EXLS - NASDAQ

Good day, and thank you for standing by. Welcome to the Second Quarter of the 2023 ExlService Holdings, Inc. Earnings Conference Call. [Operator Instructions]. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Kristoff, Vice President of Investor Relations. Please go ahead, John.

Thanks, James. Hello, and thank you for joining EXL's second quarter 2023 financial results conference call. On the call with me today are Rohit Kapoor, Vice Chairman and Chief Officer; and Maurizio Nicolelli, Chief Financial Officer. We hope you've had an opportunity to review the second quarter earnings release we issued this morning. We've also posted an earnings slide deck and investor fact sheet in the Investor Relations section of our website. As a reminder, some of the matters we'll discuss this morning are forward-looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, general economic conditions, those factors set forth in today's press release, discussed in the company's periodic reports, and other documents filed with the SEC from time to time. EXL assumes no obligation to update the information presented on this conference call today. During our call, we may reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of these measures to GAAP can be found in our press release, slide deck, and investor fact sheet. And with that, I'll turn the call over to Rohit.

Thanks, John. Good morning, everyone. Welcome to EXL's second quarter 2023 earnings call. I'm pleased to be with you this morning reporting another strong quarter. We continued our growth momentum in the second quarter with total revenue of $405 million, representing growth of 17% on both a reported and constant currency basis. We grew adjusted diluted EPS 21% to $1.82 per share. Our balanced portfolio across data analytics and digital operations and solutions makes our business resilient by focusing on both growth enablement and cost management for our clients. This has enabled us to generate continued strong double-digit growth despite a slow growth economic environment. In Analytics, we delivered revenue of $182 million for the quarter, up 13% year-over-year, which included strong growth in decision analytics services, data management, and payment integrity. This growth was driven by clients leveraging analytics to drive cost efficiencies, manage risk and increase effectiveness. Analytics growth was impacted by a decline in marketing analytics, which is a trend we have highlighted previously. In a slow growth and high-interest rate environment, banks and insurance companies have slowed down their investments for new customer acquisition. We have been successful in diversifying our marketing analytics client portfolio across other industry verticals. We have already won some new business in health care and marketing analytics for Medicare Advantage, which will convert to revenue later this year. Overall, our Analytics business continues to show strong growth across industries and geographies, which we expect will be further boosted by our focus on generative AI. Looking at our digital operations and solutions business, during the second quarter, we generated revenue of $223 million with a growth of 2% sequentially and 20% year-over-year. This is the ninth consecutive quarter where we have grown this business by double digits. This strong growth was driven by momentum across all of our digital operations and solutions businesses as our new and existing clients focus on lowering costs improving efficiencies and enhancing end customer experience. Our data-led strategy, combined with our deep domain expertise continues to resonate with our clients and fuel our growth. This has significantly increased our total addressable market and grown our sales pipeline, particularly in large transformative deals. I'm very encouraged by the size, scale, and complexity of the deals we are winning, which is driven by our ability to embed market-leading data analytics, digital, and AI competencies into our clients' core operations. Looking at the overall demand environment, we continue to hear from our current and prospective clients that their priorities over the next 12 to 18 months include cost reduction, increased efficiency, and improved customer experience. There is strong demand from clients for using generative AI to achieve these priorities. As our clients plan their generative AI investments, they need a partner who has deep business domain knowledge, can harness the data, create the appropriate use cases and implement them as part of the workflow. Our clients view EXL as an ideal partner who combines all these capabilities. During the quarter, we launched our new generative AI platform, which builds on our strength in analytics, AI, and digital operations and solutions. It includes our AI workbench, plug-and-play AI accelerators, data security and compliance framework, and our enterprise data management capabilities. Our platform launch attracted more than 1,000 attendees and has created a very strong pipeline. As we engage with our clients, we are helping them in three areas: first, we help them evaluate, select, build, and roll out generative AI use cases; second, we help them make that data AI-ready, which includes data engineering, unstructured data management, data security and data and cloud operations; and finally, we help them reimagine and design new AI-enabled operations with human in the loop. I'd like to share a couple of real-world examples where we are already deploying generative AI solutions for our clients. The first is with a large international insurance client. The client's objective was to streamline their claims process to reduce cost and improve customer experience. We developed a generative AI-based smart claim solution. It uses open source large language models and leverages the latest retrieval augmented generation architecture. Our innovative AI solution swiftly accesses end-to-end claim information and delivers accurate and concise insights through a user-friendly interface. This streamlines the claim agent's workflow and reduces the amount of time needed to process the claim, resulting in lower costs and improved customer experience. Another example involves a large energy company in the U.K. where EXL is implementing a generated AI-led agent assist solution across all of their contact center operations which will run on our cloud. This solution provides live assistance to the contact center executives while they're engaged with end customers. It monitors conversations in real time using large language models to extract relevant information and provides both proactive nudges and on-demand procedure guidance. Our solution not only helps improve compliance and first call resolution rates but also reduces the amount of time customers spend with contact center executives, thus improving customer experience. These are just two examples of how we are currently deploying generative AI-based solutions, differentiating ourselves in the marketplace and creating value for our clients. We expect generative AI to create new revenue sources for us as well as augment our existing data analytics and digital operations and solutions businesses. We will continue to invest heavily in our generative AI capabilities, including creating a center of excellence with more than 1,500 dedicated generative AI specialists. With our continued focus on talent, I'd like to recognize two new leaders that recently joined our senior leadership team. First, Pam Harrison joined as Executive Vice President and Chief Human Resources Officer. Pam has helped execute HR strategies for large and complex global organizations. Her extensive domain expertise will make her an invaluable resource in developing HR strategies as we continue to grow and recruit top talent, particularly in digital and AI. And most recently, Vishal Chhibbar has rejoined EXL as our Chief Growth and Strategy Officer. You may recall that Vishal served as CFO from 2009 to 2019, where he instituted some of EXL's foundational growth strategies. In his new role, Vishal will spearhead our growth initiatives, leading strategy, marketing, sales governance, M&A, and strategic partnerships. As our business continues to grow at a rapid pace, Vishal's practical insights and keen instincts will be tremendously valuable. I'm thrilled to have both Pam and Vishal on our team. Looking ahead, we are encouraged by the momentum in our revenue and EPS growth, our growing sales pipeline, and the resiliency in our business model. We are making significant progress on our generative AI offerings, and we will continue to build off that momentum as we invest further in advancing our capabilities in the coming quarters. I want to extend my sincere gratitude to every member of the EXL team for their unwavering dedication and relentless pursuit of innovation to better serve our clients. Given these factors and our current visibility for the remainder of the year, we are raising our 2023 revenue and EPS guidance. Maurizio will walk you through the details in a few moments. Finally, I want to reflect on our recent decision to execute a five-for-one forward stock split. This split brings several expected benefits, including increased liquidity, improved transparency, and lower trading costs for our stockholders. Additionally, the lower post-split share price enhances accessibility for our employees to participate in the company's employee stock ownership program. But perhaps most importantly, it demonstrates the confidence we have in our ability to continue to grow the company and generate long-term stockholder value. We have a highly resilient business model with long-term clients, a large percentage of recurring revenue and a balanced portfolio of business across data analytics and digital operations and solutions. Coupled with our increasing total addressable market and leading position in data analytics, digital and AI in the markets we serve, I am very excited about the opportunities that lie ahead of us. And with that, I turn the call over to Maurizio.

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 2023, followed by our revised outlook for 2023. We delivered a strong second quarter with revenue of $405 million, up 16.8% year-over-year on a reported basis. On a constant currency basis, we grew revenue 17.1% year-over-year and 1% sequentially. Adjusted EPS was $1.82, an increase of 21.3% year-over-year. All revenue growth percentages mentioned hereafter are on a constant currency basis. Revenue from our digital operations and solutions businesses as defined by three reportable segments, excluding Analytics, was $222.8 million, which represents year-over-year growth of 20.8%. Sequentially from the first quarter of 2023, we grew revenue 1.8%. In the Insurance segment, we generated revenue of $128.5 million, an increase of 19.2% year-over-year and 2.2% sequentially. This growth was driven primarily by the expansion of existing client relationships. The Insurance vertical, consisting of both our digital operations and solutions and Analytics businesses, grew 16.5% year-over-year with revenue of $164.4 million. In the Emerging segment, we grew revenue 25.4% year-over-year and 1.1% sequentially to $67.2 million. This growth was driven by the expansion of existing client relationships and new client wins. The Emerging vertical consisting of both our digital operations and solutions and Analytics businesses grew 14.3% year-over-year with revenue of $152.4 million. The Healthcare segment reported revenue of $27.2 million, growing 17.9% year-over-year and 1.7% sequentially. This growth was driven by higher volumes in our clinical services business. The Healthcare vertical consisting of our digital operations solutions and Analytics businesses grew 23.4% year-over-year with revenue of $88.2 million. In the Analytics segment, we generated revenue of $182.2 million, up 12.8% year-over-year. As Rohit noted, we generated strong growth in our decision analytics services, data management, and payment integrity businesses during the quarter, partially offset by a sequential and year-over-year decline in marketing analytics as our clients and insurance and banking continue to reduce their marketing spend. We reduced SG&A expenses as a percentage of revenue by 40 basis points year-over-year to 18.2%, driven by continued cost discipline and operating leverage. Our adjusted operating margin for the quarter was 20%, up 130 basis points year-over-year, driven by higher volumes and operating leverage. Adjusted operating margin for the second quarter includes approximately 1% of non-reoccurring revenue with lower associated costs in our digital operations and solutions business. Our effective tax rate for the quarter was 23.9%, up 60 basis points year-over-year, driven by higher U.S. state taxes. Our adjusted EPS for the quarter was $1.82, a 21.3% increase year-over-year on a reported basis. Turning to our six-month performance. Our revenue for the period was $805.6 million, up 20% year-over-year on a constant currency basis. This growth was driven by both our digital operations and solutions and Analytics businesses. Adjusted operating margin for the period was 19.7%, up 130 basis points year-over-year. Six-month adjusted EPS was $3.56, up 21.9% 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 $263 million, and our revolver debt was $220 million for a net cash position of $43 million. We generated cash flow from operations of $64 million in the first six months compared to $53 million in the same period in 2022. This was -- this improvement was driven by the expansion in our adjusted operating margin. During the first six months, we spent $26 million on capital expenditures and repurchased $65 million of our shares at an average cost of $160 per share. Now moving on to our outlook for 2023. Based on our strong performance for the first half of the year and our current visibility across all verticals, we are raising our outlook for the year. We now anticipate revenue to be in the range of $1.605 billion to $1.625 billion, representing year-over-year growth of 14% to 15% on both a reported and constant currency basis. This represents an increase of $8 million at the midpoint of our previous guidance of $1.595 billion to $1.62 billion. We expect a foreign exchange gain between $1 million to $2 million, net interest expense to be approximately $1 million and our full year effective tax rate to be in the range of 22% to 23%. Based on this, we anticipate our adjusted EPS to be in the range of $6.90 to $7.05, representing year-over-year growth of 15% to 17%, which is an increase from our prior adjusted EPS guidance of 12% to 15% growth. We expect capital expenditures to be in the range of $47 million to $52 million. In summary, our business model remains resilient due to our long-term client contracts, substantial reoccurring revenue, and a well-balanced portfolio across our data analytics and digital operations and solutions businesses. Our data-led strategy coupled with our expanding capabilities in data management and generative AI has led to a larger total addressable market, placing us in a strong position to consistently outperform in the long run. With that, Rohit and I would be happy to take your questions.

[Operator Instructions]. Our first question comes from Puneet Jain from JPMorgan.

Thanks, for taking my question. So, I quickly wanted to ask about like overall demand trends, specifically as it relates to Operations Management. So that segment was up 20%, has been growing double digits for a while. Given like the potential impact from generative AI there, like how should we think about medium-term growth rates for that segment?

Yes. Puneet, this is Rohit. So, from our perspective, the demand environment continues to remain very favorable, and particularly for digital operations and solutions, we are seeing continued strength in that segment. For us, this seems to be resonating really well because our ability to bring in analytics, technology, and automation and combine that into the operations, that's exactly what clients are seeking. As we get into the adoption of generative AI, it's becoming clearer and clearer to us that we are likely to see a further increase in demand on digital operations. And therefore, we think we are positioned really, really well as far as that is concerned. Keep in mind one other thing, which is the slow growth economic environment is actually causing companies to focus a lot more on expense reduction and, at the same time, improving the end customer experience. So, what we are seeing is clients, which previously would not have thought about digital operations and solutions outsourcing, are now kind of coming forward and engaging with us. And so, we are seeing more midsized companies come forward. We are seeing more mutuals in the insurance segment come forward. We're seeing more clients in Europe come forward. And I think that's a very good and healthy trend for us. So frankly, the demand environment is great. It seems to be we're seeing larger deals in the pipeline. And we think the digital operations and solutions business in this kind of environment will continue to do well.

Got it. And then on Analytics [indiscernible] like generative AI should benefit Analytics on an overall basis, like you it's great to hear like the examples of two projects you talked about in that area. But will that work represent incremental opportunity, driving higher than previously expected growth in the segment? Or could it just like crowd out like other investments from clients in Analytics and the overall growth could remain in the mid-to-high teens levels over next few years?

Sure. So, we think in order for any client to adopt generative AI, there are a few things which are prerequisites to kind of enabling that. Number one is to have a business understanding and a domain knowledge understanding so that you have the applicable use cases that you can apply generative AI to. And the second more important piece, particularly for analytics is the data that needs to be used for large language models, that data prep and the data architecture and the ability to use data, there's a huge need from all clients to upgrade their data platforms and their data availability. We, in our Analytics business, we think we're going to get a big boost up on the data management side of the business because we can help clients architect their data, manage their data, make that data available. There's a lot of data which is unstructured that is -- needs to be used for generative AI. There is a lot of vectorizing of the databases that needs to happen. There's cleansing of the databases that needs to happen. So frankly, there is a lot of work that needs to happen in order for generative AI to be practically usable by a client. And therefore, we think the analytics growth rate as well as the analytics portfolio for us is going to see actually a net tailwind behind it because of generative AI.

Got it. Thank you.

Our next question comes from Bryan Bergin from TD Cowen.

Good morning. Thank you. I wanted to start on Analytics here as well, I guess more near-term view. So, the underlying Analytics performance in the quarter, can you comment on how 2Q did relative to your plan? Maybe talk about the current demand trends there versus maybe three months ago. And any change in your target for Analytics growth in 2023?

Sure, Bryan. So first off, the Analytics business, we think that's a very attractive, high-growth vertical for us. We think the growth rate of that particular business segment should be 15% to 18% over the medium term. We think that growth rate is absolutely intact and kind of in place. If you take a look at the growth rate of our Analytics business in the first half of 2023, I believe the growth rate is 17%, so it's actually a very healthy growth rate. Coming specifically to Q2, the Q2 growth rate for Analytics was lower at 13%. We did see an impact of marketing analytics, which was a negative growth rate for us quarter-on-quarter as well as year-on-year, and that's what has impacted us. That is certainly not something which we had in our plan, and it was something that did reduce our growth rate in Analytics for the quarter. But we think that is a temporary phenomenon. And as insurance companies and as financial institutions get back into the customer acquisition mode, our growth rate in Analytics should kind of climb right back up. Keep in mind, analytics services, data management, and payment integrity, which are all parts of Analytics, they all grew at a very healthy pace. And like I just said, with generative AI creating more demand on data management and on data analytics, we think actually this growth rate of 15% to 18% over the medium term is likely to continue and continue for a long period of time.

Okay. Understanding that, that pressure appears transitory in the customer marketing piece, do you plan that 3Q may actually decline sequentially, too? Or do you think it's stabilized?

So, we have factored in our assessment of where we think marketing analytics will be in the second half of the year. As we said in the prepared remarks, we have diversified our marketing analytics capabilities, and we've gone into other industry verticals like health care. And health care, as you know, is not interest rate-sensitive and has a very, very stable kind of a demand environment. So, as we diversify into other industry verticals for marketing analytics, we believe that the volatility associated with the growth rate of marketing analytics will diminish. And it will actually help us protect the portfolio and grow the portfolio much better.

Okay. And if I could sneak one more in on margins, so nice outperformance here in the quarter on operating margin. Can you just comment on second half cadence expectations?

Yes, Bryan, it's Maurizio. So, we have performed very well in the first half of the year on margins. Our adjusted margin was 19.7% for the first half of the year and we got up to 20% in Q2. Now keep in mind, in both quarters, we had the benefit of non-reoccurring revenues, particularly in the second quarter also, about $4 million, and that was -- and that had very low associated costs coming through. So, you have a margin that's been elevated to a certain extent by that non-reoccurring revenue in both quarters, including Q2. Going forward, we have -- we'll be making some significant investments into gen AI to really drive our revenue growth in both digital operations solutions and analytics. And then we'll also be making investments in front-end sales to really drive the business going into 2024. So, you should think about margins in the second half of the year much more in the 18% range as we talked about earlier in the year.

Our next question comes from Maggie Nolan from William Blair.

Thank you. You just gave some good color on the marketing analytics, in particular, in the second half of the year. But I'm curious, are there any other factors for how you're thinking about demand and the growth rate for the business in the second half versus the first half at the consolidated company level?

Maggie, for us, if you take a look at our digital operations and solutions business, we are actually very happy with the new client wins that we have and the expansion of work that we are seeing from our existing clients. And there, it's all about execution and implementation. And we think that, that momentum pretty much continues into the second half of this year and even going into next year. The Analytics part of our business, again, the data management part, payment integrity piece as well as analytics services, we continue to see good growth. We think the data management piece will actually accelerate with generative AI. So that's a net positive for us. The marketing analytics, frankly, will likely remain soft for some time. Q4 will likely see some increase in the health care -- analytics health care marketing analytics. So that's something which we have factored in. For us, what we are really, really happy with is how the portfolio is performing for the company. So, if you take a look at EXL and our portfolio, we have 55% of our business in digital operations and solutions, and that's -- it's grown in the first half at 20%. We have 45% of our business which is in data analytics, and that's growing nicely at 17% as well. What we like is between these two business segments that we have, there's -- both of them are high-growth segments. Between the two of them, it builds up resiliency. So, when it's a favorable economic environment and there's growth taking place, clients are focusing on growth. That works very well for us. And in slow-growth economic environments, that works very well for us. And the last piece is the integration between analytics and operations is a sweet spot for us. And that's why our overall growth rate is much faster than the marketplace. And we think that, that business model continues to resonate very heavily and we think we're going to keep driving that. And by the way, generative AI is going to further that tight integration between analytics and digital operations.

Thank you. And then can you comment a little bit on wage dynamics since last quarter, how wage inflation is kind of intersecting with the current demand trends to inform your pricing expectations for the next couple of quarters?

Sure. So, on wage inflation, this is something which we had factored in previously. We typically give salary increments which are across the company on first of April. We already were seeing the slowdown in the economic environment in the first quarter and we planned appropriately. And I think this year across the industry, the salary increments have been somewhat moderate as compared to last year. So that's been actually very helpful. I think you can see that some of that has been disciplined execution on the part of EXL, and we continue to be very, very careful in terms of how we plan that out. There are certain skill sets which do require us to actually have a much higher wage inflation, particularly around digital, analytics, data management, and specialized domain skills. And in those areas, we have been very, very -- we have a very differentiated policy of making sure that we are market competitive. So frankly, wage inflation this year has not been that much of a challenge. But we are differentiated across skill sets, and we'll continue to be very, very judicious and careful and disciplined in terms of how we manage that.

Our next question comes from Ashwin Shirvaikar from Citi.

Let me start with this is a bit of an involved question. But when you reported 1Q, your expectation for 2Q was that you would be comparable to 1Q for revenues adjusted for one-time rev. In other words, you were looking for, roughly speaking, $395 million. You did not, as you mentioned, expect the marketing analytics thing to shrink. So, if I take that into account, you probably outperformed your expectations by about $15 million. So, I just want to figure out, what was on the other side that helped you? Was it faster ramps on the operations side? Did other parts of Analytics come through as you, I think, always expected because marketing analytics, best I understand, is what, 15% of overall Analytics? So, any details that you can provide with regards to the breakout of what worked as well?

Yes, Ashwin, that's a very good observation, to be quite honest. So, we closed the quarter at $401 million. We had -- and we talked about $6 million in non-reoccurring revenue, which would have dropped you to just at a starting base of $395 million. And in the midpoint of the range, if you calculate it within our annual guidance, you would have gotten to about $400 million. And so, you're 100% correct in that we saw marketing analytics come down a little bit more than what we had expected. What we did not factor in was continued acceleration or very good growth within digital operations and solutions because that piece of our business grew 23% in Q1 and continue to grow at 20% in Q2. And this is the third quarter in a row that, that part of our business has grown 20%-plus. So that was the differentiated factor. And that's the area that now we're seeing some continued momentum going into the second half of the year and into 2024.

Understood. And I mean, derisking is a big deal for investors nowadays in terms of the numbers. So, Rohit, you mentioned that you expect marketing to snap back. It will eventually. Growth is important to companies. But when you say snap back, do you mean beginning next year or are you kind of factoring in snap back later this year? What sort of explicit assumptions are you making? And it might help if you kind of break down overall Analytics into what percent is marketing, what percent is other parts of it and so on, so forth kind of start with that maybe?

Right, Ashwin. So, the marketing analytics, we do expect will kind of recover. We think the fourth quarter is likely to see strength in marketing analytics, like I mentioned, because of the diversification into health care marketing analytics. All the work that we do with the payers, helping them with marketing for Medicare Advantage plans all typically ends up being in the fourth quarter, and we would expect to see that kick in, in the fourth quarter. Keep in mind a couple of other things. Today, most insurance carriers have stepped out of California and they've stepped out of Florida. And they're simply not expanding their presence out there because all the rate increases that they need to get done, they need regulatory approvals on that, and that's taking time and that's not been put into place. So, because of the inflationary pressures that we saw in the previous cycle, there is pretty much a standoff in terms of expanding and offering insurance in California and Florida, which are two of the largest markets in the country. So frankly, that has to normalize at some point of time with the price increases that are necessary to kind of be brought in and for the insurance carriers to go back there. So, we think -- that's why we think that this is a temporary kind of a phenomenon. We don't think that this is going to be something that is lasting to perpetuity. And frankly, marketing analytics is becoming more and more critical and more and more important because the ability to hyper-personalize your service offerings to the relevant customer segment, the ability to target on a geographic basis and a zip code basis, the ability to rely on data and use data signals for effectiveness in marketing, that's becoming more and more important. So frankly, we think marketing analytics is a good play for our Analytics business, but it does have volatility associated with it at this point of time.

Understood. If I could ask a quick last question to Maurizio. Free cash flow, the $200 million-plus, what are the drivers in the back half of the year? And I'm not sure if I might have missed it, have expectations for free cash flow changed or are they still the same?

Our free cash flow expectations are very similar. In the first half of the year, we have a number of higher cash outlay events. We pay our annual bonuses in March, which is a big number. We have some higher tax payments earlier in the year that hit us pretty hard in terms of free cash flow. So, you're going to -- so you would see -- you see less free cash flow in the first half of the year. But in the second half of the year, we see very comparable to what we've seen in the past.

Our next question comes from Mayank Tandon from Needham.

Thank you. And good morning. Congrats on the quarter. Rohit, I wanted to ask you on the recruiting front. As you think about the implications of gen AI, rather, on your business, how do you go about changing your recruiting engine? And what kind of skill sets will you be looking to hire? And maybe on a related note, what does that mean for attrition longer term? Does that change the dynamic for your business?

Yes. Thanks, Mayank. So, the recruitment for us for gen AI, in particular, requires us to hire the same type of resources that we were hiring previously for all the machine learning and AI work that we were doing within analytics. It requires us to provide training to these resources. Keep in mind, because gen AI is so, so new, there aren't very many experienced resources out in the marketplace. So frankly, our ability to train and provide that input to these individuals, that becomes really, very important. The talent pool that we are kind of targeting for gen AI tends to be people who have a strong understanding of data, have a strong understanding of using these large language models. There's a lot of work that we do around managing databases and moving data to the cloud. So, I think there, we pick up experienced talent. But most of the actual usage on generative AI is internal training that we provide to these folks. We are fortunate we've got 8,000 data scientists internally in the company, and we've got 1,500 who are already trained on AI. So frankly, we've got a very good bench strength to kind of buildup on. And all the hiring that we have done this year and that we continue to do, we'll be able to kind of provide them with this kind of knowledge and upskill them. And the last piece on the generative AI is this, there are a number of the high-tech companies that have actually been laying off people and resources that were doing work around AI. And that is actually a target-rich environment for us to be recruiting from.

Understood. That's helpful. And then just a related question on gen AI. Again, this might be a little premature. But what do you see in terms of the impact on the size and scope of deals over time? And then just given the productivity benefits, do you imagine that you'll have to pass on more of that to your end customer versus what you've been providing at least in a more traditional digital operations and analytics space?

Yes. I think that's a very, very important question. Let me address it in the two parts that you asked for it, Mayank. One, because of generative AI, we think the deal size actually increases. So, we think there'll be a larger opportunity for us to play. We can actually deploy generative AI across the enterprise. And because we are deploying generative AI across the enterprise, it's not only on the work that we do but it's the work that our clients are doing with other partners as well as work that they're doing themselves that we can apply this to. And therefore, it becomes a much larger opportunity for us. The second part of it is the productivity benefits and the kind of headwind that, that might provide. Well, we are in a very fortunate position that the work that we do in digital operations is very complex, very fragmented and it's at the upper end of the complexity spectrum. So, the level of cannibalization of that is very, very low. And therefore, we think the productivity benefit that needs to be provided, that's not going to impact our business model by very much. It's really where you have large call centers and contact center employees and workforces or where you have simple processes being managed. I think there the impact of the productivity benefit and cannibalization is going to be a lot, lot higher. And we will actually benefit from that because we will be the ones implementing this gen AI strategy for our clients. And therefore, we think it's a net positive for us.

That a very helpful sir. Thank you so much.

Our next question comes to Moshe Katri from Wedbush.

Hey thanks. Just a couple of follow-ups here. First, so clearly the demand remains strong. Can you talk a bit about -- maybe you can describe from your perspective what you're seeing in terms of project ramp, especially for the new deal flow that's coming on board? That's my first question.

Yes. So, I think from our perspective, the demand is strong and the decision-making cycles continue to be at the same pace as previously. We really have not seen any change to that happening. And so, what that means is that the ramps and the project implementation cycles are pretty much in the same way as they were previously. And so, we expect that to continue. It's in areas where there is discretionary expense that needs to be incurred, where there is discretionary project work. So, if it's consulting work that needs to be done or an advisory work that needs to be done or it is a short-term project engagement that is discretionary, there we are seeing a shift. But again, we are very, very fortunate, Moshe, that at EXL in our portfolio, we have very, very limited work that we do around advisory and consulting and very limited work around discretionary projects. So, frankly, for us, it feels like the environment is very conducive to our growth.

Okay, that's great. And then we got some questions from investors about any noticeable volume reductions during the quarter. And I'm assuming if it does happen or did happen, it's probably more on the insurance and banking verticals. Is that the right way of looking at it?

We have not really seen any volume reduction in the second quarter. If you take a look at our digital operations and solutions business, like Maurizio mentioned, we grew that 20%. That's well above our expectation levels. And we didn't have any volume reductions out there.

Okay. And then Healthcare continues to look really strong. What are we doing to kind of continue to sustain this growth rate that we are kind of seeing here?

Yes. So, Healthcare is, again, a very, very large industry vertical. It's also a vertical that's very rich in terms of the ability to apply digital and apply data and AI into Healthcare. I think a lot of clients are moving in that direction. What we are doing is we are expanding our service offerings and solutions for the Healthcare industry vertical. So, we've built up more new capabilities, and we are investing in newer capabilities around risk adjustment. We are working around how we can leverage conversational AI, how we can kind of have a number of the generative AI capabilities be embedded into Healthcare and be helpful to members, be helpful to some of the contact center reps, and actually leverage that capability across the enterprise.

All right. And then the last one, since you mentioned AI, can we get any color on the pipeline here? And you kind of indicated there's a lot of interest, but in terms of sold deals or any sort of color and details on how this is actually -- this could potentially trigger incremental growth down the road?

Sure. So, what I can share with you is on generative AI, we have more than 150 conversations taking place with clients at this point of time. We've got several advanced stage deals that have been signed up that we are working on. We've got 120 use cases across industry segments. We have 20 gen AI demos that we've created and these are up on our website, so it's available for our clients and our prospects and our partners to see. So, frankly, there's a lot of activity that's taking place on generative AI. And we think that gives us a lot of confidence in terms of how this will result in a greater volume of work and a greater amount of revenue for us going forward.

That’s great. Thanks for the details.

[Operator Instructions]. Our next question comes from Vincent Colicchio from Barrington Research.

Yes. Rohit, on the generative AI use cases at 120, do you expect that to ramp up considerably in the coming quarter?

Yes, Vincent. I think we are likely to get clients to sign up on that. The big thing that needs to kind of take place out there is that the data needs to be ready and usable for generative AI. Most of our clients require a ton of work to be done around their data. And we're talking about unstructured data being available on these large language models. We're talking about how do we protect the confidentiality and security of this data, and how do we kind of integrate in various data sources real-time. because generative AI, it's only useful and powerful if you can leverage that in a real-time environment. So, frankly, there's a lot of work that needs to happen on that before the generative AI use case can be practically deployed, and that's where the bottleneck is right now. We are in a -- again, in a great place to help our clients on that data side. Keep in mind, most of our clients were already moving some of their structured data sets onto the cloud, and we were helping them and others were helping them. But now what you need to do is you need to do a vectorization of these databases. And that's become hugely important for applying generative AI to them. So, that's another whole work stream that needs to be undertaken before this can be practically enabled.

And could you provide some color on the new logos added in the quarter? Specifically, do any of them feel like they could be strategic clients?

Yes, Vincent. I think the portfolio mix of new clients actually is very, very healthy. We've seen some clients come in which are first time users of digital operations and solutions and analytics. We think many of these will become strategic and large opportunities for us. Keep in mind one thing that even a midsized client for us, because we are kind of doing work across the spectrum on digital operations and analytics, can become very, very meaningful for us very quickly. So, frankly, the quality of that portfolio of new clients signed up is very strategic, and we think it's very healthy that will provide us a good runway over the next several years.

Thank you.

Our next question comes from David Grossman from Stifel.

Thank you. This question has come up several times and kind of asked probably in a different way, but so sorry to ask it again. But I guess I'm just thinking about the cadence of the digital ops and solutions business. Obviously, last year was a good bookings year and you saw some acceleration in the fourth beginning of the fourth quarter. So, you're going to anniversary the comparison in the fourth quarter '23. I know you don't really disclose bookings and backlog, but maybe you could give us some context of how to think about when you anniversary that more difficult compare, particularly in the fourth quarter, and kind of what the setup is into that and as we get into next year because you did comment that you expect strong growth in digital ops into 2024. But just really interested in some context around that, particularly given how difficult the compares get beginning in the fourth quarter.

Sure, David. So, as you know, in digital operations and solutions for us, we sign up large clients and we ramp up the work that we are doing for them. But that transition takes place over an 18-month to 24-month period. So, frankly, for us, some of the large bookings that we had in 2022, the full implementation of that cycle is likely to continue into '24, and it's not fully reflected in our '23 numbers. So, it's also a business which is much less volatile. It's a business that when you go up in terms of the growth rates, it's likely to stay there for a longer period of time. And we think the bookings that we had in '22 were very healthy, and bookings continue to be healthy in '23. And some of the large deals that we are seeing right now in the marketplace, those are very healthy. The insurance industry is a great industry vertical for us to be playing in because there's a lot of technology modernization that needs to happen out there and there's a lot of cost rationalization that needs to happen over there. And we are helping our clients do that and we are the market leader out there. And then we're seeing that in Emerging. We're seeing that in Healthcare. So frankly, the digital operations business for us feels that it's got elevated growth rates as compared to our historical growth rate out there. And that's something which continues to happen. And as more digital gets embedded into operations and as more gen AI gets embedded into the operations, we actually think that, that's a net positive for us.

Right. And then you did make a comment, Rohit, about health care analytics and some activity ramping in the fourth quarter. So, is that seasonal or a seasonal uptick in the fourth quarter because of the work you're doing for Medicare Advantage? Or is this new business coming on in the fourth quarter that would continue on into 2024?

No, no, David, you're right. That business will be seasonal business. The marketing analytics piece for Medicare Advantage is only in the fourth quarter. Some of that might spill into the first quarter, but it's typically around the end of the year when there's the annual enrollment cycle that takes place.

Got it. And then just one last quarter -- or question, excuse me, on this nonrecurring revenue. At least I don't recall you reporting that before this year. So, is there something changed in the way you're contracting that we would expect this nonrecurring type revenue to kind of be more of a common occurrence? Or is this really just an unusual contract where you're truing something up or your performance base that you're getting some revenue?

I think, David, we've had a few things that have occurred over the last couple of quarters. One is we are getting -- some of these items are coming up that haven't come up in the past, whether it's a one-time payment or it's accruing revenue from an increase from a previous period. It just gives investors a little bit more insight into forecasting going forward, to be quite honest. And it does have a pretty big effect on our margin. We are investing back into the business, but we also have very healthy margins right now, especially in the first half of the year of 19.7%. So, we're working on increasing our margins but we've had very healthy margins in the first half of the year. And a piece of that is attributable to that there's onetime revenue. So, we do want to call it out just to give a little bit more context to investors.

Okay. But it sounds like that's something that could continue going forward, right? That you would have -- it's something that's part of the contracts that you're signing, so it wouldn't be unusual for those to just continue to occur in the future?

Potentially. We'll have to see, but potentially.

I would now like to turn the conference back to John Kristoff for any closing remarks.

Okay. Thank you for joining us today, and as always, if you have additional questions, please reach out to me directly. Thank you, and goodbye.