EXLS - NASDAQ

Good day, and thank you for standing by. Welcome to the Fourth Quarter 2023 ExlService Holdings, Inc. Earning 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] Please be advised that today's conference is being recorded. I would like to now hand over the conference to your first speaker today, John Kristoff, VP of Investor Relations. Please go ahead.

Thanks, Rivika. Hello, and thank you for joining EXL's Fourth Quarter 2023 financial results conference call. On the call with me today are Rohit Kapoor, Vice Chairman and Chief Executive Officer, and Maurizio Nicolelli, Chief Financial Officer. We hope you've had an opportunity to review the fourth quarter earnings release we issued this morning. We also posted an earnings release slide deck and investor factsheet 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 our investors. Reconciliation of these measures to GAAP can be found in our press release, slide deck and the investor fact sheet. With that, I'll turn the call over to Rohit.

Thanks, John. Good morning, everyone. Welcome to EXL's fourth quarter and 2023 year-end earnings call. I'm pleased to be with you this morning discussing our strong results and continued ability to outperform. EXL performed exceptionally well in 2023 despite a challenging macroeconomic environment and weakness for discretionary and project-based work across the industry. We grew full year revenue by 16% and delivered EPS growth of 19%. We achieved 13% revenue growth in our Analytics business for the year and an impressive 18% growth in our digital operations and solutions business. In the fourth quarter, we generated revenue of $414 million, an increase of 11% year-over-year and 10% in constant currency, and we grew fourth quarter adjusted EPS by 11% to $0.35. Our ability to consistently deliver industry-leading double-digit growth even in a difficult environment is the result of sound execution of our differentiated strategy and our balanced portfolio of businesses. We recognized the importance of data several years ago and pivoted to being a data-led company, which resulted in a three-year revenue CAGR of 19%. Our data-led strategy and deep expertise in analytics has uniquely positioned us to embrace AI and pivot to now becoming data and AI-led in everything that we do. Just as data-led enabled us to drive superior growth over the past several years, combining data and AI positions us well for industry-leading performance going forward. Data is crucial for the accuracy of AI outputs and is the foundation upon which all successful AI is built. The more reliable the AI outputs, the better the outcomes for our clients. This enables us to expand our total addressable market and offers our clients a much richer value proposition, driving operational efficiencies, improving customer experience and growing revenue. The value and impact of data and AI together is greater than the sum of parts. Over the past several years, we have been at the forefront of embedding machine learning and AI into our clients' operations to drive greater efficiencies and enhance customer experience. EXL has unique industry-leading data, analytics and AI capabilities which when combined with deep experience in industry-specific business models and operations, results in superior business outcomes. That's what it takes to transform AI from concept to reality and why we are so excited about the opportunity ahead. We are making meaningful investments to propel our data and AI-led strategy going forward. We have established an AI center of excellence with 1,500 specialists. More than two-thirds of our employees have already taken advantage of AI training and development tools to help them expand their knowledge and skills. We have developed several generative AI applications for enterprise use in areas such as employee self-service, recruiting and finance. We are collaborating with the leading technology partners, including our most recent announcements with Microsoft and AWS to co-develop AI solutions and accelerate go-to-market plans. And we embedded AI into our core solutions and continue to build our portfolio of more than 150 AI use cases across industries with over 30 deployments with clients. We are leading the way in helping our clients reinvent their business models fueled by data, analytics and AI to deliver higher value with speed. To support the shift to our data and AI-led strategy, we recently expanded our executive leadership team with two new leaders. Andy Logani, Executive Vice President and Chief Digital Officer, is responsible for advancing EXL's digital and AI initiatives. And, Baljinder Singh, Executive Vice President, Chief Information Officer, leads EXL's technology, cybersecurity and enterprise transformation functions. As we focus on implementing data and AI-led solutions to transform our clients' businesses along with our own operations, it is crucial that our senior leadership team is made up of executives with a deep understanding of digital and AI. Let me now share a couple of examples of how our data and AI-led strategy is enabling EXL to deliver more value to our clients. We have been working with a large US-based financial services company to reinvent their collections and payment assistant processes. We pursued an omni channel approach, leveraging data and generative AI to produce intelligence which enables the clients to offer their end customers more personalized solutions and reduce potential defaults. We initially deployed Paymentor, our proprietary AI-based digital payments and collection solution for one of their credit products and are on track to reducing their net credit loss by $30 million per year. As a result of our initial success, we are extending our Paymentor solution to various other lending products over the next several months. In addition, we won the mandate to run their collections operations end-to-end using a data and AI-led solution with human in the loop. This delivers not only improved collections outcomes, but also a better customer experience in an area where the engagement has typically been adversarial. With the recent high inflation and interest rate environment, many of our financial services clients are seeing an increase in customers requiring payment assistance and debt restructuring. We are confident in our ability to help clients overall their collections functions using the latest data, AI and CX technologies. In another example, we are using AI to help one of our large healthcare clients significantly reduce losses from potential billing errors. We review their claims data on a running basis to identify, audit, and recover hundreds of millions of dollars from incorrect payments each year. As we further embed generative AI into our solutions, this enables us to identify a greater number of billing errors in a shorter period of time while significantly reducing the number of false positive encounters with providers. We are also using AI-based tools to aid our auditors in finding billing errors faster, creating more productivity gains. One of the most exciting aspects of Gen AI is it allows us to identify errors in real-time prior to payment and identify root causes of payment or submission errors. We have put EXL in a leading position by adopting data and AI as part of our core growth strategy and making significant investments to further strengthen our value proposition. Looking ahead, we have solid momentum in our business. As we deliver more tangible value to our clients through data and AI, we are winning larger deals and improving our competitive win rates. This enables us to grow faster than competition, move more of our revenue to an outcome-based business model and capture a greater share of the value we create for our clients. Our Board of Directors authorized a $500 million stock repurchase program effective March 1, 2024 for two years. This reflects confidence in our ability to continue to deliver industry-leading growth and generate significant free cash flow. This is part of our ongoing capital allocation program. There has been a tremendous amount of change in our business and we would like to keep our stakeholders informed about the transformation of our business. Therefore, we will be holding an Investor Strategy Update event on May 7 to provide further insights about our data and AI-led strategy. Please mark your calendars and we will provide event details in the coming weeks. In summary, we delivered exceptional results in a challenging environment in 2023. Our winning strategy, unique data, analytics and AI capabilities, and an exceptionally talented and dedicated team position us well to deliver industry-leading performance in 2024 and beyond. With that, I'll turn the call over to Maurizio to cover our financial performance in detail.

Thank you, Rohit, and thanks everyone for joining us this morning. I will provide insights into our financial performance for the fourth quarter and the full year 2023, followed by our outlook for 2024. We delivered a solid fourth quarter with revenue of $414.1 million, up 10.5% year-over-year on a reported basis, 10.1% in constant currency and 0.8% sequentially. Adjusted EPS was $0.35, a year-over-year increase of 11.3%. 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 $232.1 million, representing year-over-year growth of 13.4%. Sequentially, we grew revenue 1.9%. In the Insurance segment, we generated revenue of $139.1 million, an increase of 15.3% year-over-year and 1.9% sequentially. This growth was driven by the expansion of existing client relationships and new client wins. The Insurance vertical, consisting of both our digital operations and solutions and analytics businesses, grew 11.7% year-over-year with revenue of $174.1 million. In the Emerging segment, we reported revenue of $67 million, growing 14.1% year-over-year and 2.8% sequentially. 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 1.9% year-over-year with revenue of $146.1 million. The Healthcare segment reported revenue of $26 million, representing growth of 2.5% year-over-year and a decrease of 0.8% sequentially. The year-over-year growth was driven by expansion in existing client relationships. The Healthcare vertical, consisting of our digital operations and solutions and analytics businesses, grew 22.2% year-over-year with revenue of $93.8 million. In the Analytics segment, we generated revenue of $182 million, up 6.2% year-over-year. Growth in Analytics was driven by higher volumes in payment revenue -- from payment revenue from our digital operations solutions business was $901.5 million -- services. This growth was partially offset by the decline in banking and financial services marketing analytics, reflecting trends we've highlighted in previous quarters. SG&A expenses as a percentage of revenue were up 140 basis points year-over-year to 20.6%, driven by investments in Generative AI, digital solutions, front-end sales and marketing. Our adjusted operating margin for the quarter was 17.8%, down 20 basis points year-over-year, driven by increased SG&A investments. Our adjusted EPS for the quarter was $0.35, up 11.3% year-over-year on a reported basis. Turning to our full year 2023 performance, our revenue for the period was $1.63 billion, up 15.6% year-over-year. This was driven by double-digit growth in both our digital operations and solutions and analytics businesses. Revenue from our digital operations and solutions business was $901.5 million, an increase of 18.3% year-over-year. Our Insurance, Emerging and Healthcare segments generated year-over-year growth of 18.7%, 21.7% and 8.9%, respectively. Our Analytics business generated revenue of $729.1 million, representing year-over-year growth of 12.5%. Analytics represented 45% of total revenue. Adjusted operating margin for the year was 19.3%, up 100 basis points year-over-year. Our effective tax rate for the year was 23.2%, comparable to our rate in 2022. Our adjusted EPS for the year was $1.43, up 19.1% year-over-year on a reported basis. Our balance sheet remained strong. Our cash, including short- and long-term investments as of December 31, was $209 million and our revolver debt was $200 million for a net cash position of $91 million. We generated cash flow from operations of $211 million in 2023, up 27% year-over-year compared with 2022. This improvement was driven by higher revenue and the expansion of our adjusted operating margin. During the year, we spent $53 million on capital expenditures and $125 million on repurchasing 4.1 million shares. Now, moving on to our outlook for 2024. We believe the macroeconomic environment will remain unpredictable at least through the first half of the year as inflation remains sticky and the Fed maintains interest rates at or near current levels. But as Rohit mentioned, our business momentum is robust, driven by a strong pipeline, larger contracts and increasing competitive win rates. For 2024, we anticipate revenue to be in the range of $1.78 billion to $1.82 billion, representing year-over-year growth of 9% to 12% on both a reported basis and constant currency basis. We anticipate our adjusted EPS to be in the range of $1.56 to $1.62, representing year-over-year growth of 9% to 13%. Our guidance also assumes full year adjusted operating profit margin will be largely in line with 2023. We expect a foreign exchange gain of approximately $1 million, net interest income of approximately $1 million, and our full year effective tax rate to be in the range of 23% to 24%. We expect capital expenditures to be in the range of $50 million to $55 million. In terms of quarterly progression, we anticipate our quarterly year-over-year revenue growth rates to increase as the year progresses. We expect our adjusted operating profit margin percentage to also increase in line with revenue. In summary, our differentiated strategy and consistent execution enables us to deliver exceptional results in a challenging environment. By adopting data and AI as part of our growth strategy and making significant investments to further enhance our industry leadership position, we are confident in our ability to generate superior growth in 2024 and beyond. With that, Rohit and I will be happy to take your questions.

[Operator Instructions] Our first question comes from the line of Bryan Bergin of TD Cowen. Your line is now open.

Hi, guys. Good morning. Thank you. Maybe to start on the fiscal '24 outlook here. Can you talk a bit more about the underlying growth assumptions across analytics and digital ops and just maybe a little bit more flavor on the overall client demand conversations in each of those two areas first?

Sure, Bryan. So our expectation is to be able to grow our revenues between 9% to 12% for calendar year 2024. The growth rate between our two operating business segments of digital operations and data analytics are predominantly about the same, with a little bit higher growth rate to be expected in digital operations and a slightly lower growth rate in our data analytics business this year. As Maurizio outlined, we expect the quarterly progression to gradually increase from Q1 to Q4, and our growth rates would reflect that. In terms of the demand environment in both these two segments, we continue to see very strong demand in digital operations. We're seeing much larger deals come into the pipeline and we have already signed up a number of deals that we won in 2023, which we will be executing in 2024. On the analytics side, the area that was impacted last year was marketing analytics, as well as some discretionary project-based work in banking and financial services. Our expectation is that towards the second half of the year that, that should normalize and therefore we would see the growth come back out there. As you know, in data analytics, there is a lot of work that needs to be done on data management, on movement and shifting the data to the cloud, getting the data ready for the adoption of Generative AI. So frankly, the demand environment from our perspective is very robust and we think that this is a great opportunity for us to be able to grow our business in double-digits.

Okay. Understood. Good color there. And then on the share repo, nice to see this new $500 million program. Can you just comment any change in capital allocation priority? Any increased urgency here surrounding this buyback?

Hey Bryan, it's Maurizio. So when you take a look at our share repurchase program, we did increase it fairly significantly from where we were in 2023. We did $125 million in 2023. And essentially our plan is to go up to $500 million over the next two years, essentially doubling what we did in 2023. This is still part of our overall capital allocation strategy, meaning we still allocate capital as part of our budgeting plan to internal investments. We still have an ongoing, pretty robust M&A pipeline that we still continually review and still spend a lot of time on. And then lastly, it's allocating dollars to share repurchase. And given our confidence in our growth rate, particularly in 2024 and beyond, and then also looking at our cash flow from operations being well over $200 million in 2023 and ongoing and growing that into 2024, we have plenty of capital to be able to allocate to all three of those areas now going forward.

Okay. Thank you.

One moment for our next question. Our next question comes from the line of Ashwin Shirvaikar of Citigroup. Your line is now open.

Thank you and congratulations on the results and outlook and the buyback as well. I guess, in the Healthcare vertical you guys have mentioned in the past the dependence on healthcare enrollments and how that might help and so on. Is it possible to kind of walk through sort of the healthcare opportunity in more granular fashion, as well as remind us if you are seeing the flow through as expected?

Sure, Ashwin. So on healthcare, we had stated that we would expect to see increase in our analytics revenue associated with the enrollment cycle, which typically happens in the fourth quarter. We did see that revenue come in, and therefore our direct marketing actually increased sequentially quarter-on-quarter, between Q3 and Q4, which was a direct result of the healthcare enrollments taking place. But if you take a look at our healthcare business overall, the work that we do within healthcare is pretty broad and pretty well set up, and we really like the portfolio that we have. We've got a very strong payment integrity business, which continues to grow very nicely given the fact that we can leverage data, we can leverage AI, and we are producing much stronger results for our clients than anybody else can produce. And therefore our clients are giving us more and more volume of business out there. We have a line of business around clinical operations, and that part for us continues to be pretty broad-based and well-diversified. And again, the application of AI to help improve the customer experience out there, that's been very positive. There are other areas that we are getting into which are more complex. There are areas where we have our own proprietary technology platforms within healthcare, and again, leveraging data and technology in these areas proves to be pretty resilient for us. So overall, our healthcare business has been performing quite nicely, and we expect for this business to continue to be more broad-based, apply a lot more of data, apply a lot more of AI, and therefore continue to kind of be able to build and grow in this very, very large industry vertical.

Got it. And if I could ask you, with regards to the collaboration with AWS, which you did have prepared remarks on, but in terms of getting into sort of the building out of LLMs and so on and so forth, are you kind of moving past sort of the POC stage, pilot stage, into larger projects? And specifically with regards to the collaboration, is your contribution going to be primarily from the data and process perspective? Because if your clients have access to that, is that the primary contribution you have, or are there other things you can do?

Yeah. So let me comment on that. Essentially, the partnership that we have with the hyperscalers allows us to be able to leverage their cloud infrastructure, their technology platforms, which are much more horizontal, and apply them into a vertical and into a business use case. And that's why this partnership works extremely well. We've got a number of solutions right now which are hosted on the AWS marketplace. So these are pretty much well-developed solutions that can be deployed immediately. We're also seeing a broader acceptance of the solutions that get applied enterprise-wide. So when we work with AWS and with other such providers, our ability to apply the data streamlining generally cuts across the enterprise and across geographies and across business functions and helps build that across the enterprise. So it results in much larger transactions, it results in more strategic transactions, and it embeds us at the forefront of that transformation that's taking place. And, yeah, finally, I think the way in which this is all evolving, the market seems to be evolving in a manner where the understanding of the business and the understanding of the process and the understanding of data becomes critical to the application of these LLMs and these models. And therefore our ability to help our clients and be a strategic partner on the data and AI-led side becomes really, really important. And we're seeing that that is resonating quite strongly in the marketplace and that's why we are winning more in the marketplace.

Okay. And to confirm those are larger deals as you win in the marketplace now, beyond pilots and such.

That's right.

Got it. Thank you.

One moment for our next question. Our next question comes from the line of Maggie Nolan of William Blair. Your line is now open.

Hi, good morning. This is [Jesse] (ph) on for Maggie. Thanks for taking our question. So my first one is on pricing increases. Have you been able to drive pricing increases on Gen AI related work given the demand you're seeing? And how important do you think pricing will be as a lever for the business?

Sure, Jesse. Pricing has become more and more of a focus of ours over the last two years to three years, particularly with wage inflation in 2022. We have been really focused on price throughout our business, but particularly in AI, we are focusing that a bit more intensely. It's an area that is still evolving, I would say, and one that becomes a bit more transaction or outcome-based. And that's where we really want to focus our pricing within Gen AI, but also like within AI in itself also. So I would say we've done a lot of work on it. It's still evolving and it's one where it will evolve as we continue to build out our solution set.

Okay. And then for my follow-up, have you seen your partnerships with AWS and Microsoft, for example, contributing more to your revenues over the past few quarters? Has there been any change in the level from historically?

So, Jesse, we just announced our partnerships with Microsoft and AWS, and we're tremendously excited about the opportunity to go to market on a joint basis and leverage their horizontal functional capabilities and the application of our domain knowledge as such. The revenue contribution from these partnerships is likely to build up over the next few quarters and will, I think, be a strong driver to our growth not only for '24 but way beyond that. And we think that that's going to be an important channel of growth for us going forward. So thus far the revenue contribution is fairly small, but we expect this to be a pretty sizable channel for us going forward.

Makes sense to me. Congrats and thanks again.

Thank you.

One moment for our next question. Our next question comes from the line of Puneet Jain of JPMorgan. Your line is now open.

Hey, thanks for taking my question. Rohit, like, I wanted to ask about the AI solutions that you talked about. Like, do you infuse those solutions onto clients' core systems and business processes, or use that as a tool to improve your employees' productivity, make them more efficient? And who owns IP on those AI models that you create?

Sure, Puneet. So the AI solutions that we are creating, these are proprietary solutions, and the IP on this is owned by EXL. We have multiple ways of deploying these AI solutions for our clients. All of these AI solutions are on the cloud. So what we can do is we can deploy this on a client's workflow and on their operating platforms and attach it to their system so that they get the benefit of it. We can host it on the cloud and run our clients' data and their workloads through these applications on the cloud. And lastly, we have the ability to take over a client's operation and embed this into that and deploy it. So there are multiple models and ways in which we can work with our clients. It really depends upon what the preference of the client is, what the maturity level of their platforms and applications and workflow is, and how they'd like to kind of engage on this going forward. But because we have so much of flexibility associated with it, we can deploy these very, very quickly with our clients. They can see the outcomes and the superior business benefits very quickly, and we are seeing a tremendous amount of traction come in out here on the AI solutions that we've developed.

Got it. Thank you. And can you also share the cadence of the quarter revenue throughout this year across different quarters? I know you mentioned it could be more back-end loaded. But in the first half, can you grow sequentially, especially in analytics over next few quarters?

Yeah, I think that's a really important question, and let me try and address that as transparently as I can. Number one, on an overall basis, our revenue should progress sequentially. So our quarter year-on-year growth rates quarterly should improve sequentially. So what that means is we'll start off slightly lower and progress much higher towards the end of the year. That's on an overall company basis. As far as analytics is concerned, we do think Q4 of 2023 was perhaps the bottom of the analytics business. We expect sequential growth of analytics revenue on Q1 from Q4. Keep in mind that Q1 of '23 for analytics was a very strong growth rate. So the comp for us in Q1 is actually quite strong. But you should expect sequential growth in our analytics business in Q1 over Q4 of 2023. We think this is a tremendous signal in terms of the momentum returning back into the analytics business and we think this is going to progress through the rest of the year and obviously the comps become easier as you go forward into Q2, Q3 and Q4 of '24. So basically the shape of the progression is going to be a sequential increase as we go along and you should expect quarter-on-quarter increase in analytics in Q1 over Q4 of last year.

Got it. Thank you.

One moment for our next question. Our next question comes from the line of Mayank Tandon of Needham & Company. Your line is now open.

Thank you. Good morning Rohit and Maurizio. I wanted to ask you about the short cycle work that obviously has been under pressure for the past 12-plus months. What's embedded in the guidance? In other words, if the work starts to normalize the level of activity, could that be upside or have you already baked that into your outlook for 2024?

Yeah. Thanks, Mayank. So, look, I think as you know, short cycle work is difficult to predict and difficult to manage. We are in a fortunate position where the short cycle work is a very small percentage of our overall portfolio. 55% of our business is digital operations, which is long-term annuity contracts. And even within the 45% of data analytics segment, a large percentage of that tends to be longer-term annuity contracts. The short cycle work last year that got impacted was largely marketing analytics as well as some of the short cycle and discretionary work, particularly in banking and financial services. We do think that that would normalize in 2024. We have factored that in into our guidance and that's how we've come up with our growth rate. If the recovery in the short cycle work is much faster, we would expect to be at the top end of our guidance range. If the recovery in the short cycle work is weaker and there are economic environment difficulties that our clients face, we would expect to be towards the lower part of our guidance range. But you know that our revenue growth has strong visibility and our revenue growth guidance range is pretty narrow. So we tend to be in a pretty tight band as far as that is concerned, and that's primarily got to do with our portfolio, which has a very small percentage of reliance on project-based work.

That's very helpful. Thank you so much for that. And then just as a quick follow-up, I wanted to ask you, Rohit, about those Gen AI examples you gave. What has been the financial implications of those deployments, so to speak? Has it been sort of revenue impact on the downside? Because I'm assuming you're getting more productivity that you're passing on to your clients, but then it would be margin accretive given some of the automation benefits. I don't know if I'm getting that right, but would love to get your perspective on the early financial implications of these Gen AI deployments.

Sure. So here's the ironic part. The faster the deployment and more the cannibalization, the faster is our overall growth rate because our clients entrust us with more and more business, and the penetration rate of this is so low that we are able to build and grow actually much faster. So on the revenue side, the Generative AI solutions that we have deployed are delivering the productivity benefits. And while they do cannibalize that particular portion of the process that we are working on, they actually create a much bigger headroom for us to grow our overall revenues much faster with our clients and get much bigger deals from our clients and deploy this enterprise-wide, even on the retained part of the organization of our clients, which we typically normally would not be impacting. So on the revenue growth side, it's actually a net positive for us. And then on the margin side, it certainly starts off being a lower margin on the proof of concept side. But as we scale up these Gen AI solutions across the enterprise and as these kind of get to full volume and full maturity, we are seeing better profitability from these solutions. So net-net, it's a positive for us, and it's about how quickly can we deploy this and how quickly can we accelerate our growth rate and get an advantage to our bottom line.

Very helpful. Thank you.

One moment for our next question. Our next question comes from the line of Moshe Katri of Wedbush Securities. Your line is now open.

Hey, thanks. And congrats on strong results. You spoke about win rates that are having an uptick. Maybe you can talk a bit about first on what's attributed to this win rate uptick? And is there any connection here to your two other direct peers that are having some challenges? Thanks.

Yeah. Thanks, Moshe. Look, this whole area of deploying data and AI alongside with the domain results in a pretty transparent viewpoint from the customer where either they get the business benefit or they don't get the business benefit. And therefore you're going to have a greater amount of differentiation between winners and losers. And clients are going to gravitate towards those players that will act as strategic partners and deliver the business benefit to them in tangible terms. For us, the portfolio that we are playing with, with our client base and our prospect base, we are having a tremendous amount of success in terms of being able to actually deliver the business benefit to our clients. And therefore our win rates are increasing and the size of the deals are increasing and we are growing faster as such. So it all depends on the efficacy of these solutions and the ability to deliver a tangible business benefit to your clients. And if you're able to do that successfully, I think it's going to create greater amount of differentiation. If you are going to be mediocre in terms of that delivery and execution of that business benefit, I think the growth and the win rates will come down very, very quickly. So this is an area that you have to stay on top of the game all the time. We are fortunate that we invested in data early on, we invested in AI early on, we invested in domain early on. And bringing these three together, it's not an easy task, but we've been able to do that and demonstrate that to our clients, and that's what's resulting in a superior growth rate for us.

Understood. And then you indicated that the deal flow is getting larger. Would you suggest that some of these deals, because they're larger, are taking longer to convert or they're actually converting kind of in line? And how is that impacting visibility? Thanks.

Yeah. So the deals are definitely larger, and the cycle time for them actually is the same. It's not much longer. So in the past, it used to be the case that if you had a larger deal, the cycle time would be much longer. In today's environment, clients want the business benefit to be delivered to them much quicker with speed, and therefore they're taking these bolder decisions, actually much faster than they did previously. And the reason these deals are becoming much bigger in size is we are no longer playing with our clients in silos, in geographies, or in functions. We are playing across the board, across the enterprise, because that's how data transcends across the enterprise, right? And that's making these deals much bigger in size. And the cycle time is actually the same as a smaller deal size.

Thank you.

One moment for our next question. Our next question comes from the line of David Grossman of Stifel. Your line is now open.

Thank you. Good morning. Rohit, if I heard you right, you said earlier in the call that the AI-infused offerings is kind of allowing you to kind of engage in more outcome-based kind of deals. So can you elaborate on that and maybe just explain exactly what the dynamic is?

Yes, David. So look, our clients are looking for business outcomes and business benefits. In the past, it used to be just about providing them with efficiency and efficacy. Now it's much more about delivering tangible business outcomes to them that can be measured and that can be quantified. As that becomes a lot more transparent and a lot more clearly visible as to what is the cause of that increase in business benefit, our clients are becoming much more open towards having an outcome-based pricing mechanism with us where we take the risk of the implementation of the initial investment, but we get the benefit of sharing in that business benefit that we can deliver to our clients. And our clients tend to prefer that model because they don't want to invest upfront and they don't want to carry the risk of our ability to deliver that business benefit to them. So we are seeing a gradual shift take place in this outcome-based pricing model. We frankly think this is going to be advantageous to our clients and it's going to be advantageous to us. For us, it's advantageous because we have high confidence in our ability to deliver the business benefit. And for our clients, it's beneficial because they don't need to put up the initial upfront investment and they don't carry the risk.

So can you give us an example, perhaps of a current deal that has that characteristic?

Yeah. So, like I shared in my prepared remarks a number of these deals that we are doing in healthcare where we are identifying billing errors and identifying them upfront, or in terms of collections where we are able to collect a greater amount of dollar receivables for our clients, our clients are willing to pay us as a percentage of the collection or as a percentage of the billing errors that we are avoiding for them.

And I guess the second question I had was on your margin guidance. I think you're guiding to flattish margins year-over-year. Maybe you could share it out, how much of that is the timing of wage and pricing versus maybe the upfront dilution you take on some of these outcome-based deals where, like you said, you're taking risk upfront, assuming the cost of implementation with the opportunity, with downside participation and any other dynamics that may be affecting the margin in 2024.

Yeah, David, we are guiding to flat margins with 2023. And keep in mind, we went up 100 basis points in 2023. So we had a significant uptick in 2023. As Rohit talked about, in all of the Gen AI opportunities that are in front of us, there's a lot of investments that we're making to really grow that large, significant opportunity for us going forward. And so that is going to be a big area for us to invest in this year and it's going to keep our margins fairly flat this year. Now, this year being flat is comparable to the prior years of having significant margin improvement. So this year is going to really be a year in which we're going to make a number of investments within AI, really, as we pivot the business, and that's going to be reflected in our AOPM or our profit margins.

Sorry if I missed it, Maurizio, but did you mention how we would expect margins? Would they be relatively flat all year, or is there going to be some variation across quarters?

No, no, no. So it will be -- the total operating margin will be flat in total for the year compared to 2023. But when you look at it on a quarterly basis, it's going to be in line with revenue growth. So you'll see a lower margin increase on a quarterly basis and then the average for the year being right around flat with 2023.

Got it. Great. Thank you.

One moment for our next question. Our next question comes from the line of Dave Koning of Baird. Your line is now open.

Yeah. Hey guys, thanks, and nice job. And I guess my question is on employees. Your sequential growth in employees was the strongest in, I think, over two years maybe, which I think is kind of setting you up for good growth, good wins for the future. I guess the other way to look at it is to say, I think year-over-year employees grew 19%, revenue only grew 10%. So do you need more people to get the revenue done? How should we look at it on either side of the way kind of I'm looking at it?

Yeah, David, it's Maurizio. So when you look at our headcount growth, and you're correct, it's around 19%, slightly, right around 18.8% on a year-over-year basis with the end of the fourth quarter. If you break that down, you'll see that analytics headcount has grown about 8% on a year-over-year basis, fairly in line with that revenue growth overall. It's in digital operations solutions, where we're making investments both in digital but also in ramping up new deals that we have that are coming, that are being implemented today for 2024 that will start to recognize revenue in 2024. So it's a bit of an investment and also a ramp-up in employees, particularly in digital operations that's embedded in that 18.8% growth year-over-year for the fourth quarter.

Got you. That totally makes sense. That's great. And then the one other question, revenue by industry, the emerging markets, I think in 2022 grew somewhere around 50%. The last couple of quarters have only been kind of low- to mid-single-digits, while the other industries, healthcare and insurance, are doing really well. But what's happening in the emerging market industry for you?

So when you take a look at the revenue growth within our Emerging segment, they had extremely solid revenue growth in those previous periods that you mentioned. I think there's a little bit of the comparables on a year-over-year basis that make the growth rates a little bit more difficult on a year-over-year basis. When you look at the Emerging pipeline, it's still very significant in all the different segments that we operate in. And Emerging is a segment of ours that has many smaller segments in it, and that creates a lot of opportunity for that group to really bring on new clients and then really scale up those new clients over time. So we still see a significant opportunity within emerging. I think you just when you look at the comps over a year-over-year basis, it makes it a little bit difficult in terms of the growth rate.

Yeah, totally makes sense. Well, thanks, guys. Good job.

One moment for our next question. Our next question comes from the line of Vincent Colicchio of Barrington Research. Your line is now open.

Yeah, most of mine were asked. Curious, Rohit, if you can talk a little bit about the new clients added in the quarter, what verticals did they come from and was AI a key driver in adding some of these clients?

Sure, Vincent. So first of all, for the full year, we added 63 new clients and we are very, very pleased with the pace at which we are adding new clients. The quality of clients that we are adding up are also very good. So there are a number of clients within this that are Fortune 1000 clients. And like we mentioned, some of these deals are large deals that we are signing up. Amongst the industry verticals, clearly, the insurance industry vertical is seeing a tremendous amount of growth and traction, and then we are also seeing growth in our emerging industry vertical. Keep in mind that the emerging industry vertical is pretty well diversified across a number of different sub-industries. So we see that trend across. We are signing up some companies that are scaling up their businesses. And so in terms of size of companies that we've signed up, we're seeing a number of growth companies, we are seeing a number of mature size companies and a number of global companies. We're also seeing growth rate in UK and Europe to be stronger. So that's a good thing for us because we'd love to be able to diversify our business a lot more across the globe and we've been very happy with the pace and the quality of new client logos that we are signing up.

And did marketing analytics meet your expectations in the quarter? And if I heard you right, you expect a return to growth in the second half. If you can give us a little bit more color on what gives you confidence.

Sure. So marketing analytics, as you know, for us is in a number of different segments. It's in Insurance, it's in banking and financial services, it's in Healthcare. In Insurance, marketing analytics had come to -- had slowed down quite significantly because carriers were not being able to get price increases over the last couple of quarters. That has now changed and insurance regulators are allowing carriers to increase pricing and therefore, we are seeing insurance companies go back into the market and we're seeing initial signs of that acquisition of new customers take place. Within the banking and financial services, the interest rates had gone up and therefore the marketing for new customers had dried up in 2023. If interest rates stabilize out here or start to move down, we would expect that the banks and financial services will again restart that acquisition of new customers. And then Healthcare was a new segment for us and a new industry vertical for us that we started to target in '23 and we picked up revenue from a number of different payers in '23 and we got the revenue in. Is it as much as we'd like to get? No, we think there's a lot more opportunity. So we'd love to get a lot more revenue out there, but we've got a very nice base that's been built up on that as such. So our expectation is that these things will continue to reverse out themselves and we should be able to see some growth on that in the second half of the year. And then certainly Q1 of '24 in Analytics should be higher in absolute dollar terms as compared to Q4 of '23.

That was helpful color. Thank you.

Thanks.

I'm showing no further questions at this time. I would now like to turn it back to John Kristoff for closing remarks.

Thank you, Rivika. I just wanted to reiterate what Rohit said. We are going to be conducting a Strategy Update session for investors on May 7. This will be a live event held in New York City and details will be forthcoming on that event, but please mark your calendars. And thank you for joining our call today. And as always, follow up with me with your individual questions. Thank you.