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

Financial Performance:

• Q3 2026 revenue reached $634 million, representing 20% year-over-year growth (19.7% reported) and 17% organic growth.
• Adjusted earnings per share (EPS) rose 29% year-over-year to $0.62.
• Total operations (Digital + Data/AI-led) grew 12% year-over-year; Digital operations declined 1.7% by design as work migrates to higher-value Data/AI categories.
• Data and AI-led revenue surged 36% reported (31% organic), accounting for ~62% of total revenue.
• Year-to-date (9 months) revenue was $1.8 billion (+16.5% reported, +15.5% organic); adjusted EPS was $1.79 (+23.7% YoY).
• Adjusted operating margin for the quarter was 19.3% (down 10 bps YoY) due to strategic investments, while YTD margin was 19.8% (+10 bps).
• Operating cash flow for the first nine months was $209 million; $205 million returned to shareholders via share repurchases (6.6M shares).
• Balance sheet strength: $333M cash/short-term investments; $513M debt (Net debt $180M); borrowing capacity expanded to $1 billion to support M&A.
• SG&A expenses were 21% of revenue, down 30 bps YoY driven by operating leverage.

Guidance and Future Outlook:

• Raised full-year 2026 revenue guidance to $2.43 billion–$2.44 billion (16–17% reported growth, 15% organic constant currency), up from prior $2.39B–$2.415B.
• Raised full-year 2026 adjusted EPS guidance to $2.34–$2.36 (20–21% growth), up from prior $2.25–$2.29.
• Outlook assumes ~$5M FX gains, $13–$15M net interest expense, 21–21.5% effective tax rate, and $58–$62M capex.
• Management notes a shift in client decision cycles (shorter) and double-digit pipeline growth, indicating sustainable momentum.
• Long-term strategy focuses on the "full AI stack" (data, model training, agentic AI, workflow embedding) as agentic AI enters mainstream adoption.

Business Segments and Product Lines:

• Insurance: Grew 16% YoY, accelerating for three consecutive quarters; led by data management, analytics, and improved win rates due to AI-forward value props.
• Healthcare & Life Sciences: Grew 19% YoY; driven by payment integrity leadership and a mid-market growth engine focusing on cost containment and AI integration.
• International Growth Markets: Grew 21% YoY (accelerated from 13% in H1); strength in banking, energy, and utilities, with a new large AI workflow deployment in back office/collections.
• Banking, Capital Markets, & Diversified: Grew 27% YoY, including contribution from iMerit acquisition; momentum in mid-tier banks, fintechs, and 30 new logos added.
• iMerit Acquisition: Closed end of July; contributed $15.3M revenue in first two months.
• Product Launches: Launched "Scholars" platform (30,000+ vetted experts); enhanced agentic AI suites for Finance, LifePro (Life/Annuities), and Payment Integrity.
• New Deals: Secured a major UK bank analytics rebuild on Google Cloud using agentic EXL data.ai solutions.

Market and Competitive Landscape:

• AI Trends: Market moving from experimentation to scaled implementation and "agentic AI" mainstream adoption; clients require partners with deep domain context and data foundations.
• Payment Integrity Evolution: Shift from post-payment to pre-payment analysis (100% claims coverage) to combat rising AI-driven fraud; expansion of payment integrity concepts into the broader insurance sector.
• Competitive Differentiation: EXL leverages its ability to control the full AI stack (data to model to workflow) and proprietary agentic solutions to outperform engineering-led providers.
• Client Demand: Broad-based demand across segments, with clients seeking integrated deals combining data, AI, and deep operational expertise.

Risks and Challenges:

• Margin Volatility: Short-term margin pressure (10 bps decline in Q3) due to heavy investments in infrastructure, technology, and talent ramp-ups; long-term margin improvement depends on commercial contract restructuring which is currently slow.
• Commercial Constructs: Clients currently prefer existing pricing models; the shift to outcome-based or value-added pricing is expected to be gradual.
• Integration Risks: iMerit integration is ongoing; while early signs are positive ($15.3M in 2 months), long-term success and synergies will play out over time.
• Macroeconomic Factors: Uncertainties in the macro environment and potential fluctuations in short-cycle AI business revenue.

Management Commentary and Tone:

• Tone: Highly confident and positive; management emphasizes "broad-based momentum" and the successful execution of their AI strategy.
• Strategic Narrative: Strong belief that the migration of operations work into AI-led services is the correct strategic move, creating higher value and deeper client stickiness.
• Leadership Changes: Vivek Jaitley (Head of Insurance/HLS) departed; Gopinder Singh now leads Insurance; Nikhil Dhingra leads Healthcare/Life Sciences. Management asserts continuity with an experienced bench.
• Agentic AI: Positioned as the next major growth chapter, with EXL leading in agentic AI adoption through partnerships (e.g., Google) and proprietary platforms.

Analyst Questions and Answers:

• Growth Sustainability: Management attributes 2026 acceleration to the Data/AI segment's momentum, shorter decision cycles, and pipeline velocity, noting broader segment health than last year.
• iMerit Synergies: Acquisition enables the full AI stack (model layer + workflows); expected to differentiate EXL in agentic AI assurance and model fine-tuning, though commercial ramp-up is early.
• Margin Trajectory: Margins expected to remain flat YoY for the full year; short-term pressure from tech/infrastructure investments and headcount growth, with long-term upside tied to commercial contract evolution.
• Payment Integrity Growth: Driven by AI prevalence, fraud trends, and expansion to pre-payment analysis; viewed as highly sustainable due to outcome-based compensation and total stack control.
• Headcount: Organic employee growth 11% YoY; iMerit acquisition contributed to overall headcount growth; revenue outpacing headcount growth indicates leverage.

Other Key Points:

• Win Rates: Improved meaningfully this year due to the AI-first value proposition.
• Total Operations Metric: Management advises evaluating "Total Operations" (Digital + Data/AI-led) to accurately assess business health, as it captures the migration to higher-value AI work.
• Pipeline: Pipeline creation grew double digits with clients committing to larger integrated deals.
• Share Repurchases: Continue under the $500M authorization; $205M returned in first nine months.
• Partnership Channel: Significant investments in partnerships (e.g., Google) have directly aided major wins and differentiation.