Exlservice Holdings Inc

NASDAQ:EXLS

Earnings Call Analysis

EXL Service Reports Strong Q3 Growth and Raises 2024 Guidance

EXL Service delivered impressive Q3 results with revenues of $472.1 million, a 14.9% year-over-year growth. Adjusted EPS rose 16.3% to $0.44. Digital Operations and Solutions contributed $268.1 million, growing 17.6%, while the Analytics segment saw $204 million, an 11.3% increase. The company is raising its 2024 revenue guidance to $1.825-$1.835 billion, expecting 12-13% growth, alongside adjusted EPS predictions of $1.61-$1.63, reflecting a 13-14% increase. Investments in AI and data strategies drive continued strong demand across industries, positioning EXL for sustained growth ahead.

Revenue Growth and Strong Performance

In the third quarter, EXL's revenue reached $472.1 million, which signifies a robust year-over-year increase of 14.9%. Adjusted earnings per share (EPS) also saw a positive shift, climbing to $0.44, marking a 16.3% rise. The revenue growth was consistent across several segments, demonstrating strength and momentum through analytics and digital operations. Notably, the analytics segment achieved revenue of $204 million—up 11.3% year-over-year and 5% sequentially—representing a strong recovery and reflecting the successful implementation of data-driven solutions.

Highlights from Individual Segments

Breaking down performance by segment, digital operations grew 17.6% year-over-year, reaching $268.1 million, driven by strong demand for AI solutions and digital transformation services. In the insurance sector, revenue rose 15.1% to $157.6 million, propelled by expanding client relationships and new client acquisitions. Furthermore, revenues in the emerging segment surged 21.7% year-over-year to $80 million due to successful client ramp-ups. The healthcare segment also demonstrated notable growth, with a 16.5% increase in revenue to $30.5 million, driven primarily by greater demand for clinical services.

Guidance for Future Growth

Looking ahead, EXL raised its guidance for full-year revenue to a range of $1.825 billion to $1.835 billion, which corresponds to an annual growth rate of approximately 12% to 13%. This upward revision represents an increase of $12 million at the midpoint from prior expectations. Additionally, EXL anticipates adjusted EPS will fall in the range of $1.61 to $1.63, pointing to an annual growth of 13% to 14%. These forecasts reflect the company’s confidence in sustaining its double-digit growth trajectory into the fourth quarter and beyond.

Investment in Data and AI Capabilities

EXL continues to invest heavily in data modernization and AI technologies. The recent acquisition of ITI Data has enhanced their engineering capabilities, further strengthening their footprint in banking. This complements their partnership with Databricks, which is expected to yield innovative data management solutions and generative AI capabilities. Investments in talent and technology will significantly impact their operational execution and long-term growth potential, aligning with the industry shift toward data-centric solutions.

Maintaining Competitive Advantage

To maintain their leading position in the market, EXL is focusing on building proprietary AI models tailored to their domain expertise. For instance, their new insurance large language model (LLM) has demonstrated superior performance and responsiveness compared to existing models from competitors. By capitalizing on proprietary data and extensive industry experience, EXL aims to significantly enhance productivity and reduce operational costs for clients. Their effective use of AI across various business operations is expected to yield substantial improvements in efficiency and client satisfaction.

Monitoring Margin Volatility and Cost Management

Despite strong revenue growth, EXL reported an adjusted operating margin of 19.9%, which is slightly down from previous periods due to increased depreciation costs linked to new operating centers. The company acknowledges this margin volatility and emphasizes managing it on an annual basis rather than quarterly. As investments increase in digital capabilities and operational improvements, EXL expects future margins to stabilize and grow with enhanced service delivery.

Earnings Call Transcript 2024-Q3

[Operator]

Hello, and welcome to the ExlService Holdings, Inc. Q3 2024 Earnings Call. [Operator Instructions] Also 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, executive]

Thanks, Leila. Hello, and thank you for joining EXL's Third Quarter 2024 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 had an opportunity to review the third quarter earnings press release we issued yesterday afternoon. We have also posted a slide deck and investor fact sheet in the Investor Relations section of our 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.

And with that, I'll turn the call over to Rohit.

[Rohit Kapoor, executive]

Thanks, John. Good morning, everyone. Welcome to EXL's Third Quarter 2024 Earnings Call. I'm pleased to be with you this morning reviewing our strong financial results. In the third quarter, we generated revenue of $472 million, an increase of 15% year-over-year. We also grew third quarter adjusted EPS by 16% to $0.44 per share.

The sound execution of our data and AI-led strategy enabled us to further accelerate our growth momentum across both our Analytics and Digital Operations and Solutions businesses during the quarter. In Analytics, we delivered revenue of $204 million for the quarter, up 5% sequentially and 11% year-over-year. This marks the strongest sequential quarterly growth for Analytics in 6 quarters. And we are delivering on our previously stated objective to accelerate our analytics growth both sequentially and year-over-year in the second half of 2024.

We continue to drive strong double-digit growth across health care payment services and data management. While we remain cautious on overall demand for discretionary projects, we are seeing growth in analytics services across our vertical markets, including insurance, health care and banking.

In our Digital Operations and Solutions business during the third quarter, we delivered strong double-digit growth as we leverage our domain, data and AI capabilities to win in the market. We grew revenue 5% sequentially and 18% year-over-year to $268 million. This revenue acceleration was driven by double-digit growth across all 3 of our digital operations segments.

We continue to experience a stable and favorable demand environment in digital operations, driven by our clients' focus on cost efficiency and digital transformation. Our strategy to leverage our domain expertise, data management capabilities and AI services delivery not only helps our clients achieve real-world benefits from AI, but it also differentiates us from our competitors, expands our total addressable market and extends our runway for growth.

This is beginning to manifest itself in our sales pipeline, which is up strong double digits year-to-date. We have grown the number of large deals over $25 million in total contract value by more than 25% year-over-year. This gives us confidence that our solutions and capabilities are being recognized as industry-leading by our clients. While it is still early innings, particularly with generative AI, I would like to provide details on how we are building new revenue streams across 2 of our primary capabilities: data modernization and AI implementation.

Let me describe our business model in each area. To implement AI, we start with data modernization by securing and structuring high-quality data, the foundational asset for any AI application. This includes all aspects of optimizing our clients' data estate, including helping them gather data, structure data, migrate data to the cloud and build more reliable, robust data pipelines. We have continued to enhance our data management capabilities during the quarter with the acquisition of ITI Data and our expanded partnership with Databricks.

The acquisition of ITI Data not only enhances our data engineering capacity but also grows our existing client footprint in banking. Under our expanded partnership with Databricks, we are building a robust team of Databricks-certified talent and deploying new data management and generative AI solutions into the Databricks ecosystem. Together, these strategic actions are speeding the development and implementation of cutting-edge data modernization solutions for our clients.

Once the data foundation is in place, we select and embed the best combination of AI models into the workflow in order to optimize for cost, latency and accuracy. Our repertoire of AI models includes advanced pretrained language models, domain-specific fine-tune models and intelligent AI agents suited for targeted tasks. These models are then integrated into the workflow, along with human in the loop. This not only requires technical expertise in designing the most effective AI architecture but also deep domain knowledge to provide context and increase adoption to deliver superior business outcomes.

An illustrative client example involves a large multinational pharmaceutical client where we have integrated Agentic AI into their audit processes to drive significant improvements. The AI multi-agent system we developed handles various aspects of the audit process. One AI agent specializes in anomaly detection by analyzing documents for compliance issues, while another AI agent focuses on summarizing findings for auditors. Together, these AI agents collaborate to cover all audit stages from identifying risks to generating actionable recommendations and contextualizing them against industry frameworks based on the specific needs of each audit.

The result for our client has been a 60% reduction in their audit completion time and improvement in compliance accuracy and overall greater assurance. This is just one example of how EXL is leveraging its domain, data and AI expertise today to deliver real-world tangible benefits to our clients. In addition to our capabilities in data modernization and AI implementation services, we have developed a number of proprietary generative AI solutions.

One prominent example is our recently announced insurance LLM, which is specifically designed to handle the nuances of auto bodily injury, workers' compensation and general liability claims. Our LLM was built on EXL's 25 years of experience in the insurance industry and more than a decade of proprietary claims-related data. We currently have 2 clients live with this LLM; a large U.S.-based casualty and life insurer and a regional casualty insurer. As we implement our proprietary insurance LLM across multiple clients, we can access additional data sets to further fine-tune our LLM and improve its performance.

The combination of enhanced productivity and faster claim resolution with lower indemnity costs and claims leakage is a powerful value driver for our clients. We intend to continue to build out our IP going forward by developing new proprietary solutions, including additional domain-specific LLMs and autonomous agents.

We recently launched the new EXL enterprise AI platform to accelerate development of these solutions, leveraging NVIDIA AI software. And I'm pleased to say that our insurance LLM, smart agent assist and code harbor solutions are now live on this platform. From a revenue perspective, we can embed these proprietary AI solutions into long-term services contracts as an integral part of the overall solution or we can offer them as stand-alone solutions based on client needs.

One of the keys to maintaining our competitive advantage in data and AI is our ability to attract, develop and retain the best talent in the industry. Our goal is to foster an environment conducive to continuous innovation amongst our more than 57,000 employees. To that end, we continue to attract top talent to EXL. We recently welcomed Sanjay Joshi, as Senior Vice President and Global Leader for our data management practice. Sanjay comes to EXL with extensive leadership experience building data practices across large, diverse clients. He most recently served as a senior data practice leader at Accenture.

In addition, Sarat Varanasi recently joined EXL as Senior Vice President and Global Leader for Insurance Analytics. Sarat has nearly 30 years' experience as a consulting leader in the insurance industry. He joins us from Cognizant where he most recently led their North America Insurance business unit.

We also continue to invest heavily in employee development. Our employees have completed nearly 1 million hours of training this year. Nearly 800 of our engineers have completed certification training on our partners' data and AI platforms, and we have another 1,200 enrolled. These critical certifications include partner platforms from NVIDIA, Databricks, Google, AWS and Microsoft Azure. We are not only creating career opportunities for our employees by helping them add marketable skills, but we are also enabling them to work with a purpose in a growth environment. The result has been stable attrition levels and a growing pool of highly skilled AI talent.

In summary, we delivered strong results in the third quarter and we are encouraged by the continued acceleration of growth across our analytics and digital operations and solutions businesses. The investments we are making in developing new AI-based solutions expanding our industry partnerships and developing our employees puts us in a strong position to successfully execute on our data and AI-led strategy and continue our growth trajectory.

With that, I'll turn the call over to Maurizio to cover our financial performance in detail.

[Maurizio Nicolelli, executive]

Thank you, Rohit, and thanks, everyone, for joining us this morning. I will provide insights into our financial performance for the third quarter and 9 months ended September 30, followed by our revised outlook for the full year. We delivered a strong third quarter with revenue of $472.1 million, up 14.9% year-over-year on a reported basis.

On a constant currency basis, we grew revenue 14.5% year-over-year and 4.9% sequentially. Approximately 1% of our revenue this quarter came from nonrecurring revenue that is not expected to repeat in the subsequent quarter. Adjusted EPS for the quarter was $0.44, a year-over-year increase of 16.3%.

All revenue growth percentages mentioned hereafter are on a constant currency basis. Revenue from our digital operations and solutions businesses as defined by 3 reportable segments, excluding analytics, was $268.1 million, which represents year-over-year growth of 17.1% (sic) [ 17.6% ]. Sequentially, from the second quarter of 2024, we grew revenue 4.8%.

In the Insurance segment, we generated revenue of $157.6 million, an increase of 15.1% year-over-year and 5.2% sequentially. This growth was driven by the expansion of existing client relationships and ramp-up of new client wins. The insurance vertical consisting of both our digital operations and solutions and analytics businesses grew 14.9% year-over-year with revenue of $197 million.

In the Emerging segment, we grew revenue 21.7% year-over-year and 2.8% sequentially to $80 million. This growth was primarily driven by expansion of existing client relationships and ramp-up of new client wins in 2024. The Emerging vertical consisting of both our digital operations and solutions and analytics businesses grew 12.4% year-over-year with revenue of $166.9 million.

The Healthcare segment reported revenue of $30.5 million, growing 16.5% year-over-year and 8.5% sequentially. This growth was driven by higher volumes and expansion of existing client relationships in our clinical services business. The Healthcare vertical consisting of our digital operations and solutions and analytics businesses grew 17.2% year-over-year with revenue of $108.1 million.

In the Analytics segment, we generated revenue of $204 million, up 11.3% year-over-year and 5% sequentially. Growth in Analytics was driven by higher volumes in payment services, new client wins and expansion in existing client relationships in our data management and analytics services businesses.

SG&A expenses as a percentage of revenue were down 10 basis points year-over-year to 20.1%, driven by operating leverage.

Our adjusted operating margin for the quarter was 19.9%, down 10 basis points year-over-year, driven by higher depreciation on new operating centers opened in 2024. Our effective tax rate for the quarter was 22.8%, down 60 basis points year-over-year. This was driven by higher profits in lower tax jurisdictions.

Our adjusted EPS for the quarter was $0.44, a 16.3% increase year-over-year on a reported basis.

Turning to our 9 months performance. Our revenue for the period was up $1.36 billion, up 11.5% year-over-year on a reported basis and 11.4% on a constant currency basis. Year-over-year, on a constant currency basis, Digital Operations Solutions grew 14.6% and Analytics 7.4%. Adjusted operating margin for the period was 19.6%, down 20 basis points year-over-year. Our first 9 months adjusted EPS was $1.22, up 12.1% year-over-year on a reported basis.

Our balance sheet remains strong. Our cash, including short- and long-term investments as of September 30 was $335 million, and our revolver debt was $345 million for a net debt position of $10 million. We generated cash flow from operations of $110.1 million in the third quarter compared to $68.6 million a 60% increase year-over-year driven by profitability and improved working capital management.

During the first 9 months, we spent $36 million on capital expenditures and repurchased approximately 6 million shares at an average cost of $30.70 per share for a total of $184.7 million. This includes approximately 4.2 million shares received as part of our previously announced $125 million accelerated share repurchase plan.

Now moving on to our outlook for 2024. Based on our strong year-to-date performance and our current visibility for the remainder of the year, we are raising the full year revenue and earnings guidance. We now anticipate revenue to be in the range of $1.825 billion to $1.835 billion, representing year-over-year growth of 12% to 13% on a reported basis and approximately 12% on a constant currency basis. This represents an increase of $12 million at the midpoint from our previous guidance of $1.805 billion to $1.83 billion.

The current guidance still assumes $7 million to $9 million of revenue from ITI Data. We expect a foreign exchange gain of approximately $1 million, net interest expense of $3 million to $4 million and full year effective tax rate to be in the range of 22.5% to 23.5%. We also anticipate increased investments in data and AI in the fourth quarter similar to the pattern last year.

Based on these assumptions, we anticipate our adjusted EPS to be in the range of $1.61 to $1.63, representing year-over-year growth of 13% to 14%. This is an increase from our prior adjusted EPS guidance of $1.59 to $1.62. The ITI Data acquisition is expected to be neutral to adjusted EPS in 2024. We expect capital expenditures to be in the range of $48 million to $52 million.

In summary, we are pleased with our third quarter results and encouraged by the acceleration of our growth momentum across all of our business segments. By continuing to invest in our data and AI-led strategy, we are confident in our ability to maintain our double-digit growth trajectory into the fourth quarter and beyond.

With that, Rohit and I would now be happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from Surinder Thind from Jefferies.

[Surinder Thind, analyst]

I'd like to start a question about the build-out of the proprietary AI models. Can you talk about the strategy here at this point? Is the idea to build as many of these proprietary models yourself? And how does that fit in with the broader ecosystem of maybe what the hyperscalers are building in terms of their models as well as maybe more industry-specific solutions that are also being built by third parties in the sense of the traditional software developers. I guess, essentially, are you becoming much more of a software company at this point?

[Rohit Kapoor, executive]

Sure, Surinder. So let me try and take that. So first off, our belief is that you will have an ecosystem of large language models, Agentic AI, autonomous agents and proprietary AI models. So you're going to have a whole host of these types of capabilities that are going to be there. Each one on its own is going to be relevant and useful for either being able to undertake a task or manage a process are ultimately using a combination of these different capabilities being able to achieve an entire goal or an objective.

At EXL, we are thinking about building out our own proprietary AI models in those areas where we have domain competency and we have access to data sets which are proprietary. What we have seen is, as we build out our first insurance LLM that the productivity of that LLM is far greater than what's available today in the marketplace. The latency is very low, and therefore, we can get real-time responsiveness and the cost is a fraction of what would be paid for using anything that the hyperscalers or any of the other LLMs that might be available in the marketplace.

So frankly, our strategy is twofold: one, to build proprietary AI models where we can create differentiation and we can create capability that cannot be developed by others in the marketplace; and two, for us to be able to stitch together the appropriate balance of large language models, Agentic AI capabilities, autonomous agents and embed our own proprietary AI models to be able to optimize the best benefit for the client in terms of productivity, latency and cost. Does that make sense?

[Surinder Thind, analyst]

Yes. That's helpful. And then just from perhaps a bit more of a near-term view. Can you talk about the investment that's required? Is it you kind of continue with the traditional level of CapEx, R&D to kind of build this out? Or do we enter a period of slightly elevated investments where there's a bit of an arms race to be the first to build some of these models?

[Rohit Kapoor, executive]

Sure. I'm happy to address that, and Maurizio can add to that as well. So in general, our viewpoint is with the rapidly evolving technological landscape, there is going to be a need for a much greater level of investment. And at EXL, we will be significantly stepping up our investments both on OpEx and on CapEx to be able to create these capabilities and to be able to build proprietary models as well as tools that can be leveraged in our client processes.

In specific -- as we've highlighted and Maurizio can talk about this, we will be investing a significant amount in the fourth quarter this year and continue that investment going forward because that's the only way in which we can stay ahead on capability. And because the landscape is changing so rapidly, these are necessary investments that we will need to make as we go forward. Maurizio?

[Maurizio Nicolelli, executive]

Sure, Rohit. Really to add to what Rohit just said. When you really look at just kind of the overall P&L, we will be making more investments, particularly in OpEx in our investment line in our P&L over the next 1 to 3 years. And that's really going to be funded by us driving value from gross margin. Our gross margin needs to grow an increase in order to fund this investment. But if we do that by driving price on higher value services that we really start to provide to our clients particularly in data and AI.

So what you'll end up seeing going forward is a higher gross margin offset by a higher amount of investments going forward and that flowing into an incremental increase in our AOPM on an annual basis, not a significant increase, but an increase on an annual basis going forward.

[Operator]

Our next question will come from Bryan Bergin with TD Cowen.

[Bryan Bergin, analyst]

I wanted to start with Digital Operations. Another strong quarter here on organic growth. Let's ask on your conviction and potential sustainability of this elevated growth relative to the medium-term outlook for the segment. And it's been good to see all industries contributing here. Do you have a higher level of conviction in the near-term and sustaining higher growth in any particular digital ops industries?

[Rohit Kapoor, executive]

Sure, Bryan. So first of all, we are very pleased with the growth of our digital operations business. And I think it's been at this elevated growth rate for a number of quarters. And actually, we've seen a bit of acceleration of the growth rate. When we take a look at the demand environment for our services in digital operations, that continues to be strong.

When we take a look at our pipeline, the pipeline is actually growing very nicely. And as we've shared previously, what we also see is that the number of large deals and the value of large deals in our pipeline continues to increase. So frankly, all of these are very encouraging signs about the demand environment, the pipeline and our ability to generate revenue growth in digital operations.

There are a couple of things which I would like to kind of highlight. Number one, everything that we do in terms of selling digital -- pure digital revenue is included as part of our Digital Operations segment. So the growth and the revenue in our Digital Operations segment includes all the revenue that we derive from operations, but it also includes all the revenue that we derived from digital capabilities that are sold to clients on a stand-alone basis.

Obviously, the digital capabilities are growing much more rapidly than the digital operations core piece on a stand-alone basis. In terms of industry segments, frankly, we're seeing broad strength across the board. And we're seeing strength in insurance. We're seeing it in health care and in our emerging business unit. We see this strength take place globally. So we are seeing this strength in the U.S. as well as in U.K., Europe and in Australia and New Zealand. So there seems to be a broad secular shift in terms of moving forward on this.

Going forward, our expectation is still that we should be able to grow our digital operations business in a low double-digit kind of a trajectory. And that would be something that would be sustainable for us, and that's what we would be targeting.

[Bryan Bergin, analyst]

Okay. Understood. And then just shifting to analytics, it sounds like Payment Integrity and Data Management remains solid. What about the balance of analytics, any notable changes in just the customer marketing view and decisioning analytics? And just how are you forecasting the fourth quarter growth in analytics?

[Rohit Kapoor, executive]

Sure. So look, I think we are very, very happy that in analytics, the business growth has accelerated. We are seeing analytics services to be growing as well alongside with our payment integrity business line as well as our data management business line. I think some of the strength that we are seeing again is reflected very nicely in the pipeline, and we see a lot many more deals out there.

The only thing to note here is the analytics business will always be a shorter cycle business. And therefore, there will be a fairly higher level of volatility associated with this business, but the underlying fundamentals and the traction that we are seeing with our clients and the business value that they derive from our services here, that's resonating very, very nicely.

[Bryan Bergin, analyst]

Any commentary on the fourth quarter?

[Maurizio Nicolelli, executive]

Yes, about our view for the fourth quarter for analytics.

[Rohit Kapoor, executive]

Sorry. For the fourth quarter, look, I think we would expect the business momentum to continue. When we had guided for calendar year 2024, we had guided that our digital operations business will grow slightly faster than our Analytics business this year. But we do see both our business lines getting to low double-digit growth rates going forward. And therefore, we would expect that trend to kind of maintain itself in the fourth quarter.

[Maurizio Nicolelli, executive]

And keep in mind, Bryan, when you look at the prior year, we were fairly flat on revenue and analytics between Q2 to Q4. So as we continue this momentum going into Q4, as total revenue continues to increase, you do see an increase in the growth rate, and that's been reflected now Q2, Q3, and you would see that in Q4.

[Operator]

The next question will come from Maggie Nolan with William Blair.

[Margaret Nolan, analyst]

How are you assessing the risk of a change in conversion rates of larger deals for your digital ops business? Is there anything to note there?

[Rohit Kapoor, executive]

Maggie, so actually, our conversion rates and our win rates in large deals is about the same as what we see with the rest of the portfolio. Clearly, the large deals tend to be a little bit more lumpy, but it takes a fair amount of time for us to be able to ramp up and implement the large deals. So far, we seem to be in a very good place in terms of our competitiveness and our win rates associated with large deals. And I think we've got a fair amount of traction in the pipeline, and we've got a fair amount of deals that we won as we've kind of shared in terms of the client wins, which still need to be implemented going forward into '25.

[Margaret Nolan, analyst]

And can you give some commentary on your success in the data and analytics segment organically and in data management, in particular, organically versus what the acquisition is adding in terms of synergies so far?

[Rohit Kapoor, executive]

Sure. So in data analytics, the organic growth for us largely has been on analytics services. And frankly, out there, we are seeing a reversion of the demand coming back, and therefore, growth of that business taking place. Marketing analytics for us certainly had declined, but now is less than 10% of our portfolio and therefore, is not really having much of a material impact on our data analytics business.

The data management part, there are a number of capabilities that we have built over the last 5 years that continue to grow very nicely on an organic basis. The acquisition of ITI did add to our revenue growth in the third quarter. But if we excluded the revenue that came from ITI, our growth of the analytics segment would have been between 9% to 10% growth still. So actually, it's still continues to accelerate and it's still a pretty healthy growth rate even after excluding the acquisition of ITI.

[Margaret Nolan, analyst]

Congrats on the results.

[Operator]

Our next question will come from Puneet Jain from JPMorgan.

[Puneet Jain, analyst]

Great quarter. I wanted to follow up on the question that Maggie asked about like the data and analytics. So the overall segment, like the analytics segment, do like 9% to 10% on an organic basis, like you mentioned, Rohit. How much of that segment stems from services that you didn't offer 2 or 3 years ago? Like the data management, say, for example, came through Clairvoyant and ITI, AI models and the stuff that you're building right now. So how much of that overall segment comes from services that you didn't offer 3 years ago?

[Rohit Kapoor, executive]

Thanks, Puneet. Look, I think the data analytics business is changing quite rapidly. And the kind of services and the kind of capabilities that we have continue to evolve. In the past, there used to be a fair amount of data visualization that used to be done, a lot of reporting that used to be done. All of that has completely changed, and we've moved much more towards AI and much more complex analytical services.

The data management part for us continues to build out very nicely and rapidly. The partnership that we have with the Databricks that adds to our ability to grow this but also the partnership that we have with each of the hyperscalers with Google, with Amazon, with Microsoft, these are all adding to the growth rate of our data analytics business.

I think the big thing is as clients gain confidence with us in this space and the buying center which is shifting from the Chief Analytics Officer to also include the Chief Information Officer and the Chief Technology Officer. I think that's helping us build and grow this business also very nicely.

So frankly, there's a lot of evolution that's taking place in our Decision Analytics business. Hard for me to say how much of that growth is coming from new services versus old. We don't really have data that we share on that externally right now on that.

[Puneet Jain, analyst]

That's fair but thanks for the explanation. And then you talked about insurance LLM earlier. So as you build some of these models, like which are not tied to any specific client, like what data do you use to train those models? I know you had some proprietary data, but are you allowed to use clients' data to build some of these industry-specific LLMs? And a follow-up on that would be like how much automation of like existing tasks or processes can be achieved using these AI solutions?

[Rohit Kapoor, executive]

Sure. So first off, we absolutely have contractual permissioning rights by our clients to be able to use the data, and we only use that data, which our clients give us expressed and written permission to be able to use. And the insurance LLM has been trained on that data set.

If you take a look at it over the last 10 years, we've got a lot of claims-related data from insurance carriers and those insurance carriers that allow us to use this data, that's the data set that we've used to train our insurance LLM. This work is on auto bodily injury, workers' compensation and medical liability. So basically, what the data sets that we have is when a claim comes in, what is the incidents that took place and what was the outcome that was finally settled as a result of that incident and what was a claim that got paid out.

Now that data set is really, really valuable because we can use it to train our models so that the next time a new claim comes in, we already know what is the best pathway for that claim to be settled, negotiated and paid out. And from a client perspective, they are very willing to share that data with us because it's not personal identified information. It's not personal health information, so it's not PII and PHI. It is basically a derivative data set, which allows you to be able to continuously improve the accuracy of that LLM.

And as we deploy these LLMs in our client operations, we are actually going to be getting more and more data sets from them, and therefore, we can continue to fine-tune and train our insurance LLM and become really an expert in terms of the productivity and the accuracy that these LLMs can be deployed in.

Now keep in mind that it's going to be for a pretty narrow use case and our ability is that how do we take it from that narrow use case and then we expand it into other use cases. And because we are in a privileged position where we do so much of work with carriers in a particular industry or payers in a particular industry or banks and financial institutions in the banking industry, having access to that data set makes us a unique player to be able to develop these types of LLMs.

And what we are finding is our knowledge about handling the process and our domain expertise, combined with our ability to access this data. That's what's creating the differentiation for us, and that's what is allowing us to be able to build these proprietary models for our clients.

[Operator]

Our next question will come from David Koning from RW Baird.

[David Koning, analyst]

Okay. Sorry about that. So I guess, just from a high-level perspective, it seems like a lot of the industry has struggled recently, both IT, BPO, et cetera, yet you guys seem to be growing significantly faster than most -- is it just functionality like some of the stuff you're doing is better? Is it the mix of clients that you're serving and just industries you're serving? Like what do you think are the 2 or 3 biggest differentiators that you're doing compared to a lot of your competitors?

[Rohit Kapoor, executive]

Yes, Dave. So look, I think in our business, it ultimately boils down to 2 essential ingredients. One is execution and two is capability. On execution, we've been absolutely maniacal in terms of being able to deliver to the commitments that we make to our clients. And we believe that we have one of the highest customer satisfaction scores in the industry. And we just completed our annual customer satisfaction survey in the in the third quarter, and we've got outstanding results.

And that kind of acceptance and referenceability by our existing clients to our prospects and to other players in the industry, I think stands out, and it generally results in us being able to grow our business at a faster pace.

The second aspect is capability. I think we were just a little bit early in terms of investing in analytics, investing in digital and building up market relevant capability that can be embedded into the operations and processes of our clients. So today, when every single client is trying to embed AI into the workflow. They find our capability, our ability to execute on that capability and integrate that in to be differentiated and therefore, our win rates are very healthy and we've been able to build and grow our business.

So these 2 things are very important. And I think on a go-forward basis, we will need to continue to execute well, and we will continue to invest much more to be able to stay ahead on the capability front and be a relevant partner for our clients.

[David Koning, analyst]

I mean you guys are crushing it. And I guess my follow-up question, insurance analytics, that had been flattish, give or take, on a year-over-year basis for the last 4 quarters or so, but it accelerated to about 15% or so growth this quarter. Is that where ITI falls? And maybe it seems like organically, it's also doing better. But why didn't insurance analytics accelerate so much?

[Rohit Kapoor, executive]

So ITI firstly, is largely focused in on banking and a little bit on health care, but that's where most of the revenue stream came in from. Insurance analytics has a couple of different pieces to it. It's got insurance analytics services. It did have marketing analytics in it. And the marketing analytics, as we've shared with you previously was something that declined year-over-year and that pretty much has stabilized. So that's something which is no longer a drag. There is a huge amount of work that we do around actuarial work. We do work around insurance indemnity spend. And therefore, analytics services are a critical aspect of the services and the value that we provide to our insurance clients.

That seems to be resonating nicely and is growing well. And like we said, we've also invested in building up leadership capacity out here and being able to kind of continue to grow that. One other aspect is data management within insurance analytics that's growing strongly as well. And most of the insurance carriers have got legacy platforms and systems, and therefore, data management for them becomes a critical element, and we're seeing good traction on that as well.

[Operator]

Our next question will come from David Grossman with Stifel Europe.

[David Grossman, analyst]

Rohit, perhaps you could further refine the elements of growth in the digital ops business? As you mentioned, it's been fairly strong for several quarters now. And I know you mentioned it includes some of the pure digital revenue. I'm not quite sure what exactly you're including in that bucket. But anything you could do to kind of help us better understand the growth dynamics there versus the legacy core pricing units, whatever it is that you can help us better understand that.

[Rohit Kapoor, executive]

Sure, David. So first of all, the digital revenue that we have, you can broadly break up the digital revenue into 2 pieces. One is digital solutions that we have created, which our clients buy from us on a stand-alone basis. So think about this as digital platforms or tools or solutions that our clients want to leverage across the enterprise, regardless of whether they give us their operations or not. And therefore, that's one bucket, and that bucket for us has been growing very nicely and very sharply.

The second part on the digital side is work that we embed and we combine with the workflow and therefore, it gets embedded into the digital operations work that we are doing, and it's digitizing our clients' operating workflow. So both of these -- and this is much more of an integrated service that they tend to buy from us. So those are the 2 elements within digital.

And what we are seeing is that clients, when they think about how the future of work should be managed for them they naturally gravitate towards those players that can not only execute and deliver operations at high service delivery, low cost and deliver exceptional value, but also those that are forward thinking that can apply data, can apply analytics, can apply digital and be able to deliver incremental value to them. And we've been fortunate that we've been winning a large number of deals out there and our growth rate there has accelerated and is presently at elevated levels.

[David Grossman, analyst]

So are these stand-alone solutions that you mentioned, are those like sold as a technology tool? Is that the revenue model?

[Rohit Kapoor, executive]

Yes, that's correct.

[David Grossman, analyst]

And how big can you dimension just how big these components are?

[Rohit Kapoor, executive]

David, it's difficult for me to kind of do that. We've not shared the data on that externally. But these are tools that clients will buy. Keep in mind, they'll buy the tool and pay a license fee for the tool, as well as there are services associated with the implementation of that tool that also need to be purchased by the client. So any time we have this IP that our client is buying from us, they are paying us a software license fee for being able to use that, but they're also asking us to come in and implement this into their environment, and we charge them for that service.

[David Grossman, analyst]

Right. So is there -- I mean is that mix shift impact in gross margin? Is that what -- when you talked about the need to fund incremental investment, I mean should we expect the gross margin in the ops to continue to go up?

[Rohit Kapoor, executive]

So on these stand-alone solutions, as we get scale, we certainly would expect the gross margin to go up because once the solution is built, it should be able to kind of provide us with higher gross margins. But keep in mind that every single new tool that we introduced actually is a drag on gross margin because in the initial 1 or 2 years or when we don't have the size and scale, actually, it's a lower gross margin. So it really depends on the portfolio and how fast we are introducing new tools and solutions and how fast we are achieving scale in existing solutions.

[David Grossman, analyst]

Got it. And sorry, just one more. Just -- it's hard not to notice the volatility in margins quarter-to-quarter on the EBIT line. Is that unique to this year? Or are we going to see that kind of volatility going forward as well?

[Maurizio Nicolelli, executive]

David, it's Maurizio. You've seen a little bit of volatility this year. We started with a lower margin right around 18.7% in Q1. It increased to 20% AOPM in Q2, and now you're seeing about 19.9%. The average for the first half of the year was 19.4%, right in line with last year. Last year it was 19.3%. And we do believe the second half will be right around 19.4%. So we're a little bit higher in Q3. But as Rohit talked about, we do have a number of investments that we want to make in Q4.

So I think you've really got to look at this on an annual basis. We will manage AOPM so that it incrementally builds on an annual basis marginally. But the quarter-to-quarter, we'll have a little bit of volatility, but I would stress less looking at the quarters and really think about the annual margin trajectory.

[Operator]

Our last question will come from Vincent Colicchio with Barrington Research Associates.

[Vincent Colicchio, analyst]

Rohit, can you talk about the new deals added in the quarter? Were any of them particularly large? Were they new to outsourcing? Any other relevant commentary?

[Rohit Kapoor, executive]

Sure, Vincent. So I think we are very happy with the new deals that we won this quarter. It's pretty well spread out between our digital operations business and our analytics business. In terms of the quality of the deals and the quality of the client logos that we won, it's pretty much similar to the past. It includes some Global 1000 names and Fortune 1000 names. So those are always great. And there are a few that we would expect to ramp up over the next couple of quarters. And therefore, there should be significant large deals for us.

So nothing different from previous quarters, so pretty much the same kind of complexion and quality of deals that we would have won this -- in this quarter.

[Vincent Colicchio, analyst]

And are you seeing a substantial M&A pipeline? How are valuations in the market? And Maurizio, could you reiterate your capital allocation thinking?

[Maurizio Nicolelli, executive]

Sure. So in the M&A market, we continue to see plenty of opportunities and assets that come to market. Obviously, we're going to be very selective in terms of the strategic value to us. Going forward, we purchased ITI for a number of different reasons, particularly to really drive more capability in data management and also expand our client base.

Going forward, we'll continue to allocate capital to both M&A and share repurchase. Share repurchase, we've allocated about $185 million this year. And we've gotten a relatively very good price on those -- on that repurchase activity, just slightly north of $30 a share. So you'll see a fairly balanced capital allocation trajectory going forward, really tailored between M&A and share repurchase.

[Operator]

We have no further questions at this time. I will turn the call back to John Kristoff for closing remarks.

[John Kristoff, executive]

Okay. Well, I'd like to thank everyone for joining us this morning. And as always, if you have additional questions, please feel free to reach out to me directly. Thank you.