All right. Well, good morning. My name is David Grossman, and welcome to the EXL presentation. With us today, we have, on my left, Maurizio Nicolelli, the company's CFO. Thank you for coming. And right here in the front row, we have John Kristoff the head of Investor Relations. So again, thanks to both of you for making time to be with us today. So, you know, Maurizio, why don't we start out with a quick overview of the business for those on the webcast that may not be familiar, you know, with the business, and then we'll get into Q&A.
Sure, sure.
Sure.
Then, thank you for having us today, David.
Mm-hmm.
Always a pleasure coming every year to the conference.
Mm-hmm.
So just a little bit of overview of, of EXL. We're both a digital operations and data analytics company. 55% of our revenue is in digital operations, 45% of our revenue is in data analytics, so fairly well-balanced between the two. You know, we have, we have four different segments: insurance, healthcare, emerging, which is a conglomerate of a few smaller segments into one, and is really our growth area, so hopefully one of those smaller segments becomes a main segment for us going forward. And then data analytics is our fourth segment overall, which is a bit of a capability. We really sell data analytics to, you know, a wide variety of segments overall.
So overall, you know, we're about $1.8 billion in revenue in total. Pretty much have doubled the revenues over the last four years, and you know and you know grown our margins to right around 19%, you know, adjusted margins, right around there, and that's our guide for this year. We are, our guide for the year is to grow our top line 10%-12% organically, overall, and then also grow EPS at or slightly higher than revenue growth, going forward. But that's just a very high level, just overall EXL. Hopefully, that's helpful.
Yeah. So thank you for that. And just, you know, to recap, 55% of the business operations management, which is more of an outsourcing, you know, business, and 45% from analytics, which has both recurring and kind of project-based revenue in it. And, you know, both businesses, you know, like everyone in the industry, experienced, you know, unsustainable levels of momentum right after the pandemic. There was, like, a, you know, a surge in demand for a bunch of different reasons. But the analytics business is obviously behaving a little bit differently than the ops management business, which has been relatively, you know, stable, compared to analytics.
And it would appear that, based on your commentary, that you've got two, you know, pieces of that analytics business, right, that are experiencing unique cyclical headwinds, right? The mortgage business and the insurance business within the analytics portfolio. So do you wanna talk a little bit about what are some of the fundamental dynamics that are kind of creating those cyclical headwinds, and what your expectations are for how those... You know, when do we comp out against, you know, those headwinds, and just what's happening fundamentally?
Yeah. So when you look at our data analytics business, the growth rate has come down fairly significantly. If you look at our growth rate back in 2022, we were growing over 30% organically. And so, you know, when you look at just the overall business, the reason why data analytics was growing so well in 2022, and in the years before that, is because in good macroeconomic times, companies will spend a lot of money on transformation, and but also on investing in modernizing their data and driving insights out of analytics. And so that piece of our business does extremely well in good macroeconomic times. On the flip side, our digital operations business does very well in slower macroeconomic times. That's why you're seeing digital operations do better than data analytics today.
On the data analytics side, you're seeing the growth rate come down, and we hit the bottom on our growth rate for data analytics in Q1, right around 5%-6% during that quarter. So what's really happening within that 45% of our business? If you look at payment integrity, our payment integrity business, and you look at our data management business, both are growing well into the teens, in the mid-teens, so doing very well. So our payment integrity business has done very well in terms of bringing on new clients, new healthcare clients, and also expanding the amount of claims that they see from our clients. And also, claims go up every year between 6%-8%. That helps continually drive the momentum in the growth of that business. In data management, you're seeing very good growth also.
You know, what's really driving that? Historically, our data management business has been doing very well, especially with the acquisition of Clairvoyant back in December of 2021. But with every Gen AI conversation that we're getting into today, it eventually comes back to: what does the data look like at the client site? And so that creates a lot of opportunity for us now going forward because it's so much of these, of that Gen AI opportunity, and building that LLM revolves around the data structure of that client. So that's creating a lot of opportunity. And so you're seeing those two pieces of our business doing very well right now. If you look at our marketing analytics business, that's come down because insurance companies have spent less on marketing campaigns for new customers.
And that's that business either is at or is trending to right around this trough or its bottom, you know, today. And then hopefully, you know, you know, as we go into the second half of the year or early next year, we'll start to see a little bit of a turnaround within those clients that we do marketing analytics with. We have not seen that yet, but you know, we have seen that business come down fairly significantly to the point where, you know, we are either at or near a bottom for that business. And then lastly, just our overall analytic services business, which really is tiered significantly towards the banks. That's a big segment for us within our analytic services business. We have seen the spend of banks come down over the last 12 months.
We're starting to see some growth, but it's low, low single-digit growth today. Hopefully, we will start to see that start to turn around, later on this year. But we're starting to see a little bit of a turn. We're starting to see a little bit of a turn in our growth rate also within analytics. You know, now you will see, this year, you'll see the growth rate start to increase on a quarter-to-quarter basis, throughout this year. Because we do project growth quarter- after- quarter, and we were fairly flat in total revenue between Q2 and Q4 of 2023, last year.
So just, you know, arithmetically then, flat 20 Q2 through Q4 of last year, I think flat-ish in Q1, and if you start seeing sequential growth, theoretically, we start seeing year-over-year growth improve as the year progresses. Is that...
Correct.
Is that the math?
Yeah.
Okay. That the insurance business, it sounds like, is the one that could be the remaining headwind. Because if it, if it's troughing now, you probably still have a little bit of a year-over-year headwind the balance of the year. Is that correct for insurance?
You will have a little bit, yes.
Yeah.
Yes.
Okay.
So it'd be a little bit of flat year-over-year.
Right. So the ops management business, to your earlier comment, has been relatively stable, right? And it's geared to be stable, right? Just that it always has been. But there's a little bit of differences, you know, within the mix, right, between healthcare and insurance, your two most important verticals. I think insurance has been actually really good. And the healthcare business, I think, has seen a little bit of deceleration. So I don't know, maybe you can just walk us through the differences, you know, what's driving insurance versus what may be a little bit of a headwind on the healthcare side?
Sure, sure. So when you, when you look at our digital operations business, we really lead with all three of our key capabilities, right? We lead with domain, data, and AI, right? We have significant domain expertise in each of these segments. We have been at data analytics since 2006, when we first entered into that space. So we've built up those capabilities significantly over the years, and we have been driving our capabilities in AI, which has really helped us really get much bigger and get deeper into our segments, particularly in insurance, right? In insurance, we have been getting much larger deals that involve us. Because of that, the reason we're getting that is because we have the domain expertise from being in insurance for since the beginning we started the company in insurance.
Clients are coming to us to transform their businesses through AI. It's AI, our AI solutions that we embed into those processes that clients are benefiting from, and then they get a total lower total cost of ownership, which is significant for them. And then on top of all that, we embed our data capabilities on top of that to help them manage the data and then also get insights out of that data, right? And so because of all three of those characteristics, of those capabilities, we're able to continually expand our revenue and grow insurance far higher today than what it had grown pre-2020. Within healthcare, you're seeing something, you know, seeing something very similar, but it's more specific to certain processes, right? And within healthcare, you know, it's a bit it's a, it's...
We're seeing more opportunity, a little bit on the AI side, but it's going to be a little bit more commoditized, and it's more price sensitive, at the end of the day. So that's gonna create a lower growth rate because, you know, we're gonna look to drive more high-value services. So the healthcare piece that you see in our segment reporting is really only the clinical piece of our healthcare. When you look at the total healthcare opportunity that we have in our business, you have to add in payment integrity and then also our healthcare analytics. You know, our biggest piece in healthcare is payment integrity. It's by far the biggest piece within our healthcare piece. When we think of going to market with healthcare, we think of all three pieces. Clinical piece is just a piece that we report as a separate, separate segment underneath digital operations.
Okay, so the clinical side is the headwind to the clinical side or the ops management healthcare is pricing. Is that? I mean, it sounds like it's just becoming more commoditized.
It's a little bit more commoditized, and pricing it, it's more sensitive to pricing.
Right. Got it. So I think you said that the number of clients generating ACV greater than $10 million increased from 22, you know, three years ago in 2020 to 38 last year, so that was a pretty big jump. You know, and I think you said that the pipeline, that 70% of the pipeline was characterized by large deals, right? So what is the fundamental trend driving this? I know you mentioned AI, but is there any other dynamics that may be driving the deal size up so dramatically?
So, you know, getting into larger deals involves having more capabilities. And going forward, I think what you've seen is clients being more willing to outsource, particularly in the segments that we operate in, right? And our ability to drive all three, domain expertise, data, and AI, has been a big benefit to us over the last twon to three years. And you're really starting to see that in the large deals. And so clients are coming to us and saying, "I'm willing now to outsource much bigger pieces of our operation." And you have the domain expertise, and I see you doing this for other of our clients, and they're willing to give us that work now going forward.
I think that's a bit those three characteristics, and we talked a lot about that at Investor Day, is really helping us drive the larger deals. So we get into a client in digital operations with a smaller operation, and that's leading to a much larger operation, you know, going forward. And that's why we were able to drive that revenue per client from $8 million back in 2020 to $14 million today, in 2023. So we've almost doubled the revenue per client over that three-year period, but that's...
What the reason for that is we're getting into much larger engagements now going forward. But, you know, it's all about driving value, and driving value is not only having the domain expertise, but having the data and AI capabilities, and that's where our company's really trending towards, right? When you look at what we talked about at Investor Day, 51% of our revenue now is data and AI-driven. So more than half our company is driven by data and AI.
You know, when you historically think of our company, you know, a lot of people think, you know, they lump us in with the traditional BPO-type revenue mix. But when you really lift the cover, and you really look at what we're actually doing, so much of it is being driven by data and AI at the end of the day. That trend is going to continue because just like Vikas, our head of insurance, and our president of the company talked about at Investor Day, almost every deal that we enter into now has some correlation to data and AI. Some piece of it is in data and AI. So inevitably, that 51% will continue to grow now going forward.
So just before we leave kind of the growth dynamic, I think another thing that I noted was you said that 50% of your growth now is coming from new clients, which is up, I think, pretty dramatically. I think it used to be in the, what, 20% range maybe, you know, in terms of new clients contributing to growth. What, what is the fundamental dynamic driving that?
So, when you look at revenue growth for the year, the big driver is existing clients, right? New-client growth adds somewhere between 10% or less of revenue growth for the year. What that new-client growth really enables is us growing in future years, right? So that's the big driver, from new-client growth, but existing clients are the big driver on an annual basis. New-client growth drives revenue in future years. It does add some revenue growth during the year, but not-
Right.
That 50%.
Yeah, I think I got that 50% the 50 must have been in reference to something else 'cause that sounded off to me.
Yeah.
Yeah, yeah. Okay, got it. So let's go to the margins. You know, I think, you know, the margins for EXL over a longer period of time have been, you know, a story, right? You know, it's been a novel almost, right, in terms of, you know, fluctuations. Steady improvement underlying it, but you had some acquisitions, right, that brought it down a little bit. You got out from underneath those acquisitions, and you saw some good improvement, and then you made some pretty fundamental changes to the business model, you know, two or three years ago, right, to drive even more margin improvements. So, how do you want us to think about... I know what you've guided to, right? You've guided to margin improvement, right? But with no real quantification, I don't think, behind it near-over your most recent plan.
So how do you want the market to think about margin improvement? Because your competitors have different business mix, different models a little bit, right? And so it's not an easy analog to say, "Oh, let's compare you to Genpact or WNS," right? And particularly not the IT service companies. So, you know, there's a lot of changes going on underneath the covers of your business model in terms of the mix and how you're delivering the service. So when you kind of backroom this, you know, how do you want us to think about this, going forward? Because I, I think there are many in the market that think you're kind of at peak margins now, right, and you're, you're really not going to be able to improve them much from here.
Yep. So when you look at our adjusted operating margin over the last 4 years, we were hovering around 14%, 15% back in 2019 and 2020. We ended 2023 with an operating margin for the year of 19.3%. So how did we get there? The big efficiency we got there is really becoming more efficient with our overall headcount. If you look at, you know, in a few of those years, you look at the revenue growth, and you look at the headcount growth, you know, we significantly, the headcount growth was far lower than our revenue growth, particularly between 2020 and 2022, and that really got us to becoming that much more efficient with our overall operation.
We did increase margins last year in 2023 by 100 basis points, from 18.3% to 19.3%, by holding off some investments later on in the year. And so that's our impetus this year, to holding margin fairly flat in 2024 to 2023. That's what we've guided to. Going forward, as we move more into data and AI, and we drive our business into that area, that should drive more value for clients, and we should be pricing higher for that value. And so if we're driving price, we should be driving gross margin. So you, you-- and if we're driving gross margin, you know, the reason to drive gross margin is especially in this AI era that we're entering into, we need more money for investment. It, this, i...
Entering into the current AI era will require us to invest more, and so by growing gross margin, we gives us the ability to invest more. The offset there will be an incremental to adjust our overall adjusted operating margin. And, you know, and when we think about increasing that margin, it's somewhere between probably 10 basis points-20 basis points a year. So we do think about internally, as our one thing is to grow EPS faster than revenues. Inherently, that means we need to grow margin.
Now, not significantly like we did last year by 100 basis points, but incremental improvement is achievable on an annual basis going forward. But in order to achieve that now, we have to drive data and AI value, and we have to price it accordingly. And that will help us drive gross margin, and that'll help us invest in order to continually grow the business at low double digits, and then that offset is to the margin.
So the messaging is that the higher value will drive higher gross margin, but given the AI area, a fairly large piece of that gross margin expansion...
Yes.
Has to get reinvested, but still leave 10 bps-20 bp s a year, right, in, in margin lift. So one of the things that you also have talked about in that same context has been the pricing models are changing a little bit, right, with, with AI. So do you want to walk us through a little bit about what those changes are and what to expect?
Sure. Sure, so about a third of our revenue today is transaction outcome-based, with the remaining piece being FTE pricing. As we move more into data and AI services and solutions for our clients, particularly AI, you know, we should be able to drive more transaction outcome-based pricing. So when we build solutions, and we build and we drive incremental value, whether it's driving increasing revenue for our clients, we should be able to drive more outcome or more revenue from outcome-based pricing.
If we're helping clients reduce their costs, then we should be able to drive more outcome-based pricing from that. And also, as we embed solutions like Paymentor, we should be able to drive transaction-based pricing. You know, Paymentor is our AI-based solution that helps companies improve their payments, their collections process. As they improve their collections process, as they drive more through that solution, we should be able to drive more transaction-based pricing.
So, again, just to make sure that we understand this, so is transaction-based pricing in your vernacular different than taking risk? Is that correct, or is there a risk component to this?
I think risk is more in outcome-based pricing.
Okay.
In transaction-based pricing, yes, it's more transactional-based.
Right.
It could be a little bit more volatile, but we really haven't seen it in our transaction business...
Right
Pricing business. But I think the risk is a little bit more on the outcome-based.
Got it. Okay. So you know, you've been mentioning AI several times, you know, in some of the previous, you know, things that we've been talking about, and maybe just to make this real for us, 'cause, you know, AI is, as you can imagine, a fairly overused term these days. You know, what are some of the early use cases in your model? Because, you know, as you know, you know, BPO was targeted early in the AI phenomenon, right, in terms of being a loser in this, and it's been quite different in your experience, right, in terms of the benefits to your model.
So maybe you want to talk about some of the early use cases and maybe you talked about the size of the deals being different, but any other different characteristics of the deals that we haven't talked about in some of the AI-driven, you know, use cases versus your legacy business?
Sure, sure. So I'll give you a few examples that we talked about at Investor Day. One of our use cases that we talked about was Smart Agent Assist, whereby we built an AI solution to assist contact center employees managing interaction with their customers. And so this tool helps those employees when they're managing a call or some sort of contact with a customer, it helps them guide the conversation on what to ask. And what that does, it makes the call or makes that interaction that much more efficient for the employee, but also it creates a much better experience for the customer at the end of the day, and we've been very successful in implementing that, particularly in insurance and in some of our clients within emerging.
And so we've seen very good traction there. So that's one area that has helped us not only bring AI to the client, but helps us get that much more stickier with our clients. In these large processes, those types of solutions are critical because it helps us stay well embedded with the client by driving more AI enhancement. We also talked about Code Harbor. You know, Code Harbor is our AI solution, whereby we're taking code that engineers have created from old language and transforming it into new code language. And that's something brand new to us. We weren't in that business. We were asked to work on that with one of our clients, and we built it for that client, and now we're able to resell that now going forward, which is pretty significant.
But that's an example of not only creating something in AI but creating new opportunity in AI that we can cross-sell, not just in one segment, at the end of the day. And so what we're seeing these days is we're entering into POCs that help us build solutions. Clients are helping pay for that development through the POC. They are lower-margin type revenue opportunities because we are building product with our clients, but those POCs are helping us get to resellable solutions now going forward. And that's a big area for us in terms of development, you know, going forward. And now that's a little bit different than what we've seen in the past, but we're seeing that more and more now going forward.
So to take the flip side of AI, which I mentioned a moment ago, was one of the big initial fears that it was gonna... It disintermediate, right? Offshore BPO businesses, right? Just in general, because of, you know, the labor arbitrage legacy of those business models. So, you know, you talked about Agent Assist. Obviously, call center, contact center was an early use case for offshore BPO, as you know. So the workflows are already in place, obviously, to improve on that. But how would you respond to the, you know, the fears of productivity that comes with GenAI and the traditional, you know, offshore BPO model?
Yeah. So when you look at how we win and we embed AI into client processes, it is proving like it did when we entered into RPA, and RPA went to machine learning. We went from machine learning to AI, and now the new thing is GenAI. In each one of those opportunities, in technology evolutions, we were able to take advantage of the revenue opportunity that it created. And in this case, today, what we're seeing is when we take on a large operation, and we embed AI, we are making the client's operation that much more efficient and reducing headcount. We are disintermediating it ourselves.
But what ends up happening is the client gets that much more efficient and drives more business our way, seeing the level of efficiencies that they've gotten from us. And that's one of the points that we made at Investor Day, and we gave a client example whereby the client got 30% more efficient over the period of the contract, and that gave us the ability, and that also gave the client confidence to give us that much more. And that's the reason why if you look at our revenue per client back in 2020, it hovered around $8 million. In 2023, it was at $14 million.
So we almost doubled our revenue per client over that three-year period, and the reason for that is as clients see us driving AI and helping them become that much more efficient, we're the recipient of that much more work or that much more opportunity and revenue, and that's helping us continually expand in that existing client, and that's also the reason why so much of our growth is from existing clients. New clients help us get our foot in the door, and then the expansion starts.
So let me ask you, we're almost out of time, but I wanted to make sure I got to this, is that by virtue of all the things we've talked about, the changes in the business model, you know, your free cash flow as a percentage of net income, the conversion rate has degraded, right, over the last couple of years a little bit. I think you're at, you know, somewhere in the 70% range, I believe. So what are the changes going on in the business? 'Cause it's mostly working capital, I believe, the headwind. What's the dynamic, and when do we kind of get out of that period, you know, where we get back to more of a 100%ish, 90%-100%?
Yeah. So you have, you have seen that over the last couple of years. The two big drivers of that, one is payment integrity has grown so well for us over the last two, three years. It, it has a much higher, DSO, than the rest of the business, so that, that has created a slower cash collection process on our AR. We also had some tax regulation that came through, particularly in having to pay higher taxes or upfront taxes to the federal government, particularly in the R&D area. So that created a little bit of a bump or a, slower process in terms of free cash flow, that we had to pay more out, in taxes.
You know, going forward, you know, I think you'll start to see a little bit of a change in both of those, right? You're starting to see a little bit more... Where you're going to see that DSO starting to flatten out, and then also, you're starting to see our tax payments start to moderate. And it's our goal to get back to a 1:1 ratio between free cash flow and GAAP net income. So that would put our free cash flow for the year anywhere between $175 million and $200 million for the year, and that's basically our goal.
Got it. I think we're out of time.
All right.
Thanks for...
Thank you.
Great to have you.
Thank you.
Yeah.
Thank you. Thanks for having me.