Prepared remarks
Hello, and welcome to the ExlService Holdings, Inc. Second Quarter 2026 Earnings Conference Call. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. I will now turn the call over to Andrew Thut, Head of Investor Relations and Capital Markets.
Thanks, Mariana. Hello, and thank you for joining EXL's Second Quarter 2026 Financial Results Conference Call. On the call with me today are Rohit Kapoor, Chairman and Chief Executive Officer; and Maurizio Nicolelli, Chief Financial Officer. We hope you've had an opportunity to review the second quarter earnings press release we issued yesterday afternoon. We have also posted a slide deck and investor fact sheet on our Investor Relations 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, those factors set forth in yesterday's press release and in EXL's filings with the Securities and Exchange Commission from time to time. EXL assumes no obligation to update the information presented on the conference call today. During our call, 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, slide deck and investor fact sheet. With that, I'll turn the call over to Rohit. Rohit?
Thank you, Andrew, and good morning, everyone. EXL delivered strong second quarter results, posting revenues of $595 million, up 16% year-over-year and adjusted earnings per share of $0.59, an increase of 22% year-over-year. We entered the year with positive business momentum, which has continued to strengthen throughout the first half with broad-based growth across every segment of our business. We sit here today with very good visibility into the balance of the year and are looking forward to a strong finish to 2026. We continue to differentiate ourselves with industry-leading growth. As enterprises move from proof-of-concept to AI implementation, our expertise, solutions and services sit squarely at the center of the demand vectors where investment dollars are focused, delivering measurable business outcomes and economic efficiencies. Our deep understanding of client workflows and domain context, combined with our competencies in data and AI engineering is creating a tailwind as we help clients solve the acute challenge of making AI work effectively in the enterprise. We are pleased with our results that reflect the strength of our data and AI-led strategy and our focused execution. Over the last two earnings calls, we have made additional efforts to bring transparency to our financial reporting. In addition to providing a revenue breakout across both data and AI-led and digital operations, we now provide revenue from total operations as well. Data and AI-led revenue has accelerated over the past four quarters, growing 18% in Q3 2025, 21% in Q4 2025, 28% in Q1 2026 and now 30% year-over-year in Q2 2026. Data and AI-led services and solutions represent 61% of revenue with broad-based growth across data management, AI services and solutions, payment integrity and data and AI-led operations. Reported digital operations revenue was down approximately 1.5% year-over-year, and I want to be explicit about why, because this is important. This decline is by design, and it reflects the evolution of our business mix. As we embed AI into operations engagements, that work becomes more IP-led and higher value. And the related revenue moves into our data and AI-led category. For this reason, we believe the best way to evaluate the health of our operations business is to look at total operations, which includes both digital and AI-led. Our total operations revenue in Q2 were up 10% year-over-year, continuing a trend of healthy, consistent growth. As we go to market with an AI-forward value proposition in operations, it strengthens our data and AI-led performance and vice versa. Combining operational expertise with proprietary data and AI capabilities, we help clients unlock greater productivity, faster decision-making and measurable business impact. As AI adoption expands, the value of our operations relationships deepens, enabling us to identify new use cases, accelerate deployment and drive sustained transformation. This creates a mutually reinforcing cycle that delivers greater value to clients while supporting durable recurring growth for EXL. We saw strong performance across each of our four operating segments in the quarter. Insurance grew 15% year-over-year, representing one-third of our revenues. Q2 was a defining quarter for EXL's insurance practice, translating multiyear AI investments into demonstrable client outcomes. Insurers continue to accelerate AI adoption across underwriting, claims and customer experience, and we are seeing strong deal activity across market segments. Healthcare and Life Sciences grew 22% year-over-year, representing more than one-quarter of our revenues. Payment Integrity continues to be a significant growth driver, and we are seeing strength in analytics, AI services and solutions and operations. Payers and providers are under meaningful cost and regulatory pressure and are turning to EXL to apply AI at scale to improve productivity and outcomes. Banking, Capital Markets and Diversified Industries grew 11% year-over-year, representing a little under one-quarter of our revenues. Deal activity was strong in the quarter, and we remain confident in continued progress through the year. International Growth Markets grew 15% year-over-year, an acceleration attributable to ramp-ups and new client wins. This quarter, we welcomed Bhupender Singh as President and Head of International Growth Markets. Bhupender brings a track record of building and scaling multibillion-dollar businesses in complex international markets, and he has hit the ground running, architecting our EMEA and APAC go-to-market, deepening client relationships and building pipeline. International represents one of our largest long-term growth opportunities, and Bhupender's appointment reflects our commitment to capturing it. Let me make our differentiation in the market more concrete with a few examples from the quarter because the thread running through all of them is the same. You cannot deliver strong business outcomes without deep understanding of the clients' domain and their data. First, in health care. We went live at a large national health plan with their first-ever customer-facing agentic AI module, delivering a high deflection rate and significant ROI for the client. When the client independently benchmarked our solution against that of a leading hyperscaler, EXL outperformed on every measure. What became apparent is that while technology and AI capabilities are necessary, combining deep contextual knowledge with data and AI is what creates exceptional value, and that is where we differentiate ourselves. Second, in insurance, we entered a competitive multi-vendor hackathon at a global carrier to build an AI-based data ingestion solution. Our approach, leveraging a strong understanding of the client's domain, resulted in us presenting the best solution. That win positions us as their agentic partner as they reimagine their data estate. It is repeatable, referenceable work we can now deploy rapidly across our client base. Third, a capability that has increasingly become more important and integral to scaling AI services is token optimization. As enterprises operationalize AI at scale, token consumption has become a dominant constraint on cost, speed and reliability. Working inside client workflows, we are able to reduce client token consumption by as much as 80%, helping them conserve spend and make their AI systems dramatically more efficient without compromising quality or latency. None of this is possible as a simple technology plug-and-play. It requires deep knowledge of the workflow, experience of the regulatory context and understanding of ontologies of the data estate within the industries we serve. Also during the quarter, we hosted our Investor and Analyst Day in New York. The core message was straightforward. The AI opportunity for enterprises is immense and capturing it requires partners that can make AI scalable, effective and accountable inside complex regulated environments. We laid out our view that sustained AI outcomes depends on three things working together: the right data, deep domain context and proven AI capabilities, coupled with trusted execution at scale. This is the framework that guides how we build, how we invest and increasingly, it is what we hear directly from clients as they move from pilots into production deployments. We also outlined our investment priorities to extend our competitive advantage: continued investment in proprietary IP, solutions that move us up the value chain and targeted M&A. Twenty-five percent of our client revenues today touch our proprietary IP. Strong free cash flow and an underlevered balance sheet gives us the flexibility to continue our share repurchase program and pursue acquisitions of products and solutions that allow us to better serve our clients' needs, which brings me to the most significant announcement of the quarter. Last month, we announced the acquisition of iMerit, which we expect to close on July 31. iMerit is a recognized leader in AI model training, evaluation and reinforcement learning, and we view this deal as a transformational pivot for EXL. It brings established relationships with leading foundation model companies, a new and strategically important client segment for us. It also deepens our vertically specialized AI capabilities and expands our total addressable market into high-growth AI tech sectors. The landscape is also shifting in a way that makes this timely. Gartner predicts that by 2028, open source Gen AI models will underpin more than 50% of enterprise use cases, up from less than 10% today. We believe this shift will be especially pronounced in the regulated industries we serve, where domain knowledge, context and compliance are absolutely critical. Deploying AI reliably in the business-critical workflows requires industry-specific data, rigorous evaluation and constant reinforcement learning. By combining iMerit's capabilities with EXL's domain expertise and AI platforms, we will be well positioned to help enterprises build, fine-tune and operationalize AI that performs reliably in production, a natural extension of the data and AI-led strategy we have been executing for years. The strength of our business performance and the addition of iMerit give us the confidence to raise our guidance for the full year. We now expect 2026 revenue to be in the range of $2.39 billion to $2.415 billion, representing 14% to 16% growth on a reported basis, up from our prior guidance of $2.3 billion to $2.33 billion. iMerit accounts for approximately $28 million to $32 million of that revenue for the remaining five months of the year. We are also raising our adjusted diluted EPS guidance to a range of $2.25 to $2.29, representing approximately 16% to 18% year-over-year growth, up from our prior guidance of $2.18 to $2.23. As always, I want to thank our clients, partners and employees for their continued trust and commitment and our shareholders for their continued support. With that, I'll turn the call over to Maurizio to provide additional details on our financial results and outlook.
Thank you, Rohit, and thanks, everyone, for joining us this morning. I will provide insights into our financial performance for the second quarter and our revised outlook for 2026. We delivered a strong second quarter with revenue of $594.8 million, up 15.6% year-over-year on a reported basis and 15.9% on a constant currency basis. Sequentially, revenue grew 4.4% on a constant currency basis. Adjusted EPS for the quarter was $0.59, representing a year-over-year growth of 22.3%. All revenue growth percentages mentioned hereafter are on a constant currency basis, unless otherwise stated. Now turning to the second quarter revenue performance by segment. Insurance revenue was $197.8 million, up 14.9% year-over-year. This growth was driven by both the expansion and higher volumes in existing client relationships. Sequentially, insurance revenue grew 2%. The insurance vertical, including revenue from international growth markets, grew 14.9% year-over-year with revenue of $233.7 million. Healthcare and Life Sciences reported revenue of $158 million, representing growth of 22% year-over-year and 4% sequentially. The year-over-year growth was driven by higher volumes in our payment services business, expansion in existing client relationships and new client wins. The Healthcare and Life Sciences vertical, including revenue from international growth markets, grew 22% year-over-year with revenue of $158.3 million. Banking, Capital Markets and Diversified Industries reported revenue of $133.9 million, representing growth of 10.7% year-over-year and 5.1% sequentially. This growth was driven by new client wins and expansion of existing client relationships. The Banking, Capital Markets and Diversified Industries vertical, including revenue from international growth markets, grew 12.8% year-over-year with revenue of $202.8 million. International Growth Markets reported revenue of $105.1 million, up 16.3% year-over-year and 8.9% sequentially. This growth was driven by ramp-ups and higher volumes with existing clients and new client wins in banking, capital markets and diversified industries and insurance. SG&A expenses as a percentage of revenue increased 170 basis points year-over-year to 20.9%, primarily driven by higher investments in front-end sales and support. Our adjusted operating margin for the quarter was 19.7%, up 10 basis points year-over-year, driven primarily by improved gross margins. Our effective tax rate for the quarter was 21.3%, down 110 basis points year-over-year, driven by higher profits in lower tax jurisdictions. Our adjusted EPS for the quarter was $0.59, up 22.3% year-over-year on a reported basis. Turning to the first half performance. Our revenue for the period was $1.17 billion, up 14.7% year-over-year on a reported and constant currency basis. This growth was broad-based across all segments, driven by double-digit growth in healthcare and life sciences, insurance and international growth markets. Our adjusted operating margin for the first half was 20.1%, up 20 basis points year-over-year. Our first half adjusted EPS was $1.17, up 21.3% year-over-year on a reported basis. Our balance sheet remains strong. Our cash, including short- and long-term investments as of June 30 was $284 million and revolver debt was $381 million for a net debt position of $97 million. We generated cash flow from operations of $90 million for the first six months of the year. During the first half of 2026, we spent $27 million on capital expenditures and repurchased 5.8 million shares at an average price of $30.90 per share, totaling $179 million. This includes 4.15 million shares repurchased under the accelerated share repurchase program at an average price of $30.10. Now moving on to our outlook for 2026. While we continue to monitor the evolving macroeconomic and geopolitical environment, our strong second quarter performance, sustained growth momentum and healthy pipeline in addition to the acquisition of iMerit provides us with the confidence to raise our outlook for the remainder of the year. We now expect 2026 revenue to be in the range of $2.39 billion to $2.415 billion, including $28 million to $32 million of anticipated revenue from the iMerit acquisition, which is expected to close on July 31, 2026. This represents a year-over-year growth of 14% to 16% on a reported basis and 13% to 14% on an organic constant currency basis. At the midpoint, the revised range is $88 million higher than our previous guidance. Based on the strong market opportunity and the need for us to continue to stay ahead in AI, we will increase our investments in front-end sales, data and AI capabilities and solutions for the rest of the year, and our adjusted operating margin will be lower in the second half of the year compared to the first half. We expect a foreign exchange gain of approximately $3 million, net interest expense of approximately $16 million to $18 million and our full year effective tax rate to be in the range of 21% to 22%. We expect capital expenditures to be in the range of $58 million to $62 million. We anticipate our adjusted EPS to be in the range of $2.25 to $2.29, representing year-over-year growth of 16% to 18%, up from our previous guidance of $2.18 to $2.23. Our adjusted EPS guidance includes a marginal dilutive impact of $0.01 from the iMerit acquisition. To conclude, we had a strong first half, underscoring our differentiated competitive position and exposure to attractive high-growth market segments. Our leading indicators remain positive, and our resilient, adaptable business model positions us well for a solid performance in 2026. With that, Rohit and I would be happy to take your questions.
Questions and answers
Our first question is from Bryan Bergin from TD Cowen.
I'd like to start on the data and AI strength and the durability there. So above 30% growth in the quarter, but even above 20% EXL digital solutions and data and AI-led ops. Curious if you could help kind of parse how much of that growth is coming from new AI-native programs versus traditional kind of analytics modernizations? And what gives you the confidence that data and AI perhaps can retain a 20% plus grower for the balance of '26?
Bryan, we saw a tremendous amount of strength in our data and AI-led business, and that growth rate has been accelerating for us for the last four quarters. The reason why it's showing this strength is because each of the service lines within our data and AI-led business are performing very well. Payment Integrity continues to grow nicely. The data management part of our business is accelerating. The analytics and AI services part continues to grow nicely. In terms of new work versus existing work, it really is a mix of both. We have a stable business within our payment integrity service line as well as within our analytics business. But the newer areas of data management, AI services and AI solutions are growing very rapidly on a smaller base and becoming much more pronounced and significant for us. Going forward, this area of data and AI-led services and solutions will remain a high-growth driver even after excluding data and AI-led operations. We believe we are well positioned with this portfolio of services, and the capabilities we are demonstrating to clients give them the confidence to engage with us in much more strategic ways.
Okay. That's clear. And then, Rohit, you had interesting comments on tokenomics and the optimization potential there. Just given your data and process expertise, it seems to be a major opportunity for you and just understanding there are some highly valued third-party routing platforms in the market. I'm curious how you're approaching this vector. Is this an area where you're developing IP that can better serve vertical-specific applications? And can you also use such a solution as a tip of the spear to accelerate new opportunities out there?
Token economics is becoming a very important and integral part of any AI modernization program for an enterprise client. There is tremendous value that can be created for clients in the design, engineering and implementation for AI models and how agentic AI is used on operating workflows. We have an advantage because of our deep knowledge of clients' industries, workflows and data. We are building capabilities that will give us advanced signals about token usage and cost, and we can make that transparent to our clients and help them reduce token-related costs. This will be one of the principal areas of spend. Clients may also consider more complex solutions where they host environments for infrastructure and deploy AI models on their own GPUs and environments. This area will continue to become more complex and expand rapidly, and there is a lot of value to deliver to clients here; we are in a strong position to do that.
Our next question is from Surinder Thind from Jefferies.
Rohit, can you maybe talk a bit more on the dynamics of what's going on in the international growth markets? Obviously, the back half of 2025 growth was kind of flat quarter-over-quarter, and you've seen a material acceleration there. Can you talk about whether that can continue and how we should think about that segment on a go-forward basis?
Our view is that international growth markets are a huge opportunity for EXL. AI adoption by clients internationally is keeping pace with adoption by our U.S. clients. Given the connected world today, many clients are adopting AI rapidly and equally globally. We see a tremendous opportunity to engage with clients internationally and support them on these journeys. Historically, we've had a limited presence internationally, but we've been investing aggressively in talent and solution capability in those markets so we can serve clients more directly near their point of execution. This remains an important strategic focus area and a large demand vector that is relatively untapped by us. We believe we can create significant revenue volume from these markets.
Helpful. And then as a follow-up on the incremental investment spend, you talked about investing more in front-end sales as well as data and AI capabilities. Any additional color you can provide there? Is front-end sales maybe more in international growth markets or certain segments? And on the data and AI capabilities, is that more product build-out or more services capability build-out?
For us, data and AI capabilities are primarily about building out solutions and product capability. As AI evolves, we will continue to invest in products and solutions. Front-end investment is essential because the skill set required to sell data and AI is quite different from traditional digital operations. We are investing to build that capability. We have noticed that deal decision velocity is increasing and cycle times are shortening, so we need more sales and front-end capability to handle higher velocity, faster cycle times and deeper product knowledge about our data and AI services and how we enable AI for clients.
Our next question is from Puneet Jain from JPMorgan.
Strong results. Rohit, are you seeing any changes in clients' conversations or their willingness to outsource given increasing AI complexity and the news flow around AI and also the low enterprise value creation or ROI that some AI projects have created so far?
Yes. Clients are moving away from pilots and want to deploy AI in production. We are still in early stages and production deployments are use case by use case, but clients are building foundations for AI enablement—getting their data estates in order, building platforms to develop, deploy and activate agentic AI, and putting in AI harnesses to iterate and govern models with security and compliance. The effort required to enable AI for any enterprise is massive and represents an enormous opportunity. We believe this opportunity is underestimated by the market. Clients are struggling with this change, and we are well positioned with the right capabilities, skill sets and relationships to help them on this journey.
That's great to hear. And my second question is similar to Bryan's but focused on AI and data work embedded within digital ops. Can you double-click on specifically what type of work you do in that practice within digital ops? That's about 15% of total revenue and growing at a high clip. Directionally, how much of that growth stems from AI-driven agentic operations versus data analytics work within digital ops?
When we embed data and AI into digital operations, we work on common processes such as claims or underwriting. We embed agentic AI into these processes, pulling together pieces and AI-enabling them so LLMs can take decisions and automate workflows. We must do this responsibly with guardrails for regulated industries and workflows. In some cases we use deterministic models suited to follow policies and regulations; in other cases we use probabilistic models where judgment is required. The effort is the art of combining deterministic and probabilistic models and integrating them into the workflow. Each intervention is unique by client, business line and geography, though there are common components and harnesses that can be deployed. The enablement requires a high level of customization, iteration, deep workflow knowledge, understanding of data sets and the ability to integrate and orchestrate across client technology platforms. It's a slow and gradual process, but we are well positioned to deploy this for our clients because we already run these processes for them, which is driving greater adoption and traction.
Our next question is from Maggie Nolan from William Blair.
So there are a lot of moving parts on the margin: the acquisition, the India labor code, tokenomics. You outlined some investments in the prepared remarks. Are you still hoping to drive gross margin up and also modestly improve operating margin annually? Or is the priority for the business for the next couple of years really to invest for and drive growth on the top line?
Maggie, nothing has changed in our thinking around gross margins and adjusted operating profit margin. You saw gross margins come down about 90 basis points from Q1. The primary driver was our increments that came into effect on April 1 globally; that creates a lower gross margin in Q2, similar to the prior year. We continue to make marginal yearly improvements to gross margin as we drive more value from embedding data and AI into client workflows. On the overall margin, we continue to expect 2026 to be comparable to 2025. We had a strong first half in adjusted operating margin, and we will continue to invest in the second half to drive overall top-line growth for the rest of this year and into 2027. Those investments include front-end sales and building out capabilities in data management and AI. You will see gross margins move quarterly, but we are making progress and will invest a bit more in the second half while keeping overall margin for the year comparable to the prior year.
Got it. And then can you talk about whether you've seen success in penetrating the mid-market opportunity? Do you think that cohort is perhaps in greater need of partnership and services than the enterprise, and how are you thinking about that?
The mid-market is trying to catch up on AI quickly and generally needs more help than large enterprises. We are seeing traction there and are well positioned to help mid-market clients because of the attention and focus we can provide. These relationships are meaningful and developing nicely. Speed is central to the value equation. Our ability to engage with mid-market clients, deliver value quickly and give them focus is helping us penetrate that segment.
Our next question is from David Grossman from Stifel.
Looking at the cadence of growth over the last couple of quarters, growth has accelerated on an organic constant basis. It looks like the pace of new client adds in the back half of last year had a pretty dramatic uptick. Is the acceleration we're seeing due to the pace of new client adds over the last three quarters, or was there something about the second quarter that drove the steeper acceleration?
The second quarter was notable because every single service line delivered with strength, particularly our data and AI-led business, which grew rapidly. Our client portfolio is broad-based and client confidence in our services appears to be increasing. The wins we had in the second half of last year, combined with traction across all service lines, produced a very strong outperformance in Q2. That is why we have greater visibility into the second half of 2026 and have increased our guidance for the full year.
What is a bit confusing is that despite easier comparisons, the guidance implies growth decelerating in the back half of the year, and that feels inconsistent with the business model, which is fairly consistent and stable. How should we reconcile the strong momentum with guidance that implies decelerating growth in the back half?
David, the macroeconomic environment remains unsettled and we must continue to win the confidence of CIOs. Enabling AI is hard and requires ongoing proof of ROI to clients. There are challenges and risks in the business. Additionally, we are doing a significant acquisition with iMerit and will be integrating new capabilities in model evaluation and reinforcement learning, which requires focus. The guidance is a prudent estimate balancing strong momentum with these uncertainties and integration efforts.
One quick question for you, Maurizio, on the share count. You had the ASR in place and brought share count down in the second quarter. Can you give insight into what the share count might look like in the back half of the year? Will it be pretty stable, or should we expect further declines?
We will continue to see benefit from the share repurchases done in the first half and into the second half. We will continue our repurchase program in the second half, but most likely not at the accelerated pace of the first half. Given where the share price was in the first half, we prudently spent more on repurchases earlier—$179 million in the first half. We will continue buying back shares throughout the year.
Our next question is from Vincent Colicchio from Barrington Research.
Rohit, I'm trying to think of today's AI revenue and how much represents entirely new spending versus existing work being modernized. Can you give an idea of how that looks?
Standalone AI services and solutions still represent a small portion of our overall revenue, and we expect substantial growth in that service line. AI enablement of digital operations has low penetration and there is much more work to extend across the existing portfolio. The work we do in digital operations spans about 2,000 unique processes across hundreds of clients, and enabling AI for each use case is difficult, time-consuming and only justified where the economics make sense. This is a longer-term change but we aim to accelerate it; the faster we do so, the more client confidence we gain and the more clients will give us larger parts of their operations.
Are you getting better at generating international revenue from cross-selling to U.S. clients? I know that's a large opportunity for you.
Cross-selling internationally to our U.S. clients is an area we need to invest more in and has not been a strength historically. Bhupender, our new President and Head of International Growth Markets, will focus on cross-selling to our U.S. customer base internationally. That has not been a deliberate focus in the past few years, and we need to emphasize it much more moving forward.
Our final question is from David Koning from Baird.
When we think about the acceleration, I see a few buckets where spending might fall. First, business spending had been slow and may be unfreezing. Second, is there a reallocation of AI spend to established IT services players like yourselves? Third, are you gaining market share? Are all three driving the acceleration and can you bucket why this acceleration is happening and where it's coming from?
All three factors are relevant. Over the last 12 months, the largest part of AI spend went to infrastructure and models, with little spend on the app layer and enablement. We expect that to change and for a greater share of aggregate AI spend to move to apps and AI enablement, where we hope to benefit. Reallocation of spend is driven by where clients see highest ROI, and our goal is to transparently demonstrate ROI and be part of that reallocation. From a market share perspective, our growth suggests we are gaining share, which we attribute to the speed at which we deliver and the value we provide, along with our workflow knowledge and data understanding that position us ahead of competition.
On the iMerit acquisition, you gave the revenue contribution. Is it split across all verticals or concentrated in one or two verticals we should allocate more toward?
iMerit's revenue is split, with some work for frontier and foundational model companies that would fall into our diversified industries bucket, which will be a primary recipient. They also do meaningful work in healthcare and life sciences. There is very little iMerit work in international growth markets, so that won't be a meaningful add. Overall, the majority will likely fall into the diversified industries category.
We have no further questions at this time. This concludes our call. Thank you, and have a good day.