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

Financial Performance:

• Q3 2026 revenue reached $634 million, up 19.7% year-over-year (YoY) reported and 17% organic constant currency; sequential growth was 6.6% reported.
• Adjusted earnings per share (EPS) were $0.62, a 28.5% YoY increase; Year-to-Date (YTD) EPS for the first nine months was $1.79, up 23.7%.
• Data and AI-led revenue grew 36% reported (31% organic), now comprising ~62% of total revenue.
• Digital operations revenue declined 1.7% YoY by design as work migrates to higher-value Data & AI categories; Total operations (Digital + Data/AI-led) grew 12% YoY.
• Adjusted operating margin was 19.3% for Q3 (down 10 bps YoY due to investments) and 19.8% YTD (up 10 bps YoY).
• SG&A was 21% of revenue (down 30 bps YoY); effective tax rate was 20.4%.
• Balance sheet remains strong with $333 million in cash/short-term investments and $513 million in debt (net debt $180 million); borrowing capacity expanded to $1 billion.
• Operating cash flow was $209 million YTD; $205 million returned to shareholders via share repurchases.

Guidance and Future Outlook:

• Raised full-year 2026 revenue guidance to $2.43–$2.44 billion (16–17% reported growth, 15% organic), up from previous $2.39–$2.415 billion.
• Raised full-year 2026 adjusted EPS guidance to $2.34–$2.36 (20–21% YoY growth), up from $1.25–$1.29.
• Outlook assumes FX gains of ~$5 million, net interest expense of $13–$15 million, effective tax rate of 21–21.5%, and capex of $58–$62 million.
• Management cites accelerating AI implementation as a primary driver, with agentic AI moving from experimentation to mainstream scaled deployment.
• Pipeline creation grew double digits with larger integrated deals; visibility for 2027 is described as strong, underpinned by 75% recurring revenue base.

Business Segments and Product Lines:

• Insurance: Grew 16% YoY (accelerating 3rd straight quarter), driven by data management/analytics and strong win rates.
• Healthcare & Life Sciences: Grew 19% YoY, led by payment integrity and a mid-market strategy for cost containment.
• Banking, Capital Markets & Diversified Industries: Grew 27% YoY, driven by mid-tier banks, fintechs, and the initial contribution from the iMerit acquisition.
• International Growth Markets: Grew 21% YoY (accelerating from 13% in H1), with strength in banking, energy, and utilities.
• iMerit Acquisition: Closed end of July; contributed $15.3 million in Q3 revenue over two months; integration is active with growth in high-tech, healthcare, and frontier AI labs.
• Product Launches: Introduced agentic AI suites for finance, LifePro for life/annuities, and payment integrity for healthcare payers; launched "Scholars" platform connecting 30,000+ experts for AI model fine-tuning.

Market and Competitive Landscape:

• Market trend shows a shift from AI experimentation to scaled implementation, creating demand for partners capable of full-stack delivery (data foundation, model training, workflow embedding).
• EXL differentiates via deep domain context, "agentic" approach, and partnership with Google (e.g., winning a UK bank analytics migration deal).
• Win rates have improved meaningfully due to an AI-forward value proposition.
• Growth is broad-based across verticals and client cohorts, reducing dependency on single sectors.
• International markets represent a significant untapped opportunity for future expansion.

Risks and Challenges:

• Commercial Construct Transition: Deliberate migration of clients from traditional ops to Data/AI-led services creates temporary margin uncertainty as revenue recognition models may not shift as fast as AI embedding.
• Cost Volatility: While AI token costs decline, expenses related to guardrails, agentic harness maintenance, and assurance may increase, leading to potential cost base volatility.
• Integration Risk: Full benefits of the iMerit acquisition are expected to materialize over a longer period; early-stage integration outcomes remain to be fully realized.
• Macro Environment: Management continues to monitor evolving macroeconomic conditions, though current momentum provides confidence.

Management Commentary and Tone:

• Tone was highly confident, emphasizing "broad-based momentum," "strong quarter," and the strategic necessity of the full AI stack.
• Leadership changes announced: Vivek Jaitley (President, Insurance/HCS) departing; Gopinder Singh expanding scope; Raghav Jaggi leading US Insurance; Nikhil Dhingra leading Healthcare.
• Management highlighted the "non-linearity" of the business model, noting revenue outpacing headcount growth, but offset by increased technology/infrastructure investments.
• Emphasis on the shift to "agentic AI" as the next evolution of enterprise AI adoption.

Analyst Questions and Answers:

• Growth Sustainability: Management attributes acceleration to Data/AI growth, faster client decision cycles, and a healthy pipeline, viewing 2026 as a year of stronger momentum compared to 2025.
• iMerit Impact: Confirmed strategic value in owning the full AI stack (data to model layer); revenue from iMerit may fluctuate monthly but is a strong foundation for future enterprise client pathways.
• Margin Profile: Margins guided to be flat YoY; expected to see a shift in expense mix (higher tech/AI spend vs. lower employee cost %), with potential margin improvements expected over the next few years as commercial contracts adjust.
• Payment Integrity: Growth viewed as sustainable due to AI-driven shift from post-payment to pre-payment (100% claim coverage) and rising fraud detection needs; opportunity expanding to insurance claims.
• AI Cost Capture: Management expects to maintain margins rather than passing all efficiency gains to clients, focusing on delivering value while investing in necessary infrastructure (guardrails/harnesses).
• Healthcare Deceleration: Marginal organic growth slowdown in healthcare attributed to quarterly lumpiness rather than fundamental weakness; pipeline remains healthy.

Other Key Points:

• The "Total Operations" metric (combining Digital Ops and Data/AI Ops) is recommended over Digital Ops alone to evaluate underlying business health, as it captures the value migration.
• EXL now claims to operate across the full AI stack, from data foundation and model training/fine-tuning to workflow embedding, differentiating from engineering-only providers.
• Share repurchase authorization of $500 million remains active alongside the new debt capacity for potential M&A.