Description
The documentation on the Financial analysis of Genpact and EXL and also lists down the various financial ratios used for the analysis.
Financial Analysis of Genpact and EXL
BPO Industry
BPO service providers work with clients to develop and deliver business operational improvements with the goal of achieving higher performance at lower costs. Outsourcing can enable organizations to enhance profitability and increase efficiency and reliability, permitting them to concentrate on their core areas of competence. BPO is a long-term strategic commitment for companies that, once implemented, is generally not subject to cyclical spending or information technology budget reductions. Organizations outsource their key business processes to third parties to reduce costs, improve process quality, handle increased transaction volumes and ensure redundancy. Increased global demand, cost improvements in international communications and the automation of many business services have created a significant opportunity for offshore business process service providers, and many companies are moving select office processes to providers with the capacity to perform these functions from overseas locations. Demand for offshore BPO services has grown substantially in recent years. The NASSCOMMcKinsey report published by the National Association of Software and Service Companies and McKinsey & Company in December 2005 estimates that the offshore BPO industry will grow at a 37.0% compound annual growth rate, from $11.4 billion in fiscal 2005 to $55.0 billion in fiscal 2010. The report identifies the banking and insurance industries as representing 50% of the potential offshore BPO market and estimates that providers have captured
Key Facts about Genpact from the Audit Report for the year ending 31st December 2007 Business Overview
We manage business processes for companies around the world. We combine our process expertise, information technology expertise and analytical capabilities, together with operational insight derived from our experience in diverse industries, to provide a wide range of services using our global delivery platform. Our goal is to help our clients improve the ways in which they do business by continuously improving their business processes including through the application of Six Sigma and Lean principles and leveraging technology. We strive to be a seamless extension of our clients' operations. As of December 31, 2007, we have more than 32,600 employees with operations in nine countries. In 2007, we had net revenues of $822.7 million, of which 41.3% was from clients other than GE, which we refer to as Global Clients.
The Company The 2004 Reorganization Prior to December 30, 2004, our business was conducted through various entities and divisions of GE. On December 30, 2004, in a series of transactions we refer to as the "2004 Reorganization," GE reorganized these operations by placing them all under Genpact Global Holdings SICAR S.à.r.l., or GGH, a newly formed Luxembourg entity. GE's affiliate, GE Capital International (Mauritius) also sold an indirect 60% interest in GGH to Genpact Investment Co. (Lux) SICAR S.à.r.l., or GICo, an entity owned in equal portions by General Atlantic LLC, or General Atlantic, and Oak Hill Capital Partners, or Oak Hill. On
December 16, 2005, GE's affiliate sold a portion of its equity in us to a subsidiary of Wachovia Corporation. On December 22, 2006, we redeemed shares held by GE affiliates. On December 18, 2007, GE's affiliate, GE Capital (Mauritius) Holdings Ltd., sold a further portion of its equity in us to an affiliate of a limited partner of one of our shareholders. As of December 31, 2007, GE, through its affiliates, owned 18.8% of our outstanding equity. Following the 2004 Reorganization, we began operating as an independent company. We separated ourselves operationally from GE and began building the capabilities necessary to be successful as an independent company. Among other things, we expanded our management infrastructure and business development capabilities so that we could secure business from clients other than GE. We substantially expanded administrative functions for which we had previously relied primarily on GE, such as finance, legal, accounting and human resources. We created separate employee benefit and retirement plans, developed our own leadership training capability and enhanced our management information systems.
The 2007 Reorganization and IPO On March 29, 2007, we formed Genpact Limited in Bermuda to be the new holding company for our business. It was initially a wholly-owned subsidiary of GGH. On July 13, 2007, we effectuated a transaction that resulted in Genpact Limited owning 100% of the capital stock of GGH. This transaction together with other related transactions is referred to as the "2007 Reorganization." This transaction occurred by the shareholders of GGH exchanging their common shares of GGH for common shares of Genpact Limited and the shareholders of Genpact Global (Lux) S.à.r.l., or GGL, exchanging their common and preferred shares of GGL for common shares of Genpact Limited. In addition, as part of the 2007 Reorganization, Genpact Global (Lux) S.à.r.l., or GGL, which owned approximately 63% of the outstanding equity of GGH, became a wholly owned subsidiary of Genpact Limited pursuant to a share exchange. GGL had no operations or assets other than its ownership interest in GGH, and had no liabilities other than obligations for accumulated dividends on preferred shares that were eliminated in the 2007 Reorganization and certain tax liabilities of $2.1 million that were paid on July 27, 2007. GE, through its affiliate GE Capital (International) Mauritius Holdings Ltd., and GICo reimbursed us for such tax liabilities in accordance with their agreement to indemnify us for such liabilities. As part of the 2007 Reorganization, GGH became a Bermuda company and changed its name to Genpact Global Holding (Bermuda) Limited and GGL also became a Bermuda company, in accordance with the laws of Bermuda and Luxembourg and its name was changed to Genpact Global (Bermuda) Limited. We use the terms "Genpact", "Company", "we" and "us" to refer to both GGH and its subsidiaries prior to July 13, 2007 and Genpact Limited and its subsidiaries after such date. On August 1, 2007, we commenced an initial public offering of our common shares, pursuant to which we and certain of our existing shareholders each sold 17.65 million common shares at a price of $14 per share. The offering resulted in gross proceeds of $494.1 million and net proceeds to us and the selling shareholders of approximately $233.5 million each after deducting underwriting discounts and commissions. Additionally, we incurred offering-related expenses of approximately $9.0 million. On August 14, 2007, the underwriters exercised their option to purchase 5.29 million additional common shares from us at the initial offering price of $14 per share to cover over-allotments resulting in additional gross proceeds of $74.1 million and net proceeds of approximately $70.0 million to us, after deducting underwriting discounts and commissions.
Our Services We provide a wide range of services to our clients. We group our services into the following categories: • finance and accounting; • collections and customer service; • insurance; • supply chain and procurement; • analytics; • enterprise application; and • IT infrastructure.
Industries We provide our services across a wide range of industries including banking and financial services, insurance, manufacturing, transportation and health care. We set forth below a table showing our net revenues in 2007 attributable to the various industry groups that we serve.
Year Ended December 31, 2007 (Net revenues in millions)
Industry
Banking, financial services and insurance Manufacturing Others
$
361.1 346.9 114.7
Total
$
822.7
Our Clients
Our clients include some of the best known companies in the world, many of which are leaders in their respective industries. GE has been our largest client and we benefit from a long-term contract whereby GE has committed to purchase stipulated minimum dollar amounts of services through 2014. Since our separation from GE, we have actively marketed our services to other companies and have succeeded in building a diversified client base. Many of these relationships are at an early stage and we believe they offer opportunities for growth. GE accounted for approximately 58.5% of our revenues in fiscal 2007. We currently provide services to all of GE's business units including Commercial Finance, GE Money, Healthcare, Industrial, Infrastructure and NBC Universal as well as to GE's corporate head office. The services we currently provide to GE are broad in their nature and are drawn from all of our service offerings. Although we have a single master services agreement, or MSA, with GE, we have approximately 2,700 statements of work, or SOWs, with GE. Currently, as a general matter, each GE business unit makes its own decisions as to whether to enter into a SOW with us and as to the terms of any such SOW. Therefore, although some decisions may be made centrally at GE, our revenues from GE are generally attributable to a number of different businesses each with its own senior manager responsible for decision-making regarding outsourcing. We have secured over 70 new Global Clients in a variety of industries since January 1, 2005. Our net revenues from Global Clients have rapidly increased in the last three years, from $42.2 million in 2005 to $158.3 million in 2006 and $340.2 million in 2007. Our net revenues from Global Clients as a percentage of total net revenues increased from 8.6% in 2005 to 25.8% in 2006 and 41.3% in 2007. The 2006 net revenues from Global Clients include $39.4 million for businesses that were part of GE in 2005 and were included in net revenues from GE in 2005. The 2007 net revenues from Global Clients include $14.2 million for businesses that were part of GE in 2006. See Item 7—"Management's Discussion and Analysis of Results of Operations and Financial Condition—Classification of Certain Net Revenues." The majority of our Global Clients are based in the United States, and we also have Global Clients in Europe, Asia and Australia. Our contracts with our clients generally take the form of an MSA, which is a framework agreement that is then supplemented by SOWs. Our MSAs specify the general terms applicable to the services we will provide. For a discussion of the components of our MSAs and SOWs see Item 7—Management's Discussion and Analysis of Results of Operations and Financial Condition—Overview—Revenues."
Over the next few years we will lose certain tax benefits provided in India to companies in our industry and it is not clear whether new tax policies will provide equivalent benefits and incentives. Under the Indian Income Tax Act, 1961, our Delivery Centers in India, from which we derived the majority of our revenues in fiscal 2007, benefit from a ten-year holiday from Indian corporate income taxes in respect of their export income (as defined in the legislation) under the Software Technology Parks of India ("STPI") Scheme. As a result of this tax holiday, prior to 2007 we incurred minimal income tax expense with respect to our Indian operations. In the absence of this tax holiday, income derived from our Indian operations would be taxed up to the maximum tax rate generally applicable to Indian enterprises, which, as of December 31, 2007, was 33.99%. The tax holiday enjoyed by our Delivery Centers in India under the STPI Scheme expires in stages. Our tax holiday partially expired on March 31,
2007 (in respect of approximately 35% of our Indian operations). It will further expire on March 31, 2008 (in respect of approximately 15% of our Indian operations) and on March 31, 2009 (in respect of the balance of our Indian operations), depending in each case on when each Delivery Center commenced operations. As the STPI tax holiday expires, our Indian tax expense will materially increase and our aftertax profitability will be materially reduced, unless we can obtain comparable benefits under new legislation or otherwise reduce our tax liability. For 2007, our overall tax expense increased by $11.9 million as a result of the partial expiration of this holiday.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stock Price Information and Stockholders The principal market on which the company's common shares are traded is the New York Stock Exchange under the symbol "G". The following table sets forth the high and low sales price of the company's common shares for the fourth quarter of 2007, the only full quarter for which a public market for the company's common shares has existed, as well as for the period from August 2, 2007 (the date trading commenced on the New York Stock Exchange) to September 30, 2007. As of March 15, 2008, there were approximately 45 holders of record of our common shares.
Sales Price
High
Low
August 2, 2007 to September 30, 2007 Fourth Quarter 2007
$ $
17.44 18.87
$ $
13.01 13.11
Dividends The Company has not declared or paid any cash dividends on our common shares. Our board of directors does not anticipate authorizing the payment of cash dividends in the foreseeable future and intends to retain all available funds and any future earnings to fund the development and growth of our business. Any determination to pay dividends to holders of our common shares in the future will be at the discretion of our board of directors and will depend on many factors, including our financial condition, results of operations, general business conditions and any other factors our board of directors deems relevant.
Unregistered Sales of Equity Securities
On December 10, 2007, we issued 143,453 common shares to Genpact India Holdings, a wholly owned subsidiary organized in Mauritius, and on December 13, 2007, Genpact India Holdings transferred those common shares to the shareholders of Axis Risk Consulting Private Limited as partial non-cash consideration for the purchase of Axis Risk Consulting Private Limited. This issuance was made in reliance upon the exemption from the registration requirements of the Securities Act of 1933 provided by Section 4(2) thereof for transactions by an issuer not involving any public offering. Use of Proceeds On August 1, 2007, we commenced an initial public offering of our common shares, pursuant to which the Company and our selling shareholders sold 17,647,059 common shares at a price of $14 per share. On August 14, 2007, the underwriters exercised their option to purchase 5,294,118 additional common shares from the Company at the initial offering price of $14 per share to cover over-allotments. The sales were made pursuant to a registration statement on Form S-1 (File No. 333-142875), which was declared effective by the SEC on August 1, 2007. The managing underwriters in the offering were Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. The underwriting discounts and commissions and offering expenses payable by us aggregated $9.0 million, resulting in net proceeds to us of $294.5 million. We did not receive any proceeds from common shares sold by the selling shareholders. We used $98.1 million of the net proceeds from our initial public offering to repay revolving loan indebtedness outstanding under our credit facility. In addition, we used $10.0 million of the net proceeds from our initial public offering partially to repay long term indebtedness outstanding under our credit facility in accordance with the regular payment schedule for such indebtedness. The remaining proceeds are invested in short-term deposit accounts. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b) on August 2, 2007.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net revenues. Our net revenues increased by $209.6 million or 34.2%. More than 90% of this increase in our net revenues is attributable to growth with existing clients. The number of client relationships that accounted for $5 million or more of net revenues increased to 18 from 7 in 2006. Net revenues also increased because of the acquisition of ICE in the first quarter of 2007. Net revenues from GE increased by $27.7 million or 6.1%. As described above under "— Classification of Certain Net Revenues," certain businesses in which GE has ceased to be a 20% shareholder in 2007 were classified as Global Client net revenues that had been GE revenues in 2006. In 2007, $14.2 million of net revenues from such divested businesses were classified as Global Client net revenues in 2007 and were classified as GE revenues in 2006. GE revenues for 2007 grew 11.0% over 2006, prior to adjustments for such dispositions by GE. Notwithstanding a reduction in GE net revenues resulting from this reclassification, our net revenues from GE increased, primarily as a result of increases in the volume of services provided to GE. This was attributable primarily to entering into new SOWs and to a lesser extent increasing the volume of services provided under existing SOWs. While net revenues from GE grew in absolute terms, such revenues declined as a percentage of our total net revenues from 73.9% in 2006 to 58.5% in 2007, due to growth in revenues from our Global Clients.
Net revenues from Global Clients increased by $181.9 million or 114.9%. This increase resulted from revenues from several new clients with which we entered into MSAs in 2005, 2006 and 2007. In addition, a portion of the overall increase (approximately $7.1 million) was attributable to the full year inclusion of the results of MoneyLine Lending Services, Inc. (now called Genpact Mortgage Services), which we acquired in August 2006 and which accounted for $3.3 million in net revenues in 2006. Approximately $34.5 million of net revenues were attributable to our acquisition of ICE in March 2007. A portion of the increase in net revenues from Global Clients was also related to GE ceasing to be a 20% shareholder in certain businesses and the reclassification of related net revenues as described above. As a percentage of total net revenues, net revenues from Global Clients increased from 25.8% in 2006 to 41.3% in 2007. Adjusted for the described dispositions by GE, organic growth, or growth excluding acquisitions, from Global Client revenues was 74.1%. Cost of revenue. The following table sets forth the components of our cost of revenue in absolute amounts and as a percentage of net revenues: Year Ended December 31,
2006
2007
Personnel expenses Operational expenses Depreciation and amortization Cost of revenue
(dollars in millions) $ 223.4 36.4%$ 109.3 17.8 28.1 4.6 $ 360.9 58.9%$
320.6 157.4 37.5 515.5
39.0% 19.1 4.6 62.7%
Cost of revenue increased by $154.6 million or 42.8%. As a percentage of net revenues, cost of revenue increased by 3.8%. The increase in both absolute amount and as a percentage of net revenues is primarily attributable to the appreciation of the Indian rupee against the U.S. Dollar in 2007. The impact of exchange fluctuation is largely offset by the gain recorded as a result of the movement of the Indian rupee against the U.S. Dollar relative to our hedged position as discussed below under the heading "Foreign exchange (gains)/losses, net". The largest component of the increase in cost of revenue was personnel expenses which increased by $97.2 million, or 43.5%. Such increase reflected the general growth of our business. Personnel expenses as a percentage of net revenues increased from 36.4% in 2006 to 39.0% in 2007, primarily due to the impact of foreign exchange fluctuation. In addition, operational expenses increased by $48.0 million. The increase in both absolute amount and as a percentage of net revenues is attributable to foreign exchange fluctuation, increase in facilities maintenance expenses, travel and living costs and communication expenses as a result of volume
growth, the acquisition of ICE, and the opening of new Delivery Centers, including dedicated Delivery Centers with excess capacity for new Global Clients in anticipation of performing additional services in the future for those clients as a result of general volume growth. As a percentage of net revenues, operational expenses increased from 17.8% in 2006 to 19.1% in 2007. As a result of the foregoing, our gross profit increased by $55.1 million or 21.8% and our gross margin decreased from 41.1% in 2006 to 37.3% in 2007. Selling, general and administrative expenses. The following table sets forth the components of our selling, general and administrative expenses in absolute amounts and as a percentage of net revenues: Year Ended December 31,
2006
2007
Personnel expenses Operational expenses Depreciation and amortization Selling, general and administrative expenses
(dollars in millions) $ 107.1 17.5%$ 45.3 7.4 6.8 1.1 $ 159.2 26.0%$
151.2 70.0 10.2 231.3
18.4% 8.5 1.2 28.1%
Selling, general and administrative expenses increased by $72.1 million or 45.3%. This was primarily due to an increase in personnel expenses, which increased by $44.1 million, or 41.1%. As a percentage of net revenues, SG&A expenses increased from 26.0% in 2006 to 28.1% in 2007 and personnel expenses increased from 17.5% in 2006 to 18.4% in 2007. This increase is attributable to foreign exchange fluctuation, consisting mainly of the appreciation of the Indian rupee against the U.S. Dollar in 2007. The impact of exchange fluctuation is largely offset by the gain recorded as a result of the movement of the Indian rupee against the U.S. Dollar relative to our hedged position as discussed under the heading "Foreign exchange (gains)/losses, net". The operational expenses component of SG&A expenses increased by $24.7 million. As a percentage of net revenues, such costs marginally increased from 7.4% in 2006 to 8.5% in 2007. The absolute increase reflected increases in facilities maintenance expenses, travel and living expenses and communications expenses. The increase also reflected a higher charge of $12.7 million in 2007 compared to $4.5 million in 2006 for stock based compensation. In addition, these increases included certain professional fees and other expenses related to acquisition activity, fees relating to being a public company and a $1.6 million provision in our mortgage business reserved for potential loan put backs and estimated loss on loans held for sale as of December 31, 2007. Depreciation and amortization expenses also increased in absolute terms. The increase in operational expenses and depreciation and amortization expenses, in addition to the impact of the foreign exchange fluctuations, reflected general growth of the business, including the opening of new Delivery Centers to support future growth.
Amortization of acquired intangibles. In 2007, we continued to incur significant non-cash charges consisting of the amortization of acquired intangibles resulting from the 2004 Reorganization. Although such charges declined by $4.8 million compared to 2006, they remained substantial at $36.9 million or 4.5% of net revenues. Foreign exchange (gains) losses, net. We recorded a foreign exchange gain of $43.6 million for 2007 compared to a loss of $13.0 in 2006. This increase was primarily as a result of the movement of the Indian rupee against the U.S. Dollar relative to our hedged position in 2007. This gain largely offsets the increases in our cost of revenues and SG&A expenses due to foreign exchange fluctuation. Other operating income. Other operating income, which consists of payments from GE for the use of our Delivery Centers and certain support functions for services that they manage and operate with their own employees, declined by $0.7 million in 2007. We do not recognize these payments as net revenues because GE manages and operates these services; however, our costs are included in cost of revenue and SG&A. Income from operations. As a result of the foregoing factors, income from operations increased by $43.7 million to $86.8 million. As a percentage of net revenues, income from operations increased from 7.0% in 2006 to 10.6% in 2007. Other income (expense), net. Other expense, net decreased by $4.0 million from $9.2 million in 2006 to $5.2 million in 2007. This decrease was primarily driven by higher interest income of $6.6 million relating to the proceeds of our initial public offering compared to $1.5 million in 2006. Income before share of equity in earnings/loss of affiliate, minority interest and income taxes. As a result of the foregoing factors, income before income taxes increased by $47.7 million or from 5.5% of net revenues in 2006 to 9.9% of net revenues in 2007. Equity in (earnings)/loss of affiliate. This represents our share of loss from our non-consolidated affiliate, NGEN Media Services Private Limited, a joint venture with NDTV Networks Plc. Minority interest. The minority interest is due to the acquisition of ICE in 2007. It represents the apportionment of profits to the minority partners in ICE. Income taxes. Our income tax expense increased from a $5.9 million benefit for 2006 to a $16.5 million expense for 2007. The principal components of this increase were (i) $13.5 million resulting from the partial expiration of our tax holiday in India as of March 31, 2007 and Indian taxes on interest income, (ii) $1.3 million net benefit resulting from the recomputation of our existing deferred tax assets and liabilities at U.S. Federal and state tax rates pursuant to restructuring of our legal entities as of October 1, 2007, in accordance with the provisions of SFAS 109 and (iii) $1.4 million income taxes relating to ICE. Net income. As a result of the foregoing factors, net income increased by $16.7 million from $39.8 million in 2006 to $56.4 million in 2007. As a percentage of net revenues, our net income was 6.5% in 2006 and 6.9% in 2007.
Key Highlights of EXL Services for the Finanical year ending 31 December 2007
Overview We are a recognized business solutions provider focused on providing a competitive edge to our clients by outsourcing and transforming their business processes. Our outsourcing services provide integrated front-, middle- and back-office process outsourcing services for our U.S.-based and U.K.based clients. Outsourcing services involve the transfer to us of select business operations of a client, such as claims processing, finance and accounting and customer service, after which we administer and manage the operations for our client on an ongoing basis. We also offer a suite of transformation service offerings that include research and analytics services, risk advisory services and process advisory services. These transformation services offerings help our clients improve their operating environments through cost reduction initiatives, enhanced efficiency and productivity, and improving the risk and control environment within our clients’ operations whether or not they are outsourced to us. A significant portion of our business relates to processes that we believe are integral to our clients’ operations, and the close nature of our relationships with our clients assists us in developing strong strategic long-term relationships with them. We serve primarily the needs of Global 1000 companies in the insurance, banking, financial services, utilities, healthcare, telecommunications and transportation sectors. We market our services directly through our sales and marketing and strategic account management teams, which operate out of New York and London, and our business development team, which operates out of Noida, India. We currently operate nine operations centers in India and one operation facility in U.S. In addition, we are presently in the process of establishing a new operations facility in the Philippines which will become operational in April 2008. We completed the Inductis acquisition on July 1, 2006. The Inductis acquisition has expanded the types and sophistication of the research and analytics services we offer. The results of operations of Inductis are consolidated in our financial statements with effect from July 1, 2006. As a result, our results of operations for the year ended December 31, 2007 are not comparable to our results of operations for the years ended December 31, 2006 and December 31, 2005. On October 25, 2006, we consummated an initial public offering of our shares of common stock. Our initial public offering resulted in net proceeds of $69.8 million to us after deducting underwriting discounts and commissions and related expenses. Our common stock is traded on the Nasdaq Global Select Market under the symbol “EXLS.” In connection with the initial public offering, we effected a conversion of our common stock and a two-for-one stock split. Revenues We generate revenues principally from contracts to provide BPO, research and analytics or advisory services. In 2007, we had total revenues of $179.9 million compared to total revenues of $121.8 million in 2006, an increase of 47.7%. The key drivers of growth in our total revenues in 2007 were as follows: • • • growth of our client base, both organically and inorganically, ongoing growth in existing client relationships, and addition of new services in the advisory services business.
Expenses Cost of Revenues Our cost of revenues primarily consists of: • employee costs, which include salary, retention and other compensation expenses; recruitment and training costs; non-cash amortization of stock compensation expense; and traveling and lodging costs; and
•
costs relating to our facilities and communications network, which include telecommunication and IT costs; facilities and customer management support; operational expenses for our outsourcing centers; and rent expenses.
We expect our cost of revenues to continue to increase as we continue to add professionals in India and the United States to service additional business, in particular as our research and analytics and advisory services businesses grow and as wages continue to increase in India. In particular, we expect training costs to continue to increase as we continue to add staff to service new clients. Cost of revenues is also affected by our long selling cycle and implementation period for our BPO services, which require significant commitments of capital, resources and time by both our clients and us. Before committing to use our services, potential clients require us to expend substantial time and resources educating them as to the value of our services and assessing the feasibility of integrating our systems and processes with theirs. In addition, once a client engages us in a new contract, our cost of revenues may represent a higher percentage of revenues until the implementation phase for that contract, generally three to four months, is completed SG&A Expenses Our general and administrative expenses are comprised of expenses relating to salaries of senior management and other support personnel, legal and other professional fees, telecommunications, utilities and other miscellaneous administrative costs. Selling and marketing expenses primarily consist of salaries of sales and marketing and strategic account management personnel, client relationship management, travel and brand building. We expect that sales and marketing expenses will continue to increase as we invest heavily in our front-end sales and strategic account management functions to better serve our clients. We also expect our costs to increase as we continue to strengthen our back-end support and enabling functions and invest in leadership development, performance management and training programs. SG&A expenses also include non-cash amortization of stock compensation expense related to our issuance of equity awards to senior management, members of our board of directors and advisory board, other support personnel and consultants. Depreciation and Amortization Depreciation and amortization pertains to depreciation and amortization of our tangible assets, including network equipment, cabling, computers, office furniture and equipment, motor vehicles and leasehold improvements and intangible assets. Amortization of intangible assets acquired in the Inductis acquisition is part of depreciation and amortization. As we add facilities, including our new 900workstation facility in Pasay City, Philippines, which will become operational in April 2008, we expect that depreciation expense will increase, reflecting additional investments in equipment such as desktop computers, servers and other infrastructure. Foreign Exchange Exchange Rates We report our financial results in U.S. dollars and a substantial portion of our total revenues is earned in U.K. pounds sterling. Accordingly, our results of operations are adversely affected if the U.K. pound sterling depreciates against the U.S. dollar. Although substantially all of our revenues are denominated in U.S. dollars or U.K. pounds sterling (45.6% and 54.1%, respectively, for the year ended December 31, 2007 as compared to 50.1% and 49.6%, respectively for the year ended December 31, 2006), most of our expenses (67.2% in the year ended December 31, 2007 and 67.8% in the year ended December 31, 2006) were incurred and paid in Indian rupees. The exchange rates among the Indian rupee, the U.K. pound sterling and the U.S. dollar have changed substantially in recent years and may fluctuate in the future. The results of our operations could be substantially impacted as the Indian rupee appreciates or depreciates against the U.S. dollar or the U.K. pound sterling. Currency Regulation
According to the prevailing foreign exchange regulations in India, an exporter of BPO services which is registered with a software technology park or an export processing zone in India, such as our subsidiaries Exl India and Inductis India, is required to realize its export proceeds within a period of 12 months from the date of exports. Similarly, in the event that such exporter has received any advance against exports in foreign exchange from its overseas customers, it will have to render the requisite services so that the advances so received are earned within a period of 12 months. If Exl India or Inductis India did not meet these conditions, it would be required to obtain permission to export foreign currency from the Reserve Bank of India. ExlService Holdings and Inductis receive payments under most of our client contracts and are invoiced by Exl India and Inductis India, as applicable, in respect of services that Exl India and Inductis India, as applicable, provide to our clients under these contracts. Exl India and Inductis India hold the foreign currency they receive, primarily from ExlService Holdings and Inductis, in an export earners foreign currency account. All foreign exchange requirements, including import of capital goods, expenses incurred during foreign traveling of employees and discharge of foreign exchange can be met using the foreign currency in that account. As and when funds are required in India, such funds are transferred to an ordinary Indian rupee account. Income Taxes The India Finance Act, 2000 provides Exl India, Noida Customer Operations Private Limited, which we refer to as NCOP, and Inductis India with a ten-year holiday from Indian corporate income taxes as an entity exporting IT services from designated software technology parks and export processing zones in India. The India Finance Act, 2000 phases out the tax holiday over a ten-year period from fiscal 2000 through fiscal 2009. Accordingly, facilities established in India on or before March 31, 2000 have a tenyear tax holiday, new facilities established on or before March 31, 2001 have a nine-year tax holiday and so forth until March 31, 2009. After March 31, 2009, the tax holiday will no longer be available to new facilities. Exl India and NCOP provides BPO services from its wholly owned, export oriented units situated in Noida and Pune. The income derived from the services rendered from these facilities is not subject to taxes in India until March 31, 2009. Inductis India is located in Gurgaon and its services also qualify under the India Finance Act, 2000 for a tax holiday until March 31, 2009. As a result of the tax holiday, our BPO service operations have been subject to relatively lower tax liabilities. For example, we recognized lower income tax expense with respect to the Company’s foreign operations for the year ended December 31, 2007 as a result of the tax holiday, compared to approximately $6.0 million that we would have incurred if the tax holiday had not been available for that period (without accounting for double taxation treaty set-offs). When our tax holiday expires or terminates, our tax expense will materially increase. We recognize deferred tax assets and liabilities for temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. We determine if a valuation allowance is required or not on the basis of an assessment of whether it is more likely than not that a deferred tax asset will be realized. In May 2007, the Government of India adopted the Indian Finance Act, 2007, that imposed a minimum alternative tax, or MAT, on Indian companies that benefit from a tax holiday with effect from April 1, 2007. Any MAT paid by us can be used as a credit against corporate income taxes payable by us after expiry of the tax holiday for up to seven years, subject to the satisfaction of certain conditions. In accordance with SFAS 109 “Accounting for Income Taxes” a deferred tax asset of $2,636,729 has been recognized as of December 31, 2007. Inductis Acquisition On July 1, 2006, we completed the Inductis acquisition. Inductis is a provider of research and analytics services. The Inductis acquisition has expanded the types and sophistication of the research and analytics services we offer. We paid approximately $12.2 million on the closing date in the form of $3.0 million in cash (including amounts paid for working capital adjustments), the issuance of 1,049,962 shares of our common stock after withholding in respect of taxes and $0.9 million in transaction costs,
and paid a $0.4 million bonus in January 2007. We also assumed $4.3 million of Inductis debt, which we repaid in full on September 26, 2006. For the period ended December 31, 2006, Inductis’ profit adjusted earnout revenue (which amount is defined in the Inductis acquisition agreement to equal either its revenue or a lower amount if certain profit margin targets are not achieved as set forth in the Inductis acquisition agreement) was equal to $26.6 million dollars. As a result, per the terms of the Inductis acquisition agreement, we issued an additional 257,273 shares of our common stock Derivative Instruments In the normal course of business, we actively look to mitigate the exposure of foreign currency market risk by entering into various hedging instruments, authorized under our policies, with counterparties that are highly rated financial institutions. Our primary exchange rate exposure is with the U.K. pound sterling and the Indian rupee. We use derivative instruments for the purpose of mitigating the underlying exposure from foreign currency fluctuation risks associated with forecasted transactions denominated in certain foreign currencies and to minimize earnings and cash flow volatility associated with the changes in foreign currency exchange rates, and not for speculative trading purposes. We also hedge anticipated transactions that are subject to foreign exchange exposure with foreign exchange contracts that are designated effective and qualify as cash flow hedges, under SFAS No. 133. Changes in the fair value of these cash flow hedges which are deemed effective, are recorded in accumulated other comprehensive income/(loss) until the contract is settled and at that time are recognized in the consolidated statements of operations. We evaluate hedge effectiveness at the time a contract is entered into as well as on an ongoing basis. If during this time, a contract is deemed ineffective, the change in the fair value is recorded in the consolidated statements of operations. At December 31, 2007, forward exchange contracts of $44.3 million and U.K. pounds sterling 31.4 million were outstanding. We have evaluated the effectiveness of all our forward exchange contracts. For the year ended December 31, 2007 and 2006, net gains/(losses) from ineffective cash flow hedges included in our consolidated statements of income totaled $1.0 million and $(1.6 million), respectively. For hedge contracts discontinued because the forecasted transaction is not expected to occur by the end of the originally specified period, any related derivative amounts recorded in accumulated comprehensive income are reclassified to earnings. Revenues and cost of revenues for each of the years ended December 31, 2007, 2006 for BPO, advisory and research and analytics services, respectively, are as follows:
Revenues Revenues from related parties Total revenues Cost of revenue (exclusive of depreciation and amortization) 91,504,837 8,794,930 13,420,428 113,720,195 59,261,199 5,529,156 9,046,982 73,837,337 Gross Profit $ 56,489,791 $ 4,594,168 $ 5,085,702 $ 66,169,661 $38,512,793 $3,486,070 $ 5,932,330 $ 47,931,193 Selling, General and Administrative expenses Depreciation and amortization Foreign exchange gain/(loss) Interest and other income Interest expense Interest expense—redeemable preferred stock Income tax (benefit)/ provision Dividends and accretion on preferred stock Net Income to common stockholders $ 38,449,753 10,491,763 7,674,108 4,306,068 (55,570) — 2,109,165 — $ 27,043,586
Year ended December 31, 2007 Year ended December 31, 2006 Research Research & & BPO Advisory Analytics Total BPO Advisory Analytics Total $147,611,708 $12,184,346 $18,462,781 $178,258,835 $97,236,102 $7,962,679 $14,954,812 $120,153,593 382,920 1,204,752 43,349 1,631,021 537,890 1,052,547 24,500 1,614,937 147,994,628 13,389,098 18,506,130 179,889,856 97,773,992 9,015,226 14,979,312 121,768,530
$ 23,919,984 8,939,689 (288,119) 1,909,173 (579,704) — 2,055,074 (617,329) $ 13,440,467
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006 As a result of the Inductis acquisition on July 1, 2006, our results of operations for the year ended December 31, 2007 are not comparable to the year ended December 31, 2006. Our results of operations for the year ended December 31, 2007 are impacted by an increase in revenues attributable to the increase in BPO and advisory revenues, the Inductis acquisition and changes in exchange rates of U.K. pounds sterling with respect to U.S. dollars. As we increase the amount of physical infrastructure available to perform our operations, we expect that utilization will continue to decrease, which will have a negative impact on our operating margin. Also, exchange rates fluctuations will have a positive or a negative impact on our net income depending on the direction of fluctuation. Revenues . Revenues increased 47.7% from $121.8 million for the year ended December 31, 2006 (including $5.0 million of reimbursable expenses) to $179.9 million for the year ended December 31, 2007 (including $7.7 million of reimbursable expenses). Revenues attributable to 38 new clients obtained during the year ended December 31, 2007 were $11.0 million. Revenue increases from existing clients were attributable to volume increases within existing processes and the addition of new processes. The increase in revenue was also attributable to the strengthening in the U.K. pound sterling with respect to the U.S. dollar during the period. Revenues for the year ended December 31, 2007 are higher by $3.3 million as compared to the year ended December 31, 2006 due to the inclusion of Inductis from July 1, 2006, the date of acquisition. Cost of Revenues . Cost of revenues increased 54.0% from $73.8 million for the year ended December 31, 2006 to $113.7 million for the year ended December 31, 2007. Cost of revenues for the year ended December 31, 2007 are higher by $4.8 million as compared to the year ended December 31, 2006 due to the inclusion of Inductis from July 1, 2006, the date of acquisition. Salaries and personnel expenses for the Company increased from $52.0 million in the year ended December 31, 2006 to $80.2 million in the year ended December 31, 2007 as a result of an increase in headcount and salary levels. Cost of revenues also increased due to an increase in reimbursable expenses, primarily as a result of significant additional costs associated with training activities on client premises. Facilities operating costs for the Company increased from $8.2 million for the year ended December 31, 2006 to $10.6 million for the year ended December 31, 2007, primarily reflecting our increased workforce and increased operating capacity. Cost of revenues includes $1.1 million and $0.5 million for the years ended December 31, 2007 and December 31, 2006, respectively, for non-cash amortization of stock compensation expense relating to the issuance of equity awards to employees directly involved in providing services to our clients. As a percentage of revenues, cost of revenues increased from 60.6% for the year ended December 31, 2006 to 63.2% for the year ended December 31, 2007. Gross Profit . Gross profit increased 38.0% from $47.9 million for the year ended December 31, 2006 to $66.2 million for the year ended December 31, 2007. The increase in gross profit is primarily the result of increased revenue. The increase in gross profit does not represent a trend in our results of operations. As a result, gross profit as a percentage of revenues decreased marginally from 39.4% for the year ended December 31, 2006 to 36.8% for the year ended December 31, 2007. SG&A Expenses . SG&A expenses increased 60.7% from $23.9 million for the year ended December 31, 2006 to $38.4 million for the year ended December 31, 2007. General and administrative expenses increased 52.7% from $19.2 million for the year ended December 31, 2006 to $29.3 million for the year ended December 31, 2007 and selling and marketing expenses increased 93.5% from $4.7 million for the year ended December 31, 2006 to $9.2 million for the year ended December 31, 2007. These increases were primarily due to the addition of corporate and sales and marketing staff in the United States, as well as an increase in audit and other professional fees incurred as a result of becoming
a public company. SG&A expenses for the year ended December 31, 2007 are higher by $3.4 million as compared to the year ended December 31, 2006 due to the inclusion of Inductis from July 1, 2006, the date of acquisition. Salary and personnel expenses increased from $15.7 million for the year ended December 31, 2006 to $17.6 million for the year ended December 31, 2007. SG&A expenses include $3.2 million and $1.5 million for the year ended December 31, 2007 and the year ended December 31, 2006, respectively, of non-cash amortization of stock compensation expense relating to our issuance of stock options to our non-operations staff. We expect our SG&A expenses to increase as we add significant additional sales and marketing staff in the United States and the United Kingdom. As a percentage of revenues, SG&A expenses increased from 19.6% for the year ended December 31, 2006 to 21.4% for the year ended December 31, 2007. Depreciation and Amortization . Depreciation and amortization increased 17.4% from $8.9 million for the year ended December 31, 2006 to $10.5 million for the year ended December 31, 2007. The increase was primarily due to the amortization of intangibles acquired from Inductis. As we add facilities, we expect that depreciation expense will increase, reflecting the additional investment in equipment and facilities necessary to meet customer requirements. Income From Operations . Income from operations increased 14.3% from $15.1 million for the year ended December 31, 2006 to $17.2 million for the year ended December 31, 2007. Income from operations increased due to a significant increase in revenue from BPO and advisory services attributable to higher than expected demand. This was partly offset by a loss from operations of $2.5 million at Inductis due to lower demand caused primarily by lower discretionary spending among its largest customers. As a percentage of revenues, income from operations decreased from 12.4% for the year ended December 31, 2006 to 9.6% for the year ended December 31, 2007. Other Income . Other income is comprised of foreign exchange gains and losses, interest income and interest expense. Other income increased significantly from $1.0 million for the year ended December 31, 2006 to $11.9 million for the year ended December 31, 2007 as a result of a significant increase in foreign exchange gains, interest income on our cash balances and a reduction in interest expense due to the repayment of our preferred stock in October and November 2006. Provision for Income Taxes . Provision for income taxes was unchanged at $2.1 million for the year ended December 31, 2007 as compared with the year ended December 31, 2006. However, the corresponding effective rate of taxes has decreased from 12.8% for the year ended December 31, 2006 to 7.2% for the year ended December 31, 2007. This is due to changes in the geographic distribution of our income and a change in the transfer pricing agreements among ExlService Holdings, Exl India and NCOP. We determine the pricing among our associated enterprises on the basis of detailed functional and economic analysis involving benchmarking against transactions among entities that are not under common control. Based on our analysis, we made certain changes to the transfer pricing agreements with effect from April 2007. See Note 12, “Income Taxes,” to our consolidated financial statements for the year ended December 31, 2007. Net Income to Common Stockholders . Net income to common stockholders increased 101.2% from $13.4 million for the year ended December 31, 2006 to $27.0 million for the year ended December 31, 2007. Net income increased due to increased revenue, the impact of exchange rates after considering hedge gains and better capacity and staff utilization. The significant increase in net income to common stockholders does not represent a trend in our results of operations and will vary as we build capacity for future ramps ups and exchange rates fluctuate. As a percentage of revenues, net income increased from 11.0% for the year ended December 31, 2006 to 15.0% for the year ended December 31, 2007.
Ratio analysis Profitability Ratio
Gross Profit Ratio(Gross Profit/ Sales)*100
Gross Profit Ratio is decreasing though there has been an increase in sales for both the companies but the cost of revenues has been more than the percentage increase in sales and hence the reduction in Gross profit ratio. The increase in Cost of Revenue is on account Salaries to Employees since their has been major increase in the number of employees for both the companies and also there has been an increment in the salary.
Net profit ratio (PAT/Turnover)
Net Profit ratio has rised slightly for Genpact ans Significantly for EXLS. For both the companies though the expense has increased but there has been an increase in Foreign Exchange gain which increased their profitability ratio
Operating profit ratio (EBIT/Turnover)
There has been a significant drop in EBIT of Genpact because of its rising expenditure and rising depreciation. On the other hand for EXLS the increase in expenditure is below the increase in revenues and hence there has been a rise in the Operating Profit
ROI (EBIT/C.E)
Return on Investment has increased for EXLS because there has been an increase in the net profit. On the other hand the return for Genpact has reduced due to issuance of new shares. Though the profit has increased but the increase in Investment is more than the increase in profit.
ROE (PAT/N.W)
This ratio goes in sync with the return on Investment. However in this case we see that the PAT for Genpact is more than the EBIT. This is on account of Foreign exchange Currency Fluctuations.
Financial Leverage Ratios
Debt equity ratio (Total Long Term Debts/ Total Equity)
EXLS is a zero debt company and there all the profit goes to shareholders. On the other hand the ratio for Genpact has reduced because it has issues shares in the current year and also some loans has been reimbursed and thus reducing its Debt Equity ratio
Liquidity Ratios
Current Ratio
Current ratio signifies the firms ability to meet its short term liabilities. There has been an increase in current ratio for both EXLS and Genpact. For Genpact it is majorly on account of the increase in Cash which is on account of the proceeds from IPO. On the other hand for EXL the increase in Current ratio is because of increase in Cash and Short Term Investments. Cash is increasing on account of Operating Activity and Financing Activity.
Absolute liquid ratio / cash ratio
Both Genpact and EXLS are zero inventory company but they are cash rich. The major increase in the ratio for Genpact is because of increase in cash which was on account of the IPO. For EXLS also the ratio has increased significantly on account of increased cash flow from Operating Activities
Efficiency Ratios
Fixed asset turnover ratios
The Effieciency of Fixed Asset has almost doubled in the case of EXLS. This is on account of their reduction in intangible assets and increase in Turnover. On the other hand Total Fixed Assets has increased for Genpact and therefore causing a reduction in the efficiency of its assets.
Business per employee(Total Revenue/No. of Employees)
This ratio is significant to Service industry where the revenues are majorly based on the performance of the employee. We see that though the Employee base for both the company is increasing but there has still been an increase in the revenue per employee as the revenue increase has been more than the increase in the number of Employees. This ratio is significant as it helps in calculating the bonus which should be paid to the employees. It depends on the revenue which an employee generates less salary to calculate the bonus payout ratio.
doc_799112541.doc
The documentation on the Financial analysis of Genpact and EXL and also lists down the various financial ratios used for the analysis.
Financial Analysis of Genpact and EXL
BPO Industry
BPO service providers work with clients to develop and deliver business operational improvements with the goal of achieving higher performance at lower costs. Outsourcing can enable organizations to enhance profitability and increase efficiency and reliability, permitting them to concentrate on their core areas of competence. BPO is a long-term strategic commitment for companies that, once implemented, is generally not subject to cyclical spending or information technology budget reductions. Organizations outsource their key business processes to third parties to reduce costs, improve process quality, handle increased transaction volumes and ensure redundancy. Increased global demand, cost improvements in international communications and the automation of many business services have created a significant opportunity for offshore business process service providers, and many companies are moving select office processes to providers with the capacity to perform these functions from overseas locations. Demand for offshore BPO services has grown substantially in recent years. The NASSCOMMcKinsey report published by the National Association of Software and Service Companies and McKinsey & Company in December 2005 estimates that the offshore BPO industry will grow at a 37.0% compound annual growth rate, from $11.4 billion in fiscal 2005 to $55.0 billion in fiscal 2010. The report identifies the banking and insurance industries as representing 50% of the potential offshore BPO market and estimates that providers have captured
Key Facts about Genpact from the Audit Report for the year ending 31st December 2007 Business Overview
We manage business processes for companies around the world. We combine our process expertise, information technology expertise and analytical capabilities, together with operational insight derived from our experience in diverse industries, to provide a wide range of services using our global delivery platform. Our goal is to help our clients improve the ways in which they do business by continuously improving their business processes including through the application of Six Sigma and Lean principles and leveraging technology. We strive to be a seamless extension of our clients' operations. As of December 31, 2007, we have more than 32,600 employees with operations in nine countries. In 2007, we had net revenues of $822.7 million, of which 41.3% was from clients other than GE, which we refer to as Global Clients.
The Company The 2004 Reorganization Prior to December 30, 2004, our business was conducted through various entities and divisions of GE. On December 30, 2004, in a series of transactions we refer to as the "2004 Reorganization," GE reorganized these operations by placing them all under Genpact Global Holdings SICAR S.à.r.l., or GGH, a newly formed Luxembourg entity. GE's affiliate, GE Capital International (Mauritius) also sold an indirect 60% interest in GGH to Genpact Investment Co. (Lux) SICAR S.à.r.l., or GICo, an entity owned in equal portions by General Atlantic LLC, or General Atlantic, and Oak Hill Capital Partners, or Oak Hill. On
December 16, 2005, GE's affiliate sold a portion of its equity in us to a subsidiary of Wachovia Corporation. On December 22, 2006, we redeemed shares held by GE affiliates. On December 18, 2007, GE's affiliate, GE Capital (Mauritius) Holdings Ltd., sold a further portion of its equity in us to an affiliate of a limited partner of one of our shareholders. As of December 31, 2007, GE, through its affiliates, owned 18.8% of our outstanding equity. Following the 2004 Reorganization, we began operating as an independent company. We separated ourselves operationally from GE and began building the capabilities necessary to be successful as an independent company. Among other things, we expanded our management infrastructure and business development capabilities so that we could secure business from clients other than GE. We substantially expanded administrative functions for which we had previously relied primarily on GE, such as finance, legal, accounting and human resources. We created separate employee benefit and retirement plans, developed our own leadership training capability and enhanced our management information systems.
The 2007 Reorganization and IPO On March 29, 2007, we formed Genpact Limited in Bermuda to be the new holding company for our business. It was initially a wholly-owned subsidiary of GGH. On July 13, 2007, we effectuated a transaction that resulted in Genpact Limited owning 100% of the capital stock of GGH. This transaction together with other related transactions is referred to as the "2007 Reorganization." This transaction occurred by the shareholders of GGH exchanging their common shares of GGH for common shares of Genpact Limited and the shareholders of Genpact Global (Lux) S.à.r.l., or GGL, exchanging their common and preferred shares of GGL for common shares of Genpact Limited. In addition, as part of the 2007 Reorganization, Genpact Global (Lux) S.à.r.l., or GGL, which owned approximately 63% of the outstanding equity of GGH, became a wholly owned subsidiary of Genpact Limited pursuant to a share exchange. GGL had no operations or assets other than its ownership interest in GGH, and had no liabilities other than obligations for accumulated dividends on preferred shares that were eliminated in the 2007 Reorganization and certain tax liabilities of $2.1 million that were paid on July 27, 2007. GE, through its affiliate GE Capital (International) Mauritius Holdings Ltd., and GICo reimbursed us for such tax liabilities in accordance with their agreement to indemnify us for such liabilities. As part of the 2007 Reorganization, GGH became a Bermuda company and changed its name to Genpact Global Holding (Bermuda) Limited and GGL also became a Bermuda company, in accordance with the laws of Bermuda and Luxembourg and its name was changed to Genpact Global (Bermuda) Limited. We use the terms "Genpact", "Company", "we" and "us" to refer to both GGH and its subsidiaries prior to July 13, 2007 and Genpact Limited and its subsidiaries after such date. On August 1, 2007, we commenced an initial public offering of our common shares, pursuant to which we and certain of our existing shareholders each sold 17.65 million common shares at a price of $14 per share. The offering resulted in gross proceeds of $494.1 million and net proceeds to us and the selling shareholders of approximately $233.5 million each after deducting underwriting discounts and commissions. Additionally, we incurred offering-related expenses of approximately $9.0 million. On August 14, 2007, the underwriters exercised their option to purchase 5.29 million additional common shares from us at the initial offering price of $14 per share to cover over-allotments resulting in additional gross proceeds of $74.1 million and net proceeds of approximately $70.0 million to us, after deducting underwriting discounts and commissions.
Our Services We provide a wide range of services to our clients. We group our services into the following categories: • finance and accounting; • collections and customer service; • insurance; • supply chain and procurement; • analytics; • enterprise application; and • IT infrastructure.
Industries We provide our services across a wide range of industries including banking and financial services, insurance, manufacturing, transportation and health care. We set forth below a table showing our net revenues in 2007 attributable to the various industry groups that we serve.
Year Ended December 31, 2007 (Net revenues in millions)
Industry
Banking, financial services and insurance Manufacturing Others
$
361.1 346.9 114.7
Total
$
822.7
Our Clients
Our clients include some of the best known companies in the world, many of which are leaders in their respective industries. GE has been our largest client and we benefit from a long-term contract whereby GE has committed to purchase stipulated minimum dollar amounts of services through 2014. Since our separation from GE, we have actively marketed our services to other companies and have succeeded in building a diversified client base. Many of these relationships are at an early stage and we believe they offer opportunities for growth. GE accounted for approximately 58.5% of our revenues in fiscal 2007. We currently provide services to all of GE's business units including Commercial Finance, GE Money, Healthcare, Industrial, Infrastructure and NBC Universal as well as to GE's corporate head office. The services we currently provide to GE are broad in their nature and are drawn from all of our service offerings. Although we have a single master services agreement, or MSA, with GE, we have approximately 2,700 statements of work, or SOWs, with GE. Currently, as a general matter, each GE business unit makes its own decisions as to whether to enter into a SOW with us and as to the terms of any such SOW. Therefore, although some decisions may be made centrally at GE, our revenues from GE are generally attributable to a number of different businesses each with its own senior manager responsible for decision-making regarding outsourcing. We have secured over 70 new Global Clients in a variety of industries since January 1, 2005. Our net revenues from Global Clients have rapidly increased in the last three years, from $42.2 million in 2005 to $158.3 million in 2006 and $340.2 million in 2007. Our net revenues from Global Clients as a percentage of total net revenues increased from 8.6% in 2005 to 25.8% in 2006 and 41.3% in 2007. The 2006 net revenues from Global Clients include $39.4 million for businesses that were part of GE in 2005 and were included in net revenues from GE in 2005. The 2007 net revenues from Global Clients include $14.2 million for businesses that were part of GE in 2006. See Item 7—"Management's Discussion and Analysis of Results of Operations and Financial Condition—Classification of Certain Net Revenues." The majority of our Global Clients are based in the United States, and we also have Global Clients in Europe, Asia and Australia. Our contracts with our clients generally take the form of an MSA, which is a framework agreement that is then supplemented by SOWs. Our MSAs specify the general terms applicable to the services we will provide. For a discussion of the components of our MSAs and SOWs see Item 7—Management's Discussion and Analysis of Results of Operations and Financial Condition—Overview—Revenues."
Over the next few years we will lose certain tax benefits provided in India to companies in our industry and it is not clear whether new tax policies will provide equivalent benefits and incentives. Under the Indian Income Tax Act, 1961, our Delivery Centers in India, from which we derived the majority of our revenues in fiscal 2007, benefit from a ten-year holiday from Indian corporate income taxes in respect of their export income (as defined in the legislation) under the Software Technology Parks of India ("STPI") Scheme. As a result of this tax holiday, prior to 2007 we incurred minimal income tax expense with respect to our Indian operations. In the absence of this tax holiday, income derived from our Indian operations would be taxed up to the maximum tax rate generally applicable to Indian enterprises, which, as of December 31, 2007, was 33.99%. The tax holiday enjoyed by our Delivery Centers in India under the STPI Scheme expires in stages. Our tax holiday partially expired on March 31,
2007 (in respect of approximately 35% of our Indian operations). It will further expire on March 31, 2008 (in respect of approximately 15% of our Indian operations) and on March 31, 2009 (in respect of the balance of our Indian operations), depending in each case on when each Delivery Center commenced operations. As the STPI tax holiday expires, our Indian tax expense will materially increase and our aftertax profitability will be materially reduced, unless we can obtain comparable benefits under new legislation or otherwise reduce our tax liability. For 2007, our overall tax expense increased by $11.9 million as a result of the partial expiration of this holiday.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stock Price Information and Stockholders The principal market on which the company's common shares are traded is the New York Stock Exchange under the symbol "G". The following table sets forth the high and low sales price of the company's common shares for the fourth quarter of 2007, the only full quarter for which a public market for the company's common shares has existed, as well as for the period from August 2, 2007 (the date trading commenced on the New York Stock Exchange) to September 30, 2007. As of March 15, 2008, there were approximately 45 holders of record of our common shares.
Sales Price
High
Low
August 2, 2007 to September 30, 2007 Fourth Quarter 2007
$ $
17.44 18.87
$ $
13.01 13.11
Dividends The Company has not declared or paid any cash dividends on our common shares. Our board of directors does not anticipate authorizing the payment of cash dividends in the foreseeable future and intends to retain all available funds and any future earnings to fund the development and growth of our business. Any determination to pay dividends to holders of our common shares in the future will be at the discretion of our board of directors and will depend on many factors, including our financial condition, results of operations, general business conditions and any other factors our board of directors deems relevant.
Unregistered Sales of Equity Securities
On December 10, 2007, we issued 143,453 common shares to Genpact India Holdings, a wholly owned subsidiary organized in Mauritius, and on December 13, 2007, Genpact India Holdings transferred those common shares to the shareholders of Axis Risk Consulting Private Limited as partial non-cash consideration for the purchase of Axis Risk Consulting Private Limited. This issuance was made in reliance upon the exemption from the registration requirements of the Securities Act of 1933 provided by Section 4(2) thereof for transactions by an issuer not involving any public offering. Use of Proceeds On August 1, 2007, we commenced an initial public offering of our common shares, pursuant to which the Company and our selling shareholders sold 17,647,059 common shares at a price of $14 per share. On August 14, 2007, the underwriters exercised their option to purchase 5,294,118 additional common shares from the Company at the initial offering price of $14 per share to cover over-allotments. The sales were made pursuant to a registration statement on Form S-1 (File No. 333-142875), which was declared effective by the SEC on August 1, 2007. The managing underwriters in the offering were Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. The underwriting discounts and commissions and offering expenses payable by us aggregated $9.0 million, resulting in net proceeds to us of $294.5 million. We did not receive any proceeds from common shares sold by the selling shareholders. We used $98.1 million of the net proceeds from our initial public offering to repay revolving loan indebtedness outstanding under our credit facility. In addition, we used $10.0 million of the net proceeds from our initial public offering partially to repay long term indebtedness outstanding under our credit facility in accordance with the regular payment schedule for such indebtedness. The remaining proceeds are invested in short-term deposit accounts. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b) on August 2, 2007.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net revenues. Our net revenues increased by $209.6 million or 34.2%. More than 90% of this increase in our net revenues is attributable to growth with existing clients. The number of client relationships that accounted for $5 million or more of net revenues increased to 18 from 7 in 2006. Net revenues also increased because of the acquisition of ICE in the first quarter of 2007. Net revenues from GE increased by $27.7 million or 6.1%. As described above under "— Classification of Certain Net Revenues," certain businesses in which GE has ceased to be a 20% shareholder in 2007 were classified as Global Client net revenues that had been GE revenues in 2006. In 2007, $14.2 million of net revenues from such divested businesses were classified as Global Client net revenues in 2007 and were classified as GE revenues in 2006. GE revenues for 2007 grew 11.0% over 2006, prior to adjustments for such dispositions by GE. Notwithstanding a reduction in GE net revenues resulting from this reclassification, our net revenues from GE increased, primarily as a result of increases in the volume of services provided to GE. This was attributable primarily to entering into new SOWs and to a lesser extent increasing the volume of services provided under existing SOWs. While net revenues from GE grew in absolute terms, such revenues declined as a percentage of our total net revenues from 73.9% in 2006 to 58.5% in 2007, due to growth in revenues from our Global Clients.
Net revenues from Global Clients increased by $181.9 million or 114.9%. This increase resulted from revenues from several new clients with which we entered into MSAs in 2005, 2006 and 2007. In addition, a portion of the overall increase (approximately $7.1 million) was attributable to the full year inclusion of the results of MoneyLine Lending Services, Inc. (now called Genpact Mortgage Services), which we acquired in August 2006 and which accounted for $3.3 million in net revenues in 2006. Approximately $34.5 million of net revenues were attributable to our acquisition of ICE in March 2007. A portion of the increase in net revenues from Global Clients was also related to GE ceasing to be a 20% shareholder in certain businesses and the reclassification of related net revenues as described above. As a percentage of total net revenues, net revenues from Global Clients increased from 25.8% in 2006 to 41.3% in 2007. Adjusted for the described dispositions by GE, organic growth, or growth excluding acquisitions, from Global Client revenues was 74.1%. Cost of revenue. The following table sets forth the components of our cost of revenue in absolute amounts and as a percentage of net revenues: Year Ended December 31,
2006
2007
Personnel expenses Operational expenses Depreciation and amortization Cost of revenue
(dollars in millions) $ 223.4 36.4%$ 109.3 17.8 28.1 4.6 $ 360.9 58.9%$
320.6 157.4 37.5 515.5
39.0% 19.1 4.6 62.7%
Cost of revenue increased by $154.6 million or 42.8%. As a percentage of net revenues, cost of revenue increased by 3.8%. The increase in both absolute amount and as a percentage of net revenues is primarily attributable to the appreciation of the Indian rupee against the U.S. Dollar in 2007. The impact of exchange fluctuation is largely offset by the gain recorded as a result of the movement of the Indian rupee against the U.S. Dollar relative to our hedged position as discussed below under the heading "Foreign exchange (gains)/losses, net". The largest component of the increase in cost of revenue was personnel expenses which increased by $97.2 million, or 43.5%. Such increase reflected the general growth of our business. Personnel expenses as a percentage of net revenues increased from 36.4% in 2006 to 39.0% in 2007, primarily due to the impact of foreign exchange fluctuation. In addition, operational expenses increased by $48.0 million. The increase in both absolute amount and as a percentage of net revenues is attributable to foreign exchange fluctuation, increase in facilities maintenance expenses, travel and living costs and communication expenses as a result of volume
growth, the acquisition of ICE, and the opening of new Delivery Centers, including dedicated Delivery Centers with excess capacity for new Global Clients in anticipation of performing additional services in the future for those clients as a result of general volume growth. As a percentage of net revenues, operational expenses increased from 17.8% in 2006 to 19.1% in 2007. As a result of the foregoing, our gross profit increased by $55.1 million or 21.8% and our gross margin decreased from 41.1% in 2006 to 37.3% in 2007. Selling, general and administrative expenses. The following table sets forth the components of our selling, general and administrative expenses in absolute amounts and as a percentage of net revenues: Year Ended December 31,
2006
2007
Personnel expenses Operational expenses Depreciation and amortization Selling, general and administrative expenses
(dollars in millions) $ 107.1 17.5%$ 45.3 7.4 6.8 1.1 $ 159.2 26.0%$
151.2 70.0 10.2 231.3
18.4% 8.5 1.2 28.1%
Selling, general and administrative expenses increased by $72.1 million or 45.3%. This was primarily due to an increase in personnel expenses, which increased by $44.1 million, or 41.1%. As a percentage of net revenues, SG&A expenses increased from 26.0% in 2006 to 28.1% in 2007 and personnel expenses increased from 17.5% in 2006 to 18.4% in 2007. This increase is attributable to foreign exchange fluctuation, consisting mainly of the appreciation of the Indian rupee against the U.S. Dollar in 2007. The impact of exchange fluctuation is largely offset by the gain recorded as a result of the movement of the Indian rupee against the U.S. Dollar relative to our hedged position as discussed under the heading "Foreign exchange (gains)/losses, net". The operational expenses component of SG&A expenses increased by $24.7 million. As a percentage of net revenues, such costs marginally increased from 7.4% in 2006 to 8.5% in 2007. The absolute increase reflected increases in facilities maintenance expenses, travel and living expenses and communications expenses. The increase also reflected a higher charge of $12.7 million in 2007 compared to $4.5 million in 2006 for stock based compensation. In addition, these increases included certain professional fees and other expenses related to acquisition activity, fees relating to being a public company and a $1.6 million provision in our mortgage business reserved for potential loan put backs and estimated loss on loans held for sale as of December 31, 2007. Depreciation and amortization expenses also increased in absolute terms. The increase in operational expenses and depreciation and amortization expenses, in addition to the impact of the foreign exchange fluctuations, reflected general growth of the business, including the opening of new Delivery Centers to support future growth.
Amortization of acquired intangibles. In 2007, we continued to incur significant non-cash charges consisting of the amortization of acquired intangibles resulting from the 2004 Reorganization. Although such charges declined by $4.8 million compared to 2006, they remained substantial at $36.9 million or 4.5% of net revenues. Foreign exchange (gains) losses, net. We recorded a foreign exchange gain of $43.6 million for 2007 compared to a loss of $13.0 in 2006. This increase was primarily as a result of the movement of the Indian rupee against the U.S. Dollar relative to our hedged position in 2007. This gain largely offsets the increases in our cost of revenues and SG&A expenses due to foreign exchange fluctuation. Other operating income. Other operating income, which consists of payments from GE for the use of our Delivery Centers and certain support functions for services that they manage and operate with their own employees, declined by $0.7 million in 2007. We do not recognize these payments as net revenues because GE manages and operates these services; however, our costs are included in cost of revenue and SG&A. Income from operations. As a result of the foregoing factors, income from operations increased by $43.7 million to $86.8 million. As a percentage of net revenues, income from operations increased from 7.0% in 2006 to 10.6% in 2007. Other income (expense), net. Other expense, net decreased by $4.0 million from $9.2 million in 2006 to $5.2 million in 2007. This decrease was primarily driven by higher interest income of $6.6 million relating to the proceeds of our initial public offering compared to $1.5 million in 2006. Income before share of equity in earnings/loss of affiliate, minority interest and income taxes. As a result of the foregoing factors, income before income taxes increased by $47.7 million or from 5.5% of net revenues in 2006 to 9.9% of net revenues in 2007. Equity in (earnings)/loss of affiliate. This represents our share of loss from our non-consolidated affiliate, NGEN Media Services Private Limited, a joint venture with NDTV Networks Plc. Minority interest. The minority interest is due to the acquisition of ICE in 2007. It represents the apportionment of profits to the minority partners in ICE. Income taxes. Our income tax expense increased from a $5.9 million benefit for 2006 to a $16.5 million expense for 2007. The principal components of this increase were (i) $13.5 million resulting from the partial expiration of our tax holiday in India as of March 31, 2007 and Indian taxes on interest income, (ii) $1.3 million net benefit resulting from the recomputation of our existing deferred tax assets and liabilities at U.S. Federal and state tax rates pursuant to restructuring of our legal entities as of October 1, 2007, in accordance with the provisions of SFAS 109 and (iii) $1.4 million income taxes relating to ICE. Net income. As a result of the foregoing factors, net income increased by $16.7 million from $39.8 million in 2006 to $56.4 million in 2007. As a percentage of net revenues, our net income was 6.5% in 2006 and 6.9% in 2007.
Key Highlights of EXL Services for the Finanical year ending 31 December 2007
Overview We are a recognized business solutions provider focused on providing a competitive edge to our clients by outsourcing and transforming their business processes. Our outsourcing services provide integrated front-, middle- and back-office process outsourcing services for our U.S.-based and U.K.based clients. Outsourcing services involve the transfer to us of select business operations of a client, such as claims processing, finance and accounting and customer service, after which we administer and manage the operations for our client on an ongoing basis. We also offer a suite of transformation service offerings that include research and analytics services, risk advisory services and process advisory services. These transformation services offerings help our clients improve their operating environments through cost reduction initiatives, enhanced efficiency and productivity, and improving the risk and control environment within our clients’ operations whether or not they are outsourced to us. A significant portion of our business relates to processes that we believe are integral to our clients’ operations, and the close nature of our relationships with our clients assists us in developing strong strategic long-term relationships with them. We serve primarily the needs of Global 1000 companies in the insurance, banking, financial services, utilities, healthcare, telecommunications and transportation sectors. We market our services directly through our sales and marketing and strategic account management teams, which operate out of New York and London, and our business development team, which operates out of Noida, India. We currently operate nine operations centers in India and one operation facility in U.S. In addition, we are presently in the process of establishing a new operations facility in the Philippines which will become operational in April 2008. We completed the Inductis acquisition on July 1, 2006. The Inductis acquisition has expanded the types and sophistication of the research and analytics services we offer. The results of operations of Inductis are consolidated in our financial statements with effect from July 1, 2006. As a result, our results of operations for the year ended December 31, 2007 are not comparable to our results of operations for the years ended December 31, 2006 and December 31, 2005. On October 25, 2006, we consummated an initial public offering of our shares of common stock. Our initial public offering resulted in net proceeds of $69.8 million to us after deducting underwriting discounts and commissions and related expenses. Our common stock is traded on the Nasdaq Global Select Market under the symbol “EXLS.” In connection with the initial public offering, we effected a conversion of our common stock and a two-for-one stock split. Revenues We generate revenues principally from contracts to provide BPO, research and analytics or advisory services. In 2007, we had total revenues of $179.9 million compared to total revenues of $121.8 million in 2006, an increase of 47.7%. The key drivers of growth in our total revenues in 2007 were as follows: • • • growth of our client base, both organically and inorganically, ongoing growth in existing client relationships, and addition of new services in the advisory services business.
Expenses Cost of Revenues Our cost of revenues primarily consists of: • employee costs, which include salary, retention and other compensation expenses; recruitment and training costs; non-cash amortization of stock compensation expense; and traveling and lodging costs; and
•
costs relating to our facilities and communications network, which include telecommunication and IT costs; facilities and customer management support; operational expenses for our outsourcing centers; and rent expenses.
We expect our cost of revenues to continue to increase as we continue to add professionals in India and the United States to service additional business, in particular as our research and analytics and advisory services businesses grow and as wages continue to increase in India. In particular, we expect training costs to continue to increase as we continue to add staff to service new clients. Cost of revenues is also affected by our long selling cycle and implementation period for our BPO services, which require significant commitments of capital, resources and time by both our clients and us. Before committing to use our services, potential clients require us to expend substantial time and resources educating them as to the value of our services and assessing the feasibility of integrating our systems and processes with theirs. In addition, once a client engages us in a new contract, our cost of revenues may represent a higher percentage of revenues until the implementation phase for that contract, generally three to four months, is completed SG&A Expenses Our general and administrative expenses are comprised of expenses relating to salaries of senior management and other support personnel, legal and other professional fees, telecommunications, utilities and other miscellaneous administrative costs. Selling and marketing expenses primarily consist of salaries of sales and marketing and strategic account management personnel, client relationship management, travel and brand building. We expect that sales and marketing expenses will continue to increase as we invest heavily in our front-end sales and strategic account management functions to better serve our clients. We also expect our costs to increase as we continue to strengthen our back-end support and enabling functions and invest in leadership development, performance management and training programs. SG&A expenses also include non-cash amortization of stock compensation expense related to our issuance of equity awards to senior management, members of our board of directors and advisory board, other support personnel and consultants. Depreciation and Amortization Depreciation and amortization pertains to depreciation and amortization of our tangible assets, including network equipment, cabling, computers, office furniture and equipment, motor vehicles and leasehold improvements and intangible assets. Amortization of intangible assets acquired in the Inductis acquisition is part of depreciation and amortization. As we add facilities, including our new 900workstation facility in Pasay City, Philippines, which will become operational in April 2008, we expect that depreciation expense will increase, reflecting additional investments in equipment such as desktop computers, servers and other infrastructure. Foreign Exchange Exchange Rates We report our financial results in U.S. dollars and a substantial portion of our total revenues is earned in U.K. pounds sterling. Accordingly, our results of operations are adversely affected if the U.K. pound sterling depreciates against the U.S. dollar. Although substantially all of our revenues are denominated in U.S. dollars or U.K. pounds sterling (45.6% and 54.1%, respectively, for the year ended December 31, 2007 as compared to 50.1% and 49.6%, respectively for the year ended December 31, 2006), most of our expenses (67.2% in the year ended December 31, 2007 and 67.8% in the year ended December 31, 2006) were incurred and paid in Indian rupees. The exchange rates among the Indian rupee, the U.K. pound sterling and the U.S. dollar have changed substantially in recent years and may fluctuate in the future. The results of our operations could be substantially impacted as the Indian rupee appreciates or depreciates against the U.S. dollar or the U.K. pound sterling. Currency Regulation
According to the prevailing foreign exchange regulations in India, an exporter of BPO services which is registered with a software technology park or an export processing zone in India, such as our subsidiaries Exl India and Inductis India, is required to realize its export proceeds within a period of 12 months from the date of exports. Similarly, in the event that such exporter has received any advance against exports in foreign exchange from its overseas customers, it will have to render the requisite services so that the advances so received are earned within a period of 12 months. If Exl India or Inductis India did not meet these conditions, it would be required to obtain permission to export foreign currency from the Reserve Bank of India. ExlService Holdings and Inductis receive payments under most of our client contracts and are invoiced by Exl India and Inductis India, as applicable, in respect of services that Exl India and Inductis India, as applicable, provide to our clients under these contracts. Exl India and Inductis India hold the foreign currency they receive, primarily from ExlService Holdings and Inductis, in an export earners foreign currency account. All foreign exchange requirements, including import of capital goods, expenses incurred during foreign traveling of employees and discharge of foreign exchange can be met using the foreign currency in that account. As and when funds are required in India, such funds are transferred to an ordinary Indian rupee account. Income Taxes The India Finance Act, 2000 provides Exl India, Noida Customer Operations Private Limited, which we refer to as NCOP, and Inductis India with a ten-year holiday from Indian corporate income taxes as an entity exporting IT services from designated software technology parks and export processing zones in India. The India Finance Act, 2000 phases out the tax holiday over a ten-year period from fiscal 2000 through fiscal 2009. Accordingly, facilities established in India on or before March 31, 2000 have a tenyear tax holiday, new facilities established on or before March 31, 2001 have a nine-year tax holiday and so forth until March 31, 2009. After March 31, 2009, the tax holiday will no longer be available to new facilities. Exl India and NCOP provides BPO services from its wholly owned, export oriented units situated in Noida and Pune. The income derived from the services rendered from these facilities is not subject to taxes in India until March 31, 2009. Inductis India is located in Gurgaon and its services also qualify under the India Finance Act, 2000 for a tax holiday until March 31, 2009. As a result of the tax holiday, our BPO service operations have been subject to relatively lower tax liabilities. For example, we recognized lower income tax expense with respect to the Company’s foreign operations for the year ended December 31, 2007 as a result of the tax holiday, compared to approximately $6.0 million that we would have incurred if the tax holiday had not been available for that period (without accounting for double taxation treaty set-offs). When our tax holiday expires or terminates, our tax expense will materially increase. We recognize deferred tax assets and liabilities for temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. We determine if a valuation allowance is required or not on the basis of an assessment of whether it is more likely than not that a deferred tax asset will be realized. In May 2007, the Government of India adopted the Indian Finance Act, 2007, that imposed a minimum alternative tax, or MAT, on Indian companies that benefit from a tax holiday with effect from April 1, 2007. Any MAT paid by us can be used as a credit against corporate income taxes payable by us after expiry of the tax holiday for up to seven years, subject to the satisfaction of certain conditions. In accordance with SFAS 109 “Accounting for Income Taxes” a deferred tax asset of $2,636,729 has been recognized as of December 31, 2007. Inductis Acquisition On July 1, 2006, we completed the Inductis acquisition. Inductis is a provider of research and analytics services. The Inductis acquisition has expanded the types and sophistication of the research and analytics services we offer. We paid approximately $12.2 million on the closing date in the form of $3.0 million in cash (including amounts paid for working capital adjustments), the issuance of 1,049,962 shares of our common stock after withholding in respect of taxes and $0.9 million in transaction costs,
and paid a $0.4 million bonus in January 2007. We also assumed $4.3 million of Inductis debt, which we repaid in full on September 26, 2006. For the period ended December 31, 2006, Inductis’ profit adjusted earnout revenue (which amount is defined in the Inductis acquisition agreement to equal either its revenue or a lower amount if certain profit margin targets are not achieved as set forth in the Inductis acquisition agreement) was equal to $26.6 million dollars. As a result, per the terms of the Inductis acquisition agreement, we issued an additional 257,273 shares of our common stock Derivative Instruments In the normal course of business, we actively look to mitigate the exposure of foreign currency market risk by entering into various hedging instruments, authorized under our policies, with counterparties that are highly rated financial institutions. Our primary exchange rate exposure is with the U.K. pound sterling and the Indian rupee. We use derivative instruments for the purpose of mitigating the underlying exposure from foreign currency fluctuation risks associated with forecasted transactions denominated in certain foreign currencies and to minimize earnings and cash flow volatility associated with the changes in foreign currency exchange rates, and not for speculative trading purposes. We also hedge anticipated transactions that are subject to foreign exchange exposure with foreign exchange contracts that are designated effective and qualify as cash flow hedges, under SFAS No. 133. Changes in the fair value of these cash flow hedges which are deemed effective, are recorded in accumulated other comprehensive income/(loss) until the contract is settled and at that time are recognized in the consolidated statements of operations. We evaluate hedge effectiveness at the time a contract is entered into as well as on an ongoing basis. If during this time, a contract is deemed ineffective, the change in the fair value is recorded in the consolidated statements of operations. At December 31, 2007, forward exchange contracts of $44.3 million and U.K. pounds sterling 31.4 million were outstanding. We have evaluated the effectiveness of all our forward exchange contracts. For the year ended December 31, 2007 and 2006, net gains/(losses) from ineffective cash flow hedges included in our consolidated statements of income totaled $1.0 million and $(1.6 million), respectively. For hedge contracts discontinued because the forecasted transaction is not expected to occur by the end of the originally specified period, any related derivative amounts recorded in accumulated comprehensive income are reclassified to earnings. Revenues and cost of revenues for each of the years ended December 31, 2007, 2006 for BPO, advisory and research and analytics services, respectively, are as follows:
Revenues Revenues from related parties Total revenues Cost of revenue (exclusive of depreciation and amortization) 91,504,837 8,794,930 13,420,428 113,720,195 59,261,199 5,529,156 9,046,982 73,837,337 Gross Profit $ 56,489,791 $ 4,594,168 $ 5,085,702 $ 66,169,661 $38,512,793 $3,486,070 $ 5,932,330 $ 47,931,193 Selling, General and Administrative expenses Depreciation and amortization Foreign exchange gain/(loss) Interest and other income Interest expense Interest expense—redeemable preferred stock Income tax (benefit)/ provision Dividends and accretion on preferred stock Net Income to common stockholders $ 38,449,753 10,491,763 7,674,108 4,306,068 (55,570) — 2,109,165 — $ 27,043,586
Year ended December 31, 2007 Year ended December 31, 2006 Research Research & & BPO Advisory Analytics Total BPO Advisory Analytics Total $147,611,708 $12,184,346 $18,462,781 $178,258,835 $97,236,102 $7,962,679 $14,954,812 $120,153,593 382,920 1,204,752 43,349 1,631,021 537,890 1,052,547 24,500 1,614,937 147,994,628 13,389,098 18,506,130 179,889,856 97,773,992 9,015,226 14,979,312 121,768,530
$ 23,919,984 8,939,689 (288,119) 1,909,173 (579,704) — 2,055,074 (617,329) $ 13,440,467
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006 As a result of the Inductis acquisition on July 1, 2006, our results of operations for the year ended December 31, 2007 are not comparable to the year ended December 31, 2006. Our results of operations for the year ended December 31, 2007 are impacted by an increase in revenues attributable to the increase in BPO and advisory revenues, the Inductis acquisition and changes in exchange rates of U.K. pounds sterling with respect to U.S. dollars. As we increase the amount of physical infrastructure available to perform our operations, we expect that utilization will continue to decrease, which will have a negative impact on our operating margin. Also, exchange rates fluctuations will have a positive or a negative impact on our net income depending on the direction of fluctuation. Revenues . Revenues increased 47.7% from $121.8 million for the year ended December 31, 2006 (including $5.0 million of reimbursable expenses) to $179.9 million for the year ended December 31, 2007 (including $7.7 million of reimbursable expenses). Revenues attributable to 38 new clients obtained during the year ended December 31, 2007 were $11.0 million. Revenue increases from existing clients were attributable to volume increases within existing processes and the addition of new processes. The increase in revenue was also attributable to the strengthening in the U.K. pound sterling with respect to the U.S. dollar during the period. Revenues for the year ended December 31, 2007 are higher by $3.3 million as compared to the year ended December 31, 2006 due to the inclusion of Inductis from July 1, 2006, the date of acquisition. Cost of Revenues . Cost of revenues increased 54.0% from $73.8 million for the year ended December 31, 2006 to $113.7 million for the year ended December 31, 2007. Cost of revenues for the year ended December 31, 2007 are higher by $4.8 million as compared to the year ended December 31, 2006 due to the inclusion of Inductis from July 1, 2006, the date of acquisition. Salaries and personnel expenses for the Company increased from $52.0 million in the year ended December 31, 2006 to $80.2 million in the year ended December 31, 2007 as a result of an increase in headcount and salary levels. Cost of revenues also increased due to an increase in reimbursable expenses, primarily as a result of significant additional costs associated with training activities on client premises. Facilities operating costs for the Company increased from $8.2 million for the year ended December 31, 2006 to $10.6 million for the year ended December 31, 2007, primarily reflecting our increased workforce and increased operating capacity. Cost of revenues includes $1.1 million and $0.5 million for the years ended December 31, 2007 and December 31, 2006, respectively, for non-cash amortization of stock compensation expense relating to the issuance of equity awards to employees directly involved in providing services to our clients. As a percentage of revenues, cost of revenues increased from 60.6% for the year ended December 31, 2006 to 63.2% for the year ended December 31, 2007. Gross Profit . Gross profit increased 38.0% from $47.9 million for the year ended December 31, 2006 to $66.2 million for the year ended December 31, 2007. The increase in gross profit is primarily the result of increased revenue. The increase in gross profit does not represent a trend in our results of operations. As a result, gross profit as a percentage of revenues decreased marginally from 39.4% for the year ended December 31, 2006 to 36.8% for the year ended December 31, 2007. SG&A Expenses . SG&A expenses increased 60.7% from $23.9 million for the year ended December 31, 2006 to $38.4 million for the year ended December 31, 2007. General and administrative expenses increased 52.7% from $19.2 million for the year ended December 31, 2006 to $29.3 million for the year ended December 31, 2007 and selling and marketing expenses increased 93.5% from $4.7 million for the year ended December 31, 2006 to $9.2 million for the year ended December 31, 2007. These increases were primarily due to the addition of corporate and sales and marketing staff in the United States, as well as an increase in audit and other professional fees incurred as a result of becoming
a public company. SG&A expenses for the year ended December 31, 2007 are higher by $3.4 million as compared to the year ended December 31, 2006 due to the inclusion of Inductis from July 1, 2006, the date of acquisition. Salary and personnel expenses increased from $15.7 million for the year ended December 31, 2006 to $17.6 million for the year ended December 31, 2007. SG&A expenses include $3.2 million and $1.5 million for the year ended December 31, 2007 and the year ended December 31, 2006, respectively, of non-cash amortization of stock compensation expense relating to our issuance of stock options to our non-operations staff. We expect our SG&A expenses to increase as we add significant additional sales and marketing staff in the United States and the United Kingdom. As a percentage of revenues, SG&A expenses increased from 19.6% for the year ended December 31, 2006 to 21.4% for the year ended December 31, 2007. Depreciation and Amortization . Depreciation and amortization increased 17.4% from $8.9 million for the year ended December 31, 2006 to $10.5 million for the year ended December 31, 2007. The increase was primarily due to the amortization of intangibles acquired from Inductis. As we add facilities, we expect that depreciation expense will increase, reflecting the additional investment in equipment and facilities necessary to meet customer requirements. Income From Operations . Income from operations increased 14.3% from $15.1 million for the year ended December 31, 2006 to $17.2 million for the year ended December 31, 2007. Income from operations increased due to a significant increase in revenue from BPO and advisory services attributable to higher than expected demand. This was partly offset by a loss from operations of $2.5 million at Inductis due to lower demand caused primarily by lower discretionary spending among its largest customers. As a percentage of revenues, income from operations decreased from 12.4% for the year ended December 31, 2006 to 9.6% for the year ended December 31, 2007. Other Income . Other income is comprised of foreign exchange gains and losses, interest income and interest expense. Other income increased significantly from $1.0 million for the year ended December 31, 2006 to $11.9 million for the year ended December 31, 2007 as a result of a significant increase in foreign exchange gains, interest income on our cash balances and a reduction in interest expense due to the repayment of our preferred stock in October and November 2006. Provision for Income Taxes . Provision for income taxes was unchanged at $2.1 million for the year ended December 31, 2007 as compared with the year ended December 31, 2006. However, the corresponding effective rate of taxes has decreased from 12.8% for the year ended December 31, 2006 to 7.2% for the year ended December 31, 2007. This is due to changes in the geographic distribution of our income and a change in the transfer pricing agreements among ExlService Holdings, Exl India and NCOP. We determine the pricing among our associated enterprises on the basis of detailed functional and economic analysis involving benchmarking against transactions among entities that are not under common control. Based on our analysis, we made certain changes to the transfer pricing agreements with effect from April 2007. See Note 12, “Income Taxes,” to our consolidated financial statements for the year ended December 31, 2007. Net Income to Common Stockholders . Net income to common stockholders increased 101.2% from $13.4 million for the year ended December 31, 2006 to $27.0 million for the year ended December 31, 2007. Net income increased due to increased revenue, the impact of exchange rates after considering hedge gains and better capacity and staff utilization. The significant increase in net income to common stockholders does not represent a trend in our results of operations and will vary as we build capacity for future ramps ups and exchange rates fluctuate. As a percentage of revenues, net income increased from 11.0% for the year ended December 31, 2006 to 15.0% for the year ended December 31, 2007.
Ratio analysis Profitability Ratio
Gross Profit Ratio(Gross Profit/ Sales)*100
Gross Profit Ratio is decreasing though there has been an increase in sales for both the companies but the cost of revenues has been more than the percentage increase in sales and hence the reduction in Gross profit ratio. The increase in Cost of Revenue is on account Salaries to Employees since their has been major increase in the number of employees for both the companies and also there has been an increment in the salary.
Net profit ratio (PAT/Turnover)
Net Profit ratio has rised slightly for Genpact ans Significantly for EXLS. For both the companies though the expense has increased but there has been an increase in Foreign Exchange gain which increased their profitability ratio
Operating profit ratio (EBIT/Turnover)
There has been a significant drop in EBIT of Genpact because of its rising expenditure and rising depreciation. On the other hand for EXLS the increase in expenditure is below the increase in revenues and hence there has been a rise in the Operating Profit
ROI (EBIT/C.E)
Return on Investment has increased for EXLS because there has been an increase in the net profit. On the other hand the return for Genpact has reduced due to issuance of new shares. Though the profit has increased but the increase in Investment is more than the increase in profit.
ROE (PAT/N.W)
This ratio goes in sync with the return on Investment. However in this case we see that the PAT for Genpact is more than the EBIT. This is on account of Foreign exchange Currency Fluctuations.
Financial Leverage Ratios
Debt equity ratio (Total Long Term Debts/ Total Equity)
EXLS is a zero debt company and there all the profit goes to shareholders. On the other hand the ratio for Genpact has reduced because it has issues shares in the current year and also some loans has been reimbursed and thus reducing its Debt Equity ratio
Liquidity Ratios
Current Ratio
Current ratio signifies the firms ability to meet its short term liabilities. There has been an increase in current ratio for both EXLS and Genpact. For Genpact it is majorly on account of the increase in Cash which is on account of the proceeds from IPO. On the other hand for EXL the increase in Current ratio is because of increase in Cash and Short Term Investments. Cash is increasing on account of Operating Activity and Financing Activity.
Absolute liquid ratio / cash ratio
Both Genpact and EXLS are zero inventory company but they are cash rich. The major increase in the ratio for Genpact is because of increase in cash which was on account of the IPO. For EXLS also the ratio has increased significantly on account of increased cash flow from Operating Activities
Efficiency Ratios
Fixed asset turnover ratios
The Effieciency of Fixed Asset has almost doubled in the case of EXLS. This is on account of their reduction in intangible assets and increase in Turnover. On the other hand Total Fixed Assets has increased for Genpact and therefore causing a reduction in the efficiency of its assets.
Business per employee(Total Revenue/No. of Employees)
This ratio is significant to Service industry where the revenues are majorly based on the performance of the employee. We see that though the Employee base for both the company is increasing but there has still been an increase in the revenue per employee as the revenue increase has been more than the increase in the number of Employees. This ratio is significant as it helps in calculating the bonus which should be paid to the employees. It depends on the revenue which an employee generates less salary to calculate the bonus payout ratio.
doc_799112541.doc