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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________________________
FORM 10-Q
_________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
COMMISSION FILE NUMBER 001-33089
_________________________________________________________
EXLSERVICE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
_________________________________________________________
DELAWARE
 
82-0572194
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
280 PARK AVENUE, 38TH FLOOR,
NEW YORK, NEW YORK
 
10017
(Address of principal executive offices)
 
(Zip code)
(212) 277-7100
(Registrant’s telephone number, including area code)
________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of October 30, 2018, there were 34,256,695 shares of the registrant’s common stock outstanding, par value $0.001 per share.

 



Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
 
PAGE
ITEM
 
 
 
 
 
 
 
 
 
1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.
 
 
 
 
 
3.
 
 
 
 
 
4.
 
 
 
 
 
 
 
 
 
 
 
1.
 
 
 
 
 
1A.
 
 
 
 
 
2.
 
 
 
 
 
3.
 
 
 
 
 
4.
 
 
 
 
 
5.
 
 
 
 
 
6.
 
 
 

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Table of Contents

PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXLSERVICE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
As of
 
September 30, 2018
 
December 31, 2017
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
97,636

 
$
86,795

Short-term investments
144,878

 
178,479

Restricted cash
4,679

 
3,674

Accounts receivable, net
164,307

 
135,705

Prepaid expenses
10,325

 
9,781

Advance income tax, net
7,700

 
8,801

Other current assets
24,302

 
29,582

Total current assets
453,827

 
452,817

Property and equipment, net
67,675

 
66,757

Restricted cash
3,499

 
3,808

Deferred tax assets
12,201

 
8,585

Intangible assets, net
114,799

 
48,958

Goodwill
357,533

 
204,481

Other assets
32,779

 
36,369

Investment in equity affiliate
2,824

 
3,000

Total assets
$
1,045,137

 
$
824,775

Liabilities and equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
4,310

 
$
5,918

Current portion of long-term borrowings
12,318

 
10,318

Deferred revenue
7,600

 
10,716

Accrued employee costs
46,638

 
55,664

Accrued expenses and other current liabilities
67,084

 
61,366

Current portion of capital lease obligations
221

 
267

Total current liabilities
138,171

 
144,249

Long term borrowings
288,309

 
50,391

Capital lease obligations, less current portion
261

 
331

Income taxes payable
8,721

 
13,557

Deferred tax liabilities
13,352

 

Other non-current liabilities
21,875

 
16,202

Total liabilities
470,689

 
224,730

Commitments and contingencies (Refer to Note 25)


 


Preferred stock, $0.001 par value; 15,000,000 shares authorized, none issued

 

ExlService Holdings, Inc. Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 100,000,000 shares authorized, 37,703,974 shares issued and 34,253,291 shares outstanding as of September 30, 2018 and 36,790,751 shares issued and 33,888,733 shares outstanding as of December 31, 2017
38

 
37

Additional paid-in capital
344,720

 
322,246

Retained earnings
480,387

 
427,064

Accumulated other comprehensive loss
(114,330
)
 
(45,710
)
Total including shares held in treasury
710,815

 
703,637

Less: 3,450,683 shares as of September 30, 2018 and 2,902,018 shares as of December 31, 2017, held in treasury, at cost
(136,609
)
 
(103,816
)
Stockholders’ equity
574,206

 
599,821

Non-controlling interest
242

 
224

Total equity
574,448

 
600,045

Total liabilities and equity
$
1,045,137

 
$
824,775

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share and per share amounts)

 
Three months ended September 30,
 
Nine months ended September 30,

2018
 
2017
 
2018
 
2017
Revenues, net
$
231,124

   
$
192,345

 
$
648,209

 
$
564,435

Cost of revenues(1)
152,157

   
123,077

 
429,907

 
365,883

Gross profit(1)
78,967

 
69,268

 
218,302

 
198,552

Operating expenses:

   

 
 
 
 
       General and administrative expenses
28,704

   
26,545

 
85,610

 
75,007

       Selling and marketing expenses
16,490

   
12,196

 
45,593

 
38,631

       Depreciation and amortization
14,099

   
9,582

 
35,185

 
28,489

Total operating expenses
59,293

 
48,323

 
166,388

 
142,127

Income from operations
19,674

   
20,945

 
51,914

 
56,425

Foreign exchange gain, net
1,385

   
637

 
3,414

 
1,905

Interest expense
(2,475
)
 
(482
)
 
(3,719
)
 
(1,380
)
Other income, net
2,466

   
2,796

 
8,232

 
8,495

Income before income tax expense
21,050

 
23,896

 
59,841

 
65,445

Income tax expense
5,739

 
2,819

 
6,796

 
7,202

Loss from equity-method investment
62

 

 
176

 

Net income attributable to ExlService Holdings, Inc. stockholders
$
15,249

 
$
21,077

 
$
52,869

 
$
58,243

Earnings per share attributable to ExlService Holdings, Inc. stockholders:
 
 
 
 
 
 
 
Basic
$
0.44

 
$
0.62

 
$
1.53

 
$
1.72

Diluted
$
0.43

 
$
0.60

 
$
1.50

 
$
1.66

Weighted-average number of shares used in computing earnings per share attributable to ExlService Holdings, Inc. stockholders:
 
   
 
 
 
 
 
Basic
34,458,520

   
33,838,374

 
34,472,232

 
33,834,392

Diluted
35,207,991

 
35,043,987

 
35,217,814

 
35,048,672


(1) Exclusive of depreciation and amortization.



See accompanying notes to unaudited consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME (UNAUDITED)
(In thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018

2017
 
2018
 
2017
Net income
$
15,249

 
$
21,077

 
$
52,869

 
$
58,243

Other comprehensive (loss)/income:
 
 
 
 
 
 
 
Unrealized (loss)/gain on effective cash flow hedges, net of taxes ($3,596), $314, ($7,969) and $3,895, respectively
(8,348
)
 
524

 
(21,218
)
 
8,216

Foreign currency translation (loss)/gain
(18,373
)
 
(3,030
)
 
(44,403
)
 
10,813

Reclassification adjustments
 
 
 
 

 

Loss/(gain) on cash flow hedges, net of taxes $19, ($604), ($1,183) and ($1,497), respectively(1)
46

 
(1,375
)
 
(2,890
)
 
(3,397
)
Retirement benefits, net of taxes ($4), $30, ($6) and $77, respectively(2)
(34
)
 
42

 
(109
)
 
135

Total other comprehensive (loss)/income
$
(26,709
)
 
$
(3,839
)
 
$
(68,620
)
 
$
15,767

Total comprehensive (loss)/income
$
(11,460
)
 
$
17,238

 
$
(15,751
)
 
$
74,010


(1)
These are reclassified to net income and are included either in cost of revenues or operating expenses, as applicable in the unaudited consolidated statements of income. Refer to Note 17 to the unaudited consolidated financial statements.
(2)
These are reclassified to net income and are included in other income, net in the unaudited consolidated statements of income. Refer to Note 20 to the unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(In thousands, except share and per share amounts)

 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Treasury Stock
 
Non - Controlling Interest
 
Total Equity
 
 
 
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
Balance as of December 31, 2017
36,790,751

 
$
37

 
$
322,246

 
$
427,064

 
$
(45,710
)
 
(2,902,018
)
 
$
(103,816
)
 
$
224

 
$
600,045

Impact of adoption of Topic 606

 

 

 
454

 

 

 

 

 
454

Balance as of January 1, 2018
36,790,751

 
37

 
322,246

 
427,518

 
(45,710
)
 
(2,902,018
)
 
(103,816
)
 
224

 
600,499

Stock issued on exercise/vesting of equity awards/business acquisition
913,223

 
1

 
5,163

 

 

 

 

 

 
5,164

Stock-based compensation

 

 
17,311

 

 

 

 

 

 
17,311

Acquisition of treasury stock

 

 

 

 

 
(548,665
)
 
(32,793
)
 

 
(32,793
)
Non-controlling interest

 

 

 

 

 

 

 
18

 
18

Other comprehensive loss

 

 

 

 
(68,620
)
 

 

 

 
(68,620
)
Net income

 

 

 
52,869

 

 

 

 

 
52,869

Balance as of September 30, 2018
37,703,974

 
$
38

 
$
344,720

 
$
480,387

 
$
(114,330
)
 
(3,450,683
)
 
$
(136,609
)
 
$
242

 
$
574,448




 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Treasury Stock
 
Non - Controlling Interest
 
Total Equity
 
 
 
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
Balance as of December 31, 2016
35,699,819

 
$
36

 
$
284,646

 
$
382,722

 
$
(75,057
)
 
(2,071,710
)
 
$
(60,362
)
 
$
193

 
$
532,178

Impact of adoption of ASU 2016-09

 

 
5,999

 
(4,546
)
 

 

 

 

 
1,453

Balance as of January 1, 2017
35,699,819

 
$
36

 
$
290,645

 
$
378,176

 
$
(75,057
)
 
(2,071,710
)
 
$
(60,362
)
 
$
193

 
$
533,631

Stock issued on exercise/vesting of equity awards
825,873

 
1

 
4,275

 

 

 

 

 

 
4,276

Stock-based compensation

 

 
16,771

 

 

 

 

 

 
16,771

Acquisition of treasury stock

 

 

 

 

 
(649,020
)
 
(32,336
)
 

 
(32,336
)
Non-controlling interest

 

 

 

 

 

 

 
14

 
14

Other comprehensive income

 

 

 

 
15,767

 

 

 

 
15,767

Net income

 

 

 
58,243

 

 

 

 

 
58,243

Balance as of September 30, 2017
36,525,692

 
$
37

 
$
311,691

 
$
436,419

 
$
(59,290
)
 
(2,720,730
)
 
$
(92,698
)
 
$
207

 
$
596,366



See accompanying notes to unaudited consolidated financial statements.


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EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Nine months ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
52,869

 
$
58,243

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
35,345

 
28,771

Stock-based compensation expense
17,311

 
16,771

Unrealized gain on short term investments
(5,423
)
 
(4,437
)
Unrealized foreign exchange (gain)/loss, net
(14,375
)
 
446

Deferred income tax benefit
(986
)
 
(5,417
)
Allowances for doubtful accounts receivable
(620
)
 
2,706

Loss from equity-method investment
176

 

Others, net
193

 
12

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(9,354
)
 
(22,064
)
Prepaid expenses and other current assets
(3,344
)
 
5,194

Accounts payable
(1,414
)
 
371

Deferred revenue
(5,199
)
 
(8,155
)
Accrued employee costs
(7,680
)
 
(915
)
Accrued expenses and other liabilities
(436
)
 
267

Advance income tax, net
(4,228
)
 
(2,607
)
Other assets
(5,984
)
 
1,241

Net cash provided by operating activities
46,851

 
70,427

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(30,070
)
 
(26,759
)
Business acquisition (net of cash acquired)
(231,918
)
 
(724
)
Purchase of investments
(57,957
)
 
(197,897
)
Proceeds from redemption of investments
79,536

 
54,238

Net cash used for investing activities
(240,409
)
 
(171,142
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Principal payments on capital lease obligations
(105
)
 
(133
)
Proceeds from borrowings
245,000

 

Repayments of borrowings
(5,083
)
 

Acquisition of treasury stock
(32,793
)
 
(32,336
)
Proceeds from exercise of stock options
1,084

 
4,276

Net cash provided by/(used for) financing activities
208,103

 
(28,193
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(3,008
)
 
1,802

Net increase/(decrease) in cash, cash equivalents, and restricted cash
11,537

 
(127,106
)
Cash, cash equivalents, and restricted cash at beginning of period
94,277

 
220,394

Cash, cash equivalents, and restricted cash at end of period
$
105,814

 
$
93,288

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Non-cash investing and financing transaction
 
 
 
Restricted common stock issued for business acquisition
$
4,080

 
$



See accompanying notes to unaudited consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(In thousands, except share and per share amounts)
1. Organization
ExlService Holdings, Inc. (“ExlService Holdings”) is organized as a corporation under the laws of the state of Delaware. ExlService Holdings, together with its subsidiaries and affiliates (collectively, the “Company”), operates in the Business Process Management (“BPM”) industry providing operations management services and analytics services that help businesses enhance revenue growth and improve profitability. Using its proprietary platforms, methodologies and tools, the Company looks deeper to help companies improve global operations, enhance data-driven insights, increase customer satisfaction, and manage risk and compliance. The Company’s clients are located principally in the United States of America (“U.S.”) and the United Kingdom (“U.K”).
2. Summary of Significant Accounting Policies
(a) Basis of Preparation and Principles of Consolidation
The unaudited consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (“US GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
The unaudited consolidated financial statements reflect all adjustments (of a normal and recurring nature) that management considers necessary for a fair presentation of such statements for the interim periods presented. The unaudited consolidated statements of income for the interim periods presented are not necessarily indicative of the results for the full year or for any subsequent period.
The accompanying unaudited consolidated financial statements include the financial statements of ExlService Holdings and all of its subsidiaries. The standalone financial statements of subsidiaries are fully consolidated on a line-by-line basis. Intra-group balances and transactions, and income and expenses arising from intra-group transactions, are eliminated while preparing those financial statements. The un-realized gains resulting from intra-group transactions are also eliminated. Similarly, the un-realized losses are eliminated, unless the transaction provides evidence as to impairment of the asset transferred.
Accounting policies of the respective individual subsidiary and associate are aligned, wherever necessary, so as to ensure consistency with the accounting policies that are adopted by the Company under US GAAP.
The Company’s investments in equity affiliates are initially recorded at cost and any excess cost over proportionate share of the fair value of the net assets of the investee at the acquisition date is recognized as goodwill. The proportionate share of net income or loss of the investee is recognized in the unaudited consolidated statements of income.
Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to the parent and it represents the minority partner’s interest in the operations of ExlService Colombia S.A.S. Non-controlling interest consists of the amount of such interest at the date of obtaining control over the subsidiary, and the non-controlling interest's share of changes in equity since that date. The non-controlling interest in the operations for all periods presented were insignificant and is included under general and administrative expenses in the unaudited consolidated statements of income.
(b) Use of Estimates
The preparation of the unaudited consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the unaudited consolidated statements of income during the reporting period. Although these estimates are based on management’s best assessment of the current business environment, actual results may be different from those estimates. The significant estimates and assumptions that affect the financial statements include, but are not limited to, allowance for doubtful receivables, recoverability of dues from statutory authorities, assets and obligations related to employee benefit plans, deferred tax valuation allowances, income-tax uncertainties and other contingencies, valuation of derivative financial instruments, assumptions used to calculate stock-based compensation expense, depreciation and amortization periods, purchase price allocation, recoverability of long-term assets including goodwill and intangibles, and estimated costs to complete fixed price contracts.

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)


(c) Employee Benefits
Contributions to defined contribution plans are charged to the consolidated statements of income in the period in which services are rendered by the covered employees. Current service costs for defined benefit plans are accrued in the period to which they relate. The liability in respect of defined benefit plans is calculated annually by the Company using the projected unit credit method. Prior service cost, if any, resulting from an amendment to a plan is recognized and amortized over the remaining period of service of the covered employees.
The Company recognizes its liabilities for compensated absences depending on whether the obligation is attributable to employee services already rendered, relates to rights that vest or accumulate and payment is probable and estimable.
Effective January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2017-07, Compensation -Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post Retirement Benefit Cost. Pursuant to this, the Company retrospectively adopted the presentation of service cost separate from other components of net periodic costs for each period presented. The interest cost, expected return on plan assets and amortization of actuarial gains/loss, have been reclassified from “Cost of revenues”, “General and administrative expenses” and “Selling and marketing expenses” to “Other income, net”. Refer to Note 20 to the unaudited consolidated financial statements for details.
(d) Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with an original maturity of ninety days or less to be cash equivalents. Pursuant to the Company’s investment policy, surplus funds are invested in highly-rated debt mutual funds, money market accounts and time deposits to reduce its exposure to market risk with regard to these funds.
Restricted cash represents amounts on deposit with banks against bank guarantees issued through banks in favor of relevant statutory authorities for equipment imports, deposits for obtaining indirect tax registrations and for demands against pending income tax assessments (refer to Note 25 to the unaudited consolidated financial statements for details). These deposits with banks have maturity dates after September 30, 2019. Restricted cash presented under current assets represents funds held on behalf of clients in dedicated bank accounts.
Effective January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. Pursuant to this adoption, for the purpose of unaudited statements of cash flows, the Company includes in its cash and cash-equivalent balances those amounts that have been classified as restricted cash and restricted cash equivalents for each period presented.
(e) Revenue Recognition
Revenue is recognized when services are provided to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for our services.
Revenue is measured based on consideration specified in a contract with a customer and excludes discounts and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by providing services to a customer.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.  
Adoption of ASU 2014-09 Topic 606, Revenue from Contracts with Customers (Topic 606)
On January 1, 2018, the date of initial application, the Company adopted Topic 606 using the modified retrospective method by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of equity, resulting in an increase of $454, primarily due to new contract acquisition costs. The initial application scopes in those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with Company’s historical accounting under Topic 605. The key area impacted upon adoption of Topic 606 relates to the accounting for sales commissions costs. Specifically, under Topic 606 a portion of sales commission costs have been recorded as an asset and recognized as an operating expense on a straight-line basis over the life of the contract. Prior to adoption, the Company was expensing sales commission costs as incurred.


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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)

Nature of services
The Company derives its revenues from operations management and analytics services. The Company operates in the business process management (“BPM”) industry providing operations management and analytics services helping businesses enhance revenue growth and improve profitability. The Company provides BPM or “operations management” services, which typically involve transfer to the Company of business operations of a client, after which it administers and manages those operations for its client on an ongoing basis. The Company also provides industry-specific digital transformational services related to operations management services, and analytics services that focus on driving improved business outcomes for clients by generating data-driven insights across all parts of their business. The Company also provides care optimization and reimbursement optimization services, for its clients through its healthcare analytics solutions and services. The Company offers integrated solutions to help its clients with cost containment by leveraging technology platforms, customizable and configurable analytics and expertise in healthcare reimbursements to help clients enhance their claims payment accuracy.
Arrangements with Multiple Performance Obligations
The Company’s contracts with customers do not generally bundle different services together except for software and related services contracts, which are not significant, involving implementation services and post contract maintenance services. In such software and related services contracts, revenue is allocated to each performance obligation based on the relative standalone selling price.
A separate contract is generally drafted for each type of service sold, even if to the same customer. The typical length of a contract is 3 to 5 years for our operations management contracts.
Type of Contracts
i.
a) Revenues under time-and-material, transaction and outcome-based contracts are recognized as the services are performed. When the terms of the client contract specify service level parameters that must be met (such as turnaround time or accuracy), the Company monitors such service level parameters to determine if any service credits or penalties have been incurred. Revenues are recognized net of any penalties or service credits that are due to a client.
b) In respect of arrangements involving subcontracting, in part or whole of the assigned work, the Company evaluates revenues to be recognized based on guidance on “Principal versus agent considerations” in Topic 606.
ii.
Revenues for Company’s fixed-price contracts are recognized using the time-elapsed output method because the Company transfers control evenly during execution of its projects. Determining a measure of progress requires management to make judgments that affect the timing of revenue recognized. The Company regularly monitors its estimates for progress on completion of a project and records changes in the period in which a change in an estimate is determined. If a change in an estimate results in a projected loss on a project, such loss is recognized in the period in which it is identified.
iii.
Revenues from the Company's software and related services contracts, which are not significant, are primarily related to maintenance renewals or incremental license fees for additional users. Maintenance revenues are generally recognized on a straight-line basis over the annual contract term. Fees for incremental license fees without any associated services are recognized upon delivery of the related incremental license.
iv.
Revenues from reimbursement optimization services having contingent fee arrangements are recognized by the Company at the point in time when a performance obligation is satisfied, which is when it identifies an overpayment claim and the same is acknowledged by its customers. In such contracts, the Company’s consideration is contingent upon the actual collections made by its customers and subsequent potential retraction claims. Based on guidance on “variable consideration” in Topic 606, the Company uses its historical experience and projections to determine the expected recoveries from its customers and recognizes revenue based upon such expected recoveries. Any adjustment required due to change in estimates are recorded in the period in which such change is identified.

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)


Unbilled receivables represents revenues recognized for services rendered between the last billing date and the balance sheet date. Unbilled receivables also include revenues recognized from reimbursement optimization services when the Company identifies an overpayment claim and the same is acknowledged by its customers, however not invoiced at the balance sheet date. Accordingly, amounts for services that the Company has performed and for which an invoice has not yet been issued to the customers are presented as a part of contract assets as accounts receivable.

The Company has deferred revenue attributable to certain process transition activities, with respect to its customers where such activities do not represent separate performance obligations. Revenues related to such transition activities are contract liabilities classified under “Deferred Revenue” in the Company's consolidated balance sheets and subsequently recognized ratably over the period in which the related services are performed. Deferred revenue also includes the amount for which services have been rendered but other conditions of revenue recognition are not met, for example where the Company does not have persuasive evidence of an arrangement with customer. Costs related to such transition activities are contract fulfillment costs, and thereby classified under “Other Current Assets” and “Other Assets” in the consolidated balance sheets, and are recognized ratably over the estimated expected period of benefit, under Cost of Revenues in the consolidated statements of income.

Other incremental and direct costs incurred for acquiring contracts, such as sales commissions are contract acquisition costs and thereby classified under “Other Current Assets” and “Other Assets” in the consolidated balance sheets. Such costs are amortized over the expected period of benefit and recorded under Selling and marketing expenses in the consolidated statements of income.

Any upfront payments made to customers are contract assets and classified under “Other Current Assets and Other Assets” in the consolidated balance sheets. Such costs are amortized over the expected period of benefit and are recorded as an adjustment to transaction price and reduced from revenues.
Reimbursements of out-of-pocket expenses received from clients are included as part of revenues.

Payment terms
All Contracts entered into by the Company specify the payment terms and are defined for each contract separately. Usual payment terms range between 30-60 days. The Company does not have any extended payment terms clauses in existing contracts. At times, the Company enters into fixed price contracts and software licenses involving significant implementation wherein the milestones are defined such that the Company can recover the costs with a reasonable margin.

Variable Consideration
Variability in the transaction price arises primarily due to service level agreements, cost of living adjustments, and pre-payment and volume discounts.
The Company considers its experience with similar transactions and expectations regarding the contract in estimating the amount of variable consideration that should be recognized during a period.
The Company believes that the expected value method is most appropriate for determining the variable consideration since the company has large number of contracts with similar nature of transactions/services.

Allocation of transaction price to performance obligations
The transaction price is allocated to performance obligations on a relative standalone selling price basis. Standalone selling prices are estimated by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract.  In assessing whether to allocate variable consideration to a specific part of the contract, the Company considers the nature of the variable payment and whether it relates specifically to its efforts to satisfy a specific part of the contract.

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)


Practical expedients and exemptions
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

(f) Recent Accounting Pronouncements    
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842), which requires the identification of arrangements that should be accounted for as leases. In general, lease arrangements exceeding a twelve months term should be recognized as assets with corresponding liabilities on the balance sheet of the lessee. This ASU requires recording a right-of-use asset and lease obligation for all leases, whether operating or finance, while the income statement will reflect lease expense for operating leases and amortization and interest expense for finance leases. The balance sheet amount recorded for existing leases at the date of adoption of this ASU must be calculated using the applicable incremental borrowing rate. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and the implementation approach to be used.
In June 2016, FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is to be deducted from the amortized cost of the financial asset(s) so as to present the net carrying value at the amount expected to be collected on the financial asset. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendment should be applied through a modified retrospective approach. Early adoption as of the fiscal years beginning after December 15, 2018 is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
In June 2018, FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting. This ASU involves several aspects of the accounting for non-employee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees. The amendments in this ASU affect all entities that enter into share-based payment transactions for acquiring goods and services from non-employees. This ASU is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year.  Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The adoption of this ASU is not expected to have any material effect on the Company’s consolidated financial statements.
In July 2018, FASB issued ASU No. 2018-11, Leases (Topic 842), which provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and the implementation approach to be used.
In August 2018, FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity is permitted to early adopt either the entire standard or only the provisions that eliminate or modify requirements. The adoption of this ASU is not expected to have any material effect on the Company’s consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)


In August 2018, FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this Update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The amendments in ASU are effective for fiscal years beginning after December 15, 2020. An entity is permitted to early adopt this Update. The adoption of this ASU is not expected to have any material effect on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the ASU requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in FASB Accounting Standard Codification Subtopic 350-40 on internal-use software to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The ASU 2018-15 also provides guidance on amortization and impairment of any costs capitalized, along with new presentation and disclosure requirements. The new guidance is effective for fiscal years beginning after December 15, 2019.  Early adoption is permitted and both prospective and retrospective transition methods are allowed. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

(g) Recently Adopted Accounting Pronouncements
In May 2014, FASB issued ASU No. 2014-09 (Topic 606) "Revenue from Contracts with Customers." Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. Refer to Note 4 to the unaudited consolidated financial statements for details.
In August 2016, FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The amendments apply to all entities that are required to present a statement of cash flows under Topic 230. The amendments are an improvement to US GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice. The amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within those annual periods and should be applied using a retrospective transition method to each period presented. The Company has adopted the guidance retrospectively to each period presented. The adoption does not have any material effect on the presentation of its unaudited consolidated statements of cash flows.
In November 2016, FASB issued ASU No. 2016-18, Statement of cash flows (Topic 230) - Restricted cash. The amendments apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. The amendments in this update require that a statement of cash flows should explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within those annual periods and should be applied using a retrospective transition method to each period presented. Early adoption is permitted with an adjustment reflected as of the beginning of the fiscal year in which the amendment is adopted. The Company has adopted the guidance retrospectively to each period presented. The adoption does not have any material effect on the presentation of its unaudited consolidated statements of cash flows. Refer to Note 6 to the unaudited consolidated financial statements for details.
In January 2017, FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017 and should be applied prospectively. The Company has adopted the guidance effective January 1, 2018. The adoption does not have any material effect on its unaudited consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)


In March, 2017, FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost. The ASU amends ASC 715, Compensation — Retirement Benefits, to require employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic pension cost and net periodic post-retirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in non-operating expenses. The update also stipulates that only the service cost component of net benefit cost is eligible for capitalization. The amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within those annual periods and should be applied using a retrospective transition method to each period presented. The Company has adopted the guidance retrospectively to each period presented. Refer to Note 2(c) and Note 20 to the unaudited consolidated financial statements for details.
In May 2017, FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. Modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company has adopted the guidance effective January 1, 2018. The adoption does not have any material effect on its unaudited consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)

3. Segment and Geographical Information

The Company operates in the BPM industry and is a provider of operations management and analytics services. The Company has eight operating segments, which are strategic business units that align its products and services with how it manages its business, approaches its key markets and interacts with its clients. Six of those operating segments provide BPM or “operations management” services, five of which are industry-focused operating segments (Insurance, Healthcare, Travel, Transportation and Logistics, Banking and Financial Services, and Utilities) and one of which is a “capability” operating segment (Finance and Accounting) that provides services to clients in our industry-focused segments as well as clients across other industries. In each of these six operating segments, the Company provides operations management services, which typically involve transfer to the Company of the business operations of a client, after which it administers and manages those operations for its client on an ongoing basis. The remaining two operating segments are Consulting, which provides industry-specific transformational services related to operations management services, and Analytics, which provides services that focus on driving improved business outcomes for clients by generating data-driven insights across all parts of their business.

The Company presents information for the following reportable segments:

Insurance
Healthcare
Travel, Transportation and Logistics (“TT&L”)
Finance and Accounting (“F&A”)
Analytics, and
All Other (consisting of the Company's remaining operating segments, which are the Banking and Financial Services, Utilities and Consulting operating segments).

The chief operating decision maker (“CODM”) generally reviews financial information such as revenues, cost of revenues and gross profit, disaggregated by the operating segments to allocate an overall budget among the operating segments.

The Company does not allocate and therefore the CODM does not evaluate other operating expenses, interest expense or income taxes by segment. Many of the Company’s assets are shared by multiple operating segments. The Company manages these assets on a total Company basis, not by operating segment, and therefore asset information and capital expenditures by operating segment are not presented.

The July 2018 acquisition of SCIOinspire Holdings Inc. (“SCIO”) is included in the Analytics reportable segment.

Revenues and cost of revenues for the three months ended September 30, 2018 and 2017, respectively, for each of the reportable segments, are as follows:
 
 
Three months ended September 30, 2018
 
Insurance
 
Healthcare
 
TT&L
 
F&A
 
All Other
 
Analytics
 
Total
 
 
Revenues, net
$
64,303

 
$
20,375

 
$
17,278

 
$
24,517

 
$
21,944

 
$
82,707

 
$
231,124

 
Cost of revenues(1)
43,524

 
15,797

 
9,958

 
14,917

 
14,323

 
53,638

 
152,157

 
Gross profit(1)
$
20,779

 
$
4,578

 
$
7,320

 
$
9,600

 
$
7,621

 
$
29,069

 
$
78,967

 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
59,293

 
Foreign exchange gain, interest expense and other income, net
 
 
 
 
 
 
 
 
 
 
 
 
1,376

 
Income tax expense
 
 
 
 
 
 
 
 
 
 
 
 
5,739

 
Loss from equity-method investment
 
 
 
 
 
 
 
 
 
 
 
 
62

 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
$
15,249

(1) Exclusive of depreciation and amortization.

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)

 
 
Three months ended September 30, 2017
 
Insurance
 
Healthcare
 
TT&L
 
F&A
 
All Other
 
Analytics
 
Total
 
 
Revenues, net
$
59,608

 
$
18,871

 
$
18,496

 
$
21,642

 
$
19,984

 
$
53,744

 
$
192,345

 
Cost of revenues(1)*
39,174

 
12,072

 
9,996

 
12,634

 
13,571

 
35,630

 
123,077

 
Gross profit(1)*
$
20,434

 
$
6,799

 
$
8,500

 
$
9,008

 
$
6,413

 
$
18,114

 
$
69,268

 
Operating expenses*
 
 
 
 
 
 
 
 
 
 
 
 
48,323

 
Foreign exchange gain, interest expense and other income, net*
 
 
 
 
 
 
 
 
 
 
 
 
2,951

 
Income tax expense
 
 
 
 
 
 
 
 
 
 
 
 
2,819

 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
$
21,077

(1) Exclusive of depreciation and amortization.

Revenues and cost of revenues for the nine months ended September 30, 2018 and 2017, respectively, for each of the reportable segments, are as follows:
 
 
Nine months ended September 30, 2018
 
Insurance
 
Healthcare
 
TT&L
 
F&A
 
All Other
 
Analytics
 
Total
 
 
Revenues, net
$
193,018

 
$
62,989

 
$
53,326

 
$
72,717

 
$
66,732

 
$
199,427

 
$
648,209

 
Cost of revenues(1)
129,984

 
49,752

 
31,026

 
44,189

 
44,587

 
130,369

 
429,907

 
Gross profit(1)
$
63,034

 
$
13,237

 
$
22,300

 
$
28,528

 
$
22,145

 
$
69,058

 
$
218,302

 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
166,388

 
Foreign exchange gain, interest expense and other income, net
 
 
 
 
 
 
 
 
 
 
 
 
7,927

 
Income tax expense
 
 
 
 
 
 
 
 
 
 
 
 
6,796

 
Loss from equity-method investment
 
 
 
 
 
 
 
 
 
 
 
 
176

 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
$
52,869

(1) Exclusive of depreciation and amortization.

 
 
Nine months ended September 30, 2017
 
Insurance
 
Healthcare
 
TT&L
 
F&A
 
All Other
 
Analytics
 
Total
 
 
Revenues, net
$
173,784

 
$
56,726

 
$
53,374

 
$
63,694

 
$
62,547

 
$
154,310

 
$
564,435

 
Cost of revenues(1)*
117,675

 
36,687

 
30,457

 
37,398

 
42,629

 
101,037

 
365,883

 
Gross profit(1)*
$
56,109

 
$
20,039

 
$
22,917

 
$
26,296

 
$
19,918

 
$
53,273

 
$
198,552

 
Operating expenses*
 
 
 
 
 
 
 
 
 
 
 
 
142,127

 
Foreign exchange gain, interest expense and other income, net*
 
 
 
 
 
 
 
 
 
 
 
 
9,020

 
Income tax expense
 
 
 
 
 
 
 
 
 
 
 
 
7,202

 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
$
58,243


(1) Exclusive of depreciation and amortization.


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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)

*The Company early adopted ASU 2017-12, Derivative and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. Pursuant to this adoption, effective January 1, 2017, the resultant foreign exchange gain/(loss) upon settlement of cash flow hedges are recorded along with the underlying hedged item in the same income statement line as either part of “Cost of revenues”, “General and administrative expenses”, “Selling and marketing expenses”, "Depreciation and amortization”, as applicable. Refer to Note 17 to the unaudited consolidated financial statements for details.
Revenues, net of the Company by service type, were as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
BPM and related services(1)
$
148,417

 
$
138,601

 
$
448,782

 
$
410,125

Analytics services
82,707

 
53,744

 
199,427

 
154,310

Total
$
231,124

 
$
192,345

 
$
648,209

 
$
564,435


(1) BPM and related services include revenues of the Company's five industry-focused operating segments, one capability operating segment and the consulting operating segment, which provides services related to operations management services. Refer to segment disclosure above.

The Company attributes the revenues to regions based upon the location of its customers.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues, net
 
 
 
 
 
 
 
United States
$
191,671

 
$
158,501

 
$
536,956

 
$
462,676

Non-United States
 
 
 
 
 
 
 
          United Kingdom
29,901

 
26,824

 
85,397

 
81,857

          Rest of World
9,552

 
7,020

 
25,856

 
19,902

Total Non-United States
39,453

 
33,844

 
111,253

 
101,759

 
$
231,124

 
$
192,345

 
$
648,209

 
$
564,435


Property and equipment, net by geographic area, were as follows:
 
As of
 
September 30, 2018
 
December 31, 2017
Property and equipment, net
 
 
 
India
$
33,995

 
$
39,143

United States
24,689

 
16,371

Philippines
6,000

 
8,217

Rest of World
2,991

 
3,026

 
$
67,675

 
$
66,757


4. Revenues, net
Adoption of ASU 2014-09 Topic 606, Revenue from Contracts with Customers
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method and applied its guidance to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605.The Company recorded a net addition to opening equity of $454 as of January 1, 2018 due to the cumulative impact of adopting Topic 606, primarily due to contract acquisition costs.

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)

The adoption of Topic 606 did not have a significant impact on the measurement or recognition of revenues during the three and nine months ended September 30, 2018.
Refer to Note 3 to the unaudited consolidated financial statements for revenues disaggregated by reportable segments and geography.

Contract balances
The following table provides information about accounts receivable, contract assets and contract liabilities from contracts with customers:
 
As of
September 30, 2018
 
December 31, 2017
Accounts receivable, net
$
164,307

 
$
135,705

Contract assets
$
5,766

 
$
2,643

Contract liabilities
 
 
 
     Deferred revenue (advance payments portion)
$
7,481

 
$
9,311


Accounts receivable includes $71,538 and $49,125 as of September 30, 2018 and December 31, 2017, respectively, representing amounts not billed to customers. The Company has accrued the unbilled receivables for work performed in accordance with the terms of contracts with customers and considers no significant performance risk associated with its unbilled receivables.

Contract assets represents upfront payments made to customers.
Contract liabilities represents that portion of deferred revenue for which payments have been received in advance from customers including revenues attributable to certain process transition activities for which costs have been capitalized by the Company as contract fulfillment costs. The contract liabilities are included within deferred revenues in the consolidated balance sheet and are recognized as revenue as (or when) the performance obligation is fulfilled under the contract.
Revenue recognized from the carrying value of contract liabilities as of December 31, 2017 during the three and nine months ended September 30, 2018 was $1,644 and $8,025, respectively.
Contract acquisition costs
The Company had contract acquisition costs of $1,087 as of September 30, 2018. As of January 1, 2018, the Company capitalized $454 as contract acquisition costs related to contracts that were not completed. Further, the Company capitalized an additional $186 and $858 during the three and nine months ended September 30, 2018, respectively, and amortized $72 and $225 during the three and nine months ended September 30, 2018, respectively. There was no impairment loss in relation to costs capitalized. The capitalized costs are being amortized on a straight-line basis over the life of contract.
Contract fulfillment costs
The Company had deferred contract fulfillment costs relating to transition activities of $4,179 and $2,769 as of September 30, 2018 and December 31, 2017, respectively. The Company capitalized an additional $1,455 and $2,140 during the three and nine months ended September 30, 2018, respectively, and amortized $335 and $730 during the three and nine months ended September 30, 2018, respectively. There was no impairment loss in relation to costs capitalized. The capitalized costs are being amortized on a straight line basis over the life of contract.
Consideration received from customers, if any, relating to such transition activities are classified under Contract Liabilities and are recognized ratably over the period in which the related performance obligations are fulfilled.


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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)

5. Earnings Per Share
Basic earnings per share is computed by dividing net income to common stockholders by the weighted average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted average number of common shares plus the potentially dilutive effect of common stock equivalents (outstanding stock options, restricted stock and restricted stock units) issued and outstanding at the reporting date, using the treasury stock method. Stock options, restricted stock and restricted stock units that are anti-dilutive are excluded from the computation of weighted average shares outstanding.
The following table sets forth the computation of basic and diluted earnings per share:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income
$
15,249

 
$
21,077

 
$
52,869

 
$
58,243

Denominators:
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
34,458,520

 
33,838,374

 
34,472,232

 
33,834,392

Dilutive effect of share based awards
749,471

 
1,205,613

 
745,582

 
1,214,280

Diluted weighted average common shares outstanding
35,207,991

 
35,043,987

 
35,217,814

 
35,048,672

Earnings per share attributable to ExlService Holdings Inc. stockholders:
 
 
 
 
 
 
 
Basic
$
0.44

 
$
0.62

 
$
1.53

 
$
1.72

Diluted
$
0.43

 
$
0.60

 
$
1.50

 
$
1.66

Weighted average potentially dilutive shares considered anti-dilutive and not included in computing diluted earnings per share
256

 

 
161,792

 
151,961

6. Cash, Cash Equivalents and Restricted Cash
For the purpose of unaudited statements of cash flows, cash, cash equivalents and restricted cash comprise of the following:
 
As of
 
September 30, 2018
 
September 30, 2017
Cash and cash equivalents
$
97,636

 
$
87,665

Restricted cash (current)
4,679

 
1,913

Restricted cash (non-current)
3,499

 
3,710

 
$
105,814

 
$
93,288

7. Other Income, net
Other income, net consists of the following:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Interest and dividend income
$
523

 
$
322

 
$
1,160

 
$
1,317

Gain on sale of mutual funds
2,180

 
2,556

 
7,007

 
6,777

Others, net
(237
)
 
(82
)
 
65

 
401

Other income, net
$
2,466

 
$
2,796

 
$
8,232

 
$
8,495


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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)

8. Property and Equipment, net
Property and equipment, net consist of the following:

Estimated useful lives
 
As of
 
(Years)
 
September 30, 2018
 
December 31, 2017
Owned Assets:
 
 
 
 
 
Network equipment and computers
3-5
 
$
78,693

 
$
77,587

Software
3-5
 
63,668

 
59,325

Leasehold improvements
3-8
 
37,079

 
38,857

Office furniture and equipment
3-8
 
19,354

 
19,667

Motor vehicles
2-5
 
556

 
638

Buildings
30
 
1,097

 
1,245

Land
 
718

 
815

Capital work in progress
 
10,407

 
9,184

 
 
 
211,572

 
207,318

Less: Accumulated depreciation and amortization
 
 
(144,285
)
 
(141,059
)
 
 
 
$
67,287

 
$
66,259

Assets under capital leases:
 
 
 
 
 
Leasehold improvements
 
 
$
712

 
$
941

Office furniture and equipment
 
 
7

 
167

Motor vehicles
 
 
550

 
710

 
 
 
1,269

 
1,818

Less: Accumulated depreciation and amortization
 
 
(881
)
 
(1,320
)
 
 
 
$
388

 
$
498

Property and equipment, net
 
 
$
67,675

 
$
66,757

Capital work in progress represents advances paid towards acquisition of property and equipment and cost incurred to develop software not yet ready to be placed in service.
The depreciation and amortization expense excluding amortization of acquisition-related intangibles recognized in the unaudited consolidated statements of income was as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Depreciation and amortization expense
$
7,381

 
$
6,095

 
$
20,759

 
$
17,997

Effective January 1, 2017, the depreciation and amortization expenses set forth above includes the effect of foreign exchange gain/(loss) upon settlement of cash flow hedges, amounting to ($33) and $125 for the three months ended and $160 and $282 for the nine months ended September 30, 2018 and 2017, respectively. Refer to Note 17 to the unaudited consolidated financial statements for further details.




20

Table of Contents
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)

Internally developed software costs, included under Software, was as follows:
 
As of
 
September 30, 2018
 
December 31, 2017
Cost
$
7,625

 
$
2,571

Less : Accumulated amortization
(1,950
)
 
(976
)
 
$
5,675

 
$
1,595


9. Business Combinations, Goodwill and Intangible Assets
SCIOinspire Holdings Inc.

On July 1, 2018, the Company, through its wholly owned subsidiary ExlService.com, LLC (“Buyer”) and Buyer’s wholly owned subsidiary, ExlService Cayman Merger Sub, completed the acquisition of SCIO pursuant to an Agreement of Merger dated April 28, 2018 (the "Merger Agreement"). ExlService Cayman Merger Sub, merged with and into SCIO, with SCIO surviving the merger as a wholly-owned subsidiary of the Buyer.

SCIO is a health analytics solution and services company serving over 100 healthcare organizations representing over 130 million covered lives across the continuum including providers, health plans, pharmacy benefit managers, employers, health services and global life sciences companies. The acquisition is expected to significantly strengthen the Company’s capability in the high growth cost optimization and care optimization markets. The acquisition of SCIO is included in the Analytics reportable segment.

The preliminary estimated aggregate purchase consideration was $245,491, including estimated cash and cash equivalents acquired and incorporating estimated post-closing adjustments. The aggregate base purchase consideration payable at closing of the merger was $236,500 based on completion of diligence, which was adjusted based on, among other things, SCIO’s cash, debt, working capital position and other adjustments as of the Closing as set forth in the Merger Agreement. To finance the acquisition at Closing, the Company utilized its revolving credit facility in the amount of $233,000, issued 69,459 shares of restricted common stock of the Company in the amount of $4,080 and paid the balance with available cash on hand.

Pursuant to the Company’s business combinations accounting policy, the total estimated purchase consideration for SCIO was allocated to identifiable net tangible and intangible assets based upon their preliminary fair values. The excess of the estimated purchase consideration over fair value of identifiable net tangible and intangible assets was recorded as goodwill. The preliminary purchase price allocation is subject to change during the one-year measurement period as the Company obtains additional information about these net tangible and intangible assets. In order to allocate the consideration transferred for SCIO, the fair values of all identifiable assets and liabilities must be established. For accounting and financial reporting purposes, fair value is defined under ASC Topic 820, “Fair Value Measurement and Disclosure” as the price that would be received upon sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, fair value measurements for an asset assume the highest and best use of that asset by market participants. Use of different estimates and judgments could yield different results.









    

21

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)

        


The Company’s preliminary purchase price allocation to net tangible and intangible assets of SCIO is as follows:

Assets:
 
 
Cash and cash equivalents
 
$
10,026

Restricted cash
 
2,790

Accounts receivable
 
19,924

Other current assets
 
1,798

Property and equipment
 
1,824

Other assets
 
1,751

Intangible assets
 
 
Customer relationships
 
47,800

Developed technology
 
28,900

Trade names and trademarks
 
3,700

 
 
118,513

Liabilities:
 
 
Current liabilities
 
(11,679
)
Deferred tax liabilities
 
(19,052
)
Other non-current liabilities
 
(200
)
 
 
(30,931
)
 
 
 
Net assets acquired
 
$
87,582

Goodwill
 
157,909

Total purchase consideration
 
$
245,491


The fair values of the trade names and trademarks intangible assets were determined by using an “income approach”, specifically the relief-from-royalty approach. The basic principle of the relief-from-royalty method is that without ownership of the subject intangible asset, the user of that intangible asset would have to make a stream of payments to the owner of the asset in return for the rights to use that asset. By acquiring the intangible asset, the user avoids these payments. Therefore, a portion of SCIO’s earnings, equal to the after-tax royalty that would have been paid for the use of the asset, can be attributed to the firm’s ownership. The trade names and trademarks are being amortized on a straight-line basis (which approximates the economic pattern of benefits) over the estimated economic life of 3 years.

The fair values of the developed technology intangible assets were also determined by the relief-from-royalty approach. Similarly, this approach is based on the assumption that in lieu of ownership, a firm would be willing to pay a royalty in order to exploit the related benefits of the technology. Therefore, a portion of SCIO’s earnings, equal to the after-tax royalty that would have been paid for the use of the technology, can be attributed to the firm’s ownership of the technology. The technology assets are being amortized on a straight-line basis (which approximates the economic pattern of benefits) over the estimated economic life of 5 years.

The fair values of the customer relationships were determined by using an “income approach”, specifically the Multi-Period Excess Earnings Method ("MPEEM"). The MPEEM is a specific application of the discounted cash flow method. The principle behind the MPEEM is that the value of an intangible asset is equal to the present value of the incremental after-tax cash flows attributable only to the subject intangible asset after deducting Contributory Asset Charges ("CAC"). The principle behind a CAC is that an intangible asset ‘rents’ or ‘leases’ from a hypothetical third party all the assets it requires to produce the cash flows resulting from its development, that each project rents only those assets it needs (including elements of goodwill) and not the ones that it does not need, and that each project pays the owner of the assets a fair return on (and of, when appropriate) the value of the

22

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)

rented assets. The customer relationship assets are being amortized on a straight-line basis (which approximates the economic pattern of benefits) over the estimated economic life of 10 years.

The goodwill recognized is attributable primarily to expected synergies from continuing operations of SCIO and the Company. The amount of goodwill recognized from SCIO's acquisition is not deductible for tax purposes. The goodwill has been assigned to our Analytics reportable segment based upon the Company’s assessment of nature of services rendered by SCIO.

Supplemental Pro Forma Data

The Company completed the acquisition of SCIO on July 1, 2018 and accordingly SCIO’s operations for the period from July 1, 2018 to September 30, 2018 are included in the Company’s consolidated statements of income. SCIO contributed revenues of $19,205 for the period from the completion of acquisition through September 30, 2018. The Company does not allocate other operating expenses, interest expense or income taxes by legal entity, and therefore the Company has not presented earnings of SCIO for the period from the completion of acquisition through September 30, 2018. The following unaudited pro forma results of operations have been prepared using the acquisition method of accounting to give effect to the SCIO acquisition as though it occurred on January 1, 2017. The pro forma amounts reflect certain adjustments, such as amortization of intangible assets acquired, interest expense related to borrowings not assumed by the Company and stock based compensation expense. The unaudited pro forma financial information is presented for illustrative purposes only, is based on a preliminary purchase price allocation, and is not necessarily indicative of the results of operations that would have actually been reported had the acquisitions occurred on January 1, 2017, nor is it necessarily indicative of the future results of operations of the combined company.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues, net
$
231,124

 
$
210,263

 
$
689,269

 
$
615,157

Net income
$
15,395

 
$
19,580

 
$
51,666

 
$
51,820

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.45

 
$
0.58

 
$
1.50

 
$
1.53

Diluted
$
0.44

 
$
0.56

 
$
1.47

 
$
1.47


Health Integrated, Inc.
On December 22, 2017, a wholly owned subsidiary of the Company entered into an Asset Purchase Agreement to acquire substantially all the assets and assumed certain liabilities of Health Integrated, Inc. (“Health Integrated”), a company based in Tampa, Florida. The initial purchase price consisted of $22,577 in cash including working capital adjustment. The purchase agreement allows sellers the ability to earn up to $5,000 as earn-out, based on the achievement of certain performance goals by the acquired Health Integrated business during the 2018 calendar year. The earn-out was fair valued at $920 as of December 31, 2017. As of September 30, 2018 fair value of earn-out is Nil.
A portion of the purchase price otherwise payable was placed into escrow as security for the post-closing working capital adjustments and the indemnification obligations under the Asset Purchase Agreement.
Health Integrated provides dedicated care management services on behalf of health plans. Its services include case management, utilization management, disease management, special needs programs and multichronic care management. Health Integrated serves millions of lives in the Medicaid, Medicare, and dual eligible populations. It is known for its strong capabilities in improving member health status through behavioral change. Accordingly, the Company paid a premium for the acquisition, which is reflected in the goodwill recognized from the purchase price allocation. The acquisition of Health Integrated is included in the Healthcare reportable segment.

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Table of Contents
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)

The Company finalized its purchase price allocation for the acquisition based on their fair values as set forth below:
 
 
Amount
Tangible Assets
 
$
5,475

Liabilities
 
(5,733
)
Identifiable Intangible Assets:
 
 
        Customer relationships
 
6,760

        Developed technology
 
1,510

        Trade names and trademarks
 
570

Goodwill
 
14,229

Total purchase price
 
$
22,811


The amount of goodwill recognized from the Health Integrated acquisition is deductible for tax purposes.

The customer relationships from the Health Integrated acquisition are being amortized over the weighted average useful life of 7.0 years and developed technology and trademarks are being amortized over the useful life of 1.0 year and 2.0 years, respectively.

Acquisition-related costs

Acquisition-related costs are being expensed as incurred and are included in general and administrative expenses in the unaudited consolidated statements of income. The Company recognized acquisition-related costs, which were incurred to effect business combination, for its SCIO and Health Integrated acquisitions of $323 and $457 during the three months ended September 30, 2018 and 2017, respectively, and recognized $1,230 and $505 for the nine months ended September 30, 2018 and 2017, respectively.
Goodwill
The following table sets forth details of the Company’s goodwill balance as of September 30, 2018:
 
Insurance
 
Healthcare
 
TT&L
 
F&A
 
All Other
 
Analytics
 
Total
Balance as at January 1, 2017
$
38,110

 
$
19,276

 
$
12,983

 
$
47,537

 
$
5,326

 
$
63,538

 
$
186,770

Acquisitions

 
15,957

 

 

 

 

 
15,957

Currency translation adjustments
223

 

 
696

 
835

 

 

 
1,754

Balance as at December 31, 2017
$
38,333

 
$
35,233

 
$
13,679

 
$
48,372

 
$
5,326

 
$
63,538

 
$
204,481

Acquisitions

 

 

 

 

 
157,909

 
157,909

Measurement period adjustments*

 
(1,728
)
 

 

 

 

 
(1,728
)
Currency translation adjustments
(93
)
 

 
(1,380
)
 
(1,656
)
 

 

 
(3,129
)
Balance as at September 30, 2018
$
38,240

 
$
33,505

 
$
12,299

 
$
46,716

 
$
5,326

 
$
221,447

 
$
357,533


* Subsequent to December 31, 2017, adjustments of $1,728 have been made to the Health Integrated amounts of net tangible assets acquired and the earn-out with the corresponding offsets to goodwill. These adjustments are within the measurement period and have been accounted for prospectively. These adjustments did not have a significant impact on the Company’s unaudited consolidated statements of income, balance sheets or cash flows.


24

Table of Contents
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2018
(In thousands, except share and per share amounts)

Intangible Assets
Information regarding the Company’s intangible assets is set forth below:

As of September 30, 2018

Gross
Carrying Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Finite-lived intangible assets:


 


 


Customer relationships
$
129,788

 
$
(52,570
)
 
$
77,218

Leasehold benefits
2,545

 
(2,425
)
 
120

Developed technology
44,677

 
(13,043
)
 
31,634

Non-compete agreements
2,045

 
(1,899
)
 
146

Trade names and trademarks
9,642

 
(4,861
)
 
4,781

 
$
188,697

 
$
(74,798
)
 
$
113,899

Indefinite-lived intangible assets:
 
 
 
 
 
Trade names and trademarks
$
900

 
$

 
$
900

Total intangible assets
$
189,597

 
$
(74,798
)
 
$
114,799

 
As of December 31, 2017
 
Gross
Carrying Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Finite-lived intangible assets:
 
 
 
 
 
Customer relationships
$
82,165

 
$
(43,667
)
 
$
38,498

Leasehold benefits
2,888

 
(2,596
)
 
292

Developed technology
15,835

 
(8,749
)
 
7,086

Non-compete agreements
2,045

 
(1,780
)
 
265

Trade names and trademarks
5,951

 
(4,034
)
 
1,917

 
$
108,884

 
$
(60,826
)
 
$
48,058

Indefinite-lived intangible assets:
 
 
 
 
 
Trade names and trademarks
$
900

 
$