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

[Audio Gap] Citi's Technology Conference. I'm Ashwin Shirvaikar. I'm Citi's Payments, Processors & IT Services analyst. And I'm delighted to introduce the next company that we have on the schedule, which is ExlService. And from EXL, it's my pleasure to introduce Rohit Kapoor, the Vice Chairman and CEO. And we also have Steve Barlow, who heads Investor Relations for EXL. Welcome, gentlemen, and thank you for joining us. Really looking forward to it.

I thought that because in a group setting, often, there are a few investors who may be new to the story, I could start by asking you, Rohit, to just give us maybe a couple of minutes elevator pitch on EXL, who you are? What you do? Competition? How are you differentiated? Let's start there, and then we'll get into more detailed questions.

Sure, Ashwin. First of all, thank you so much for having us join this, and we're delighted to be here. And then yesterday, we did a brand launch. And so I'm excited to talk to you about EXL's positioning in the marketplace today. So the way we think about ourselves is we think about ourselves as an analytics and digital solutions company. And what that really means is that we help our clients make sense out of data and create value for them to propel their business forward. And for us, data is the underlying lynchpin that we work on. We have become masters of helping our clients create value out of data. We do it in 2 fundamental ways. One, help them make better business decisions, which is all about data analytics. And the second is about embedding intelligence into their operations and running operations for them, and that's our Operations Management business, which is digitally infused. We work with clients across the globe. Our primary client markets are the U.S., U.K., Australia and Europe. We service clients out of multiple delivery geographies. We are present in 11 different countries, and we provide services from there. In terms of size, we are about $1 billion in revenue and about 32,000 employees globally situated. We work with clients in specific industry verticals. Insurance and health care have become dominant industry verticals for us, but we also serve clients in other industry verticals like utilities, transportation, travel and other retail and entertainment industry verticals. For us, the secret sauce of our differentiation is a very strong understanding of the domain and our clients' business. really in-depth capabilities on analytics, on data, on advanced automation, on AI, machine learning and an ability to integrate all of this together, and combine technological capabilities with human capabilities and deliver outcomes to our clients. So that's what we are all about.

Yes. Yes, absolutely. And some of the points that you mentioned there with regards to the vertical expertise, the growing part that analytics plays in your financials as well as in your approach has been true for many years now. But in terms of recent evolution, like the last year, 1.5 years, some of it because of COVID, but not all because of COVID. Could you talk maybe a little bit more about sort of the heightened demand for digital, the heightened demand for automation? Talk about that evolution, if you will. How you would have it?

Sure. So with the pandemic over the last 18 months, there are a few significant changes that have happened. Number one is, every customer today has become a digital customer. And what that means is that the customer is not only distributed but they access to get services or products using different digital means and different digital channels. And so that's become important. Number two, speed has become a key differentiator for customer success, and having speed and flexibility has become ultra important. And number three, the use of data in terms of hyper personalization, contextual-based offerings and again, speed becomes really, really critical. So these 3 trends, our clients are adopting digital transformation at an accelerated pace. They no longer want vanilla operations management capabilities, but they're looking for digitally infused operations management capabilities. They're looking to help them in their journey to move some of their data, their workflow and their systems to the cloud, and they're looking to serve their customer base in a completely distributed model. So I think both the segments that we kind of work on are seeing a heightened amount of demand, and that's certainly accelerating the pace of growth and the ability for us to be able to engage with our clients.

Got it. Got it. It does lead to this question that I've been actually asking to -- asking all of the companies that I cover, and it does result in some very interesting answers and responses. And I hope you don't mind. I know you have several hundred clients. But based on what you said, could you maybe give us examples of 1 or 2 really cool things that EXL is doing today, just to kind of bring it home for investors with regards to what you do for clients in terms of making a difference.

Sure, sure. So I'll first give you an example of data analytics, and then I'll give you an example of a digital solution that we've created for our client. So on data analytics, we traditionally would help our clients in terms of managing risk, managing pricing, underwriting and taking the right kind of decisions. But today, we are also helping our clients in terms of their revenue growth and customer acquisition. So EXL has a proprietary database of 250 million adults in the U.S. So the entire adult population in the U.S. We've got 6,000 attributes associated with these 250 million adults in the U.S., and these attributes are updated daily. So we've got their credit scores, we've got their demographics, we've got their past purchase patterns, we've got determinants on social media. We've got a number of different attributes and information about them. So when a client of ours looks at launching a new product and wants to understand which customers they should target and where the prospects will have the best chance of conversion and that product or service will appeal to them most. We can actually run algorithms and models to be able to provide them with a highly targeted list that they can go after and have a much better chance of success of getting to our customers. So that would be a great example of helping our clients grow their business and be able to introduce new service offerings or cross-sell a service offering or even for customer retention, which is to be able to tell them where they might likely see some customer attrition take place. So that's an example on the data analytics side. On the digital solution side, there are a whole host of things that we do. But an example, which is -- recently something which we've engaged on is for an insurance broker, which basically works with multiple insurance carriers and multiple companies as corporates, providing insurance services and advice out there. What we ended up doing is moving their workflow to the cloud. And by moving their workflow to the cloud, we are able to extract information in an automated way so that some of the work that is done downstream manually, that can be completely eliminated. And by doing so, we use our content extraction tool to be able to extract that data, populate that into their systems and eliminate work that needs to be done downstream. So that's an example of actually solving an issue for our client across the enterprise, across global locations and being able to systematically reduce the amount of manual effort that's required out there to do the work. And in this particular case, we don't really end up doing the servicing of the work. We simply help them move that workflow onto the cloud and be able to make a huge amount of efficiency and automation saves on that.

Great. Those are cool examples. Maybe we'll come back to it when and we perhaps talk about monetization and how that might be changing and how you're targeting the customers, right? Because ultimately, that matters to investors. But as most of these conversations go, we kind of have to talk about demand. And so let's spend the next several minutes maybe getting into demand and demand trends and so on. Maybe a good starting point, which has been a recent positive for you guys, current state of the pipeline bookings, you obviously had positive surprises recently. Is it possible to maybe provide an update?

Sure, Ashwin. Sure. So look, the demand side of it, I don't think has ever been better than what it is today. And the ironic part is, we are still in the pandemic, and there is still a high level of uncertainty and volatility that we are seeing in the marketplace. But at the same time, despite the uncertainty and despite the volatility, some of the underlying trends seem to be permanent secular shifts that are taking place that are very, very favorable from a demand perspective. And so let me try and share a little bit of more color on this. As far as our Operations Management work is concerned, with the pandemic, we went into a completely distributed workforce model. So our clients and us are now operating in a completely distributed remote kind of a work environment. And the light bulb that has gone on for our clients is, oh, if this work can be done remotely in a distributed environment, we can actually take a look at that remote environment not only being restricted to the country in which we operate, but actually look at it on a global basis. So frankly, the ability for our client to be able to think about a partnership with a provider like us to be able to serve them with a globally distributed workforce as opposed to a country-specific distributed workforce. That has changed fundamentally, and that's something which is very, very positive in terms of the trend of this. The second part of the acceleration of demand is. They can not only partner with us to be able to reduce their cost, but they can actually get digitally infused, highly intelligent operations. So when we take on operations for our clients, we are infusing in analytics. We are infusing in advanced automation, technology, AI, machine learning, and we are combining all of that so that the end customer experience is a lot better. The service can be provided a lot faster and the cost is a lot lower. So frankly, with this change, they're seeing a trifecta benefit as opposed to just a single benefit on the cost dimension. So we are seeing very strong demand in Operations Management, particularly around some of these digitally enabled solutions. The second part of it is our Analytics business. The Analytics business, as you've seen and in the numbers that we've reported, that's on a TAM, and it's really accelerated the pace at which we are being able to serve our clients. Every single client they want to be a data-led business. And our positioning of being an indispensable partner to clients which are data-led businesses is really, really resonating well. We are, by far, the largest third-party service provider of analytical services and our ability to serve clients at scale is something which is resonating very, very strongly in the marketplace. So we're seeing a huge amount of demand out there in our Analytics business, and we are able to play the entire spectrum right from proprietary data assets to building the right kind of models, to generating insights and executing it. And this integrated business model that we have of being -- not only being able to deliver the insight but actually execute on it and deliver the outcome. That is unique. And that is something which I think is resonating very strongly in the marketplace. So great demand, and it's across industry verticals. It's across geographies, and it seems to be playing well to our strengths.

Yes. If I said to you that it seems to me that the focus from the client has shifted much more so to capabilities and outcome as opposed to cost and trying to micromanage where stuff happens from. Would that be a fair statement?

Yes. I think, absolutely. Clients are much more concerned about outcomes than they are about other parameters. Cost still remains important, but it's never been the sole driver of a decision. We have always positioned ourselves in terms of delivering value and delivering tangible outcomes to our clients. And as long as you could focus in on that and make your clients successful, I think they will continue to engage with you. And you'll continue to have extremely high customer satisfaction scores, which is something which, at EXL, we are really, really proud of.

Yes, yes. So there's -- I hit 2 things when I do some of these checks in terms of how contract flow is progressing. One of the things I hear is that the deals are getting larger and more complex, partly because there is so much more to be done, and the pace at which it needs to be done -- the acceptable pace at which it should be done is much faster than before. The other thing I hear though is because are -- these contracts and projects have a higher digital content. It necessarily breaks down into smaller bite-size pieces, which kind of -- on the surface might seem a little bit anti each other, but I'd like to get your viewpoint with regards to sort of contract size, complexity, flow. What are you seeing with regards to that?

So Ashwin, we are certainly seeing much bolder steps being taken by our clients and by service partners like us. We are seeing an engagement which is much more enterprise-focused, much more end-to-end and much more bigger in size and in value. I think your first point about combining digital, making it more complex, making it more holistic, I think that's clearly something which we are seeing because clients are saying, I don't want to outsource a task or I don't want to outsource a piece of a process. I want to be able to elevate my entire customer experience. I want to elevate my competitiveness and my competitiveness comes from speed, flexibility, innovation and cost. And it's all of them that we need to kind of work on. And so I'm going to work with a partner that delivers all of these attributes to me. The second part, in terms of breaking it up into smaller pieces. There may be situations where a proof of concept might be required where you break it down into a smaller piece. But the minute it is successful and you can successfully demonstrate that capability, the client wants to expand that to the entire enterprise. And when you expand that to the enterprise on a global basis, even that small intervention that is there, can become large value. So frankly, the scaling up of that is a huge amount of a growth lift for companies like us, and we are certainly benefiting from that success.

Okay. Now that makes sense. And I would imagine that, that is true across verticals, whether we talk insurance, whether we talk NPS, so on.

That's correct. That is absolutely correct.

Okay. In terms of just being able to then charge for value, incremental value that you can now provide both because the tools you have are better, the data you have is better, stuff is more built out, but also because the clients' mindset perhaps has changed. Are you seeing that? So is there a flow-through in terms of acceptance that this isn't just send the 1 work across, do it cheaper. This is really value, and this is difficult.

I think as the value becomes more visible to the clients by virtue of the outcomes, the ability to charge appropriately to deliver that value becomes a lot easier for us. And certainly, the margins are a lot better because of that. Because you certainly move away from how much does it cost to deliver that value to how much is the absolute value that a client is getting and for them to be willing to share the right kind of proportion of that with you. The other attribute, which I think is falling into places, as we provide digital solutions to our clients, the amount of rework that we need to do with the next new client or another new industry, that is much less than what we had to invest with our first client or the first few clients that we worked with. So frankly, even the effort that's required to be able to deliver that same outcome, reduces quite significantly. And as we scale up, we're going to get the benefit of that profit advantage. And I think that's why our business model is being focused a lot more around digital solutions that we can create for our clients and apply that across clients in the same industry vertical. And that's something which we are investing in quite heavily, and creating these solutions, which will be able to benefit all of our clients in that industry group.

Yes. Yes. I mean you've always had tools. You've always had a level of, let's call it, software development capability for the solutions that you bring to your customers. Has it -- I mean is there a discussion nowadays that you can, in some parts of the business, start offering holistic software solutions and then charge on a subscription basis perhaps as opposed to time and material per hour, per transaction?

Yes, Ashwin. As some of these solutions mature, I think we'll be able to charge them on a solution-as-a-service model base, which is going to be a consumption-based model. Many of our clients want to move into that kind of a commercial arrangement where they will pay for the solution-as-a-service. But obviously, that's going to be there for the more mature solutions that we are able to create, which don't require too much of customization for each different new client that we are adding on. And it's got a fair amount of standardization of that solution. Clearly, that solution has to be technology agnostic. It has to be cloud-enabled, and it is really relying on being able to have the right connectivity at the data level. And that's what we are building so that we can present these solutions to our clients. And we certainly would expect in the future that, that solution-as-a-service model will evolve and will become a larger piece of our business.

Okay. Okay. No, that's super interesting. Is your competition so to speak keeping up -- in other words, the question becomes, is everyone doing similar things now? Or has your win rate changed? Has your competitive set changed?

So I think our competitor set is pretty much the same, but I think we are edging out ourselves as compared to competition, primarily on account of the strength in analytics and the strength in digital capabilities, and making it real for our clients. And I think in those dimensions, the customer basically looks at who can deliver this well. And that, I think, is also being reflected in our customer satisfaction scores. So the customer satisfaction scores that we have today are one of the highest that we've had in our history. But we also think it's the highest in the industry, and no other service provider is at that level of customer satisfaction.

Okay. And when you think of growth rates, right? We clearly are seeing very healthy growth rates, currently. Some of it is the factors we've spoken about. Some of it is the comps relative to last year. So the question sort of becomes what's a good normalized growth rate? What were the Ops Management and the Analytics business?

Right. So we had presented a view of the industry growth rate and our own growth rate at the Investor Day last year in November, which -- post COVID and post experiencing this. After normalizing for 2020, we do believe that between our 2 businesses of Data Analytics and Operations Management, we should be able to get to an organic double-digit growth rate. And certainly, our Analytics business will grow a lot faster, somewhere between 12% to 14%. And the Operations Management business will grow slightly slower, maybe about 6% to 8%. And when you apply that combination, we should be able to get to a double-digit growth rate. Now our expectation today is pretty much consistent with that guidance that we had provided at our Investor Day last year in November, and we continue to remain on track for being able to deliver those growth rates after normalizing some of these anomalies that took place between the years.

Right. Right. Now the question there becomes normally process is becoming a little bit more stretched out because of Delta -- and Delta variant, those sort of things already mentioned. So you could see a more sort of a prolonged period such as what the -- would that be kind of a fair comment or would...

Well, I would say that for our business, we really saw a pullback of revenue in Q2 and a little bit perhaps in Q3 of last year in 2020. After the second quarter of Q2 of 2020, and maybe a marginal impact in Q3, we really haven't seen any pullback of revenue either because of the Delta variant or otherwise in terms of our business model. And even with the second wave that took place in India earlier this year, we didn't really see an impact of that either on service delivery or on client demand as such. So for us, we would say that 2021 has been pretty much of a normal year in terms of the growth that we are experiencing right now.

Okay. Perfect. In terms of just kind of moving on from demand and talking about how do you deliver on the demand sort of talent, if it's not for talent. There is clearly increased competition for talent. To me, that seems to be a bit more of an IT services comment than a BPM comment. First of all, I guess, would you agree with that? And then the second part of that would be, in the spectrum of talent that you have, are you seeing challenges in terms of accessing talent, maybe in the analytics part of what you do or in any other part of what you do?

Yes. Certainly, I would say, the center of gravity of focus in terms of execution is pretty much on the supply side, and that's something which we are working on, on the talent side. Clearly, from the Operations Management side, being able to get adequate resources to be able to do work out there. That's not a challenge for us today or it wasn't a challenge for us in the past. And you're absolutely right about thinking about this more for IT services than for companies like us. We've never faced really a constraint out there. The constraint on talent is in 2 areas. It's in analytics and in digital. And in both these 2 talent pools, there is much growing need of access to talent. And therefore, all of our effort and energy is really about how do we attract the best talent out there. How do we retain the talent? How do we upskill this talent? And how do we grow this talent so that they have meaningful careers with EXL here? Now the fortunate part of our business is, we have always, in the last 15, 20 years, learned to deal with attrition and manage talent at scale. And so we have been focusing our effort in terms of building a much stronger brand. And also building up capabilities of bringing in people that can be trained and that can be provide an experience set that allows them to be a lot more productive and value additive very quickly. So that's something which we do well at. By being a leader in analytics, I think we have a dominant position in terms of attracting the best talent and nurturing that talent and growing the talent. In digital, I think we are able to attract some of the best talent because of the interesting work that we're doing and the growth that we are seeing. So that provides a huge opportunity for great talent to come join and become part of EXL and be able to grow that business with us. So I think it is a challenge. We're certainly going to see a lot more wage inflation out there. Certainly, attrition out there is a huge challenge, and being able to manage talent is going to be a huge priority, and it is a priority for us.

Right. Right. In the more contested areas or the areas where -- like digital and analytics, what sorts of wages inflation are more common now? What sort of attrition rates are more common now?

Yes. So the wage inflation is double digits and in the low teens. That's something which we are seeing out there. And that's something which certainly for offshore-based resources we are likely to see going forward. For us, on Analytics, 80% of our workforce is in India. So that's predominantly where it stands. Being able to move our resources from entry level to next level, that becomes important. And we are trying to align our workforce with the work that we do with our clients so that the pricing with our clients is commensurate with the increase in compensation that will take place for an employee as they become more experienced and they become more tenured.

Right. In other words, it's from a margin perspective, yes, you have these sorts of challenges, but in some ways, you always have these sort of challenges and it's well absorbed by the -- from a margin perspective.

It is. And the other thing to keep in mind, Ashwin, is the linkage between revenue growth and number of employee growth used to be very linear. Now it is no longer -- so particularly in Operations Management and even more so in Analytics, particularly as we go towards much more of these solutions as a service kind of a model. It's not going to be a linear correlation.

Right. So last question on the talent side, and no discussion on talent nowadays seems to be complete without asking for your view on work from home. Where do you think we'll end up with work from home?

Yes. So it seems like work from home is here to stay. It seems like the hybrid working model is likely to be the predominant working model. We are working with our clients to be able to jointly solve for that. We've got 3 different buckets that we are looking at. One is those set of activities that necessarily need to be performed from office, and that will be work from office. Those set of activities that can be done from home, which is going to be a work-from-home model. And the third one, which is a flexible model, which is a hybrid model where you can work from home, but you also will be required to come to office periodically. I think the shift and the mix will depend on client-by-client and activity-by-activity. But in general, across the board, we might end up with a mix, which is something like 50-30-20, so we're going to see how that kind of plays out. And I do think longer term, if the pandemic threat subsides, we will revert back more as a proportion in terms of working from the office. If the threat continues to remain, I think work from home will be the predominant way in which we will continue to operate.

Right. Right. Now that you've operated in the work-from-home mode for 18 months. It's not really -- is it a challenge anymore to go back and forth as we see waves and things like that?

I think it's only about the flexibility of planning. And the infrastructure that needs to be there to support people to come back into the office and the logistics of transportation and commute time, that has to be planned for. And also keep in mind, one other thing, which is when people work from home, they don't necessarily work from home in the same city. They might have chosen to go to a home, which is in a different city. So if they have to come back to office, that transition back to office is a significant transition.

Got it. Understood. Maybe as we kind of head up on time here, last couple of questions with regards to capital allocation, and more recently that has been directed towards share repurchases. Would you expect that to continue? Are you perhaps rebuilding the M&A pipeline as we -- the out situation of what's required further?

Yes. So we, as a company, definitely throw out a fair amount of free cash flow. And our utilization of that free cash flow is really for those 3 purposes. One is organic investment; two is M&A; and three is stock buyback. I think we have a nice balance that we have created out there. We, first and foremost, want to make sure that our organic investments are fully funded. So that's something which we will continue to do. We haven't had the need to invest in infrastructure as we grow our business because of the work from home. So frankly, that investment is a little bit curtailed because working from home doesn't require investment in infrastructure. M&A is certainly something which is something that we are actively looking at, but we want to be very mindful of the kind of acquisitions that we do, do. The last acquisition that we did do was SCIO, which was 3 years back, and that has played out now extremely well. So we are very happy with how that has played out. But as you know, in today's market, valuations are pretty high for some of these small tuck-in acquisitions. And we just want to make sure that we buy the right kind of capability with the right cultural fit and the right team, and we will be pretty active out there. Stock buyback for us is certainly something that -- we've been very clear in terms of signaling as to the level of stock buyback. We certainly don't want any dilution to take place, and that's something which we'll continue to focusing on.

Right. Right. And your mention of valuation sensitivity on M&A, would that imply that your knowledge being looking at tuck-ins in the analytics area as opposed to adding maybe a new vertical on OM or something like that? I mean how transformational might you be in terms of what you intend?

Yes. I think for us, the predominant area of focus is adding more capability and more service. So it would be in the area of analytics and digital that we'll be looking to acquire and bringing in more capability that we can take to our clients.

Okay. Okay. Well, in turns out 11:10 a.m. And right on [Audio Gap] but in terms of just all the insights that we got from a short conversation, I really appreciate it. Thank you very much both of you.

Thanks, Ashwin. Thanks for having us, and good to see you.

Absolutely. Same here. Thanks.