Thank you for standing by and welcome to the Q3 2020 ExlService Holdings Earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that this conference is being recorded. [Operator Instructions]. I'd now like to hand the conference over to your speaker today, Mr. Steve Barlow. Thank you. Please go ahead, sir.

Thank you, Anthony. Hello and thanks to everyone for joining EXL's Third Quarter 2020 Financial Results Conference Call. I'm Steve Barlow, EXL's Vice President of Investor Relations. With me today by telephone are Rohit Kapoor, our Vice Chairman and Chief Executive Officer, and Maurizio Nicolelli, our Chief Financial Officer. We hope you've had an opportunity to review our Q3 2020 earnings release we issued this morning. We've also updated our investor fact sheet in the Investor Relations section of EXL's website. As you know, some of the matters we'll discuss in this call 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 Securities and Exchange Commission from time to time. EXL assumes no obligation to update the information presented on this conference call. During our call today, 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 as well as the investor fact sheet. I'll now turn the call over to Rohit Kapoor, EXL's Chief Executive Officer. Rohit?

Thank you, Steve. Good morning, everyone. Welcome to our third quarter 2020 earnings call. I hope you and your families are all safe and healthy. As shared in our interim update, our third quarter performance was much better than we originally expected. Both our analytics and our operation management businesses saw a strong bounce back from the second quarter. Our investments in virtual transition capabilities have enabled us to expand relationships with existing clients as well as ramp-up on deals we won earlier this year. For the third quarter 2020, we generated revenues of $241 million, which represents an 8.3% sequential increase on a reported basis and a 7.7% increase on a constant currency basis. Adjusted EPS for the quarter increased 97% quarter-over-quarter to $1.04. The key drivers for the EPS growth are the strong revenue rebound and the full impact of the cost actions taken earlier this year. Our operations management business reported $150.5 million in revenue, up 6.9% sequentially. The key driver was revenue growth in insurance due largely to the ramp-up of large deals won in the first half of 2020 and late 2019. We also saw some recovery in client volumes across our other business verticals. Our Analytics business saw significant growth from the second quarter and was up by 10.8% sequentially to $90.5 million. Our clients' focus has now shifted from crisis response to winning and growing in the new normal. This includes, one, being able to identify and rapidly shift gears to address changes in economic sentiment and consumer behavior, and two, greater adoption of data-enabled decision-making to better predict and respond to these changes. As a result, our clients' data and analytics agenda has expanded and we are seeing robust growth in this space. Today, I want to highlight two key growth trends…

Thank you, Rohit. And thanks, everyone, for joining us this morning. I will provide insights into our financial performance for the third quarter and the first nine months of 2020, followed by our outlook for the business. As Rohit mentioned, our quarter was better than we expected as revenue was $241 million, up 7.7% sequentially on a constant currency basis. Adjusted EPS was $1.04 compared to $0.53 in the second quarter. All revenue growth numbers mentioned hereafter are on a constant currency basis. My discussion on year-over-year growth percentages or improvements will be excluding Health Integrated for 2019 for a true comparison with 2020 performance unless mentioned otherwise. For the quarter, we generated revenue of $241 million, down 3.1% year-over-year. This includes one-time COVID related pass-through revenue of $4.4 million. Sequentially, from the second quarter, revenue was up 7.7%. Revenue for the quarter was higher than the interim guidance we provided in September as we were able to fulfill almost 100% of demand. Revenue from our operations management business as defined by three reportable segments excluding analytics was $150.5 million, down 5.7% year-over-year. Sequentially, from the second quarter, revenue was up 6.1%. Insurance generated revenue of $87.8 million, down 3.9% year-over-year. This decline was driven largely by supply constraints in our field service business. Compared to Q2 of 2020, insurance revenue was up 7.1%. Healthcare continued its growth momentum, with revenue of $25.1 million, up 10.5% year-over-year. This growth was driven by the ramp-up of new client wins in 2019 in the area of clinical services. Emerging reported revenue of $37.6 million, which was a year-over-year decline of 17.3% due to the reduction in travel, transportation and logistics volumes, offset by increases in all other categories. Revenue was up 8% when comparing to the second quarter of this year. Analytics…

[Operator Instructions]. And your first question comes from the line of Maggie Nolan from William Blair.

You're obviously seeing the benefit of the cost actions that you've implemented. I'm wondering how long you can operate in this kind of more lean structure. And then, can you give us some longer-term thoughts around modeling margins when you expect some of those costs may start fading back in?

Look, we benefited in a few different areas on the cost side, which has really helped our adjusted operating margins. We've seen two real benefits, one being the work from home environment has really reduced our cost base in some specific areas. And we're seeing lower costs in our transportation costs, in T&E, in facilities, which has really benefited us. And then, we've also had the benefit of our cost actions that we put in place back in the second quarter. And that is really helping out our margins in the third quarter and we're seeing that benefit also rolling to the fourth quarter. When we get to 2021, a few items will come back into our P&L. One, some of these cost measures are temporary in nature. And so, we're going to start to see those costs come back, specifically in the employee comp area and a few other areas. And then also, in this new environment, we will have to spend additional money on technology costs. So, when we get to our margins in 2021, we will see some costs creep back into our P&L. And so, you'll see a little bit of a change in 2021. But right now, we're really seeing those two significant benefits really helping out our margins.

And then, on the analytics work, it's been a little bit more tied to the COVID response. How long do you expect to benefit from that and generate revenue from that kind of COVID specific work? And then, do you feel that clients are receptive to the idea that that need for real-time insights is going to extend beyond the kind of significant and unusual events that COVID is?

Our data and analytics business has certainly benefited because of the COVID response, but the shift that has taken place to digital and the shift that is taking place where our clients are shifting most of their platforms to become cloud-based platforms and the adoption of digital by end consumers, that seems to be a much more of a permanent shift that is taking place. We've done some research on this and we find that 75% of end consumers, once they try out a digital means of communicating with their providers of services and products, intend to continue to use digital. So, there's been a big shift in terms of the use of digital. And as that shift becomes more permanent, more deeply penetrated, the need for data and analytics services is just going to increase dramatically. So, we think while there is a catalyst in the COVID environment that is forcing end consumers to shift to digital, it's forcing our clients to offer digital mechanisms and channels to engage with the end clients. A large part of this shift is actually permanent and is a step function change that is taking place. And in this new environment with the shift on to digital and cloud-based platforms, the need for data and analytics has suddenly become much, much more important and much, much more necessary. So, we think the benefit on our data and analytics business is likely to continue for a much longer period and the ability to grow this business significantly is going to be there for several years going forward. And this is not just a temporary phenomenon that we are witnessing.

And your next question comes from the line of Bryan Bergin from Cowen.

I heard some of the commentary around an uneven recovery and I see the 4Q implied revenue contraction is somewhat similar to what you did in 3Q. But as we start to think about 2021 recovery potential, can you give us a sense of the type of trajectory we should expect based on what you're seeing in client decision-making and then your pipeline activity?

Right now, at the end of the third quarter, the pipeline has actually grown significantly in size. So, we are very actually happy with the way in which we are seeing customers make decisions and the kind of changes that they need to make because as they think about modernizing their business models, engaging a lot more in digital, using a lot more technology and embedding a lot more intelligence into their operating and business processes, EXL is a perfect partner to help them make that transition. So that change and that shift has been very positive for us. However, the recovery will be uneven because, with the virus, there are going to be fits and starts, there are going to be geographic impacts that are going to be very uneven. So, we might see certain states and certain countries recover quickly or not recover so quickly. And that is going to create some uncertainty and there might be a decision-making that gets impacted because of that. So, it's very difficult to predict which way this would go. Our best guess at this point of time is that the need for our services, both in data and analytics as well as operations management has just gone up. And because of that, we would expect that we'd be able to help our clients and be able to build our business back on to a growth path as we get into Q4 and as we get into 2021.

Maurizio, I wanted to follow-up on Maggie's question on margin. Can you quantify some of the key margin outperformance drivers, particularly within gross margin, the strong level you had there, what type of mix of cost savings are lasting versus short-term discretionary, like T&E type items within 3Q?

When you look at the benefit in Q3, there's benefit from the work from home environment and then also our cost actions. The benefits from the work from home environment is slightly higher than our cost actions, just in terms of looking at the overall benefit. It's a little bit more of a 60-40 benefit, meaning the work from home environment has a bigger benefit. And a lot of that benefit fits in our gross margin. And that's why you see our gross margin at a fairly high end of 36.9% during the quarter. Going forward, I did talk a little bit before about certain amount of technology costs that we're going to have to spend going forward in 2021 and also some of the additional costs that are going to come back into the P&L. In terms of trying to get to a margin in 2021, we'll be giving guidance when we do our fourth quarter earnings release on 2021. But I would take a look to see – go back to the first quarter, you see our margins right around 15.6% without any COVID expenses and really build off of that going forward. And it's our desire to really start to grow margins. But if you need something to really go back to, that's the best of best measure right now to go back to.

Your next question comes from the line of Vincent Colicchio from Barrington Research.

Rohit, could you give us some color on the new logos added in the quarter? Are any of them potentially strategic over the next number of years?

First of all, we are seeing new logos come in both in operations management as well as in analytics. That is very encouraging to us. We've seen some pretty quick decision-making on the operations management side. And particularly in those situations where some of the clients are challenged in terms of being able to deliver and execute to their end customers, they are embracing operations management very, very actively and very holistically, which is again very encouraging. We do see some of these new logos ramping up actually much quicker and being able to provide our clients the benefit much faster. So, that's actually going to be very positive for us. We also see new names in this list of customers that we've acquired, which can become strategic clients for us and contribute significant value. On the analytics side, our engagement with new clients typically starts off small. And over a period of time, it builds up and gets to size and scale. So, we would expect the same trend to follow through on the analytics side.

Strategically, with an uneven recovery, what are your thoughts on doing an acquisition to supplement growth?

Look, any kind of volatility will create opportunity for an ability to acquire and to an ability to add capability. We are in a fortunate position that we've got a very healthy balance sheet and we've got a fair amount of capital at our disposable to be able to use for acquisitions. So, we are in the market and we've got a fairly active pipeline on M&A. But at the same time, this is a period where you have to be extremely careful of the type of assets that you acquire and the valuations at which you acquire them. So, we're going to be very disciplined in our approach and be thoughtful in terms of our ability to do M&A, but we would expect to be active in M&A at this point of time. We think that there is an advantage for us to be able to make benefit of the market environment and the volatility that exists.

[Operator Instructions]. Your next question comes from the line of Mayank Tandon from Needham. Your line is now open.

Rohit, given the adoption of digital across verticals, what are the conversations around pricing these days? Do you think that the move to digital could actually accelerate the shift to outcome-based pricing? So, just maybe a general commentary on pricing trends and the shift that you might see, given the adoption of all these different technologies? Thanks.

Mayank, I think that's a great question. And what we are seeing in the discussions with our clients and prospects is actually very encouraging. So, first of all, some of the hard-held beliefs and assumptions that clients and prospects used to have in the past, they've been thrown out of the window. So, we've got a totally new set of assumptions coming in, which basically means starting from a plain white piece of paper and taking a look at what are the odds of possible. And that, to your point, means the commercial models will be outcome based and there's a greater propensity for clients to completely outsource end-to-end work and get to a much better level of operational execution and delivery and resiliency because that's become their number one priority. And in order to do that, if it requires an outcome-based pricing model, that's certainly something which – that conversation, that dialogue is a much more open dialogue at this point of time. We're also seeing a big shift to take place toward execution, resiliency and value as opposed to pricing. And therefore, it is about who is a stable, secure and dependable partner as opposed to who is the lowest cost provider that we can work with for the next three months or six months. The conversation has shifted to thinking about this a lot more strategically, thinking about it for a much longer time period, and therefore, the conversation is about value creation, productivity, stability, resiliency, and that's much, much more important on our clients' agendas than pricing. So, actually, it's very favorable, both from a total overall demand volume. It's favorable from a commercial construct, and it's favorable from focusing on things that will be additive for our clients and for us.

Rohit, staying on the digital theme, how about sourcing talent? Are you finding it harder, easier to find the skill sets to be able to meet the needs, given the rapid changes in the environment for both BPM and analytics types of services?

Mayank, I think that's another great question. So, first of all, we've started hiring and we've hired quite aggressively in the third quarter, and we continue to hope to be able to acquire talent in the fourth quarter as well. Now, there are certain areas and certain skill sets where actually it's quite easy to hire. But like you rightly mentioned, in digital, which is where everybody is focusing their attention, that is a much more challenging area to be able to source talent, integrate talent and to be able to create teams that will collaborate. There's a lot of focus on cloud-based talent. There's a lot of focus on digital. There's a lot of focus on AI and ML. Now we are in a fortunate position that we've got a very strong foundation, and we've got a very rich and fertile customer base where we are doing very exciting things with our clients. And that creates a huge opportunity for somebody from the outside to come and join us. We are also on a growth part. So, that's something which, again, is exciting for an individual to come and become part of our team. And our ability to attract talent in digital, on the cloud, in big data, in AI and ML is actually becoming much stronger just because our message is resonating well. The kind of work that we are doing with our clients is very, very complex, rich and something which is challenging for employees. So, they like that kind of work and we are able to attract very good talent there.

And there are no further questions at this time. Mr. Rohit Kapoor, I'll turn the call back over to you.

Thank you, operator. And thank you all for attending this call. We really appreciate it. I think we've had a good rebound in our business and we look forward to continued progress moving forward into the fourth quarter and next year. I'd just like to close by inviting everybody to come and join us for our Investor Day, which is on November 17, and we look forward to providing you with more color around our operating business model and our future direction of the company. Thank you. And see you on November 17.

Ladies and gentlemen, this concludes todays' conference call. Thank you for participating. You may now disconnect.