Item 2. Management’s Discussion and Analysis
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in connection with our unaudited consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Some of the statements in the following discussion are forward looking statements.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. These factors include but are not limited to:
• the impact of COVID-19 and related response measures on our business, results of operations and financial condition, including the impact of governmental lockdowns and other restrictions on our operations and processes and those of our clients and suppliers;
• our dependence on a limited number of clients in a limited number of industries and our ability to withstand the loss of a significant client;
• negative public reaction in the U.S. or elsewhere to offshore outsourcing;
• fluctuations in our earnings;
• our ability to attract and retain clients including in a timely manner;
• our ability to successfully consummate or integrate strategic acquisitions;
• our ability to accurately estimate and/or manage the costs;
• restrictions on immigration;
• our ability to hire and retain enough sufficiently trained employees to support our operations;
• our ability to grow our business or effectively manage growth and international operations;
• any changes in the senior management team;
• increasing competition in our industry;
• telecommunications or technology disruptions or breaches, natural or other disasters, medical epidemics or pandemics, or acts of violence or war;
• our ability to realize the entire book value of goodwill and other intangible assets from acquisitions;
• our ability to make accurate estimates and assumptions in connection with the preparation of our consolidated financial statements;
• failure to protect our intellectual property;
• regulatory, legislative and judicial developments, including changes to or the withdrawal of governmental fiscal incentives;
• changes in tax laws or decisions regarding repatriation of funds held abroad;
• ability to service debt or obtain additional financing on favorable terms;
• credit risk fluctuations in the market values of our investment and derivatives portfolios;
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• legal liability arising out of customer contracts;
• technological innovation;
• our ability to meet our environmental, social and governance-related goals and targets;
• effects of political and economic conditions globally, particularly in the geographies where we operate, including potential effects of the Russian invasion of Ukraine;
• operational and information security failures arising as a result of remote work solutions adopted due to COVID-19;
• cyber security incidents, data breaches, or other unauthorized disclosure of sensitive or confidential client and employee data; and
• adverse outcome of our disputes with the tax authorities, in the geographies where we operate.
These and other factors are more fully discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. These and other risks could cause actual results to differ materially from those implied by forward-looking statements in this Quarterly Report on Form 10-Q.
The forward-looking statements made by us in this Quarterly Report on Form 10-Q, or elsewhere, speak only as of the date on which they were made. New risks and uncertainties come up from time to time, and it is impossible for us to predict those events or how they may affect us. We have no obligation to update any forward-looking statements in this Quarterly Report on Form 10-Q after the date of this Quarterly Report on Form 10-Q, except as required by federal securities laws.
Executive Overview
We are a leading data analytics and digital operations and solutions company that partners with clients to improve business outcomes and unlock growth. By bringing together deep domain expertise with robust data, powerful analytics, cloud, AI and ML, we create agile, scalable solutions and execute complex operations for the world’s leading corporations in industries including insurance, healthcare, banking and financial services, media, and retail, among others.
We deliver data analytics and digital operations and solutions to our clients, driving enterprise-scale business transformation initiatives that leverage our deep expertise in advanced analytics, AI, ML and cloud. We manage and report financial information through our four strategic business units: Insurance, Healthcare, Analytics and Emerging Business, which reflects how management reviews financial information and makes operating decisions.
Our reportable segments are as follows:
• Insurance,
• Healthcare,
• Analytics, and
• Emerging Business.
Our global delivery network, which includes highly trained industry and process specialists across the United States, Latin America, South Africa, Europe and Asia (primarily India and the Philippines), is a key asset. We have operations centers in India, the United States, the United Kingdom, the Philippines, Bulgaria, Colombia, South Africa, Romania and the Czech Republic.
On December 16, 2021, we completed the acquisition of Clairvoyant, a global data, AI, ML, and cloud services firm that helps organizations in their business transformation by maximizing the value of data through actionable insights. It provides data engineering, analytics, AI, ML, product engineering, and cloud-based solutions. The acquisition strengthens our Analytics capabilities by adding additional expertise in data engineering and cloud enablement, further supporting our clients in the insurance, healthcare, banking and financial services, and retail industries.
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On June 10, 2022, the Company, through its wholly owned subsidiary ExlService.com, LLC, entered into an Asset Purchase Agreement to acquire certain assets of Inbound, a digital marketing business focused primarily on lead generation in the insurance space. The acquisition expands our digital direct-to-consumer marketing services by adding proven performance marketing, lead generation and customer engagement capabilities to our suite of end-to-end marketing solutions, proprietary data sets and robust consumer analytics.
Continued Impact of COVID-19 on Our Business
During 2022, we continued to recover from the COVID-19 pandemic. As the global economy continued to adapt to the impact of COVID-19, our clients are focused on receiving personalized customer experiences, optimizing costs and supporting resilient operating models. We remain committed to helping our clients adapt and thrive through the ongoing uncertainties caused by COVID-19 and, going forward, to the shifting business environment, which has led to increased demand for digital capabilities.
In 2022, we implemented a new work standard under which employees in many of our locations, where permitted by local laws and regulations, and where the role and client requirements permit, have the opportunity to choose between different work arrangements. Subject to local rules and regulations, these work arrangements include working in a hybrid arrangement or a fully remote arrangement, with occasional work from the office when warranted. We have begun to re-open our operation centers and offices globally with a focus on safety and consistency with applicable local regulations.
We continue to focus on effectively managing the unprecedented challenges and uncertainties of the pandemic on a global basis. Management has prioritized the health and safety of our employees and their families: we have adopted numerous safety procedures at our global facilities, including hygiene and disinfection protocols, testing and contact tracing, social distancing and wearing personal protective equipment. We share best practices throughout our facilities globally in order to standardize effective safety guidelines and procedures across our operations. Our safety guidelines and procedures are updated on a regular basis.
While many of the COVID-19 related restrictions have been lifted in the geographies in which we operate, there have been periodic resurgences of COVID-19 as a result of new strains and variants, which has led us to monitor our work model and / or implement additional safety procedures.
We believe our actions have been successful and that the pandemic has not significantly affected our business, results of operations, financial position and cash flow during the first nine months of 2022, however the impact of the pandemic for the period beyond the first nine months of 2022 will depend on many evolving and uncertain factors that are not within our control.
For additional information and risks related to COVID-19, see Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Revenues
For the three months ended September 30, 2022, we had revenues of $361.4 million compared to revenues of $290.3 million for the three months ended September 30, 2021, an increase of $71.1 million, or 24.5%. For the nine months ended September 30, 2022, we had revenues of $1,037.3 million compared to revenues of $826.8 million for the nine months ended September 30, 2021, an increase of $210.5 million, or 25.5%.
We serve cli ents mainly in the United States and the United Kingdom, which generated 86.0% and 9.4%, respectively, of our total revenues for the three months ended September 30, 2022 and 2021. These two regions generated 85.9% and 9.5%, respectively, of our total revenues for the nine months ended September 30, 2022 and 85.8% and 9.5%, respectively, of our total revenues for the nine months ended September 30, 2021.
For the three months ended September 30, 2022 and 2021 , our total revenues from our top ten clients accounted for 34.2% and 38.7% of our total revenues, respectively. For the nine months ended September 30, 2022 and 2021 , our total revenues from our top ten clients accounted for 33.7% and 38.6% of our total revenues, respectively. Although we continue to develop relationships with new clients to diversify our client base, we believe that the loss of any of our top ten clients could have a material adverse effect on our financial performance.
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Our Business
We provide data analytics and digital operations and solutions to our clients. We market our services to our existing and prospective clients through our sales and client management teams, which are aligned by key industry verticals and cross-industry domains such as finance and accounting. Our sales and client management teams operate primarily from the United States, Europe and Australia.
Digital Operations and Solutions: We provide our clients with a range of digital operations and solutions from our Insurance, Healthcare and Emerging Business strategic business units, which are focused on solving complex industry problems such as the insurance claims lifecycle and financial transactions processing, and typically involve the use of agile delivery models to implement digital technologies and interventions like hyper-automation, customer experience transformation, advanced automation, robotics, enterprise architecture, end-to-end business function management and transformations. We either administer and manage these functions on an ongoing basis via longer-term arrangements or project work. For a portion of our digital operations and solutions, we hire and train employees to work at our operations centers on the relevant business operations, implement a process migration to these operations centers and then provide services either to the client or directly to the client’s customers. Each client contract has different terms based on the scope, deliverables and complexity of the engagement. We also provide consulting services related to digital operations and solutions that include industry-specific digital transformational services as well as cross-industry finance and accounting services as part of the Emerging Business strategic business unit.
We provide our services under contracts with our clients, which typically have terms of three or more years, with some being rolling contracts with no end dates. Typically, our clients can terminate these contracts with or without cause and with short notice periods. These contracts provide us with a relatively predictable revenue base for a substantial portion of our digital operations and solutions business. However, we have a long selling cycle for our services and the budget and approval processes of prospective clients make it difficult to predict the timing of entering into definitive agreements with new clients. Similarly, new license sales and implementation projects for our technology service platforms and other software-based services have a long selling cycle, however ongoing annual maintenance and support contracts for existing arrangements provide us with a relatively predictable revenue base.
We charge for our services using various pricing models like time-and-material pricing, full-time-equivalent pricing, transaction-based pricing, outcome-based pricing, subscription-based pricing and other alternative pricing models. Outcome-based pricing arrangements are examples of non-linear pricing models where clients link revenues from platforms and solutions and the services we provide to usage or savings rather than the efforts deployed to provide these services. We continue to observe a shift in the industry pricing models toward transaction-based pricing, outcome-based pricing and other alternative pricing models. We believe this trend will continue and we use such alternative pricing models with some of our current clients and are seeking to move certain other clients from a full-time-equivalent pricing model to a transaction-based or other alternative pricing model. These alternative pricing models place the focus on operating efficiency in order to maintain or improve our gross margins.
We have also observed that prospective larger clients are entering into multi-vendor relationships with regard to their outsourcing needs. We believe that the trend toward multi-vendor relationships will continue. A multi-vendor relationship allows a client to seek more favorable pricing and other contract terms from each vendor, which can result in significantly reduced gross margins from the provision of services to such client for each vendor. To the extent our large clients expand their use of multi-vendor relationships and are able to extract more favorable contract terms from other vendors, our gross margins and revenues may be reduced with regard to such clients if we are required to modify the terms of our relationships with such clients to meet competition.
Analytics: Our analytics services focus on driving improved business outcomes for our clients by unlocking deep insights from data and create data driven solutions across all parts of our clients’ business. We also provide care optimization and reimbursement optimization services, for our clients through our healthcare analytics solutions and services. We also offer integrated solutions to help our clients in cost containment by leveraging technology platforms, customizable and configurable analytics and expertise in healthcare reimbursements to help clients enhance their claim payment accuracy. Our teams deliver predictive and prescriptive analytics in the areas of customer acquisition and lifecycle management, risk underwriting and pricing, operational effectiveness, credit and operational risk monitoring and governance, regulatory reporting, payment integrity and care management and data management. We enhance, modernize and enrich structured and unstructured data and use a spectrum of advanced analytical tools and techniques, including our in-house ML and AI capabilities to create insights
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and improve decision making for our clients. Our acquisition of Clairvoyant in December 2021 strengthens our analytics capabilities by adding additional expertise in data engineering and cloud enablement, further supporting our clients in the insurance, healthcare, banking and financial services, and retail industries. We actively cross-sell and, where appropriate, integrate our analytics services with other digital operations and solutions as part of a comprehensive offering for our clients. Our projects-based analytics services are cyclical and can be significantly affected by variations in business cycles. In addition, our projects-based analytics services are documented in contracts with terms generally not exceeding one year and may not produce ongoing or recurring business for us once the project is completed. These contracts also usually contain provisions permitting termination of the contract after a short notice period. The short-term nature and specificity of these projects could lead to fluctuations and uncertainties in the revenues generated from providing analytics services.
We anticipate that revenues from our analytics services will grow as we expand our service offerings and client base, both organically and through acquisitions.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies and estimates during the three and nine months ended September 30, 2022, as compared to the critical accounting policies and estimates referred in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Critical Accounting Policies and Estimates” and Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Results of Operations
The following table summarizes our results of operations:
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
(dollars in millions) (dollars in millions)
Revenues, net $ 361.4 $ 290.3 $ 1,037.3 $ 826.8
Cost of revenues (1)
230.5 177.7 659.2 507.2
Gross profit (1)
130.9 112.6 378.1 319.6
Operating expenses:
General and administrative expenses 42.5 36.2 122.9 103.4
Selling and marketing expenses 23.9 21.7 72.0 59.7
Depreciation and amortization expense 14.4 12.3 42.1 36.7
Total operating expenses 80.8 70.2 237.0 199.8
Income from operations 50.1 42.4 141.1 119.8
Foreign exchange gain, net 1.5 1.2 4.7 3.0
Interest expense (2.4) (1.8) (4.8) (6.8)
Other income, net 2.3 1.7 4.5 5.3
Loss on settlement of convertible notes — (12.8) — (12.8)
Income before income tax expense and earnings from equity affiliates 51.5 30.7 145.5 108.5
Income tax expense 12.5 4.2 34.8 22.1
Income before earnings from equity affiliates 39.0 26.5 110.7 86.4
Gain from equity-method investment 0.1 — 0.4 —
Net income attributable to ExlService Holdings, Inc. stockholders $ 39.1 $ 26.5 $ 111.1 $ 86.4
(1) Exclusive of depreciation and amortization expense.
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Due to rounding, the numbers presented in the tables included in this Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may not add up precisely to the totals provided.
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Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
Revenues.
The following table summarizes our revenues by reportable segments:
Three months ended September 30, Percentage
change
2022 2021 Change
(dollars in millions)
Insurance $ 116.2 $ 98.0 $ 18.2 18.6 %
Healthcare 22.8 27.3 (4.5) (16.5) %
Emerging Business 56.1 44.5 11.6 25.9 %
Analytics 166.3 120.5 45.8 38.0 %
Total revenues, net $ 361.4 $ 290.3 $ 71.1 24.5 %
Revenues for the three months ended September 30, 2022 were $361.4 million, up $71.1 million, or 24.5%, compared to the three months ended September 30, 2021, driven primarily by revenue growth in Analytics.
Revenue growth in Insurance of $18.2 million was primarily driven by expansion of business from our new and existing clients aggregating to $19.9 million. This was partially offset by a loss of $1.7 million mainly attributable to the depreciation of the U.K. pound sterling, the Australian dollar and the Indian rupee against the U.S. dollar during the three months ended September 30, 2022, compared to the three months ended September 30, 2021. Insurance revenues were 32.2% and 33.8% of our total revenues during the three months ended September 30, 2022 and September 30, 2021, respectively.
Revenue decline in Healthcare of $4.5 million was primarily driven by the ramp-down in certain existing clients during the three months ended September 30, 2022. Healthcare revenues were 6.3% and 9.4% of our total revenues during the three months ended September 30, 2022 and September 30, 2021, respectively.
Revenue growth in Emerging Business of $11.6 million was primarily driven by expansion of business from our new and existing clients aggregating to $13.8 million. This was partially offset by a loss of $2.2 million mainly attributable to the depreciation of the U.K. pound sterling, the Indian rupee and the Euro against the U.S. dollar during the three months ended September 30, 2022, compared to the three months ended September 30, 2021. Emerging Business revenues were 15.5% and 15.3% of our total revenues during the three months ended September 30, 2022 and September 30, 2021, respectively.
Revenue growth in Analytics of $45.8 million was primarily driven by higher volumes in our annuity and project-based engagements from our new and existing clients of $35.0 million, and contributions from our acquisition of Clairvoyant in December 2021 of $12.5 million. This was partially offset by a loss of $1.7 million mainly attributable to the depreciation of the U.K. pound sterling against the U.S. dollar during the three months ended September 30, 2022, compared to the three months ended September 30, 2021. Analytics revenues were 46.0% and 41.5% of our total revenues during the three months ended September 30, 2022 and September 30, 2021, respectively.
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Cost of Revenues and Gross Margin : The following table sets forth cost of revenues and gross margin of our reportable segments:
Cost of Revenues Gross Margin
Three months ended September 30, Change Percentage
change Three months ended September 30, Change
2022 2021 2022 2021
(dollars in millions)
Insurance $ 75.0 $ 61.4 $ 13.6 22.0 % 35.4 % 37.3 % (1.9) %
Healthcare 17.1 17.1 — — % 25.0 % 37.6 % (12.6) %
Emerging Business 32.4 23.7 8.7 36.8 % 42.2 % 46.8 % (4.6) %
Analytics 106.0 75.5 30.5 40.2 % 36.3 % 37.3 % (1.0) %
Total $ 230.5 $ 177.7 $ 52.8 29.7 % 36.2 % 38.8 % (2.6) %
For the three months ended September 30, 2022, cost of revenues was $230.5 million compared to $177.7 million for the three months ended September 30, 2021, an increase of $52.8 million, or 29.7%. Our gross margin for the three months ended September 30, 2022 was 36.2%, compared to 38.8% for the three months ended September 30, 2021, a decrease of 260 basis points (“bps”).
The increase in cost of revenues in Insurance of $13.6 million during the three months ended September 30, 2022 was primarily due to increases in employee-related costs of $13.6 million on account of higher headcount and wage inflation, and higher technology costs of $2.0 million on account of increased leverage of the remote work model, partially offset by foreign exchange gain, net of hedging of $2.0 million. Gross margin in Insurance decreased by 190 bps during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to lower margins associated with ramp-ups in certain new clients during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.
The cost of revenues in Healthcare remained unchanged at $17.1 million during the three months ended September 30, 2022 and 2021. This was driven by increases in employee-related costs of $0.7 million on account of higher headcount in existing clients and wage inflation, offset by foreign exchange gain, net of hedging of $0.5 million and lower other operating costs of $0.2 million. Gross margin in Healthcare decreased by 1,260 bps during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to lower revenues associated with ramp-down of certain existing clients during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.
The increase in cost of revenues in Emerging Business of $8.7 million during the three months ended September 30, 2022 was primarily due to increases in employee-related costs of $8.2 million on account of higher headcount and wage inflation, higher technology costs of $0.9 million on account of increased leverage of the remote work model, higher travel costs of $0.8 million, and higher facilities cost of $0.5 million, partially offset by foreign exchange gain, net of hedging of $1.7 million. Gross margin in Emerging Business decreased by 460 bps during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to lower margins associated with ramp-ups in certain new clients, higher employee-related costs and higher operating expenses during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.
The increase in cost of revenues in Analytics of $30.5 million during the three months ended September 30, 2022 was primarily due to increases in employee-related costs of $29.4 million on account of higher headcount and wage inflation, including incremental cost related to our acquisition of Clairvoyant in December 2021. The remaining increase was attributable to higher technology costs of $1.2 million on account of increased leverage of the remote work model, higher travel costs of $1.1 million, and higher other operating costs of $2.3 million. This was partially offset by foreign exchange gain, net of hedging of $3.5 million. Gross margin in Analytics decreased by 100 bps during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to increases in employee-related costs and higher operating expenses during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.
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Selling, General and Administrative (“SG&A”) Expenses.
Three months ended September 30, Change Percentage
change
2022 2021
(dollars in millions)
General and administrative expenses $ 42.5 $ 36.2 $ 6.3 17.6 %
Selling and marketing expenses 23.9 21.7 2.2 10.2 %
Selling, general and administrative expenses $ 66.4 $ 57.9 $ 8.5 14.8 %
As a percentage of revenues 18.4 % 19.9 %
The increase in SG&A expenses of $8.5 million was primarily due to higher employee-related costs of $7.5 million on account of a higher headcount and wage inflation, including incremental costs related to our acquisition of Clairvoyant in December 2021, increase in technology costs of $2.3 million on account of continued investments in digital capabilities and higher other operating costs of $0.3 million, partially offset by foreign exchange gain, net of hedging of $1.6 million.
Depreciation and Amortization.
Three months ended September 30, Change Percentage
change
2022 2021
(dollars in millions)
Depreciation expense $ 10.1 $ 9.3 $ 0.8 9.2 %
Intangible amortization expense 4.3 3.0 1.3 40.4 %
Depreciation and amortization expense $ 14.4 $ 12.3 $ 2.1 16.9 %
As a percentage of revenues 4.0 % 4.2 %
The increase in intangibles amortization expense of $1.3 million was primarily due to amortization of intangibles associated with our acquisition of Clairvoyant and Inbound in December 2021 and June 2022, respectively, during the three months ended September 30, 2022, compared to the three months ended September 30, 2021. The increase in depreciation expense of $0.8 million was primarily due to depreciation of $1.2 million related to our investments in digital capabilities and computer and networking equipment, partially offset by foreign exchange gain, net of hedging of $0.4 million during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.
Income from Operations. Income from operations increased by $7.7 million, or 18.1%, from $42.4 million for the three months ended September 30, 2021 to $50.1 million for the three months ended September 30, 2022, primarily due to higher revenues, partially offset by higher cost of revenues and higher SG&A expenses during the three months ended September 30, 2022. As a percentage of revenues, income from operations decreased from 14.6% for the three months ended September 30, 2021 to 13.9% for the three months ended September 30, 2022.
Foreign Exchange Gain/(Loss). Foreign exchange gains and losses are primarily attributable to the movement of the U.S. dollar against the Indian rupee, the U.K. pound sterling, the Philippine peso and the South African ZAR during the three months ended September 30, 2022. The average exchange rate of the U.S. dollar against the Indian rupee increased from 73.88 during the three months ended September 30, 2021 to 80.01 during the three months ended September 30, 2022. The average exchange rate of the U.K. pound sterling against the U.S. dollar decreased from 1.37 during the three months ended September 30, 2021 to 1.16 during the three months ended September 30, 2022. The average exchange rate of the U.S. dollar against the Philippine peso increased from 50.24 during the three months ended September 30, 2021 to 56.63 during the three months ended September 30, 2022. The average exchange rate of the U.S. dollar against the South African ZAR increased from 14.76 during the three months ended September 30, 2021 to 17.21 during the three months ended September 30, 2022.
We recorded a net foreign exchange gain of $1.5 million for the three months ended September 30, 2022, compared to net foreign exchange gain of $1.2 million for the three months ended September 30, 2021.
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Interest expens e. Interest expense increased from $1.8 million for the three months ended September 30, 2021 to $2.4 million for the three months ended September 30, 2022, primarily due to higher outstanding obligations under our revolving Credit Facility and higher effective interest rates during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.
Other Income, net.
Three months ended September 30, Percentage
change
2022 2021 Change
(dollars in millions)
Gain on sale and mark-to-market of mutual funds and money market funds $ 1.5 $ 1.2 $ 0.3 19.3 %
Interest income 1.5 0.8 0.7 91.5 %
Other, net (0.7) (0.3) (0.4) 144.3 %
Other income, net $ 2.3 $ 1.7 $ 0.6 31.4 %
Other income, net increased by $0.6 million, from $1.7 million for the three months ended September 30, 2021 to $2.3 million for the three months ended September 30, 2022, primarily due to higher interest income on investments in term deposits of $0.7 million and higher yield on our mutual fund investments of $0.3 million.
Loss on settlement of Notes. On August 27, 2021, we settled our outstanding obligations under the Notes and recognized
a loss of $12.8 million during the three months ended September 30, 2021. See Note 18 - Borrowings to our unaudited consolidated financial statements.
Income Tax Expense. The effective tax rate increased from 13.7% during the three months ended September 30, 2021 to 24.2% during the three months ended September 30, 2022. We recorded income tax expense of $12.4 million and $4.2 million for the three months ended September 30, 2022 and 2021, respectively. The increase in income tax expense was primarily a result of higher profit during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, the recording of a one-time deferred tax benefit of $2.4 million on settlement of the Notes during the three months ended September 30, 2021, and higher excess tax benefits during the three months ended September 30, 2021.
Net Income. Net income increased from $26.5 million for the three months ended September 30, 2021 to $39.1 million for the three months ended September 30, 2022, primarily due to increase in income from operations of $7.7 million, loss on settlement of the Notes of $12.8 million during three months ended September 30, 2021 and higher foreign exchange gain, net of $0.3 million, partially offset by higher income tax expense of $8.3 million. As a percentage of revenues, net income increased from 9.1% for the three months ended September 30, 2021 to 10.8% for the three months ended September 30, 2022.
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Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Revenues.
The following table summarizes our revenues by reportable segments:
Nine months ended September 30, Percentage
change
2022 2021 Change
(dollars in millions)
Insurance $ 328.0 $ 283.8 $ 44.2 15.5 %
Healthcare 72.1 85.9 (13.8) (16.1) %
Emerging Business 160.6 122.9 37.7 30.8 %
Analytics 476.6 334.2 142.4 42.6 %
Total revenues, net $ 1,037.3 $ 826.8 $ 210.5 25.5 %
Revenues for the nine months ended September 30, 2022 were $1,037.3 million, up $210.5 million, or 25.5%, compared to the nine months ended September 30, 2021, driven primarily by revenue growth in Analytics and Insurance.
Revenue growth in Insurance of $44.2 million was primarily driven by expansion of business from our new and existing clients aggregating to $47.6 million. This was partially offset by a loss of $3.4 million mainly attributable to the depreciation of the U.K. pound sterling, the Australian dollar and the Indian rupee against the U.S. dollar during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. Insurance revenues were 31.6% and 34.3% of our total revenues during the nine months ended September 30, 2022 and September 30, 2021, respectively.
Revenue decline in Healthcare of $13.8 million was primarily driven by the ramp-down in certain existing clients during the nine months ended September 30, 2022. Healthcare revenues were 6.9% and 10.4% of our total revenues during the nine months ended September 30, 2022 and September 30, 2021, respectively.
Revenue growth in Emerging Business of $37.7 million was primarily driven by expansion of business from our new and existing clients of $42.1 million. This was partially offset by a loss of $4.4 million mainly attributable to the depreciation of the U.K. pound sterling, the Indian rupee and the Euro against the U.S. dollar during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. Emerging Business revenues were 15.5% and 14.9% of our total revenues during the nine months ended September 30, 2022 and September 30, 2021, respectively.
Revenue growth in Analytics of $142.4 million was primarily driven by the higher volumes in our annuity and project based engagements from our new and existing clients of $112.1 million, and contributions from our acquisition of Clairvoyant in December 2021 of $33.7 million. This was partially offset by a loss of $3.4 million mainly attributable to the depreciation of the U.K. pound sterling against the U.S. dollar during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. Analytics revenues were 45.9% and 40.4% of our total revenues during the nine months ended September 30, 2022 and September 30, 2021, respectively.
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Cost of Revenues and Gross Margin : The following table sets forth cost of revenues and gross margin of our reportable segments:
Cost of Revenues Gross Margin
Nine months ended September 30, Percentage change Nine months ended September 30, Change
2022 2021 Change 2022 2021
(dollars in millions)
Insurance $ 210.7 $ 176.9 $ 33.8 19.1 % 35.7 % 37.7 % (2.0) %
Healthcare 52.4 52.2 0.2 0.6 % 27.2 % 39.3 % (12.1) %
Emerging Business 92.8 66.8 26.0 38.8 % 42.2 % 45.6 % (3.4) %
Analytics 303.3 211.3 92.0 43.4 % 36.4 % 36.8 % (0.4) %
Total $ 659.2 $ 507.2 $ 152.0 29.9 % 36.5 % 38.6 % (2.1) %
For the nine months ended September 30, 2022, cost of revenues was $659.2 million compared to $507.2 million for the nine months ended September 30, 2021, an increase of $152.0 million, or 29.9%. Our gross margin for the nine months ended September 30, 2022 was 36.5% compared to 38.6% for nine months ended September 30, 2021, a decrease of 210 bps.
The increase in cost of revenues in Insurance of $33.8 million during the nine months ended September 30, 2022 was primarily due to increases in employee-related costs of $32.8 million on account of higher headcount and wage inflation, higher technology costs of $5.1 million on account of increased leverage of the remote work model and higher travel costs of $1.1 million, partially offset by foreign exchange gain, net of hedging of $4.3 million and lower other operating costs of $0.9 million. Gross margin in Insurance decreased by 200 bps during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to lower margins associated with ramp-ups in certain new clients during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.
The increase in cost of revenues in Healthcare of $0.2 million during the nine months ended September 30, 2022 was primarily due to increases in employee-related costs of $1.8 million on account of higher headcount in existing clients and wage inflation, partially offset by lower other operating costs of $0.8 million and foreign exchange gain, net of hedging of $0.8 million. Gross margin in Healthcare decreased by 1,210 bps during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to lower revenues and higher operating expenses associated with the ramp-down of certain existing clients during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.
The increase in cost of revenues in Emerging Business of $26.0 million during the nine months ended September 30, 2022 was primarily due to increases in employee-related costs of $24.7 million on account of higher headcount and wage inflation, higher technology costs of $3.1 million on account of increased leverage of the remote work model, higher travel costs of $1.7 million, higher facilities costs of $0.5 million, partially offset by foreign exchange gain, net of hedging of $4.0 million. Gross margin in Emerging Business decreased by 340 bps during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to lower margins associated with ramp-ups in certain new clients, higher employee-related costs and higher operating expenses during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.
The increase in cost of revenues in Analytics of $92.0 million during the nine months ended September 30, 2022 was primarily due to increases in employee-related costs of $85.5 million on account of higher headcount and wage inflation, including incremental cost related to our acquisition of Clairvoyant in December 2021. The remaining increase was attributable to higher travel costs of $3.2 million, higher technology costs of $2.5 million on account of increased leverage of the remote work model and higher other operating costs of $7.5 million. This was partially offset by foreign exchange gain, net of hedging of $6.7 million. Gross margin in Analytics decreased by 40 bps during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to increases in employee-related costs and higher operating expenses during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.
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Selling, General and Administrative (“SG&A”) Expenses.
Nine months ended September 30, Percentage change
2022 2021 Change
(dollars in millions)
General and administrative expenses $ 122.9 $ 103.4 $ 19.5 18.9 %
Selling and marketing expenses 72.0 59.7 12.3 20.8 %
Selling, general and administrative expenses $ 194.9 $ 163.1 $ 31.8 19.6 %
As a percentage of revenues 18.8 % 19.7 %
The increase in SG&A expenses of $31.8 million was primarily due to higher employee-related costs of $28.2 million on account of a higher headcount and wage inflation, including incremental costs related to our acquisition of Clairvoyant in December 2021, increase in technology costs of $7.6 million on account of continued investments in digital capabilities and higher other operating costs of $1.4 million, partially offset by foreign exchange gain, net of hedging of $3.2 million, during the nine months ended September 30, 2022 and COVID-19 related expenses of $2.2 million during the nine months ended September 30, 2021.
Depreciation and Amortization.
Nine months ended September 30, Percentage change
2022 2021 Change
(dollars in millions)
Depreciation expense $ 29.2 $ 26.9 $ 2.3 8.3 %
Intangible amortization expense 12.9 9.8 3.1 31.6 %
Depreciation and amortization expense $ 42.1 $ 36.7 $ 5.4 14.5 %
As a percentage of revenues 4.1 % 4.4 %
The increase in intangibles amortization expense of $3.1 million was primarily due to amortization of intangibles associated with our acquisition of Clairvoyant and Inbound in December 2021 and June 2022, respectively, partially offset by decrease in intangibles amortization expense due to end of useful lives for certain intangible assets during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The increase in depreciation expense of $2.3 million was primarily due to depreciation of $3.0 million related to our investments in digital capabilities and computer and networking equipment, partially offset by foreign exchange gain, net of hedging of $0.7 million during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.
Income from Operations. Income from operations increased by $21.3 million, or 17.8%, from $119.8 million for the nine months ended September 30, 2021 to $141.1 million for the nine months ended September 30, 2022, primarily due to higher revenues, partially offset by higher cost of revenues and higher SG&A expenses during the nine months ended September 30, 2022. As a percentage of revenues, income from operations decreased from 14.5% for the nine months ended September 30, 2021 to 13.6% for the nine months ended September 30, 2022.
Foreign Exchange Gain/(Loss). Foreign exchange gains and losses are primarily attributable to the movement of the U.S. dollar against the Indian rupee, the U.K. pound sterling, the Philippine peso and the South African ZAR during the nine months ended September 30, 2022. The average exchange rate of the U.S. dollar against the Indian rupee increased from 73.57 during the nine months ended September 30, 2021 to 77.65 during the nine months ended September 30, 2022. The average exchange rate of the U.K. pound sterling against the U.S. dollar decreased from 1.38 during the nine months ended September 30, 2021 to 1.25 during the nine months ended September 30, 2022. The average exchange rate of the U.S. dollar against the Philippine peso increased from 48.94 during the nine months ended September 30, 2021 to 53.71 during the nine months ended September 30, 2022. The average exchange rate of the U.S. dollar against the South African ZAR increased from 14.64 during the nine months ended September 30, 2021 to 16.10 during the nine months ended September 30, 2022.
We recorded a net foreign exchange gain of $4.7 million for the nine months ended September 30, 2022, compared to the net foreign exchange gain of $3.0 million for the nine months ended September 30, 2021.
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Interest expense. Interest expense decreased from $6.8 million for the nine months ended September 30, 2021 to $4.8 million for the nine months ended September 30, 2022, primarily due to the settlement of outstanding obligations under the Notes (as defined under Note 18 – Borrowings-Convertible Senior Notes to our unaudited consolidated financial statements”) on August 27, 2021, partially offset by higher outstanding obligations under our revolving Credit Facility bearing a relatively lower effective interest rate as compared to the Notes during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.
Other Income, net.
Nine months ended September 30, Percentage change
2022 2021 Change
Gain on sale and mark-to-market of mutual funds and money market funds $ 3.4 $ 3.9 $ (0.5) (16.3) %
Interest and dividend income 3.7 2.1 1.6 79.0 %
Other, net (2.6) (0.7) (1.9) 261.1 %
Other income, net $ 4.5 $ 5.3 $ (0.8) (15.9) %
Other income, net decreased by $0.8 million, from $5.3 million for the nine months ended September 30, 2021 to $4.5 million for the nine months ended September 30, 2022. The decrease is primarily due to a fair value adjustment to recognize an increase in contingent consideration liability of $1.0 million related to our acquisition of Clairvoyant in December 2021, interest on statutory payments of $0.7 million, and lower return on mutual fund investments of $0.5 million, partially offset by higher interest income on investments in term deposits of $0.9 million and interest on income tax refunds of $0.7 million.
Loss on settlement of Notes. On August 27, 2021, we settled our outstanding obligations under the Notes and recognized
a loss of $12.8 million during the nine months ended September 30, 2021. See Note 18 - Borrowings to our unaudited consolidated financial statements.
Income Tax Expense. The effective tax rate increased from 20.3% during the nine months ended September 30, 2021 to 23.9% during the nine months ended September 30, 2022. We recorded income tax expense of $34.8 million and $22.1 million for the nine months ended September 30, 2022 and 2021, respectively. The increase in income tax expense was primarily as a result of higher profit during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, the recording of a one-time deferred tax benefit of $2.4 million on settlement of the Notes during the nine months ended September 30, 2021, and an increase in non-deductible expenses, partially offset by higher excess tax benefits during the nine months ended September 30, 2022.
Net Income. Net income increased from $86.4 million for the nine months ended September 30, 2021 to $111.1 million for the nine months ended September 30, 2022, primarily due to increase in income from operations of $21.3 million, loss on settlement of the Notes of $12.8 million during three months ended September 30, 2021, lower interest expense of $2.0 million, higher foreign exchange gain, net of $1.7 million and higher gain from equity-method investment of $0.4 million, partially offset by higher income tax expense of $12.7 million and lower other income, net of $0.8 million. As a percentage of revenues, net income increased from 10.5% for the nine months ended September 30, 2021 to 10.7% for the nine months ended September 30, 2022.
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Liquidity and Capital Resources
Nine months ended September 30,
2022 2021
(dollars in millions)
Opening cash, cash equivalents and restricted cash $ 143.8 $ 225.5
Net cash provided by operating activities 101.1 113.8
Net cash used for investing activities (75.2) (21.5)
Net cash used for financing activities (61.8) (189.1)
Effect of exchange rate changes (9.6) (5.0)
Closing cash, cash equivalents and restricted cash $ 98.3 $ 123.7
As of September 30, 2022 and 2021, we had $262.2 million and $284.9 million, respectively, in cash, cash equivalents and short-term investments, of which $237.5 million and $254.8 million, respectively, is located in foreign jurisdictions that upon distribution may be subject to withholding and other taxes. We periodically evaluate opportunities regarding distribution to fund our operations in the United States and other geographies, and as and when we decide to distribute, we may have to accrue additional taxes in accordance with local tax laws, rules and regulations in the relevant foreign jurisdictions.
Operating Activities: Net cash provided by operating activities was $101.1 million and $113.8 million for the nine months ended September 30, 2022 and 2021, respectively, reflecting higher working capital needs, offset by higher cash earnings. The major drivers contributing to the decrease of $12.7 million year-over-year included the following:
• A decrease in accrued employee costs, offset by an increase in accrued expenses and other liabilities contributed to a lower cash flow of $33.3 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The decrease was primarily due to higher payments (net of accruals) of annual performance incentives of $43.0 million, offset by higher employee costs accruals of $4.9 million and higher accrued expenses of $4.8 million due to an increase in our cost base to support revenue growth.
• An increase in net income of $24.7 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to an increase in income from operations of $21.3 million driven by higher revenues, lower interest expense of $2.0 million and higher foreign exchange gain, net of $1.7 million.
• Other drivers decreasing cash flows during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 included: income tax payments, net of refunds, of $4.1 million, primarily due to higher income tax payments on higher net income.
Investing Activities: Net cash used for investing activities was $75.2 million and $21.5 million for the nine months ended September 30, 2022 and 2021, respectively. The increase in net cash flows used for investing activities of $53.7 million is mainly due to higher net purchase of investments of $40.0 million during nine months ended September 30, 2022 compared to net redemption of investments of $6.7 million during the nine months ended September 30, 2021. The increase is also due to higher capital expenditures in infrastructure, technology assets, software and product developments of $3.7 million and acquisitions related payouts of $3.3 million during the nine months ended September 30, 2022.
Financing Activities: Net cash used for financing activities was $61.8 million and $189.1 million during the nine months ended September 30, 2022 and 2021, respectively. The decrease of $127.2 million was primarily due to net proceeds of our borrowings under our revolving Credit Facility of $10.0 million during the nine months ended September 30, 2022 compared to net repayment of our borrowings of $104.0 million during the nine months ended September 30, 2021. The remaining decrease was attributable to lower purchases of treasury stock under our share repurchase program of $13.9 million during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. This was partially offset by proceeds from the exercise of stock options by $0.7 million during the nine months ended September 30, 2021.
We expect to use cash from operating activities to maintain and expand our business by making investments, primarily related to new facilities and capital expenditures associated with leasehold improvements to build our facilities, digital capabilities and purchase telecommunications equipment and computer hardware and software in connection with managing client operations.
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We incurred $32.1 million of capital expenditures during the nine months ended September 30, 2022. We expect to incur total capital expenditures of between $37.0 million to $42.0 million in 2022, primarily to meet our growth requirements, including additions to our facilities as well as investments in technology applications, product development, digital technology, advanced automation, robotics and infrastructure.
In connection with any demand orders by the tax and/or other statutory authorities, that have been issued or may be issued against us or our subsidiaries, we may be required to deposit additional amounts with respect to such assessment orders (see Note 25 - Commitments and Contingencies to our unaudited consolidated financial statements herein for further details). We anticipate that we will continue to rely upon cash from operating activities to finance our working capital needs, capital expenditures and smaller acquisitions. If we have significant growth through acquisitions, we may need to obtain additional financing.
We believe that our existing cash, cash equivalents and short-term investments and sources of liquidity will be sufficient to satisfy our cash requirements over the next 12 months. Our future cash requirements will depend on many factors, including our rate of revenue growth, our investments in strategic initiatives, applications or technologies, operation centers and acquisition of complementary businesses, continued purchases under our board-authorized stock repurchase program, which may require the use of significant cash resources and/or additional financing. Although we anticipate that we will continue to rely upon cash from operating activities to finance most of our above mentioned requirements, if we have significant growth through acquisitions, we may need to obtain additional financing.
In the ordinary course of business, we enter into contracts and commitments that obligate us to make payments in the future. These obligations include borrowings, including interest obligations, purchase commitments, operating and finance lease commitments, employee benefit payments under Gratuity plans and uncertain tax positions. See Note 18 - Borrowings, Note 21 - Leases, and Note 25 - Commitments and Contingencies to our unaudited consolidated financial statements herein for further information on material cash requirements from known contractual and other obligations.
In the ordinary course of business, we provide standby letters of credit to third parties primarily for facility leases. As of September 30, 2022 and December 31, 2021, we had outstanding letters of credit of $0.5 million, each, that were not recognized in our consolidated balance sheets. These are not reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We had no other off-balance sheet arrangements or obligations.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) allows employers to defer the payment of the employer share of Federal Insurance Contributions Act (“FICA”) taxes for the period from April 1, 2020 and ending December 31, 2020. The deferred amount is payable as follows: (1) 50% of the deferred amount was paid on or before December 31, 2021 and (2) the remaining 50% of the deferred amount will be paid on or before December 31, 2022. Our deferred contributions, net of payments to FICA was $3.1 million as of September 30, 2022 and December 31, 2021, each, which will be paid on or before December 31, 2022.
Financing Arrangements (Debt Facility)
The following tables summarizes our debt position:
As of September 30,2022 As of December 31, 2021
(dollars in millions)
Credit Facility
Current portion of long-term borrowings $ 35.0 $ 260.0
Long-term borrowings 235.0 —
Total borrowings $ 270.0 $ 260.0
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Unamortized debt issuance costs for our Credit Facility of $1.2 million and $0.2 million as of September 30, 2022 and December 31, 2021, respectively, is presented under “Other current assets” and “Other assets,” as applicable in our consolidated balance sheets.
See Note 18 - Borrowings to our unaudited consolidated financial statements herein for further details.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2—“Recent Accounting Pronouncements” to our unaudited consolidated financial statements contained herein.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.