UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________________________________________

FORM 10-Q

_________________________________________________________

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER 001-33089

_________________________________________________________

EXLSERVICE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

_________________________________________________________

Delaware		82-0572194
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
320 Park Avenue,	29th Floor,
New York,	New York	10022
(Address of principal executive offices)		(Zip code)

(212) 277-7100

(Registrant’s telephone number, including area code)

________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	EXLS	NASDAQ

As of July 26, 2019, there were 34,174,860 shares of the registrant’s common stock outstanding, par value $0.001 per share.

TABLE OF CONTENTS

		PAGE
ITEM
	Part I. Financial Information	3
1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets as of June 30, 2019 (Unaudited) and December 31, 2018	3
	Consolidated Statements of Income (Unaudited) for the Three and Six months ended June 30, 2019 and 2018	4
	Consolidated Statements of Comprehensive Income/(Loss) (Unaudited) for the Three and Six months ended June 30, 2019 and 2018	5
	Consolidated Statements of Equity (Unaudited) for the Three and Six months ended June 30, 2019 and 2018	6
	Consolidated Statements of Cash Flows (Unaudited) for the Six months ended June 30, 2019 and 2018	8
	Notes to Consolidated Financial Statements (Unaudited)	9
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
3.	Quantitative and Qualitative Disclosures About Market Risk	59
4.	Controls and Procedures	59
	Part II. Other Information	59
1.	Legal Proceedings	59
1A.	Risk Factors	59
2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
3.	Defaults Upon Senior Securities	60
4.	Mine Safety Disclosures	60
5.	Other Information	60
6.	Exhibits	60
Signatures		62

2

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	As of
	June 30, 2019			December 31, 2018
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	84,842		$	95,881
Short-term investments	168,204			184,489
Restricted cash	4,098			5,608
Accounts receivable, net	180,680			164,752
Prepaid expenses	11,616			11,326
Advance income tax, net	7,906			9,639
Other current assets	31,729			28,240
Total current assets	489,075			499,935
Property and equipment, net	78,083			73,510
Operating lease right-of-use assets	93,162			—
Restricted cash	2,507			2,642
Deferred tax assets, net	4,200			6,602
Intangible assets, net	84,402			95,495
Goodwill	350,220			349,984
Other assets	33,194			31,015
Investment in equity affiliate	2,624			2,753
Total assets	$	1,137,467		$	1,061,936
Liabilities and equity
Current liabilities:
Accounts payable	$	3,269		$	5,653
Current portion of long-term borrowings	20,885			21,423
Deferred revenue	11,790			7,722
Accrued employee costs	42,967			54,893
Accrued expenses and other current liabilities	65,007			64,169
Current portion of operating lease liabilities	23,439			—
Income taxes payable	604			1,012
Current portion of finance lease obligations	279			223
Total current liabilities	168,240			155,095
Long term borrowings	231,409			263,241
Finance lease obligations, less current portion	474			315
Deferred tax liabilities, net	6,366			8,445
Operating lease liabilities, less current portion	80,531			—
Other non-current liabilities	9,094			16,521
Total liabilities	496,114			443,617
Commitments and contingencies (Refer Note 26)
Preferred stock, $0.001 par value; 15,000,000 shares authorized, none issued	—			—
ExlService Holdings, Inc. Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized, 38,295,083 shares issued and 34,206,324 shares outstanding as of June 30, 2019 and 37,850,544 shares issued and 34,222,476 shares outstanding as of December 31, 2018	38			38
Additional paid-in capital	378,633			364,179
Retained earnings	511,503			484,244
Accumulated other comprehensive loss	(74,358		)	(83,467		)
Total including shares held in treasury	815,816			764,994
Less: 4,088,759 shares as of June 30, 2019 and 3,628,068 shares as of December 31, 2018, held in treasury, at cost	(174,463		)	(146,925		)
Stockholders’ equity	641,353			618,069
Non-controlling interest	—			250
Total equity	641,353			618,319
Total liabilities and equity	$	1,137,467		$	1,061,936

See accompanying notes to unaudited consolidated financial statements.

3

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except share and per share amounts)

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Revenues, net	$	243,509		$	210,112		$	483,082		$	417,085
Cost of revenues(1)	162,446			139,649			319,686			277,750
Gross profit(1)	81,063			70,463			163,396			139,335
Operating expenses:
General and administrative expenses	31,228			27,640			63,759			56,906
Selling and marketing expenses	17,647			15,151			35,694			29,103
Depreciation and amortization	12,752			10,582			26,419			21,086
Impairment and restructuring charges	5,580			—			6,807			—
Total operating expenses	67,207			53,373			132,679			107,095
Income from operations	13,856			17,090			30,717			32,240
Foreign exchange gain, net	1,202			1,414			2,462			2,029
Interest expense	(3,864		)	(706		)	(7,446		)	(1,244		)
Other income, net	4,102			2,232			8,525			5,766
Income before income tax expense and earnings from equity affiliates	15,296			20,030			34,258			38,791
Income tax expense	2,670			5,510			6,870			1,057
Income before earnings from equity affiliates	12,626			14,520			27,388			37,734
Loss from equity-method investment	62			58			129			114
Net income attributable to ExlService Holdings, Inc. stockholders	$	12,564		$	14,462		$	27,259		$	37,620
Earnings per share attributable to ExlService Holdings, Inc. stockholders:
Basic	$	0.36		$	0.42		$	0.79		$	1.09
Diluted	$	0.36		$	0.41		$	0.78		$	1.07
Weighted-average number of shares used in computing earnings per share attributable to ExlService Holdings, Inc. stockholders:
Basic	34,451,671			34,511,777			34,413,455			34,479,202
Diluted	34,702,547			35,142,388			34,768,203			35,222,838

(1) Exclusive of depreciation and amortization.

See accompanying notes to unaudited consolidated financial statements.

4

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (UNAUDITED)

(In thousands)

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Net income	$	12,564		$	14,462		$	27,259		$	37,620
Other comprehensive income/(loss):
Unrealized gain/(loss) on effective cash flow hedges, net of taxes $693, ($3,573), $1,882 and ($4,373), respectively	2,595			(8,656		)	7,343			(12,870		)
Foreign currency translation gain/(loss)	604			(18,219		)	3,284			(26,030		)
Reclassification adjustments
Gain on cash flow hedges, net of taxes ($560), ($426), ($206) and ($1,202), respectively(1)	(324		)	(1,041		)	(1,349		)	(2,936		)
Retirement benefits, net of taxes ($19), ($3), $90 and ($2), respectively(2)	(21		)	(35		)	(169		)	(75		)
Total other comprehensive income/(loss)	$	2,854		$	(27,951	)	$	9,109		$	(41,911	)
Total comprehensive income/(loss)	$	15,418		$	(13,489	)	$	36,368		$	(4,291	)

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

(2) These are reclassified to net income and are included in other income, net in the unaudited consolidated statements of income. Refer Note 20 to the unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

5

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

For the three months ended June 30, 2019 and 2018

(In thousands, except share and per share amounts)

	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss)/Income			Treasury Stock					Non - Controlling Interest			Total Equity
	Shares	Amount									Shares		Amount
Balance as of March 31, 2019	38,256,036	$	38	$	371,144	$	498,939	$	(77,212	)	(3,890,599	)	$	(162,333	)	$	259		$	630,835
Stock issued against stock-based compensation plans	39,047	—		316		—		—			—		—			—			316
Stock-based compensation	—	—		7,155		—		—			—		—			—			7,155
Acquisition of treasury stock	—	—		—		—		—			(198,160	)	(12,130		)	—			(12,130		)
Purchase of non-controlling interest	—	—		18		—		—			—		—			(259		)	(241		)
Other comprehensive income	—	—		—		—		2,854			—		—			—			2,854
Net income	—	—		—		12,564		—			—		—			—			12,564
Balance as of June 30, 2019	38,295,083	$	38	$	378,633	$	511,503	$	(74,358	)	(4,088,759	)	$	(174,463	)	$	—		$	641,353

	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss			Treasury Stock					Non - Controlling Interest		Total Equity
	Shares	Amount									Shares		Amount
Balance as of March 31, 2018	37,568,973	$	38	$	327,750	$	450,676	$	(59,670	)	(3,126,011	)	$	(117,320	)	$	231	$	601,705
Stock issued against stock-based compensation plans	14,187	—		—		—		—			—		—			—		—
Stock-based compensation	—	—		6,893		—		—			—		—			—		6,893
Acquisition of treasury stock	—	—		—		—		—			(168,835	)	(9,632		)	—		(9,632		)
Non-controlling interest	—	—		—		—		—			—		—			2		2
Other comprehensive loss	—	—		—		—		(27,951		)	—		—			—		(27,951		)
Net income	—	—		—		14,462		—			—		—			—		14,462
Balance as of June 30, 2018	37,583,160	$	38	$	334,643	$	465,138	$	(87,621	)	(3,294,846	)	$	(126,952	)	$	233	$	585,479

6

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

For the six months ended June 30, 2019 and 2018

(In thousands, except share and per share amounts)

	Common Stock			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive (Loss)/Income			Treasury Stock					Non - Controlling Interest			Total Equity
	Shares	Amount										Shares		Amount
Balance as of January 1, 2019	37,850,544	$	38	$	364,179		$	484,244	$	(83,467	)	(3,628,068	)	$	(146,925	)	$	250		$	618,319
Stock issued against stock-based compensation plans	444,539	—		338			—		—			—		—			—			338
Stock-based compensation	—	—		14,111			—		—			—		—			—			14,111
Acquisition of treasury stock	—	—		—			—		—			(460,691	)	(27,538		)	—			(27,538		)
Allocation of equity component related to issuance costs on convertible senior notes	—	—		(13		)	—		—			—		—			—			(13		)
Purchase of non-controlling interest, net of its share of income	—	—		18			—		—			—		—			(250		)	(232		)
Other comprehensive income	—	—		—			—		9,109			—		—			—			9,109
Net income	—	—		—			27,259		—			—		—			—			27,259
Balance as of June 30, 2019	38,295,083	$	38	$	378,633		$	511,503	$	(74,358	)	(4,088,759	)	$	(174,463	)	$	—		$	641,353

	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss			Treasury Stock					Non - Controlling Interest		Total Equity
	Shares	Amount									Shares		Amount
Balance as of December 31, 2017	36,790,751	$	37	$	322,246	$	427,064	$	(45,710	)	(2,902,018	)	$	(103,816	)	$	224	$	600,045
Impact of adoption of ASU 2016-09	—	—		—		454		—			—		—			—		454
Balance as of January 1, 2018	36,790,751	$	37	$	322,246	$	427,518	$	(45,710	)	(2,902,018	)	$	(103,816	)	$	224	$	600,499
Stock issued against stock-based compensation plans	792,409	1		430		—		—			—		—			—		431
Stock-based compensation	—	—		11,967		—		—			—		—			—		11,967
Acquisition of treasury stock	—	—		—		—		—			(392,828	)	(23,136		)	—		(23,136		)
Non-controlling interest	—	—		—		—		—			—		—			9		9
Other comprehensive loss	—	—		—		—		(41,911		)	—		—			—		(41,911		)
Net income	—	—		—		37,620		—			—		—			—		37,620
Balance as of June 30, 2018	37,583,160	$	38	$	334,643	$	465,138	$	(87,621	)	(3,294,846	)	$	(126,952	)	$	233	$	585,479

See accompanying notes to unaudited consolidated financial statements.

7

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

	Six months ended June 30,
	2019			2018
Cash flows from operating activities:
Net income	$	27,259		$	37,620
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	26,532			21,279
Stock-based compensation expense	14,111			11,967
Amortization of operating lease right-of-use assets	13,701			—
Unrealized gain on short term investments	(4,362		)	(3,940		)
Unrealized foreign exchange loss/(gain), net	1,967			(7,782		)
Deferred income tax (benefit)/expense	(2,631		)	543
Allowance for doubtful accounts receivable	281			(590		)
Loss from equity-method investment	129			114
Amortization of non-cash interest expense related to convertible senior notes	1,218			—
Impairment charges	3,167			—
Others, net	961			123
Change in operating assets and liabilities:
Accounts receivable	(16,478		)	(11,719		)
Prepaid expenses and other current assets	(2,033		)	(2,430		)
Advance income tax, net	1,345			(7,605		)
Other assets	126			(4,287		)
Accounts payable	(2,114		)	(1,343		)
Deferred revenue	5,654			(199		)
Accrued employee costs	(12,567		)	(20,711		)
Accrued expenses and other liabilities	5,200			2,753
Operating lease liabilities	(13,749		)	—
Net cash provided by operating activities	47,717			13,793
Cash flows from investing activities:
Purchase of property and equipment	(22,287		)	(19,296		)
Purchase of non-controlling interest	(241		)	—
Business acquisition (net of cash acquired)	—			(495		)
Purchase of investments	(68,188		)	(40,663		)
Proceeds from redemption of investments	91,669			60,811
Net cash provided by investing activities	953			357
Cash flows from financing activities:
Principal payments on finance lease obligations	(207		)	(83		)
Proceeds from borrowings	46,000			12,000
Repayments of borrowings	(79,590		)	(5,065		)
Payment of debt issuance costs	(117		)	—
Acquisition of treasury stock	(27,538		)	(23,136		)
Proceeds from exercise of stock options	338			431
Net cash used for financing activities	(61,114		)	(15,853		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(240		)	(2,582		)
Net decrease in cash, cash equivalents and restricted cash	(12,684		)	(4,285		)
Cash, cash equivalents and restricted cash at beginning of period	104,131			94,277
Cash, cash equivalents and restricted cash at end of period	$	91,447		$	89,992

See accompanying notes to unaudited consolidated financial statements.

8

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(In thousands, except share and per share amounts)

1. Organization

ExlService Holdings, Inc. (“ExlService Holdings”) is organized as a corporation under the laws of the state of Delaware. ExlService Holdings, together with its subsidiaries and affiliates (collectively, the “Company”), operates in the Business Process Management (“BPM”) industry providing operations management services and analytics services that help businesses enhance revenue growth and improve profitability. Using its proprietary platforms, methodologies and tools, the Company looks deeper to help companies improve global operations, enhance data-driven insights, increase customer satisfaction, and manage risk and compliance. The Company’s clients are located principally in the United States of America (“U.S.”) and the United Kingdom (“U.K”).

2. Summary of Significant Accounting Policies

(a) Basis of Preparation and Principles of Consolidation

The unaudited consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (“US GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

The unaudited consolidated financial statements reflect all adjustments (of a normal and recurring nature) that management considers necessary for a fair presentation of such statements for the interim periods presented. The unaudited consolidated statements of income for the interim periods presented are not necessarily indicative of the results for the full year or for any subsequent period.

The accompanying unaudited consolidated financial statements include the financial statements of ExlService Holdings and all of its subsidiaries. The standalone financial statements of subsidiaries are fully consolidated on a line-by-line basis. Intra-group balances and transactions, and income and expenses arising from intra-group transactions, are eliminated while preparing those financial statements.

Accounting policies of the respective individual subsidiary and associate are aligned, wherever necessary, so as to ensure consistency with the accounting policies that are adopted by the Company under US GAAP.

The Company’s investments in equity affiliates are initially recorded at cost and any excess cost over proportionate share of the fair value of the net assets of the investee at the acquisition date is recognized as goodwill. The proportionate share of net income or loss of the investee is recognized in the unaudited consolidated statements of income.

(b) Use of Estimates

The preparation of the unaudited consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the unaudited consolidated statements of income during the reporting period. Although these estimates are based on management’s best assessment of the current business environment, actual results may be different from those estimates. The significant estimates and assumptions that affect the financial statements include, but are not limited to, allowance for doubtful receivables, expected recoverability from customers with contingent fee arrangements, recoverability of dues from statutory authorities, assets and obligations related to employee benefit plans, deferred tax valuation allowances, income-tax uncertainties and other contingencies, valuation of derivative financial instruments, assumptions used to calculate stock-based compensation expense, assumptions used to determine incremental borrowing rate to calculate lease liabilities and right-of-use (“ROU”) assets, lease term to calculate lease cost, depreciation and amortization periods, purchase price allocation, recoverability of long-lived assets including goodwill and intangibles, and estimated costs to complete fixed price contracts.

9

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

(c) Employee Benefits

Contributions to defined contribution plans are charged to the unaudited consolidated statements of income in the period in which services are rendered by the covered employees. Current service costs for defined benefit plans are accrued in the period to which they relate. The liability in respect of defined benefit plans is calculated annually by the Company using the projected unit credit method. Prior service cost, if any, resulting from an amendment to a plan is recognized and amortized over the remaining period of service of the covered employees.

The Company recognizes its liabilities for compensated absences depending on whether the obligation is attributable to employee services already rendered, relates to rights that vest or accumulate and payment is probable and estimable.

The Company includes the service cost component of the net periodic benefit cost in the same line item or items as other compensation costs arising from services rendered by the respective employees during the period. The interest cost, expected return on plan assets and amortization of actuarial gains/loss are classified in “Other income, net”. Refer Note 20 to the unaudited consolidated financial statements for details.

(d) Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments purchased with an original maturity of ninety days or less to be cash equivalents. Pursuant to the Company’s investment policy, surplus funds are invested in highly-rated debt mutual funds, money market accounts and time deposits to reduce its exposure to market risk with regard to these funds.

Restricted cash represents amounts on deposit with banks against bank guarantees issued through banks in favor of relevant statutory authorities for equipment imports, deposits for obtaining indirect tax registrations and for demands against pending income tax assessments (refer Note 26 to the unaudited consolidated financial statements for details). These deposits with banks have maturity dates after June 30, 2020. Restricted cash presented under current assets represents funds held on behalf of clients in dedicated bank accounts.

For purposes of the unaudited statements of cash flows, the Company includes in its cash and cash-equivalent balances those amounts that have been classified as restricted cash and restricted cash equivalents.

(e) Revenue Recognition

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

Revenue is measured based on consideration specified in a contract with a customer and excludes discounts and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by providing services to a customer.

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.  

Nature of services

The Company derives its revenues from operations management and analytics services. The Company operates in the business process management (“BPM”) industry providing operations management and analytics services helping businesses enhance revenue growth and improve profitability. The Company provides BPM or “operations management” services, which typically involve transfer to the Company of business operations of a client, after which it administers and manages those operations for its client on an ongoing basis. The Company also provides industry-specific digital transformational services related to operations management services, and analytics services that focus on driving improved business outcomes for clients by generating data-driven insights across all parts of their business. The Company also provides care optimization and reimbursement optimization services, for its clients through its healthcare analytics solutions and services. The Company offers integrated solutions to help its clients with cost containment by leveraging technology platforms, customizable and configurable analytics and expertise in healthcare reimbursements to help clients enhance their claims payment accuracy.

10

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

June 30, 2019

(In thousands, except share and per share amounts)

Type of Contracts

a. Revenues under time-and-material, transaction and outcome-based contracts are recognized as the services are performed. When the terms of the client contract specify service level parameters that must be met (such as turnaround time or accuracy), the Company monitors such service level parameters to determine if any service credits or penalties have been incurred. Revenues are recognized net of any penalties or service credits that are due to a client.

b. Revenues from arrangements involving subcontracting, either in part or whole of the assigned work, are recognized after Company’s assessment of “Principal versus agent considerations”. The Company evaluates whether it is in control of the services before the same are transferred to the customer to assess whether it is Principal or Agent in the arrangement. Revenues are recognized on Gross basis if the Company is in the capacity of Principal and on Net basis if it falls in the capacity of an agent.

c. Revenues for the Company’s fixed-price contracts are recognized using the proportional performance method when the pattern of performance under the contracts can be reasonably determined. The Company estimates the proportional performance of a contract by comparing the actual number of hours or days worked to the estimated total number of hours or days required to complete each engagement. The use of the proportional performance method requires significant judgment relative to estimating the number of hours or days required to complete the contracted scope of work, including assumptions and estimates relative to the length of time to complete the project and the nature and complexity of the work to be performed. The Company regularly monitors its estimates for completion of a project and record changes in the period in which a change in an estimate is determined. If a change in an estimate results in a projected loss on a project, such loss is recognized in the period in which it is first identified.

d. Revenue from the Company’s software and related services contracts, which are not significant, are primarily related to annual maintenance renewals or incremental license fees for additional users. Maintenance revenues are generally recognized on a straight-line basis over the annual contract term. Fees for incremental license without any associated services are recognized upon delivery of the related incremental license.

To a lesser extent, certain contracts may include offerings such as sale of licenses, which may be perpetual or subscription-based. The Company recognizes revenue from distinct perpetual licenses upfront at a point in time when the software is made available to the client, whereas for a combined software license and services performance obligation, revenue is recognized over the period that the services are performed.

Revenue from distinct subscription based licenses is recognized over the period of service performed. Revenue from any associated maintenance or ongoing support services is recognized over the term of the contract.

e. Revenues from reimbursement optimization services having contingent fee arrangements are recognized by the Company at the point in time when a performance obligation is satisfied, which is when it identifies an overpayment claim and the same is acknowledged by its customers. In such contracts, the Company’s consideration is contingent upon the actual collections made by its customers and subsequent potential retraction claims. Based on guidance on “variable consideration” in Topic 606, the Company uses its historical experience and projections to determine the expected recoveries from its customers and recognizes revenue based upon such expected recoveries. Any adjustment required due to change in estimates are recorded in the period in which such change is identified.

Modification to contracts

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

Arrangements with Multiple Performance Obligations

The Company’s contracts with customers do not generally bundle different services together except for software and related services contracts, which are not significant, involving implementation services and post contract maintenance services. In such

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(In thousands, except share and per share amounts)

software and related services contracts, revenue is allocated to each performance obligation based on the relative standalone selling price. A separate contract is generally drafted for each type of service sold, even if to the same customer.

Variable Consideration

Variability in the transaction price arises primarily due to service level agreements, pre-payment and volume discounts.

The Company considers its experience with similar transactions and expectations regarding the contract in estimating the amount of variable consideration that should be recognized during a period.

The Company believes that the expected value method is most appropriate for determining the variable consideration since the Company has large number of contracts with similar nature of transactions/services.

Allocation of transaction price to performance obligations

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

Unbilled Receivables

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

Deferred Revenue

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

Contract Acquisition Cost

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

Upfront payment made to customer

Upfront payments, if any, made to customers are contract assets and classified under “Other Current Assets and Other Assets” in the consolidated balance sheets. Such costs are amortized over the expected period of benefit and are recorded as an adjustment to transaction price and reduced from revenues.

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(In thousands, except share and per share amounts)

Out of pocket expenses

Reimbursements of out-of-pocket expenses received from clients are included as part of revenues.

Payment terms

All contracts entered into by the Company specify the payment terms and are defined for each contract separately. Usual payment terms range between 30-60 days. The Company does not have any extended payment terms clauses in existing contracts.

Remaining Performance Obligation

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

i. Contract with an original expected length of one year or less as determined under ASC 606,

ii. Contracts for which Company recognize revenue based on the right to invoice for service performed.

Accounts Receivable

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

(f) Leases

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

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

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

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

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

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(In thousands, except share and per share amounts)

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

(g) Recent Accounting Pronouncements    

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments - Credit Losses, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is to be deducted from the amortized cost of the financial asset(s) so as to present the net carrying value at the amount expected to be collected on the financial asset. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendment should be applied through a modified retrospective approach. Early adoption as of the fiscal years beginning after December 15, 2018 is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

In August 2018, FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity is permitted to early adopt either the entire standard or only the provisions that eliminate or modify requirements. The adoption of this ASU is not expected to have any material effect on the Company’s consolidated financial statements.

In August 2018, FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this ASU remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The amendments in ASU are effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The adoption of this ASU is not expected to have any material effect on the Company’s consolidated financial statements.

In August 2018, FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the ASU requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in FASB Accounting Standard Codification Subtopic 350-40 on internal-use software to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The ASU 2018-15 also provides guidance on amortization and impairment of any costs capitalized, along with new presentation and disclosure requirements. The new guidance is effective for fiscal years beginning after December 15, 2019.  Early adoption is permitted and both prospective and retrospective transition methods are allowed. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

In April 2019, FASB issued ASU no. 2019-04, Codification Improvements to Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Financial Instruments: Targeted Transition Relief (Topic 825). The amendments clarify the scope of the credit losses standard and address issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. With respect to hedge accounting, the amendments address partial-term fair value hedges, fair value hedge basis adjustments, and certain transition requirements, among other things. With respect to recognizing and measuring financial instruments, the amendment in ASU address the scope of the guidance, the requirement for remeasurement under ASC 820 when using the measurement alternative, certain disclosure requirements and which equity securities have to be remeasured at historical exchange rates. This ASU is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

In May 2019, FASB issued ASU no. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. This ASU provide entities with the option to irrevocably elect the fair value option, on an instrument-by-instrument basis in accordance with Subtopic 825-10, for certain financial instruments that are within the scope of Subtopic 326-20, upon adopting Topic 326. The fair value option election does not apply to held-to-maturity debt securities. The amendments in this Update provide entities with targeted transition relief that is intended to increase comparability of financial statement information for some entities

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(In thousands, except share and per share amounts)

that otherwise would have measured similar financial instruments using different measurement methodologies. This ASU is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

(h) Recently Adopted Accounting Pronouncements

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

In July 2018, FASB issued ASU No. 2018-11, Leases (Topic 842), which provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). The Company adopted Topic 842 as of January 1, 2019 using this ASU. Refer Note 21 to the unaudited consolidated financial statements for details.

3. Segment and Geographical Information

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

The Company presents information for the following reportable segments:

• Insurance

• Healthcare

• Travel, Transportation and Logistics (“TT&L”)

• Finance and Accounting (“F&A”)

• Analytics, and

• All Other (consisting of the Company's remaining operating segments, which are the Banking and Financial Services, Utilities and Consulting operating segments).

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

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(In thousands, except share and per share amounts)

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

Revenues and cost of revenues for the three months ended June 30, 2019 and 2018, respectively, for each of the reportable segments, are as follows:

	Three months ended June 30, 2019
	Insurance		Healthcare		TT&L	F&A	All Other	Analytics	Total
Revenues, net	$	72,236	$	20,016