# ExlService Holdings, Inc. (EXLS) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ExlService Holdings, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1297989/000129798923000001/exls-20221231.htm
Accession: 0001297989-23-000001
Filing date: 2023-02-23
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/EXLS/
All MD&A years: /company/EXLS/mda/
Previous year: /company/EXLS/mda/fy2021/ (FY 2021)
Next year: /company/EXLS/mda/fy2023/ (FY 2023)

ITEM 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in connection with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. Some of the statements in the following discussion are forward looking statements.

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this Annual Report on Form 10-K, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. These factors include but are not limited to:

•our ability to maintain and grow client demand for our services and solutions, including anticipating and incorporating the latest technology into our offerings;

•fluctuations in our earnings;

•our ability to hire and retain enough sufficiently trained employees to support our operations or any changes in the senior management team;

•our ability to accurately estimate and/or manage the costs;

•our ability to adjust our pricing terms or effectively manage our asset utilization levels to meet the changing demands of our clients and potential clients;

•cyber security incidents, data breaches, or other unauthorized disclosure of sensitive or confidential client and employee data;

•reliance on third parties to deliver services and infrastructure for client critical services;

•failure to protect our intellectual property;

•our dependence on a limited number of clients in a limited number of industries and our ability to withstand the loss of a significant client;

•our ability to grow our business or effectively manage growth and international operations;

•our ability to successfully consummate or integrate strategic acquisitions including the impact from the impairment of goodwill and other intangible assets, if any;

•increasing competition in our industry;

•telecommunications or technology disruptions or breaches, natural or other disasters, medical epidemics or pandemics, such as COVID-19, or acts of violence or war;

•operational and information security failures arising as a result of remote work solutions adopted due to COVID-19;

•legal liability arising out of customer and third party contracts;

•adverse outcome of our disputes with the tax authorities, in the geographies where we operate;

•our financial condition could be negatively affected if governments in the countries we operate in introduces new unfavorable tax legislation;

•changes in tax laws or decisions regarding repatriation of funds held abroad;

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•exposure to currency exchange rate fluctuations in the various currencies in which we do business including the potential effects of Russian-Ukraine conflict, rising inflation, high interest rates and economic recessionary trends on currency exchange rates;

•restrictions on immigration;

•ability to service debt or obtain additional financing on favorable terms. Inception of interest rate swaps to hedge interest rate risk;

•negative public reaction in the U.S. or elsewhere to offshore outsourcing;

•effects of political and economic conditions globally, particularly in the geographies where we operate;

•our ability to make accurate estimates and assumptions in connection with the preparation of our consolidated financial statements;

•credit risk fluctuations in the market values of our investment and derivatives portfolios; and

•our ability to meet our environmental, social and governance-related goals and targets;

In particular, you should consider the numerous risks outlined in Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K. These and other risks could cause actual results to differ materially from those implied by forward-looking statements in this Annual Report on Form 10-K.

The forward-looking statements made by us in this Annual Report on Form 10-K, or elsewhere, speak only as of the date on which they were made. New risks and uncertainties may come up from time to time, and it is impossible for us to predict those events or how they may affect us. We have no obligation to update any forward-looking statements in this Annual Report on Form 10-K after the date of this Annual Report on Form 10-K, except as required by federal securities laws.

Executive Overview

We are 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, AI and ML, we create agile, scalable solutions and execute complex operations for the world’s leading corporations in industries including insurance, healthcare, banking and financial services, media, and retail, among others.

We deliver data analytics and digital operations and solutions to our clients, driving enterprise-scale business transformation initiatives that leverage our deep expertise in advanced analytics, AI, ML and cloud. We manage and report financial information through our four strategic business units: Insurance, Healthcare, Analytics and Emerging Business, which reflects how management reviews financial information and makes operating decisions.

Our reportable segments are as follows:

•Insurance,

•Healthcare,

•Analytics, and

•Emerging Business

Our global delivery network, which includes highly trained industry and process specialists across the United States, Latin America, South Africa, Europe and Asia (primarily India and the Philippines), is a key asset. We have operations centers in India, the United States, the United Kingdom, the Republic of Ireland, the Philippines, Bulgaria, Colombia, South Africa, Romania and the Czech Republic.

On June 10, 2022, we acquired certain assets of Inbound Media Group, LLC (“Inbound”), a digital marketing business focused primarily on lead generation in the insurance space. The acquisition expands our digital direct-to-consumer marketing services by adding proven performance marketing, lead generation and customer engagement capabilities to our suite of end-to-end marketing solutions, proprietary data sets and robust consumer analytics.

On December 16, 2021, we completed the acquisition of Clairvoyant, a global data, AI, ML, and cloud services firm that helps organizations in their business transformation by maximizing the value of data through actionable insights. It provides data engineering, analytics, AI, ML, product engineering, and cloud-based solutions. The acquisition strengthens our Analytics

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capabilities by adding additional expertise in data engineering and cloud enablement, further supporting our clients in the insurance, healthcare, banking and financial services, and retail industries.

Impact of COVID-19 on Our Business

During 2022, we continued to recover from the COVID-19 pandemic. As the global economy continued to adapt to the impact of COVID-19, our clients are focused on receiving personalized customer experiences, optimizing costs and supporting resilient operating models. We remain committed to helping our clients adapt and thrive through the ongoing uncertainties caused by COVID-19 and, going forward, to the shifting business environment, which has led to increased demand for digital capabilities.

In 2022, we implemented a new work standard under which employees in many of our locations, where permitted by local laws and regulations, and where the role and client requirements permit, have the opportunity to choose between different work arrangements. Subject to local rules and regulations, these work arrangements include working in a hybrid arrangement or a fully remote arrangement, with occasional work from the office when warranted. We have begun to re-open our operation centers and offices globally with a focus on safety and consistency with applicable local regulations.

While many of the COVID-19 related restrictions have been lifted in the geographies in which we operate, there have been periodic resurgences of COVID-19 as a result of new strains and variants, which has led us to monitor our work model and / or implement additional safety procedures.

We believe our actions have been successful and that the pandemic has not significantly affected our business, results of operations, financial position and cash flow during 2022, however the impact of the pandemic for the period beyond 2022 will depend on many evolving and uncertain factors that are not within our control.

For additional information and risks related to COVID-19, see Part I, Item 1A, “Risk Factors.”

Revenues

For the year ended December 31, 2022, we generated revenues of $1,412.0 million compared to revenues of $1,122.3 million for the year ended December 31, 2021, an increase of $289.7 million, or 25.8%.

We serve clients mainly in the United States and the United Kingdom, with these two regions generating 85.9% and 9.5%, respectively, of our total revenues for the year ended December 31, 2022 and 85.9% and 9.4%, respectively, of our revenues for the year ended December 31, 2021.

For the years ended December 31, 2022 and 2021, our total revenues from our top ten clients accounted for 34.9% and 38.1% of our total revenues, respectively. Although we continue to develop relationships with new clients to diversify our client base, we believe that the loss of any of our top ten clients could have a material adverse effect on our financial performance.

Our Business

We provide data analytics and digital operations and solutions to our clients. We market our services to our existing and prospective clients through our sales and client management teams, which are aligned by key industry verticals and cross-industry domains such as finance and accounting. Our sales and client management teams operate primarily from the United States, Europe and Australia.

Digital Operations and Solutions: We provide our clients with a range of digital operations and solutions from our Insurance, Healthcare and Emerging Business strategic business units, which are focused on solving complex industry challenges such as the insurance claims life cycle, financial transactions processing and provider and member experiences. This typically involves the use of agile delivery models to implement digital technologies and interventions like hyper-automation, customer experience transformation, advanced automation, robotics, enterprise architecture, end-to-end business function management and transformations. We either administer and manage these functions on an ongoing basis via longer-term arrangements or project work. For a portion of our digital operations and solutions, we hire and train employees to work at our operations centers on the relevant business operations, implement a process migration to these operations centers and then provide services either to the client or directly to the client’s customers. Each client contract has different terms based on the scope, deliverables and complexity of the engagement. We also provide consulting services related to digital operations and solutions that include industry-specific digital transformational services as well as cross-industry finance and accounting services as part of the Emerging Business strategic business unit.

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We provide our services under contracts with our clients, which typically have terms of three or more years, with some being contracts with no end dates. These contracts provide us with a relatively predictable revenue base for a substantial portion of our digital operations and solutions business. However, our clients can typically terminate these contracts with or without cause and with short notice periods. We have a long selling cycle for our services and the budget and approval processes of prospective clients make it difficult to predict the timing of entering into definitive agreements with new clients. Similarly, new license sales and implementation projects for our technology service platforms and other software-based services have a long selling cycle, however ongoing annual maintenance and support contracts for existing arrangements provide us with a relatively predictable revenue base.

We charge for our services using various pricing models like time-and-material pricing, full-time-equivalent pricing, transaction-based pricing, outcome-based pricing, subscription-based pricing and other alternative pricing models. Outcome-based pricing arrangements are examples of non-linear pricing models where clients link revenues from platforms and solutions and the services we provide to usage or savings rather than the efforts deployed to provide these services. We continue to observe a shift in the industry pricing models toward transaction-based pricing, outcome-based pricing and other alternative pricing models. We believe this trend will continue and we use such alternative pricing models with some of our current clients and are seeking to move certain other clients from a full-time-equivalent pricing model to a transaction-based or other alternative pricing model. These alternative pricing models place the focus on operating efficiency in order to maintain or improve our gross margins.

We have also observed that prospective larger clients are entering into multi-vendor relationships with regard to their digital operations and solutions needs to seek more favorable contract terms and diversification of the risk of concentration on a few vendors. We believe that the trend toward multi-vendor relationships will continue. A multi-vendor relationship allows a client to seek more favorable pricing and other contract terms from each vendor, which can result in significantly reduced gross margins from the provision of services to such client for each vendor. To the extent our large clients expand their use of multi-vendor relationships and are able to extract more favorable contract terms from other vendors, our gross margins and revenues may be reduced with regard to such clients if we are required to modify the terms of our relationships with such clients to meet competition.

Analytics: Our analytics services aim to drive better business outcomes for our clients by unlocking deep insights from data and creating data-led solutions across all parts of our clients’ business. We provide care optimization and reimbursement optimization services, for our clients through our healthcare analytics solutions and services. We also offer integrated solutions to help our clients in cost containment by leveraging technology platforms, customizable and configurable analytics and expertise in healthcare reimbursements to help clients enhance their claim payment accuracy. Our Analytics teams deliver predictive and prescriptive analytics in the areas of customer acquisition and life cycle management, risk underwriting and pricing, operational effectiveness, credit and operational risk monitoring and governance, regulatory reporting and data management. We enhance, modernize and enrich structured and unstructured data and use a spectrum of advanced analytical tools and techniques, including our in-house AI and ML capabilities and proprietary solutions to create insights, improve decision making for our clients and address a range of complex industry-wide priorities. Our acquisition of Clairvoyant in December 2021 strengthens our data analytics capabilities with additional expertise in data and product engineering, cloud enablement and managed services, further supporting our clients in the insurance, healthcare, banking and financial services and retail industries. We actively cross-sell and, where appropriate, integrate our analytics services with other digital operations and solutions as part of a comprehensive offering for our clients. Our projects-based analytics services are cyclical and can be significantly affected by variations in business cycles. In addition, our projects-based analytics services are documented in contracts with terms generally not exceeding one year and may not produce ongoing or recurring business for us once the project is completed. These contracts also usually contain provisions permitting termination of the contract after a short notice period. The short-term nature and specificity of these projects could lead to fluctuations and uncertainties in the revenues generated from providing analytics services.

We anticipate that revenues from our analytics services will grow as we expand our service offerings and client base, both organically and through acquisitions.

Expenses

Cost of Revenues

Our cost of revenues primarily consists of:

•employee costs, which include salary, bonus and other compensation expenses; retirement benefits, recruitment and training costs; employee health and life insurance; transport; rewards and recognition for certain employees; and non-cash stock compensation expense; and

•costs relating to our facilities and communications network, which include telecommunication and IT costs; facilities and customer management support; operational expenses for our operations centers; rent expenses; and

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•Outsourced/subcontractors and professional services costs; and

•travel and other billable costs to our clients; and

•costs relating to our direct mail operations and other digital operations and solutions.

The most significant components of our cost of revenues are salaries and benefits (including stock-based compensation), retirement benefits, recruitment, training, transport, meals, rewards and recognition and employee health and life insurance. Salary levels, employee turnover rates and our ability to efficiently manage and utilize our employees significantly affect our cost of revenues. We make every effort to manage employee and capacity utilization and continuously monitor service levels and staffing requirements. Although we generally have been able to reallocate our employees as client demand has fluctuated, a contract termination or significant reduction in work assigned to us by a major client could cause us to experience a higher-than-expected number of unassigned employees, which would increase our cost of revenues as a percentage of revenues until we are able to reduce or reallocate our headcount. A significant increase in the turnover rate among our employees, particularly among the highly skilled workforce needed to execute certain services, would increase our recruiting and training costs and decrease our operating efficiency, productivity and profit margins. In addition, cost of revenues also includes non-cash amortization of stock-based compensation expense related to the grant of our equity awards to employees directly involved in providing services to our clients.

We expect our cost of revenues to continue to increase as we continue to add professionals in our operations centers globally to service additional business and as wages continue to increase globally. In particular, we expect recruitment and training costs to continue to increase as we hire additional staff to service new clients and train existing staff to provide them with evolving skill sets. There is significant competition for professionals with skills necessary to perform the services we offer to our clients. As our existing competitors continue to grow, and as new competitors enter the market, we expect competition for skilled professionals in each of these areas to continue to increase, with corresponding increases in our cost of revenues to reflect increased compensation levels for such professionals. We also expect that we will continue to incur additional costs to monitor and improve operational efficiency of our hybrid and remote working models, invest in information technology solutions, including adaption to evolving modes of seeking such solutions through cloud-based hosting arrangements and security measures to safeguard against information security risks and costs to protect the health and safety of our employees as they gradually return to the office. See Part I, Item 1A, “Risk Factors” under “Risks Related to Our Business-Employee wage increases may prevent us from sustaining our competitive advantage and may reduce our profit margin.” However, a significant portion of our client contracts include inflation-based adjustments to our billing rates year over year which partially offset such increase in cost of revenues.

We generally experience a higher cost of revenues as a percentage of revenues during the initial 12 to 18 months in a long-term digital operations and solutions contract due to upfront investments in infrastructure, resource hiring and training during migration. The cost of revenues as a percentage of revenues improves as we scale up, achieve operational efficiencies and complete the migration.

Selling, General and Administrative Expenses ("SG&A")

Our General and Administrative expenses (“G&A”) comprise of expenses relating to salaries and benefits (including stock-based compensation), retirement benefits as well as costs related to recruitment, training and retention of senior management and other support personnel in enabling functions, telecommunications, utilities, travel and other miscellaneous administrative costs. G&A expenses also include acquisition-related costs, legal and professional fees (which represent the costs of third party legal, tax, accounting, immigration and other advisors), cost of technology solutions sought through evolving modes of cloud-based hosting arrangements, investment in product development, digital technology, advanced automation and robotics, cloud, AI and MI, bad debt allowance and stock-based compensation expenses related to grant of our equity awards to members of our board of directors. We expect our G&A costs to increase as we continue to strengthen our support and enabling functions and invest in leadership development, performance management and training programs.

Selling and marketing expenses primarily consist of salaries and benefits (including stock-based compensation), retirement benefits and other compensation expenses of sales and marketing and client management personnel, sales commission, travel and brand building, client events and conferences. We expect that sales and marketing expenses will continue to increase as we invest in our sales and client management functions to better serve our clients and in our branding.

Depreciation and Amortization Expense

Depreciation and amortization pertains to depreciation of our property and equipment, including network equipment, cabling, computers, office furniture and equipment, motor vehicles and leasehold improvements and amortization of intangible assets acquired in business combinations. As part of our ongoing evaluation of our business needs, we continually optimize our

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operations centers and expect depreciation to decrease on assets related to operations centers, such as office furniture and equipment and leasehold improvements. As our business continues to expand we expect additional investments in digital technologies and equipment, including laptops, desktop computers, servers and other infrastructure, and increased reliance on hybrid and remote working models, we expect increases in depreciation on assets-related to such investments. The property and equipment that are evaluated as being used differently than as originally intended are assessed for revision of their useful life, thereby revising their future depreciation to reflect the actual use of such property and equipment over the remaining shortened life. We expect amortization of intangible assets to increase further as we pursue strategic relationships and acquisitions.

Foreign Exchange gain, net

We report our financial results in U.S. dollars.

However, a significant portion of our total revenues are earned in the U.K. pound sterling (8.6% for each of the years ended December 31, 2022 and 2021), while a significant portion of our expenses are incurred and paid in the Indian rupee, the Philippine peso and the U.K. pound sterling, representing 29.1%, 8.2% and 3.0%, respectively, of our total expenses in the year ended December 31, 2022, compared to 29.4%, 9.5% and 3.4%, respectively, of our total expenses in the year ended December 31, 2021. The exchange rates among the Indian rupee, the Philippine peso, the U.K. pound sterling and the U.S. dollar have changed substantially in recent years and may fluctuate substantially in the future as well. The results of our operations could be substantially impacted as the Indian rupee, the Philippine peso and the U.K. pound sterling appreciate or depreciate against the U.S. dollar. See Note 2 - Summary of Significant Accounting Policies and Note 17 - Derivatives and Hedge Accounting to our consolidated financial statements and Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk-Components of Market Risk-Foreign Currency Risk.”

Interest Expense

Interest expense primarily consist of interest on our borrowings under our revolving credit facility and convertible senior notes, finance leases and notional interest implicit in the purchase of property and equipment.

Other Income/(Loss), net

Other income/(loss), net primarily consists of gain/(loss) on sale, mark to market, dividend income and interest income on our short-term and long-term investments, cash equivalents, as applicable. Other income/(loss), net also consists of changes in fair value of contingent consideration related to business combinations, interest on refunds received from income tax authorities in India on completion of tax assessments, profit or loss on disposal of long-lived assets and components of net periodic benefit cost such as interest cost, expected return on plan assets and amortization of actuarial gain or loss.

Income Taxes

We are subject to taxes in the countries we operate in. Our future tax liabilities could be adversely affected by any new unfavorable tax legislative and other changes in such countries. We continuously monitor such changes to assess and quantify the potential impacts on our consolidated financial statements.

We periodically evaluate opportunities to distribute cash among our group entities to fund our operations in the United States and other geographies, and as and when we decide to distribute, we may have to accrue additional taxes in accordance with local tax laws, rules and regulations in the relevant foreign jurisdictions. These distributions do not constitute a change in our permanent reinvestment assertion.

We currently benefit from corporate tax holidays in our qualified Philippines Economic Zone Authority operations centers in the Philippines. Our ability to utilize these tax holidays could be adversely affected by any new unfavorable tax legislative changes. We continuously monitor such changes to assess and quantify any potential impacts on our consolidated financial statements.

We recognize deferred tax assets and liabilities for temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. We determine if a valuation allowance is required on the basis of an assessment of whether it is more likely than not that a deferred tax asset will be realized.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon the financial statements included in this Annual Report on Form 10-K, which have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). A summary of our significant accounting policies is included in Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements.

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We consider the policies discussed below to be critical to an understanding of our consolidated financial statements, as their application places the most significant demands on management’s judgment regarding matters that are inherently uncertain at the time an estimate is made.

These policies include revenue recognition, allowance for expected credit losses, business combinations, goodwill, other intangible assets and long-lived assets, stock-based compensation, employee benefits, derivative financial instruments and hedging, leases and income taxes.

The significant estimates and assumptions that affect the financial statements include, but are not limited to, estimates of the fair value of the derivative financial instruments, stock-based awards, identifiable intangible assets and contingent consideration, assumptions related to 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, assets and obligations related to employee benefit plans, determination of incremental borrowing for measuring lease liabilities, deferred tax assets and liabilities, deferred tax valuation allowances, income-tax contingencies, purchase price allocation, revenue projections and discount rate applied within the discounted cash flow model.

These accounting policies, estimates and the associated risks are set out below. Future events may not develop exactly as forecasted and estimates routinely require adjustment.

Revenue Recognition

Revenue is recognized when services are provided to our clients, in an amount that reflects the consideration which we expect to be entitled to in exchange for the services provided. We recognize revenue when we satisfy a performance obligation by providing services to a customer.

Revenue is measured based on consideration specified in a contract with a customer and excludes value added tax, business tax, any applicable discounts and amounts collected on behalf of third parties. Reimbursements of out-of-pocket expenses are included as a part of revenue.

Significant judgments

Arrangements with Multiple Performance Obligations

We sometimes enter into contracts with our clients which include promises to transfer multiple products and services to the client. Determining whether products and services are considered as distinct performance obligations that should be accounted for separately rather than as one performance obligation may require significant judgment. The transaction price is allocated to performance obligations on relative standalone selling price basis.

Judgment is also required to determine the standalone selling price for each distinct performance obligation. In instances where the standalone selling price is not directly observable, it is determined using information that may include market conditions and other observable inputs.

The contracts with our clients may be modified to add, remove or change existing performance obligations, which requires judgment to evaluate and determine whether such performance obligations are to be accounted for on a prospective basis as a separate contract or as a termination of an existing contract and creation of a new contract.

Variable Consideration

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

We consider our experience with similar transactions and expectations regarding the contract in estimating the amount of variable consideration that should be recognized during a period.

We believe that the expected value method is most appropriate for determining the variable consideration since we have a large number of contracts with similar nature of transactions/services.

Type of Contracts Requiring Judgment

a.Revenues for our fixed-price contracts are recognized using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby reasonably reflects transfer of control to the client. The use of this method requires significant judgment to estimate the cost required to complete the contracted scope of work, including

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assumptions and estimates relative to the length of time to complete the project and the nature and complexity of the work to be performed and resources engaged. We regularly monitor these estimates throughout the execution of the 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.

b.Revenues from reimbursement optimization services having contingent fee arrangements are recognized by us at the point in time when a performance obligation is satisfied, which is when we identify an overpayment claim. In such contracts, our consideration is contingent upon the actual collections made by our clients and net of any subsequent retraction claims. Based on guidance on “variable consideration” in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), we use our historical experience and projections to determine the expected recoveries from our clients and recognize 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.

For additional information, see Note 4 - Revenues, net to our consolidated financial statements under Part II, Item 8, “Financial Statements and Supplementary Data.”

Unbilled Receivables

Unbilled receivables represent revenues recognized for services rendered between the last billing date and the balance sheet date. Unbilled receivables also include revenues recognized from reimbursement optimization services where we identify an overpayment claim. In such contracts, our consideration is contingent upon and collectable only when the actual collections are made by our clients. Based on guidance on “variable consideration” in ASC Topic 606, we use our historical experience and projections to determine the expected recoveries from our clients and recognize revenue and receivables based upon such expected recoveries. Accordingly, the amounts for which services have been performed and for which invoices have not been issued to customers on the balance sheet date, (i.e. unbilled receivables) are presented under accounts receivable, net.

Deferred Revenue and contract fulfillment costs

We have contract liabilities (deferred revenue) consisting of advance billings and billing in excess of revenues recognized. Deferred revenue also includes the amount for which services have been rendered but other conditions of revenue recognition are not met, for example where we do not have an enforceable contract.

Further, we also defer revenues attributable to certain process transition activities, with respect to our clients where such activities do not represent separate performance obligations. Revenues related to such transition activities are classified under “Deferred revenue” and “Other non-current liabilities” in our consolidated balance sheets and are recognized ratably over the period during 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 expected duration of the relationship with customers, under “Cost of revenues” in our consolidated statements of income.

Contract Acquisition Costs

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 our consolidated balance sheets. Such costs are amortized over the expected duration of the relationship with customers and recorded under Selling and marketing expenses in our consolidated statements of income.

Upfront Payment Made to Customers

Upfront payments in nature of deal signing discount or deal signing bonuses made to customers are contract assets and classified under “Other current assets” and “Other assets” in our 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.

Allowance for Expected Credit Losses

We record accounts receivable net of allowances for expected credit losses. Allowances for credit losses are established through the evaluation of aging of accounts receivables, prior collection experience, current market conditions, forecasts about future economic conditions, clients’ financial condition and the amount of accounts receivable in dispute to estimate the collectability of these accounts receivable. Accounts receivable balances are written-off against the allowance for expected credit losses after all means of collection have been exhausted and the potential for recovery is considered remote.

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Business Combinations

We account for all business combinations using the acquisition method of accounting as prescribed by ASC Topic 805, Business Combinations. The guidance requires the use of significant estimates and assumptions in determining the fair value of identifiable assets acquired and liabilities assumed, including intangible assets and contingent consideration, and allocation of purchase price over such assets and liabilities on the acquisition date. The significant estimates and assumptions include, but are not limited to, the timing and amount of future revenue and cash flows based on, among other things, discount rate reflecting the risk inherent in future cash flows, customer attrition rates and the long-term growth rate applied within the discounted cash flow model. This requires a high degree of our judgment and the need to involve fair value specialists to evaluate the reasonableness of our valuation methodology and the selection of inputs to the valuation.

In addition, assets acquired and liabilities assumed including uncertain tax positions and tax-related valuation allowances in connection with business combinations are initially estimated as of the acquisition date. We subsequently re-evaluate the assets acquired and liabilities assumed, including additional assets and liabilities identified subsequent to acquisition date, with any adjustments to our preliminary estimates being recorded to goodwill within the measurement period (up to one year from the acquisition date).

Goodwill, Other Intangible Assets and Long-lived Assets

Goodwill represents the cost of the acquired businesses in excess of the fair value of identifiable tangible and intangible net assets purchased in a business combination. Goodwill is not amortized but is tested for impairment at least on an annual basis, relying on a number of factors including operating results, business plans and estimated future cash flows of the reporting units to which it is assigned. We undertake studies to determine the fair values of assets and liabilities acquired and allocate purchase consideration to assets and liabilities, including property and equipment, goodwill and other identifiable intangibles. We examine the carrying value of the goodwill annually in the fourth quarter, or more frequently, as circumstances warrant, to determine whether there are any impairment losses. We test for goodwill impairment at the reporting unit level.

The goodwill quantitative impairment test involves a comparison of the fair value of a reporting unit with its carrying amount. We estimate the fair value of a reporting unit using a combination of the income approach, using discounted cash flow analysis (“DCF model”) and the market approach, using market multiples for reporting units whereby the fair value is not substantially in excess of carrying value. Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. The discount rate is based on judgment of the specific risk inherent in the future cash flows of the respective reporting units. The variables within the discount rate, many of which are outside of our control, provide us best estimate of all assumptions applied within the DCF model. Under the market approach, we estimate fair value based on market multiples of revenues and earnings derived from comparable publicly-traded companies with characteristics similar to the reporting unit and comparable market transactions. The market approach is used to corroborate the results of the income approach. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit.

Determining fair value requires the use of estimates and exercise of significant judgment, including assumptions about appropriate discount rates, perpetual growth rates, amount and timing of expected future cash flows, market multiples of revenues and earnings and comparable market transactions. These estimates and judgements may not be within our control and accordingly it is reasonably possible that the estimates and judgments described above could change in future periods. There can be no assurance that operations will achieve the future cash flows reflected in the projections. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss shall be recognized, in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

We review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, we will recognize an impairment loss when the sum of discounted expected future cash flows is less than the carrying amount of such asset. The estimate of discounted cash flows and the fair value of assets require several assumptions and estimates like the weighted average cost of capital, discount rates, risk-free rates, market rate of return and risk premiums and can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. See Note 2 - Summary of Significant Accounting Policies - Business Combinations, Goodwill and Other Intangible Assets to our consolidated financial statements for more information.

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Stock-based Compensation

Under the fair value recognition provisions of ASC Topic 718, Compensation-Stock Compensation, cost is measured at the grant date based on the fair value of the award and is amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

Determining the fair value of stock-based awards at the grant date requires significant judgment, including estimating the expected term over which the stock awards will be outstanding before they are exercised and the expected volatility of our stock.

We also grant performance-based restricted stock units (“PRSUs”) to executive officers and other specified employees. Generally, we grant PRSUs cliff vest based on an aggregated revenue target (“PUs”) for a three-year period, while grants based on market conditions (“MUs”) are contingent on meeting or exceeding the total shareholder return relative to a group of peer companies specified under the 2018 Plan, and are measured over a three-year performance period. The award recipient may earn up to 200% of the PRSUs granted based on the actual achievement of both targets. However, the features of our equity incentive compensation program are subject to change by the Compensation and Talent Management Committee of our board of directors.

The fair value of each PU is determined based on the market price of one share of our common stock on the day prior to the date of grant. The grant date fair value for the MUs is determined using a Monte Carlo simulation model. The Monte Carlo simulation model simulates a range of possible future stock prices and estimates the probabilities of the potential payouts. The Monte Carlo simulation model also involves the use of additional key assumptions, including dividend yield and risk-free interest rate. We periodically assess the reasonableness of our assumptions and update our estimates as required. If actual results differ significantly from our estimates, stock-based compensation expense and our results of operations could be materially affected.

Stock-based compensation expense associated with our 2022 Employee Stock Purchase Plan is measured at fair-value using a Black-Scholes option-pricing model at commencement of each offering period and recognized over that offering period.

Derivative Instruments

In the normal course of business, we use derivative instruments to mitigate the exposure from risk of foreign currency and interest rate fluctuations. We enter into foreign currency forward contracts to hedge cash flow risks from forecasted transactions denominated in certain foreign currencies, and interest rate swaps to hedge cash flow risks from our revolving credit facility having variable interest rate obligations. These contracts adhere to our treasury operations’ objectives and policies to qualify as cash flow hedges, and are with counterparties that are highly rated financial institutions.

Changes in the fair value of these cash flow hedges are recorded as a component of accumulated other comprehensive income/(loss) (“AOCI”), net of tax. The resultant foreign exchange gain/(loss) upon settlement of cash flow hedges of a forecast transaction are recorded in the consolidated statements of income along with the underlying hedged item in the same line in our consolidated statements of income as a part of “Cost of revenues,” “General and administrative expenses,” “Selling and marketing expenses,” and “Depreciation and amortization expense,” as applicable. The accumulated changes in the fair value of interest rate swaps recognized in AOCI are reclassified to our consolidated statements of income and are presented as a part of “Interest expense” over the term of the contract.

We evaluate hedge effectiveness of cash flow hedges at the time a contract is entered into as well as on an ongoing basis. For hedge relationships that are discontinued because the forecasted transaction is not expected to occur by the end of the originally specified period, any related derivative amounts recorded in AOCI are reclassified to earnings.

We also use derivative instruments consisting of foreign currency forward contracts to hedge intercompany balances and other monetary assets or liabilities denominated in currencies other than the functional currency, against the risk of foreign currency fluctuations associated with remeasurement of such assets and liabilities to functional currency. These derivatives do not qualify as fair value hedges. Changes in the fair value of these derivatives are recognized in our consolidated statements of income and are included in foreign exchange gain, net.

We also use foreign currency forward contracts designated as net investment hedges to hedge the foreign currency risks related to our investment in foreign subsidiaries. Fair value changes on these forward contracts and gains and losses on settlement of such forward contracts are recognized in AOCI as part of the foreign currency translation adjustments and are reclassified to consolidated statements of income when a foreign operation is disposed or partially disposed.

All of the assets and liabilities related to our forward contracts are subject to master netting arrangements with each individual counterparty. These master netting arrangements generally provide for net settlement of all outstanding contracts

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with the counterparty in the case of an event of default or a termination event. We present all of the assets and liabilities related to these contracts on a gross basis, with no offsets, in our consolidated statements of financial position. There is no financial collateral (including cash collateral) provided or received by us related to these contracts.

We determine the fair value of our derivatives based on market observable inputs including both forward and spot prices for currencies. Derivative assets and liabilities included in Level 2 primarily represent foreign currency forward contracts. The quotes are taken primarily from independent sources, including highly rated financial institutions.

Income Taxes

We account for income tax using the asset and liability method. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized in respect of future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and operating losses carried forward, if any. Deferred tax assets and liabilities are measured using the anticipated tax rates for the years in which such temporary differences are expected to be recovered or settled. We recognize the effect of a change in tax rates on deferred tax assets and liabilities during the period in which the new tax rate was enacted or the change in tax status was filed or approved. We release (reclassify) the tax effects from AOCI to the consolidated statements of income at the time of settlement of cash flows hedges and amortization of deferred actuarial gain/(loss) on retirement benefits. Deferred tax assets are recognized in full, subject to a valuation allowance that reduces the amount recognized to that which is more likely than not to be realized. In assessing the likelihood of realization, we consider all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. With respect to any entity that benefits from a corporate tax holiday, deferred tax assets or liabilities for existing temporary differences are recorded only to the extent such temporary differences are expected to reverse following the expiration of the tax holiday.

We also evaluate potential exposures related to tax contingencies or claims made by the tax authorities in various jurisdictions in order to determine whether a reserve may be required. A reserve is recorded if we believe that a loss is probable and if the amount of such loss can be reasonably estimated. Such reserves are based on estimates and, consequently, are subject to changing facts and circumstances, including the progress of ongoing audits, changes in case law and the passage of new legislation. We have established adequate reserves to cover any potential tax contingencies or claims.

We have adopted an accounting policy to treat Global Intangible Low-Taxed Income as a period cost.

Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, requires companies to recognize, measure, present and disclose uncertain tax positions. We employ a two-step process for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining, based on the technical merits, that the position will, more likely than not, be sustained upon examination. The second step is to measure the tax benefit as the largest amount of the tax benefit that is more likely than not to be realized upon settlement. We have established adequate reserves to cover all uncertain tax positions.

We base our decision to continue to indefinitely reinvest earnings from our foreign subsidiaries on our estimate of the working capital required to support operations in these geographies. In addition, we periodically review our capital initiatives to support and expand our global operations, as well as whether there exists an economically viable rate of return on our investments in these geographies, as compared to those made in the United States.

Employee Benefits

We record contributions to defined contribution plans in our consolidated statements of income in the period in which services are rendered by the covered employees. Current service costs for defined benefit plans are recognized in the period to which they relate. The liability in respect of defined benefit plans is calculated annually by using the projected unit credit method and various actuarial assumptions including discount rates, mortality, expected return on assets, expected increase in the compensation rates and attrition rates. We evaluate these critical assumptions at least annually. If actual results differ significantly from our estimates, current service costs for defined benefit plans and our results of operations could be materially impacted.

We include 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 included in “Other income/(loss), net.” See Note 20 - Employee Benefit Plans to our consolidated financial statements for details.

We recognize the liabilities for compensated absences dependent on whether the obligation is attributable to employee services already rendered, relates to rights that vest or accumulate and payment is probable and estimable.

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Leases

We account for a lease at the inception of the contract. Our assessment is based on whether: (1) the contract involves the use of a distinct identified asset, (2) we obtain the right to substantially all the economic benefits from the use of the asset throughout the term of the contract, and (3) we have the right to direct the use of the asset. A lease is classified as a finance lease if any one of the following criteria are met: (1) the lease transfers ownership of the asset by the end of the lease term, (2) the lease contains an option to purchase the asset that is reasonably certain to be exercised, (3) the lease term is for a major part of the remaining useful life of the asset or (4) the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. Operating leases are recorded in “Operating lease right-of-use assets,” “Current portion of operating lease liabilities” and “Operating lease liabilities, less current portion” in our consolidated balance sheets. Finance leases are recorded in “Property and equipment, net,” and the current and non-current portion of finance lease liabilities are presented within “Accrued expenses and other current liabilities” and “Other non-current liabilities,” respectively in our consolidated balance sheets.

ROU assets represent our right to use an underlying asset during the lease term and lease liabilities represent our obligation to make lease payments arising from the lease arrangement. Lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Operating lease ROU assets are recognized at commencement date in an amount equal to lease liability, adjusted for any lease prepayments, initial direct costs and lease incentives. For leases in which the rate implicit in the lease is not readily determinable, we use our incremental borrowing rate at commencement date by adjusting the benchmark reference rates, applicable to the respective geographies where the leases were entered, with appropriate financing spreads and lease specific adjustments for the effects of collateral. We determine the incremental borrowing rate by adjusting the benchmark reference rates with appropriate financing spreads applicable to the respective geographies where we entered into leases and lease specific adjustments for the effects of collateral.

Lease terms includes our assessment for the effects of options to extend or terminate the lease. We consider the extension option as part of our lease term for those lease arrangements where we are reasonably certain at commencement of the lease that we will exercise that option. Lease expense for operating lease arrangements is recognized on a straight-line basis over the lease term. We evaluate lease agreements to determine lease and non-lease components, which are accounted for separately.

Lease payments that depend on factors other than an index or rate are considered variable lease payments and are excluded from the operating lease assets and liabilities and are recognized as expense in the period in which the obligation is incurred. Lease payments include payments for common area maintenance, utilities such as electricity, heating and water, among others, and property taxes, and other similar payments paid to the landlord, which are treated as non-lease component.

We account for lease-related concessions in accordance with guidance in ASC Topic 842, Leases, to determine, on a lease-by-lease basis, whether the concession provided by lessor should be accounted for as a lease modification.

We account for a modification as a separate contract when it grants an additional right of use not included in the original lease and the increase is commensurate with the standalone price for the additional right of use, adjusted for the circumstances of the particular contract. Modifications which are not accounted for as a separate contract are reassessed as of the effective date of the modification based on its modified terms and conditions and the facts and circumstances as of that date. The lease liability is remeasured to reflect changes to the remaining lease payments and discount rates and we recognize the amount of the remeasurement of the lease liability as an adjustment to the ROU assets. However, if the carrying amount of the ROU assets is reduced to zero as a result of modification, any remaining amount of the remeasurement is recognized as an expense in our consolidated statements of income.

We review the ROU assets for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable.

Contingencies

Loss contingencies are recorded as liabilities when a loss is considered probable and the amount can be reasonably estimated. When a material loss contingency is reasonably possible but not probable, we do not record a liability, but instead disclose the nature and the amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made. Significant judgment is required in the determination of probability and whether an exposure is reasonably estimable, both. Our judgments are subjective and based on the information available from the status of the legal or regulatory proceedings, the merits of our defenses and consultation with in-house and outside legal counsel. As additional information becomes available, we reassess any potential liability related to any pending litigation and may revise our estimates. Such revisions in estimates of any potential liabilities could have a material impact on our results of operations, financial position and cash flows.

Results of Operations

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For a discussion of our results of operations for the year ended December 31, 2020, including a year-to-year comparison between 2021 and 2020, refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021.

The following table summarizes our results of operations:

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2022","","2021","","2020"],["","(dollars in millions)"],["Revenues, net","$","1,412.0","","","$","1,122.3","","","$","958.4"],["Cost of revenues(1)","896.6","","","690.9","","","623.9"],["Gross profit(1)","515.4","","","431.4","","","334.5"],["Operating expenses:"],["General and administrative expenses","169.0","","","142.1","","","113.9"],["Selling and marketing expenses","98.0","","","84.3","","","60.1"],["Depreciation and amortization expense","56.3","","","49.1","","","50.5"],["Total operating expenses","323.3","","","275.5","","","224.5"],["Income from operations","192.1","","","155.9","","","110.0"],["Foreign exchange gain, net","6.2","","","4.3","","","4.4"],["Interest expense","(8.2)","","","(7.6)","","","(11.2)"],["Other income, net","\u2014","","","6.8","","","12.1"],["Loss on settlement of convertible notes","\u2014","","","(12.8)","","","\u2014"],["Income before income tax expense and earnings from equity affiliates","190.1","","","146.6","","","115.3"],["Income tax expense","47.5","","","31.9","","","25.6"],["Income before earnings from equity affiliates","142.6","","","114.7","","","89.7"],["Gain/(loss) from equity-method investment","0.4","","","\u2014","","","(0.2)"],["Net income attributable to ExlService Holdings, Inc. stockholders","$","143.0","","","$","114.7","","","$","89.5"]]
[[/GREPCENT_TABLE]]

(1) Exclusive of depreciation and amortization expense.

Due to rounding, the numbers presented in the tables included in this Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may not add up precisely to the totals provided.

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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Revenues.

The following table summarizes our revenues by reportable segments:

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","","","Percentage change"],["","2022","","2021","","Change"],["","(dollars in millions)"],["Insurance","$","448.7","","","$","382.0","","","$","66.7","","","17.5","%"],["Healthcare","97.4","","","112.4","","","(15.0)","","","(13.4)","%"],["Emerging Business","218.6","","","167.2","","","51.4","","","30.7","%"],["Analytics","647.3","","","460.7","","","186.6","","","40.5","%"],["Total revenues, net","$","1,412.0","","","$","1,122.3","","","$","289.7","","","25.8","%"]]
[[/GREPCENT_TABLE]]

Revenues for the year ended December 31, 2022 were $1,412.0 million, up $289.7 million, or 25.8%, compared to the year ended December 31, 2021, driven primarily by revenue growth from our new and existing clients in the Analytics, Emerging Business and Insurance reportable segments.

Revenue growth in Insurance of $66.7 million was primarily driven by expansion of business from our new and existing clients of $71.7 million. This was partially offset by a loss of $5.0 million mainly attributable to the depreciation of the U.K. pound sterling, the Australian dollar and the Indian rupee against the U.S. dollar during the year ended December 31, 2022, compared to the year ended December 31, 2021. Insurance revenues were 31.8% and 34.0% of our total revenues during the years ended December 31, 2022 and 2021, respectively.

Revenue decline in Healthcare of $15.0 million was primarily driven by the ramp-down in certain existing clients during the year ended December 31, 2022. Healthcare revenues were 6.9% and 10.0% of our total revenues during the years ended December 31, 2022 and 2021, respectively.

Revenue growth in Emerging Business of $51.4 million was primarily driven by expansion of business from our new clients and existing clients of $58.0 million. This was partially offset by a loss of $6.6 million mainly attributable to the depreciation of the U.K. pound sterling and the Indian rupee against the U.S. dollar during the year ended December 31, 2022, compared to the year ended December 31, 2021. Emerging Business revenues were 15.5% and 14.9% of our total revenues during the years ended December 31, 2022 and 2021, respectively.

Revenue growth in Analytics of $186.6 million was primarily driven by higher volumes in our annuity and project based engagements from our new and existing clients of $144.1 million, and an incremental contribution from our acquisition of Clairvoyant in December 2021 of $47.4 million. This was partially offset by a loss of $4.9 million mainly attributable to the depreciation of the U.K. pound sterling against the U.S. dollar during the year ended December 31, 2022, compared to the year ended December 31, 2021. Analytics revenues were 45.8% and 41.0% of our total revenues during the years ended December 31, 2022 and 2021, respectively.

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Cost of Revenues and Gross Margin: The following table sets forth cost of revenues and gross margin of our reportable segments.

[[GREPCENT_TABLE]]
[["","Cost of Revenues","","Gross Margin"],["","Year ended December 31,","","","","Percentage change","","Year ended December 31,"],["","2022","","2021","","Change","","","2022","","2021","","Change"],["","(dollars in millions)"],["Insurance","$","287.7","","","$","239.5","","","$","48.2","","","20.1","%","","35.9","%","","37.3","%","","(1.4)","%"],["Healthcare","71.0","","","69.8","","","1.2","","","1.7","%","","27.1","%","","37.9","%","","(10.8)","%"],["Emerging Business","128.0","","","91.7","","","36.3","","","39.5","%","","41.4","%","","45.1","%","","(3.7)","%"],["Analytics","409.9","","","289.9","","","120.0","","","41.4","%","","36.7","%","","37.1","%","","(0.4)","%"],["Total","$","896.6","","","$","690.9","","","$","205.7","","","29.8","%","","36.5","%","","38.4","%","","(1.9)","%"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2022, cost of revenues was $896.6 million compared to $690.9 million for the year ended December 31, 2021, an increase of $205.7 million, or 29.8%. Our gross margin for the year ended December 31, 2022 was 36.5% compared to 38.4% for year ended December 31, 2021, a decrease of 190 basis points (“bps”) primarily driven by lower margins associated with higher costs during ramp-ups in certain new clients and higher employee-related costs during the year ended December 31, 2022, compared to the year ended December 31, 2021.

The increase in cost of revenues in Insurance of $48.2 million for the year ended December 31, 2022 was primarily due to

increases in employee-related costs of $47.3 million on account of higher headcount and wage inflation, higher technology costs of $7.3 million on account of increased leverage of the hybrid and remote working models and higher travel costs of $1.6 million, partially offset by foreign exchange gain, net of hedging of $7.3 million and lower other operating costs of $0.7 million. Gross margin in Insurance decreased by 140 bps during the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to lower margins associated with higher costs during ramp-ups in certain new clients during the year ended December 31, 2022, compared to the year ended December 31, 2021.

The increase in cost of revenues in Healthcare of $1.2 million for the year ended December 31, 2022 was primarily due to

increases in employee-related costs of $3.5 million on account of higher headcount and wage inflation, and higher technology costs of $0.6 million on account of increased leverage of the hybrid and remote working models, partially offset by lower facilities cost of $1.1 million and foreign exchange gain, net of hedging of $1.8 million. Gross margin in Healthcare decreased by 1,080 bps during the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to lower revenues associated with the ramp-down of certain existing clients and higher operating expenses associated with the ramp-down of certain existing clients during the year ended December 31, 2022, compared to the year ended December 31, 2021.

The increase in cost of revenues in Emerging Business of $36.3 million for the year ended December 31, 2022 was primarily due to increases in employee-related costs of $34.5 million on account of higher headcount and wage inflation, higher technology costs of $4.0 million on account of increased leverage of the hybrid and remote working models, higher travel costs of $2.3 million, higher facilities costs of $1.2 million, partially offset by foreign exchange gain, net of hedging of $5.7 million. Gross margin in Emerging Business decreased by 370 bps during the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to lower margins associated with higher costs during ramp-ups in certain new clients, higher employee-related costs and higher operating expenses during the year ended December 31, 2022, compared to the year ended December 31, 2021.

The increase in cost of revenues in Analytics of $120.0 million for the year ended December 31, 2022 was primarily due to increases in employee-related costs of $113.0 million on account of higher headcount and wage inflation, including incremental cost related to our acquisition of Clairvoyant in December 2021. The remaining increase was attributable to higher travel costs of $4.5 million, higher technology costs of $3.5 million on account of increased leverage of the hybrid and remote working models and higher other operating costs of $9.6 million. This was partially offset by foreign exchange gain, net of hedging of $10.6 million. Gross margin in Analytics decreased by 40 bps during the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to increases in employee-related costs and higher operating expenses during the year ended December 31, 2022, compared to the year ended December 31, 2021.

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Selling, General and Administrative (“SG&A”) Expenses.

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","","","Percentage change"],["","2022","","2021","","Change"],["","(dollars in millions)"],["General and administrative expenses","$","169.0","","","$","142.1","","","$","26.9","","","19.0","%"],["Selling and marketing expenses","98.0","","","84.3","","","13.7","","","16.2","%"],["Selling, general and administrative expenses","$","267.0","","","$","226.4","","","$","40.6","","","18.0","%"],["As a percentage of revenues","18.9","%","","20.2","%"]]
[[/GREPCENT_TABLE]]

The increase in SG&A expenses of $40.6 million was primarily due to higher employee-related costs of $32.4 million on account of higher headcount and wage inflation, including incremental costs related to our acquisition of Clairvoyant in December 2021, increase in technology costs of $9.3 million on account of continued investments in digital capabilities, higher travel costs of $4.0 million and higher other operating costs of $1.3 million. This was partially offset by foreign exchange gain, net of hedging of $3.7 million, during the year ended December 31, 2022 and COVID-19 related expenses of $2.7 million during the year ended December 31, 2021.

Depreciation and Amortization.

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","","","Percentage change"],["","2022","","2021","","Change"],["","(dollars in millions)"],["Depreciation expense","$","39.2","","","$","36.3","","","$","2.9","","","7.8","%"],["Intangible amortization expense","17.1","","","12.8","","","4.3","","","33.9","%"],["Depreciation and amortization expense","$","56.3","","","$","49.1","","","$","7.2","","","14.6","%"],["As a percentage of revenues","4.0","%","","4.4","%"]]
[[/GREPCENT_TABLE]]

The increase in intangibles amortization expense of $4.3 million was primarily due to amortization of intangibles associated with our acquisitions of Clairvoyant and Inbound in December 2021 and June 2022, respectively, partially offset by decrease in intangibles amortization expense due to end of useful lives for certain intangible assets during the year ended December 31, 2022, compared to the year ended December 31, 2021. The increase in depreciation expense of $2.9 million was primarily due to depreciation of $4.3 million related to our investments in digital capabilities, computers and networking equipment, partially offset by foreign exchange gain, net of hedging of $1.4 million during the year ended December 31, 2022, compared to the year ended December 31, 2021.

Income from Operations. Income from operations increased by $36.2 million, or 23.3%, from $155.9 million for the year ended December 31, 2021 to $192.1 million for the year ended December 31, 2022, primarily due to higher revenues, partially offset by higher cost of revenues and higher SG&A expenses during the year ended December 31, 2022. As a percentage of revenues, income from operations decreased from 13.9% for the year ended December 31, 2021 to 13.6% for the year ended December 31, 2022.

Foreign Exchange Gain, net. Foreign exchange gains and losses are primarily attributable to the movement of the U.S. dollar against the Indian rupee, the Philippine peso, the U.K. pound sterling and the South African ZAR during the year ended December 31, 2022. The average exchange rate of the U.S. dollar against the Indian rupee increased from 73.88 during the year ended December 31, 2021 to 78.81 during the year ended December 31, 2022. The average exchange rate of the U.S. dollar against the Philippine peso increased from 49.36 during the year ended December 31, 2021 to 54.47 during the year ended December 31, 2022. The average exchange rate of the U.K. pound sterling against the U.S. dollar decreased from 1.38 during the year ended December 31, 2021 to 1.23 during the year ended December 31, 2022. The average exchange rate of the U.S. dollar against the South African ZAR increased from 14.92 during the year ended December 31, 2021 to 16.44 during the year ended December 31, 2022.

We recorded a foreign exchange gain, net of $6.2 million for the year ended December 31, 2022 compared to a foreign exchange gain, net of $4.3 million for the year ended December 31, 2021.

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Interest expense. Interest expense increased from $7.6 million for the year ended December 31, 2021 to $8.2 million for the year ended December 31, 2022, primarily due to a higher average outstanding amount under our revolving credit facility, which had a higher effective interest rate of 2.9% during the year ended December 31, 2022, compared to 1.7% during the year ended December 31, 2021, partially offset by a decrease in interest expense on the Notes due to settlement of outstanding obligations under the Notes (as defined below under “Financing Arrangements (Debt Facility and Notes)”) on August 27, 2021.

Other Income/(Loss), net.

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","","","Percentage change"],["","2022","","2021","","Change"],["","(dollars in millions)"],["Fair value changes of contingent consideration","$","(8.3)","","","$","\u2014","","","$","(8.3)","","","(100.0)","%"],["Gain on sale and mark-to-market on investments","4.9","","","4.9","","","\u2014","","","\u2014","%"],["Interest and dividend income","5.2","","","2.7","","","2.5","","","91.8","%"],["Others, net","(1.8)","","","(0.8)","","","(1.0)","","","124.6","%"],["Other income/(loss), net","$","\u2014","","","$","6.8","","","$","(6.8)","","","(100.0)","%"]]
[[/GREPCENT_TABLE]]

Other income/(loss), net decreased by $6.8 million, from a net income of $6.8 million for the year ended December 31, 2021 to $nil for the year ended December 31, 2022. The decrease is primarily due to an increase in the fair value of contingent consideration related to our Clairvoyant acquisition by $8.5 million as a result of strong operational performance. This was partially offset by higher interest income on our short-term and long-term investments of $1.8 million.

Loss on settlement of Notes. On August 27, 2021, we settled our outstanding obligations under the Notes and recognized a loss of $12.8 million during the year ended December 31, 2021. See Note 18 - Borrowings to our consolidated financial statements.

Income Tax Expense. The effective tax rate increased from 21.7% during the year ended December 31, 2021 to 25.0% during the year ended December 31, 2022. We recorded income tax expense of $47.5 million and $31.9 million for the years ended December 31, 2022 and 2021, respectively. The increase in income tax expense was primarily as a result of higher profit during the year ended December 31, 2022, compared to the year ended December 31, 2021, an increase in state taxes and an increase in non-deductible expenses, partially offset by higher excess tax benefits related to stock-based compensation.

Net Income. Net income increased from $114.7 million for the year ended December 31, 2021 to $143.0 million for the year ended December 31, 2022, primarily due to increase in income from operations of $36.2 million, loss on settlement of the Notes of $12.8 million during the year ended December 31, 2021 and higher foreign exchange gain, net of $1.9 million, partially offset by higher income tax expense of $15.6 million and lower other income, net of $6.8 million. As a percentage of revenues, net income decreased from 10.2% during the year ended December 31, 2021 to 10.1% during the year ended December 31, 2022.

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Liquidity and Capital Resources

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2022","","2021","","2020"],["","(dollars in millions)"],["Opening cash, cash equivalents and restricted cash","$","143.8","","","$","225.5","","","$","127.0"],["Net cash provided by operating activities","166.1","","","184.4","","","203.0"],["Net cash used for investing activities","(96.5)","","","(114.3)","","","(18.3)"],["Net cash used for financing activities","(81.7)","","","(146.9)","","","(89.6)"],["Effect of exchange rate changes","(6.1)","","","(4.9)","","","3.4"],["Closing cash, cash equivalents and restricted cash","$","125.6","","","$","143.8","","","$","225.5"]]
[[/GREPCENT_TABLE]]

As of December 31, 2022 and 2021, we had $297.7 million and $314.8 million, respectively, in cash, cash equivalents and short-term investments, of which $260.0 million and $278.3 million, respectively, is located in foreign jurisdictions that upon distribution may be subject to withholding and other taxes. We periodically evaluate opportunities to distribute cash among our group entities to fund our operations, expand our business and make strategic acquisitions in the United States and other geographies, and as and when we decide to distribute, we may have to accrue additional taxes in accordance with local tax laws, rules and regulations in the relevant foreign jurisdictions.

Operating Activities:

Net cash provided by operating activities was $166.1 million for the year ended December 31, 2022, compared to $184.4 million for the year ended December 31, 2021, reflecting higher working capital needs, offset by higher cash earnings. The major drivers contributing to the decrease of $18.3 million year-over-year included the following:

•Increase in accounts receivable, including unbilled receivable and deferred revenue, contributed to a lower cash flow of $15.2 million in 2022 compared to 2021. Increase in accounts receivable was driven by revenue growth in 2022. Cash flows were also affected by our accounts receivable days sales outstanding, which increased to 61 days as of December 31, 2022 from 56 days as of December 31, 2021.

•Increase in employee-related payments, partially offset by an increase in accrued expenses, accounts payable and operating lease liabilities contributed to a higher cash outflow of $23.9 million in 2022 compared to 2021. The higher cash outflow was primarily due to higher payments for annual performance incentives and employee compensation aggregating to $40.9 million, partially offset by lower payments for operating expenses of $17.0 million in 2022.

•Increase in cash earnings including adjustments for non-cash and other items contributed higher cash flow of $19.4 million in 2022 compared to 2021. These adjustments comprise of depreciation and amortization of long-lived assets and intangibles acquired in business combinations, share-based employee compensation, unrealized foreign currency exchange gain/loss, mark-to-market adjustments on investments, among others.

Investing Activities: Cash used for investing activities were $96.5 million for the year ended December 31, 2022 as compared to cash used for investing activities of $114.3 million for the year ended December 31, 2021. The decrease of $17.7 million was primarily due to lower cash paid for business acquisitions of $3.9 million during the year ended December 31, 2022 as compared to $76.8 million during the year ended December 31, 2021. This was partially offset by higher cash paid for net purchase of investments of $48.1 million during the year ended December 31, 2022 as compared to net purchase of investments of $1.5 million during the year ended December 31, 2021, and higher cash paid for purchase of long-lived assets, including investments in infrastructure, technology assets, software and product developments of $8.6 million during the year ended December 31, 2022 compared to the year ended December 31, 2021.

Financing Activities: Cash used for financing activities were $81.7 million during the year ended December 31, 2022 as compared to cash used for financing activities of $146.9 million during the year ended December 31, 2021. The decrease of $65.2 million was primarily due to lower purchases of treasury stock by $45.7 million under our share repurchase program and net repayment of $10.0 million under our revolving credit facility during the year ended December 31, 2022 as compared to net repayments of $29.0 million during the year ended December 31, 2021.

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We expect to use cash from operating activities to maintain and expand our business by making investments, primarily related to building new digital capabilities and purchase telecommunications equipment and computer hardware and software in connection with managing client operations.

We incurred $44.8 million of capital expenditures during the year ended December 31, 2022. We expect to incur total capital expenditures of between $47 million to $52 million in 2023, primarily to meet our growth requirements, including additions to our facilities as well as investments in technology applications, product development, digital technology, advanced automation, robotics and infrastructure.

In connection with any tax assessment orders that have been issued, or may be issued against us or our subsidiaries, we may be required to deposit additional amounts with the relevant authorities with respect to such assessment orders (see Note 25 - Commitments and Contingencies to our consolidated financial statements herein for further details).

We believe that our existing cash, cash equivalents and short-term investments and sources of liquidity will be sufficient to satisfy our cash requirements over the next 12 months. Our future cash requirements will depend on many factors, including our rate of revenue growth, our investments in strategic initiatives, applications or technologies, operation centers and acquisition of complementary businesses, continued purchases under our board-authorized stock repurchase program, which may require the use of significant cash resources and/or additional financing. We anticipate that we will continue to rely upon cash from operating activities to finance most of our above mentioned requirements, while if we have significant growth through acquisitions, we may need to obtain additional financing.

In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future. These obligations include borrowings, including interest obligations, purchase commitments, operating and finance lease commitments, employee benefit payments under gratuity plans and uncertain tax positions. See Note 18- Borrowings, Note 20- Employee Benefit Plans, Note 21- Leases, Note 22- Income Taxes and Note 25- Commitments and Contingencies to our consolidated financial statements herein for further information on material cash requirements from known contractual and other obligations.

In the ordinary course of business, we provide standby letters of credit to third parties primarily for facility leases. As of December 31, 2022 and 2021, we had outstanding letters of credit of $0.5 million, each, that were not recognized in our consolidated balance sheets. These are unlikely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We had no other off-balance sheet arrangements or obligations.

Financing Arrangements (Debt Facility and Notes)

The following table summarizes our debt position:

[[GREPCENT_TABLE]]
[["","","As of December 31"],["","","2022","","2021"],["","","(dollars in millions)"],["","","Revolving credit facility"],["Current portion of long-term borrowings","","$","30.0","","","$","260.0"],["Long-term borrowings","","220.0","","","\u2014"],["Total borrowings","","$","250.0","","","$","260.0"]]
[[/GREPCENT_TABLE]]

Unamortized debt issuance costs for our revolving credit facility of $1.2 million and $0.2 million as of December 31, 2022 and December 31, 2021, respectively, are presented under “Other current assets” and “Other assets,” as applicable in our consolidated balance sheets.

Credit Agreement

We held a $300.0 million revolving credit facility pursuant to our credit agreement (the “Credit Agreement”), dated as of November 21, 2017 with certain lenders and Citibank N.A. as Administrative Agent. The revolving credit facility originally had a maturity date of November 21, 2022 and was voluntarily pre-payable from time to time without premium or penalty.

On April 18, 2022, we and each of our wholly owned material domestic subsidiaries entered into an Amendment and Restatement Agreement with Citibank, N.A. as Administrative Agent and certain lenders (the “2022 Credit Agreement”), pursuant to which the parties thereto amended and restated the Credit Agreement. Among other things, the 2022 Credit Agreement (a) provides for the issuance of new revolving credit commitments such that the aggregate amount of revolving

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credit commitments available is equal to $400.0 million; (b) extends the maturity date of the revolving credit facility from November 21, 2022 to April 18, 2027; and (c) replaces London Inter-Bank Offered Rate (“LIBOR”) with Secured Overnight Financing Rate (“SOFR”) as the reference rate for the U.S. dollar borrowings.

The 2022 Credit Agreement provides an option to increase the commitments by up to $200.0 million, subject to certain approvals and conditions. The 2022 Credit Agreement includes a letter of credit sub facility and is voluntarily pre-payable from time to time without premium or penalty. Borrowings under the 2022 Credit Agreement can be used for working capital and general corporate purposes, including permitted acquisitions.

Obligations under the 2022 Credit Agreement are guaranteed by our material domestic subsidiaries and are secured by all or substantially all of our and our material domestic subsidiaries’ assets. The 2022 Credit Agreement contains customary affirmative and negative covenants, including, but not limited to, restrictions on the ability to incur indebtedness, create liens, make certain investments, make certain dividends and related distributions, enter into, or undertake, certain liquidations, mergers, consolidations or acquisitions and dispose of assets or subsidiaries. In addition, the 2022 Credit Agreement contains a covenant to not permit the interest coverage ratio or the total net leverage ratio, both as defined for the four consecutive quarter period ending on the last day of each fiscal quarter, to be less than 3.0 to 1.0 or more than 3.5 to 1.0, respectively.

The 2022 Credit Agreement bears interest at a rate equal to specified prime rate (alternate base rate) or adjusted SOFR, plus, in each case, an applicable margin. The applicable margin is tied to our total net leverage ratio and ranges from 0% to 0.75% per annum on loans pegged to the specified prime rate, and 0.88% to 1.75% per annum on loans pegged to the adjusted SOFR. The revolving credit commitments under the 2022 Credit Agreement are subject to a commitment fee which is also tied to our total net leverage ratio, and ranges from 0.13% to 0.28% per annum on the average daily amount by which the aggregate revolving commitments exceed the sum of outstanding revolving loans and letter of credit obligations.

The revolving credit facility carried an effective interest rate as shown below:-

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2022","","2021"],["Effective interest rate","","2.9","%","","1.7","%"]]
[[/GREPCENT_TABLE]]

As of December 31, 2022 and 2021, we were in compliance with all financial and non-financial covenants listed under the applicable revolving credit facility.

Convertible Senior Notes

On October 1, 2018, we entered into an investment agreement with Orogen Echo LLC (the “Purchaser”), an affiliate of The Orogen Group LLC, relating to the issuance to the Purchaser of $150.0 million, in an aggregate principal amount (the “Notes”). The Notes carried interest at a rate of 3.5% per annum, payable semi-annually in arrears in cash on April 1 and October 1 of each year. The Notes were convertible at an initial conversion rate of 13.3333 shares of the common stock per one thousand dollar principal amount of the Notes (which represents an initial conversion price of approximately $75 per share).

On August 27, 2021, we entered into a Payoff and Termination Agreement with the Purchaser, pursuant to which we prepaid and settled our outstanding obligations under the Notes for an aggregate consideration of $236.7 million in the form of a combination of cash and shares of our common stock. See Note 18 - Borrowings to our consolidated financial statements herein for further details.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, see Note 2 - Summary of Significant Accounting Policies - Recent Accounting Pronouncements to our consolidated financial statements contained herein.

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