Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2022 ExlService Holdings, Inc. Earnings 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] It is now my pleasure to introduce Vice President of Investor Relations, Steven Barlow.

Thank you, Andrew. Good morning, everyone. Thanks for joining our second quarter conference call. I'm Steve Barlow, EXL's Vice President of Investor Relations. On the call today are Rohit Kapoor, our Vice Chairman and Chief Executive Officer; and Maurizio Nicolelli, our Chief Financial Officer. We hope you've had an opportunity to review our Q2 2022 earnings release we issued this morning. We've also updated our investor fact sheet in the Investor Relations section of EXL's website. As you know, some of the matters we'll discuss in this call 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 Securities and Exchange Commission from time to time. EXL assumes no obligation to update the information presented on this conference call. During our call today, we may reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of these measures to GAAP can be found in our press release as well as on the investor fact sheet. I'll now turn the call over to Rohit Kapoor, EXL's Chief Executive Officer. Rohit?

Thank you, Steve. Good morning, everyone. Welcome to our Q2 2022 earnings call. I hope all of you are doing well. I'm pleased to report another great quarter following our strong performance in Q1. Our second quarter revenue was $346.8 million, up 5.3% from Q1 and up 26.1% year-over-year. For the quarter, adjusted EPS was $1.50 per share, up 31.6% year-over-year. Our growth was driven by our Analytics business, which generated $161.3 million in revenue for the quarter, up 8.2% sequentially and 44.8% year-over-year. Analytics now accounts for 47% of our total revenue. Our Digital Operations & Solutions business saw strong growth this quarter with revenue of $185.5 million, up 2.9% quarter-over-quarter and 13.3% year-over-year. This was led by double-digit revenue growth from our emerging business segment, which generated year-over-year growth of 32.4%. Our data-led approach is unique and is resonating well in the marketplace. Our clients need to respond much faster with the most relevant service offerings to their end customers in this new world of increased volatility and higher expectations from the consumer. Our data-led approach allows for precision-based targeted responses, better business decisions and improve operational processes in a systemic way. This has led to an accelerated growth of our overall business, and we are very pleased with the business results so far. I want to spend a few minutes today talking about the current macroeconomic environment and how we see it impacting our business. A combination of high inflation, talent scarcity and global supply constraints has created significant uncertainty and volatility in the economic environment. With continued geopolitical risks, rising interest rates and a low growth environment, these threats are likely to be persistent and [indiscernible] However, in the current environment, it becomes more important than ever for businesses to invest in technology, automation and data-led…

Thank you, Rohit, and thanks, everyone, for joining us this morning. I will provide insights into our financial performance for the second quarter and the first six months of 2022, followed by our revised outlook for 2022. We had a strong second quarter with revenue of $346.8 million, up 23.6% year-over-year and 6% sequentially on an organic constant currency basis. Adjusted EPS was $1.50. All revenue growth numbers mentioned hereafter are on an organic constant currency basis. Revenue from our digital operations and solutions businesses as defined by three reportable segments, excluding Analytics, was $185.5 million, up 15% year-over-year. Sequentially from the first quarter, revenue was up 3.7%. Insurance generated revenue of $108.6 million, up 15.9% year-over-year, driven by expansion in existing client relationships in life and annuities, property and casualty and new client wins of 2021. The insurance vertical consisting of both our digital operations and solutions and Analytics businesses grew 16.1% year-over-year. Emerging reported revenue of $53.9 million, up 36.1% year-over-year. This growth was driven by new client wins of 2021 and expansion in existing client relationships. The emerging vertical consisting of both our digital operations and solutions and Analytics businesses grew 43.5% year-over-year. Health care reported revenue of $23.1 million, down 18.4% year-over-year, driven by lower volumes in the clinical services business, primarily due to a transitioning client., The health care vertical consisting of digital operations and solutions and Analytics businesses grew 10.8% year-over-year. Analytics had revenue of $161.3 million, up 36.1% year-over-year on an organic constant currency basis. Clairvoyant contributed $11 million of revenue. Including Clairvoyant, Analytics grew 44.8% on a reported basis. Similar to the first quarter, this growth was driven by increased volumes in banking and financial services, payment integrity, and direct marketing. Sequentially, from the first quarter of 2022, Analytics grew 8.7% on…

[Operator Instructions] And our first question comes from the line of Bryan Bergin with Cowen.

I wanted to start by digging in a bit on the macro and client sentiment comments. So can you just confirm, Rohit, have you seen any disturbing change in client behavior or decision-making pace through the last, I guess, even into July? And can you segment that by what you made in digital ops versus like anything different to call out there? And also, just if things do slow down, how are you thinking about that Analytics growth risk just as it relates to some of the shorter cycle work you have?

Sure, Bryan. So we continue to see a very strong engagement with our clients and prospects across the board. And frankly, there is -- our pipeline is strong, and we are quite encouraged by the dialogue that's taking place. However, like I noted in my prepared remarks, there is a shift in the composition of the pipeline as well as the conversations that we are having with our customers. So one area where we are seeing our clients being more cautious is around marketing analytics. And that's something which we would expect them to readjust as they go forward into the second half of the year. But at the same time, we are also seeing increased strength in terms of cost management as well as managing delinquencies and getting prepared for a higher level of delinquencies and fraud. So we think on an overall basis, the strength continues to be strong and is balanced out while the composition of that demand seems to be shifting a little bit. The sales cycle for us continues to be about the same as we had previously and the progression of the pipeline continues to be at the same pace as what we've experienced previously. So overall, from a macroeconomic environment with our customer base, we think things continue to be heading along the same as what they were previously.

Okay. Okay. That's good to hear. And then just a follow-up on margins. You had a quarter here with strong op margin surprise. How are you thinking about kind of fiscal '22 op margin target for the year and in second half and then just longer-term potential just based on your pricing initiatives, wage levels and internal efficiency opportunities?

Sure, Bryan. So when we think about our operating margin or adjusted operating margin, look, we came in at 18.7% for the quarter, which was a little bit higher than what we had expected. Going -- looking at the rest of the year, we do have the return to office continuing for us in Q3 and Q4. So we will have higher costs in the second half of the year. So our guidance for margins is similar to what we had in the first half. It's in the low 18% range when you calculate our margins. And that's been pretty consistent, and then includes the additional expenses that we have for a return to office and also some incremental investments that we're going to be making in the second half of the year. Looking forward, as we go into 2023, we should have comparable margins but also try and grow them marginally as we go forward. And so we've done very good over the last couple of years to really increase our margins. Now as we start to add more value-add services going forward and drive pricing, we should have -- we should be looking at incremental upticks on a marginally as we go into 2023 and further.

And our next question comes from the line of Puneet Jain with JPMorgan.

Following up on Bryan's question on potential slowdown, macro slowdown and its impact on Analytics. How should we think about like the mix of Analytics business as it relates to marketing analytics versus risk management services that you provide? And can you also talk about the new JV and potential financial implications from that over the near term?

Sure, Puneet. So look, I think our view is that the macroeconomic slowdown that is taking place is certainly creating a fair amount of volatility and uncertainty in the marketplace. But in this environment, the use of a data-led approach becomes even more important and even more critical for our clients. So what we are seeing is our clients are investing more in automation, more in advanced analytics, more in terms of moving their data to the cloud, more in terms of becoming much more agile and nimble. And as that secular shift continues to take place, the strength in the demand for our services is actually very strong. So frankly, our data-led approach, which is both true for digital operations and solutions as well as for data analytics that is resonating very, very nicely, and we are positioned extremely well in this kind of a macroeconomic environment. We think data analytics -- actually, you need to use more of analytics to deal with a volatile and uncertain environment. And therefore, clients will invest more in that capability, and we are very, very strong partners for our clients in that particular area. The joint venture that we created and the new risk decisioning-as-a-service that we have launched. This is a unique capability and a product launch that we have done which we think will be very attractive to midsized banks and smaller banks and financial institutions and credit unions. We have got a good traction in terms of conversations that have started in this direction, but we're going to see how this kind of plays out and how this kind of evolves. It certainly gives us access to have a conversation with the key decision makers at these financial institutions and it also broadens out our customer base, which previously was much more tied in with larger banks and financial institutions. It allows us to broaden out that portfolio into the mid-market. And we think that, that broadening out of our portfolio, is a long-term good thing for us structurally. So we are very, very excited by this joint venture that we have launched.

Got you. And then on the attrition rate, it seemed like it increased a little bit, assuming most of it is from Philippines. Can you talk about like supply issues and the supply trends you expect rest of the year in the U.S. and in India and in your other major locations?

Sure. So the attrition has certainly ticked up, and it is -- for us, it is 38%. However, it seems to be that attrition has ticked up for the entire industry. And our entire focus is to make sure that we can hire the right talent, attract the best people, engage with them in an appropriate way, make sure that we are investing significantly in their learning and development, build up great career pathways for them and really have our employees do the best work that they can so that it matches with their expectation set. Most of the attrition is taking place at the lower levels. And I guess from our perspective, we are trying to make sure that we can adhere to all the service level requirements of our customers and execute and deliver despite this higher attrition rate that's taking place. I think we've demonstrated an ability to do that, and we are confident that we can manage this as we go along. But the one -- the silver lining on the high attrition rate is it's also indicating a high demand environment as such for these types of skills. What we are finding is the areas that are of critical importance to us and to our clients, particularly around analytics and digital that our attrition rates in those areas haven't gone up as such, and we are being able to manage attrition there very, very well. So frankly, we feel we are in a better position as compared to some of our other peers and we think that that's something which we will continue to be able to manage. But it clearly is our #1 priority and to be able to manage to higher retain and make sure that we can continue to have the minds and hearts of our workforce, and that's critical. And by the way, what the team has done in the last two quarters is phenomenal. With the growth rate that we've had, with the kind of engagement that we have had and the kind of execution that we've had, it's really, really tremendous. So we are very, very happy with how the team has responded out here.

And our next question comes from the line of Maggie Nolan with William Blair.

Nice quarter. You gave some data points around how your employee base of analytics-focused employees is growing nicely. So what does that look like in terms of the percentage of overall employees? And how has that been trending? And as that grows, should we expect it to have an impact on your revenue per employee over time?

Thanks, Maggie. So yes, the head count in our analytics business has grown very nicely, and it's grown by 50% year-over-year. We have a very strong recruitment program from the premier colleges and institutions in the U.S. and in India, and we continue to build our brand in these institutions. The total headcount for the Analytics business has certainly increased as a percentage of our total headcount. So that's something which continues to drive up. And yes, the revenue per headcount will continue to move up as our employee base in Analytics continues to move up.

And then at the gross margin level, has there been much of an impact from the transition of the health care clients? And is that something that you can continue to offset at the operating margin level in the back half of the year here? Or how should we be thinking about the dynamics at each gross and operating margin levels?

Maggie, sure. So let's talk a little bit about the gross margin. So the gross margin this quarter came in at 36.2%. So it was affected to a certain extent by health care by our transitioning clients during the period. You saw the health care gross margin come down also. What you'll see going forward as we are projecting a higher gross margin in health care going forward in Q3 and Q4, trying to get back to recent levels back to Q1 and Q4. So it had an effect during the period on our gross margin. We had nice operating leverage on our SG&A line, which really was an offset and really helped us drive to 18.7% in AOPM. But going forward, the 36.2% of gross margin was affected by health care, but also was affected by our increments that we paid on April 1. And so that was -- that contributed to the lower gross margin during the period but forecasting a higher gross margin as we go into the second half of the year.

And our next question comes from the line of Ashwin Shirvaikar with Citi.

Guys, I guess my first question is with regards to the stronger growth profile in '22, how does that impact in medium-term outlook? There's only one other year remaining in there. Do you think of it in terms of tougher comps, elevated exit growth rate? Or are you kind of contemplating a different growth profile into next year because of an economic downturn or slowdown?

Sure, Ashwin. So in terms of the comps, Ashwin, for us, 2021 was a year when we saw the return back of the demand from the pandemic and actually, it became a high-growth year for us. And therefore, our growth rates in '22 is based off that higher growth number in '21. So frankly, we think that the comps are pretty much consistent, and they're going to continue on in this direction. Big lift that we are getting is actually from both our businesses on data analytics, as well as from our digital operations and solutions business. Both these businesses have accelerated in terms of growth rate. And we think the fundamental reason why this is accelerated is because our data-led approach, which applies both to data analytics and to our digital operations and solutions businesses is resonating really, really strongly with our clients. Our clients want to make improvements on the basis of data and whether it is making better business decisions or whether it is running better operations, both of these require data to be understood, and that data-led approach is, I think, what's causing this for us to kind of go up. We do think the macroeconomic environment is going to be volatile and uncertain. But like we said, we think the use of data in this environment becomes even more critical. So we think that's something which is likely to continue. Now going forward into the rest of '22, we provided that in terms of our guidance going into the medium term into '23 and going forward, we'll provide color on that when we provide our guidance for '23 at the end of the year. But right now for us, the pipeline, the demand environment continues to feel strong.

Got it. Got it. And then on digital ops solutions, the gross margin, I know it tends to be down sequentially, I think, 1Q to 2Q, but on a year-over-year basis was down about almost 400 basis points. Anything to call out what's driving that? I might have missed it, hoped in a little bit late, I'm sorry. Is there any impact, say, from attrition, any productivity commitments? And how should we kind of model that the rest of the year and into next?

Yes. Ashwin, -- in terms of the gross margin in digital operations is really being affected by two things. One is the lower gross margin in health care that I talked about a little bit earlier and then also the secondary is we've done a lot of investing for new client ramp-ups. Given our growth rate within digital operations and solutions right now, we needed to invest a bit more in new client ramp-ups, which is a positive thing, which really helps us drive revenue into the second half of the year. So as you look at that gross margin in the second half of the year, you should look at it in terms of probably the Q4, Q1 percentages, which will be more reflective in the second half of the year.

And our next question comes from the line of Vincent Colicchio with Barrington Research.

Yes. So Rohit, I'm curious, do you have any new economy clients that are maybe facing funding challenges, which could be an issue going forward?

Yes, Vincent. So for us, just so you know, in terms of our overall portfolio, we've got very little exposure in terms of new economy clients, whether these be FinTech or Insurtechs or others. We certainly do business with a number of them. But as a percentage of our total revenue and our total profit, it's still a very small number. To your specific question about do we have exposure to any of these new age companies that might be having concerns on their credit quality? We don't have any such customer in our portfolio currently, which is in a challenged position. So frankly, we are in a fortunate position where the portfolio for us is pretty clean and actually does not really have much exposure on an overall aggregate basis to this part of the economy, which seems to be kind of drifting down. And then we certainly don't have any which has a credit risk associated with it.

On your decisioning application you introduced for the banking sector, what is your vision there? Will we see more of these types of applications in the near future? Is there a pipeline you're working on?

Yes, absolutely. So this is a very conscious, deliberate and proactive approach that we are taking, which is how can we offer a solution as a service to our customers? And that's something which we are trying to do and make a pivot across our portfolio. We do believe that clients are looking for solutions where they need to pay on a usage basis and on a consumption model. We do think clients want to have this available to them wherever on the cloud and they are looking to leverage on the deep knowledge and capability of their partners in this area. So frankly, this is something which we will continue to do whether it be about risk decisioning, whether it be about data management, whether it be in terms of marketing analytics, whether it be in terms of fraud and risk management, whether it be in terms of managing delinquencies, we're going to keep trying to push and invest in areas where we can offer a usage-based or a consumption-based service offering to our clients. And we think that's going to be very attractive to our clients and very attractive to us.

Thank you. I'm showing no further questions. With that, we would like to thank you for participating in today's conference call. This does conclude the program, and you may now disconnect.