exls-20230331

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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, 2023


☐			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 25, 2023, there were 33,246,709 shares of the registrant’s common stock outstanding, par value $0.001 per share.

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		PAGE
ITEM
	Part I. Financial Information	1

1.	FINANCIAL STATEMENTS (UNAUDITED)
	Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022	1
	Consolidated Statements of Income for the Three Months Ended March 3 1 , 202 3 and 202 2	3
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2023 and 2022	4
	Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2023 and 2022	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022	6
	Notes to Consolidated Financial Statements	7

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

3.	Quantitative and Qualitative Disclosures About Market Risk	45

4.	Controls and Procedures	45

	Part II. Other Information	45

1.	Legal Proceedings	45

1A.	Risk Factors	45

2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

3.	Defaults Upon Senior Securities	46

4.	Mine Safety Disclosures	46

5.	Other Information	46

6.	Exhibits	47

Signatures		48

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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, 2023		December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	87,298	$	118,669
Short-term investments	116,479		179,027
Restricted cash	5,598		4,897
Accounts receivable, net	290,512		259,222
Other current assets	66,340		50,979
Total current assets	566,227		612,794
Property and equipment, net	86,652		82,828
Operating lease right-of-use assets	52,782		55,347
Restricted cash	2,069		2,055
Deferred tax assets, net	62,252		55,791
Intangible assets, net	60,681		64,819
Goodwill	405,824		405,637
Long-term investments	35,559		34,779
Other assets	36,525		32,069
Total assets	$	1,308,571	$	1,346,119
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	3,384	$	7,789
Current portion of long-term borrowings	40,000		30,000
Deferred revenue	21,525		18,782
Accrued employee costs	49,955		108,100
Accrued expenses and other current liabilities	133,400		95,352
Current portion of operating lease liabilities	14,095		14,978
Income taxes payable, net	18,545		2,945
Total current liabilities	280,904		277,946
Long-term borrowings, less current portion	160,000		220,000
Operating lease liabilities, less current portion	45,655		48,155
Deferred tax liabilities, net	493		547
Other non-current liabilities	26,297		41,292
Total liabilities	513,349		587,940
Commitments and contingencies (Refer to Note 25)
ExlService Holdings, Inc. Stockholders’ equity:
Preferred stock, $0.001 par value; 15,000,000 shares authorized, none issued	—		—
Common stock, $0.001 par value; 100,000,000 shares authorized, 40,334,368 shares issued and 33,321,455 shares outstanding as of March 31, 2023 and 39,987,976 shares issued and 33,234,444 shares outstanding as of December 31, 2022	40		40
Additional paid-in capital	460,527		445,108
Retained earnings	950,436		899,105
Accumulated other comprehensive loss	(131,487)		(144,143)
Total including shares held in treasury	1,279,516		1,200,110

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Less: 7,012,913 shares as of March 31, 2023 and 6,753,532 shares as of December 31, 2022, held in treasury, at cost	(484,294)		(441,931)
Total stockholders’ equity	795,222		758,179
Total liabilities and stockholders’ equity	$	1,308,571	$	1,346,119

See accompanying notes to unaudited consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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


	Three months ended March 31,
	2023		2022
Revenues, net	$	400,643	$	329,208
Cost of revenues (1)	251,469		207,516
Gross profit (1)	149,174		121,692
Operating expenses:
General and administrative expenses	46,746		39,945
Selling and marketing expenses	29,493		24,170
Depreciation and amortization expense	13,487		13,602

Total operating expenses	89,726		77,717
Income from operations	59,448		43,975
Foreign exchange gain, net	105		1,756
Interest expense	(3,385)		(876)
Other income, net	3,155		2,411

Income before income tax expense and earnings from equity affiliates	59,323		47,266
Income tax expense	8,058		11,202
Income before earnings from equity affiliates	51,265		36,064
Gain from equity-method investment	66		114
Net income attributable to ExlService Holdings, Inc. stockholders	$	51,331	$	36,178
Earnings per share attributable to ExlService Holdings, Inc. stockholders:
Basic	$	1.54	$	1.08
Diluted	$	1.51	$	1.07
Weighted average number of shares used in computing earnings per share attributable to ExlService Holdings, Inc. stockholders:
Basic	33,439,564		33,442,038
Diluted	33,931,480		33,894,868

(1) Exclusive of depreciation and amortization expense.

See accompanying notes to unaudited consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)


	Three months ended March 31,
	2023		2022
Net income	$	51,331	$	36,178
Other comprehensive income/(loss):
Unrealized gain/(loss) on cash flow hedges	7,294		(517)

Foreign currency translation gain/(loss)	5,313		(7,445)

Reclassification adjustments:
(Gain)/loss on cash flow hedges(1)	3,065		(1,989)
Retirement benefits(2)	(25)		155
Income tax effects relating to above(3)	(2,991)		964
Total other comprehensive income/(loss)	$	12,656	$	(8,832)
Total comprehensive income	$	63,987	$	27,346

(1)These are reclassified to net income and are included in cost of revenues, operating expenses and interest expense, as applicable in the unaudited consolidated statements of income. Refer to Note 17 - 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 20 - 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 gain/(loss). Refer to Note 22 - Income Taxes to the unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

For the three months ended March 31, 2023 and 2022

(In thousands, except share count)


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income/(loss)		Treasury Stock			Total

	Shares	Amount								Shares	Amount
Balance as of January 1, 2023	39,987,976	$	40	$	445,108	$	899,105	$	(144,143)	(6,753,532)	$	(441,931)	$	758,179
Stock issued against stock-based compensation plans	346,392	—		1,012		—		—		—	—		1,012
Stock-based compensation	—	—		14,407		—		—		—	—		14,407
Acquisition of treasury stock	—	—		—		—		—		(259,381)	(42,363)		(42,363)


Other comprehensive income	—	—		—		—		12,656		—	—		12,656
Net income	—	—		—		51,331		—		—	—		51,331
Balance as of March 31, 2023	40,334,368	$	40	$	460,527	$	950,436	$	(131,487)	(7,012,913)	$	(484,294)	$	795,222


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock			Total

	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

See accompanying notes to unaudited consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Three months ended March 31,
	2023		2022
Cash flows from operating activities:
Net income	$	51,331	$	36,178
Adjustments to reconcile net income to net cash provided by/(used for) operating activities:
Depreciation and amortization expense	13,408		13,669
Stock-based compensation expense	14,407		11,224
Amortization of operating lease right-of-use assets	4,883		6,043
Unrealized loss/(gain) on investments	8,186		(384)
Unrealized foreign currency exchange loss/(gain), net	2,814		(3,165)
Deferred income tax benefit	(9,444)		(193)
Allowance for expected credit losses	342		34





Others, net	1,160		705
Change in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(30,896)		(45,659)
Other current assets	(6,046)		(1,116)
Income taxes payable, net	7,883		6,185
Other assets	(4,172)		(2,924)
Accounts payable	(4,445)		(808)
Deferred revenue	2,451		3,707
Accrued employee costs	(57,315)		(60,008)
Accrued expenses and other liabilities	26,931		15,647
Operating lease liabilities	(5,453)		(6,005)
Net cash provided by/(used for) operating activities	16,025		(26,870)

Cash flows from investing activities:
Purchases of property and equipment	(12,479)		(16,101)
Proceeds from sale of property and equipment	565		63
Business acquisition (net of cash and cash equivalents acquired)	—		(1,367)
Purchases of investments	(51,495)		(36,804)
Proceeds from redemption of investments	106,750		49,515


Net cash provided by/(used for) investing activities	43,341		(4,694)

Cash flows from financing activities:
Principal payments of finance lease liabilities	(43)		(39)
Proceeds from borrowings	50,000		35,000
Repayments of borrowings	(100,000)		—





Acquisition of treasury stock	(42,363)		(31,385)

Proceeds from ESPP contribution	1,102		—
Net cash (used for)/provided by financing activities	(91,304)		3,576
Effect of exchange rate changes on cash, cash equivalents and restricted cash	1,282		(753)
Net decrease in cash, cash equivalents and restricted cash	(30,656)		(28,741)
Cash, cash equivalents and restricted cash at the beginning of the period	125,621		143,810
Cash, cash equivalents and restricted cash at the end of the period	$	94,965	$	115,069

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	3,325	$	1,277
Income taxes, net of refunds	$	6,525	$	5,404
Supplemental disclosure of non-cash investing and financing activities:
Assets acquired under finance lease	$	99	$	50

See accompanying notes to unaudited consolidated financial statements.

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EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(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.

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, 2022.

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.

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.

Accounting policies of the respective individual subsidiaries and equity affiliates are aligned wherever necessary, so as to ensure consistency with the accounting policies that are adopted by the Company under U.S. GAAP.

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EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2023

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

(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 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 the discount rate applied within the discounted cash flow model for business acquisitions, credit risk of customers, 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, stock-based awards, and debt 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.

In March 2023, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2023-01, Leases (“ASC Topic 842”): Common Control Arrangements. This ASU provides guidance in ASC Topic 842 that leasehold improvements associated with common control leases should be (i) amortized by the lessee over the useful life of the leasehold improvements to the common control group, regardless of the lease term, as long as the lessee controls the use of the underlying asset through a lease, and (ii) accounted for as a transfer between entities under common control through an adjustment to equity if and when the lessee no longer controls the use of the underlying asset. The ASU is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted for both interim and annual financial statements that have not yet been issued. When adopted in an interim period, it must be adopted from the beginning of the year that includes that interim period. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

(d) Recently adopted Accounting Pronouncements

In October 2021, FASB issued ASU No. 2021-08, Business Combinations (“ASC Topic 805”): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU provides guidance in ASC Topic 805 to require the acquirer entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contract 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 adoption of this ASU is applicable for future business combinations.

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.

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EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2023

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

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.

Revenues and cost of revenues for the three months ended March 31, 2023 and 2022, respectively, for each of the reportable segments, are as follows:


	Three months ended March 31, 2023
	Insurance		Healthcare		Emerging Business		Analytics		Total

Revenues, net	$	125,937	$	26,703	$	66,161	$	181,842	$	400,643
Cost of revenues(1)	82,324		18,809		35,970		114,366		251,469
Gross profit(1)	$	43,613	$	7,894	$	30,191	$	67,476	$	149,174
Operating expenses									89,726
Foreign exchange gain, net, interest expense and other income, net									(125)
Income tax expense									8,058
Gain from equity-method investment									66
Net income									$	51,331

(1) Exclusive of depreciation and amortization expense.


	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, net, 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.

Revenues, net by service type, were as follows:


	Three months ended March 31,
	2023		2022
Digital operations and solutions(1)	$	218,801	$	180,169
Analytics services	181,842		149,039
Revenues, net	$	400,643	$	329,208

(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.

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

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EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2023

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


	Three months ended March 31,
	2023		2022
Revenues, net
United States	$	339,073	$	282,379
Non-United States
United Kingdom	41,574		32,773
Rest of World	19,996		14,056
Total Non-United States	61,570		46,829
Revenues, net	$	400,643	$	329,208

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, 2023		December 31, 2022
Long-lived assets
United States	$	61,183	$	60,709
India	46,732		50,118
Philippines	17,686		18,406
Rest of World	13,833		8,942
Long-lived assets	$	139,434	$	138,175

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, 2023		December 31, 2022
Accounts receivable, net	$	290,512	$	259,222
Contract assets	$	2,628	$	2,768
Contract liabilities:
Deferred revenue (consideration received in advance)	$	19,685	$	17,079
Consideration received for process transition activities	$	5,295	$	5,423

Accounts receivable includes $155,992 and $126,027 as of March 31, 2023 and December 31, 2022, 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

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EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2023

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

reduced from revenues. The Company’s assessment did not indicate any impairment losses on its contract assets for the periods presented.

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 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, 2023 and 2022, which was included in the contract liabilities balance at the beginning of the respective periods:


	Three months ended March 31,
	2023		2022
Deferred revenue (consideration received in advance)	$	13,002	$	9,564
Consideration received for process transition activities	$	703	$	366

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
	Three months ended				Year ended		Three months ended				Year ended
	March 31, 2023		March 31, 2022		December 31, 2022		March 31, 2023		March 31, 2022		December 31, 2022
Opening Balance	$	1,095	$	511	$	511	$	13,871	$	5,795	$	5,795
Additions	1,079		547		1,014		4,618		2,177		15,509
Amortization	(180)		(131)		(430)		(616)		(537)		(7,433)
Closing Balance	$	1,994	$	927	$	1,095	$	17,873	$	7,435	$	13,871

There was no impairment for contract acquisition and contract fulfillment costs as of March 31, 2023 and December 31, 2022. 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.


	As of
	March 31, 2023		December 31, 2022
Accounts receivable, including unbilled receivables	$	292,183	$	260,554
Less: Allowance for expected credit losses	(1,671)		(1,332)
Accounts receivable, net	$	290,512	$	259,222

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

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EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2023

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


	Three months ended March 31,				Year ended
	2023		2022		December 31, 2022
Opening Balance	$	1,332	$	573	$	573
Additions	451		172		815
Reductions due to write-off of Accounts Receivables	(112)		(158)		(60)
Currency translation adjustments	—		1		4
Closing Balance	$	1,671	$	588	$	1,332

Concentration of credit risk

To reduce credit risk, the Company conducts ongoing credit evaluations of its customers. No customer accounted for more than 10% of accounts receivable, net, as of March 31, 2023 and December 31, 2022.

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, restricted stock units and employee stock purchase plans) issued and outstanding at the reporting date, using the treasury stock method. Common stock equivalents that are anti-dilutive are excluded from the computation of weighted average shares outstanding.

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


	Three months ended March 31,
	2023		2022
Numerators:
Net income	$	51,331	$	36,178
Denominators:
Basic weighted average common shares outstanding	33,439,564		33,442,038
Dilutive effect of share-based awards	491,916		452,830
Diluted weighted average common shares outstanding	33,931,480		33,894,868
Earnings per share attributable to ExlService Holdings, Inc. stockholders:
Basic	$	1.54	$	1.08
Diluted	$	1.51	$	1.07
Weighted average potentially dilutive shares considered anti-dilutive and not included in computing diluted earnings per share	109,269		1,082

6. Other Income, net

Other income, net consists of the following:


	Three months ended March 31,
	2023		2022
Gain on sale and mark-to-market on investments	$	1,644	$	1,236
Interest and dividend income	1,721		1,370

Others, net	(210)		(195)
Other income, net	$	3,155	$	2,411

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EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2023

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

7. Cash, Cash Equivalents and Restricted Cash

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


	As of
	March 31, 2023		March 31, 2022		December 31, 2022
Cash and cash equivalents	$	87,298	$	106,540	$	118,669
Restricted cash (current)	5,598		6,274		4,897
Restricted cash (non-current)	2,069		2,255		2,055
Cash, cash equivalents and restricted cash	$	94,965	$	115,069	$	125,621

Restricted cash (current) primarily represents funds held on behalf of clients in dedicated bank accounts. The corresponding liability against the same is included under “Accrued Expenses and other current liabilities.” Restricted cash (non-current) 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. These deposits with banks will mature one year after the balance sheet date.

8. Investments

Investments consist of the following:


	As of
	March 31, 2023		December 31, 2022
Short-term investments
Mutual funds	$	64,253	$	110,964
Term deposits	52,226		68,063
Total Short-term investments	$	116,479	$	179,027

Long-term investments
Term deposits	$	32,055	$	31,341
Investment in equity affiliate	3,504		3,438
Total Long-term investments	$	35,559	$	34,779

Refer to Note 16 - Fair Value Measurements to the unaudited consolidated financial statements for further details.

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EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2023

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

9. Property and Equipment, net

Property and equipment, net consists of the following:


		As of
	Estimated useful lives (Years)	March 31, 2023		December 31, 2022
Owned Assets:
Network equipment and computers	3-5	$	136,289	$	130,218
Software	2-5	98,410		88,487
Leasehold improvements	3-8	41,040		42,890
Office furniture and equipment	3-8	19,936		20,211
Motor vehicles	2-5	683		605
Buildings	30	968		961
Land	—	633		629
Capital work in progress	—	9,750		14,459
		307,709		298,460
Less: Accumulated depreciation and amortization		(221,621)		(216,132)
		$	86,088	$	82,328
Right-of-use assets under finance leases*:
Network equipment and computers		58		82
Leasehold improvements		611		1,013
Office furniture and equipment		437		662
Motor vehicles		816		742
		1,922		2,499
Less: Accumulated depreciation and amortization		(1,358)		(1,999)
		$	564	$	500
Property and equipment, net		$	86,652	$	82,828

*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, 2023, 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,
	2023		2022
Depreciation and amortization expense	$	9,338	$	9,116

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EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2023

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

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


	Three months ended March 31,
	2023		2022
Effect of foreign exchange gain/(loss)	$	(79)	$	67

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


	As of
	March 31, 2023		December 31, 2022
Cost	$	40,944	$	31,544
Less : Accumulated amortization	(18,114)		(16,134)
Internally developed software, net	$	22,830	$	15,410

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


	Three months ended March 31,
	2023		2022
Amortization expense	$	1,975	$	1,033

As of March 31, 2023 and December 31, 2022, 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 assurance 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, the asset’s residual value, if any. It is reasonably possible that the judgments and estimates described above could change in future periods.

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EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2023

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

10. Goodwill and Other Intangible Assets

Goodwill

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


	Insurance		Healthcare		Emerging Business		Analytics		Total
Balance as of January 1, 2023	$	49,929	$	21,875	$	47,101	$	286,732	$	405,637
Currency translation adjustments	68		4		115		—		187

Balance as of March 31, 2023	$	49,997	$	21,879	$	47,216	$	286,732	$	405,824

As of March 31, 2023, the Company performed an assessment to determine whether events or circumstances exist that may lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company considered current and forecasted economic and market conditions and qualitative factors, such as the Company’s performance during the first quarter of the current fiscal year, business forecasts for the remainder of the year, stock price movements, generation and availability of cash and expansion plans. The Company reviewed key assumptions, including revisions of projected future revenues for reporting units against the results of the annual impairment test performed during the fourth quarter of 2022. The Company did not identify any triggers or indications of potential impairment for its reporting units as of March 31, 2023.

The recoverability of goodwill is dependent upon the continued growth of cash flows from the Company’s business activities. This growth is based on business forecasts and improvement in profitability of its reporting units. The Company continues to maintain its focus on cultivating long-term client relationships as well as attracting new clients.

Other Intangible Assets

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


	As of March 31, 2023
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Finite-lived intangible assets:
Customer relationships	$	99,146	$	(42,642)	$	56,504
Developed technology	24,912		(22,185)		2,727
Trade names and trademarks	1,700		(1,375)		325
Non-compete agreements	336		(111)		225
	126,094		(66,313)		59,781
Indefinite-lived intangible assets:
Trade names and trademarks	900		—		900
Total intangible assets	$	126,994	$	(66,313)	$	60,681

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EXLSERVICE HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

March 31, 2023

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


	As of December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Finite-lived intangible assets:
Customer relationships	$	99,146	$	(39,848)	$	59,298
Developed technology	24,878		(