ExlService Q2 2026 Earnings Call Transcript

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Provided by Quartr
July 29, 2026

Key Takeaways

  • Positive Sentiment: Strong second-quarter results: Revenue rose 16% year over year to $594.8 million, while adjusted EPS increased 22% to $0.59, with growth across all operating segments.
  • Positive Sentiment: Data and AI-led growth accelerated to 30% year over year and now represents 61% of revenue. Management said demand is shifting from AI pilots to production deployments, supported by EXL’s domain expertise, proprietary IP, and AI-enabled operations.
  • Positive Sentiment: EXL raised its 2026 guidance to revenue of $2.39 billion-$2.415 billion and adjusted EPS of $2.25-$2.29. The outlook includes $28 million-$32 million of revenue from the planned iMerit acquisition, expected to close July 31.
  • Positive Sentiment: The acquisition of iMerit is expected to expand EXL’s AI model training, evaluation, and reinforcement-learning capabilities, add relationships with foundation-model companies, and broaden its addressable market in high-growth AI sectors.
  • Negative Sentiment: Management expects increased investment in sales, data management, and AI capabilities during the second half, resulting in lower adjusted operating margins than in the first half; full-year margins are expected to be roughly comparable with 2025.
AI Generated. May Contain Errors.
Earnings Conference Call
ExlService Q2 2026
00:00 / 00:00

Transcript Sections

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Operator

Hello, and welcome to the ExlService Holdings, Inc. second quarter 2026 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 Andrew Thut, Head of Investor Relations and Capital Markets.

Andrew Thut
Head of Investor Relations and Capital Markets at EXL

Thanks, Mariana. Hello, and thank you for joining EXL's second quarter 2026 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, those factors set forth in yesterday's press release and in EXL's filings with the Securities and Exchange Commission from time to time.

Andrew Thut
Head of Investor Relations and Capital Markets at EXL

EXL assumes no obligation to update the information presented on the 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?

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Thank you, Andrew, and good morning, everyone. EXL delivered strong second quarter results, posting revenues of $595 million, up 16% year-over-year, and adjusted earnings per share of $0.59, an increase of 22% year-over-year. We entered the year with positive business momentum, which has continued to strengthen throughout the first half, with broad-based growth across every segment of our business. We sit here today with very good visibility into the balance of the year and are looking forward to a strong finish to 2026. We continue to differentiate ourselves with industry-leading growth. As enterprises move from proof of concept to AI implementation, our expertise, solutions, and services sit squarely at the center of the demand vectors where investment dollars are focused, delivering measurable business outcomes and economic efficiencies.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Our deep understanding of client workflows and domain context, combined with our competencies in data and AI engineering, is creating a tailwind as we help clients solve the acute challenge of making AI work effectively in the enterprise. We are pleased with our results that reflect the strength of our data and AI-led strategy and our focused execution. Over the last two earnings calls, we have made additional efforts to bring transparency to our financial reporting. In addition to providing a revenue breakout across both data and AI-led and digital operations, we now provide revenue from total operations as well. Data and AI-led revenue has accelerated over the past four quarters, growing 18% in Q3 2025, 21% in Q4 2025, 28% in Q1 2026, and now 30% year-over-year in Q2 2026.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Data and AI-led services and solutions represent 61% of revenue, with broad-based growth across data management, AI services and solutions, Payment Integrity, and data and AI-led operations. Reported digital operations revenue was down approximately 1.5% year-over-year, and I want to be explicit about why, because this is important. This decline is by design, and it reflects the evolution of our business mix. As we embed AI into operations engagements, that work becomes more IP-led and higher value, and the related revenue moves into our data and AI-led category. For this reason, we believe the best way to evaluate the health of our operations business is to look at total operations, which includes both digital and AI-led. Our total operations revenue in Q2 were up 10% year-over-year, continuing a trend of healthy, consistent growth.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

As we go to market with an AI-forward value proposition in operations, it strengthens our data and AI-led performance, and vice versa. Combining operational expertise with proprietary data and AI capabilities, we help clients unlock greater productivity, faster decision-making, and measurable business impact. As AI adoption expands, the value of our operations relationships deepens, enabling us to identify new use cases, accelerate deployment, and drive sustained transformation. This creates a mutually reinforcing cycle that delivers greater value to clients while supporting durable, recurring growth for EXL. We saw strong performance across each of our four operating segments in the quarter. Insurance grew 15% year-over-year, representing one-third of our revenues. Q2 was a defining quarter for EXL's insurance practice, translating multi-year AI investments into demonstrable client outcomes. Insurers continue to accelerate AI adoption across underwriting, claims, and customer experience, and we are seeing strong deal activity across market segments.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Healthcare and life sciences grew 22% year-over-year, representing more than a quarter of our revenues. Payment Integrity continues to be a significant growth driver, and we are seeing strength in analytics, AI services and solutions, and operations. Payers and providers are under meaningful cost and regulatory pressure and are turning to EXL to apply AI at scale to improve productivity and outcomes. Banking, capital markets, and diversified industries grew 11% year-over-year, representing a little under a quarter of our revenues. Deal activity was strong in the quarter, and we remain confident in continued progress through the year. International growth markets grew 15% year-over-year, an acceleration attributable to ramp-ups and new client wins. This quarter, we welcomed Bhupender Singh as President and Head of International Growth Markets.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Bhupender brings a track record of building and scaling multi-billion-dollar businesses in complex international markets. He has hit the ground running, architecting our EMEA and APAC go-to-market, deepening client relationships, and building pipeline. International represents one of our largest long-term growth opportunities, and Bhupender's appointment reflects our commitment to capturing it. Let me make our differentiation in the market more concrete with a few examples from the quarter, because the thread running through all of them is the same. You cannot deliver strong business outcomes without deep understanding of the client's domain and their data. First, in healthcare. We went live at a large national health plan with their first ever customer-facing agentic AI module, delivering a high deflection rate and significant ROI for the client. When the client independently benchmarked our solution against that of a leading hyperscaler, EXL outperformed on every measure.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

What became apparent is that while technology and AI capabilities are necessary, combining deep contextual knowledge with data and AI is what creates exceptional value. That is where we differentiate ourselves. Second, in insurance. We entered a competitive multi-vendor hackathon at a global carrier to build an AI-based data ingestion solution. Our approach, leveraging a strong understanding of the client's domain, resulted in us presenting the best solution. That win positions us as their agentic partner as they reimagine their data estate. It is repeatable, referenceable work we can now deploy rapidly across our client base. Third, a capability that has increasingly become more important and integral to scaling AI services is token optimization. As enterprises operationalize AI at scale, token consumption has become a dominant constraint on cost, speed, and reliability.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Working inside client workflows, we are able to reduce client token consumption by as much as 80%, helping them conserve spend and make their AI systems dramatically more efficient without compromising quality or latency. None of this is possible as a simple technology plug-and-play. It requires deep knowledge of the workflow, experience of the regulatory context, and understanding of ontologies of the data estate within the industries we serve. Also during the quarter, we hosted our investor and analyst day in N.Y. The core message was straightforward. The AI opportunity for enterprises is immense. Capturing it requires partners that can make AI scalable, effective, and accountable inside complex regulated environments. We laid out our view that sustained AI outcomes depend on three things working together. The right data, deep domain context, and proven AI capabilities, coupled with trusted execution at scale.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

This is the framework that guides how we build, how we invest. Increasingly, it is what we hear directly from clients as they move from pilots into production deployments. We also outlined our investment priorities to extend our competitive advantage. Continued investment in proprietary IP, solutions that move us up the value chain, and targeted M&A. 25% of our client revenues today touch our proprietary IP. Strong free cash flow and an under-levered balance sheet gives us the flexibility to continue our share repurchase program and pursue acquisitions of products and solutions that allow us to better serve our clients' needs. Which brings me to the most significant announcement of the quarter. Last month, we announced the acquisition of iMerit, which we expect to close on July 31st.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

iMerit is a recognized leader in AI model training, evaluation, and reinforcement learning. We view this deal as a transformational pivot for EXL. It brings established relationships with leading foundation model companies, a new and strategically important client segment for us. It also deepens our vertically specialized AI capabilities and expands our total addressable market into high-growth AI tech sectors. The landscape is also shifting in a way that makes this timely. Gartner predicts that by 2028, open source GenAI models will underpin more than 50% of enterprise use cases, up from less than 10% today. We believe this shift will be especially pronounced in the regulated industries we serve, where domain knowledge, context, and compliance are absolutely critical. Deploying AI reliably in the business critical workflows requires industry-specific data, rigorous evaluation, and constant reinforcement learning.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

By combining iMerit's capabilities with EXL's domain expertise and AI platforms, we will be well-positioned to help enterprises build, fine-tune, and operationalize AI that performs reliably in production. A natural extension of the data and AI-led strategy we have been executing for years. The strength of our business performance and the addition of iMerit give us the confidence to raise our guidance for the full year. We now expect 2026 revenue to be in the range of $2.39 billion-$2.415 billion, representing 14%-16% growth on a reported basis. Up from our prior guidance of $2.3 billion-$2.33 billion. iMerit accounts for approximately $28 million-$32 million of that revenue for the remaining five months of the year.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

We are also raising our adjusted diluted EPS guidance to a range of $2.25-$2.29, representing approximately 16%-18% year-over-year growth, up from our prior guidance of $2.18-$2.23. As always, I want to thank our clients, partners, and employees for their continued trust and commitment, and our shareholders for their continued support. With that, I'll turn the call over to Maurizio to provide additional details on our financial results and outlook.

Maurizio Nicolelli
Maurizio Nicolelli
CFO at EXL

Thank you, Rohit. Thanks everyone for joining us this morning. I will provide insights into our financial performance for the second quarter and our revised outlook for 2026. We delivered a strong second quarter with revenue of $594.8 million, up 15.6% year-over-year on a reported basis, and 15.9% on a constant currency basis. Sequentially, revenue grew 4.4% on a constant currency basis. Adjusted EPS for the quarter was $0.59, representing a year-over-year growth of 22.3%. All revenue growth percentages mentioned hereafter are on a constant currency basis unless otherwise stated. Turning to the second quarter revenue performance by segment. Insurance revenue was $197.8 million, up 14.9% year-over-year. This growth was driven by both the expansion and higher volumes in existing client relationships. Sequentially, insurance revenue grew 2%.

Maurizio Nicolelli
Maurizio Nicolelli
CFO at EXL

The insurance vertical, including revenue from international growth markets, grew 14.9% year-over-year with revenue of $233.7 million. Healthcare and life sciences reported revenue of $158 million, representing growth of 22% year-over-year and 4% sequentially. The year-over-year growth was driven by higher volumes in our Payment Integrity services business, expansion in existing client relationships and new client wins. The healthcare and life sciences vertical, including revenue from international growth markets, grew 22% year-over-year with revenue of $158.3 million. Banking, capital markets, and diversified industries reported revenue of $133.9 million, representing growth of 10.7% year-over-year and 5.1% sequentially. This growth was driven by the new client wins and expansion of existing client relationships. The banking, capital markets, and diversified industries vertical, including revenue from international growth markets, grew 12.8% year-over-year with revenue of $202.8 million.

Maurizio Nicolelli
Maurizio Nicolelli
CFO at EXL

International growth markets reported revenue of $105.1 million, up 16.3% year-over-year and 8.9% sequentially. This growth was driven by ramp-ups and higher volumes with existing clients and new client wins in banking, capital markets and diversified industries and insurance. SG&A expenses as a percentage of revenue increased 170 basis points year-over-year to 20.9%, primarily driven by higher investments in front-end sales and support. Our adjusted operating margin for the quarter was 19.7%, up 10 basis points year-over-year, driven primarily by improved gross margins. Our effective tax rate for the quarter was 21.3%, down 110 basis points year-over-year, driven by higher profits in lower tax jurisdictions. Our adjusted EPS for the quarter was $0.59, up 22.3% year-over-year on a reported basis.

Maurizio Nicolelli
Maurizio Nicolelli
CFO at EXL

Turning to our first half performance, our revenue for the period was $1.17 billion, up 14.7% year-over-year on reported and constant currency basis. This growth was broad-based across all segments, driven by double-digit growth in healthcare and life sciences, insurance, and international growth markets. Our adjusted operating margin for the first half was 20.1%, up 20 basis points year-over-year. Our first half adjusted EPS was $1.17, up 21.3% 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 $284 million, and revolver debt was $381 million for a net debt position of $97 million. We generated cash flow from operations of $90 million for the first six months of the year.

Maurizio Nicolelli
Maurizio Nicolelli
CFO at EXL

During the first half of 2026, we spent $27 million on capital expenditures and repurchased 5.8 million shares at an average price of $30.90 per share, totaling $179 million. This includes 4.15 million shares repurchased under the accelerated share repurchase program at an average price of $30.10. Moving on to our outlook for 2026. While we continue to monitor the evolving macroeconomic and geopolitical environment, our strong second quarter performance, sustained growth momentum, and healthy pipeline, in addition to the acquisition of iMerit, provides us with the confidence to raise our outlook for the remainder of the year. We now expect 2026 revenue to be in the range of $2.39 billion-$2.415 billion, including $28 million-$32 million of anticipated revenue from the iMerit acquisition, which is expected to close on July 31st, 2026.

Maurizio Nicolelli
Maurizio Nicolelli
CFO at EXL

This represents a year-over-year growth of 14%-16% on a reported basis and 13%-14% on an organic constant currency basis. At the midpoint, the revised range is $88 million higher than our previous guidance. Based on the strong market opportunity and the need for us to continue to stay ahead in AI, we will increase our investments in front-end sales, data and AI capabilities, and solutions for the rest of the year. Our adjusted operating margin will be lower in the second half of the year compared to the first half. We expect a foreign exchange gain of approximately $3 million, net interest expense of approximately $16 million-$18 million, and our full year effective tax rate to be in the range of 21%-22%. We expect capital expenditures to be in the range of $58 million-$62 million.

Maurizio Nicolelli
Maurizio Nicolelli
CFO at EXL

We anticipate our adjusted EPS to be in the range of $2.25-$2.29, representing year-over-year growth of 16%-18%, up from our previous guidance of $2.18-$2.23. Our adjusted EPS guidance includes a marginal dilutive impact of $0.01 from the iMerit acquisition. To conclude, we had a strong first half, underscoring our differentiated competitive position and exposure to attractive high-growth market segments. Our leading indicators remain positive, our resilient, adaptable business model positions us well for a solid performance in 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 wait one moment to allow the queue to form. Our first question is from Bryan Bergin from TD Cowen. Please unmute your line and ask your question.

Bryan Bergin
Bryan Bergin
Analyst at TD Cowen

Hey, good morning. Thank you. I'd like to start on the data and AI strength and the durability there. Above 30% growth in the quarter, but even above 20x the digital solutions and data and AI-led ops. Curious if you could help parse how much of that growth is coming from new AI-native programs versus traditional kind of analytics modernizations. What gives you the confidence that data and AI perhaps can retain a 20%+ grower for the balance of 2026?

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Hi, Bryan. We saw tremendous amount of strength in our data and AI-led business, and that growth rate has been accelerating for us for the last four quarters. The reason why it's showing this kind of strength is because each of the service lines within our data and AI-led business are actually performing really well. Payment Integrity continues to grow very nicely. The data management part of our business is accelerating. The analytics and AI services part continues to grow nicely. In terms of your question, in terms of new work that we are undertaking here versus existing work that we are undertaking, it really is a mix of both. We do have a stable business within our Payment Integrity service line as well as within our analytics business.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

The newer areas of data management, AI services, and AI solutions, those are growing very rapidly on a small base, but becoming much more pronounced and big for us. Going forward, this area of data and AI-led services and solutions for us is going to remain a high-growth driver, even after excluding data and AI-led operations. We think we are very well-positioned with this portfolio of services, and the capabilities that we are demonstrating to our clients is giving them the confidence to engage with us in much more strategic ways.

Bryan Bergin
Bryan Bergin
Analyst at TD Cowen

That's clear. Rohit, you had some interesting comments on tokenomics and the optimization potential there. Just given your data and process expertise, it seems to be a major opportunity for you, and just understanding there are some highly valued third-party routing platforms in the market. I'm curious how you're approaching this vector. Is this an area where you're developing IP that can kind of better serve vertical specific applications? Can you also use such a solution as kind of a tip of the spear to accelerate new opportunities out there?

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Yes, Bryan. Look, I think token economics is going to become a very important and integral part of any AI modernization program for an enterprise client. There seems to be a tremendous amount of value that can be created for clients just in terms of the design, the engineering, and the way in which the implementation is done for AI models, and the way in which agentic AI is used on the operating workflows. We are obviously in a much more advantageous position, having a deep knowledge of our clients' industry and their workflow and their data. We are building up capabilities that will give us advanced signals about the use of tokens and the cost of tokens, and we can make that transparent to our clients and be able to help them reduce their cost on token economics.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

This is going to be one of the principal areas of spend.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

I think clients will also start to look at more complex solutions out here, where they might even think about having their own hosted environments for the infrastructure and being able to deploy the AI models on their own GPUs and in their own environments. Frankly, this is an area that's going to continue to become more complex and expand rapidly. There's a lot of value that needs to be delivered to clients on that, and we are in a great position to do that.

Bryan Bergin
Bryan Bergin
Analyst at TD Cowen

Okay. Sounds like an exciting opportunity. Thank you.

Operator

Thank you. Our next question is from Surinder Thind from Jefferies. Please unmute your line and ask your question.

Surinder Thind
Surinder Thind
Analyst at Jefferies

Thank you. Rohit, can you maybe talk a bit more on just kind of the dynamics of what's going on in the international growth markets? Obviously, the back half of 2025, growth was kind of flat quarter-over-quarter, obviously you've seen a material acceleration there. Can you talk about can that continue and how we should think about that segment on a go-forward basis?

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Sure, Surinder. Look, our view is that the international growth markets is a huge opportunity for EXL. The adoption of AI by clients in the international growth markets is actually trying to keep up base with the adoption of AI from our U.S. clients. Actually, what we are seeing is, given the fact that we are in a much more connected world right now, everybody is moving on to the adoption of AI very, very rapidly and equally. We see that could be a tremendous opportunity for us to help and engage with clients internationally and be able to support them along these journeys.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

In the past, we've had a limited presence internationally, we've been investing quite aggressively in terms of building up more talent capability and solutioning capability in the international growth markets so that we can serve our international clients much more directly and much more near their point of execution. This, for us, remains an important strategic focus area. It's a huge demand vector that is literally untapped by us, we think we can play in this space and create a significant amount of revenue volume out here.

Surinder Thind
Surinder Thind
Analyst at Jefferies

Helpful. Then as a follow-up on the investment spend or the incremental investment spend, you talked about investing maybe a bit more in front-end sales as well as data and AI capabilities. Any additional color you can provide there? Is front-end sales maybe more in international growth markets, certain segments? Then on the data and AI capabilities, is that more product build-out or is that more services capability build-out?

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Yes, Surinder. For us, the data and AI capabilities is much more building out solutions and product capability. As AI continues to evolve, this is something which we will continue to invest in. Then the front-end investment is also essential because the skill set required to make a sale on data and AI is quite different from traditional digital operations. That's something which we are investing in. One of the things which we have noticed is that the velocity of decision-making of deals by clients is actually increasing, and the cycle time is coming down.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

We need to have a greater amount of sales and front-end capability to be able to deal with this higher velocity and a much faster cycle time, as well as much deeper product knowledge about our data and AI services and capabilities and the way in which we can enable AI for the clients.

Surinder Thind
Surinder Thind
Analyst at Jefferies

Thank you.

Operator

Thank you. Our next question is from Puneet Jain from JPMorgan. Please unmute your line and ask your question.

Puneet Jain
Puneet Jain
Analyst at JPMorgan

Hey, thanks for taking my question, and strong results. Rohit, are you seeing any changes in clients' conversations or their willingness to outsource given increasing AI complexity and the news flow around AI, and also the low enterprise value creation or ROI that some of those AI projects have created so far?

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Thanks, Puneet. Yes. Look, as we've kind of shared previously, the changes that we are seeing are clients are moving away from pilots, and they want to go into production. They want to be able to deploy AI in production. Still, we are in the early stages, and this deployment into production is use case by use case. It's still at initial nascent phase. The second part is enterprise clients are building out their foundations for the AI enablement of the enterprise. What that means is they're getting their data estates in order. They are putting together platforms that will allow them to develop, deploy, and activate agentic AI.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

They are putting together AI harnesses that will allow them to be able to iterate and modify their AI models very, very rapidly and be able to govern and be able to have adequate security and compliance with regulatory requirements and have that in place. The effort that is required to enable AI for any enterprise is massive, and it's really an enormous opportunity. I think this is one area which is significantly underestimated by the market, and what we are seeing is clients are really struggling with this change, and we are in a great position to actually help them with this. We feel fortunate that we've got the right kind of capabilities, the right kind of skill sets, and the right kind of relationships and the know-how to be able to help them move on this journey.

Puneet Jain
Puneet Jain
Analyst at JPMorgan

That's great to hear. My second question is similar to Bryan's question, but focused on AI and data work that's embedded within digital ops. Can you double-click on specifically what type of work you do in that practice within digital ops? That's like 15% of total revenue growing, obviously growing at very high clip. Directionally, how much of that growth and revenue stems from AI-driven agentic operations versus data analytics work with again, I'm talking about data AI within digital ops.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Right. When we talk about embedding data and AI into digital operations, think about some of the common processes that we run for clients. Let's take insurance where we run claims processes for clients, or we run underwriting processes for clients. We are embedding agentic AI into claims and into underwriting. What that means is we are pulling together pieces of that process and AI-enabling that and allowing the LLMs to be able to take the decisions and to be able to automate some of the workflows that we are working on with our clients. We have to do this in a responsible manner, which is also got the right kind of guardrails for a regulated industry and for a regulated workflow. What that means is that in some cases, we use deterministic models, which are very much well-suited for following policies, procedures, and regulations.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

In some cases we are using probabilistic models, which is where judgment is required and where decision-making is required. It's really the art of combining both of these two deterministic models and probabilistic models and integrating that into the workflow. That's the effort required to embed data and AI into these digital operations processes that we're running. Keep in mind, every time we do this, if you're doing this for a particular carrier, a particular business line, a particular geography, each one of this is a unique intervention that needs to be undertaken. It's got a common harness, it's got common component pieces that can be deployed, but every single time, the enablement requires a very high level of customization.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

That level of customization is also iterative, and it requires deep knowledge of the workflow, deep understanding of the datasets, and a deep knowledge of being able to integrate and orchestrate across the various technology platforms of our clients. It's a slow and gradual process, but we are in the best position to be able to deploy this for our clients because of our knowledge and understanding of the workflow and the fact that we already do this work for our clients. That's why we are seeing greater adoption and greater traction and greater confidence by our clients to allow us to do this work.

Puneet Jain
Puneet Jain
Analyst at JPMorgan

Got you. Thanks.

Operator

Thank you. Our next question is from Maggie Nolan from William Blair. Please unmute your line and ask your question.

Maggie Nolan
Maggie Nolan
Analyst at William Blair

Hi, thank you. There are a lot of moving parts on the margin, the acquisition, the India labor code tokenomics. You outlined some investments in the prepared remarks. Are you still hoping to drive gross margin up and then also modestly improve operating margin annually? Or is the priority for the business for the next couple of years really to invest for and drive growth on the top line?

Maurizio Nicolelli
Maurizio Nicolelli
CFO at EXL

Hi, Maggie. Thanks for the question. I don't think anything has really changed in our thinking around gross margins and also AOPM. You saw gross margins come down about 90 basis points from Q1. The big driver there was our increments came into effect as of April 1st, globally. That always creates a lower gross margin in the second quarter, which is no different than the prior year. You'll see the same effect in the prior year. We continue to make improvements marginally every year to gross margin as we drive more value overall from embedding more data and AI into our client workflows. We've talked about that pretty significantly in the past, and nothing has changed there. Now, when it comes to our overall margin, we continue to see our overall margin in 2026 to be comparable to 2025.

Maurizio Nicolelli
Maurizio Nicolelli
CFO at EXL

Now, we had a very good first half of the year in terms of our adjusted operating margin, and we will continue to invest in the second half of the year, which will help us really drive overall top-line growth, both for the second half of this year and 2027. Again, that involves the investments that we're going to be making in front-end sales and also to build out capabilities in both data management and also in our AI capability area. We continue to make progress on gross margins. You will see them go up and down slightly when you look at it quarterly, but we'll continue to make progress there. You will see us invest a bit more in the second half of the year. Our overall margin for the year will be comparable to the prior year.

Maggie Nolan
Maggie Nolan
Analyst at William Blair

Got it. Thank you, Maurizio. Then, can you talk about, have you seen success in penetrating the mid-market opportunity? Do you think that cohort is in perhaps greater need of a partnership and services from you all than the enterprise, or how are you thinking about that?

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Yes, Maggie. I think the mid-market is trying to catch up on AI as quickly as possible, frankly, the mid-market needs a lot more help than the large enterprises. We are seeing a fair amount of traction out there and we are in a great position to help out the mid-market clients because of the kind of attention that we can provide to them. These mid-market clients are very meaningful and wholesome client relationships for us that are developing quite nicely. It plays to the nice fitment between us and the mid-market clients and the value that we can deliver for them. The last piece I would say is everything is obviously got to be done with speed being at the center of the value equation.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Again, our ability to be able to engage with the mid-market clients, deliver the value to them at speed, and give them the focus and attention is really helping us.

Maggie Nolan
Maggie Nolan
Analyst at William Blair

Thanks, Rohit.

Operator

Thank you. Our next question is from David Grossman from Stifel. Please unmute your line and ask your question.

David Grossman
David Grossman
Analyst at Stifel

Excuse me. Good morning. Thank you. Just looking at the kind of cadence of growth over the last couple of quarters, it looks like growth has accelerated on an organic constant basis. Just looking at the pace of new client adds in the back half of last year, it looks like you had a pretty dramatic uptick. Just curious, is the acceleration that we're seeing the pace of new client adds over the last three quarters or so, or was there something about the second quarter? The second quarter had a much steeper acceleration of growth, and just curious if there was anything else that may have landed in the second quarter that drove that.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Yeah. Thanks, David. Look, I think the second quarter for us was a unique quarter. Every single service line actually delivered with strength, and we saw particularly good momentum in our data and AI-led business. That grew very rapidly. We are also fortunate that our client portfolio is actually very broad-based and their confidence in our ability to provide them these services, that seems to be increasing. You're absolutely right. The wins that we had in the second half of last year, combined with all of our service lines actually seeing good traction, resulted in a very strong outperformance in the second quarter, and that's what gives us confidence and much greater visibility into the second half of 2026, therefore we've increased our guidance for the full year.

David Grossman
David Grossman
Analyst at Stifel

I guess what's a little confusing, Rohit, is that despite easier compares, the guidance implies growth decelerating in the back half of the year, and that's really not your business model, right? It's fairly consistent and stable. Just trying to kind of reconcile what sounds like incredibly strong momentum and a guide that implies somewhat decelerating growth in the back half of the year.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Right. David, look, I think for us, number one, the macroeconomic environment continues to be a little bit unsettled. We do need to continue to win the hearts and minds of the CIOs in our enterprise client organizations. This enablement of AI and this change is hard. It's something which needs to be worked upon, and we need to be able to demonstrate the ROI to our clients on a daily basis to be able to continue to build and grow our business. There are a number of challenges and risks that we have in our business. We are also doing a major acquisition with iMerit, and we are going to be integrating that and building up new capabilities on model evaluation, reinforcement learning, and we have to focus our attention out there.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Yes, I think this is something which we are this is our best guess in terms of a prudent way to be able to build and grow out the organization.

David Grossman
David Grossman
Analyst at Stifel

Sure. Just one quick question for you, Maurizio, on the share count. I know you had the ASR in place, right? You brought the share count down in the second quarter. Can you give us some kind of insight into what the share count looks like in the back half of the year? Are we pretty stable now, or does it go down some more in the back half?

Maurizio Nicolelli
Maurizio Nicolelli
CFO at EXL

We'll continue to see benefit from the share repurchases we did in the first half and the second half of the year, obviously in the share count. We'll continue our share repurchase program in the second half of the year. I think given where our share price was in the first half of the year, we saw it to be prudent to spend a bit more on share repurchases in the first half of the year. Again, we spent $179 million in the first half of the year. We'll continue to be buying back shares throughout the year, just most likely not at the accelerated pace of the first half.

David Grossman
David Grossman
Analyst at Stifel

Got it. Great. Thank you.

Operator

Thank you. Our next question is from Vincent Colicchio from Barrington Research. Please unmute your line and ask your question.

Vincent Colicchio
Vincent Colicchio
Analyst at Barrington Research

Rohit, I'm curious. I'm trying to think of today's AI revenue and how much represents entirely new spending versus existing work being modernized. Can you sort of give us an idea of how that looks?

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Vincent, for us, the AI revenue for us, which is standalone AI services and solutions, is still a very small portion of our overall revenue. We think there's a tremendous amount of growth that we would see in that service line going forward. The AI enablement of digital operations, again, the penetration of that remains quite low. There's a lot more work to be done, in terms of extending that to the entire existing portfolio. Keep in mind that the work that we do in digital operations is spread across 2,000 unique processes. It's spread across multiple hundreds of clients. Enabling that for each use case, it's very difficult and hard and time-consuming, and can only be done in areas where the economics justify it. Frankly, this is going to be a much longer-term change that's going to take place.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Our goal is to do this as rapidly as we possibly can. Frankly, the faster we can do this, the more client confidence we gain, the clients are willing to give us much larger pieces of their business so that we can do this across their much bigger operations estate.

Vincent Colicchio
Vincent Colicchio
Analyst at Barrington Research

Thanks for that. Are you getting better at generating international revenue from cross-selling to U.S. clients? I know that's a large opportunity for you.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Right. Actually, that's one area that we need to invest more in. We have not been able to do a good job of that. Bhupender, who's just come in as our President and Head of International Growth Markets, one of the key areas that he wants to drive and focus on is cross-selling to our U.S. customer base internationally. That is something which we will focus on. It quite candidly has not been something that we have deliberately done in the past few years. We do need to focus on that a lot more.

Vincent Colicchio
Vincent Colicchio
Analyst at Barrington Research

Thanks. Good quarter.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Thank you.

Operator

Thank you. Our final question is from David Koning from Baird. Please unmute your line and ask your question.

David Koning
David Koning
Analyst at Baird

Hey, guys. Thank you. Great job. When we think about the acceleration, I was kind of thinking of a few buckets that it seems like the spending might fall into. First of all, business spending had been kind of slow in general, so maybe some of that's unfreezing that slowness. Secondly, is there a reallocation of AI spend to the established IT services players like yourselves? Third, is it just you gaining market share? Maybe all three are driving it right now. Is there a way to kind of bucket why you think this acceleration is happening, where it's coming from?

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Thanks, David. Look, I think you're right in terms of these three categories. Our sense, if you think about the total spend on AI over the last 12 months, the largest part of that spend has gone towards AI infrastructure, and then to the AI models. Actually, very little spend has gone towards the app layer and the AI enablement layer. Going forward, we think that that is going to change and there'll be much more spend as a percentage of the total aggregate AI spend that's going to be on apps and on AI enablement. We obviously hope to benefit from that. The reallocation of spend that is there, that's a little bit difficult to estimate because clients will spend on the areas that provide them with the highest ROI.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

I think our goal is to be able to demonstrate transparently the evidence of delivering greater ROI and to be able to be part of that reallocation spend. Then from a market share perspective, clearly, our growth rate suggests that that's something that is happening. I would attribute it to two things. One is the speed of play and the value that we are delivering. The speed and the value that we deliver, both of them are going to be differentiators. It's just that our knowledge of the workflow and our knowledge and understanding of the dataset just puts us in a slightly better position as compared to our competition.

David Koning
David Koning
Analyst at Baird

Great. Thank you for that. Then just one follow-up. The iMerit acquisition, you gave the revenue contribution. Is it pretty split across all verticals, or are there one or two verticals we should kind of allocate that more toward?

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

The iMerit revenue is actually split up with some of the frontier and foundational model companies. That would really fall into our diversified industries bucket. They also do a fair amount of work within healthcare and life sciences, that's going to be meaningful. There's very little work that iMerit does in the international growth markets, that's not going to be a meaningful add. I would say the majority of that really will fall into the diversified industries category. That's where most of the revenue would come in.

David Koning
David Koning
Analyst at Baird

Great. Thank you. Good job.

Rohit Kapoor
Rohit Kapoor
Chairman and CEO at EXL

Thank you.

Operator

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

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