ExlService Holdings, Inc. (EXLS) Earnings Call Transcript & Summary

Hi, Ashwin.

Hi. Great to see you. So let's kick off this next session. For everyone who's joined, I'm Ashwin Shirvaikar. I'm Citi's payments, processors and IT services analyst. Thank you all for joining. One quick logistical item before we introduce the next company. And that is, if you have any questions, during the course of the session, just send me an e-mail, and my e-mail should appear at the bottom of your screen. It's ashwin.shirvaikar@citi.com. With that, let me welcome the next company, which is ExlService. And from EXL, we are fortunate to have Rohit Kapoor, who is the Vice Chairman and CEO. Rohit, thank you for joining, and I appreciate you're doing this for us. So should we just jump into the questions?

Sure, Ashwin. Thanks for having me here. Glad to be here.

Absolutely. Rohit, we often have relatively new investors, 1 or 2 or 3 or 5 of them in the room. So I always like to get started with a kind of a 2-minute elevator pitch, if you will, on EXL. If I could ask you to do that, so let me just level set everyone in the audience, and then we can just talk about the main topics of the day around growth and operations and analytics and margins and things like that. But a quick elevator pitch would be great.

Sure, Ashwin. Always happy to do that. So ExlService is an operations management and a data analytics company. We focus on serving clients in select industry verticals and in select geographies. The geographies that we've chosen to target clients are basically North America, U.K. and Europe and Australia. And from an industry vertical, we target clients in insurance, in health care, in banking, and a couple of other related industry verticals. The way in which we try and differentiate ourselves is along 3 dimensions. Number one, we are very, very sharply focused in on becoming market leaders in a few industry verticals and really having the domain expertise to be very helpful and value-added to our clients in these verticals. And for us, insurance and health care are the dominant industry verticals, and we've got a very strong presence in the banking industry vertical as well. Second, we've got a very strong capability around data analytics and digital. Almost 38% of our stand-alone revenues come in from data analytics. It's a capability that we've invested in for the last 15 years, and we've built up a market leadership position in this space. We embed a lot of automation and data analytics into our operations management business. And we can actually drive a lot of the growth as well as the portfolio management for our clients using data analytics and be helpful to them in that regard. So that's number two. And number three is, in terms of our operational delivery and excellence. That's something which we invest again very heavily in, and we've been able to deliver to our clients sustained, superior levels of service delivery, both in operations management and in analytics. And that's what builds our reputation, that's builds our credibility, and that's why more and more clients are choosing to work with EXL. So domain, analytics and digital and service execution, those are the critical factors.

Okay. No, that's a really good description there. Let's talk about how these factors affect growth. And I also want to talk about sort of the topic of COVID and pandemic because that might have -- it certainly had recent impact on numbers, but I suspect is likely to have ongoing impact on business model and so on and so forth. So let's talk about a few different dimensions. One thing I wanted to start by asking is with regards to sort of the historical ops management demand, the factors that affect it. The things that you mentioned, are you actually able to charge for value? What's the percent from outcomes? So why that's not larger than roughly 1/3 of it? I believe it is where it's at. If you could talk about that, and then we'll kind of layer in the COVID impact type questions.

Sure. So the operations management business is 62% of our revenues. And largely, it is work that we perform for our clients, which is ongoing in nature. These are long-term annuity contracts that our clients like to engage with us on. And the pricing models that they've been deploying with us are different constructs. Some of them are on an FTE base, which is a time and material basis. Some of it is on a transaction pricing business model, and some of it is on an outcome-driven commercial construct. Over the years, we've seen a gradual shift towards transaction-based pricing and outcome-based pricing, which is today about 1/3 of our business in operations management. It is certainly directionally a way in which clients are wanting to go, particularly as they want to variabilize their cost structure. So they would like to be able to pay on a transaction basis. And for us also, it's a better business model because we can drive a greater amount of profitability as we introduce more efficiency and productivity into this construct. The reason why this hasn't expanded beyond 1/3 and it's got stuck there is because of a lot of the work that we do for our clients is very, very fragmented and it's broken up into multiple processes where it's difficult to identify what a unit transaction might look like. Most of those high volume, standardized unit, clearly defined kind of processes are largely today either automated, or the risk cannibalization taking place over the -- sometime over the next few years. So a large part of the work that we do is fragmented processes, very complex, higher up the value chain. And therefore, these tend to be done typically on an FTE basis as such. Now over a period of time, we will still see a migration towards an outcome-based business model. And it might actually shift, for example, let's say, we're working with an insurance company. We might be able to shift that to charging them on a per policy basis, where we are handling everything for them on an end-to-end basis, and we take up responsibility for the automation, for the intelligence, for the servicing, for the customer acquisition, and we provide every service associated with that policyholder. But until the time we get to that stage where we are handling everything end-to-end, it's unlikely that this percentage will shift very significantly or materially.

Okay. Okay. If I can jump in because you and I have talked multiple times over the years, and you've had this vision of an end-to-end processing for a number of years now. It's something that EXL has kind of worked towards both organically and inorganically in terms of getting to that end-to-end. How far along are you today when you look at your core verticals with regards to reaching that end-to-end, where you can maybe charge per policy as you can say -- or for a different type of transactional outcome?

So I would say we are still in the very early stages of getting to that kind of an eventuality. There are a few cases where we have been able to get to charging our clients on a per customer or a per policy basis, and that becomes the definitional aspect of it. But in a vast majority of cases, it might be an end-to-end process, but it may not be an end-to-end support capability. Now given COVID and given the pandemic and given the massive shift towards digital that is taking place, I believe that this trend could actually accelerate. Because, ultimately, if you think about a completely digital world, I believe our clients will want to have control over the end customer relationship. And the relationship will be the biggest value that every company will have with its end customers, and that is what they would manage, and that's what they would control. And everything that is required to support that relationship, whether that be data, whether that be analytics, whether that be automation, whether that be service, whether that be product, I think that's going to be provided by third parties, and that can actually be brought together, so that the end customer experience is absolutely the very best. If you think about it, there's a lot of use of data today that's being applied, a lot of analytics that's being applied. In fact, many companies are changing their business models to not only provide services and products that they themselves manufacture and distribute, but rather, they're also becoming the marketplace for competitor services and products to be brought to the end customer so that the end customer experience is a lot better. So I think as we kind of play out this progression, we're going to see that the customer relationship is what our customers will want to manage and keep, and everything else will be provided to them by third-party providers.

Understood. Understood. I wanted to kind of go into -- you mentioned COVID in there. I want to ask you, first, a slightly broader question with regards to a normal downturn, if you will. Now if I kind of look at the only other normal downturn that you guys have faced, at least on a full year basis, you guys still grew, right, at that time. There was a level of stability that one should expect, I think, from managing core processes for clients. What would you expect in this downturn? And I completely understand we're sort of a quarter into it and things already seem on the face to be improving. So how are you thinking of the impact here?

Yes. So the last time we faced a crisis or we went through that was the financial crisis that took place in 2008. But the global financial crisis that took place was a crisis on credit and a crisis on liquidity. This time around, it's been a crisis, which is a global pandemic, all playing out simultaneously. And it's also, in many cases, been an operational crisis as well. Because everybody had to pivot their business models from working from the office to working remotely. We had to make changes to the way in which we support our clients. Business volumes, in certain cases, completely dried up, for example, in the travel industry vertical. There was nobody who was traveling during that time period and all the volumes kind of shrank. So it's been a completely different kind of a shock that has been given to the system. I think what we are seeing over this period of time, over the last 6 months, is that there was a dramatic falloff in activity. And then there is a very sharp bounce back in activity and in terms of volumes that is taking place. So the operations management business and the resiliency of the business model actually has been able to withstand this extreme shock, I would say, relatively well. And we are seeing that, that stability is returning back. The DSOs have not been impacted as such. So frankly, everybody's receivables are in great shape. The credit quality has not been impacted much. That's in great shape. And the business volumes are coming right back, so that's actually playing out quite nicely as well.

Okay. Understood. And so as we think of exiting, say, for example, this year and heading into next year, do you expect then another 1 or 2 quarters of recovery period and then it's life as normal? What are you looking for from a post-COVID versus pre-COVID perspective?

So Ashwin, obviously, it depends on how the virus performs and behaves. I think if you get a second wave of infections and that goes up and all the business activity slows down, it's going to have a totally different repercussion as opposed to the kind of period that we are seeing right now where things are stable, but operating at a level which is still manageable. So it just depends on what the volatility and what the fluctuation associated with this might be. Assuming that things are stable and we are gradually returning back to normalcy, we would expect a couple of quarters of getting back to normal and then growth continuing on. And the reason that, that would happen is the penetration of operations management today is still very low. The use of a global service delivery model and the adoption of that model is still a secular trend that is going to continue on for several years. The use of data and analytics actually has been catalyzed and it's accelerating into a much, much more fast-paced activity, and it's also become all pervasive. So every single company is using data analytics across the board in a much, much more significant and meaningful way. So frankly, I think the growth opportunity after this normalization takes place is going to be very robust.

Understood. Understood. And if you could break that down perhaps by verticals, right, say, health care, and then kind of F&A, talk about analytics, even though that's not strictly speaking over to COVID functional description. Then we'll will perhaps leave the tougher ones like travel for last. But if you can -- I know you're traveling, and you have a golf course in your background there, but not like the rest of us. I still have my study.

I'm home in New York, but just with a beautiful background.

I know. So what can you talk about the verticals?

Yes. So look, I think, if you take the health care industry vertical, certainly, there's been a lot of dislocation out there. If you take a look at the large payers, there has been a reduction in volume on pre certification because a number of folks in the population group have chosen to push back elective surgery. If you take a look at the providers in the health care industry vertical, they have actually been swamped with work that they've been doing on COVID, but they've been strapped for cash because the elective surgeries have been pushed out. So there are whole different types of dynamics that are taking place. In some cases, there is a push. In some cases, there's a pull. And there's a load balancing that's taking place in the health care industry vertical. The insurance industry vertical, which is another big vertical for us. If I break it up into life and annuities and P&C, we're seeing a lot of activity in the life and annuity space because with interest rates being low, the need for these companies to be able to generate extra cost savings has become very, very significant and meaningful. And so we're seeing a lot of activity out there, where with some of the closed blocks of business, there's a lot more efficiency, a lot more automation and a lot more productivity benefits that need to be brought in, and they need to use service providers like EXL to help them with that transition. On the P&C side, we saw a drop-down in volumes on auto claims because the mobility had come down quite significantly. But now as more and more consumers are going back on to the roads, as the economy is opening up, and as people are going from a shared automobile to the ownership of their automobile and not using public transportation, we're seeing volumes come right back out there. So there are different factors that are kind of coming into play in these industry verticals. You rightly said, on the capability side, F&A and finance and accounting, regardless of the volumes and regardless of any kind of activity, finance and accounting and the books have to be closed on time, and that activity continues on pretty much as normal. There's been no real change out there. So we haven't seen anything shift there. Analytics took a pause in March and April and May. But in June and July, it's kind of picked right back up. So there's a lot of activity that's taking place there.

Understood. Understood. And to the extent that there's the travel piece and so on, are you dependent on volumes? Or is it not so dependent because you're doing other things for those sorts of clients, travel, retail and so on?

So first of all, we don't break out our travel portfolio as such because we now have everything grouped into an emerging business segment. But previously, when we did, travel, transportation and logistics collectively was about 6% to 7% of our revenues. And the travel part of it was a small piece within that 6% to 7%. So for us, it's a very small percentage of our portfolio. Even within just the travel industry vertical, the work that we do for our clients is around finance and accounting as well as some customer-related work. So it's only the customer-related piece that has shrunk in volume, whereas the finance and accounting and some of the other work that we do for our clients continues to be exactly the same as it was before. So the real impact to us from that vertical and the drop in volumes over there has been very, very insignificant as such. So overall, we don't see much of an impact from the travel industry vertical. The transportation and logistics business volumes have come right back, and there's a lot of shipments taking place, a lot of activity taking place, and that volume is back up. Consumer spending is back up. So frankly, we think the way in which the portfolio is playing out, it's actually going to kind of come back to stability over the next 1 or 2 quarters.

Understood. Okay. Now is there a kind of desire at the current time to double down, scale up on the capabilities you have, use M&A to kind of double down on the recovery, so to speak, if that's what you're betting on right now?