ExlService Holdings, Inc. (NASDAQ:EXLS) Q4 2023 Earnings Call Transcript

ExlService Holdings, Inc. (NASDAQ:EXLS) Q4 2023 Earnings Call Transcript March 2, 2024

ExlService Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Fourth Quarter 2023 ExlService Holdings, Inc. Earning Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would like to now hand over the conference to your first speaker today, John Kristoff, VP of Investor Relations. Please go ahead.

John Kristoff: Thanks, Rivika. Hello, and thank you for joining EXL's Fourth Quarter 2023 financial results conference call. On the call with me today are Rohit Kapoor, Vice Chairman and Chief Executive Officer, and Maurizio Nicolelli, Chief Financial Officer. We hope you've had an opportunity to review the fourth quarter earnings release we issued this morning. We also posted an earnings release slide deck and investor factsheet in the Investor Relations section of our website. As a reminder, some of the matters we'll discuss this morning 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 SEC from time to time. EXL assumes no obligation to update the information presented on this conference call today. During our call, we may reference certain non-GAAP financial measures, which we believe provide useful information for our investors. Reconciliation of these measures to GAAP can be found in our press release, slide deck and the investor fact sheet. With that, I'll turn the call over to Rohit.

Rohit Kapoor: Thanks, John. Good morning, everyone. Welcome to EXL's fourth quarter and 2023 year-end earnings call. I'm pleased to be with you this morning discussing our strong results and continued ability to outperform. EXL performed exceptionally well in 2023 despite a challenging macroeconomic environment and weakness for discretionary and project-based work across the industry. We grew full year revenue by 16% and delivered EPS growth of 19%. We achieved 13% revenue growth in our Analytics business for the year and an impressive 18% growth in our digital operations and solutions business. In the fourth quarter, we generated revenue of $414 million, an increase of 11% year-over-year and 10% in constant currency, and we grew fourth quarter adjusted EPS by 11% to $0.35.

Our ability to consistently deliver industry-leading double-digit growth even in a difficult environment is the result of sound execution of our differentiated strategy and our balanced portfolio of businesses. We recognized the importance of data several years ago and pivoted to being a data-led company, which resulted in a three-year revenue CAGR of 19%. Our data-led strategy and deep expertise in analytics has uniquely positioned us to embrace AI and pivot to now becoming data and AI-led in everything that we do. Just as data-led enabled us to drive superior growth over the past several years, combining data and AI positions us well for industry-leading performance going forward. Data is crucial for the accuracy of AI outputs and is the foundation upon which all successful AI is built.

The more reliable the AI outputs, the better the outcomes for our clients. This enables us to expand our total addressable market and offers our clients a much richer value proposition, driving operational efficiencies, improving customer experience and growing revenue. The value and impact of data and AI together is greater than the sum of parts. Over the past several years, we have been at the forefront of embedding machine learning and AI into our clients' operations to drive greater efficiencies and enhance customer experience. EXL has unique industry-leading data, analytics and AI capabilities which when combined with deep experience in industry-specific business models and operations, results in superior business outcomes. That's what it takes to transform AI from concept to reality and why we are so excited about the opportunity ahead.

We are making meaningful investments to propel our data and AI-led strategy going forward. We have established an AI center of excellence with 1,500 specialists. More than two-thirds of our employees have already taken advantage of AI training and development tools to help them expand their knowledge and skills. We have developed several generative AI applications for enterprise use in areas such as employee self-service, recruiting and finance. We are collaborating with the leading technology partners, including our most recent announcements with Microsoft and AWS to co-develop AI solutions and accelerate go-to-market plans. And we embedded AI into our core solutions and continue to build our portfolio of more than 150 AI use cases across industries with over 30 deployments with clients.

We are leading the way in helping our clients reinvent their business models fueled by data, analytics and AI to deliver higher value with speed. To support the shift to our data and AI-led strategy, we recently expanded our executive leadership team with two new leaders. Andy Logani, Executive Vice President and Chief Digital Officer, is responsible for advancing EXL's digital and AI initiatives. And, Baljinder Singh, Executive Vice President, Chief Information Officer, leads EXL's technology, cybersecurity and enterprise transformation functions. As we focus on implementing data and AI-led solutions to transform our clients' businesses along with our own operations, it is crucial that our senior leadership team is made up of executives with a deep understanding of digital and AI.

Let me now share a couple of examples of how our data and AI-led strategy is enabling EXL to deliver more value to our clients. We have been working with a large US-based financial services company to reinvent their collections and payment assistant processes. We pursued an omni channel approach, leveraging data and generative AI to produce intelligence which enables the clients to offer their end customers more personalized solutions and reduce potential defaults. We initially deployed Paymentor, our proprietary AI-based digital payments and collection solution for one of their credit products and are on track to reducing their net credit loss by $30 million per year. As a result of our initial success, we are extending our Paymentor solution to various other lending products over the next several months.

In addition, we won the mandate to run their collections operations end-to-end using a data and AI-led solution with human in the loop. This delivers not only improved collections outcomes, but also a better customer experience in an area where the engagement has typically been adversarial. With the recent high inflation and interest rate environment, many of our financial services clients are seeing an increase in customers requiring payment assistance and debt restructuring. We are confident in our ability to help clients overall their collections functions using the latest data, AI and CX technologies. In another example, we are using AI to help one of our large healthcare clients significantly reduce losses from potential billing errors.

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We review their claims data on a running basis to identify, audit, and recover hundreds of millions of dollars from incorrect payments each year. As we further embed generative AI into our solutions, this enables us to identify a greater number of billing errors in a shorter period of time while significantly reducing the number of false positive encounters with providers. We are also using AI-based tools to aid our auditors in finding billing errors faster, creating more productivity gains. One of the most exciting aspects of Gen AI is it allows us to identify errors in real-time prior to payment and identify root causes of payment or submission errors. We have put EXL in a leading position by adopting data and AI as part of our core growth strategy and making significant investments to further strengthen our value proposition.

Looking ahead, we have solid momentum in our business. As we deliver more tangible value to our clients through data and AI, we are winning larger deals and improving our competitive win rates. This enables us to grow faster than competition, move more of our revenue to an outcome-based business model and capture a greater share of the value we create for our clients. Our Board of Directors authorized a $500 million stock repurchase program effective March 1, 2024 for two years. This reflects confidence in our ability to continue to deliver industry-leading growth and generate significant free cash flow. This is part of our ongoing capital allocation program. There has been a tremendous amount of change in our business and we would like to keep our stakeholders informed about the transformation of our business.

Therefore, we will be holding an Investor Strategy Update event on May 7 to provide further insights about our data and AI-led strategy. Please mark your calendars and we will provide event details in the coming weeks. In summary, we delivered exceptional results in a challenging environment in 2023. Our winning strategy, unique data, analytics and AI capabilities, and an exceptionally talented and dedicated team position us well to deliver industry-leading performance in 2024 and beyond. With that, I'll turn the call over to Maurizio to cover our financial performance in detail.

Maurizio Nicolelli: Thank you, Rohit, and thanks everyone for joining us this morning. I will provide insights into our financial performance for the fourth quarter and the full year 2023, followed by our outlook for 2024. We delivered a solid fourth quarter with revenue of $414.1 million, up 10.5% year-over-year on a reported basis, 10.1% in constant currency and 0.8% sequentially. Adjusted EPS was $0.35, a year-over-year increase of 11.3%. All revenue growth percentages mentioned hereafter are on a constant currency basis. Revenue from our digital operations and solutions businesses, as defined by three reportable segments excluding analytics, was $232.1 million, representing year-over-year growth of 13.4%. Sequentially, we grew revenue 1.9%.

In the Insurance segment, we generated revenue of $139.1 million, an increase of 15.3% year-over-year and 1.9% sequentially. This growth was driven by the expansion of existing client relationships and new client wins. The Insurance vertical, consisting of both our digital operations and solutions and analytics businesses, grew 11.7% year-over-year with revenue of $174.1 million. In the Emerging segment, we reported revenue of $67 million, growing 14.1% year-over-year and 2.8% sequentially. This growth was driven by the expansion of existing client relationships and new client wins. The Emerging vertical, consisting of both our digital operations and solutions and analytics businesses, grew 1.9% year-over-year with revenue of $146.1 million.

The Healthcare segment reported revenue of $26 million, representing growth of 2.5% year-over-year and a decrease of 0.8% sequentially. The year-over-year growth was driven by expansion in existing client relationships. The Healthcare vertical, consisting of our digital operations and solutions and analytics businesses, grew 22.2% year-over-year with revenue of $93.8 million. In the Analytics segment, we generated revenue of $182 million, up 6.2% year-over-year. Growth in Analytics was driven by higher volumes in payment revenue -- from payment revenue from our digital operations solutions business was $901.5 million -- services. This growth was partially offset by the decline in banking and financial services marketing analytics, reflecting trends we've highlighted in previous quarters.

SG&A expenses as a percentage of revenue were up 140 basis points year-over-year to 20.6%, driven by investments in Generative AI, digital solutions, front-end sales and marketing. Our adjusted operating margin for the quarter was 17.8%, down 20 basis points year-over-year, driven by increased SG&A investments. Our adjusted EPS for the quarter was $0.35, up 11.3% year-over-year on a reported basis. Turning to our full year 2023 performance, our revenue for the period was $1.63 billion, up 15.6% year-over-year. This was driven by double-digit growth in both our digital operations and solutions and analytics businesses. Revenue from our digital operations and solutions business was $901.5 million, an increase of 18.3% year-over-year. Our Insurance, Emerging and Healthcare segments generated year-over-year growth of 18.7%, 21.7% and 8.9%, respectively.

Our Analytics business generated revenue of $729.1 million, representing year-over-year growth of 12.5%. Analytics represented 45% of total revenue. Adjusted operating margin for the year was 19.3%, up 100 basis points year-over-year. Our effective tax rate for the year was 23.2%, comparable to our rate in 2022. Our adjusted EPS for the year was $1.43, up 19.1% year-over-year on a reported basis. Our balance sheet remained strong. Our cash, including short- and long-term investments as of December 31, was $209 million and our revolver debt was $200 million for a net cash position of $91 million. We generated cash flow from operations of $211 million in 2023, up 27% year-over-year compared with 2022. This improvement was driven by higher revenue and the expansion of our adjusted operating margin.

During the year, we spent $53 million on capital expenditures and $125 million on repurchasing 4.1 million shares. Now, moving on to our outlook for 2024. We believe the macroeconomic environment will remain unpredictable at least through the first half of the year as inflation remains sticky and the Fed maintains interest rates at or near current levels. But as Rohit mentioned, our business momentum is robust, driven by a strong pipeline, larger contracts and increasing competitive win rates. For 2024, we anticipate revenue to be in the range of $1.78 billion to $1.82 billion, representing year-over-year growth of 9% to 12% on both a reported basis and constant currency basis. We anticipate our adjusted EPS to be in the range of $1.56 to $1.62, representing year-over-year growth of 9% to 13%.

Our guidance also assumes full year adjusted operating profit margin will be largely in line with 2023. We expect a foreign exchange gain of approximately $1 million, net interest income of approximately $1 million, and our full year effective tax rate to be in the range of 23% to 24%. We expect capital expenditures to be in the range of $50 million to $55 million. In terms of quarterly progression, we anticipate our quarterly year-over-year revenue growth rates to increase as the year progresses. We expect our adjusted operating profit margin percentage to also increase in line with revenue. In summary, our differentiated strategy and consistent execution enables us to deliver exceptional results in a challenging environment. By adopting data and AI as part of our growth strategy and making significant investments to further enhance our industry leadership position, we are confident in our ability to generate superior growth in 2024 and beyond.

With that, Rohit and I will be happy to take your questions.

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