Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Date

Wednesday, April 29, 2026 at 10 a.m. ET

Call participants

  • Vice Chairman and Chief Executive Officer — Rohit Kapoor
  • Executive Vice President and Chief Financial Officer — Maurizio Nicolelli

Need a quote from a Motley Fool analyst? Email [email protected]

Takeaways

  • Total revenue -- $570.4 million, up 13.8% year over year on a reported basis and 13.4% on a constant currency basis; sequential constant currency growth was 5.1%.
  • Adjusted EPS -- $0.58, up 20.2% year over year.
  • Data and AI-led revenue -- Grew 28% year over year and represents 60% of total company revenue.
  • Digital operations revenue -- Down 2% year over year as planned due to migration of services to data and AI-led; total operations revenue grew 10% year over year.
  • Insurance segment revenue -- $193.9 million, up 12.6% year over year; 4.4% sequential growth.
  • Healthcare and life sciences segment revenue -- $151.9 million, up 21% year over year; 6.8% sequential growth.
  • Banking, capital markets, and diversified industries revenue -- $127.4 million, up 8.1% year over year; 4% sequential growth.
  • International growth markets revenue -- $97.1 million, up 10.9% year over year; 5.4% sequential growth.
  • Adjusted operating margin -- 20.5%, up 40 basis points year over year.
  • SG&A expenses -- Increased 20 basis points year over year to 20.4% of revenue, attributed to investments in data and AI-led solutions.
  • Cash and net debt position -- $266 million in cash (including short- and long-term investments) and $417 million in revolver debt, resulting in net debt of $151 million as of March 31, 2026.
  • Capital expenditures -- $13 million during the quarter.
  • Share repurchases -- 4.4 million shares repurchased at an average price of $31 per share, totaling $136 million (includes 3.35 million shares received up front via accelerated share repurchase).
  • Recurring revenue -- More than 75% of revenue is recurring or annuity-like, providing stability and visibility.
  • 2026 revenue guidance -- Increased to $2.3 billion to $2.33 billion, representing 10%-12% year-over-year growth on both reported and constant currency bases.
  • 2026 adjusted EPS guidance -- Raised to $2.18-$2.23, for 12%-14% year-over-year growth; previous guidance was $2.14-$2.19.
  • Expected capital expenditures for 2026 -- Projected at $50 million to $55 million.
  • Full-year effective tax rate -- Projected in the 21%-22% range.
  • Foreign exchange headwind in guidance -- $2 million FX headwind included relative to prior guidance; anticipated $2-$3 million FX gain for the year.
  • Margin outlook -- Adjusted operating margin expected to be “in that 19% range” for the remainder of the year despite increased investment pace.
  • Deal activity and partnerships -- Company highlighted industry recognition from partners such as NVIDIA, Genesys, and AWS and cited expanding co-innovation and pipeline contributions from these alliances.
  • AI adoption impact -- CEO Kapoor said, “the commercial model is changing much more towards a fixed-fee and milestone-based payment and an outcome-based model.”
  • Net revenue retention (NRR) -- Remains above 100%, attributed to larger, end-to-end client engagements and expanded scope via AI services.
  • Headcount -- Grew about 11% year over year versus 14% revenue growth; management expects this dynamic (revenue outpacing headcount growth) to persist.

Summary

ExlService Holdings (EXLS +1.63%) delivered double-digit top-line and bottom-line growth, raised full-year revenue and EPS guidance, and continues to rapidly shift its business mix toward data and AI-led services. Management observed significant demand for embedded AI solutions across insurance, healthcare, and international verticals, emphasizing an accelerating pivot from pilots to production AI deployments within its client base. Expanding partnerships with leading technology firms contributed both to solution differentiation and to new growth opportunities. The company executed a large share repurchase, maintained a strong balance sheet, and projected disciplined investments in data and AI capabilities. Management expects continued revenue stability due to high recurring revenue but signaled flat to slightly declining operating margins as investments increase.

  • CEO Kapoor stated, “Most of our clients across verticals need to improve the way that they capture, enrich, and utilize their structured and unstructured data to drive AI outcomes.”
  • Continued shift from digital operations to data and AI-led work is expected to accelerate, resulting in planned deceleration of the digital operations segment as proprietary, higher-value services gain share.
  • Pricing model evolution toward outcome- and milestone-based fees is enabling margin stability even as AI-driven productivity benefits are shared with clients.
  • Company announced an Investor and Analyst Day scheduled for May 13, 2026, where it will share a multiyear growth framework and AI monetization model.
  • Future headcount growth is expected to lag revenue growth as the company expands higher-value, IP-led service offerings and drives revenue per employee gains.

Industry glossary

  • NRR (Net Revenue Retention): Recurring revenue metric indicating year-over-year expansion or contraction within existing clients, exclusive of new client wins.
  • LLM (Large Language Model): An advanced AI model trained on extensive datasets for language processing and automated tasks.
  • Agentic AI: AI systems designed to operate as autonomous agents, executing multi-step tasks within enterprise business processes.

Full Conference Call Transcript

Rohit Kapoor: Thank you, Andrew, and good morning, everyone. We entered 2026 with strong momentum. In the first quarter, ExlService Holdings, Inc. generated revenue of $570 million, up 14% year over year, and adjusted earnings of $0.58 per share, an increase of 20% year over year. Our sustained double-digit growth demonstrates the strength of our competitive position as well as strong execution against our data and AI strategy. ExlService Holdings, Inc.'s recognized industry expertise and leadership in helping clients adopt AI throughout their enterprise is resonating strongly with the market and fueling our growth with new and existing clients.

Demand is being driven by scaled deployments of AI inside core client workflows where ExlService Holdings, Inc. delivers measurable productivity, increased effectiveness, and superior risk-based outcomes. Underpinning this growth is a combination of capabilities that has taken over two decades to build. Helping our clients adopt AI in complex regulated industries requires more than technology. It requires deep familiarity with the operational workflows, regulatory frameworks, and data ecosystems that define how our clients actually operate. This is where our unique combination of domain, data, and AI expertise differentiates ExlService Holdings, Inc. and drives superior client outcomes.

ExlService Holdings, Inc.'s proprietary data assets, domain-specific AI models, and orchestration capabilities allow us to embed intelligence directly into how work gets done—not as an overlay but as an integrated part of the process. It is one of the key reasons our renewal rates remain high and we continue to grow at market-leading rates. In addition to our segments, we also provide revenue information across two categories, data and AI-led and digital operations. Data and AI-led revenues grew 28% year over year in Q1, and now represent 60% of the company total.

We are seeing strong momentum across our full portfolio of data and AI-led offerings, as clients are stepping up the pace of AI adoption and need help with data for AI, design of their agentic AI systems, and reimagining business processes. Most of our clients across verticals need to improve the way that they capture, enrich, and utilize their structured and unstructured data to drive AI outcomes. We are seeing strong market interest in our EXL Data.ai platform, which helps clients preserve domain-specific semantic context as they build new AI-ready data foundations.

And we are continuing to leverage AI in solutions that we manage, which is both driving greater efficiencies and creating new value for clients by increasing precision and enabling improved outcomes. We are embedding AI both in our data and AI-led solutions as well as the operations that we manage for our clients. This last point is important and worth stressing. When we successfully embed AI into an existing client workflow, the nature of that engagement changes. It becomes more intelligent, more IP-led, and more value added. The revenue associated with it moves from our digital operations category into our data and AI-led category.

As I communicated to you last quarter, in order to provide greater transparency we share in our investor fact sheet a total operations view that combines digital operations and data and AI-led operations that have migrated into our data and AI-led category. In Q1, total operations grew 10% year over year and remains a growth driver for our company's revenue. The reported digital operations revenue after that migration was down 2% year over year. This is by design. We expect this deliberate and planned shift to continue going forward. We saw strong performance across each of our four operating segments to start the year. Insurance grew 13% year over year, representing over a third of our revenues.

I am particularly pleased to see it return to double-digit growth. Insurers are accelerating adoption of AI to improve underwriting, claims, and customer experience. We are seeing strong deal activity across all market segments. Healthcare and Life Sciences grew 21% year over year, representing over a quarter of our revenues. Payers and providers are facing rising cost pressures, regulatory complexity, and margin strain. They are turning to ExlService Holdings, Inc. to apply AI at scale to improve productivity and outcomes. Payment integrity continues to be a significant driver of growth along with broad-based strength in analytics, AI services and solutions, and operations. Banking, capital markets and diversified industries grew 8% year over year and represented a quarter of revenue.

The quarter saw very high deal activity and we remain confident in continued progress as the year unfolds. International growth markets grew 13% year over year, reflecting successful AI-led expansions in new and existing clients. International markets are an important driver of our long-term growth and global expansion strategy, and we continue to invest in talent and partnerships to expand our footprint. During the quarter, we hosted our annual AI in Action flagship event bringing together senior business and technology leaders from across our client and partner ecosystem. The focus this year was on what it takes to make agentic AI real inside enterprise operations, from building the right data foundations to orchestrating AI across complex workflows.

The level of engagement and the participation reinforced what we are seeing in our pipeline. Enterprises are moving from AI curiosity to AI in production. And we are the partner that can help them execute. We are also seeing co-innovation with our technology partners continuing to resonate and earn us industry recognition. ExlService Holdings, Inc. was recently named Advanced Technology Partner of the Year by NVIDIA, Best New Partner of the Year by Genesys, and AI and Machine Learning Market Disruptor of the Year by AWS. These partnerships are not only enabling our differentiated solutions, they are becoming meaningful go-to-market and pipeline contributors.

In summary, ExlService Holdings, Inc. entered 2026 with strong momentum, and we have excellent visibility for the remainder of the year. Demand for our data and AI-led services and solutions remains robust, continuing the momentum we saw at the end of 2025. We continue to strengthen our position through investments in capabilities, partnerships, and talent. Our portfolio is well balanced. Our pipeline is strong. And we have high renewal rates. More than 75% of our revenue is recurring or annuity-like, providing revenue stability and a great line of sight for the year. For full year 2026, we are increasing our revenue guidance to a range of $2.3 billion to $2.33 billion, representing 10% to 12% constant currency organic growth.

We are also increasing our adjusted diluted EPS to $2.18 to $2.23, representing 12% to 14% year-over-year growth. As always, I want to thank our clients, partners, and employees for their trust and commitment and to our shareholders for their continued support. Before I hand it over to Maurizio, I would like to remind you that we will be hosting our Investor and Analyst Day on May 13 in New York. We will share our multiyear growth framework, AI monetization model, and client case studies that bring our AI strategy to life. For those of you looking to understand the ExlService Holdings, Inc. growth story, this is the event to attend. Please reach out to Andrew for details.

I look forward to seeing you there. I will now turn the call over to Maurizio to provide more details on our financial performance.

Maurizio Nicolelli: Thank you, Rohit, and thanks, everyone, for joining us this morning. I will provide insights into our financial performance for the first quarter and our revised outlook for 2026. We delivered a strong first quarter with revenue of $570.4 million, up 13.8% year over year on a reported basis and 13.4% on a constant currency basis. Sequentially, we grew 5.1% on a constant currency basis. Adjusted EPS was $0.58, a year-over-year increase of 20.2%. All revenue growth percentages mentioned hereafter are on a constant currency basis unless otherwise stated. Now, turning to segment revenue for the first quarter. The Insurance segment grew 12.6% year over year with revenue of $193.9 million.

This growth was driven by expansion and higher volumes in existing client relationships and new wins. Sequentially, Insurance grew 4.4%. The Insurance vertical, including revenue from International Growth Markets, grew 12.2% year over year with revenue of $226.1 million. The Healthcare and Life Sciences segment reported revenue of $151.9 million, representing growth of 21% year over year and 6.8% sequentially. The year-over-year growth was driven by higher volumes in our payment services business and expansion in existing client relationships with other healthcare services we provide. The Healthcare and Life Sciences vertical, including revenue from International Growth Markets, grew 20.9% year over year with revenue of $152.1 million.

In the Banking, Capital Markets and Diversified Industries segment, we reported revenue of $127.4 million, representing growth of 8.1% year over year and 4% sequentially. This growth was driven by new client wins and expansion of existing client relationships. The Banking, Capital Markets and Diversified Industries vertical, including revenue from International Growth Markets, grew 9.4% year over year with revenue of $192.2 million. In the International Growth Markets segment, we generated revenue of $97.1 million, up 10.9% year over year and 5.4% sequentially. This growth was driven by ramp-ups and higher volumes with existing clients and new wins across Banking, Capital Markets and Diversified Industries and Insurance.

SG&A expenses as a percentage of revenue increased 20 basis points year over year to 20.4%, driven by investments in data and AI-led solutions. Our adjusted operating margin for the quarter was 20.5%, up 40 basis points year over year, driven primarily by improved gross margins. Our effective tax rate for the quarter was 21.9%, down 40 basis points year over year, driven by higher profits in lower-tax jurisdictions. Our adjusted EPS for the quarter was $0.58, up 20.2% year over year on a reported basis. Our balance sheet remains strong. Our cash, including short- and long-term investments, as of March 31 was $266 million, and our revolver debt was $417 million, for a net debt position of $151 million.

During the quarter, we spent $13 million on capital expenditures and repurchased 4.4 million shares at an average price of $31 per share, totaling $136 million. This includes 3.35 million shares received upfront as part of the settlement of our previously announced $125 million accelerated share repurchase. We expect to receive the remaining shares in the second quarter. Now moving on to our outlook for 2026. While we remain cautious about the current macroeconomic climate and geopolitical uncertainties, we are increasing our guidance for the year based on our current growth momentum and our strong pipeline. We now anticipate 2026 revenue to be in the range of $2.3 billion to $2.33 billion.

This represents year-over-year growth of 10% to 12% on a reported and constant currency basis. This also represents an increase of $20 million at the midpoint, which includes a $2 million foreign exchange headwind from our previous guidance. We anticipate increased investments in data and AI capabilities and solutions for the rest of the year to expand our competitive advantage and continue to drive top-line revenue growth. We expect a foreign exchange gain of approximately $2 million to $3 million, net interest expense of approximately $6 million to $8 million, and our full-year effective tax rate to be in the range of 21% to 22%. We expect capital expenditures to be in the range of $50 million to $55 million.

We anticipate our adjusted EPS to be in the range of $2.18 to $2.23, representing year-over-year growth of 12% to 14%, up from our previous guidance of $2.14 to $2.19. To conclude, we had a strong start to the year, demonstrating unique competitive position and participation in high-growth market segments. Despite the current geopolitical uncertainty, our leading indicators remain positive, and we have a highly adaptable and resilient business model, setting us up well for a solid 2026. With that, Rohit and I would be happy to take your questions.

Operator: Thank you. At this time, if you would like to ask a question, please click on the Raise Hand button, which can be found on the black bar at the bottom of your screen. When it is your turn, you will receive a message on your screen from the host allowing you to talk, and then you will hear your name called. Please accept, unmute your audio, and ask your question. As a reminder, we are allowing analysts one question and one related follow-up today. We will pause a moment to allow the queue to form. We will now open the call for questions. Our first question comes from an Analyst with TD Cowen.

Please unmute your line and ask your question.

Analyst: Hi. Good morning. Thank you. I wanted to ask here on the growth guide. So good to see the raise. Can you just dig in on the key assumptions for data and AI-led versus digital ops growth and maybe how your views on the industries may shape up? And then, Maurizio, just despite the strong commentary here, it does not suggest any demand impact to you. But would you still say this feels like a prudent outlook for the balance of the year?

Rohit Kapoor: Hi. So, our growth outlook—you know, we have increased our guidance for the full year. As you all know, our first quarter is typically a strong quarter, and we had a great first quarter this time. What we have seen is that we have been able to outperform our own expectations in the first quarter. We continue to see good pipeline and good demand for our services, and therefore we have increased our guidance for the balance of the year. The data and AI-led part of our business is actually resonating very nicely in the marketplace. It now represents 60% of our total portfolio and it is growing very nicely.

Even for digital operations, as we have shared with you, our total operations is actually growing quite nicely as well, and we continue to see demand out there. If you talk about industries, we continue to see good momentum in insurance, in banking, and in healthcare. Some of the industries where we see a little bit of softness are retail and communications. But a majority of our business is really made up of banking, financial services, insurance, and healthcare, and those are all very strong pipelines and demand for us.

We do not really provide a break-up, as you know, between data and AI-led and digital operations, but it would be fair to say that our digital operations will grow slightly below the company average and our data and AI-led piece will be powering the growth of the overall company. I will pass it on to Maurizio to talk about the prudent guidance that we have given.

Maurizio Nicolelli: Thank you, Rohit. And, we are seeing very good momentum coming into the calendar year. Q1 is normally a strong quarter for us to really start out the year, and we saw that again this year. We continue to see that momentum going into the rest of the year. One thing to highlight is we did raise our guidance at the midpoint by $20 million, more than our beat in the first quarter, and that does include a $2 million FX headwind from the last time we gave guidance.

And then lastly, our guidance is going to be a bit prudent and take into account what is happening in the current macro environment and also the geopolitical uncertainties that are out there. We have three more quarters remaining for the rest of the year. We have very good momentum going into the second quarter and the rest of the year, and we have increased our guide. We are still early in the year, and we will continue to revisit our guide as we go forward. But the big positive here is that we have very positive momentum going into the rest of the year from Q1.

Analyst: Okay. That is helpful. That is clear. Maybe on margin. So it looks like you outperformed there as well. Can you just comment on any change in the expectation on adjusted operating margin for the year? And is it investment timing—any cadence expectations—just to help?

Maurizio Nicolelli: Sure. You saw our adjusted operating margin come in at 20.5% in Q1, and that is up 40 basis points from Q1 of last year. We always see Q1 being a very strong quarter both on revenue and profitability, and that sets us up very well for the rest of the year in terms of investing to continue to drive double-digit growth for the rest of the year and also going into 2027. So you will see us, as you saw last year, start to make additional investments, particularly into our data and AI capabilities during the rest of the year.

And our adjusted operating margin forecast for the rest of the year will be similar to what we have talked about—in that 19% range.

Analyst: Alright. Great. Thank you.

Operator: Our next question comes from David Koning with Baird. Please unmute your line and ask your question.

David Koning: Yeah. Hey, guys. Thanks, and great job again. I guess one question: we hear your clients—just all the companies in the environment right now—are really looking for AI savings. Do you get some of them pushing you on price a little bit, just saying, “Hey, we need to find ways to save to show our CEO, our board, etc., that we are saving money”? Do you see that as a price headwind at all or more of a demand tailwind?

Rohit Kapoor: Hi, Dave. Let me provide a little bit of context around what we are seeing around the adoption of AI. Number one, we are seeing clients switching over from AI pilots and AI POCs to AI in production. That is a big change, and that started out early this year. Frankly, that is playing to our strengths and the value that we can add to these relationships. The second thing we are seeing is, as clients think about AI in production, they are quite willing to open up access to their technology systems, to their databases, and allow us to make changes to the end-to-end workflow.

As you know, the application of AI has to be driven in conjunction with the transformation of the workflow, and we are in the best position to drive that. The third piece is the commercial model is also changing. What we are seeing is, as clients come to us with the adoption of AI to be implemented and enabled, the commercial model is changing much more towards a fixed-fee and milestone-based payment and an outcome-based model. That allows us to manage pricing and margins and add value to the customer relationship.

The negotiations and conversations are much more about providing our clients with deterministic benefits associated with AI adoption and for us to do it in a way that allows us to earn a respectable margin. We are not really seeing clients come to us just asking for price reductions. The price reduction is alongside the transformation and alongside the value creation.

David Koning: Thank you for that. And just one follow-up. In the International segment, I know you called out a little uncertainty with the conflict. At 17% of revenue, it actually accelerated pretty nicely in the quarter. Would you expect to see a little deceleration there? Maybe describe what the impacts you think would happen.

Rohit Kapoor: Dave, firstly, our International Growth Markets is highly underpenetrated, so the opportunity set out there is enormous. Second, we have very little and very limited exposure to the Middle East. Most of our revenue from clients really comes from the UK, Europe, Australia, and New Zealand, and we are seeing healthy adoption of AI in these geographies. Our goal will be to continue to drive greater and faster adoption of our services in the International Growth Markets. We are not really seeing any direct impact due to the conflict as such. There may be some downstream second-degree or third-degree impacts associated with that with our clients. But frankly, it is very fertile ground for us in the International Growth Markets.

We are going to continue to invest in that space by adding more talent and bringing more capabilities, and we think we should be able to grow our International Growth Markets business quite nicely, and it should grow at the same level as, if not higher than, the company average growth rate.

David Koning: Great. Thank you, guys. Good job.

Operator: Our next question comes from Maggie Nolan with William Blair. Please unmute your line and ask your question.

Maggie Nolan: Hi. Thank you. I am curious if you can share any perspective on net revenue retention at some of your largest accounts to help us get at the question of volume versus some of this work migration between types of offerings?

Rohit Kapoor: Hi, Maggie. That is a great question and something that we have been paying close attention to. As I said earlier, one of the things happening with our more mature clients is, as they ask us to help them adopt AI into their enterprise workflows, we are able to work on much larger pieces of operations for them as compared to the past, and also work on a lot of work associated with building the right kind of data foundation and new service lines which we would not have engaged with them on previously. The landscape at which we are operating—our TAM—is expanding. It is becoming a much bigger playing field for us.

At the same time, we are able to deploy AI and eliminate and reduce the amount of manual effort required to do some of these processes and pass on this productivity benefit to our clients. So if you talk about net revenue retention, it still is a growth story for us because, on a net basis, we are seeing a much wider landscape to play in, and we are seeing the revenue size and the size of the operation actually increase despite providing them with a benefit associated with the manual portion of the work that was being done previously.

Maggie Nolan: Thank you. And then I noticed in the prepared remarks a little bit of an emphasis on partnerships. I am wondering if there is anything you can share with us to give us a sense of how that is progressing—like what the partner-sourced pipeline looks like or co-selling metrics—and then any variance in things like the deal cycle when you have partnership involvement.

Rohit Kapoor: We have been very pleased with the progression of our partner relationships. As you saw, our partners are recognizing our effort and our differentiated capabilities as compared to some of the other players they might be dealing with. The unique thing about ExlService Holdings, Inc. is that we come at the transformation and the adoption of AI from a process and workflow lens and with knowledge of our clients’ business and operations. Our partners are finding that to be a unique value proposition—the knowledge of the domain and the ability to apply contextual understanding of our clients’ business alongside the technologies that our partners are providing. That is creating a huge amount of value uplift for our clients.

These partnerships are resonating. The motion is becoming a lot easier and smoother in terms of our go-to-market strategies, and our partners are recognizing us and giving us these awards as compared to other players. Go-to-market is the more exciting part because now, when we interact with clients, we are able to take our partners there, and our partners are also bringing us into deals in which they are participating. The activity and the deal flow have increased substantially, and we foresee that going into the future as well.

Maggie Nolan: Thank you. Congratulations.

Rohit Kapoor: Thank you.

Operator: Our next question comes from Surinder Thind with Jefferies LLC. Please unmute your line and ask your question.

Surinder Thind: Rohit, can you help me understand the step-down in the digital ops segment? Over the past couple of years, that was a high single-digit grower. I think the expectation is more muted. Is the idea here that correlates with the advancement in agentic model capabilities? Should we expect to maybe a year or two from now see a further step-down in that segment as the models further advance? And then ultimately, is all of that getting recaptured in the data and AI-led segment?

Rohit Kapoor: Yes, Surinder. Let me try to go through this step by step. Firstly, if you take a look at total operations, that continues to grow and expand, and in the first quarter, total operations grew 10% year over year. Within total operations, you could split it into two buckets: one is digital operations, and the other is data and AI-led operations. As the adoption of AI increases, we are going to see a bigger shift towards data and AI-led operations, and frankly, that is a very good thing from our perspective because as the operations shift towards data and AI-led, we are putting in more IP, more proprietary assets of ExlService Holdings, Inc., and creating more value for our clients.

That business becomes much stickier, much bigger in size, and we control the outcome end to end. Going forward for the remainder of this year, digital operations will likely continue to have the same kind of deceleration of growth that happened in the first quarter, but the shift towards data and AI-led operations is the critical piece. That is positioning the company to be a future-forward company for our clients, and that is what our clients and prospects are looking at, engaging with us in an even more determined manner. That is why we are seeing our pipeline being extremely full and the level of activity very high.

We feel very confident about continuing to grow our overall business in this double-digit range going forward.

Surinder Thind: And then turning to headcount. You continue to see a strong uptick there. Is that how we should expect the model to evolve over the next couple of years—where there is a spread between revenues and headcount—or should that spread expand in the coming years when we think about getting to a more revenue-per-headcount model as you build out your IP?

Rohit Kapoor: If you take a look at Q1, our revenues increased by 14% and our headcount increased by about 11%. If you look at previous quarters and previous years, typically that has been the trend where headcount increase is lower than the revenue increase. We would expect that to continue. Going forward, it depends upon the type of service mix we are providing to our clients and the activities we are undertaking. As we move from digital operations to data and AI-led operations, that is definitely going to result in a lower headcount addition and a much higher revenue uptick.

But if we get into newer service lines, it will depend upon the dynamics of those new service lines, and the revenue per headcount will be determined by the characteristics of that particular service line. On a steady-state basis as this transition takes place, you would expect a delta between revenue growth and headcount growth to be about 3%, which is the case right now. But as we go forward, that can shift one way or the other.

Operator: Please use the Raise Hand button that can be found on the black bar at the bottom of your screen. Our next question comes from an Analyst with JPMorgan. Please unmute your audio and ask your question.

Analyst: Hi. Thanks for taking my question. I was wondering if you could talk about the specific drivers on such strong traction in AI and data services you provide to operations management clients. Was it in any way related to AI model evolution or just clients embracing AI with new budgets?

Rohit Kapoor: Our data and AI-led portion of our business has multiple elements: our data management business, our analytical model and services and solutions business, our payment integrity business, and our data and AI-led operations. We are seeing broad-based traction and growth across all of these different service lines. The data management part is foundational, and that is where we are seeing huge demand. The challenge for us is hiring talent quickly enough to fulfill that demand. In other areas, we are seeing a pivot—some of our analytical services are switching over to AI services, and that is a very strong pivot. We are also seeing a very sharp increase in data and AI-led operations.

When those conversions move into production, that is driving a faster growth rate of our data and AI-led category. We are very pleased that we have multiple service lines in that category, each with tremendous headroom and all growing very nicely. It is very broad-based. It is not one particular service line driving that growth; it is multiple service lines. That gives us confidence in the sustainability and durability of our business growth.

Analyst: Got it. Seems very broad-based. And maybe as my follow-up, our checks are showing that AI-driven automation of business processes from 50% to 80% is 10 times harder than going from zero to 50. Could you touch on what you are seeing in your clients in embracing this next milestone? And is there any progress within the quarter?

Rohit Kapoor: The 50% to 80% refers to what metric?

Analyst: AI-driven automation of business processes.

Rohit Kapoor: When clients want to adopt AI into their operations, it is not simply taking an LLM and pasting it on top of that operation. There is a whole series of work that needs to be undertaken. Number one, the data foundation has to be correct, and the ability to use structured and unstructured data and make that readily usable is a key foundational step. Secondly, the application of the LLM or the AI model needs to be iterated upon and refined as we go forward. Third, there is a very big piece associated with knowledge and understanding of context—bringing together policies, rules, regulations, and how a particular transaction needs to be processed.

That knowledge needs to be clearly defined with the use and application of the AI model. Finally, the semantic layer—which is key for creating value for any enterprise AI adoption—needs to be combined using both the probabilistic elements of an LLM and deterministic elements, particularly for regulated industries. Bringing together all of these things, and then putting together guardrails, security, and a number of elements associated with token economics—this is all very complex. We are in a fortunate position that we have done this several times over. We can deliver the business outcomes to our clients, and our clients trust our ability to execute. That is what is driving the growth there.

Operator: Our next question comes from David Grossman with Stifel. Please unmute your audio and ask your question.

David Grossman: Good morning. Thank you. I think, Rohit, you had mentioned in an earlier question that the NRR is above 100%. We can clearly see that in the numbers. Perhaps you could help us understand how that number has trended over the past couple of years, as well as compare and contrast that with what the IT services companies are seeing—who are struggling—and what is making you different there. As well as maybe talk about the backlog and just how far out you can see that dynamic continuing?

Rohit Kapoor: Yes, David. The NRR for us is quite strong and positive. The big reason is that with the adoption of AI, clients are getting more comfortable outsourcing more work and outsourcing more end-to-end process journeys. In the past, they were comfortable outsourcing tasks and pieces of it, but now they are comfortable allowing a partner like ExlService Holdings, Inc. to manage that journey end to end. The reason is that is the only way to transform the journey, take control of the data assets, deploy AI across the workflow, and be held accountable for the outcome. Frankly, the business model change with AI is allowing a very favorable shift compared to previously.

Previously, with the adoption of other technologies—whether it was bots or other automation—it was always about whether more work could be outsourced. Now it is the full end-to-end life cycle that can be outsourced. It is a lot better in this AI adoption wave.

David Grossman: And how long, Rohit, does it take to go from the beginning to more of a steady state?

Rohit Kapoor: A while, David. Setting up the data foundation itself takes a fair amount of time because most of our clients do not have very mature data estates, and putting that in place requires a lot of heavy lifting. Then iterating on the model and making sure that it is working along with the contextual pieces of our clients’ business also requires a fair amount of effort, complexity, and time. This is not a once-and-done piece. Once you implement AI into the workflow, you have to constantly maintain and upkeep it, and there is a managed service portion that needs to be in place because these models will drift over time.

You need to apply new context to these models on an ongoing basis. It is a fairly complex piece of work to deliver the outcome and then to maintain it and keep it up.

David Grossman: So can the NRR stay above one when you go into the maintenance mode?

Rohit Kapoor: We will have to see how that progresses. One of the things we are seeing is, as we deploy AI into the workflow, our clients are starting to offer newer feature sets to their customers in their offerings. They are also willing to offer newer service lines. There is more being added to the existing piece of work, and if that continues, yes, I think the NRR will continue to remain above one.

David Grossman: Great. Thanks. So just one quick one on margins. I know you are guiding, Maurizio, to flattish margins year over year—or at least that is what it would appear in the 19 range—and that is despite what looks like favorable mix shift. Is there some dynamic when you migrate from a person-based billing model to more of an outcomes-based model on a short-term basis where there are some transition costs? Or is there something else going on that would result in flattish margins on such strong revenue growth?

Maurizio Nicolelli: We had a very good quarter overall on profitability, and you continue to see an uptick in gross margins. If you look at the second quarter of last year, we were at 37.7%. This quarter, we are at 38.9%. Each quarter since then has continued to rise. What you are seeing is us driving profitability there. The offset is continued investment. If you look at our investment line and the level of investment we are making, it is growing faster than revenue overall. We need to continue to invest, particularly in R&D, as we develop more and more AI capabilities. That leads us back to a mid-19% range overall in margins.

And if you look at our overall guidance, we are still driving EPS slightly higher than overall revenue, which is one of our stated goals.

David Grossman: Got it. Alright, guys. Thanks very much.

Operator: Our last question comes from Vincent Colicchio with Barrington Research. Please unmute your audio and ask your question.

Vincent Colicchio: Yeah. Rohit, you had mentioned the commercial model has changed, and it often incorporates outcome-based pricing on AI deals. I am curious, what portion of new AI deals involve outcome-based pricing?

Rohit Kapoor: We are seeing some AI deals have outcome-based pricing models, particularly those where clients are allowing us to transform their end-to-end processes. That is where they are holding us accountable for the outcomes, and the pricing model is switching over to that. Keep in mind that the adoption of AI is gradual, and that shift is happening over time. There are portions of our business that are already outcome-based—the payment integrity work that we do is completely outcome-based. As that business continues to grow and use a lot more AI in its service line, that portion continues to increase. Anytime we are adopting more AI into the workflow, that is something which is kicking in.

The biggest barrier is clients do not have good metrics associated with how to define that outcome and how to attribute responsibility for the outcome. Some of this tends to be a portion on a fixed-fee basis and, over and above that, some sharing of the gain and productivity that we can provide to our clients. That model works well for newer clients that are going into this and wanting to seek the benefit of that outcome.

Vincent Colicchio: And could you update us on how robust your acquisition pipeline is and where your priorities may lie?

Rohit Kapoor: In this environment, we are seeing a fairly strong pipeline of assets. We want to be very careful in terms of the choice of these assets and make sure they further our ambitions to be the AI strategic partner of choice for our enterprise clients. There are capability sets within the AI enablement workstream that we want to add to. We have consciously picked and chosen the areas where we would like to add more capability, and we are looking at acquisitions on a fairly regular basis. As you know, only when you consummate an acquisition can you really be sure about doing an acquisition.

We hope that we will be able to close an acquisition soon, but we cannot comment on the timing as of now.

Vincent Colicchio: Thank you, Rohit. Nice quarter.

Rohit Kapoor: Thank you, Vincent.

Operator: We have no further questions at this time. This concludes our call. Thank you, and have a good day.