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 MARCH 31, 2022    

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)

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, par value $0.001 per share	EXLS	NASDAQ

Securities registered pursuant to Section 12(g) of the Act:

None

________________________________________________________

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 every Interactive Data File required to be submitted 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 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.

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  ☒

As of April 26, 2022, there were 33,286,190 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 (UNAUDITED)
	Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	3
	Consolidated Statements of Income for the Three Months Ended March 31, 2022 and 2021	5
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2022 and 2021	6
	Consolidated Statements of Equity for the Three Months Ended March 31, 2022 and 2021	7
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021	8
	Notes to Consolidated Financial Statements	9
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
3.	Quantitative and Qualitative Disclosures About Market Risk	50
4.	Controls and Procedures	50
	Part II. Other Information	50
1.	Legal Proceedings	50
1A.	Risk Factors	50
2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
3.	Defaults Upon Senior Securities	51
4.	Mine Safety Disclosures	51
5.	Other Information	51
6.	Exhibits	52
Signatures		53

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED) 

(In thousands, except per share amount and share count)

	As of
	March 31, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	106,540	$	135,337
Short-term investments	162,694		178,538
Restricted cash	6,274		6,174
Accounts receivable, net	239,279		194,232
Prepaid expenses	20,118		14,655
Advance income tax, net	9,336		15,199
Other current assets	28,377		34,009
Total current assets	572,618		578,144
Property and equipment, net	85,610		86,008
Operating lease right-of-use assets	75,147		76,692
Restricted cash	2,255		2,299
Deferred tax assets, net	22,447		21,404
Intangible assets, net	76,578		81,082
Goodwill	404,561		403,902
Other assets	32,215		30,369
Investment in equity affiliate	3,118		3,004
Total assets	$	1,274,549	$	1,282,904
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	4,796	$	5,647
Current portion of long-term borrowings	35,000		260,016
Deferred revenue	22,571		20,000
Accrued employee costs	52,276		114,285
Accrued expenses and other current liabilities	86,911		76,350
Current portion of operating lease liabilities	19,308		18,487
Income taxes payable, net	1,259		901
Total current liabilities	222,121		495,686
Long-term borrowings, less current portion	260,000		—
Operating lease liabilities, less current portion	66,173		68,506
Income taxes payable	1,790		1,790
Deferred tax liabilities, net	928		965
Other non-current liabilities	23,196		22,801
Total liabilities	574,208		589,748
Commitments and contingencies (Refer to Note 23)
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, 39,794,154 shares issued and 33,328,744 shares outstanding as of March 31, 2022 and 39,508,340 shares issued and 33,291,482 shares outstanding as of December 31, 2021	40		40

3

Additional paid-in capital	406,966		395,742
Retained earnings	792,315		756,137
Accumulated other comprehensive income/(loss)	(98,306)		(89,474)
Total including shares held in treasury	1,101,015		1,062,445
Less: 6,465,410 shares as of March 31, 2022 and 6,216,858 shares as of December 31, 2021, held in treasury, at cost	(400,674)		(369,289)
Stockholders’ equity	700,341		693,156
Total equity	700,341		693,156
Total liabilities and stockholders’ equity	$	1,274,549	$	1,282,904

See accompanying notes to unaudited consolidated financial statements.

4

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except per share amount and share count)

	Three months ended March 31,
	2022		2021
Revenues, net	$	329,208	$	261,415
Cost of revenues (1)	207,516		158,821
Gross profit (1)	121,692		102,594
Operating expenses:
General and administrative expenses	39,945		30,703
Selling and marketing expenses	24,170		18,235
Depreciation and amortization expense	13,602		12,101
Total operating expenses	77,717		61,039
Income from operations	43,975		41,555
Foreign exchange gain, net	1,756		434
Interest expense	(876)		(2,474)
Other income, net	2,411		1,410
Income before income tax expense and earnings from equity affiliates	47,266		40,925
Income tax expense	11,202		8,958
Income before earnings from equity affiliates	36,064		31,967
Gain/(loss) from equity-method investment	114		(36)
Net income attributable to ExlService Holdings, Inc. stockholders	$	36,178	$	31,931
Earnings per share attributable to ExlService Holdings, Inc. stockholders:
Basic	$	1.08	$	0.95
Diluted	$	1.07	$	0.93
Weighted-average number of shares used in computing earnings per share attributable to ExlService Holdings Inc. stockholders:
Basic	33,442,038		33,734,118
Diluted	33,894,868		34,318,318

(1) Exclusive of depreciation and amortization expense.

See accompanying notes to unaudited consolidated financial statements.

5

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)

	Three months ended March 31,
	2022		2021
Net income	$	36,178	$	31,931
Other comprehensive income/(loss):
Unrealized gain/(loss) on cash flow hedges	(517)		568
Foreign currency translation loss	(7,445)		(1,911)
Reclassification adjustments
Gain on cash flow hedges(1)	(1,989)		(2,829)
Retirement benefits(2)	155		179
Income tax effects relating to above(3)	964		224
Total other comprehensive income/(loss)	$	(8,832)	$	(3,769)
Total comprehensive income	$	27,346	$	28,162

(1)These are reclassified to net income and are included in cost of revenues and operating expenses, as applicable in the unaudited consolidated statements of income. Refer to Note 16 - Derivatives and Hedge Accounting to the unaudited consolidated financial statements.

(2)These are reclassified to net income and are included in other income, net in the unaudited consolidated statements of income. Refer to Note 19 - Employee Benefit Plans to the unaudited consolidated financial statements.

(3)These are income tax effects recognized on cash flow hedges, retirement benefits and foreign currency translation gains/(losses). Refer to Note 21 - Income Taxes to the unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

6

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

For the three months ended March 31, 2022 and 2021

(In thousands, except share count)

	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income/(Loss)		Treasury Stock			Total Equity
	Shares	Amount								Shares	Amount
Balance as of January 1, 2022	39,508,340	$	40	$	395,742	$	756,137	$	(89,474)	(6,216,858)	$	(369,289)	$	693,156
Stock issued against stock-based compensation plans	285,814	—		—		—		—		—	—		—
Stock-based compensation	—	—		11,224		—		—		—	—		11,224
Acquisition of treasury stock	—	—		—		—		—		(248,552)	(31,385)		(31,385)
Other comprehensive loss	—	—		—		—		(8,832)		—	—		(8,832)
Net income	—	—		—		36,178		—		—	—		36,178
Balance as of March 31, 2022	39,794,154	$	40	$	406,966	$	792,315	$	(98,306)	(6,465,410)	$	(400,674)	$	700,341

	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income/(Loss)		Treasury Stock			Total Equity
	Shares	Amount								Shares	Amount
Balance as of January 1, 2021	38,968,052	$	39	$	420,976	$	641,379	$	(74,984)	(5,408,618)	$	(268,238)	$	719,172
Stock issued against stock-based compensation plans	305,937	—		74		—		—		—	—		74
Stock-based compensation	—	—		7,832		—		—		—	—		7,832
Acquisition of treasury stock	—	—		—		—		—		(338,482)	(29,015)		(29,015)
Other comprehensive loss	—	—		—		—		(3,769)		—	—		(3,769)
Net income	—	—		—		31,931		—		—	—		31,931
Balance as of March 31, 2021	39,273,989	$	39	$	428,882	$	673,310	$	(78,753)	(5,747,100)	$	(297,253)	$	726,225

See accompanying notes to unaudited consolidated financial statements.

7

EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

	Three months ended March 31,
	2022		2021
Cash flows from operating activities:
Net income	$	36,178	$	31,931
Adjustments to reconcile net income to net cash (used for)/provided by operating activities:
Depreciation and amortization expense	13,669		12,266
Stock-based compensation expense	11,224		7,832
Amortization of operating lease right-of-use assets	6,043		6,761
Unrealized gain on short term investments	(384)		(1,103)
Unrealized foreign currency exchange gain, net	(3,165)		(1,139)
Deferred income tax benefit	(193)		(2,695)
Allowance for expected credit losses	34		48
(Gain)/loss from equity-method investment	(114)		36
Amortization of non-cash interest expense related to convertible senior notes	—		673
Others, net	819		216
Change in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(45,659)		(11,818)
Prepaid expenses and other current assets	(1,116)		(21)
Advance income tax, net	6,185		9,057
Other assets	(2,924)		1,268
Accounts payable	(808)		1,902
Deferred revenue	3,707		(17,986)
Accrued employee costs	(60,008)		(23,611)
Accrued expenses and other liabilities	15,647		8,456
Operating lease liabilities	(6,005)		(6,868)
Net cash (used for)/provided by operating activities	(26,870)		15,205
Cash flows from investing activities:
Purchases of property and equipment	(16,101)		(12,680)
Proceeds from sale of property and equipment	63		129
Business acquisition (net of cash and cash equivalents acquired)	(1,367)		—
Purchases of investments	(36,804)		(18,835)
Proceeds from redemption of investments	49,515		5,357
Net cash used for investing activities	(4,694)		(26,029)
Cash flows from financing activities:
Principal payments of finance lease liabilities	(39)		(57)
Proceeds from borrowings	35,000		25,000
Repayments of borrowings	—		(25,000)
Acquisition of treasury stock	(31,385)		(29,015)
Proceeds from exercise of stock options	—		75
Net cash provided by/(used for) financing activities	3,576		(28,997)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(753)		(984)
Net decrease in cash, cash equivalents and restricted cash	(28,741)		(40,805)
Cash, cash equivalents and restricted cash at the beginning of the period	143,810		225,519
Cash, cash equivalents and restricted cash at the end of the period	$	115,069	$	184,714
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	1,277	$	610
Income taxes, net of refunds	$	5,404	$	2,415
Supplemental disclosure of non-cash investing and financing activities:
Assets acquired under finance lease	$	50	$	10

See accompanying notes to unaudited consolidated financial statements.

8

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(In thousands, except per share amount and share count)

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”), is a leading data analytics and digital operations and solutions company that partners with clients to improve business outcomes and unlock growth. By bringing together deep domain expertise with robust data, powerful analytics, cloud, artificial intelligence and machine learning, the Company creates agile, scalable solutions and executes complex operations for the world’s leading corporations in industries including insurance, healthcare, banking and financial services, media, and retail, among others. The Company’s data-led value creation framework enables better and faster decision making, leveraging its end-to-end data and analytics capabilities to drive improved business outcomes, and re-designing of operating models to integrate advanced technology into operational workflows. The Company embeds digital operations and solutions into clients’ businesses and introduces its data led approach to transform operations. Accordingly, as the Company’s operations management services are now a part of its digital operations and solutions, they are referred to as “digital operations and solutions” herein; however, the Company has not changed the way in which it manages its business or its operating segments or segment reporting structure.

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 (“U.S. 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 U.S. 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, 2021.

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

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

The Company’s investments in equity affiliates are initially recorded at cost and any excess purchase consideration paid 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 after its acquisition is recognized in the unaudited consolidated statements of income.

(b) Use of Estimates

The preparation of the unaudited consolidated financial statements in conformity with U.S. 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

9

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2022

(In thousands, except per share amount and share count)

business environment, actual results may be different from those estimates. The significant estimates and assumptions that affect the unaudited consolidated financial statements include, but are not limited to, estimates of the fair value of the identifiable intangible assets and contingent consideration, purchase price allocation, including revenue projections and discount rate applied within the discounted cash flow model for business acquisitions, allowance for expected credit losses, the nature and timing of the satisfaction of performance obligations, the standalone selling price of performance obligations, and variable consideration in a customer contract, expected recoverability from customers with contingent fee arrangements, estimated costs to complete fixed price contracts, 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 the incremental borrowing rate to calculate lease liabilities and right-of-use (“ROU”) assets, lease term to calculate amortization of ROU, depreciation and amortization periods, and recoverability of long-lived assets, goodwill and intangibles.

(c) Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and London Inter-Bank Offered Rate (“LIBOR”). The ASU provides practical expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are elective and are effective upon issuance for all entities through December 31, 2022. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

In October 2021, FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU provides guidance in Topic 805 to require the acquirer entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers, as if it had originated the contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements, if the acquiree prepared financial statements in accordance with U.S. GAAP. The ASU is effective for fiscal years beginning after December 15, 2022. An entity may early adopt the ASU including adoption in an interim period, with retrospective application to all business combinations within the fiscal year that includes such interim period. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

3. Segment and Geographical Information

The Company is a provider of data analytics and digital operations and solutions.

The Company manages and reports financial information through its four reportable segments: Insurance, Healthcare, Analytics and Emerging Business, which reflects how management reviews financial information and makes operating decisions. These business units develop client-specific solutions, build capabilities, maintain a unified go-to-market approach and are integrally responsible for service delivery, customer satisfaction, growth and profitability.

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

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

The December 2021 acquisition of Clairvoyant AI Inc. (“Clairvoyant”) is included in the Analytics reportable segment. Refer to Note 9 - Business Combination, Goodwill and Intangible Assets to the unaudited consolidated financial statements for further details.

10

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2022

(In thousands, except per share amount and share count)

Revenues and cost of revenues for the three months ended March 31, 2022 and 2021, respectively, for each of the reportable segments, are as follows:

	Three months ended March 31, 2022
	Insurance		Healthcare		Emerging Business		Analytics		Total
Revenues, net	$	103,266	$	26,156	$	50,747	$	149,039	$	329,208
Cost of revenues(1)	65,082		17,651		29,213		95,570		207,516
Gross profit(1)	$	38,184	$	8,505	$	21,534	$	53,469	$	121,692
Operating expenses									77,717
Foreign exchange gain, interest expense and other income, net									3,291
Income tax expense									11,202
Gain from equity-method investment									114
Net income									$	36,178

(1) Exclusive of depreciation and amortization expense.

	Three months ended March 31, 2021
	Insurance		Healthcare		Emerging Business		Analytics		Total
Revenues, net	$	91,160	$	30,265	$	37,668	$	102,322	$	261,415
Cost of revenues(1)	56,093		17,391		20,844		64,493		158,821
Gross profit(1)	$	35,067	$	12,874	$	16,824	$	37,829	$	102,594
Operating expenses									61,039
Foreign exchange gain, interest expense and other income, net									(630)
Income tax expense									8,958
Loss from equity-method investment									36
Net income									$	31,931

(1) Exclusive of depreciation and amortization expense.

Revenues, net by service type, were as follows:

	Three months ended March 31,
	2022		2021
Digital operations and solutions(1)	$	180,169	$	159,093
Analytics services	149,039		102,322
Revenues, net	$	329,208	$	261,415

(1)Digital operations and solutions include revenues of the Company's Insurance, Healthcare and Emerging Business reportable segments. Refer to the reportable segment disclosure above.

11

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2022

(In thousands, except per share amount and share count)

The Company attributes the revenues to regions based upon the location of its customers.

	Three months ended March 31,
	2022		2021
Revenues, net
United States	$	282,379	$	224,368
Non-United States
United Kingdom	32,773		24,751
Rest of World	14,056		12,296
Total Non-United States	46,829		37,047
Revenues, net	$	329,208	$	261,415

Long-lived assets by geographic area, which consist of property and equipment, net and operating lease right-of-use assets were as follows:

	As of
	March 31, 2022		December 31, 2021
Long-lived assets
India	$	72,793	$	79,604
United States	52,856		50,095
Philippines	23,760		22,011
Rest of World	11,348		10,990
Long-lived assets	$	160,757	$	162,700

4. Revenues, net

Refer to Note 3 - Segment and Geographical Information to the unaudited consolidated financial statements for revenues disaggregated by reportable segments and geography.

Contract balances

The following table provides information about accounts receivable, contract assets and contract liabilities from contracts with customers:

	As of
	March 31, 2022		December 31, 2021
Accounts receivable, net	$	239,279	$	194,232
Contract assets	$	2,150	$	2,524
Contract liabilities:
Deferred revenue (consideration received in advance)	$	19,765	$	18,247
Consideration received for process transition activities	$	3,138	$	2,203

Accounts receivable includes $123,123 and $93,336 as of March 31, 2022 and December 31, 2021, respectively, representing unbilled receivables. The Company has accrued the unbilled receivables for work performed in accordance with the terms of contracts with customers and considers no significant performance risk associated with its unbilled receivables.

Contract assets represent upfront payments such as deal signing discounts or deal signing bonuses made to customers. These costs are amortized over the expected period of the benefit and are recorded as an adjustment to transaction price and reduced from revenues. The Company’s assessment did not indicate any impairment losses on its contract assets for the periods presented.

12

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2022

(In thousands, except per share amount and share count)

Contract liabilities represent that portion of deferred revenue for which payments have been received in advance from customers. The Company also defers revenues attributable to certain process transition activities for which costs have been capitalized by the Company as contract fulfillment costs. Consideration received from customers, if any, relating to such transition activities are classified under contract liabilities and are included within “Deferred revenues” and “Other non-current liabilities” in the unaudited consolidated balance sheets. The revenues are recognized as (or when) the performance obligation is fulfilled under the contract with customer.

Revenue recognized during the three months ended March 31, 2022 and 2021, which was included in the contract liabilities balance at the beginning of the respective periods:

	Three months ended March 31,
	2022		2021
Deferred revenue (consideration received in advance)	$	9,564	$	23,621
Consideration received for process transition activities	$	366	$	679

Contract acquisition and fulfillment costs

The following table provides details of the Company’s contract acquisition and fulfillment costs:

	Contract Acquisition Costs						Contract Fulfillment Costs
	Quarter Ended				Year Ended		Quarter Ended				Year Ended
	March 31, 2022		March 31, 2021		December 31, 2021		March 31, 2022		March 31, 2021		December 31, 2021
Opening Balance	$	511	$	1,027	$	1,027	$	5,795	$	5,631	$	5,631
Additions	547		—		277		2,177		6		3,742
Amortization	(131)		(242)		(793)		(537)		(1,218)		(3,578)
Closing Balance	$	927	$	785	$	511	$	7,435	$	4,419	$	5,795

There was no impairment for contract acquisition and contract fulfillment costs as of March 31, 2022 and December 31, 2021. The capitalized costs are amortized over the expected period of benefit of the contract.

Allowance for expected credit losses

The Company evaluates the credit risk of its customers based on a combination of various financial and qualitative factors that may affect the ability of each customer to pay. The Company considered current and anticipated future economic conditions relating to the industries of the Company’s customers and the countries where it operates. In calculating expected credit loss, the Company also considered past payment trends, credit rating and other related credit information for its significant customers to estimate the probability of default in the future and estimates relating to the possible effects resulting from COVID-19.

	As of
	March 31, 2022		December 31, 2021
Accounts receivable, including unbilled receivables	$	239,867	$	194,805
Less: Allowance for expected credit losses	(588)		(573)
Accounts receivable, net	$	239,279	$	194,232

13

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2022

(In thousands, except per share amount and share count)

The movement in “Allowance for expected credit losses” on customer balances was as follows:

	Three months ended				Year ended
	March 31, 2022		March 31, 2021		December 31, 2021
Balance at the beginning of the period	$	573	$	1,189	$	1,189
Additions / (reductions) during the period	172		50		(496)
Reductions due to write-off of Accounts Receivables	(158)		(60)		(129)
Translation adjustment	1		4		9
Balance at the end of the period	$	588	$	1,183	$	573

5. Earnings Per Share

Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding, adjusted for outstanding shares that are subject to repurchase during each period. Diluted earnings per share is computed using the weighted average number of common shares plus the potentially dilutive effect of common stock equivalents (outstanding stock options, restricted stock and restricted stock units) issued and outstanding at the reporting date, and an assumed conversion premium of outstanding convertible notes, using the treasury stock method (as discussed further in the subsequent paragraph). Common stock equivalents that are anti-dilutive are excluded from the computation of weighted average shares outstanding. The Company includes performance stock unit awards in dilutive potential common shares when they become contingently issuable and have a dilutive impact per authoritative guidance and excludes such awards when they are not contingently issuable.

In 2021, diluted weighted-average shares outstanding was affected by the treatment of the Company's 3.5% per annum Convertible Senior Notes due October 1, 2024 (the “Notes”). The Company had a choice to settle the Notes in cash, shares or any combination of the two. The Company had the ability to settle the principal balance of the Notes in cash, and as such, the Company applied the treasury stock method. The dilution related to the conversion premium, if any, of the Notes is included in the calculation of diluted weighted-average shares outstanding for the portion of the period until actual settlement and to the extent the issuance is dilutive based on the average stock price during the reporting period being greater than the conversion price of $75. During the third quarter of 2021, the Company settled the Notes by electing a combination of cash and shares of the Company’s common stock and as such included the count of shares issued on settlement in the calculation of basic earnings per share for the portion of the period outstanding.

The following table sets forth the computation of basic and diluted earnings per share:

	Three months ended March 31,
	2022		2021
Numerators:
Net income	$	36,178	$	31,931
Denominators:
Basic weighted average common shares outstanding	33,442,038		33,734,118
Dilutive effect of share based awards	452,830		342,993
Dilutive effect of conversion premium on the Notes	—		241,207
Diluted weighted average common shares outstanding	33,894,868		34,318,318
Earnings per share attributable to ExlService Holdings Inc. stockholders:
Basic	$	1.08	$	0.95
Diluted	$	1.07	$	0.93
Weighted average potentially dilutive shares considered anti-dilutive and not included in computing diluted earnings per share	1,082		—

14

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2022

(In thousands, except per share amount and share count)

6. Cash, Cash Equivalents and Restricted Cash

For the purposes of the unaudited statements of cash flows, cash, cash equivalents and restricted cash comprise of the following:

	As of
	March 31, 2022		March 31, 2021		December 31, 2021
Cash and cash equivalents	$	106,540	$	177,121	$	135,337
Restricted cash (current)	6,274		5,295		6,174
Restricted cash (non-current)	2,255		2,298		2,299
Cash, cash equivalents and restricted cash	$	115,069	$	184,714	$	143,810

7. Other Income, net

Other income, net consists of the following:

	Three months ended March 31,
	2022		2021
Gain on sale and mark-to-market of mutual funds and money market funds	$	1,236	$	1,103
Interest and dividend income	1,370		602
Others, net	(195)		(295)
Other income, net	$	2,411	$	1,410

15

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2022

(In thousands, except per share amount and share count)

8. Property and Equipment, net

Property and equipment, net consists of the following:

	Estimated useful lives	As of
	(Years)	March 31, 2022		December 31, 2021
Owned Assets:
Network equipment and computers	3-5	$	122,887	$	116,023
Software	3-5	106,947		101,884
Leasehold improvements	3-8	45,853		46,401
Office furniture and equipment	3-8	22,003		22,302
Motor vehicles	2-5	681		693
Buildings	30	1,049		1,070
Land	—	687		700
Capital work in progress	—	5,812		10,288
		305,919		299,361
Less: Accumulated depreciation and amortization		(220,662)		(213,699)
		$	85,257	$	85,662
Right-of-use assets under finance leases:*
Network equipment and computers		$	90	$	91
Leasehold improvements		1,105		1,229
Office furniture and equipment		711		787
Motor vehicles		583		578
		2,489		2,685
Less: Accumulated depreciation and amortization		(2,136)		(2,339)
		$	353	$	346
Property and equipment, net		$	85,610	$	86,008

*Depreciation on assets held under finance leases are computed using the straight-line method over the shorter of the assets estimated useful lives or the lease term.

Capital work in progress represents advances paid towards acquisition of property and equipment and costs incurred on internally developed software not yet ready to be placed in service.

During the three months ended March 31, 2022, there were no changes in estimated useful lives of property and equipment during the ordinary course of operations.

The depreciation and amortization expense, excluding amortization of acquisition-related intangibles, recognized in the unaudited consolidated statements of income was as follows:

	Three months ended March 31,
	2022		2021
Depreciation and amortization expense	$	9,116	$	8,740

The effect of foreign exchange gain upon settlement of cash flow hedges recorded under depreciation and amortization, was as follows:

	Three months ended March 31,
	2022		2021
Effect of foreign exchange gain	$	67	$	165

16

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2022

(In thousands, except per share amount and share count)

Internally developed software costs, included under Software, was as follows:

	As of
	March 31, 2022		December 31, 2021
Cost	$	25,977	$	19,289
Less : Accumulated amortization	(11,265)		(10,226)
Internally developed software, net	$	14,712	$	9,063

The amortization expense on internally developed software recognized in the unaudited consolidated statements of income was as follows:

	Three months ended March 31
	2022		2021
Amortization expense	$	1,033	$	1,024

As of March 31, 2022 and December 31, 2021, the Company believes no impairment exists because the long-lived asset's future undiscounted net cash flows expected to be generated exceeds its carrying value; however, there can be no assurances that long-lived assets will not be impaired in future periods. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. It is reasonably possible that the judgments and estimates described above could change in future periods. The duration and severity of COVID-19 and continued market volatility is highly uncertain and, as such, the impact on undiscounted cash flows is subject to significant judgment and may cause variability in the Company’s assessment of the existence of any impairment.

9. Business Combination, Goodwill and Intangible Assets

Clairvoyant AI Inc.

On December 16, 2021, the Company, through its wholly owned subsidiary ExlService.com, LLC (“Buyer”), completed the acquisition of Clairvoyant, a Delaware corporation, pursuant to an equity securities purchase agreement dated December 16, 2021 (the "Purchase Agreement"). The Company purchased 100% of the issued and outstanding equity securities in Clairvoyant.

Clairvoyant is a global technology consulting and services company that helps organizations in their business transformation by maximizing the value of data through actionable insights. It provides data engineering, analytics, machine learning, product engineering, and cloud-based solutions. The acquisition strengthens the Company’s capabilities by adding additional expertise in data engineering and cloud enablement, further supporting its clients in insurance, healthcare, banking and financial services, and retail.

The base purchase consideration payable at Closing was $80,080, excluding cash and cash equivalents acquired, debt and other estimated post-closing adjustments. As of March 31, 2022 and December 31, 2021, of the total purchase consideration, the Company has paid $78,198 and $76,831, respectively, net of cash and cash equivalents acquired. The Purchase Agreement also allows sellers the ability to earn up to $20,000 in earn-out payments, based on the achievement of certain performance goals by Clairvoyant during 2022 and 2023 calendar years. The earn-out has an estimated fair value of $9,000 and has been presented as contingent consideration under “Other non-current liabilities” and “Accrued expenses and other current liabilities,” as applicable, as of March 31, 2022 and December 31, 2021 in the consolidated balance sheets. A portion of the purchase consideration otherwise payable was placed into escrow as security for the post-closing working capital adjustments and the indemnification obligations under the Purchase Agreement. To finance the acquisition at Closing, the Company utilized its revolving Credit Facility in the amount of $75,000 and paid the balance with available cash on hand.

The Company accounted for the business combination using the acquisition method of accounting. The measurement period will not exceed one year from the acquisition date.

17

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2022

(In thousands, except per share amount and share count)

Pursuant to the Company’s business combinations accounting policy, the aggregate purchase consideration for Clairvoyant was allocated to identifiable net tangible and intangible assets based upon their preliminary fair values. The excess of the estimated purchase consideration over fair value of identifiable net tangible and intangible assets was recorded as goodwill. In order to allocate the consideration transferred for Clairvoyant, the fair values of all identifiable assets and liabilities must be established. For accounting and financial reporting purposes, fair value is defined under ASC No. 820, Fair Value Measurement and Disclosure, as the price that would be received upon sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, fair value measurements for an asset assume the highest and best use of that asset by market participants. Use of different estimates and judgments could yield different results.

The Company’s preliminary purchase price allocation to net tangible and intangible assets of Clairvoyant as of December 16, 2021 was as follows:

Assets:
Cash and cash equivalents	$	5,606
Accounts receivable, net	9,042
Other current assets	352
Property and equipment, net	399
Intangible assets, net
Customer relationships	31,600
Developed technology	2,070
Trade names and trademarks	300
Non-compete agreements	300
Other assets	216
Total assets	$	49,885
Liabilities:
Accounts payable	$	(1,241)
Accrued expenses and other current liabilities	(4,833)
Deferred tax liabilities	(9,383)
Other non-current liabilities	(1,226)
Total liabilities	(16,683)
Net assets acquired	33,202
Goodwill	56,373
Total purchase consideration*	$	89,575

* Includes contingent consideration of $9,000 recognized at fair value.

The fair value of assets acquired and liabilities assumed from the acquisition of Clairvoyant is based on a preliminary valuation and, as such, the Company's estimates and assumptions are subject to change within the measurement period. The primary areas of the purchase price allocation that are not yet finalized are related to post-closing working capital and debt adjustments and reflect management’s best estimates and assumptions as of the reporting date.

During the three months ended March 31, 2022, the Company recognized measurement period adjustments, which led to increase in goodwill in an amount of $1,148. The adjustments related to measurement of favorable lease intangibles of $160 included under “other assets” and reserves for various tax matters of $988 included under “other current liabilities.”

The fair values of customer relationships were determined by using an “income approach,” specifically the Multi-Period Excess Earnings Method. The customer relationship assets are being amortized on a straight-line basis (which approximates the economic pattern of benefits) over the estimated economic life of 7 years.

18

EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2022

(In thousands, except per share amount and share count)

The fair values of the developed technology intangible assets were determined by using the “cost approach,” specifically the replacement cost method. The technology assets are being amortized on a straight-line basis (which approximates the economic pattern of benefits) over the estimated economic life of 3 years.

The goodwill recognized represents the acquired capabilities, operating synergies and other benefits expected to result from combining the acquired operations with the Company’s existing operations. The amount of goodwill recognized from Clairvoyant’s acquisition is not deductible for tax purposes. The goodwill has been assigned to the Company’s Analytics reportable segment based upon the Company’s assessment of nature of services rendered by Clairvoyant.

Acquisition-related costs are being expensed as incurred and are included in general and administrative expenses in the consolidated statements of income. The Company recognized acquisition-related costs of $134 and $761 during the three months ended and year ended March 31, 2022 and December 31, 2021, respectively.

The results of operations of the acquired business and the fair value of the acquired assets and assumed liabilities are included in the Company’s consolidated financial statements with effect from the date of the acquisition. The acquisition did not materially impact the Company's financial position, results of operations or cash flows, and therefore, the Company has not provided supplemental pro forma results.

Goodwill

The following table sets forth details of changes in goodwill by reportable segment of the Company:

	Insurance		Healthcare		Emerging Business		Analytics		Total
Balance at January 1, 2022	$	50,428	$	21,942	$	49,020	$	282,512	$	403,902
Measurement period adjustments	—		—		—		1,148		1,148
Currency translation adjustments	(116)		(12)		(361)		—		(489)
Balance at March 31, 2022	$	50,312	$