Exlservice - Earnings Call - Q2 2025

Executive Summary

• EXLS delivered a clean top-line/EPS beat and raised FY25 guidance. Q2 revenue was $514.5M (+14.7% y/y; +2.7% q/q) and adjusted EPS was $0.49 (+20.3% y/y). Both exceeded S&P Global consensus: revenue $507.2M* and EPS $0.453*, driven by broad-based growth and strong AI-led demand. Q2 consensus figures: revenue $507.19M*, EPS $0.4528*.
• Management raised FY25 guidance to revenue of $2.05–$2.07B (from $2.035–$2.065B) and adjusted EPS of $1.86–$1.90 (from $1.83–$1.89), citing momentum in data and AI and a robust pipeline.
• Mix/tone: Data & AI-led revenue grew 17% y/y and reached 54% of total, with multiple domain LLM launches and growing adoption of the EXLerate.ai agentic AI platform; secular AI adoption remains the key growth vector.
• Capital allocation: Announced a $125M accelerated share repurchase under the existing $500M authorization; balance sheet supports buybacks while funding AI investments, serving as a potential stock support/catalyst alongside the guidance raise.

What Went Well and What Went Wrong

• What Went Well

  • Broad-based growth and clean beat: Revenue grew 14.7% y/y to $514.5M and adjusted EPS rose 20.3% to $0.49; both exceeded consensus and Q/Q growth continued (+2.7% q/q revenue).
  • AI-led differentiation: Data & AI-led revenue rose 17% y/y, now 54% of total; CEO emphasized proprietary domain models and high implementation success rates as competitive moats. “Data and AI now represent the majority of our revenue, 54% this quarter”.
  • Guidance raise and cash generation: FY25 revenue and EPS guidance increased; Q2 operating cash flow of $109M and net cash position of $96M support investment and buybacks.

• What Went Wrong

  • Slight non-GAAP margin compression: Adjusted operating margin of 19.6% declined 20 bps y/y (vs. 19.8% in Q2’24) as EXLS reinvests in data/AI solutions; management flagged higher 2H investments tempering 2H margins vs. 1H.
  • Gross margin ticked down sequentially: Total gross margin was 37.7% vs. 38.6% in Q1’25; Insurance and International Growth Markets saw lower segment gross margins q/q (Insurance 34.8% vs. 36.6% in Q1).
  • Analyst concern on vertical cadence: Questions persisted on Insurance growth moderation and healthcare policy risk; management reiterated healthy Insurance pipeline and payer efficiency demand offsetting policy noise.

Transcript

Operator (participant)

Hello and welcome to theExlService Holdings, Inc Second Quarter 2025 earnings conference call. We ask that you please hold all questions until the completion of the formal remarks, at which time you will be given instructions for the question and answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. I will now turn the call over to John Kristoff, Vice President of Investor Relations.

John Kristoff (VP of Investor Relations)

Thanks, Jennifer. Hello and thank you for joining EXL Second Quarter 2025 Financial Results Conference Call. On the call with me today are Rohit Kapoor, Chairman and Chief Executive Officer, and Maurizio Nicolelli, Chief Financial Officer. We hope you've had an opportunity to review the second quarter earnings press release we issued yesterday afternoon. We have also posted a slide deck and investor fact sheet on our Investor Relations website. As a reminder, some of the matters we'll discuss this morning are forward-looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include, but are not limited to, general economic conditions, those factors set forth in today's press release, discussed in the company's periodic reports, and other documents filed with the SEC from time to time. EXL assumes no obligation to update the information presented on this conference call today. During our call, we may reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of these measures to GAAP can be found in our press release, slide deck, and investor fact sheet. With that, I'll turn the call over to Rohit.

Rohit Kapoor (Chairman and CEO)

Thanks, John. Good morning, everyone. Welcome to EXL Second Quarter 2025 Earnings Call. I'm pleased to report another strong quarter as we consistently execute on our data and AI growth strategy. In the second quarter, we generated revenue of $514 million, an increase of 15% year-over-year. We grew second quarter adjusted EPS by 20% to $0.49 per share. Our results demonstrate significant momentum across all our operating segments. We delivered solid growth in the insurance segment, which represented a third of our revenue in the quarter. Insurance is a stable, core strategic market for us, with long-term growth opportunities as our major clients continue to evolve their operations to be more AI-powered. Healthcare and life sciences represented a quarter of our revenue and was once again our fastest growing segment.

This exceptional growth was driven by higher volumes in our payment services business, expansion of domain operations, and analytic services with existing clients in the healthcare payer space, fueled by demand for our data and AI solutions. Banking, capital markets, and diversified industries also represented nearly a quarter of our revenue, and we were able to accelerate year-over-year growth for the fourth consecutive quarter. Leveraging our full data and AI capabilities to drive end-to-end value and improve business outcomes in this segment is a tremendous opportunity. We also drove strong year-over-year and sequential growth in our international growth market segment during the quarter as we continue to diversify our business geographically. This segment grew to 18% of our total revenue in the quarter. We have immense potential to grow our client base in this segment, which is an opportunity to enhance our overall growth rate over time.

During the quarter, our data and AI-led revenue increased 17% year-over-year and grew to 54% of total revenue, with strong performance across all four of our reporting segments. This demonstrates the strength of our competitive position as a recognized leader in embedding AI in the workflow and delivering superior return on investments for our clients. This strength is reflected not only in our consistent double-digit revenue growth but also in a robust double-digit expansion of our sales pipeline this past quarter, driven by large integrated deals. We have consistently delivered double-digit growth for seven of the past eight years, with 2020 being the only exception due to the pandemic. Looking ahead, we remain confident in our ability to sustain this performance. I'd like to highlight three key areas where EXL is clearly differentiated, setting us apart in our ability to consistently drive double-digit long-term growth.

First, our business model is fundamentally different from many of our peers. We've deliberately avoided low-value work, which is highly vulnerable to disruption from AI. Instead, we have always focused on serving our clients in domain-specific, complex business workflows. These workflows are mission-critical and are crucial to achieving business outcomes for our clients. Over time, we've built deep trust by continuously evolving alongside our clients, helping them drive growth and deliver measurable business outcomes. This has resulted in exceptionally high renewal rates, with over 75% of our revenue being recurring or annuity-like. This provides stability and consistency in our revenue. Second, we've spent the last 25 years continually evolving our solution portfolio with a sharp focus on building analytics, data, and AI.

As generative AI and agentic AI become central to transformation efforts, success increasingly depends on three things: deep domain expertise and a nuanced understanding of process value chain complexity, proficiency with the multimodal data generated and consumed by these processes, and the ability to orchestrate and embed advanced AI into workflows to deliver meaningful outcomes. EXL has a unique combination of strengths across domain, data, and AI. Our decades of domain experience and early investments in data and AI allow us to help clients seamlessly embed AI into operations and achieve tangible results. The third key area where EXL is differentiated is that data and AI now represent the majority of our revenue, 54% this quarter. This makes us one of the only few companies in our space with such a heavy concentration of revenue in these high-growth areas.

As AI adoption accelerates, industry forecasts show AI services growing at twice the pace of overall IT, Cloud, and digital services. This long-term secular trend presents a significant opportunity for EXL In short, our differentiated business model, deep capabilities in data and AI, and strong alignment with long-term market trends position us exceptionally well. We've earned the trust of our clients by consistently helping them grow and improve performance, making EXL the partner of choice now and into the future. We continue to invest in next-generation data and AI capabilities, solutions, and partnerships to deliver differentiated value for our clients. During the quarter, we expanded our proprietary large language model offerings. Notably, we launched our first multimodal LLM for property insurance underwriting, leveraging our proprietary survey data. This solution automates the interpretation and classification of property survey images, enhancing our property underwriting services.

We also introduced a finance and accounting LLM that integrates structured and unstructured data to power agentic AI across finance workflows. Built with finance-specific ontologies, it supports use cases such as invoice extraction, audit Q&A, negotiation, and forecasting. In healthcare, we unveiled a payer-focused LLM designed to automate and enhance the accuracy of medical code extraction and summarize complex clinical data from physician notes, medical records, discharge summaries, and lab reports. Our extensive domain knowledge and access to relevant training data in these specific domains uniquely positions EXL to deliver more effective generative AI solutions at a lower cost to drive higher ROI for our clients. We also experienced growing adoption of our EXLerate.ai agentic AI platform, which enables clients to reimagine operations and deliver transformative business outcomes. For example, we partnered with a major insurance client to modernize its customer communication management.

Handling over 4 million correspondents annually, the client faced high operational costs, inconsistent templates, and regulatory compliance risks. By deploying an agentic AI solution capable of autonomously planning, executing, and adapting complex workflows with minimal human oversight, we helped the client significantly reduce costs, improve consistency and documentation, and mitigate compliance risk. We leveraged our AI solutions to expand our client base by adding a large global bank. We partnered with them to modernize their data lineage framework. The client's legacy systems lacked transparency and were heavily reliant on manual processes. We implemented our agentic AI data harbor solution to produce a comprehensive data lineage map. Our client achieved over 98% data lineage coverage with a significantly reduced manual effort. This result exceeded the client's expectations and has enabled us to generate additional opportunities with them in other areas.

These are just two examples of how EXLerate.ai is enabling us to move into new domains, from automating customer communications to delivering full data lineage and traceability, expanding our service offerings, increasing our total addressable market, and sustaining our double-digit growth trajectory. We're also extending our reach through strategic partnerships. Most recently, we announced a collaboration with Genesys, a global cloud leader in AI-powered customer experience. This partnership combines EXLs deep data AI and domain expertise with Genesys' industry-leading contact center as a service platform. Together, we are enabling enterprises across insurance, banking, healthcare, and retail to transform customer engagement through intelligent personalization, predictive analytics, and enhanced customer experiences. Our progress on data and AI is gaining global recognition and reinforcing EXL's position as a leader in AI deployment. I recently had the privilege of participating in the World Economic Forum's annual meeting of the new champions in Tianjin, China.

I addressed delegates as an industry leader at an interactive AI hub session and at a press conference where EXL was honored as a 2025 Minds winner for our code harbor solution, an AI-powered platform for software code translation. Minds, which stands for meaningful, intelligent, novel, deployable solutions, was established to spotlight real-world AI applications delivering measurable impact at scale. Not pilots or prototypes, but deployed solutions already transforming industries and lives. As part of this recognition, EXL will actively contribute insights to World Economic Forum initiatives over the next two years and collaborate with other global AI leaders working on similar challenges. We believe this collective approach is critical to unlocking AI's full potential for positive impact. In conclusion, we are excited about the expanding market opportunities in data and AI.

With our deep domain knowledge, advanced data and AI capabilities, and proven ability to embed AI into complex workflows, EXL is uniquely positioned to deliver meaningful business outcomes and strong ROI for our clients. Our business model is well-balanced and resilient, with a strong track record of performance across economic cycles. Over 75% of our revenue is annuity-like, providing excellent visibility and stability for the remainder of the year. Coupled with the continued double-digit growth in our sales pipeline, this strong foundation gives us the confidence to raise both our revenue and EPS guidance for the full year. With that, I'll turn the call over to Maurizio to provide more details on our financial performance.

Maurizio Nicolelli (CFO)

Thank you, Rohit, and thanks everyone for joining us this morning. I will provide insights into our financial performance for the second quarter and our revised outlook for 2025. We delivered a strong second quarter with revenue of $514.5 million, up 14.7% year-over-year on a reported basis, and 14.6% on a constant currency basis. Sequentially, we grew 2.2% on a constant currency basis. Adjusted EPS was $0.49, a year-over-year increase of 20.3%. All revenue growth percentages mentioned hereafter are on a constant currency basis unless otherwise stated. Now, turning to revenue by segment in the second quarter, the insurance segment grew 8.6% year-over-year with revenue of $172.2 million. This was driven by expansion in existing client relationships and new client wins. The insurance vertical, including revenue from international growth markets, grew 9.5% year-over-year with revenue of $203.2 million.

The healthcare and life sciences segment reported revenue of $129.5 million, representing growth of 22% year-over-year and 3.1% sequentially. The year-over-year growth was driven by higher volumes in our payment services business and expansion in existing client relationships. The healthcare and life sciences vertical, including revenue from international growth markets, grew 21.9% year-over-year with revenue of $129.7 million. In the banking, capital markets, and diversified industries segment, we reported revenue of $121.1 million, representing growth of 15.8% year-over-year and 2.7% sequentially. This growth was driven by the expansion of existing client relationships and new wins largely in banking and capital markets clients. The banking, capital markets, and diversified industries vertical, including revenue from international growth markets, grew 15.7% year-over-year with revenue of $181.5 million.

In the international growth markets segment, we generated revenue of $91.7 million, up 15% year-over-year and 4.7% sequentially. This growth was primarily driven by new client wins, ramp-ups, and higher volumes with existing clients across insurance and banking, capital markets, and diversified industries. SG&A expenses as a percentage of revenue declined 130 basis points year-over-year to 19.2%, driven by the one-time restructuring costs we had in the second quarter of last year and lower employee costs. Our adjusted operating margin for the quarter was 19.6%, down 20 basis points year-over-year, driven by investments in new solutions. Our effective tax rate for the quarter was 22.4%, down 80 basis points year-over-year, driven by higher profits in lower tax jurisdictions and reduced U.S. state taxes. Our adjusted EPS for the quarter was $0.49, up 20.3% year-over-year on a reported basis.

Turning to our first half performance, our revenue for the period was $1.015 billion, up 14.9% year-over-year on a constant currency basis. This increase was driven by double-digit growth across both our data analytics and AI-led and digital operations services. The adjusted operating margin for the period was 19.9%, up 50 basis points year over year. Our first half adjusted EPS was $0.97, up 23.5% year-over-year on a reported basis. Our balance sheet remains strong. Our cash, including short and long-term investments, as of June 30th, was $356 million, and our revolver debt was $260 million for a net cash position of $96 million. We generated cash flow from operations of $109 million in the quarter versus $75 million in the second quarter of 2024. This improvement was driven by higher profitability and improved working capital.

During the first six months, we spent $27 million on capital expenditures and $50 million on share repurchases. Given our confidence in the business and strong cash flow generation, we have entered into a $125 million accelerated share repurchase program under our existing $500 million board authorization. The repurchase will be funded through available cash and our credit facility. Share repurchases are a key component of our capital allocation strategy and an effective way to enhance shareholder value. Now, moving on to our outlook for 2025. While we remain prudent in our outlook for the year, our continued momentum and strong sales pipeline give us confidence to raise our revenue and adjusted diluted EPS guidance for the year. We now anticipate 2025 revenue to be in the range of $2.05 billion to $2.07 billion, representing year-over-year growth of 12% to 13% on a reported and constant currency basis.

This is an increase of $10 million at the midpoint of our previous guidance. We expect a foreign exchange gain of approximately $4 million to $5 million, net interest expense of approximately $1 million, and our full-year effective tax rate to be in the range of 22%-23%. We expect capital expenditures to be in the range of $50 million-$55 million. We anticipate our adjusted EPS to be in the range of $1.86-$1.90, representing year-over-year growth of 13%-15%. To conclude, we delivered another exceptional quarter, demonstrating our formidable competitive position in embedding AI into the workflow. In addition, we have a highly adaptable and resilient business model and a strong sales pipeline, giving us confidence in our ability to maintain our double-digit growth momentum. With that, Rohit and I would be happy to take your questions.

Operator (participant)

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 wait one moment to allow the queue to form. Our first question comes from Bryan Bergin with TD Cowen. Bryan, please unmute your audio and ask your question.

Bryan Bergin (Managing Director)

Hi guys, good morning, thank you. I wanted to start on some details within your two key sectors in insurance and healthcare. In insurance, you see growth was stable quarter on quarter. Just curious, are there any drivers weighing on that relative growth rate versus the strong growth in the other sectors? Do you see insurance accelerating as you go through the second half? On healthcare, really strong first half. Can you just give some details though on your underlying exposures? We've gotten some questions as it's related from risks, from I think potential bill cuts to certain programs. Just curious if you see any impacts potentially in that sector as you move ahead.

Rohit Kapoor (Chairman and CEO)

Sure, Bryan. I think first of all, the overall growth of the company is very good and healthy. As we've guided to between 11%-13%, that's very solid growth that we are seeing. In terms of the industry verticals, the growth rate in the insurance industry vertical is a nice healthy growth rate. The pipeline that we have in insurance is actually very strong, and it continues to be a very attractive industry vertical for us to continue to modernize, continue to embed more data and AI into the workflows, and continue to help our clients achieve and get the benefits of AI. We feel good about the industry vertical. In terms of healthcare, we've had strong growth in the healthcare industry vertical for the last several quarters.

The reason for that is that some of the data and AI-led solutions that we have out there, particularly around payment integrity, as well as some of the domain-specific operations that use a fair amount of data and AI-led solutions, that's resonating very strongly with the healthcare industry payers. While there has been a number of different regulations that are impacting the healthcare payers, they are constantly looking at ways to introduce more efficiency into their business operations. We are a very effective partner for them to be able to deliver that. Some of this will ebb and flow as things go along. I think some of the industries will rotate out, and some will grow faster, some will grow slower.

In general, if you take a look at our core industry verticals of insurance, healthcare and life sciences, banking, retail, diversified industries, as well as our international growth markets, there is adequate diversification that we have. In general, we see good momentum across the board, across the industries.

Bryan Bergin (Managing Director)

Okay, understood. Thank you. On GenAI and Agentic, very active developments continue. Good to see there. Understanding it's early, but as clients are adopting your solutions and transitioning from traditional contracting to leveraging these tools, can you share any quantitative details on how that's impacting the relative revenue and margin profiles of the engagements?

Rohit Kapoor (Chairman and CEO)

Sure. You're absolutely right. I think with the generative and agentic AI and all of our new solutions in that area, that's something which we are very excited about because the adoption of these solutions is now taking place across the board. As we engage with our clients out here, the first and foremost objective for the company is to be able to deliver the business outcome that we are promising to these clients. Keep in mind that the traditional industry success rate in terms of deploying data and AI solutions leveraging generative AI is actually quite low at present. It's only about a 30% success rate. EXL is operating at about a 94% success rate associated with the implementation of these data and AI solutions. That's the number one thing that we are focusing on, which is to deliver that business outcome.

In terms of the commercial model, the commercial model is shifting, and it will gravitate down towards much more usage-based metrics. That becomes a lot more on a transaction basis or an outcome basis. As that shift takes place, I think there is an opportunity for us to be able to expand margins. That's one of the levers that we have over the long term to be able to continue to deliver an EPS growth rate, which is faster than revenue. That's a long-term trend that we see, which is as we get more data and AI revenue into our portfolio, the opportunity for us to be able to manage our margins becomes a lot better. There is less sensitivity to pricing associated with this because the value that we are delivering to our clients is significantly higher.

As long as we can deliver that value to our clients, I think it'll afford the opportunity for us and our clients to be able to share in that benefit and continue to build and grow our margins out there.

Bryan Bergin (Managing Director)

Thank you.

Operator (participant)

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

Surinder Thind (Equity Research Analyst)

Thank you. I guess where I'd like to start with is, given that we're building all of these more proprietary type solutions, Rohit, can you talk a little bit about the moat and your ability to protect the IP around that versus competitors acting as fast followers?

Rohit Kapoor (Chairman and CEO)

Sure. There are a couple of things that I'd like to just point out. Number one is, you know, at EXL, we own a number of technology platforms on which we serve our clients, particularly in insurance and in healthcare, and then some of the new solutions that we've built. These platforms actually allow us access to proprietary data assets. We've used these proprietary data assets to train our models and to be able to implement differentiated solutions for our clients. Some of the domain-specific large language models that I spoke about in my prepared remarks talk about how we've trained these models on these proprietary data assets and created differentiated solutions. One big source of differentiation and IP protection for us comes from these proprietary data assets, which we have access to and others do not have access to.

The second part of that IP protection is you would see that the number of patents and the number of proprietary solutions that we are creating at a rapid pace is accelerating very, very strongly. Those areas of creation of this IP create, again, a proprietary differentiated access point for us. I think that's going to be pretty sustainable. I would really point out those two things. One is access to data assets which are not available to others, and number two, creating proprietary IP solutions.

Surinder Thind (Equity Research Analyst)

That's helpful. When we think about just the mix of business, obviously significant continued demand on the data and AI-led piece, the quarter-over-quarter growth in digital operations was a little bit slower than it has been historically. Can you talk a little bit about that and the pipeline of those projects? When you talk about maintaining double-digit growth, is that meant for both segments or is that meant to be an overall firm-wide growth rate?

Rohit Kapoor (Chairman and CEO)

Sure, I think that's a great question. I think what we are focused on is, number one, to deliver double-digit growth overall for the company. That's most important for us. The biggest pivot that we've made as an organization is to continue to sharpen our focus on data and AI-led revenue. As you saw in this quarter, we grew that by about 17%. That's growing much faster than the rest of the company. That's something which we are going to be very focused on in terms of driving the growth rate, driving our acceptance with our customer base out there, improving our win rate on those solutions. Our belief is that over the next one, three, and five-year terms, those data and AI services and solutions are going to grow at twice the pace of the rest of the services that are there in the industry.

If we can position ourselves with a majority of our portfolio being in those segments, we can actually grow faster and we can deliver that double-digit growth rate for the overall company. Interestingly enough, the digital operations part of our business also is getting good traction and we're seeing a fair amount of healthy demand out there as well. Our job is to take that digital operation and convert that as much as possible with data and AI-led solutions so that we are continuously embedding more and more of our solutions into the work that our clients entrust us to do.

Frankly, this is a shift in our business mix, but it's also a shift in terms of being able to access a lot more and expand the playing field that we have and therefore the TAM that we kind of target and be able to kind of sustain a double-digit growth rate.

Surinder Thind (Equity Research Analyst)

Thank you.

Operator (participant)

Our next question comes from Puneet Jain with JPMorgan. Please unmute your audio and ask your question.

Puneet Jain (Associate Equity Research)

Hey, thanks for taking my question. Rohit, it seems like the AI adoption traction has increased this year. Do clients typically go with their existing vendors, like existing vendors of business process or existing BPO vendors when they're looking to implement AI solutions? Are the differences across vendors high enough right now in terms of what they can offer in AI that they would be okay going with a new vendor to replace human-driven BPO services or automate human-driven BPO services?

Rohit Kapoor (Chairman and CEO)

Sure, Puneet. You're absolutely right. The adoption of data and AI is accelerating, and it's actually playing out very, very nicely for EXL. From a client perspective, I will tell you that clients are focused on seeing where they can get the most amount of value and which service partner of theirs is going to deliver the most amount of value and help them in this journey of modernizing their operating and their business stack and being able to serve their end customers in a seamless way. We at EXL have a distinct advantage that we understand the domain and the business of our clients. We understand the workflow. We understand how to manage, access, and use data. We know how to apply AI into the workflow. That unique combination of mastery of domain, data, and AI definitely creates a positive differentiation for EXL.

to be the partner of choice for many of these engagements that our clients are undertaking. What we are finding is a number of newer clients are being attracted to us because of our ability to do this, and existing clients are gaining confidence in terms of entrusting us to be able to work there. The key thing for us is to be able to also access the CIO and the CTO of our client organizations. We are building up those relationship access points so that we can serve our clients on the operating and the business side alongside with serving the clients on the technology side.

Puneet Jain (Associate Equity Research)

Should we expect the growth trends across data and AI-led and digital operations to continue in the second half, especially on a sequential basis?

Rohit Kapoor (Chairman and CEO)

Yes, we would expect our data and AI business to continue to grow and kind of increase. You should expect a slightly lower growth rate of the digital operations business. That's something which we would see on a go-forward basis. Keep in mind one thing, that as we embed more data and AI into our existing digital operations business, that becomes a lot more valuable for us and for our clients as we go along. The primary metric to focus on is obviously the overall growth rate of the company, but also how quickly we are being able to pivot towards data and AI-led operations.

Puneet Jain (Associate Equity Research)

Got it. Thank you.

Operator (participant)

Our next question comes from Matt Dezort with William Blair. Please unmute your audio and ask your question.

Matt Dezort (Equity Research)

Great, thanks for taking our questions. This is Matt on for Maggie Nolan. Congrats on the sustainable organic growth you're enjoying. I guess, what gives you confidence that that can persist? Can you parse out the drivers across volume from existing clients versus new logo additions? How do you expect that to evolve?

Rohit Kapoor (Chairman and CEO)

Sure, Matt. I think a few things really stand out for us. Number one is the work that we essentially do for our clients is mission-critical work. It's work that they need to kind of undertake no matter what the economic environment is. Therefore, despite all the geopolitical noise, despite all the uncertainty in the economic environment, our engagement with our clients, with over 75% of our business being annuity-like and recurring, is a very strong foundation for that sustainable growth rate. The second aspect of this is we've been able to shift our portfolio where 54% of our total revenue now is data and AI. That piece is accelerating in growth, and the market opportunity is actually expanding. We would say that AI has dramatically increased the TAM that we can now target.

In terms of some of these new services and solutions that we are offering to our clients, it's a gigantic opportunity that we have in front of us. We are positioned very well. The final piece is execution. I think you have to execute and deliver the business outcome for your clients in order to have sustained growth and be able to have sustained momentum. We are in a fortunate position that we've been able to do this consistently across our customer base and be able to drive that. Your last point about existing clients and new clients, I think we've got a pretty healthy mix in terms of growth coming in from our existing clients, as well as our ability to add on new clients. We're very pleased with how the portfolio is progressing.

Matt Dezort (Equity Research)

Thanks, Rohit. I guess to follow up, could I ask you to discuss the competitive environment? How are you seeing that evolve as clients are pressured a little bit by the macro and tariffs and the drive to adopt AI, which you seem to have an advantage in? Are you seeing sole source deals increase? Is this a mix of elements improving the competitive environment for you guys? Just talk to me about that a little bit. Thanks.

Rohit Kapoor (Chairman and CEO)

Sure. The competitive environment has certainly changed in this kind of a backdrop. Number one, with AI coming in, there are a number of new startups. There are a number of AI-first companies and organizations that are participating. There are a number of large global consulting firms that are getting into the fray, a number of large data companies getting into the fray, a number of new AI companies kind of getting into the fray. I think clients will look at all available options that are out there. Our advantage lies in the fact that we understand the AI part of it, and we've built very, very strong capability around it. We also understand the domain and the workflow.

That is something which I think some of these new companies lack, which is they don't have the same domain knowledge and business understanding of the operating processes which we have by virtue of being engaged with our clients over this long period of time. That's certainly changing in terms of the competitive landscape. To your point about geopolitical changes in terms of economic uncertainty, I think clients are gravitating towards having long-term partnerships with select strategic providers. They're choosing partners that are going to be relevant for them today and are going to be relevant for them three to five years out because these are long-term relationships that they're building. Necessarily, there is a lot of engagement that needs to take place from the client's organization and from the partner's organization. This takes a while to be able to be established.

They cannot really work with hundreds of different providers out here because that way the effort to transform is going to get diffused. You'll end up in different kinds of architectures, and it's going to be quite messy. At the same time, going to a single partner is also problematic because the ability to access new ideas, the ability to diversify, all of those benefits go away. In general, we are seeing them gravitate down to a few strategic partners that they're going to work across the value chain. That's across business operations, across advanced analytics, around data management, around AI, and kind of pulling all of that together. We are, again, in one of those fortunate positions that we've got all the right capabilities to be that strategic partner of choice for our clients.

Operator (participant)

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

David Grossman (Managing Director)

Great, thank you. The first question I have is just on the architecture of the guidance. It would seem your annual guide would seem to imply EPS will be down year over year in the back half of the year. I am just curious, maybe you could help us understand that dynamic given what appears to be very strong momentum in the business. Plus, you've got the share repurchase coming in at some point in the back half of the year.

Maurizio Nicolelli (CFO)

Hey, David, it's Maurizio. That is correct. When you look at the first half of the year, we had a very strong first half of the year financially, both top line and bottom line. We continue to see that going into the second half of the year. We've always guided up for our AOPM at slightly higher than what we did last year. In 2024, we had AOPM of 19.4%, and we are still targeting this year to be slightly higher, 10 to 20 basis points this year. We ended the first half of the year at 19.9%. In order for us to continue our growth trend of growing double digits well into 2026 and thereafter, we have to continue to invest. That's what we'll be doing in the second half of the year. We still project the year to be in the mid-19% range, as we've always talked about.

Given the strong first half of the year, there's a little bit of a reflection in the EPS guidance that we will be slightly lower than the midpoint of 19% in the second half of the year, more towards the lower end of 19%. That's really for us to continue to invest in both data and AI solutions to really drive revenue in 2026 and thereafter.

David Grossman (Managing Director)

Okay. I guess to that point, just looking at the headcount trends versus revenue growth, the last, I think, two, three, four quarters, your revenue growth is outpacing the headcount growth. That, I would think, would be a positive to margins. Maybe you could reflect on what's going on in that dynamic. Is it kind of some of the AI initiatives that get you productivity gains internally and operationally, or maybe there's something else going on that's more kind of point in time than something secular. The fact that you're growing revenue substantially faster than headcount is an interesting dynamic. Curious of the impact going forward and the impact on margins.

Maurizio Nicolelli (CFO)

Yeah, David, that's a great observation because that's a key metric for us is to really drive our revenue growth faster than headcount growth. If you look at it again this quarter, you know, revenue per headcount continued to increase quarter over quarter sequentially. That's really important for us going forward. What we're doing today as we get that benefit in our P&L is reinvesting it back into data and AI to really drive future growth. Keep in mind, you know, a lot of our AI solutions that we're building today, they're still in a very young phase at the end of the day. As we continue to sell those and those get more accepted into the market and we really build on that, that's when we really get the benefit in future years.

It goes back to what Rohit was talking about in that we should continue to see that benefit to margins going forward in future years. Right now, we are reinvesting that into the business and continually pushing to drive top line growth in that low double-digit range.

David Grossman (Managing Director)

Right. If I could just sneak one more in, obviously there was one of your competitors was taken out recently. I don't know, Rohit, if you have any thoughts on consolidation, what the implications may be for EXL. and kind of how you're viewing that dynamic.

Rohit Kapoor (Chairman and CEO)

Sure, David. First of all, the market space in which we are playing in is very, very large. One of our competitors being taken out, I don't think has any real material impact on us. The real issue for us is we have to focus in on our efforts to be able to be relevant for our clients. We think with our domain knowledge and understanding of our clients' business, the investments that we've made in data and AI, that's actually resonating well. We are actually very well positioned to compete against any competitor in this space to be able to continue to drive growth and be able to build margins in our business. I think how that particular transaction will play out, we'll see over a period of time. As you very well know, a lot of that depends on execution and the ability to integrate.

We'll see how that plays out. What I would say is that the market space is so big and so large, and we have a number of competitors that we compete with, that this really should not make any difference to our competitive positioning in the market space. We are just focused in on just building and growing our business and continuing to add value to our clients.

David Grossman (Managing Director)

Got it. Just while I have you, sorry, Rohit, if I could just get one more. It looks like the new client adds in the first half of the year have decelerated pretty significantly from the first half last year. You obviously had a really strong first half of last year. Just wondering, is that more a reflection of the size of the clients? Is it kind of the economic backdrop? Anything you can share there since you don't really report bookings, maybe help us understand that dynamic.

Rohit Kapoor (Chairman and CEO)

Yeah, you're right, David. I think that's an incorrect observation. The way we are seeing the business trends, we're seeing the demand, we're seeing a look at the pipeline. Our pipeline has actually expanded by very strong double-digit growth in the pipeline, and the business opportunities for us remain good. The quality of the clients that we have signed up, you know, we are comfortable with that. We think the growth rate of the business continues to be sustained going forward. There's nothing that we are seeing which would cause us any concern for our growth rate for the second half of this year or going into 2026. I think, you know, there is a lot of active dialogue with new clients. Like I said, you know, these capabilities are opening up avenues for us to provide new services to existing clients and new services to new clients as well.

Frankly, it's a pretty healthy trend that we have, and the opportunity set for us, you know, globally is actually huge. Frankly, there's a lot for us to do out here, and there's enough demand for us to be able to target and to be able to build and grow the business.

David Grossman (Managing Director)

Okay, very good. Thank you for taking my questions.

Operator (participant)

Our next question comes from David Koning with Robert W. Baird & Co. Please unmute your line and ask your question.

David Koning (Senior Research Analyst)

Yes, thanks, guys. Great job again. I guess first of all, employee costs, I was just looking through the 10-Q. Employee costs were up 16% to 17% year-over-year. Employees themselves up about 9%. I guess, what are the dynamics, or is this partly a function of kind of a shift to hiring higher value-add employees, or maybe what are some of the dynamics of that?

Maurizio Nicolelli (CFO)

Yeah, David, the biggest driver there is really us hiring more highly skilled talent going forward overall. You're right, you do see a slower growth in terms of overall headcount and a higher % on employee costs. I would say the biggest driver there is as we get more and more into data and AI, there's a lot more in terms of technical, highly technical skilled employees that we need to hire. That is really starting to get reflected in that % overall.

Rohit Kapoor (Chairman and CEO)

Yeah, I would add, David, that as you know, the second quarter is when we do our salary increments, and that's also being added on to the cost of the employees in the second quarter.

David Koning (Senior Research Analyst)

Okay, gotcha. A lot of great questions already asked. I'll ask just kind of a technical 10-Q question. I saw another line called the other costs within cost of services. That's been down quite a bit year to date, both in Q1 and Q2. I think it was $13 million this quarter, $17 million in the year ago quarter. It seems like that's helping margins. What is that? Does that sustainably help margins going forward?

Maurizio Nicolelli (CFO)

Yeah, David, if you look back in the second quarter of last year, we had a one-time restructuring charge during the period. That was the biggest driver in that, and you see that fall off this year.

David Koning (Senior Research Analyst)

Gotcha, that makes sense. All right, thanks. Great job, guys.

Rohit Kapoor (Chairman and CEO)

Thank you.

Operator (participant)

Next question comes from Vincent Colicchio from Barrington Research Associates. Please unmute your line and ask your question. Apologies, there's been a technical difficulty. Bear with me one moment. Vincent, please unmute your line and ask your question. Vincent Colicchio, your line is now open. With that, we have no further questions at this time. I will turn the call back to John Kristoff for closing remarks.

John Kristoff (VP of Investor Relations)

Thank you, everyone, for joining us this morning. If you have additional questions, please don't hesitate to reach out to me.