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, 2022. 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:
• our ability to maintain and grow client demand for our services and solutions, including anticipating and incorporating the latest technology into our offerings;
• impact on client demand by the selling cycle and terms of our client contracts;
• fluctuations in our earnings;
• our ability to hire and retain enough sufficiently trained employees to support our operations or any changes in the senior management team;
• our ability to accurately estimate and/or manage costs;
• our ability to adjust our pricing terms or effectively manage our asset utilization levels to meet the changing demands of our clients and potential clients;
• cyber security incidents, data breaches, or other unauthorized disclosure of sensitive or confidential client and employee data;
• reliance on third parties to deliver services and infrastructure for client critical services;
• employee wage increases;
• failure to protect our intellectual property;
• 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;
• our ability to grow our business or effectively manage growth and international operations;
• our ability to successfully consummate or integrate strategic acquisitions including the impact from the impairment of goodwill and other intangible assets, if any;
• our ability to adhere to regulations or accreditation or licensing standards that govern our business;
• increasing competition in our industry;
• telecommunications or technology disruptions or breaches, natural or other disasters, medical epidemics or pandemics, such as COVID-19, or acts of violence or war;
• operational and information security failures arising as a result of remote work solutions adopted due to COVID-19;
• legal liability arising out of customer and third party contracts;
• adverse outcome of our disputes with the tax authorities in the geographies where we operate;
• the introduction of new or unfavorable tax legislation;
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• changes in tax laws or decisions regarding repatriation of funds held abroad;
• exposure to currency exchange rate fluctuations in the various currencies in which we do business including the potential effects of Russian-Ukraine conflict, rising inflation, high interest rates and economic recessionary trends on currency exchange rates;
• restrictions on immigration;
• ability to service debt or obtain additional financing on favorable terms. Inception of interest rate swaps to hedge interest rate risk;
• negative public reaction in the U.S. or elsewhere to offshore outsourcing;
• effects of political and economic conditions globally, particularly in the geographies where we operate;
• ability to make accurate estimates and assumptions in connection with the preparation of our consolidated financial statements;
• regulatory, legislative and judicial developments, including changes to or the withdrawal of governmental fiscal incentives;
• credit risk fluctuations in the market values of our investment and derivatives portfolios; and
• our ability to meet our environmental, social and governance-related goals and targets.
These and other factors are more fully discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. 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 may occur 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, artificial intelligence, including generative AI, 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, artificial intelligence, generative AI 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
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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 Republic of Ireland, the Philippines, Bulgaria, Colombia, South Africa, Romania and the Czech Republic.
Revenues
For the three months ended September 30, 2023, we generated revenues of $411.0 million compared to revenues of $361.4 million for the three months ended September 30, 2022, an increase of $49.6 million, or 13.7%. For the nine months ended September 30, 2023, we generated revenues of $1,216.6 million compared to revenues of $1,037.3 million for the nine months ended September 30, 2022, an increase of $179.3 million, or 17.3%.
We serve cli ents mainly in the United States and the United Kingdom, with these two regions generating 83.5% and 11.3%, respectively, of our total revenues for the three months ended September 30, 2023, and 86.0% and 9.4%, respectively, of our total revenues for the three months ended September 30, 2022. For the nine months ended September 30, 2023, these two regions generated 84.1% and 10.8%, respectively, of our total revenues and 85.9% and 9.5%, respectively, of our total revenues for the nine months ended September 30, 2022.
For the three months ended September 30, 2023 and 2022, our total revenues from our top ten clients accounted for 34.6% and 34.2% of our total revenues, respectively. For the nine months ended September 30, 2023 and 2022, our total revenues from our top ten clients accounted for 34.2% and 33.7% 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.
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 challenges such as the insurance claims life cycle, financial transactions processing and provider and member experiences. This typically involves the use of agile delivery models to implement digital technologies and interventions like hyper-automation, customer experience transformation, advanced automation, generative AI, 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 contracts with no end dates. These contracts provide us with a relatively predictable revenue base for a substantial portion of our digital operations and solutions business. However, our clients can typically terminate these contracts with or without cause and with short notice periods. 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-
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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 digital operations and solutions needs to seek more favorable contract terms and diversification of the risk of concentration on a few vendors. 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 aim to drive better business outcomes for our clients by unlocking deep insights from data and creating data-led solutions across all parts of our clients’ business. We 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 Analytics teams deliver predictive and prescriptive analytics in the areas of customer acquisition and life cycle management, risk underwriting and pricing, operational effectiveness, credit and operational risk monitoring and governance, regulatory reporting 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 and third party artificial intelligence, generative AI, and machine learning capabilities and proprietary solutions to create insights, improve decision making for our clients and address a range of complex industry-wide priorities. 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 project-based analytics services are cyclical and can be significantly affected by variations in business cycles. In addition, our project-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.
2023 Stock Split
On June 20, 2023, subsequent to the approval and recommendation of our board of directors, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation, which upon filing with the State of Delaware on August 1, 2023, and effectiveness thereof, effected a 5-for-1 forward stock split of our common stock and an increase in the number of authorized shares of our common stock from 100,000,000 shares to 400,000,000 shares. The par value of each share of common stock, $0.001, remained unchanged. See Note 19 – Capital Structure to our unaudited consolidated financial statements herein for further details.
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, 2023, 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, 2022.
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Results of Operations
The following table summarizes our results of operations:
Three months ended September 30, Nine months ended September 30,
2023 2022 2023 2022
(dollars in millions) (dollars in millions)
Revenues, net $ 411.0 $ 361.4 $ 1,216.6 $ 1,037.3
Cost of revenues (1)
256.0 230.5 760.7 659.2
Gross profit (1)
155.0 130.9 455.9 378.1
Operating expenses:
General and administrative expenses 52.2 42.5 144.5 122.9
Selling and marketing expenses 31.0 23.9 88.7 72.0
Depreciation and amortization expense 11.6 14.4 38.2 42.1
Total operating expenses 94.8 80.8 271.4 237.0
Income from operations 60.2 50.1 184.5 141.1
Foreign exchange gain, net 0.4 1.5 0.8 4.7
Interest expense (3.4) (2.4) (10.0) (4.8)
Other income, net 0.8 2.3 6.6 4.5
Income before income tax expense and earnings from equity affiliates 58.0 51.5 181.9 145.5
Income tax expense 14.2 12.5 37.8 34.8
Income before earnings from equity affiliates 43.8 39.0 144.1 110.7
Gain from equity-method investment 0.1 0.1 0.2 0.4
Net income attributable to ExlService Holdings, Inc. stockholders $ 43.9 $ 39.1 $ 144.3 $ 111.1
(1) Exclusive of depreciation and amortization expense.
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, 2023 Compared to Three Months Ended September 30, 2022
Revenues.
The following table summarizes our revenues by reportable segments:
Three months ended September 30, Percentage
change
2023 2022 Change
(dollars in millions)
Insurance $ 136.4 $ 116.2 $ 20.2 17.4 %
Healthcare 26.2 22.8 3.4 14.7 %
Emerging Business 65.3 56.1 9.2 16.6 %
Analytics 183.1 166.3 16.8 10.1 %
Total revenues, net $ 411.0 $ 361.4 $ 49.6 13.7 %
Revenues for the three months ended September 30, 2023 were $411.0 million, up $49.6 million, or 13.7%, compared to the three months ended September 30, 2022, driven primarily by revenue growth from our new and existing clients in all of our reportable segments.
Revenue growth in Insurance of $20.2 million was primarily driven by expansion of business from our new and existing clients of $20.4 million. This was partially offset by a loss of $0.2 million, mainly attributable to the depreciation of the Australian dollar, the South African rand and the Indian rupee against the U.S. dollar during the three months ended September 30, 2023, compared to the three months ended September 30, 2022. Insurance revenues were 33.2% and 32.2% of our total revenues during the three months ended September 30, 2023 and September 30, 2022, respectively.
Revenue growth in Healthcare of $3.4 million was primarily driven by expansion of business from our new and existing clients during the three months ended September 30, 2023. Healthcare revenues were 6.4% and 6.3% of our total revenues during the three months ended September 30, 2023 and September 30, 2022, respectively.
Revenue growth in Emerging Business of $9.2 million was primarily driven by expansion of business from our new and existing clients of $8.2 million and an increase in revenues of $1.0 million, mainly attributable to the appreciation of the U.K. pound sterling against the U.S. dollar during the three months ended September 30, 2023, compared to the three months ended September 30, 2022. Emerging Business revenues were 15.9% and 15.5% of our total revenues during the three months ended September 30, 2023 and September 30, 2022, respectively.
Revenue growth in Analytics of $16.8 million was primarily driven by higher volumes in our annuity and project based engagements from our new and existing clients of $15.7 million and an increase in revenues of $1.1 million, mainly attributable to the appreciation of the U.K. pound sterling against the U.S. dollar during the three months ended September 30, 2023, compared to the three months ended September 30, 2022. Analytics revenues were 44.5% and 46.0% of our total revenues during the three months ended September 30, 2023 and September 30, 2022, 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
2023 2022 2023 2022
(dollars in millions)
Insurance $ 86.5 $ 75.0 $ 11.5 15.2 % 36.6 % 35.4 % 1.2 %
Healthcare 16.5 17.1 (0.6) (3.4) % 36.8 % 25.0 % 11.8 %
Emerging Business 37.6 32.4 5.2 16.2 % 42.4 % 42.2 % 0.2 %
Analytics 115.4 106.0 9.4 9.0 % 37.0 % 36.3 % 0.7 %
Total $ 256.0 $ 230.5 $ 25.5 11.1 % 37.7 % 36.2 % 1.5 %
For the three months ended September 30, 2023, cost of revenues was $256.0 million compared to $230.5 million for the three months ended September 30, 2022, an increase of $25.5 million, or 11.1%. The increase in cost of revenues was primarily due to increases in employee-related costs, partially offset by foreign exchange gain, net of hedging. Our gross margin for the three months ended September 30, 2023 was 37.7%, compared to 36.2% for the three months ended September 30, 2022, an increase of 150 basis points (“bps”) primarily driven by higher revenues and operational efficiencies during the three months ended September 30, 2023, compared to the three months ended September 30, 2022.
The increase in cost of revenues in Insurance of $11.5 million for the three months ended September 30, 2023 was primarily due to increases in employee-related costs of $11.3 million on account of higher headcount and wage inflation and higher technology costs of $1.7 million on account of increased use of the hybrid and remote working models, partially offset by foreign exchange gain, net of hedging of $1.5 million. Gross margin in Insurance increased by 120 bps during the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to higher revenues and operational efficiencies during the three months ended September 30, 2023, compared to the three months ended September 30, 2022.
The decrease in cost of revenues in Healthcare of $0.6 million for the three months ended September 30, 2023 was primarily due to lower other operating costs of $0.5 million and foreign exchange gain, net of hedging of $0.3 million, partially offset by increases in employee-related costs of $0.2 million on account of wage inflation. Gross margin in Healthcare increased by 1,180 bps during the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to higher revenues and operational efficiencies during the three months ended September 30, 2023, compared to the three months ended September 30, 2022.
The increase in cost of revenues in Emerging Business of $5.2 million for the three months ended September 30, 2023 was primarily due to increases in employee-related costs of $5.5 million on account of higher headcount and wage inflation and higher technology costs of $1.0 million on account of increased use of the hybrid and remote working models, partially offset by foreign exchange gain, net of hedging of $0.8 million and lower travel costs of $0.5 million. Gross margin in Emerging Business increased by 20 bps during the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to higher revenues and operational efficiencies during the three months ended September 30, 2023, compared to the three months ended September 30, 2022.
The increase in cost of revenues in Analytics of $9.4 million for the three months ended September 30, 2023 was primarily due to increases in employee-related costs of $11.5 million on account of higher headcount and wage inflation, partially offset by foreign exchange gain, net of hedging of $1.3 million and lower travel costs of $0.8 million. Gross margin in Analytics increased by 70 bps during the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to higher revenues and operational efficiencies during the three months ended September 30, 2023, compared to the three months ended September 30, 2022.
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Selling, General and Administrative (“SG&A”) Expenses.
Three months ended September 30, Change Percentage
change
2023 2022
(dollars in millions)
General and administrative expenses $ 52.2 $ 42.5 $ 9.7 22.8 %
Selling and marketing expenses 31.0 23.9 7.1 29.6 %
Selling, general and administrative expenses $ 83.2 $ 66.4 $ 16.8 25.2 %
As a percentage of revenues 20.2 % 18.4 %
The increase in SG&A expenses of $16.8 million was primarily due to higher employee-related costs of $10.7 million on account of higher headcount and wage inflation, higher investment in digital capabilities of $3.7 million, higher allowance for expected credit losses of $1.9 million, primarily related to a customer bankruptcy event and increase in travel costs of $0.9 million. This was partially offset by foreign exchange gain, net of hedging of $0.4 million during the three months ended September 30, 2023, compared to the three months ended September 30, 2022.
Depreciation and Amortization.
Three months ended September 30, Change Percentage
change
2023 2022
(dollars in millions)
Depreciation expense $ 8.4 $ 10.1 $ (1.7) (16.9) %
Intangible amortization expense 3.2 4.3 (1.1) (25.6) %
Depreciation and amortization expense $ 11.6 $ 14.4 $ (2.8) (19.5) %
As a percentage of revenues 2.8 % 4.0 %
The decrease in depreciation expense of $1.7 million was primarily due to lower depreciation of $1.5 million on assets related to operations centers closed as a result of optimization of office space and increased use of the hybrid and remote working models and foreign exchange gain, net of hedging of $0.2 million during the three months ended September 30, 2023, compared to the three months ended September 30, 2022. The decrease in intangibles amortization expense of $1.1 million during the three months ended September 30, 2023, compared to the three months ended September 30, 2022 was primarily due to end of useful lives for certain intangible assets.
Income from Operations. Income from operations increased by $10.1 million, or 20.2%, from $50.1 million for the three months ended September 30, 2022 to $60.2 million for the three months ended September 30, 2023, primarily due to higher revenues and higher gross margins, partially offset by higher SG&A expenses during the three months ended September 30, 2023. As a percentage of revenues, income from operations increased from 13.9% for the three months ended September 30, 2022 to 14.7% for the three months ended September 30, 2023.
Foreign Exchange Gain, net. Foreign exchange gains and losses are primarily attributable to the movement of the U.S. dollar against the Indian rupee, the Philippine peso, the U.K. pound sterling and the South African rand during the three months ended September 30, 2023, compared to the three months ended September 30, 2022. The average exchange rate of the U.S. dollar against the Indian rupee increased from 80.01 during the three months ended September 30, 2022 to 82.69 during the three months ended September 30, 2023. The average exchange rate of the U.S. dollar against the Philippine peso decreased from 56.63 during the three months ended September 30, 2022 to 56.02 during the three months ended September 30, 2023. The average exchange rate of the U.K. pound sterling against the U.S. dollar increased from 1.16 during the three months ended September 30, 2022 to 1.26 during the three months ended September 30, 2023. The average exchange rate of the U.S. dollar against the South African rand increased from 17.21 during the three months ended September 30, 2022 to 18.49 during the three months ended September 30, 2023.
We recorded a foreign exchange gain, net of $1.5 million for the three months ended September 30, 2022 compared to a foreign exchange gain, net of $0.4 million for the three months ended September 30, 2023.
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Interest expens e. Interest expense increased from $2.4 million for the three months ended September 30, 2022 to $3.4 million for the three months ended September 30, 2023, primarily due to a higher effective interest rate of 6.5% during the three months ended September 30, 2023, compared to 3.4% during the three months ended September 30, 2022, partially offset by a lower average outstanding balance under our revolving credit facility during the three months ended September 30, 2023, compared to the three months ended September 30, 2022.
Other Income, net.
Three months ended September 30, Change Percentage
change
2023 2022
(dollars in millions)
Gain on sale and mark-to-market on investments $ 1.3 $ 1.5 $ (0.2) (9.1) %
Interest and dividend income 2.1 1.5 0.6 44.5 %
Fair value changes of contingent consideration (2.5) — (2.5) (100.0) %
Others, net (0.1) (0.7) 0.6 (75.3) %
Other income, net $ 0.8 $ 2.3 $ (1.5) (65.6) %
Other income, net decreased by $1.5 million, from $2.3 million for the three months ended September 30, 2022 to $0.8 million for the three months ended September 30, 2023. The decrease is primarily due to a fair value adjustment to recognize an increase in contingent consideration liability of $2.5 million related to our acquisition of Clairvoyant AI, Inc. (“Clairvoyant”) in December 2021 as a result of strong operational performance. This was partially offset by higher interest and dividend income on our investments and lower other expenses during the three months ended September 30, 2023, compared to the three months ended September 30, 2022.
Income Tax Expense. The effective tax rate increased from 24.2% during the three months ended September 30, 2022 to 24.4% during the three months ended September 30, 2023. We recorded income tax expense of $14.2 million and $12.5 million for the three months ended September 30, 2023 and 2022, respectively. The increase in income tax expense was primarily as a result of higher profit during the three months ended September 30, 2023, compared to the three months ended September 30, 2022, and an increase in non-deductible expenses during the three months ended September 30, 2023, partially offset by higher excess tax benefits related to stock-based compensation, and higher tax credits during the three months ended September 30, 2023, compared to the three months ended September 30, 2022.
Net Income. Net income increased from $39.1 million for the three months ended September 30, 2022 to $43.9 million for the three months ended September 30, 2023, primarily due to increase in income from operations of $10.1 million, partially offset by higher income tax expense of $1.7 million, lower other income, net of $1.5 million, lower foreign exchange gain, net of $1.1 million and higher interest expense of $1.0 million. As a percentage of revenues, net income decreased from 10.8% for the three months ended September 30, 2022 to 10.7% for the three months ended September 30, 2023.
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Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
Revenues.
The following table summarizes our revenues by reportable segments:
Nine months ended September 30, Percentage
change
2023 2022 Change
(dollars in millions)
Insurance $ 390.8 $ 328.0 $ 62.8 19.1 %
Healthcare 80.0 72.1 7.9 11.1 %
Emerging Business 198.7 160.6 38.1 23.7 %
Analytics 547.1 476.6 70.5 14.8 %
Total revenues, net $ 1,216.6 $ 1,037.3 $ 179.3 17.3 %
Revenues for the nine months ended September 30, 2023 were $1,216.6 million, up $179.3 million, or 17.3%, compared to the nine months ended September 30, 2022, driven primarily by revenue growth from our new and existing clients in all of our reportable segments.
Revenue growth in Insurance of $62.8 million was primarily driven by expansion of business from our new and existing clients of $65.3 million. This was partially offset by a loss of $2.5 million, mainly attributable to the depreciation of the Australian dollar, the Indian rupee and the South African rand against the U.S. dollar during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. Insurance revenues were 32.1% and 31.6% of our total revenues during the nine months ended September 30, 2023 and September 30, 2022, respectively.
Revenue growth in Healthcare of $7.9 million was primarily driven by expansion of business from our new and existing clients during the nine months ended September 30, 2023. Healthcare revenues were 6.6% and 6.9% of our total revenues during the nine months ended September 30, 2023 and September 30, 2022, respectively.
Revenue growth in Emerging Business of $38.1 million was primarily driven by expansion of business from our new and existing clients of $39.2 million. This was partially offset by a loss of $1.1 million, mainly attributable to the depreciation of the Indian rupee against the U.S. dollar during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. Emerging Business revenues were 16.3% and 15.5% of our total revenues during the nine months ended September 30, 2023 and September 30, 2022, respectively.
Revenue growth in Analytics of $70.5 million was primarily driven by higher volumes in our annuity and project based engagements from our new and existing clients of $70.2 million and an increase in revenues of $0.3 million, mainly attributable to the appreciation of the U.K. pound sterling against the U.S. dollar during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. Analytics revenues were 45.0% and 46.0% of our total revenues during the nine months ended September 30, 2023 and September 30, 2022, 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
2023 2022 Change 2023 2022
(dollars in millions)
Insurance $ 253.1 $ 210.7 $ 42.4 20.1 % 35.2 % 35.7 % (0.5) %
Healthcare 52.9 52.4 0.5 0.8 % 33.9 % 27.2 % 6.7 %
Emerging Business 111.4 92.8 18.6 20.1 % 43.9 % 42.2 % 1.7 %
Analytics 343.3 303.3 40.0 13.2 % 37.3 % 36.4 % 0.9 %
Total $ 760.7 $ 659.2 $ 101.5 15.4 % 37.5 % 36.5 % 1.0 %
For the nine months ended September 30, 2023, cost of revenues was $760.7 million compared to $659.2 million for the nine months ended September 30, 2022, an increase of $101.5 million, or 15.4%. The increase in cost of revenues was primarily due to increases in employee-related costs, partially offset by foreign exchange gain, net of hedging. Our gross margin for the nine months ended September 30, 2023 was 37.5% compared to 36.5% for the nine months ended September 30, 2022, an increase of 100 basis points (“bps”) primarily driven by higher revenues, operational efficiencies and foreign exchange gain, net of hedging during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
The increase in cost of revenues in Insurance of $42.4 million for the nine months ended September 30, 2023 was primarily due to increases in employee-related costs of $42.0 million on account of higher headcount and wage inflation, higher technology costs of $6.7 million on account of increased use of the hybrid and remote working models and higher other operating cost of $2.6 million, partially offset by foreign exchange gain, net of hedging of $6.5 million, lower travel cost of $1.5 million and lower facilities cost of $0.9 million on account of optimization of office space. Gross margin in Insurance decreased by 50 bps during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to lower margins associated with higher costs during ramp-ups in certain existing and new clients during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
The increase in cost of revenues in Healthcare of $0.5 million for the nine months ended September 30, 2023 was primarily due to increases in employee-related costs of $3.2 million on account of wage inflation, partially offset foreign exchange gain, net of hedging of $1.7 million and lower facilities cost of $1.0 million on account of optimization of office space. Gross margin in Healthcare increased by 670 bps during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to higher revenues, operational efficiencies and foreign exchange gain, net of hedging during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
The increase in cost of revenues in Emerging Business of $18.6 million for the nine months ended September 30, 2023 was primarily due to increases in employee-related costs of $18.7 million on account of higher headcount and wage inflation, higher technology costs of $2.8 million on account of increased use of the hybrid and remote working models and higher other operating costs of $1.8 million, partially offset by foreign exchange gain, net of hedging of $3.5 million and lower travel costs of $1.2 million. Gross margin in Emerging Business increased by 170 bps during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to higher revenues and foreign exchange gain, net of hedging during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
The increase in cost of revenues in Analytics of $40.0 million for the nine months ended September 30, 2023 was primarily due to increases in employee-related costs of $48.4 million on account of higher headcount and wage inflation and higher technology costs of $1.2 million on account of increased use of the hybrid and remote working models, partially offset by foreign exchange gain, net of hedging of $6.0 million, lower travel costs of $2.4 million and lower facilities cost of $1.2 million on account of optimization of office space. Gross margin in Analytics increased by 90 bps during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to higher revenues, operational efficiencies and foreign exchange gain, net of hedging during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
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Selling, General and Administrative (“SG&A”) Expenses.
Nine months ended September 30, Percentage change
2023 2022 Change
(dollars in millions)
General and administrative expenses $ 144.5 $ 122.9 $ 21.6 17.6 %
Selling and marketing expenses 88.7 72.0 16.7 23.1 %
Selling, general and administrative expenses $ 233.2 $ 194.9 $ 38.3 19.7 %
As a percentage of revenues 19.2 % 18.8 %
The increase in SG&A expenses of $38.3 million was primarily due to higher employee-related costs of $27.7 million on account of higher headcount and wage inflation, higher investment in digital capabilities of $4.6 million, higher sales and marketing spend of $3.6 million, increase in travel costs of $2.9 million and higher allowance for expected credit losses of $2.1 million, primarily related to a customer bankruptcy event. This was partially offset by foreign exchange gain, net of hedging of $2.6 million during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
Depreciation and Amortization.
Nine months ended September 30, Percentage change
2023 2022 Change
(dollars in millions)
Depreciation expense $ 26.7 $ 29.2 $ (2.5) (8.6) %
Intangible amortization expense 11.5 12.9 (1.4) (10.6) %
Depreciation and amortization expense $ 38.2 $ 42.1 $ (3.9) (9.2) %
As a percentage of revenues 3.1 % 4.1 %
The decrease in depreciation expense of $2.5 million was primarily due to lower depreciation of $1.7 million on assets related to operations centers closed as a result of optimization of office space, increased use of the hybrid and remote working models and foreign exchange gain, net of hedging of $0.8 million during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The decrease in intangibles amortization expense of $1.4 million during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022 was primarily due to end of useful lives for certain intangible assets.
Income from Operations. Income from operations increased by $43.4 million, or 30.7%, from $141.1 million for the nine months ended September 30, 2022 to $184.5 million for the nine months ended September 30, 2023, primarily due to higher revenues and higher gross margins, partially offset by higher SG&A expenses during the nine months ended September 30, 2023. As a percentage of revenues, income from operations increased from 13.6% for the nine months ended September 30, 2022 to 15.2% for the nine months ended September 30, 2023.
Foreign Exchange Gain, net. Foreign exchange gains and losses are primarily attributable to the movement of the U.S. dollar against the Indian rupee, the Philippine peso, the U.K. pound sterling and the South African rand during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The average exchange rate of the U.S. dollar against the Indian rupee increased from 77.65 during the nine months ended September 30, 2022 to 82.38 during the nine months ended September 30, 2023. The average exchange rate of the U.S. dollar against the Philippine peso increased from 53.71 during the nine months ended September 30, 2022 to 55.46 during the nine months ended September 30, 2023. The average exchange rate of the U.K. pound sterling remained unchanged at 1.25 for each of the nine months ended September 30, 2023 and September 30, 2022. The average exchange rate of the U.S. dollar against the South African rand increased from 16.10 during the nine months ended September 30, 2022 to 18.47 during the nine months ended September 30, 2023.
We recorded a foreign exchange gain, net of $4.7 million for the nine months ended September 30, 2022 compared to a foreign exchange gain, net of $0.8 million for the nine months ended September 30, 2023.
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Interest expense. Interest expense increased from $4.8 million for the nine months ended September 30, 2022 to $10.0 million for the nine months ended September 30, 2023, primarily due to a higher effective interest rate of 6.2% during the nine months ended September 30, 2023, compared to 2.3% during the nine months ended September 30, 2022, partially offset by a lower average outstanding balance under our revolving credit facility during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
Other Income, net.
Nine months ended September 30, Percentage change
2023 2022 Change
Gain on sale and mark-to-market on investments $ 4.1 $ 3.4 $ 0.7 22.0 %
Interest and dividend income 5.5 3.7 1.8 49.2 %
Fair value changes of contingent consideration (2.5) (1.0) (1.5) 150.0 %
Others, net (0.5) (1.6) 1.1 (69.5) %
Other income, net $ 6.6 $ 4.5 $ 2.1 46.6 %
Other income, net increased by $2.1 million, from $4.5 million for the nine months ended September 30, 2022 to $6.6 million for the nine months ended September 30, 2023. The increase is primarily due to higher return on mutual fund investments of $0.7 million, higher interest income on our investments of $1.8 million and lower other expenses of $1.1 million during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. This was partially offset by an increase in fair value adjustment to recognize an increase in contingent consideration liability of $1.5 million related to our acquisition of Clairvoyant in December 2021 during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
Income Tax Expense. The effective tax rate decreased from 23.9% during the nine months ended September 30, 2022 to 20.8% during the nine months ended September 30, 2023. We recorded income tax expense of $37.8 million and $34.8 million for the nine months ended September 30, 2023 and 2022, respectively. The increase in income tax expense was primarily as a result of higher profit during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, and an increase in non-deductible expenses, partially offset by higher excess tax benefits related to stock-based compensation, and higher tax credits during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
Net Income. Net income increased from $111.1 million for the nine months ended September 30, 2022 to $144.3 million for the nine months ended September 30, 2023, primarily due to increase in income from operations of $43.4 million and higher other income, net of $2.1 million, partially offset by higher interest expense of $5.2 million, lower foreign exchange gain, net of $3.9 million and higher income tax expense of $3.0 million. As a percentage of revenues, net income increased from 10.7% for the nine months ended September 30, 2022 to 11.9% for the nine months ended September 30, 2023.
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Liquidity and Capital Resources
Nine months ended September 30,
2023 2022
(dollars in millions)
Opening cash, cash equivalents and restricted cash $ 125.6 $ 143.8
Net cash provided by operating activities 132.2 101.1
Net cash provided by/(used for) investing activities 11.4 (75.2)
Net cash used for financing activities (141.0) (61.8)
Effect of exchange rate changes (0.3) (9.6)
Closing cash, cash equivalents and restricted cash $ 127.9 $ 98.3
As of September 30, 2023 and 2022, we had $274.2 million and $262.2 million, respectively, in cash, cash equivalents and short-term investments, of which $256.5 million and $237.5 million, respectively, is located in foreign jurisdictions that upon distribution may be subject to withholding and other taxes. We periodically evaluate opportunities to distribute cash among our group entities to fund our operations, expand our business and make strategic acquisitions 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. During the nine months ended September 30, 2023, our subsidiaries in India, the United Kingdom and Australia repatriated $76.0 million (net of $4.0 million withholding taxes), $15.6 million and $9.1 million, respectively, to the United States. These distributions do not constitute a change in our permanent reinvestment assertion.
Operating Activities:
Net cash provided by operating activities was $132.2 million for the nine months ended September 30, 2023, as compared to net cash provided by operating activities of $101.1 million for the nine months ended September 30, 2022, reflecting higher cash earnings, partially offset by higher working capital needs. The major drivers contributing to the increase of $31.1 million year-over-year included the following:
• Increase in cash earnings including adjustments for non-cash and other items contributed higher cash flow of $38.6 million during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. These adjustments comprise of deferred tax effects, unrealized foreign currency exchange gain/(loss), unrealized gain/(loss) on investments, stock-based employee compensation, depreciation and amortization of long-lived assets and intangibles acquired in business combinations, fair value changes in contingent consideration, among others.
• Changes in accounts receivable, including advance billings, contributed higher cash flow of $21.8 million during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. Collections in accounts receivable, including advance billings was driven by revenue growth during the nine months ended September 30, 2023. This was partially offset by increase in our days sales outstanding which was 64 days as of September 30, 2023, as compared to 63 days as of September 30, 2022.
• Higher income tax payments, net of refunds, contributed higher cash payouts of $41.6 million, partially offset by provision for income tax and changes in deferred tax assets and liabilities of $25.5 million during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.
• Changes in other assets, accounts payables including other liabilities contributed higher cash payouts of $13.2 million during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.
Investing Activities: Cash provided by investing activities were $11.4 million for the nine months ended September 30, 2023, as compared to cash used for investing activities of $75.2 million for the nine months ended September 30, 2022. The increase in cash provided by investing activities of $86.6 million year-over-year is mainly due to net redemption of investments of $52.5 million during nine months ended September 30, 2023, as compared to net purchase of investments of $40.0 million during the nine months ended September 30, 2022. The increase was also due to acquisition-related payouts of $3.3 million during the nine months ended September 30, 2022 with no corresponding payouts during the nine months ended September 30, 2023. This was partially offset by higher capital expenditures in infrastructure, technology assets, software and product
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developments of $9.0 million during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.
Financing Activities: Cash used for financing activities were $141.0 million during the nine months ended September 30, 2023, as compared to cash used for financing activities of $61.8 million during the nine months ended September 30, 2022. The increase in cash used for financing activities of $79.2 million year-over-year was primarily due to net repayment of our borrowings under our revolving credit facility of $40.0 million during the nine months ended September 30, 2023, as compared to net proceeds of our borrowings of $10.0 million during the nine months ended September 30, 2022. The increase was also due to higher purchases of treasury stock by $28.8 million under our share repurchase program during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.
We expect to use cash from operating activities to maintain and expand our business by making investments, primarily related to building new digital capabilities and purchase telecommunications equipment and computer hardware and software in connection with managing client operations.
We incurred $41.1 million of capital expenditures during the nine months ended September 30, 2023. We expect to incur total capital expenditures of between $50.0 million to $55.0 million in 2023, 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 tax assessment orders that have been issued, or may be issued against us or our subsidiaries, we may be required to deposit additional amounts with the relevant authorities with respect to such assessment orders. See Note 25 - Commitments and Contingencies to our unaudited consolidated financial statements herein for further details.
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 stock repurchases under our board-authorized stock repurchase program, which may require the use of significant cash resources and/or additional financing. We anticipate that we will continue to rely upon cash from operating activities to finance most of our above mentioned requirements, although 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, payments for contingent consideration and uncertain tax positions. See Note 16 - Fair Value Measurements - Fair Value of Contingent Consideration, 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, 2023 and December 31, 2022, we had outstanding letters of credit of $0.5 million, each, that were not recognized in our consolidated balance sheets. These are unlikely 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.
Financing Arrangements (Debt Facility)
The following table summarizes our debt position:
As of September 30,2023 As of December 31, 2022
(dollars in millions)
Revolving credit facility
Current portion of long-term borrowings $ 50.0 $ 30.0
Long-term borrowings 160.0 220.0
Total borrowings $ 210.0 $ 250.0
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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 - Summary of Significant Accounting Policies - 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.