Great. Good afternoon, everyone. My name is Mayank Tandon. I cover IT services and BPO at Needham. I'd like to welcome Maurizio Nicolelli, the CFO of EXL. Maurizio, thank you for joining us.
Thank you.
We're gonna do a fireside chat. Let me kick it off with a few questions, and then I'll open it up to the audience as well. Maurizio, you're coming off your earnings last week, and then you also held the Analyst Day. I thought maybe just to give people a brief overview, you could quickly recap what you said at the event, and then we can dive into more specific questions.
Sure, sure, and good afternoon, everyone. Happy to see everyone. So let me—why don't I give a little bit of a recap of our event last week at Investor Strategy Day? That's coming off our earnings release at the end of the first quarter. So we released in the first week of May, early May, with, for our first quarter results. Our first quarter was in line with what we were expecting. We're slightly higher than the Street, both on revenue and EPS. We reiterated our guidance for 2024. We had talked about 9%-12% revenue growth for 2024 back in February, when we released our Q4 earnings.
That was our guidance for 2024, and our guidance for the at the Q1 earnings release was for 10%-12% growth for the year, and that's organic 10%-12% growth. We maintained our our guidance, and we also actually increased the bottom end of the range from 9%-10% because we thought that 9% was fairly unrealistic for the year, given our performance in Q1, and also our our expectation for the rest of the year. And we were right in line with EPS at the end of the day. So going into Investor Day, you know, coming off our Q1 results, we wanted to give investors more clarity into the the the background of our business.
There's been a lot of talk about AI, moving into this AI era now, going forward, and we've pivoted to being data-led back in 2020. And what that means is that everything, all the deals that we signed were really driven by client data, whether it was digital operations, or whether it was data analytics, data was at the core of our solution or our offering. Now, we're finding and we've pivoted to really being data and AI-led because AI is being a core core capability that's being embedded in all of our deals now going forward. So really, for us going forward, we, all of our, you know, the majority of our pipeline and the deals that come in are really around data and AI.
And we wanted to give investors kind of that clarity into our business on what does that really mean in, in quantifiable terms, for our business? And, you know, when you look at our revenue for 2023, 51% of our revenue was driven by data and AI, one or the other or both. And so when you think about, you know, our, the overall core of our revenue, you know, more than half of our business now is really driven around data and AI, you know? And, and, you know, a lot of investors historically have thought of us more on the digital operations or the operations management side, and that's still a core piece of our business, but the, the core of our business is really, is being centered around data and AI.
And we also gave additional metrics to investors in that we talked about what is our pipeline for data and AI, and our metric there is currently it's about $2 billion, our pipeline in data and AI. And we talked about our GenAI pipeline, which stands right now right around $150 million. And so these are all quantifiable numbers that we have not given in the past, that we want to give a bit more color because, you know, when you think of EXL, you know, our, our business mix has changed over the years.
If you look at where we were, where we were with data and AI back in 2020, it's only about, slightly more than a third of our business, and now it's over half our business, which means during that period, we've really propelled ourselves both in data and in AI, going forward. And then lastly, we gave a little bit of color just on the financial side and also, you know, reiterated our guidance for 2024, but also reiterated that our medium-term guidance now going forward as we go into 2025, so medium term meaning 2024 and 2025, is we continue to see low double-digit organic growth and EPS growing faster than revenues.
Which means, at the end of the day, that we will be incrementally growing our margins, you know, during that time period in order to grow EPS faster than revenues. So a lot of our guidance for our medium term reflects 2024, but we believe data and AI being at the core of our offering, helps propel our business and sustains us going forward with low double-digit growth.
Great overview, Maurizio. Thank you so much for that.
Yep.
So maybe let me just step back, and I think it might help everyone on the call and here in the room as well, in terms of how we should think about the implications of AI and GenAI on your business. Could you give us maybe some real-world examples of the type of work you're doing? What are some of the benefits that clients are seeing as they deploy these tools and leverage your capabilities? So maybe across two or three different verticals, if you could share any examples, that would be very helpful.
Sure. So we gave a few examples at Investor Strategy Day. If you look at insurance, Vikas talked about Smart Data Signals and being our AI tool that's embedded in the claims process to really give the client real-time data on metrics that are core to them to keep their process. And so what we're able to do is embed AI into that process and be able to give management key information real time as a claim is being processed. And that'll give them information on, you know, whether a claim is more or less expensive than the average. It gives them all sorts of metric information that is core to management that they have not seen in the past, and that's unique in the marketplace at the end of the day.
That's also helping us win larger deals at the end of the day, because embedding those capabilities is a differentiator for us going forward. That's the value that we bring in these large deals, to be able to embed more digital into those deals. You know, if you look at some of the other solutions that we have, I think Rebecca talked about PayMentor. That's our AI solution for payments in terms of collections for our clients. That's a tool that we have developed over the last three, four years that is no longer kind of in that POC stage. That's really a developed tool that has been resold to multiple clients that's driving higher margins now going forward, 'cause it's been developed over multiple years, resold to multiple clients.
But that is an AI tool that's a real-time tool that gives information to our clients on the payment process and where they stand on a real-time basis. But it also is an AI tool that is also reaching out to clients to drive payments, you know, going forward. So those are kind of the types of solutions that we're building, just examples from Investor Day, that help us win more in the marketplace, but also embed more AI into our revenue base that should continue to help us drive growth, but then also drive margin going forward. And that's gonna be critical for us, 'cause one of the things I talked about at Investor Day was the amount of investment that we need now going forward.
I talked about tripling our investments in data and AI over the last three years, and we're gonna continue doing that, but that will be funded through us driving more profitability and gross margin.
Excellent. Maurizio, you gave the example of the payments company, you gave the example of the insurance client. When I think of other verticals like banking, healthcare, et cetera, where you play in, are you seeing faster adoption, slower adoption across verticals, or is it pretty consistent across your core industry groups in terms of AI and GenAI adoption, and the interest from their side coming to you for helping them navigate these challenges?
I think it's been pretty consistent overall, between the different segments. Even in banking, we are seeing a reasonable high level of interest. You know, we talked about the level of conversations that we're having with clients. That continues now going forward. So I would say, you know, we're still seeing the same level of interest and acceptance now going forward, and us embedding AI into the different verticals. What you do see in GenAI, probably a slower process, and it's not a slower process in us developing tools. I think clients have to get comfortable with a couple of factors, particularly with their data. They have to be comfortable with how their data is set up, and that's actually creating opportunities for us in these GenAI conversations, because they look to us to help them structure their data.
And then there's always the security concerns that slow them down a bit because they have to go through their own protocols. But we are seeing clients start to adopt it, adopt, AI, particularly GenAI, more and more, but I would say GenAI is probably a little bit slower right now.
In addition to the data challenges, I think also the cost of computing is extremely prohibitive for a lot of companies, which could be another gating factor to adoption early on. Is that something you hear as well?
We hear some of that, to be quite honest. And there is, they have to work through that higher cost with the hyperscalers, right? We have relationships now, partnerships with each of the hyperscalers, because it's to their benefit to partner with us, because they want the client to run those processes on their platforms, but they need us to implement and help the client run it at the end of the day. And so they are seeing a higher cost in that area, and so they're managing through that.
Just to recap, so it's the data aspect, the security and privacy, and then of course, the cost. Three factors that potentially could be gating factors to adoption.
Faster adoption.
Right. 'Cause it's been considered an overhang, but it seems like it's more of an opportunity for you, at least that's the way you framed it at the end.
Yeah.
I mean, if you look at the technology evolutions over the years, every time there's been a technology evolution, you know, it has been an opportunity for us. Because we're able to take that technology evolution, create more efficiency for the client, and then get a bigger share of wallet within that client. One of the slides that I showed at Investor Day showed how much meaningfully we have grown our revenue per client over the last three years. We've almost doubled our revenue per client over the last three years, and that's us getting in deeper with more capabilities, more opportunity within our existing base to really sell more and create larger, meaningful, stickier engagements with our clients that has led to a much higher revenue per client overall.
Maurizio, maybe not a great comparison, but is this similar to, you know, about 5 years-6 years ago, there was concern about RPA potentially disrupting or disintermediating the whole industry? Does this, in some ways, remind you of the same type of early concerns, but ultimately turned out to be a boon for the industry?
So when RPA came out, it was supposedly gonna be the displacer for, the, quote-unquote, "BPO companies" at the time. And, for us, it turned into an opportunity, because we were able to work with clients and implement bots into their processes to, for them to become more efficient, and it was our opportunity to get more wallet share within the client because we became more of a trusted resource for our clients going forward. So we were able to gain their confidence, run more of their operation, and gain a bigger wallet share within their, within their base.
You mentioned some numbers early on from the Investor Day, I think the 2 billion TAM on the AI side. Is that correct?
Data and AI.
Data and AI, AI. And then I think you mentioned a $150 million dollar pipeline, GenAI related. So could you maybe just give us some sense of how that converts to revenue over time? You know, when do we actually see the benefits of that pipeline converting into actual revenue? Is it happening now, or is it down the road that is still, you know, maybe TBD?
Yeah, so I would say the data and AI pipeline that we have today is part of our overall pipeline, and that is part of our recurring conversion of pipeline, and that's both in digital operations and also in data analytics. So that conversion is very similar to what it has been in the past. We have not seen any significant change. I would say the GenAI pipeline has grown pretty significantly over the last 6-12 months, but that conversion, I would say, is a little bit slower than the rest of the pipeline, just because of the concerns I kinda mentioned before.
As you've shifted the business more towards data and AI, and of course, now the GenAI opportunity, have you seen a change in the competitive landscape? Are you seeing any shifts in terms of who you go head-to-head on RFPs, or is it the usual suspects in the market?
It's predominantly the usual suspects in the market that we're competing against. I would say that's typical of who we see in digital operations. I would say in data analytics, it's a wide variety of competitors that we see in data analytics, whereby we'll see some of the smaller, privately held firms that are in India, or we will see some of the very large firms here in the US, that we compete with on an ongoing basis. So I would say data analytics, you're gonna see a much wider variety of firms, versus in digital operations, it's much more contained.
Maurizio, one question we often get, I'm sure you get it too, is the financial implications of GenAI adoption. I think the view is that, well, you might need less headcount, so less FTE-based pricing, but potentially it could open up the TAM to additional areas of growth. So maybe if you could help frame what you're seeing early on as clients adopt GenAI especially, how is that impacting the financial model for you in terms of pricing, in terms of their need for FTEs, and then what does that mean for growth and margins for you, for your business?
Sure. So we have been embedding AI into our processes, particularly in digital operations, and we showed in the chart in on Investor Day, how much that digital piece has really grown over the last three years. And so we have been providing those efficiencies through AI over the last three years, so that's already kinda embedded in our process. The real opportunity for us now going forward is what Rohit showed in his chart, whereby our TAM has almost tripled because of AI, because of the opportunity set that we can really go into now with data and AI, particularly AI. And so that's gonna be the real opportunity for us. And but so, you know, going forward, you're gonna still see us embed efficiencies, guarantees into our clients' contracts, and that will continue going forward.
What you will see is us continue to grow a larger TAM or a larger share of wallet within our clients. That really helps us grow. It's, it's, it's what we have been doing for many, many years now, in that we, we take on a large process, we make it very efficient for the client, the client gets a significant cost reduction through that process, and in the meantime, we are expanding our moat within that client to gain a much larger share of wallet within that client.
Can you remind us today, what is the pricing breakdown in terms of FTE-based pricing, outcome-based pricing, and other drivers, like transaction-based pricing? What does that look like over time as the model evolves?
Yeah. So today, slightly more than a third of our pricing is transaction outcome-based pricing. And the other piece is gonna be, is FTE pricing. As we move forward, with our opportunity in data and AI, you know, it's our goal to really drive that third or slightly more than a third of transaction outcome-based pricing higher going forward, because that's where the real value is, so that we share in the benefits with our clients. And that also enables us to grow margins and be able to reinvest going forward, 'cause which is gonna be critical for us.
In terms of investments, you've mentioned earlier you are investing in the capabilities. Where is that showing up? Is it sales and marketing? Is it R&D? Like, how do we see it in the P&L, like... And what does that mean in terms of the, like, dollar amount? Like, what are you sort of tackling in terms of, how much you wanna actually invest?
So the chart that we showed in the investor deck showed us investing around $20 million a year, three years ago, and it's up to right around $60 million, or almost 4% of revenue in 2023. You know, for us, going forward, you know, you should start to see that investment number start to grow pretty meaningfully, you know, but that's gotta be offset by growth and gross margin, right? For us to continue to sell, as we sell more data and AI, we have to drive price. We have to drive the value, which drives up gross margin, which helps pay for a higher level of investment going forward. And then, that offset is slight incremental benefit to the overall margin of the company.
Got it. One of the questions we also get is in terms of positioning for the growth opportunities, how do you have to retool, upskill your workforce? What are the changes you expect to make? Who are you recruiting today? Where are you sort of maybe flushing out people where you don't maybe need them as much as you did a few years ago? So any sort of changes in the HR, you know, strategy going forward?
Yeah, as we talked a little bit about this last week, in that, you know, we are having a little bit of a changing workforce, in that we're going from, you know, from a data analytics area or digital area, whereby we had more of the historical kind of data modeling skill sets that we've had people have in the past, to more of a data skill or AI skill set going forward. And so that is actually a little bit of a transition that we are going through right now, particularly in data analytics. In that more and more of what we do in data analytics, that historical modeling work is now becoming more AI-driven modeling work going forward, and that's a bit of a different skill set now going forward.
So that's a critical area that we're investing in more, and that's also part of our recruiting process in India. 'Cause that's where our really our core service delivery areas are for data analytics and also in digital at the end of the day. But, you know, the one benefit that we've always had is that we have a very good pipe into the colleges and universities in India, particularly at the graduate school level, and that enables us to really get top talent and when we need it on a timely basis. So that's benefited us in the past, and we really have not had that resource issue that some of our competitors have had in the past.
Turning to the marketing strategy, so as you tackle these newer growth areas, any change in the go-to-market strategy, investments in the sales force? Do you have to make major changes there, or do you feel like you have the resources in place today to be able to go out and win in this market?
I would say we're going through a process whereby we're doing a good amount of, I wouldn't say reskilling, but an education process on our sales force to embed more knowledge in that base on AI. It's a big area that our Chief Growth Officer is really leading at the end of the day. And that's gonna be a big focal point for us now going forward because it's a little bit, and like you said, it's a little bit of a different skill set now going forward in selling AI solutions. So there's a few things that are going on. We have a whole education program in place.
We also run a continuous education or webinars on our current solutions to really educate our front-end group on the current solutions, the value of those solutions, and how we have already sold those solutions in the market, and what has worked and what has not worked in trying to sell those solutions. So there's a bit of an education process going on internally to really drive the sales force or the front-end folks to be more data AI-driven going forward.
Maybe now I'll turn to some of the financial discussion that you had at the Investor Day. In the past, you've broken out growth between the digital operations piece and the data analytics or the analytics segment. So as we parse out the growth, the double-digit growth that you mentioned at the Investor Day, how does that break down between the two different segments? 'Cause you've clearly been growing much faster on the digital operations side recently. While analytics has been maybe on the lower end of the spectrum where you would expect to be because of some soft areas. So maybe if you could just parse it out for us, that would be very helpful.
Yeah. So if you look at this year's guidance of 10%-12% organic revenue growth, digital operations, as you said, is growing faster than analytics. Which means that the growth rate for digital operations is gonna be higher than 10%-12% growth. It's gonna be somewhere in the 11%-14% range, which would mean analytics is gonna be below that 10%-12% range. And so analytics grew 5% year-over-year in Q1 of this year, and that's the low point we believe for growth in analytics on a year-over-year basis this year. And why is that? Because last year, in the first quarter, we grew analytics 22% on a year-over-year basis. It started to slow in our business in Q2 of last year.
So our total revenue in data analytics in Q2, 3, and 4 of last year was fairly flat, around $182 million-$183 million. And so as we grow into 2024, so, you know, Q4's revenue was $182 million. In Q1, it was $191 million. So we had a meaningful uptick in data analytics in Q1, but because of the higher base last year, you had a lower growth rate. Now, as we continue to grow that quarter after quarter this year, you're gonna see that growth rate uptick continually every quarter now during the year.
So you're gonna have digital operation solutions fairly consistent this year, slightly above our overall company growth rate, and then you'll see data analytics start to uptick on a quarterly basis just because of the comps to the prior year period.
Very helpful. So Maurizio, maybe we'll break it down further. So in terms of digital operations, you've had, again, very strong growth, I would say above trend. What has been the main driver behind that?
You know, so this is a little bit of what Vikas talked about in at Investor Day. You know, we've done very well in driving growth in digital operations by combining all of our capabilities. And when we say combined, we're combining domain expertise with our data capabilities and our digital capabilities. So the client is getting all three in their process, and a lower total cost of ownership, meaning a reduced total cost for them going forward. We've been able to be very successful in providing that holistic approach, and that holistic approach has really helped us drive the growth in digital operations to almost twice it was previous to 2020. Historically, digital operations for us only grew between 6%-8% on an annual basis.
You know, over the last couple of years, it's growing anywhere between 12% and 16%. I think 17% was actually the high point last year.
So do you think the focus on cost optimization, efficiency improvement, has been sort of the underpinning of that stronger growth at the end of the day? And if the economy turns out to be more resilient and improves, a lot of mixed signals right now in the economy to begin with, but let's say there is higher level of, capital spending, B2B, technology spending, does that in a way maybe create a downward, you know, pressure on the digital operations piece over time, do you think, from where we are today?
I think we have very good momentum in digital operations right now. And that'll carry us, you know, beyond the next 12 months. But what you see in our business is we are a well-balanced overall business. In very good economic times, data analytics does extremely well. In 2022, data analytics grew over 30% organically, because companies wanted to invest heavily-
Right
...in their infrastructure, in data, and getting insights out of there, and with using analytics. In slower economic times, those budgets get crimped a little bit, and so you're going to see a lower growth rate in certain areas of our data analytics business. But in slower economic times, clients look for that reduced cost and that efficiency even more, particularly in digital operations. So in slower macroeconomic times, digital operations does extremely well, and we've seen that over the last couple of years, in that digital operations is growing far higher than the normal growth rate of that side of our business. So, you know, we are fairly well-balanced. And when you look at the percentage of revenue in both, it's 55/45%, so it's almost 50/50 between the two also.
So overall, it's a well-balanced portfolio, regardless of the macroeconomic times. If you get into better economic environment, you would see data analytics do even much better, potentially, like we have seen in the past.
Mm-hmm.
But I'm not sure that digital operations would slow materially, to be quite honest, because of the momentum and also the willingness of the clients that we are... in our segments that we operate in, to outsource more to us.
That's good to hear. Maurizio, on the analytics side, I think the marketing analytics has been kind of the soft spot. Any signals there in terms of is the tide now turning, or are you still seeing maybe, is it more sort of plugging along at these levels, or any sort of downward pressure? Like, what's sort of the best indications right now on that piece?
We saw a little bit of additional pressure in Q1, and we talked about it on the call. But, you know, marketing analytics has come down pretty significantly from its peak in 2022. And so now it's fairly stable, and we believe where it is today. We have seen a number of insurance companies now sell insurance policies in states that they had pulled out of. So when we start to see those companies start to aggressively go after new customers, is when we should see that reverse and start to grow again for us going forward. And so we have not incorporated that in our guidance at all, any type of rebound there, but that is a potential, you know, either later on this year or in 2025.
Very helpful. Maybe turning to margins very quickly. I think you talked earlier about incremental improvement in margins over the medium term. Again, what are the main drivers? Is it more sort of global delivery? Is it pricing? What are some of the factors that will help drive that incremental margin improvement?
Yeah. So, we have done a lot of progress on margins over the, over the last four years. We were hovering right around 14, 15% in 2020. We got all the way up to 18.3% in 2022, and then we hit 19.3% last year, in a year that we were, we were initially thinking only about 10-30 basis points increase. So we have increased margins fairly materially. That's really from us becoming that much more efficient within our, within our cost base, particularly with our employees. If you look at employee growth, you know, over that period of time, and you look at revenue growth, you'll find that employee growth is far less than the revenue growth.
You know, now that we've materially increased our margins to up over 19%, now it really comes down to us driving value out of the higher value services that we provide to our clients, particularly in data and AI. We should be able to drive higher profitability by driving a higher value service now going forward, increasing that 51, 51% further higher, driving a higher gross margin, offsetting that with a little bit of investment, and then overall increasing margins. You know, marginally at the end of the day. You know, we've made some significant hikes over the last two, three years. Now you would see that, you know, bit of a smaller uptick on an annual basis.
That gets back to what Rohit talked about at Investor Day, the one big thing that we have internally is grow EPS faster than revenues. If you're going to do that, you can tinker with some of the line items below the operating margin, but at the end of the day, you know, the real driver is that operating margin.
... One last question from me before I open it to the audience. In terms of capital allocation, just, between, you know, buybacks, potential M&A, you know, what is your sort of thought process around how you leverage your, balance sheet?
So we're in a really good spot in terms of our balance sheet and, and our free cash flow. We ended 2023 with only a couple hundred million in debt. We had close to $300 million in cash, and we're driving a high level of adjusted EBITDA. This year we'll probably drive close to $400 million in adjusted EBITDA. So we're fairly under-levered overall on our balance sheet, and we're driving close to $200 million a year in free cash flow. So given all of those characteristics, it gives us a big opportunity to leverage our balance sheet for both M&A and share repurchase. On the M&A side, you know, we've been fairly conservative in our acquisitions, over the last three years. The last meaningful acquisition we did was Clairvoyant back in December 2021.
But also, you know, keep in mind, over that period, over the last two, three years, valuations have been very high and we were growing significantly organically, right? And now we focused a lot on organic growth. Now, you know, now that we have a very good balance sheet in terms of leverage, a high amount of free cash flow, we're gonna look to allocate capital both to M&A going forward and also to share repurchase. In M&A, we'll look more at capabilities, particularly in data and AI, in the segments we operate in. That'll be a big focus for us. And share repurchase will be a big focus for us.
You know, given where our stock price is today, and when we look at this year's growth and growth beyond 2024, we do think that you know, buying back shares today opportunistically is of high value going forward, that can really drive accretion overall. And so the board approved $500 million in additional share repurchases in March for the next two years, and we've just initiated, about a month ago, $125 million accelerated share repurchase program with Citi. And so we started that. We kicked that off. So we've already committed about $144 million in share repurchases for the year, and we'll look to at least do half that $500 million this year, and then see what we do next year.
But you're gonna see, you know, us using the balance sheet and our free cash flow pretty significantly now going forward in both M&A and share repurchase.
Excellent. On that note, I'll open the floor to the audience. Any questions? Okay, I think that should wrap it up.
All right.
Marissa, thank you so much. Appreciate it.
Thank you, Mayank. Thanks, sir.
All the pleasure. Thanks.