Why Exlservice Shares Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Exlservice Holdings (NASDAQ: EXLS  ) closed down as much as 20% today after the company was terminated by Travelers (NYSE: TRV  ) because of a failure to protect its confidential information.

So what: The outsourcing firm lost its contract with the insurance provider but said it had fired the employees responsible for the breach in security. Travelers had accounted for 9.6% of the company's revenue, and Exlservice expects the loss to lower next year's sales by $14 million to $28 million. Perhaps more importantly, the event damages Exlservice's reputation and, unsurprisingly, downgrades followed from Oppenheimer, Wells Fargo, and JPMorganChase. JPMorgan dropped its rating to "underweight," saying that the company's near-term deal pipeline could be affected by the development.

Now what: The stock certainly looks like a high-risk play after losing the Travelers contract, as there could be further fallout for Exlservice. I'd expect its current clients to look into any potential wrongdoing as well, as another similar revelation could really hammer the company. Notably, Exlservice's estimate for lost revenue next year is only 3%-6% of projections, meaning today's stock drop could be exaggerated, but I'd wait to see if Travelers' decision leads to any further consequences before hitting the "buy" button.

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