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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________________________
FORM 10-Q
_________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019
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.)
 
 
 
 
320 Park Avenue,
29th Floor,
 

New York,
New York
 
10022
(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      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      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
 
  
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  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value per share
EXLS
NASDAQ
As of October 25, 2019, there were 34,094,635 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.
 
 
 

2


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, 2019
 
December 31, 2018
 
 
(Unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
101,432

 
$
95,881

Short-term investments
 
179,340

 
184,489

Restricted cash
 
5,412

 
5,608

Accounts receivable, net
 
179,702

 
164,752

Prepaid expenses
 
9,364

 
11,326

Advance income tax, net
 
3,002

 
9,639

Other current assets
 
27,974

 
28,240

Total current assets
 
506,226

 
499,935

Property and equipment, net
 
78,471

 
73,510

Operating lease right-of-use assets
 
88,753

 

Restricted cash
 
2,441

 
2,642

Deferred tax assets, net
 
6,190

 
6,602

Intangible assets, net
 
78,845

 
95,495

Goodwill
 
349,530

 
349,984

Other assets
 
32,967

 
31,015

Investment in equity affiliate
 
2,555

 
2,753

Total assets
 
$
1,145,978

 
$
1,061,936

Liabilities and equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
3,658

 
$
5,653

Current portion of long-term borrowings
 
20,876

 
21,423

Deferred revenue
 
9,585

 
7,722

Accrued employee costs
 
59,568

 
54,893

Accrued expenses and other current liabilities
 
69,876

 
64,169

Current portion of operating lease liabilities
 
23,516

 

Income taxes payable
 
575

 
1,012

Current portion of finance lease liabilities
 
248

 
223

Total current liabilities
 
187,902

 
155,095

Long term borrowings
 
223,916

 
263,241

Finance lease liabilities, less current portion
 
436

 
315

Deferred tax liabilities, net
 
720

 
8,445

Operating lease liabilities, less current portion
 
76,080

 

Other non-current liabilities
 
9,241

 
16,521

Total liabilities
 
498,295

 
443,617

Commitments and contingencies (Refer Note 26)
 


 


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, 38,322,354 shares issued and 34,107,851 shares outstanding as of September 30, 2019 and 37,850,544 shares issued and 34,222,476 shares outstanding as of December 31, 2018
 
38

 
38

Additional paid-in capital
 
386,060

 
364,179

Retained earnings
 
530,547

 
484,244

Accumulated other comprehensive loss
 
(86,153
)
 
(83,467
)
Total including shares held in treasury
 
830,492

 
764,994

Less: 4,214,503 shares as of September 30, 2019 and 3,628,068 shares as of December 31, 2018, held in treasury, at cost
 
(182,809
)
 
(146,925
)
Stockholders’ equity
 
647,683

 
618,069

Non-controlling interest
 

 
250

Total equity
 
647,683

 
618,319

Total liabilities and equity
 
$
1,145,978

 
$
1,061,936

See accompanying notes to unaudited consolidated financial statements.

3


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,
 
 
2019
 
2018
 
2019
 
2018
Revenues, net
 
$
251,392

   
$
231,124

 
$
734,474

   
$
648,209

Cost of revenues(1)
 
167,542

   
152,157

 
487,228

   
429,907

Gross profit(1)
 
83,850

 
78,967

 
247,246

 
218,302

Operating expenses:
 

   

 
 
   
 
General and administrative expenses
 
29,590

 
28,704

 
93,349

   
85,610

Selling and marketing expenses
 
18,302

 
16,490

 
53,996

   
45,593

Depreciation and amortization
 
13,047

 
14,099

 
39,466

   
35,185

Impairment and restructuring charges
 
489

 

 
7,296

 

Total operating expenses
 
61,428

 
59,293

 
194,107

 
166,388

Income from operations
 
22,422

   
19,674

 
53,139

   
51,914

Foreign exchange gain, net
 
1,009

   
1,385

 
3,471

   
3,414

Interest expense
 
(3,180
)
 
(2,475
)
 
(10,626
)
 
(3,719
)
Other income, net
 
4,563

   
2,466

 
13,088

   
8,232

Income before income tax expense and earnings from equity affiliates
 
24,814

 
21,050

 
59,072

 
59,841

Income tax expense
 
5,701

 
5,739

 
12,571

 
6,796

Income before earnings from equity affiliates
 
19,113

 
15,311

 
46,501

 
53,045

Loss from equity-method investment
 
69

 
62

 
198

 
176

Net income attributable to ExlService Holdings, Inc. stockholders
 
$
19,044

 
$
15,249

 
$
46,303

 
$
52,869

Earnings per share attributable to ExlService Holdings, Inc. stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.55

 
$
0.44

 
$
1.35

 
$
1.53

Diluted
 
$
0.55

 
$
0.43

 
$
1.33

 
$
1.50

Weighted-average number of shares used in computing earnings per share attributable to ExlService Holdings, Inc. stockholders:
 
 
   
 
 
 
   
 
Basic
 
34,322,449

   
34,458,520

 
34,382,787

   
34,472,232

Diluted
 
34,699,497

 
35,207,991

 
34,744,968

 
35,217,814


(1) Exclusive of depreciation and amortization.



See accompanying notes to unaudited consolidated financial statements.

4


Table of Contents

EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (UNAUDITED)
(In thousands)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019

2018
 
2019
 
2018
Net income
 
$
19,044

 
$
15,249

 
$
46,303

 
$
52,869

Other comprehensive income/(loss):
 
 
 
 
 
 
 
 
Unrealized gain/(loss) on effective cash flow hedges, net of taxes ($1,791), ($3,596), $91 and ($7,969), respectively
 
(1,805
)
 
(8,348
)
 
5,538

 
(21,218
)
Foreign currency translation loss
 
(8,104
)
 
(18,373
)
 
(4,820
)
 
(44,403
)
Reclassification adjustments
 

 
 
 
 
 
 
(Gain)/loss on cash flow hedges, net of taxes $133, $19, ($73) and ($1,183), respectively(1)
 
(1,837
)
 
46

 
(3,186
)
 
(2,890
)
Retirement benefits, net of taxes $9, ($4), $99 and ($6), respectively(2)
 
(49
)
 
(34
)
 
(218
)
 
(109
)
Total other comprehensive loss
 
$
(11,795
)
 
$
(26,709
)
 
$
(2,686
)
 
$
(68,620
)
Total comprehensive income/(loss)
 
$
7,249

 
$
(11,460
)
 
$
43,617

 
$
(15,751
)

(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 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 Note 20 to the unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

5


Table of Contents

EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
For the three months ended September 30, 2019 and 2018
(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 June 30, 2019
38,295,083

 
$
38

 
$
378,633

 
$
511,503

 
$
(74,358
)
 
(4,088,759
)
 
$
(174,463
)
 
$

 
$
641,353

Stock issued against stock-based compensation plans
27,271

 

 

 

 

 

 

 

 

Stock-based compensation

 

 
7,427

 

 

 

 

 

 
7,427

Acquisition of treasury stock

 

 

 

 

 
(125,744
)
 
(8,346
)
 

 
(8,346
)
Purchase of non-controlling interest

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 
(11,795
)
 

 

 

 
(11,795
)
Net income

 

 

 
19,044

 

 

 

 

 
19,044

Balance as of September 30, 2019
38,322,354

 
$
38

 
$
386,060

 
$
530,547

 
$
(86,153
)
 
(4,214,503
)
 
$
(182,809
)
 
$

 
$
647,683



 
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 June 30, 2018
37,583,160

 
$
38

 
$
334,643

 
$
465,138

 
$
(87,621
)
 
(3,294,846
)
 
$
(126,952
)
 
$
233

 
$
585,479

Stock issued against stock-based compensation plans
120,814

 

 
4,733

 

 

 

 

 

 
4,733

Stock-based compensation

 

 
5,344

 

 

 

 

 

 
5,344

Acquisition of treasury stock

 

 

 

 

 
(155,837
)
 
(9,657
)
 

 
(9,657
)
Non-controlling interest

 

 

 

 

 

 

 
9

 
9

Other comprehensive loss

 

 

 

 
(26,709
)
 

 

 

 
(26,709
)
Net income

 

 

 
15,249

 

 

 

 

 
15,249

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

 
$
38

 
$
344,720

 
$
480,387

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

 
$
574,448


6


Table of Contents

EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
For the nine months ended September 30, 2019 and 2018
(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 January 1, 2019
37,850,544

 
$
38

 
$
364,179

 
$
484,244

 
$
(83,467
)
 
(3,628,068
)
 
$
(146,925
)
 
$
250

 
$
618,319

Stock issued against stock-based compensation plans
471,810

 

 
338

 

 

 

 

 

 
338

Stock-based compensation

 

 
21,538

 

 

 

 

 

 
21,538

Acquisition of treasury stock

 

 

 

 

 
(586,435
)
 
(35,884
)
 

 
(35,884
)
Allocation of equity component related to issuance costs on convertible senior notes

 

 
(13
)
 

 

 

 

 

 
(13
)
Purchase of non-controlling interest, net of its share of income

 

 
18

 

 

 

 

 
(250
)
 
(232
)
Other comprehensive loss

 

 

 

 
(2,686
)
 

 

 

 
(2,686
)
Net income

 

 

 
46,303

 

 

 

 

 
46,303

Balance as of September 30, 2019
38,322,354

 
$
38

 
$
386,060

 
$
530,547

 
$
(86,153
)
 
(4,214,503
)
 
$
(182,809
)
 
$

 
$
647,683




 
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 ASU 2016-09

 

 

 
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 against stock-based compensation plans
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


See accompanying notes to unaudited consolidated financial statements.


7


Table of Contents

EXLSERVICE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Nine months ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
46,303

 
$
52,869

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
39,633

 
35,345

Stock-based compensation expense
21,538

 
17,311

Amortization of operating lease right-of-use assets
20,544

 

Unrealized gain on short term investments
(7,443
)
 
(5,423
)
Unrealized foreign exchange loss/(gain), net
19

 
(14,375
)
Deferred income tax benefit
(6,859
)
 
(986
)
Allowance for doubtful accounts receivable
433

 
(620
)
Loss from equity-method investment
198

 
176

Amortization of non-cash interest expense related to convertible senior notes
1,836

 

Impairment charges
3,167

 

Others, net
(148
)
 
193

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(16,475
)
 
(9,354
)
Prepaid expenses and other current assets
752

 
(3,344
)
Advance income tax, net
6,212

 
(4,228
)
Other assets
(1,307
)
 
(5,597
)
Accounts payable
(1,847
)
 
(1,414
)
Deferred revenue
3,247

 
(5,199
)
Accrued employee costs
3,420

 
(7,680
)
Accrued expenses and other liabilities
12,160

 
(436
)
Operating lease liabilities
(19,428
)
 

Net cash provided by operating activities
105,955

 
47,238

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(32,308
)
 
(30,070
)
Purchase of non-controlling interest
(241
)
 

Business acquisition (net of cash acquired)

 
(231,918
)
Purchase of investments
(117,934
)
 
(57,957
)
Proceeds from redemption of investments
129,143

 
79,536

Net cash used for investing activities
(21,340
)
 
(240,409
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Principal payments on finance lease liabilities
(274
)
 
(105
)
Proceeds from borrowings
46,000

 
245,000

Repayments of borrowings
(87,763
)
 
(5,083
)
Payment of debt issuance costs
(117
)
 
(387
)
Acquisition of treasury stock
(35,884
)
 
(32,793
)
Proceeds from exercise of stock options
338

 
1,084

Net cash (used for) / provided by financing activities
(77,700
)
 
207,716

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(1,761
)
 
(3,008
)
Net increase in cash, cash equivalents and restricted cash
5,154

 
11,537

Cash, cash equivalents and restricted cash at beginning of period
104,131

 
94,277

Cash, cash equivalents and restricted cash at end of period
$
109,285

 
$
105,814

 
 
 
 
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.

8


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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(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, 2018.
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 gains and losses arising from intra-group transactions, are eliminated while preparing those financial statements.
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.

(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, expected recoverability from customers with contingent fee arrangements, 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, assumptions used to determine incremental borrowing rate to calculate lease liabilities and right-of-use (“ROU”) assets, lease term to calculate lease cost, depreciation and amortization periods, purchase price allocation, recoverability of long-lived 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, 2019
(In thousands, except share and per share amounts)


(c) Employee Benefits
Contributions to defined contribution plans are charged to the unaudited 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.
The Company includes the service cost component of the net periodic benefit cost in the same line item or items as other compensation costs arising from services rendered by the respective employees during the period. The interest cost, expected return on plan assets and amortization of actuarial gains/loss are classified in “Other income, net”. Refer 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 Note 26 to the unaudited consolidated financial statements for details). These deposits with banks have maturity dates after September 30, 2020. Restricted cash presented under current assets represents funds held on behalf of clients in dedicated bank accounts.
For purposes of the 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.

(e) Revenue Recognition
Revenue is recognized when services are provided to the Company's customers, in an amount that reflects the consideration which the Company expects to be entitled to in exchange for the services provided.
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.  
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.

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2019
(In thousands, except share and per share amounts)


Type of Contracts
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.
Revenues from arrangements involving subcontracting, either in part or whole of the assigned work, are recognized after Company’s assessment of “Principal versus agent considerations”. The Company evaluates whether it is in control of the services before the same are transferred to the customer to assess whether it is Principal or Agent in the arrangement. Revenues are recognized on Gross basis if the Company is in the capacity of Principal and on Net basis if it falls in the capacity of an agent.
c.
Revenues for the Company’s fixed-price contracts are recognized using the proportional performance method when the pattern of performance under the contracts can be reasonably determined. The Company estimates the proportional performance of a contract by comparing the actual number of hours or days worked to the estimated total number of hours or days required to complete each engagement. The use of the proportional performance method requires significant judgment relative to estimating the number of hours or days required to complete the contracted scope of work, including assumptions and estimates relative to the length of time to complete the project and the nature and complexity of the work to be performed. The Company regularly monitors its estimates for completion of a project and record 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 first identified.
d.
Revenue from the Company’s software and related services contracts, which are not significant, are primarily related to annual 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 without any associated services are recognized upon delivery of the related incremental license.
To a lesser extent, certain contracts may include offerings such as sale of licenses, which may be perpetual or subscription-based. The Company recognizes revenue from distinct perpetual licenses upfront at a point in time when the software is made available to the client, whereas for a combined software license and services performance obligation, revenue is recognized over the period that the services are performed.
Revenue from distinct subscription based licenses is recognized over the period of service performed. Revenue from any associated maintenance or ongoing support services is recognized over the term of the contract.
e.
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.
Modification to contracts

The Company’s contracts may be modified to add, remove or change existing performance obligations. The accounting for modifications to contracts involves assessing whether the services added to an existing contract are distinct and whether the pricing is at the standalone selling price. Services added that are distinct and at standalone selling price are accounted on a prospective basis either as a separate contract, or as a termination of existing contract and creation of a new contract.

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

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2019
(In thousands, except share and per share amounts)

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.

Variable Consideration

Variability in the transaction price arises primarily due to service level agreements, 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.

Unbilled Receivables

Unbilled receivables represent 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 unbilled receivables under accounts receivable.

Deferred Revenue

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 over the period in which the related services are performed. 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 over the estimated expected period of benefit, under Cost of Revenues in the consolidated statements of income. 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 an enforceable contract.

Contract Acquisition Cost

Direct and incremental 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.

Upfront payment made to customer

Upfront payments, if any, 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.



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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2019
(In thousands, except share and per share amounts)

Out of pocket expenses

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.

Remaining Performance Obligation

The Company does not disclose the value of remaining performance obligations by applying the practical expedient provided in Topic 606, for contracts that meet any of the following criteria:

i.
Contract with an original expected length of one year or less as determined under ASC 606,
ii.
Contracts for which Company recognize revenue based on the right to invoice for service performed.
Accounts Receivable

The Company records accounts receivable net of allowances for doubtful accounts. Allowances for doubtful accounts are established through the evaluation of aging of accounts receivables, prior collection experience, current market conditions, clients’ financial condition and the amount of accounts receivables in dispute to estimate the collectability of these accounts receivables.

(f) Leases

The Company determines if an arrangement is a lease at inception of the contract. Operating leases are included in "operating lease right-of-use ("ROU") assets", "current portion of operating lease liabilities" and "operating lease liabilities, less current portion" in the Company's unaudited consolidated balance sheets. Finance leases are included in "property and equipment", "current portion of finance lease liabilities" and "finance lease liabilities, less current portion" in the Company's unaudited consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. For leases in which the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease terms include the effects of options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating lease arrangements is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for separately.

On January 1, 2019, the date of initial application, the Company adopted, Leases (Topic 842), using the modified retrospective method. The modified retrospective method provides a method of recognizing those leases which had not expired as of the date of adoption of January 1, 2019. The prior period unaudited consolidated financial statements have not been retrospectively adjusted and continues to be reported under Topic 840.

The Company elected the practical expedient permitted under the transition guidance under Topic 842, which amongst other matters, allowed the Company (i) not to apply the recognition requirements to short-term leases (leases with a lease term of 12 months or less), (ii) not to reassess whether any expired or existing contracts are or contain leases, (iii) not to reassess the lease classification for any expired or existing leases, and (iv) not to reassess initial direct costs for any existing leases.

The adoption resulted in the recognition of ROU assets of $80,328 (net of deferred rent of $8,626) and lease liabilities of $88,954 for operating leases as of January 1, 2019. The Company's accounting for finance leases remained substantially unchanged.

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Table of Contents
EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2019
(In thousands, except share and per share amounts)

The adoption had no impact on opening balance of retained earnings. Refer Note 21 to the unaudited consolidated financial statements for details.

(g) Recent Accounting Pronouncements    

In June 2016, the Financial Accounting Standards Board ("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 based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The new guidance replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. These changes will result in earlier recognition of credit losses. 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. Early adoption as of the fiscal years beginning after December 15, 2018 is permitted. The amendment should be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. The Company expects that the impact of adoption of this guidance will not have material effect on its consolidated financial statements including accounting policies, processes, and systems.
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.
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 ASU 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. Early adoption is permitted. The adoption of this ASU is not expected to have any material effect on the Company’s consolidated financial statements.
In August 2018, 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.
In April 2019, FASB issued ASU No. 2019-04, Codification Improvements to Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Financial Instruments: Targeted Transition Relief (Topic 825). The amendments clarify the scope of the credit losses standard and address issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. With respect to hedge accounting, the amendments address partial-term fair value hedges, fair value hedge basis adjustments, and certain transition requirements, among other things. With respect to recognizing and measuring financial instruments, the amendment in ASU address the scope of the guidance, the requirement for remeasurement under ASC 820 when using the measurement alternative, certain disclosure requirements and which equity securities have to be remeasured at historical exchange rates. This ASU is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2019
(In thousands, except share and per share amounts)

In May 2019, FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. This ASU provide entities with the option to irrevocably elect the fair value option, on an instrument-by-instrument basis in accordance with Subtopic 825-10, for certain financial instruments that are within the scope of Subtopic 326-20, upon adopting Topic 326. The fair value option election does not apply to held-to-maturity debt securities. The amendments in this Update provide entities with targeted transition relief that is intended to increase comparability of financial statement information for some entities that otherwise would have measured similar financial instruments using different measurement methodologies. This ASU is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

(h) Recently Adopted Accounting Pronouncements
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842), which requires the identification of arrangements that should be accounted for as leases. 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 recognition of an ROU asset and lease obligation for those leases classified as operating leases under Topic 840, while the income statement will reflect lease expense for operating leases. The balance sheet amounts recorded for existing operating leases at the date of adoption of this ASU must be calculated using the applicable incremental borrowing rate. The Company adopted Topic 842 as of January 1, 2019 using the modified retrospective method provided by ASU 2018-11. The adoption had a material impact on the Company's unaudited consolidated balance sheets, but did not have a material impact on the Company's unaudited consolidated income statements and unaudited consolidated statements of cash flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while the Company's accounting for finance leases remained substantially unchanged. Refer Note 21 to the unaudited consolidated financial statements for details.
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 Company adopted Topic 842 as of January 1, 2019 using this ASU. Refer Note 21 to the unaudited consolidated financial statements for details.
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 i