EXLSERVICE HOLDINGS, INC. Q3 2026 EARNINGS CALL - EXLSERVICE HOLDINGS INC

Financial Performance:

• Q3 2026 revenue reached $634 million, up 19.7% YoY (reported) and 17% organically; sequential growth was 6.6% (reported) and 4.1% (organic).
• Adjusted EPS was $0.62, a 28.5% increase YoY; Year-to-date revenue was $1.8 billion (up 16.5% reported, 15.5% organic).
• Data and AI-led revenue grew 36% (reported) and 31% (organic), now comprising 62% of total revenue; Digital operations revenue declined 1.7% YoY as work migrated to the AI category.
• Total operations (combining digital and AI-led) grew 12% YoY, highlighting the shift to higher-value engagements.
• Adjusted operating margin was 19.3% for Q3 (down 10 bps YoY) and 19.8% for YTD (up 10 bps YoY), driven by operating leverage partially offset by AI infrastructure investments.
• Balance sheet remains strong with $333 million in cash/short-term investments; net debt position was $180 million following an expansion of borrowing capacity to $1 billion.
• Generated $209 million in operating cash flow over nine months and returned $205 million to shareholders via share repurchases (6.6 million shares).

Guidance and Future Outlook:

• Raised full-year 2026 revenue guidance to $2.43–$2.44 billion (previously $2.39–$2.415 billion), implying 16–17% reported growth and 15% organic growth.
• Raised full-year adjusted EPS guidance to $2.34–$2.36 (previously $2.25–$2.29), reflecting 20–21% YoY growth.
• Assumes foreign exchange gains of ~$5 million, net interest expense of $13–$15 million, effective tax rate of 21–21.5%, and capex of $58–$62 million for 2026.
• Management anticipates "agentic AI" moving to mainstream adoption, driving a shift from POCs to scaled implementation.
• Pipeline creation grew double digits with clients committing to larger integrated deals; 75% of business is recurring/annuity-based providing strong visibility.

Business Segments and Product Lines:

• Insurance segment grew 16% YoY, accelerated for three straight quarters, led by data management and analytics; win rates improved due to AI-forward value proposition.
• Healthcare and Life Sciences grew 19% YoY, driven by payment integrity and mid-market health plan strategy; organic growth was 17.2%.
• International Growth Markets grew 21% YoY (accelerating from 13% in H1), with strength in banking, energy, and utilities.
• Banking, Capital Markets, and Diversified Industries grew 27% YoY, boosted by initial contribution from iMerit acquisition and 30 new logos.
• iMerit acquisition closed in July, contributing $15.3 million in revenue over two months, with notable traction in high tech, healthcare, and frontier AI labs.
• Launched "Scholars Platform" integrating 30,000+ domain experts for AI model training and validation; introduced agentic suites for finance, life and annuities, and payment integrity.

Market and Competitive Landscape:

• AI implementation is shifting from experimentation to scaled deployment, with enterprises prioritizing partners possessing deep domain context and data foundations.
• Secular trend observed in mid-market health plans adopting cost containment and AI integration solutions.
• Competitive differentiation lies in controlling the full AI stack (data, model, workflow, operations) and the "agentic" approach to accelerating migration and decision-making.
• Notable win: Partnership with Google to rebuild a UK bank's analytics environment on Google Cloud using agentic AI solutions.
• Demand is broad-based across segments, reducing dependency on single verticals or client cohorts.

Risks and Challenges:

• Digital operations revenue decline is a temporary structural shift as AI embeds into workflows, moving value to the Data/AI category.
• Margin profile for transitioning engagements is currently unsettled as clients prefer existing commercial constructs despite increasing AI value.
• AI cost volatility is anticipated due to rising expenses for guardrails, agentic harness maintenance, and assurance, potentially offsetting declining token costs.
• Integration of iMerit remains in early stages; revenue contribution may fluctuate monthly.
• Management notes uncertainties regarding macroeconomic conditions and potential ebbs and flows in short-cycle revenue.

Management Commentary and Tone:

• Tone is highly confident and optimistic, emphasizing broad-based momentum and successful pivots to AI-led growth.
• CEO Rohit Kapoor highlighted the strategic advantage of the full AI stack enabled by iMerit and the secular shift toward agentic AI.
• CFO Maurizio Nicolelli emphasized strong balance sheet flexibility, allowing for continued M&A and shareholder returns.
• Leadership transition announced: Vivek Jaitley (Insurance/Healthcare) departing; Bhupinder Singh expanding to lead Insurance; Nikhil Dhingra leading Healthcare.

Analyst Questions and Answers:

• Sustainability: Growth is sustained by accelerated data/AI adoption, shorter decision cycles, and broad pipeline growth; international markets remain a significant untapped growth driver.
• iMerit Strategy: Acquisition allows full AI stack coverage (data to model layer); early results show strong value in model alignment and frontier lab partnerships, though financial impact may be lumpy.
• Margins: Current quarter margin decline reflects heavy investment in employee costs, infrastructure, and hiring for new engagements; management expects stable margins going forward as revenue growth outpaces headcount.
• Payment Integrity: Growth is sustainable as AI shifts focus from post-payment recovery to pre-payment prevention and 100% claim scanning; opportunity extends to insurance claims fraud.
• Banking Margins: Q3 gross margin decline was due to strategic ramp-up hiring for new analytics/AI services; expected to normalize as utilization increases.

Other Key Points:

• EXL now operates across the complete AI lifecycle: building data foundations, training/fine-tuning models, and embedding AI into client workflows.
• The "Total Operations" metric is preferred by management to evaluate underlying business health, capturing the value of intelligent, IP-led operations.
• Success rate for AI engagements exceeds 90%, driving confidence in the ability to scale client relationships.
• Strategic focus on mid-tier banks and fintechs, alongside deepening relationships with existing enterprise clients.