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

Hello, and welcome to the ExlService Holdings, Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. I will now turn the call over to Andrew Thut, Head of Investor Relations and Capital Markets.

Thanks, Marianna. Hello, and thank you for joining EXL's Second Quarter 2026 Financial Results Conference Call. On the call with me today are Rohit Kapoor, Chairman and Chief Executive Officer; and Maurizio Nicolelli, Chief Financial Officer. We hope you've had an opportunity to review the second quarter earnings press release we issued yesterday afternoon. We have also posted a slide deck and investor fact sheet on our Investor Relations website. As a reminder, some of the matters we'll discuss this morning are forward looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, those factors set forth in yesterday's press release and in EXL's filings with the Securities and Exchange Commission from time to time. EXL assumes no obligation to update the information presented on the conference call today. During our call, we may reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of these measures to GAAP can be found in our press release, slide deck and investors back sheet. With that, I'll turn the call over to Rohit. Rohit?

Thank you, Andrew, and good morning, everyone. EXL delivered strong second quarter results, posting revenues of $595 million up 16% year-over-year and adjusted earnings per share of $0.59, an increase of 22% year-over-year. We entered the year with positive business momentum, which has continued to strengthen throughout the first half with broad-based growth across every segment of our business. We sit here today with very good visibility into the balance of the year and are looking forward to a strong finish to 2026. We continue to differentiate ourselves with industry-leading growth. As enterprises move from proof-of-concept to AI implementation, our expertise, solutions, and services sit squarely at the center of the demand vectors where investment dollars are focused, delivering measurable business outcomes and economic efficiencies. Our deep understanding of client workflows and domain context, combined with our competencies in data and AI engineering is creating a tailwind as we help clients solve the acute challenge of making AI work effectively in the enterprise. We are pleased with our results that reflect the strength of our data and AI strategy and our focused execution. Over the last 2 earnings calls, we have made additional efforts to bring transparency to our financial reporting. In addition to providing a revenue breakout across both data and AI-led and digital operations. We now provide revenue from total operations as well. Data and AI-led revenue has accelerated over the past 4 quarters, growing 18% in Q3 2025, 21% in Q4 2025, 28% in Q1 2026 and now 30% year-over-year in Q2 2026. Data and AI-led services and solutions represent 61% of revenue with broad-based growth across data management, AI services and solutions, payment integrity and data and AI-led operations. Reported digital operations revenue was down approximately 1.5% year-over-year, and I want to be explicit about why because this is important. This decline is by design, and it reflects the evolution of our business mix. As we embed AI into operations engagements, that work becomes more IP-led and higher value and the related revenue moves into our data and AI-led category. For this reason, we believe the best way to evaluate the health of our operations business is to look at total operations, which includes both digital and AI-led. Our total operations revenue in Q2 were up 10% year-over-year, continuing a trend of healthy, consistent growth. As we go to market with an AI forward value proposition in operations, it strengthens our data and AI-led performance and vice versa. Combining operational expertise with proprietary data and AI capabilities, we help clients unlock greater productivity, faster decision-making and measurable business impact. As AI adoption expands, the value of our operations relationships deepens, enabling us to identify new use cases, accelerate deployment and drive sustained transformation. This creates a mutually reinforcing cycle that delivers greater value to clients while supporting durable recurring growth for EXL. We saw strong performance across each of our 4 operating segments in the quarter. Insurance grew 15% year-over-year, representing 1/3 of our revenues. Q2 was a defining quarter for EXL's insurance practice, translating multiyear AI investments into demonstrable client outcomes. Insurers continue to accelerate AI adoption across underwriting, claims and customer experience, and we are seeing strong deal activity across market segments. Healthcare and Life Sciences grew 22% year-over-year, representing more than 1/4 of our revenues. Payment Integrity continues to be a significant growth driver, and we are seeing strength in analytics, AI services and solutions and operations. Payers and providers are under meaningful cost and regulatory pressure and are turning to EXL to apply AI at scale to improve productivity and outcomes. Banking, Capital Markets and diversified industries grew 11% year-over-year, representing a little under 1/4 of our revenues. Deal activity was strong in the quarter, and we remain confident in continued progress through the year. International growth markets grew 15% year-over-year an acceleration attributable to ramp-ups and new client wins. This quarter, we welcomed Bhupender Singh as President and Head of International Growth Markets. Bhupender brings a track record of building and scaling multibillion-dollar businesses in complex international markets, and he has hit the ground running, architecting our EMEA and APAC go-to-market, deepening client relationships and building pipeline. International represents one of our largest long-term growth opportunities, and Bhupender's appointment reflects our commitment to capturing it. Let me make our differentiation in the market, more concrete with a few examples from the quarter because the thread running through all of them is the same. You cannot deliver strong business outcomes without deep understanding of the clients' domain and their data. First, in health care. We went live at a large national health plan with their first-ever customer-facing agentic AI module, delivering a high deflection rate and significant ROI for the client. When the client independently benchmarked our solution against that of a leading hyperscaler, EXL outperformed on every measure. What became apparent is that while technology and AI capabilities are necessary, combining deep contextual knowledge with data and AI is what creates exceptional value. And that is where we differentiate ourselves. Second, in insurance, we entered a competitive multi-vendor hackathon at a global carrier to build an AI-based data ingestion solution. Our approach, leveraging a strong understanding of the clients' domain resulted in us presenting the best solution. That win positions us as their agentic partner as they reimagine their data estate. It is repeatable, referenceable work, we can now deploy rapidly across our client base. Third, a capability that has increasingly become more important and integral to scaling AI services is token optimization. As enterprises operationalize AI at scale, token consumption has become a dominant constraint on cost, speed and reliability. Working inside client workflows, we are able to reduce client token consumption by as much as 80%, helping them conserve spend and make their AI systems dramatically more efficient without compromising quality or latency. None of this is possible as a simple technology plug and play. It requires deep knowledge of the workflow, experience of the regulatory context and understanding of ontologies of the data estate within the industries we serve. Also during the quarter, we hosted our Investor and Analyst Day in New York. The core message was straightforward. The AI opportunity for enterprises is immense, and capturing it requires partners that can make AI scalable, effective and accountable inside complex regulated environments. We laid out our view that sustained AI outcomes depend on 3 things working together: the right data, deep domain context and proven AI capabilities coupled with trusted execution at scale. This is the framework that guides how we build, how we invest and increasingly, it is what we hear directly from clients as they move from pilots into production deployments. We also outlined our investment priorities to extend our competitive advantage. Continued investment in proprietary IP solutions that move us up the value chain and targeted M&A. 25% of our client revenues today touch our proprietary IP. Strong free cash flow and an underlevered balance sheet gives us the flexibility to continue our share repurchase program and pursue acquisitions of products and solutions that allow us to better serve our clients' needs, which brings me to the most significant announcement of the quarter. Last month, we announced the acquisition of iMerit which we expect to close on July 31. iMerit is a recognized leader in AI model training, evaluation and reinforcement learning and we view this deal as a transformational pivot for EXL. It brings established relationships with leading foundation model companies, a new and strategically important client segment for us. It also deepens our vertically specialized AI capabilities and expands our total addressable market into high-growth AI tech sectors. The landscape is also shifting in a way that makes this timely. Gartner predicts that by 2028, open source GenAI models will underpin more than 50% of enterprise use cases, up from less than 10% today. We believe this shift will be especially pronounced in the regulated industries we serve, where domain knowledge, context and compliance are absolutely critical. Deploying AI reliably in the business-critical workflows requires industry-specific data, rigorous evaluation and constant reinforcement learning. By combining iMerit's capabilities with EXL's domain expertise and AI platforms, we will be well positioned to help enterprises build fine-tune and operationalize AI that performs reliably in production, a natural extension of the data and AI strategy we have been executing for years. The strength of our business performance and the addition of iMerit give us the confidence to raise our guidance for the full year. We now expect 2026 revenue to be in the range of $2.39 billion to $2.415 billion, representing 14% to 16% growth on a reported basis, up from our prior guidance of $2.3 billion to $2.33 billion. iMerit accounts for approximately $28 million to $32 million of that revenue for the remaining 5 months of the year. We are also raising our adjusted diluted EPS guidance to a range of $2.25 to $2.29, representing approximately 16% to 18% year-over-year growth, up from our prior guidance of $2.18 to $2.23. As always, I want to thank our clients, partners and employees for their continued trust and commitment and our shareholders for their continued support. With that, I'll turn the call over to Maurizio to provide additional details on our financial results and outlook.

Thank you, Rohit, and thanks, everyone, for joining us this morning. I will provide insights into our financial performance for the second quarter and our revised outlook for 2026. We delivered a strong second quarter with revenue of $594.8 million, up 15.6% year-over-year on a reported basis and 15.9% on a constant currency basis. Sequentially, revenue grew 4.4% on a constant currency basis. Adjusted EPS for the quarter was $0.59, representing a year-over-year growth of 22.3%. All revenue growth percentages mentioned hereafter are on a constant currency basis unless otherwise stated. Now turning to the second quarter revenue performance by segment. Insurance revenue was $197.8 million, up 14.9% year-over-year. This growth was driven by both the expansion and higher volumes in existing client relationships. Sequentially, insurance revenue grew 2%. The insurance vertical, including revenue from international growth markets, grew 14.9% year-over-year with revenue of $233.7 million. Healthcare and Life Sciences reported revenue of $158 million, representing growth of 22% year-over-year and 4% sequentially. The year-over-year growth was driven by higher volumes in our payment services business, expansion in existing client relationships and new client wins. The Healthcare and Life Sciences vertical including revenue from international growth markets grew 22% year-over-year with revenue of $158.3 million. Banking, Capital Markets and Diversified Industries reported revenue of $133.9 million, representing growth of 10.7% year-over-year and 5.1% sequentially. This growth was driven by the new client wins and expansion of existing client relationships. The Banking, Capital Markets and Diversified Industry vertical, including revenue from international growth markets, grew 12.8% year-over-year with revenue of $202.8 million. International growth markets reported revenue of $105.1 million of 16.3% year-over-year and 8.9% sequentially. This growth was driven by ramp-ups and higher volumes with existing clients and new client wins in Banking, Capital Markets and Diversified Industries and insurance. SG&A expenses as a percentage of revenue increased 170 basis points year-over-year to 20.9%, primarily driven by higher investments in front-end sales and support. Our adjusted operating margin for the quarter was 19.7%, up 10 basis points year-over-year, driven primarily by improved gross margins. Our effective tax rate for the quarter was 21.3%, down 110 basis points year-over-year, driven by higher profits in lower tax jurisdictions. Our adjusted EPS for the quarter was $0.59, up 22.3% year-over-year on a reported basis. Turning to the first -- to our first half performance. Our revenue for the period was $1.17 billion, up 14.7% year-over-year on a reported and constant currency basis. This growth was broad based across all segments driven by double-digit growth in healthcare and life sciences, insurance and international growth markets. Our adjusted operating margin for the first half was 20.1%, up 20 basis points year-over-year. Our first half adjusted EPS was $1.17, up 21.3% year-over-year on a reported basis. Our balance sheet remains strong. Our cash, including short- and long-term investments, as of June 30 was $284 million and revolver debt was $381 million for a net debt position of $97 million. We generated cash flow from operations of $90 million for the first 6 months of the year. During the first half of 2026, we spent $27 million on capital expenditures and repurchased 5.8 million shares at an average price of $30.90 per share, totaling $179 million. This includes 4.15 million shares repurchased under the accelerated share repurchase program at an average price of $30.10. Now moving on to our outlook for 2026. While we continue to monitor the evolving macroeconomic and geopolitical environment, our strong second quarter performance, sustained growth momentum and healthy pipeline in addition to the acquisition of iMerit provides us with the confidence to raise our outlook for the remainder of the year. We now expect 2026 revenue to be in the range of $2.39 billion to $2.415 billion, including $28 million to $32 million of anticipated revenue from the iMerit acquisition, which is expected to close on July 31, 2026. This represents a year-over-year growth of 14% to 16% on a reported basis and 13% to 14% on an organic constant currency basis. At the midpoint, the revised range is $88 million higher than our previous guidance. Based on the strong market opportunity and the need for us to continue to stay ahead in AI, we will increase our investments in front-end sales, data and AI capabilities and solutions for the rest of the year, and our adjusted operating margin will be lower in the second half of the year compared to the first half. We expect a foreign exchange gain of approximately $3 million, net interest expense of approximately $16 million to $18 million and our full year effective tax rate to be in the range of 21% to 22%. We expect capital expenditures to be in the range of $58 million to $62 million. We anticipate our adjusted EPS to be in the range of $2.25 to $2.29, representing year-over-year growth of 16% to 18%, up from our previous guidance of $2.18 to $2.23. Our adjusted EPS guidance includes a marginal dilutive impact of $0.01 from the iMerit acquisition. To conclude, we had a strong first half, underscoring our differentiated competitive position and exposure to attractive high-growth market segments. Our leading indicators remain positive and our resilient, adaptable business model positions us well for a solid performance in 2026. With that, Rohit and I would be happy to take your questions.

[Operator Instructions] Our first question is from Bryan Bergin from TD Cowen.

I'd like to start on the data and AI strength and the durability there. So above 30% growth in the quarter, but even above 20% ex the digital solutions and data and AI-led ops. Curious if you could help kind of parse how much of that growth is coming from new AI native programs versus traditional kind of analytics modernizations? And what gives you the confidence that, that data in AI perhaps can retain a 20%-plus grower for the balance of '26?

Brian, so yes, we saw a tremendous amount of strength in our data and AI-led business and that growth rate has been accelerating for us for the last 4 quarters. The reason why it's kind of showing this kind of strength is because each of the service lines within our data and AI-led business are actually performing really well. So Payment Integrity continues to grow very nicely. The data management part of our business is accelerating. The analytics and AI services are -- continues to grow nicely. So in terms of your question in terms of new work that we are undertaking here versus existing work that we are undertaking, it really is a mix of both. We do have a stable business within our Payment Integrity service line as well as within our analytics business. But the newer areas of data management, AI services and AI solutions, those are growing very, very rapidly on a small base but becoming much more pronounced and big for us. So going forward, this area of data and AI-led services and solutions for us is going to remain a high growth driver even after excluding data and AI-led operations. And we think we are very well positioned with this portfolio of services and the capabilities that we are demonstrating to our clients is giving them the confidence to engage with us in much more strategic ways.

Okay. Okay. That's clear. And then really interesting comments on kind of tokenomics and the optimization potential there. Just given your data and process expertise, it seems to be a major opportunity for you and just understanding there are some highly valued third-party routing platforms in the market. I'm curious how you're approaching this vector. Is this an area where you're developing IP that can kind of better serve vertical specific applications? And can you also use such a solution as kind of a tip of the spear to accelerate new opportunities out there?

Yes, Bryan. So look, I think token economics is going to become a very important and integral part of any AI modernization program for an enterprise client. And there seems to be a tremendous amount of value that can be created for clients just in terms of the design, the engineering, and the way in which the implementation is done for AI models and the way in which AI -- agentic AI is used on the operating workflows. We are obviously now in a much more advantageous position having a deep knowledge of our clients' industry and their workflow and their data. And we are building up capabilities that will give us advanced signals about the use of tokens and the cost of tokens, and we can make that transparent to our clients and be able to help them reduce their cost on token economics. This is going to be one of the principal areas of spend. And I think clients will also start to look at more complex solutions out here where they might even think about having their own hosted environments for the infrastructure and being able to deploy the AI models on their own GPUs and in their own environment. So frankly, this is an area that's going to continue to become more complex and expand rapidly. And there's a lot of value that needs to be delivered to clients on that, and we are in a great position to do that.

Our next question is from Surinder Thind from Jefferies.

Rohit, can you maybe talk a bit more on just kind of the dynamics of what's going on in the international growth markets? Obviously, the back half of 2025 growth was kind of flat quarter-over-quarter. And obviously, you've seen a material acceleration there. Can you talk about can that continue? And how we should think about that segment on a go-forward basis?

Sure, Surinder. So look, our view is that the international growth markets is a huge opportunity for EXL. The adoption of AI by clients in the international growth markets is actually trying to keep our base with the adoption of AI from our U.S. clients. And actually, what we are seeing is -- given the fact that we are in a much more connected world right now, everybody is moving on to the adoption of AI very, very rapidly and equally. So we see there to be a tremendous opportunity for us to help and engage with clients internationally and be able to support them along these journeys. Now in the past, we've had a limited presence internationally, but we've been investing quite aggressively in terms of building up more talent capability and solutioning capability in the international growth markets so that we can serve our international clients much more directly and much more near the point of execution. So this for us remains an important strategic focus area. It's a huge demand vector that is literally untapped by us. And we think we can play in this space and create a significant amount of revenue volume out here.

Helpful. And then as a follow-up on the investment spend or the incremental investment spend, you talked about investing maybe a bit more in front-end sales as well as data and AI capabilities. Any additional color you can provide there? Is front-end sales maybe more in international growth markets, certain segments? And then on the data and AI capabilities, is that more product build out? Or is that more services capability build-out?

Yes, Surinder. So for us, the data and AI capabilities is much more building out solutions and product capability. And as AI continues to evolve, this is something which we will continue to invest in. And then the front-end investment is also essential because the skill set required to make a sale on data and AI is quite different from traditional digital operations. And that's something which we are investing in. One of the things which we have noticed is that the velocity of decision-making of deals by clients is actually coming -- the velocity is increasing and the cycle time is coming down. So we need to have a greater amount of sales and front-end capability to be able to deal with this higher velocity and a much faster cycle time as well as much deeper product knowledge about our data and AI services and capabilities and the way in which we can enable AI for the clients.

Our next question is from Puneet Jain from JPMorgan.

Strong results. Rohit, are you seeing any changes in client conversations or their willingness to outsource given increasing AI complexity and the news flow around AI and also like the low enterprise value creation or ROI that some of those AI projects have treated so far?

Thanks, Puneet. So yes, look, as we've kind of shared previously, the changes that we are seeing are clients are moving away from pilots and they want to go into production. So they want to be able to deploy AI in production. But still, we are in the early stages, and this deployment into production is use case by use case. So it's still at an initial nascent phase. The second part is enterprise clients are building out their foundations for the AI enablement of the enterprise. So what that means is they're getting their data estates in order, they are putting together platforms that will allow them to develop, deploy and activate agentic AI. They are putting together AI harnesses that will allow them to be able to iterate and modify their AI models very, very rapidly and be able to govern and be able to have adequate security and compliance with regulatory requirements and have that in place. But the effort that is required to enable Tie for any enterprise is massive, and it's really an enormous opportunity. I think this is one area which is significantly underestimated by the market and what we are seeing is clients are really struggling with this change and we are in a great position to actually help them with this. So we feel fortunate that we've got the right kind of capabilities, the right kind of skill sets and the right kind of relationships and the know-how to be able to help them move on this journey.

No, that's great to hear. And my second question is similar to Bryan's question, but focus on AI and data work that's embedded within digital ops. Can you double click on the -- specifically, what type of work you do in that practice within digital ops, that's like 15% of total revenue growing, obviously, growing at a very high clip. Directionally, how much of that growth in revenue stems from AI-driven identic operations versus data analytics work? And again, I'm talking about data AI within digital ops.

Right. So when we talk about embedding data and AI into digital operations, think about some of the common processes that we run for clients. So let's take insurance where we run claims processes for clients or where run underwriting processes for clients. We are embedding agentic AI into claims and into underwriting. So what that means is we are pulling together pieces of that process and AI enabling that and allowing the LLMs to be able to take the decisions and to be able to automate some of the workflows that we are working on with our clients. Now we have to do this in a responsible manner, which has also got the right kind of guardrails for a regulated industry and for a regulated workflow. So what that means is that in some cases, we use deterministic models, which are very much well suited for following policies, procedures and regulations. And in some cases, we are using probabilistic models, which is where judgment is required and where decision-making is required. And it's really the art of combining both of these 2 deterministic models and probabilistic models and integrating that into the workflow, that's the effort required to embed data and AI into these digital operations processes that we're running. Now keep in mind, every time we do this, if you're doing this for a particular carrier, a particular business line, a particular geography, each one of this is a unique intervention that needs to be undertaken. It's got a common harness. It's got a common component pieces that can be deployed. But every single time, the enablement requires a very high level of customization. And that level of customization is also iterative and it requires deep knowledge of the workflow, deep understanding of the data sets and a deep knowledge of being able to integrate and orchestrate across the various technology platforms of our clients. So it's a slow and gradual process, but we are in the best position to be able to deploy this for our clients because of our knowledge and understanding of the workflow and the fact that we already do this work for our clients and that's why we're seeing greater adoption and greater traction and greater confidence for our clients to allow us to do this work.

Our next question is from Maggie Nolan from William Blair.

So there are a lot of moving parts on the margin, the acquisition, the India labor code tokoenomics, you outlined some investments in the prepared remarks. Are you still hoping to drive gross margin up and then also modestly improve operating margin annually? Or is the priority for the business for the next couple of years really to invest for and drive growth on the top line?