ExlService Holdings, Inc. (EXLS) Earnings

Management highlights

Overall Financial Performance • Delivered strong Q2 2026 results with total revenue of $595 million, up 16% year-over-year, and adjusted EPS of 59 cents, up 22% year-over-year. Broad-based growth was achieved across all business segments, with positive momentum that strengthened through the first half of 2026. AI-Led Strategy Differentiation • EXL’s competitive advantage stems from combining deep industry domain knowledge, client workflow understanding, and data/AI engineering expertise to deliver measurable production AI outcomes for enterprise clients in regulated industries. Management highlighted three Q2 examples of this differentiation: 1) an agentic AI deployment for a large national health plan that outperformed a leading hyperscaler’s solution on all metrics, 2) winning a competitive AI data ingestion hackathon at a global insurance carrier that positioned EXL as a strategic AI partner, and 3) delivering up to 80% token consumption reduction for clients through workflow-specific optimization, cutting AI costs without compromising performance. Acquisition Announcement • EXL announced the planned acquisition of iMerit, a leader in AI model training, evaluation, and reinforcement learning, expected to close July 31, 2026. The acquisition is a strategically transformational move that adds new client relationships with leading foundation model companies, deepens vertically specialized AI capabilities, and expands EXL’s total addressable market into high-growth AI tech sectors. iMerit is expected to contribute $28 million to $32 million in revenue for the remaining five months of 2026. Leadership and Investment Priorities • Appointed Bhupinder Singh as President and Head of International Growth Markets, to capitalize on the segment’s large long-term growth opportunity by scaling go-to-market operations in EMEA and APAC. Management outlined core investment priorities: continued development of proprietary AI IP, moving up the value chain to higher-margin solutions, and targeted M&A. 25% of current client revenue already touches EXL’s proprietary IP. The company maintains a strong underlevered balance sheet and strong free cash flow, supporting ongoing share repurchases and strategic acquisitions. Operational Dynamics • The 1.5% year-over-year decline in reported digital operations revenue is intentional: as AI is embedded into existing operations engagements, the higher-value work is reclassified to the data and AI-led segment. The cross-pollination between AI and operations creates a mutually reinforcing growth cycle: deep operations relationships help identify new AI use cases, while AI improvements deepen client loyalty and drive incremental growth.

Guidance

• Management raised full-year 2026 revenue guidance to a range of $2.39 billion to $2.415 billion, representing 14% to 16% year-over-year reported growth, from the prior guidance range of $2.3 billion to $2.33 billion. The midpoint of the new range is $88 million higher than the previous midpoint. Organic constant currency revenue growth is expected to be 13% to 14%. • Full-year 2026 adjusted diluted EPS guidance was raised to a range of $2.25 to $2.29, representing 16% to 18% year-over-year growth, up from the prior guidance range of $2.18 to $2.23. • Management plans to increase investments in front-end sales, data and AI capabilities, and solution development for the remainder of 2026, so adjusted operating margin is expected to be lower in the second half of 2026 compared to the first half. Full-year 2026 adjusted operating margin is expected to be comparable to 2025 levels. • Additional 2026 guidance assumptions: a ~$3 million foreign exchange gain, net interest expense of $16 million to $18 million, an effective tax rate of 21% to 22%, and capital expenditures of $58 million to $62 million.

Segment performance

EXL Service Holdings reports four core operating segments for Q2 2026: 1. Insurance: $197.8 million in standalone revenue, up 14.9% year-over-year, growing 2% sequentially. Including international growth market revenue, total segment revenue reached $233.7 million, up 14.9% year-over-year, and represents 33% of total company revenue. 2. Healthcare and Life Sciences: $158 million in standalone revenue, up 22% year-over-year, growing 4% sequentially. Including international growth market revenue, total segment revenue was $158.3 million, up 22% year-over-year, and represents over 25% of total company revenue. 3. Banking, Capital Markets, and Diversified Industries: $133.9 million in standalone revenue, up 10.7% year-over-year, growing 5.1% sequentially. Including international growth market revenue, total segment revenue was $202.8 million, up 12.8% year-over-year, and represents just under 25% of total company revenue. 4. International Growth Markets: $105.1 million in standalone revenue, up 16.3% year-over-year, growing 8.9% sequentially. By service category, data and AI-led revenue grew 30% year-over-year in Q2 2026 and represents 61% of total company revenue. Reported standalone digital operations revenue declined 1.5% year-over-year by design, as AI-embedded operations work is reclassified to the higher-value data and AI-led segment; total operations (digital + AI-led) grew 10% year-over-year.

Risks & headwinds

• Forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from projections, including broader macroeconomic and geopolitical instability that can impact client spending and decision-making. • Enterprise AI deployment is a nascent market, and clients require demonstration of consistent ROI to increase engagement, creating ongoing execution risk. • Integration of the newly announced iMerit acquisition requires management focus and carries integration risk that could impact near-term performance. • AI token consumption cost and scalability remain key constraints for enterprise AI deployment, creating ongoing operational and cost management challenges for service providers.

Analyst Q&A

• Q: With 30% year-over-year growth in data and AI-led services, how much growth comes from new AI-native programs versus traditional analytics modernization, and can 20%+ growth be sustained for the rest of 2026? Also, how is EXL approaching token optimization as a new market opportunity? /

  A: Growth is broad-based across all service lines within the data and AI segment, including payment integrity, data management, and AI services, with a mix of new and expanded existing work. Management expects data and AI to remain a sustained high-growth driver, as EXL’s differentiated domain expertise builds client confidence for larger strategic engagements. Token optimization is a rapidly growing, strategically important area: EXL’s deep workflow and industry knowledge lets it build proprietary IP to cut client token costs dramatically, and this capability acts as a spearhead to win new client opportunities. (417 characters)

• Q: International growth accelerated significantly after flat growth in H2 2025. Can this acceleration continue, and what is the nature of planned investments in the segment? /

  A: International growth markets are a large long-term strategic opportunity, with AI adoption among regional clients now catching up to US client levels. EXL is investing heavily in local talent, solution development, and front-end sales capabilities to serve international clients closer to their operations. Front-end sales investments are focused on building the specialized skill set required to sell AI services, to match faster client deal velocity and shorter decision cycles. Data and AI investments focus on building out vertical-specific product capabilities. (388 characters)

• Q: Are clients changing their outsourcing approach amid widespread reports of underwhelming ROI for early AI projects, and what does AI embedding in digital operations look like in practice? /

  A: Clients have shifted from AI pilots to prioritizing production deployment, but the market remains in an early nascent phase. Most enterprises are still building foundational AI capabilities (data estate organization, regulatory compliant governance frameworks) and require significant third-party support to scale, which is a much larger opportunity than the market currently estimates. For existing digital operations, EXL embeds agentic AI into core workflows (e.g. insurance claims and underwriting), combining deterministic rule-based processes and probabilistic AI models aligned with regulatory requirements, leveraging existing domain knowledge to deliver faster adoption. (472 characters)

• Q: What is driving the recent acceleration in growth, and what are the sources of this growth? /

  A: Three factors are contributing to the acceleration: a gradual unfreezing of general business spending that was paused in prior periods, reallocation of AI spending toward experienced established IT services players like EXL, and gradual market share gains driven by EXL’s differentiated positioning. Historically, most enterprise AI spend has gone to infrastructure and model development, but going forward management expects a much larger share of spend will shift to the application and AI enablement layer, where EXL is positioned to benefit. (321 characters)