, the conversation is about value creation, productivity, stability, resiliency, and that's much, much more important on our clients' agendas than pricing. So actually, it's very favorable, both from a total overall demand volume. It's favorable from a commercial construct, and it's favorable from focusing on things that will be additive for our clients and for us.
Mayank Tandon -- Needham -- Analyst
That's a very helpful cover -- And Rohit, staying on the digital team. How about sourcing talent? Are you finding it harder, easier to find the skill sets to be able to meet the needs, given the rapid changes in the environment for both BPM and analytics types of services?
Rohit Kapoor -- Vice Chairman and Chief Executive Officer
Yes, Mayank, I think that's another great question. So first of all, we've started hiring and we've hired quite aggressively in the third quarter, and we continue to hope to be able to acquire talent in the fourth quarter as well. Now there are certain areas and certain skill sets where actually it's quite easy to hire. But like you rightly mentioned, in digital, which is where everybody is focusing their attention. That is a much more challenging area to be able to source talent, integrate talent and to be able to create teams that will collaborate. There's a lot of focus on cloud-based talent. There's a lot of focus on digital. There's a lot of focus on AI and MM. Now we are in a fortunate position that we've got a very strong foundation, and we've got a very rich and fertile customer base where we are doing very exciting things with our clients.
And that creates a huge opportunity for somebody from the outside to come and join us. We are also on a growth part. So that's something which, again, is exciting for an individual to come and become part of our team. And our ability to attract talent in digital, on the cloud, in big data, in AI and ML is actually becoming much stronger just because our message is resonating well. The kind of work that we are doing with our clients, is very, very complex, rich and something which is challenging for employees, so they like that kind of work, and we are able to attract very good talent there.
Mayank Tandon -- Needham -- Analyst
Thank you, good job on the quarter.
Rohit Kapoor -- Vice Chairman and Chief Executive Officer
Thanks man.
Operator
And there are no further questions at this time. Mr. Rohit Kapoor. I'll turn the call back over to you.
Rohit Kapoor -- Vice Chairman and Chief Executive Officer
Thank you, operator, and thank you all for attending this call. We really appreciate it. I think we've had a good rebound in our business, and we look forward to continued progress moving forward into the fourth quarter and next year. I'd just like to close by inviting everybody to come and join us for our Investor Day, which is on November 17, and we look forward to providing you with more color around our operating business model and our future direction of the company. Thank you, and see you on November 17.
Operator
[Operator Closing Remarks].
Duration: 38 minutes
Call participants:
Steven Barlow -- Vice President of Investor Relations
Rohit Kapoor -- Vice Chairman and Chief Executive Officer
Maurizio Nicolelli -- Executive Vice President and Chief Financial Officer
Maggie Nolan -- William Blair -- Analyst
Bryan Bergin -- Cowen -- Analyst
Vincent Colicchio -- Barrington Research -- Analyst
Mayank Tandon -- Needham -- Analyst
