ExlService Holdings, Inc.

Good day, and thank you for standing by, and welcome to the Q1 2021 EXL Service Holdings Earnings Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone keypad. If you require further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Stephen Barlow. Please go ahead.

Thank you, Amanda. Good morning, everyone. Thank you for joining EXL's first quarter 2021 financial results conference call. I'm Steve Barlow, EXL's Vice President of Investor Relations. With me today in our offices in New York are Rod Kapoor, our Vice Chairman and Chief Executive Officer, and Maurizio Nicolelli, our Chief Financial Officer. We hope you've had an opportunity to review our Q1 2021 earnings release we issued this morning. We've also updated our investor fact sheet in the Investor Relations section of EXL. such statements. Such risks and uncertainties include, but are not limited to, general economic conditions. Those factors set forth in today's press release discuss in the company's periodic reports and other documents filed with the Securities and Exchange Commission from time to time. ESL assumes no obligation to update the information presented on this conference call. During our call today, we may reference certain non-GAAP financial measures, which we believe provide useful information for investors.

Thank you, Steve. Good morning, everyone. Welcome to our Q1 2021 earnings call. I hope all of you and your families are safe and healthy. I'm pleased to report a strong start to 2021. EXL generated first quarter revenues of $261.4 million and which represents a 4.7% sequential increase and a 5.5% year-over-year increase, both on a constant currency basis. Our strong performance was led by our analytics business, which secured new wins across multiple industry verticals. Further, we successfully expanded within our existing strategic clients by penetrating new buying centers and offering new solutions. Adjusted EPS for the quarter grew by 46% year-over-year to $1.18, driven by lower operating expenses. Our analytics business had an outstanding quarter, crossing $100 million in quarterly revenue for the very first time. We reported $102.3 million in revenue, representing a 4.1% sequential growth and a 10% year-over-year growth. The primary driver of this growth was our data-led marketing solution, which experienced strong demand this quarter as our clients resumed their customer acquisition and growth initiatives. We are also seeing accelerated adoption of our data and analytics services, which is driving growth in our strategic clients across banking, healthcare, and insurance. Our operations management business reported revenues of $159.1 million in the first quarter, up 5.1% quarter over quarter, driven by the ramp-up of large deal wins in healthcare, life and annuities insurance, and banking. As we focus on growth in 2021, We recognize that we are working through a period of continued impact from the COVID-19 pandemic. Specifically, there is a new surge of infections in India, the Philippines, and Colombia. The situation in India is particularly concerning due to the substantial increase in the number of cases combined with an overwhelmed healthcare infrastructure. Our delivery locations in Noida, Gurgaon, Pune, and Bangalore are amongst the most affected regions in India. Even though almost everyone is working from home, we have team members and their families who are directly impacted by the virus. The top priority for us in this environment is the health and safety of our employees. We are taking proactive measures, And today, almost all of our employees are working from home in India. We are also helping our employees by investing and facilitating easier access to medical care through partnerships and support groups. Our clients have been very supportive and flexible, demonstrating a true spirit of partnership in these trying times. We are keeping our clients apprised of the situation and are collaborating with them to ensure steady operational resiliency. To date, we have had minimal disruption to our service delivery and are actively engaged in managing the situation as it evolves. Our primary client markets are bouncing back as vaccination rates continue to climb throughout the United States, UK, and Europe. Increasingly, we see a trend towards clients making bigger, bolder investments in building out data, analytics, and digital capabilities. Our clients are laser-focused on delivering superior customer experiences, improving speed, and building and scaling future-ready operating models. As a result, our data-led value creation framework is resonating very well in the market, and we continue to see momentum across two vectors. One, enabling better business decisions by leveraging deep data and analytics capabilities, and two, delivering superior customer outcomes by applying cloud-enabled AI solutions. The increased demand for data and analytics is moving in lockstep with the large-scale transition of customer interaction to digital channels. Our clients are investing in highly personalized, direct-to-consumer marketing to enable more effective customer acquisition and retention. This results in a larger addressable market for our data-led marketing solutions and proprietary marketing analytics algorithms. The second vector where we are gaining market traction is the adoption of EXL's AI-powered solutions in the cloud. Our clients are pursuing speed as their primary goal, which in turn drives enhanced customer experience, superior business outcomes, and improved efficiency. current business processes are constrained by legacy technology and heavy dependence on manual intervention. In order to become data-driven and effectively harness the power of AI, our clients would have had to redesign enterprise-wide platforms and processes, which is expensive, time-consuming, and has a low success rate. In contrast, EXL's AI solutions are deployed upstream on the cloud and are easily configurable. This generates clean data flows that disintermediates downstream legacy processes and technology. The cloud ecosystem allows us to swiftly deploy machine learning and AI-driven interventions along with automation to enable what we call as the AI operating system. Our ability to transition clients to an AI operating system creates powerful business impact. The understanding of current state business processes combined with AI-powered cloud solutions minimizes execution risk and accelerates speed of transition. An example of this work in action is an engagement we entered into with one of the largest independent title insurance businesses to modernize their title search process. The company's legacy title search process was time-consuming, entirely manual, and distributed across several vendors. Using EXL's AI operating system, the firm was able to seamlessly migrate to an entirely cloud-based automated search process that improved both the speed and accuracy of the title search and will enable our client to capture market share much faster than competition. This engagement positions EXL as the cloud-enabled AI transformation partner of choice. In addition to delivering for our clients, our mission to find a better way means we are committed to doing our part as a global citizen to build a better future by operating in a responsible and sustainable manner. At EXCEL, we have taken several actions to enhance our sustainability programs over the past year. In the fall of 2020, we published our first annual sustainability report, which was developed in accordance with the Global Reporting Initiative standards and aligned to the United Nations Sustainability Development Goals. We recently signed up to become a participant of the United Nations Global Compact. More recently, we expanded our sustainability disclosures in our proxy statement and have provided metrics and long-term goals relating to our environmental commitments and workforce diversity. Among such goals, we intend to raise the representation of women, particularly in leadership positions at EXL, from 18% to 25% by 2025. Lastly, as you know, after 19 years of service, Pawan Bagai has decided to retire from EXL on October 1, 2021. Pawan has been an architect of EXL as well as a mentor and confidant of many within the company, including myself. He has been a great partner for me in building the organization into what it is today. Pawan's career with EXL mirrors the company's own growth. His leadership established the foundation of our operations management business. His guidance helped develop the analytics business. And it is his insights that has enabled our shift to digital. Pawan has been instrumental in navigating the company through every challenge it has faced. Pawan will leave an indelible mark on the organization and for each of us. Over the next several months, Bhavan's responsibilities will be transitioned to other members of the leadership team at EXL. We are fortunate to have the next cohort of leaders who are now ready to pick up the mantle. All of us at EXL will miss him, and we wish him all the very best.

With that, I will turn over the call to Mauricio. Thank you, Rohit, and thanks, everyone, for joining us this morning. per share was $1.18. All revenue growth numbers mentioned hereafter are on a constant currency basis. Revenue from our operations management business as defined by three reportable segments excluding analytics was $159.1 million, up 2.8% year over year. Sequentially from the fourth quarter, revenue was up 5.1%. insurance grew 25%. Emerging reported revenue Our SG&A expenses increased by 100 basis points year-over-year to 18.7% of revenue driven by investments in front-end sales and marketing. Our adjusted operating margin for the quarter was 20.2% of 540 basis points year-over-year driven by improved operating margin Our GAAP tax rate for the quarter was 21.9%. Excluding the impact of discrete items, our normalized effective tax rate for the quarter was 24.2%. Our adjusted EPS for the quarter was $1.18. we generated cash flow from operations in Q1 of $15.2 million compared to a negative cash outflow of $13.6 million in Q1 of 2020. Our BSOs at March 31st was 54 days. During the quarter, quarter-over-quarter performance since the trough in the second quarter of 2020. Also alive. digital solutions, and technology. return to a more normalized operating environment. In conclusion, we had a good

Amanda, could you queue up the questions, please?

Yes, my pleasure. As a reminder, if you'd like to ask questions, please press star followed by the number one on your telephone keypad. That is star one to ask an audio question. Your first question comes from Brian Bergen with Cohen.

Wow. I wanted to ask just on the India surge impact and the risk around that, does the risk impact certain businesses more than others? Can you dig in a bit more there on the potential service disruption magnitude and where and how we should be thinking about that? And I know you mentioned minimal service disruption so far, but what are you thinking forward here?

Sure, Brian. So for us, India geography represents about 45% of our revenue delivery capabilities. And it really represents all industry verticals across the board, perhaps a little less so in healthcare, which is global. I think at this current point of time, like we mentioned on the call, almost 100% of the work that's being done is being done by our employees working from home. So we really do not have anybody coming into the office. And it really depends on how the surge of the virus and the infections continues and for how long it continues in India. creates a problem not only for our employees but also for their families, and that's creating the challenge and the issues. But the impact is going to be across all the businesses as such. It's not really tied into any one business.

Okay. Thank you for that detail. And a follow-up here on margin, so specifically ops, management gross margin. That looks to be at record levels. Can you unpack the drivers there in the quarter? Is it a mix of work? Anything that's one time? Can you really give us a sense of what is lasting within that outperformance? Thanks. So that

we've been able to really run our business and keep headcount much more efficient than over the last 12 months. And you're starting to see some of that come through within our ops management margin. And the last part I would say is we are getting a certain amount of benefit right now in cost from the environment that we're in. So that is also helping the ops management margin. Going forward, The one piece that should last going forward is really that cost efficiency piece as we really focus on being lean going forward.

Okay. Thank you.

Your next question comes from Maggie Nolan with William Blair.

Thank you. I'm curious about what specific considerations are given in the guidance, considering the developments in India and the Philippines, and in particular around those margins that you were just talking about with Brian.

Yes, Maggie. right now. Our assumption in terms of our guidance really assumes that we will have minimal disruption going forward. However, that's something which we'll have to see how things play out. We really don't know how this will unfold in India and in the Philippines. I think in the Philippines, the rate of infection seems to have somewhat stabilized. and that is creating a better hope for us out there. In India, the rate of infection has really gone very, very high and very significantly up, and that does create its own challenges. So it depends on how long it continues to be as such and what time period this might subside in. our employee population might be. As you can imagine, our number one priority is to make sure that we can keep our employees healthy and safe, and that's what we're going to do. So we're going to make sure that each of them has the best possible medical care and attention that we can provide for them, and we can keep them isolated and safe and healthy. And our focus is going to be based on that. How this plays out, you know, we really don't know, but our guidance assumes that we have minimal disruption.

Just to dig into that a little bit further, are you talking about disruption from a logistical delivery standpoint, or are there additional considerations in terms of productivity? And then my second question is about your AI solutions. Can you talk a little bit about kind of the proprietary components of that, versus what does the partner ecosystem around this look like, and then how are the AI solutions incorporated into your pricing structure within contracts? Thank you.

Sure. So the disruption is basically on account of, you know, if the infection has an impact on our employees or their immediate families. As you know, you know, in India, many of our employees live in – environment, and they have to take care of their family as well. So it's really about our employees themselves and their families as to how they kind of fare out here. We do have an adequate amount of planning and a buffer that we maintain in terms For the second part of your question pertaining to AI solutions and the proprietary nature of it and the partnerships component of it, that is something which is being developed by us very, very rapidly. And over the last 12 to 15 months, we've made a tremendous amount of progress out there. We've built both proprietary solutions as well as we've embedded some partner solutions into our proprietary capabilities. The part that is proprietary is also our understanding of the domain of our customer's business and the application of technologies specifically in those processes within our client industry verticals and their client businesses. We have obviously now got track records and data and performance data scorecards associated with the intervention of these proprietary capabilities and our ability to plug and play and do this in a very effective and a very fast manner that's becoming better and better. So these AI solutions which are on the cloud and which are placed upstream and they don't need to interfere or disturb the existing legacy technology or, for that matter, how the work is currently being performed, I think it's working really well with our clients. And our clients are engaging with us more and more actively in terms of the adoption of these AI solutions on the cloud. And so we see a tremendous amount of opportunity out here.

Thank you. Nice quarter.

Thank you.

And your next question comes from Puneet Jain with JP Morgan.

Hey, thanks for taking my question. Following up on Maggie's question in analytics, so as you offer more solutions, is revenue model also going to be different from what it used to be in the past? Will it be more SaaS-based, software-like model for some of those offerings? or will it still be FTE-based?

Yes, Puneet. I think overall we would expect that as we move towards more solutions, more proprietary and partner interventions that we're going to be bringing into bear, that we're going to move towards outcome-based pricing models and transaction-based pricing models. We have seen a noticeable shift in Q1 towards transaction-based and outcome-based pricing models, both in operations management, where we've started to deploy digital technologies and capabilities, and use AI-based solutions, as well as in analytics, where some of the work that we are now undertaking is driven of outcome-based pricing models. The data-driven marketing initiatives that we had, which had a strong component to it in the first quarter of 2021 – that is primarily driven on an outcome basis as such. So we're going to see more and more of outcome and transaction-based pricing in analytics.

Got you. And what was the incremental license fee revenue that drove margin upside in healthcare vertical in this quarter? Okay.

There's nothing that we've shared on the healthcare vertical from a license perspective, so I'm not sure where that's coming from. Our healthcare business in operations management grew very, very nicely over the previous quarter and year over year because of a number of new clients that we had signed up in 2020, which we onboarded, you know, through the year and the revenue was visible in first quarter. But all of that is really based off the operations management work that we do for our clients there.

Got you. Got you. I'll follow up on that. Thank you.

And again, if you would like to ask a question, please press star followed by the number one on your telephone keypad. That is star one to ask an audio question. Your next question comes from Vincent Colicchio with Barrington Research.

Do a meaningful number have COVID in their families as of yet?

Vincent, I think we missed the first part of your question, so could you please repeat that?

Yes, I'm curious if a meaningful portion of your employees in India have COVID or have COVID in their family as of yet.

Right. So we obviously track, you know, the number of our employees that have, you know, been impacted by COVID, but we don't share that, you know, publicly. What I will share with you is that the percentage of our employees that are directly impacted by COVID is in the low single digits. But with the families being impacted, that number certainly becomes much larger. So we want to make sure that our employees can take care of themselves first and then also take care of their families. And therefore, we are being very, very accommodative towards, A, helping them out, B, supporting them at this point of time to be able to take time and devote attention to their families.

And then a question on your guidance. What needs to happen to hit the high end of your revenue outlook for the year?

I think one of the things which has been really positive for us is that the demand environment is very strong. Our pipeline is very good. We would need to have the pipeline conversion take place into real revenue. And we would need to have no real disruption in terms of our ability to fulfill the demand that we are seeing from our clients. I think we're seeing a tremendous amount of strength in data and analytics and in digital as well as in our industry verticals. So frankly, the demand side seems to be much more broad-based, and that's less of an issue. the challenge might be from a fulfillment standpoint and an ability to kind of execute and convert the demand into revenue.

Thanks for answering my questions in a nice quarter. Thank you, Vincent.

And your final question comes from David Grissman with Stiefel.

Good morning. Thank you. I wonder if you could just... review the commentary about the margin trend during the year, just trying to understand, you know, what you have visibility on today in terms of higher expenses as the year rolls out and what component of that margin guide is more variable depending on the pace of reopening, travel, you know, all the other elements that come with, you know, getting back to normal. Look, we had a very good Q1 in terms of margins, you know, just over 20%.

You know, a lot of that is really driven by the increase in revenue that really fell to the bottom line and also, you know, a certain amount of cost efficiencies for the environment that we're currently working in, in terms of this work-from-home environment that we have some cost optimizations from that. You know, going forward, you know, there's a number of areas that we're going You know, knowing that, you know, our margins are going to be significantly higher this year than they were last year and right in line with what we talked about at Investor Day. And I would say, you know, layered in all of this to a certain extent. India and the Philippines.

Thanks, Murcio. Can you size some of those items for us, the three big buckets in terms of how much of a margin impact they'll have on the year, the investments, the hybrid work from home, and the return to office, just so we have a sense for how impactful each of these initiatives are?

the rest of the year.

Right. And I'm not sure I heard this right, but I think you may have mentioned that in the first quarter, the OM business had some, I don't know if it was one time, but there was some revenue that drove the margin. How much of an impact is that in the first quarter?

It had some.

certain extent right got it and then just a you know kind of a higher level question just about how you know this evolves with the clients I know you know there was you know just everyone had a kind of morph their model immediately you know just overnight virtually last year and I'm just wondering how the conversations are going with clients it looks like you're committed to a hybrid work-from-home model on a longer-term basis. And, you know, how does that impact, you know, kind of contracting and pricing at all, you know, with your clients? Just kind of curious what to expect there.

So, David, the conversation with the clients is, you know, having us perform the work for them, and they're driving more and more responsibility to EXL to take ownership of the work. In terms of the commercial arrangement and the hybrid construct that we have, it really works both ways because when we do have people and our employees coming to work in the office, because of social distancing, we have to make sure that there is more space office space available for our employees to work in our offices and our facilities, and therefore the cost of infrastructure per employee goes up. So there are pieces of the cost structure and the cost stack that will go up because of working from the office. Working from home clearly is a little bit lower and there is a benefit. But when you combine the two together and you combine a certain proportion of the work being done from home and a certain proportion of the work being done from the office, actually the cost structure is fairly neutral. And our clients can see that. They can, you know, they appreciate that. And they do want us to get to a structure where even those employees that are working from home at some point of time will need to come to the office for meetings and for making sure that we can have the right kind of alignment of business objectives, culture, you know, creation and innovation. so that we can have them all be tied in together to the organization and to meeting the needs of our clients.

I see. So the anticipation, at least at the client level, is that even if they don't come back working full-time, they would come back certain days of the week or the month.

Yeah, it's going to be very specific, you know, by client and by geography. And we're going to continue to work, you know, with our clients on that. And it clearly depends on what they are comfortable with, what their regulators are comfortable with, and how this evolves. Absolutely.

And so your read today, though, is that it's a net neutral to margins going forward, though, at this point.

Yeah, I think it's net neutral to pricing and to margins.

Right. And then just one last question. I mean, you referenced the pipeline being pretty strong a couple of times on the call already, but I'm just curious as you look at what activity you're ramping in 2021 ahead since you don't disclose specifics. I'm just curious, when you compare new client starts in 21 to what you had in 20 and 19, I'm wondering if you could just give us a sense for just how that compares. And then when you look at the pipeline that you're working on to close in 2021, what that looks like relative to what you're wrapping in 2021, or excuse me, that you're trying to close in 2021 and how the wrap in 22 may compare to the 21 wraps that you're experiencing.

Sure. So, you know, just to give you a sense on the pipeline, the pipeline, when we say is strong, it is significantly stronger, which means, you know, it's high double-digit stronger than previous periods. And in terms of velocity of decision-making, we are seeing acceleration in the velocity of decision-making. So the sales cycle also is much shorter for our clients. And I think that is very helpful as we scale up our business and as we support our clients in terms of moving forward. Our clients... I think this is all being driven by the fact that their end customers and the consumers are adopting digital channels for their interactions with our clients, and therefore enabling this kind of work is very important, and it needs to be undertaken quickly. So very positive momentum from that perspective.

So can you, is any of that, pipeline increase in velocity decision-making a function of some catharsis last year and catch-up this year? I mean, again, since you don't disclose the specific numbers, we don't really have that information, so perhaps you could reflect on that.

Sure, sure. Look, I think there may be a little bit of a catch-up, but largely the adoption of the digital channel as a means of interaction for their customers, and the hyper-personalization that needs to be done and the use of data and analytics, that's just driving this decision-making into a much faster gear. And so what we're seeing is the client's willingness to accept change, that's become a lot better. And it's not only a catch-up from 2020. It's actually the business model has changed and the realization that if you don't, you know, speed up some of these changes, you may not be competitive anymore. I think that's become far more urgent and critical.

And your next question comes from Ashlyn Smith. Shivarkar with Citi.

Thank you. Hey, guys. Good quarter here. I have a headcount question. It's, you know, obviously down sequentially, down year over year against the backdrop of improving demand and the acceleration that you guys have mentioned. So I want to ask, first of all, how much of the headcount trend is perhaps due to productivity that you've gotten due to automation and things like that versus specific verticals where demand's down and not yet recovering like travel. And then the second part of the question would be in the current environment, what's the process that you're using to hire people lower-level employees, delivery employees in geographies like India and Philippines.

Ashwin, let me give you a little bit of insight just on your headcount question. When you look at our headcount, you do see a bit of a decline in Q1 versus Q4, and you do see some productivity gains on a year more in line with that revenue growth on a year-over-year basis. operations management. And you see that on a year-over-year basis. You also see it on a sequential quarter-to-quarter basis. And that's in all three of our business segments within ops management.

And Ashwin, to your question about hiring, the hiring is all being done virtually and remote hiring. So far, we've been able to actually hire very effectively and onboard our talent quite nicely, so it hasn't really created an issue for us. But given the surge in the pandemic levels in India in the last four weeks, that's something certainly which we will need to be watchful about.

Got it. And then my second question is with regards to margins. There's a lot of good color with... the factors that puts and takes into margins. I was wondering if, you know, why you didn't necessarily provide an updated margin outlook for the year. I mean, I would imagine that we're now taking up perhaps, you know, maybe 50 to 100 basis points higher than where you started the year. Is that fair?

Yes, Ashwin, you know, if you're coming up.

I understand. Thank you.

And your next question comes from Robbie Immenberg with Bayard.

Yeah, thanks. So it's been a couple of years since you did M&A and with, you know, $4 a share in net cash. Um, when do you think you'll be ready to do a deal again? And I guess which segments seem the most interesting to you?

Sure. Uh, So we are still very active in looking at opportunities in the market for acquisitions. Our pipeline is fairly significant in terms of what we've been looking at. The one thing to keep in mind in terms of M&A in healthcare. But really, you know, the two big hurdles for us on M&A is, one, you know, is it the right strategic fit for us going forward? And two, is it at the right valuation to drive ROIC now going forward? You know, given the market that we're in right now, those are two fairly, you know, significant hurdles. But I will tell you that quarterly basis.

Yep. Uh, that's very helpful. And then maybe just one question on, uh, EPS guidance. Um, you know, Q1 was a dollar 18 on the rest of the quarters. Now it looks like it's about, you know, averaging about a dollar per quarter. So I guess if there was some conservatism in that outlook and maybe any color around just the cadence of EPS growth throughout the year. really drive growth in 2022 and 2023.

And two, also, you know, we talk about the return to office, but even that is a little bit of a moving target in terms of different geographies. So, you know, our EPS guidance there takes into all of that account. And as we go on later on in the year, we'll update it as we need to.

Great. Thank you.

Thank you for joining. That does conclude today's call. You may now disconnect.