ExlService Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Q3 2021 EXL Service Holdings, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touchtone telephone. I would like to turn the conference over to your host, Mr. Stephen Barlow. Please go ahead, sir.

I'm Steve Barlow, EXL Vice President of Investor Relations. We meet today in our offices in New York, Aurob Kabor, our Vice Chairman and Chief Executive Officer, and Maurizio Nicolelli, our Chief Financial Officer. We hope you've had an opportunity to review our Q3 2021 earnings release we issued this morning, as well as the press release announcing a new $300 million share repurchase authorization. We have also updated our investor fact sheet in the Investor Relations section of EXL's website. As you know, some of the matters we'll discuss in this call 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, general economic conditions. Those factors set forth in today's press release, discussed in the company's periodic reports and other documents filed with the Securities and Exchange Commission from time to time. Each fellow 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. Reconciliation of these measures to GAAP can be found in our press release as well as on the investor fact sheet. I'll now turn the call over to Robert Kapoor, ESL Chief Executive Officer. Robert. Thank you, Steve.

Good morning, everyone. Welcome to our third quarter 2021 earnings call. I hope you and your families are safe and healthy. I'm delighted to report another outstanding quarter. EXL achieved better than expected results in the third quarter on revenue and adjusted EPS. Our Q3 revenue was $290.3 million, which represents a 5.8% sequential increase and a 20.1% year-over-year increase, both on a constant currency basis. was $1.30 per share. Our analytics business reported revenue of $120.5 million, growing 8.3% sequentially and 32.7% year-over-year. Consistent with the first half of the year, demand for analytics has increased significantly in the post-pandemic environment. We foresee continued healthy growth in analytics, driven by consistent demand for our expertise in data-driven solutions. Our operations management business also achieved growth this quarter, generating $169.9 million in revenue, which is up 4.1% quarter over quarter and 12.6% year over year driven primarily by higher revenues from our suite of insurance solutions and new wins in our emerging business. Our revenue growth this quarter has been broad-based. We have continued to win across all industry verticals, with analytics and digital being our core differentiators. We see this trend continuing with a strong pipeline of large deals and surging demand for our digital solutions and analytics capabilities. We feel confident that we will maintain our strong position in the market by continuing to secure strategic wins. To illustrate what we are seeing in the market, I would like to share some insights on a few of our recent showcase our unique strengths. Starting with our analytics business, point of sale financing through buy now, pay later solutions have become a rapidly growing segment in the banking and retail industries. The popularity of the format is due to how seamless and easy it is from the customer perspective. Real-time credit approvals at the point of purchase allows for a much smoother customer experience. This creates significant value for the customer, the bank or lending institution, and the merchant. On the merchant side, by integrating a financing solution directly into the purchase journey, we are able to drive higher conversions and higher order value. On the financing side, we are enabling banks to expand their share of wallet with existing customers, attract new customers, and create an efficient merchant services workflow. We've developed and implemented a buy now, pay later solution for First National Bank of Omaha, the largest privately held bank subsidiary in the United States. It is unique for two reasons. First, It allows merchants to provide information about a customer in real time, enabling an instantaneous credit decision with comprehensive credit analytics, free approvals, fraud prevention, know your customer support built directly into the process. Second, it is highly scalable. Working together with our partners, the solution was developed as an in-the-box capability that can be deployed rapidly across margins. In the case of First National Bank of Omaha, we built and launched the solution in a live retail environment in just four months. Given our deep client base in retail banking, we see good traction for this solution going forward. Similarly, our innovative digital solutions built on our proprietary AIOS architecture are helping clients reimagine traditional business functions. EXL partnered with a leading Australian insurer to proactively identify claims payment leakages and prevent regulatory breaches. Our AI-powered smart audit solution has helped the insurer automate 100% of the claims reviews, which has streamlined workflows and improved the accuracy of claims processing. Additionally, our powerful algorithms are now tracking data across the claims lifecycle to identify over 10 times more leakage than previous benchmarks. The smart audit solution is highly scalable, By making simple changes to our algorithms, we have been able to pivot the solution to also address audit and compliance issues within other industries. This expands our addressable market. For example, a major healthcare payer is using the solution to improve accuracy and compliance across 200 different outbound member communications in multiple languages. Additionally, a leading manufacturer of electrical components leveraged smart audit to identify 20% leakages within their vendor payments. We are also seeing strong demand for our payment integrity solutions. This is evident in our recent audit services and deploys several components of our payment integrity solutions. With a strong alignment to our growth strategy, this multi-year win represents a significant step forward for our payment services business. The common theme across all these examples is the extensive use of data, analytics, AI, and cloud. and evolved, we've doubled down on our analytics and digital focus to create solutions that address their biggest challenges, unlock opportunities for growth, and drive efficiency. This trajectory has been central to our growth. In order to better communicate our focus on analytics and digital solutions, we launched our bold new brand platform in September. Anchored in the client value proposition, we make sense of data to drive your business forward. The new brand more accurately reflects the critical role we play in our clients' strategic growth agendas. It also emphasizes the critical role data plays in driving better decision-making and more intelligent operations, enabling companies to predict trends and streamline workflows. With greater volumes of data and more focus on delivering real-time insights and solutions, making sense of data has become the most important baseline capability for businesses today. This is a noteworthy evolution of our business and positions us well in the marketplace. To realize our brand promise, we are making significant investments in advanced analytics, AI-based content extraction, conversational AI, and cloud-based operations analytics. As we look to the future, we will continue to keep the health and safety of our employees and their families as our top priority. We have conducted vaccinations the last quarter. Currently, 70% of our employees globally have received at least one dose of the vaccine. As vaccines become more readily available in geographies such as the Philippines and South Africa, we will continue to push ahead for greater vaccination rates amongst our workforce and enable a safer work environment. We have also built a future of work operating model which focuses on maintaining a distributed workforce to maximize our resilience and deliver an optimal working environment for our employees. As we've seen over the past several months, the flexibility of a hybrid work-from-home model has been great for our employees and clients alike. As we have continued to grow and evolve as a company, we have made a very conscious effort to cultivate a strong bench of leaders who will help drive our business forward. I'm pleased to share that we have elevated two of our senior leaders to our executive committee. Amkur Rai, our chief digital officer, leader of our emerging business, are both now part of the Leadership Executive Committee. Amkur joined EXL in 2006 as part of our acquisition of Inductus and was co-head of analytics for several years. Kimi is a 21-year veteran of EXL and has held numerous leadership roles since joining in 2001. I am confident that Ankur and Kiri will play pivotal roles in achieving the promise of our new brand and meeting our growth aspirations. Going forward, our pipeline remains strong and our capabilities in the analytics and digital space are resonating well in the market. Similarly, within operations management, to becoming truly digital. In conclusion, 2021 is shaping up to be a great year for EXF. We have been able to grow our business across our verticals and form stronger partnerships with our clients. We have created unique solutions using data and analytics, AI, and the cloud that solve their most pressing problems. I am confident in the resilience of our business model and extremely proud of the commitment and ingenuity of our people to support one another and our clients in a fast-changing and complex business environment. I will now invite Maurizio to highlight our Q3 financial performance and 2021 guidance.

Thank you, Roy, and thanks, everyone, for joining us this morning. I will provide insights into our financial performance for the third quarter of 2021, followed by our updated outlook for 2021. As Rohit mentioned, we had an outstanding quarter with revenue of $290.3 million, up 20.5% year-over-year, while adjusted earnings per share was $1.30. All revenue growth numbers mentioned hereafter are on a constant currency basis. excluding analytics, was $169.9 million, up 12.6% year-over-year. Sequentially from the second quarter, revenue was up 4.1%. Our insurance segment generated revenue of $98 million, up 11.3% year-over-year, driven by expansion in existing client relationships and higher volumes. Compared to the second quarter of 2021, revenue was up 3.9%. The insurance vertical consisting of insurance operations management and analytics businesses grew 17% year-over-year. Healthcare reported revenue of $27.3 million, up 8.9% year-over-year, driven by new due to a transitioning client. The healthcare vertical consisting of healthcare operations management and analytics businesses grew 12.9% year over year. Emerging reported revenue of $44.5 million, up 18.2% year over year. This growth was year-over-year. Analytics revenue totaled $120.5 million, up 32.7% year-over-year. Analytics was 41.5% of total revenue in the third quarter of 2021, compared to 37.5% in the third quarter of 2020. This growth was driven by higher volumes across all industry client relationships, particularly in banking and financial services, and new wins in 2021 as clients embrace our data-led advanced analytics, AI, and cloud solutions. Compared to the second quarter of 2021, revenue was up 8.3%. Moving down the income statement, our SG&A expenses were 19.9% of total revenue, of 240 basis points year-over-year driven by investments in front-end sales, marketing, capability development, higher compensation, and COVID-related expenses for health and safety of our employees. Our adjusted operating margin for the quarter was 19.4% of 20 basis points year-over-year Our adjusted EPS for the quarter was $1.30, up 25% year-over-year on a reported basis. Now, moving to our nine-month performance. Our revenue was $826.8 million, up 15.7% year-over-year. This growth was broad-based across all our segments with operations management up 9.9%, and analytics up 25.5%. Our year-to-date adjusted operating margin is 19.2%, an increase of 460 basis points over the prior year. Adjusted EPS for the first nine months of 2021 is $3.62, up 50%. to $126.3 million in the same period last year, driven by higher receivables and incremental income and withholding tax payments. EXL's balance sheet continues to remain strong, with a focus on liquidity, flexibility, and strong cash flow from operations. of 99 million. During the third quarter, we settled our 3.5% convertible senior notes with an aggregate value of 150 million due in 2024 for 200 million in cash and approximately 310,000 shares of common stock. We are generating significant cash flow to invest in new digital and cloud solutions and have sufficient capital repurchase program. During the first three quarters of 2021, we repurchased 845,000 shares at an average price of $99 per share, totaling $83.6 million. In addition, today we announced a new repurchase authorization for $300 million effective January 1, 2022. Now, turning to guidance. we have increased both our top and bottom line guidance for 2021 based on our strong year-to-date performance and visibility into the fourth quarter. Our guidance is based on our current flexible work model with more than 90% of our employees working remotely for the remainder of the year. We are increasing our $1.12 billion, up $25 million at the midpoint. This represents a year-over-year growth rate of 16% to 17% on a reported basis and 15% to 16% on a constant currency basis. In 2021, we expect analytics to grow in the mid-20% range and operations management to grow approximately 10%. For the fourth quarter, we expect the revenue to be parable to Q3 due to lower volumes in ops management, including healthcare, as mentioned earlier. We expect our adjusted EPS to be in the range of $4.70 to $4.80, of 33% to 36%, driven by increased revenue in 2021. Adjusted EPS is expected to decline higher sales and marketing expenses, increased investments in technology, and higher compensation in select areas. We expect a foreign exchange gain between $3 and $4 million, net interest expense of $0.5 million to $1 million, and our affected tax rate to be in the range of 23 to 24%. In terms of capital allocation, we continue to invest in analytics, AI, digital solutions, and technology. We expect capital expenditures to be in the range of $35 to $40 million. In conclusion, the first three quarters have been strong with a double-digit revenue growth of 16.5% and adjusted EPS increasing by 51% over 2020. Our success is attributable to strong demand for our services, outstanding delivery despite challenges faced by the pandemic, and a keen focus on fixed and variable costs, which has driven more changes. And I will be happy to take your questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press star then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We also ask that you limit yourself to one question and one follow-up. Your first question comes from the line of Maggie Nolan from William Blair. Your line is open.

Hi. Thank you. Congrats on the results. I wanted to ask a little bit more about the healthcare segment within ops management. Could you go into maybe what your expectations are for kind of the medium-term performance of that segment? Yeah, thanks, Peggy. You know, there's nothing unusual going on in the healthcare segment. in ops management is fundamentally sound. It is growing very nicely. We are seeing strong traction amongst the payers but also amongst the providers where we've started to now serve the provider group in a fairly active way.

And the other part is as healthcare embraces data-driven solutions, Keep in mind that the healthcare industry pretty much recession-proof. So it's something which we think is a large market space where our capabilities and our solutions can be really helpful, and we are excited about the potential for us to serve and grow clients in that vertical.

Okay, thank you. And then thinking about the margin profile of the company, Obviously, you've seen some structural pickup in the margins. Do you think you can kind of continue to operate at above that, at or above that kind of 38% gross margin? And if you do, is even like a 17% adjusted operating margin an easy target or kind of a low target at this point?

Thanks, Maggie, for the question. When we look at margins for You know, this year we have done very well with margins in this remote hybrid model that we're all working in. But we have made some significant improvement that is permanent really going forward. If you look at our headcount growth over the last 12 months, it is lower on a year-over-year basis than our revenue growth pretty significantly. And that's us just becoming much more efficient. So, you know, with that guidance that we gave back at Investor Day, we're trending towards the higher end of that guidance really going forward.

Makes sense. Thank you.

Thank you. Next we have Brian Bergen from Common. Your line is open.

Hi. Good morning. Thank you. Marcy, I just wanted to follow up on that in that gross margin question. So you did say there are some lasting changes here. I mean, it seems like you've got a good tailwind for this to continue easily into the early part of next year. Is there any reason you're going to have significant travel costs coming back in the short term? Just trying to frame, because it seems like you could outperform even the high end of this 17% right now.

Hi, Brian. So when you our P&L. You know, we'll start to travel a little bit more, most likely in 2022. You know, we all think that it won't be at the level that we were pre-pandemic, but we will have some additional costs coming in from the return from office in this new environment that we work in. We'll still have a portion of our employees working from home, but we will start to go back to the office in 2022. And we're also going to start hiring also to really drive growth in 2022 and 2023. You know, having said all that, you know, right now we've given guidance from Investor Day, you know, going forward, and we're trending towards the higher end of that, of those margins going forward. And we'll update that in February of, most likely we'll update it in February of 2022, really for the upcoming calendar year. But right now, you are correct, correct. and we are trending towards a higher end of that guidance and also above that.

Okay. I appreciate that. And then just on the emerging segment within ops management, can you dig in a bit more there? Is that a travel recovery, or is it more broad-based across all the varying subsegments within that? And can you just comment, is it expansions of existing clients, or is it also new local additions there?

segment has actually seen broad-based growth across industry verticals. The travel segment for us is a very small portion of our revenue within the emerging business, and that has certainly increased, but it has very little impact because the size is much smaller. What we are seeing is a tremendous amount of improvement in verticals like banking and financial services. expansion, and new clients, we're really, really pleased with our existing clients expanding their scope of work with us. But at the same time, we're signing up a number of new clients in the emerging business. So frankly, it's a very healthy, broad-based growth that we're seeing in the emerging business, and that provides us great confidence as we step into 2022.

Okay, thank you.

Thank you. Next up, we have Dave Koenig from Baird. Your line is open, sir.

Yeah, hey, guys. Great job. And I guess, first of all, just when I look at Q4 sequential guidance, kind of flattish, kind of up, I think, up five to down five million sequentially, give or take. Normally that's up a lot sequentially. You kind of talked a little bit. Was there something a little inflated in Q3 that falls off a bit in Q4?

Dave, thanks for your comments. You know, as Maurizio kind of shared in his prepared remarks, we expect Q4 to be flattish to Q3, you know, because of the client that we spoke about in the healthcare segment. And so that's something which, you know, is something which we are anticipating, but there's nothing unusual in Q3 in terms of our revenues. We think we've got strong growth momentum both in operations management and in analytics, and that likely continues going forward. However, because of this client transition that is taking place, there will be an offset, and that's what we are factoring in our guidance.

Gotcha. Okay. That's, that's helpful. And then in the analytics segment, I mean, you, you talk kind of about how, you know, some of this post pandemic work or it's just coming on and I mean, you're growing way faster than the normal is like, is there some, is there any non-recurring business in there or is this really something that it's just at a higher level and can it continue to grow at this kind of elevated pace or does, or does it come back to mid teens?

Sure. So you're absolutely right. You know, the focus on data, the focus on data analytics has certainly shifted into high gear with the pandemic, and the demand environment has become very, very rich and very, very attractive for us. And I think our capability sets are really resonating very well in the marketplace. We don't think that the emphasis on data It's going to continue to be there. We know that data ends up being the differentiator between success and mediocrity. And we think our clients are going to continue to embrace data-led strategies going forward, and we should be in a great position to be able to help them as we step forward. At the same time, you also know that our analytics business always has about a third of its business which is project-based. Two-thirds of our analytics business is annuity-based, and therefore those revenue streams continue to develop nicely, but we always will carry about a third of that business, which is project-based. That project-based revenue is subject to discretionary decisions on the behalf of our clients, and therefore there will always be some level of volatility associated with that. But we feel confident about the growth of the analytics business, which we shared in our investor day in November 2020, as Mauricio said. That is something which we are very confident about.

Got you. Yeah, it seems like it. Great job. Thank you.

Thank you. Next up, we have Vincent Colicchio from Barrington Research. Your line is open.

Yes, I'm curious. Has wage inflation gotten significantly worse since last quarter? And I think last quarter you talked about using some equity to retain people. I'm curious if you're doing any of that.

Yes, Vincent. Certainly, wage inflation is a risk out there that we need to manage and be able to navigate. What we are seeing is strong in a few areas of our business, but not across the entire business altogether. So in areas around data analytics and digital, certainly there is higher level of wage inflation and we are trying to manage that. As we discussed last quarter, our focus really is to be able a very rich environment where they can learn, grow their professional capabilities, be able to advance their careers and manage a greater and a bigger piece of business, get the right compensation, and then as you get more senior in the organization, be able to participate more actively in the equity component, which is a strong retention tool for us. As our stock continues to remain buoyant, that's something which does provide a huge retentive value to our employees. I think it's really a continuation of our strategy of focusing in on those areas where we need to be competitive from a compensation perspective and making sure that we provide a holistic experience for our employees. that is focused in on the work environment, the work itself, compensation, benefits, and the team that is there. So that's something that seems to be playing out nicely.

And Mauricio, could you remind us what you've done on the real estate footprint and if that's a significant opportunity going forward in terms of production?

Thanks, Vince, for the question. On the real estate side, we have started to review, we have been reviewing, I should say, all of our real estate footprint around the world. We've started to become more efficient on real estate in the last 12 months, and we have plans to optimize real estate going forward in our 2022 budget. We'll continue to look at real estate. It is an opportunity for us going forward. or hybrid model for the future working environment, you know, going forward. But it does remain a potential opportunity, you know, going forward. But, you know, again, we will start to incur costs going forward as we start to open up offices. So that will be a little bit of an offset for us to take a little bit of benefit in 2022. But you're correct. You know, we continue to look at real estate in areas that we can optimize, and we'll do so over the next 12 to 24 months as leases come up.

Thank you for answering my questions.

Thank you. Once again, in order to ask a question, please press start in the number one on your telephone keypad. Again, that will be start in the number one on your telephone keypad. Your next question comes from the line of Puneet Jain from JP Morgan. Your line is open.

Hey, thanks for taking my question and good quarter. Rohit, can you talk about supply environment for analytics? EXLS always had premium talent in that practice, but as demand in data and digital picks up and your needs also increase in analytics, are you able to hire enough people to service demand or are you also resorting to training internally to service analytics demand? Thanks, Puneet.

So for analytics business, investing in talent the last decade, and we have a two-part strategy in terms of managing the talent in analytics. One is we have a very strong campus recruitment program where we hire from the premier engineering and management institutes in India, in the U.S., and these programs are now sufficiently mature, well-developed, quality of talent from these programs. The second part of our talent development program is really about grooming talent internally within eXcel and providing them the inputs necessary to take on more on client engagements. Again, given the size and scale of our team in analytics, that is something which we believe we have one of the strongest capabilities of developing internal talent, and therefore that continues to work very well. So the supply side of talent for data analytics is definitely a challenge, but at this point of time we are able and develop adequate numbers of people to be able to support that business. So we feel good about where we are from a talent perspective.

Got you. And the healthcare client you talked about, can you size the impact you expect? Will all of that hit in Q4, or could there be a subsequent impact next year as well on a sequential basis? And also, I know you mentioned that it happens, it's not unusual for clients to insource, but was there any specific reason that they chose to go that path this time? No, Balit, there's nothing there that's, you know, like we discussed, sometimes clients

It's something which, you know, we'll just settle down, and we don't really expect anything further to go beyond 2021 as far as that transition is concerned.

Okay. Thank you.

Thank you. Next up, we have David Grossman from Stiefel. Your line is open, sir.

Thank you. Good morning. I guess the first thing I just wanted to ask is about the bookings. I know you don't disclose bookings or quantify them, but perhaps you could provide some qualitative color on net new bookings year-to-date on a year-over-year basis, or even comment on the backlog and how that's been trending as well.

Sure, David. Looking at the numbers, the operations management pipeline has gone up very meaningfully. It's gone up close to about 50% over the last two years or so. The analytics pipeline has actually very strong as well. I think the other part that seems to be happening is that the sales cycle is shortening, and that's something which is helpful for us to be able to grow our business much more rapidly. And the deal sizes are medium to large-sized deals, so that's, again, very chunky and very significant. From a bookings perspective, we don't really share any data pertaining to the bookings. So it's difficult to kind of talk about it, particularly when it comes to transaction-based pricing and outcome-based pricing. All of these are, of course, driven off delivering the output to the customer. So it's very difficult to measure that or to provide any kind of information color on that. The other part is the pipeline is strong across all the verticals, so across insurance, healthcare, emerging, analytics. It's very broad-based and it's strong across, so we're very pleased with the quality of the pipeline as well.

Thanks, Steve. Just the follow-up question is really, and I think I'm I'm probably going to ask a question that was asked earlier, but in a slightly different way, and it's about the margins. I'm just curious whether, you know, how you view the structural impact of the hybrid work model. You know, this industry historically is pretty quickly priced in efficiencies that get passed through, and I'm just wondering, you know, how you feel about the hybrid work model and the benefits and how enduring, if you will, those benefits may be.

When we look at the benefits from the hybrid working model, I think we think of it a little bit as there's benefits, but there's also related costs to it. When you look at the benefits, obviously, you know, if you've got a significant portion of your workforce working from home, you're going to be able to optimize a number of different costs, you know, spending a good amount of money on technology costs. of an offset to those benefits from the new environment that we're working in.

Yeah, Dave, I'll just add a little bit to what Maurizio just said. When you think about margins, from our perspective, there are three broad categories where we would see a significant movement on margins. One is operational efficiency. On operational efficiency, we had signaled a couple of years back that that is something that we would tighten up and we would start to manage our business in a much more disciplined manner, and that is something that we have consciously and deliberately done, and that is something which we believe will be sustainable going forward. The second is really pertaining particularly around travel, around working from the office in a much more significant manner, and those costs will offset some of the other changes that are there. And the third part is probably more fundamental, and that's the business mix. From a business mix perspective, as we continue to do more work around digital, more work around data analytics where we are delivering greater value to the customer, we think we should be able to, you know, improve our margins on the basis of the value that we are delivering to our customer. And that's, you know, probably a longer-term secular trend that we would need to make sure that we can execute upon. But I hope that that provides you with some perspective on the three broad buckets of margin contributions.

No, it does. So just on that third point about mix, should we use the data analytics business as a proxy for that mix, or is it really blended both through OM and analytics?

Yeah, so the analytics business is certainly one part of the proxy, but most of the digital comes a lot more outcome-driven business as well as a digitally-infused business, I think you're going to see changes take place in that margin structure.

Got it. Great. Thank you very much.

Thank you. That's our last question for today. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining Humana All Disconnect.