Executive Summary / Key Takeaways

• EXLService Holdings (EXLS) is executing a strategic pivot to become a data and AI-led company, leveraging decades of domain expertise and data mastery to drive client transformation and unlock growth.
• The company reported a strong start to 2025 with Q1 revenue of $501 million, up 14.8% year-over-year (15.1% constant currency), and Adjusted EPS of $0.48, a 26.9% increase, demonstrating significant momentum across its newly realigned segments.
• Data and AI-led revenue now constitutes 53% of total revenue and grew 16% year-over-year in Q1 2025, highlighting the successful adoption and impact of EXLS's advanced capabilities and proprietary platforms like EXLerate.AI and Code Harbor.
• EXLS operates a resilient business model, characterized by a high percentage of annuity-like revenue from mission-critical operations and a diversified client base in stable industries, positioning it well to deliver value and capture market share even amidst macroeconomic uncertainty.
• Management raised its full-year 2025 guidance, now anticipating revenue between $2.035 billion and $2.065 billion (11-12% reported growth) and Adjusted EPS between $1.83 and $1.89 (11-14% growth), reflecting confidence in current momentum, a strong pipeline, and the strategic investments being made in data and AI.

The Foundation: Domain, Data, and the Strategic Pivot to AI

EXLService Holdings has evolved significantly since its founding in 1999 as a traditional outsourcing provider. Over its 25-year history, the company has strategically invested in building deep domain expertise across key industries, developing robust analytics capabilities over the past 15 years, and achieving mastery over data. This foundational strength in domain knowledge, data management, and analytics has paved the way for EXLS's critical pivot to becoming a data and artificial intelligence (AI) led company, a strategy that is now driving its growth and defining its competitive position.

The company's core business today is centered on leveraging the power of data, AI, and this deep industry knowledge to reinvent client business models, drive better outcomes, and unlock growth with speed. Serving leading corporations primarily in the United States and the United Kingdom across industries like insurance, healthcare and life sciences, banking and capital markets, and diversified sectors, EXLS has strategically aligned its operations to better serve these markets. Effective in the first quarter of 2025, EXLS implemented a new operating model, reorganizing into Industry Market Units (IMUs) – Insurance, Healthcare and Life Sciences, and Banking, Capital Markets and Diversified Industries – and establishing International Growth Markets as a dedicated unit. This realignment integrates the company's analytics capabilities directly within these industry verticals and aims to bring EXLS closer to its clients, deepen industry expertise, and accelerate the development and deployment of data and AI solutions at scale.

In a competitive landscape that includes large IT service providers like Accenture (ACN), Cognizant (CTSH), Genpact (G), and Wipro (WIT), as well as hyperscalers and specialized AI startups, EXLS differentiates itself through its unique combination of domain expertise, data mastery, and AI implementation capabilities. While larger competitors like Accenture may boast greater scale and broader market share, EXLS's focused approach allows it to embed AI more effectively into specific industry workflows. For instance, EXLS's AI platform offers efficiency advantages in niche areas, and its specialized data analytics for healthcare payers and providers can offer greater efficiency in predictive analytics compared to more generalized solutions from competitors. While some rivals like Genpact may offer cost advantages in certain BPO segments, EXLS's focus on delivering tangible business outcomes and high ROI through integrated data and AI solutions resonates with clients seeking more than just labor arbitrage. The company's strong existing client relationships and high customer satisfaction scores also provide a preferential pathway for introducing new AI capabilities.

Central to EXLS's competitive edge is its investment in proprietary technology and platforms. The company recently launched EXLerate.AI, an Agentic AI platform designed to help enterprises reimagine workflows by seamlessly integrating EXLS and third-party AI agents. This open, cloud-agnostic, and modular orchestration platform enables faster, lower-cost AI deployment with the potential for substantial ROI. It includes over 15 industry-specific proprietary AI agents already deployed across verticals, demonstrating the practical application of AI in areas like underwriting, claims processing, and internal audits. Another key technological asset is Code Harbor, a GenAI-enabled solution for migrating legacy codebases (like SAS) to modern cloud environments like Databricks. This solution aims to accelerate migration timelines by up to 50% and reduce manual effort by 70-80%, addressing a critical need for clients undergoing data modernization. EXLS also continues to develop domain-specific Large Language Models (LLMs), such as its Insurance LLM, which has been trained on proprietary claims data and is designed to outperform foundational models on specific tasks, offering higher productivity and lower latency/cost. Strategic partnerships with technology leaders like NVIDIA (NVDA), Databricks (achieving Select partner status), and Microsoft (MSFT) (recognized as a Solutions Partner for Data and AI) further enhance EXLS's ability to leverage scalable infrastructure and accelerate AI development and deployment. These technological differentiators, combined with deep domain knowledge, form the core of EXLS's competitive moat, enabling it to deliver superior outcomes and capture value in the evolving market.

Performance Reflecting Strategy and Market Dynamics

The execution of EXLS's data and AI-led strategy is clearly reflected in its recent financial performance. The first quarter of 2025 marked a strong start to the year, with reported revenue increasing 14.8% year-over-year to $501 million (15.1% on a constant currency basis). This growth was broad-based, driven by expansion within existing client relationships and new client wins across all reportable segments. Adjusted EPS grew 26.9% year-over-year to $0.48 per share.

The Healthcare and Life Sciences segment showed particularly strong growth at 24.8%, boosted by higher volumes in payment services, client expansion, and incremental revenue from the August 2024 acquisition of ITI Data. The Insurance segment grew 8.7%, Banking, Capital Markets and Diversified Industries grew 14.3%, and International Growth Markets grew 17%.

A key highlight under the new reporting structure is the performance of Data and AI-led revenue, which grew 16% year-over-year in Q1 2025 and represented 53% of total revenue. This metric underscores the successful shift towards higher-value, AI-powered solutions and services.

Profitability also saw improvement. Gross profit increased to $193.3 million in Q1 2025 from $163.1 million in Q1 2024, resulting in a gross margin of 38.6%, up from 37.4%. This expansion was primarily driven by higher revenues and operational efficiencies, although partially offset by increases in employee-related costs. Income from operations rose significantly to $78.4 million (15.6% of revenue) in Q1 2025, compared to $61.5 million (14.1% of revenue) in the prior-year quarter, reflecting the leverage gained from revenue growth and gross margin improvement, despite an increase in SG&A expenses. SG&A expenses increased due to higher headcount, wage inflation (including costs from the ITI Data acquisition), and increased investments in digital and generative AI capabilities, as well as sales and marketing.

Cash flow from operations saw a notable improvement, turning positive at $3.2 million provided in Q1 2025, compared to $21.9 million used in Q1 2024. This was attributed to higher cash earnings and lower working capital needs, including the absence of a significant contingent consideration payment made in the prior-year period. Investing activities used $22.3 million, primarily due to higher net purchases of investments and increased capital expenditures ($12.9 million in Q1 2025) related to investments in infrastructure, technology assets, and digital capabilities. Financing activities provided $3.4 million, benefiting from lower share repurchases compared to the prior year and lower net borrowings.

EXLS maintains a solid balance sheet with $331.4 million in cash and short-term investments as of March 31, 2025, and a net cash position of $39 million after accounting for revolver debt. While a significant portion of cash is held in foreign jurisdictions, the company believes its existing liquidity and operating cash flow generation are sufficient to meet its requirements over the next 12 months, including planned capital expenditures of $50 million to $55 million for fiscal 2025.

Outlook and Risks

Building on the strong first-quarter performance and current business momentum, EXLS management raised its full-year 2025 guidance. The company now anticipates revenue in the range of $2.035 billion to $2.065 billion, representing year-over-year growth of 11% to 12% on a reported basis (11% to 13% constant currency). This guidance includes a forecasted foreign exchange headwind of approximately $5 million and reflects a $7 million increase at the midpoint from previous guidance. Adjusted EPS is expected to be in the range of $1.83 to $1.89, representing growth of 11% to 14%.

Management anticipates continued investments in data and AI capabilities and solutions throughout 2025 to maintain and expand its competitive advantage. These investments are expected to contribute to an adjusted operating profit margin improvement of 10 to 20 basis points for the full year. While quarterly margins may fluctuate due to the timing of these investments, the annual trajectory is expected to be positive, funded by anticipated gross margin expansion driven by higher-value service offerings. The outlook is supported by a strong sales pipeline that has grown year-over-year and sequentially, particularly in the data and AI portion, indicating healthy client activity and future growth potential.

Despite the positive outlook, EXLS operates in a dynamic environment and faces several risks. The loss of any of its top ten clients, which accounted for 33.7% of revenue in Q1 2025, could have a material adverse effect. The ability to hire and retain sufficiently trained employees, particularly those with specialized data and AI skills, is critical. Pricing pressure, especially in a volatile macroeconomic environment where clients focus on cost reduction, remains a factor. Cybersecurity incidents, data breaches, and reliance on third parties also pose risks. Furthermore, the company is involved in ongoing tax disputes with Indian authorities, including transfer pricing demands totaling $50.5 million and VAT demands of $5.3 million as of March 31, 2025. While EXLS believes its positions are likely to be sustained, adverse outcomes could impact financial performance. Managing rapid infrastructure and personnel growth across multiple geographies and successfully integrating strategic acquisitions like ITI Data are also ongoing operational challenges.

Conclusion

EXLService Holdings has successfully transformed itself into a data and AI-led company, leveraging its deep domain expertise and data mastery to deliver significant value to clients. The strategic realignment of its operating model and reporting segments underscores its commitment to this high-growth area and positions it to capitalize on the increasing demand for AI-powered transformation.

The strong financial results in the first quarter of 2025, highlighted by double-digit revenue and Adjusted EPS growth and the increasing contribution from Data and AI-led services, demonstrate the tangible impact of this strategy. While the competitive landscape is intense, EXLS's proprietary technology platforms like EXLerate.AI and Code Harbor, coupled with its industry-specific knowledge and focus on delivering measurable business outcomes, provide a clear differentiation. The company's resilient business model, anchored by annuity-like revenue and a diversified client base, offers a buffer against macroeconomic uncertainties. The raised full-year guidance for 2025 reflects management's confidence in the company's continued momentum and its ability to execute on its growth strategy, supported by a robust pipeline and ongoing strategic investments in AI capabilities. Despite facing operational and market risks, EXLS appears well-positioned to continue its growth trajectory by helping clients navigate the complexities of data and AI adoption to drive efficiency and unlock new opportunities.