Exlservice Holdings Inc

NASDAQ:EXLS

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 ExlService Holdings, Inc. Earnings Conference Call. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Steven Barlow. Thank you. Please go ahead, sir.

[Steven Barlow, VP, IR]

Thank you, Carol. Good morning, and thanks to everyone for joining EXL's Fourth Quarter and Year-end 2019 Financial Results Conference Call. I'm Steve Barlow, EXL's Vice President of Investor Relations. With me today in New York are Rohit Kapoor, our Vice Chairman and Chief Executive Officer; and Maurizio Nicolelli, our Chief Financial Officer. We hope that you've had an opportunity to review our Q4 2019 earnings release we issued this morning. We've also updated our Investor Fact Sheet in the Investor Relations section of EXL's website.

As you know, some of the matters we'll discuss on this call are forward-looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, general economic conditions, those factors set forth in today's press release, discussed in the company's periodic reports and other documents filed with the Securities and Exchange Commission from time to time. EXL assumes no obligation to update the information presented on this conference call.

During our call today, we may reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of these measures to GAAP can be found in our press release as well as the Investor Fact Sheet.

I'll now turn the call over to Rohit Kapoor, EXL's Chief Executive Officer. Rohit?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

Thank you, Steve. Good morning, everyone. Welcome to our 2019 year-end earnings call. I am pleased to report that 2019 was a great year for EXL. We celebrated our 20th anniversary as a company and surpassed $1 billion in annualized revenues for the first time. We continue to see a favorable demand environment, and our value proposition is resonating very well across industries and service lines.

For the year 2019, we generated revenues of $991.3 million, which represents an annual growth rate of 12.3% on a reported basis. Excluding Health Integrated, we generated $978.8 million in revenues, which represents a growth rate of 13.1% on a reported basis. On an organic constant currency basis, we grew by 9.8%, which is the fastest growth rate for the company in the past 4 years. In fact, we have been accelerating our organic constant currency growth rate from 7.8% in 2017 to 8.9% in 2018 and 9.8% in 2019. The acceleration of our growth rate has been the result of winning and scaling up large multi-year transformational engagements.

Our adjusted EPS for 2019 was $3.09, representing a growth rate of 11.6%. Excluding Health Integrated, our adjusted EPS grew 10.7% to $3.31. Our Operations Management business grew nicely to $634 million in revenues, representing 6.1% growth year-over-year. Excluding Health Integrated, Operations Management generated $621.5 million in revenues, up 8.1% on an organic constant currency basis. In the second half of the year, Operations Management was particularly strong with a growth rate of over 10% year-over-year for 2 consecutive quarters. This was powered by a double-digit growth across Insurance, Healthcare and Finance & Accounting.

Our Analytics business also had another solid year. In 2019, our Analytics business generated $357.3 million of revenue, which represents a growth of 25.3% on a reported basis and 13.9% growth on an organic constant currency basis. Our full stack of Analytics capabilities, including data management, predictive modeling and advanced analytics continues to resonate very well in the market. We are now participating in new markets, new verticals and in larger, more complex deals. In the past 5 years, our Analytics revenue has tripled and today represents 36% of EXL's total revenues. In Analytics, we are established as the market leader, differentiated by both the scope and scale of the practice. This is evidenced by our inclusion in the Gartner Magic Quadrant for Data and Analytics Service Providers Worldwide.

In the fourth quarter, our Analytics business grew by 9% year-over-year on an organic constant currency basis. The growth rate for Analytics this quarter was impacted by the proactive exit of some of our small, low-margin and nonstrategic client engagements. This is consistent with our messaging last quarter. Despite these portfolio rationalization actions, our full year growth rate remains strong at the mid-teens.

Now I would like to discuss 2 key trends that drove an accelerated growth rate for EXL in 2019 and will provide momentum for future growth in 2020 and beyond: One, our expansion into many more buying centers within existing accounts; and two, our ability to design and build large-scale global centers of excellence in data management and analytics.

Our clients are demonstrating a greater appetite to leverage our capabilities across new buying centers. Our access to C-level client executives and the referenceability of our existing customer network has positioned EXL as a strategic partner of choice for these new opportunities. This is enabling us to participate in and win a wide variety of deals across new buying centers within our existing clients. We have also successfully built a high level of trust and credibility through consistent superior execution and a focus on client satisfaction. This is reflected in our high win rate amongst these engagements, which in turn translates into high growth rates in our top clients.

In the past year, our top 10 clients grew 15.4%, and our top 30 clients grew 14.6%. For example, we recently expanded our relationship with a large national health plan in a very meaningful way. EXL had a longstanding relationship with the client through its acquisition of SCIO. We have created a strong foundation of trust and credibility across the organization. Moreover, we were able to demonstrate the value of the combined capabilities of the broader organization to the client's C-level team. We were selected to support the health plans provider community from precertification to claims settlement.

The second trend I would like to call out is our ability to design and scale global data and analytics centers of excellence. Our clients are seeking partners who understand their business and can scale up these centers at a rapid pace. Our global delivery model and demonstrated experience in this space across multiple industries is helping us capitalize on this demand.

Our approach to lead with a focus on business outcomes, especially resonates very well, given the broad scope and large size of these engagements. We have a proven ability to combine domain expertise with data and analytics to drive insights at the point of execution. This is helping us win large global deals and data and analytics that support multiple buying centers.

Today, we have four clients generating more than $25 million in annual revenue in our Analytics business compared to none 3 years ago. One great example of this demand trend is our recent selection by a top 5 P&C insurance carrier to create a global data management and analytics center of excellence. This deal is a culmination of multiple engagements across the insurance value chain and spans multiple business functions. Through this win, we will support the U.S. as well as 15 other global markets in Latin America, Asia Pacific and EMEA. This win was a testament to our market-leading P&C domain expertise and our ability to implement advanced analytics at scale to support our clients' transformation initiatives. This win comes in quick succession following the large insurance analytics center of excellence win last quarter. We continue to see a strong pipeline of similar engagements.

2019 was also the key year of key changes in our organization structure and leadership. We streamlined our organization structure to 4 business units: Insurance, Healthcare, Analytics and Emerging. The deeper verticalization in Insurance and Healthcare will accelerate our growth by bringing together our capabilities across operations, analytics, data and digital with an industry-specific lens. Our Analytics business will continue to remain a growth engine for EXL, and we will expand our investment in data and advanced analytics solutions. Finally, the Emerging business unit consolidates our other verticals as well as parts of our F&A and consulting practices. With this, we have the opportunity to build new and profitable sources of growth for EXL. At the same time, we have invested significantly to strengthen and expand our senior leadership, including the executive committee, by attracting market-leading talent as well as promoting internally. We also created an operating committee of diverse senior leaders to expand executive bandwidth to drive enterprise-wide initiatives.

Lastly, we have successfully exited the Health Integrated business within the time lines communicated early last year. I am pleased with how we have met our cost expectations, appropriately enabled employee transitions and successfully managed our client relationships. The wind down of Health Integrated operations is now complete, and there will be no more restructuring charges going forward.

Overall, our pipeline remains strong. We continue to win new clients as well as expand within our existing clients. In Operations Management, our pipeline is strong with strategic deals and engagements that drive end-to-end digital transformation. Our Analytics business also continues to enjoy a healthy demand, spread across industries and geographies.

The momentum for our business is strong heading into 2020. Our clients see EXL as a strategic partner who can help them reimagine business models and generate value from advanced technologies. I look forward to 2020 being another great year for EXL.

And lastly, it is my pleasure to introduce you to our new CFO, Maurizio Nicolelli. Maurizio joined us earlier this month. He has a strong background of driving growth and profitability in a large global and data and analytics company. His rich experience and unique perspective will generate value for our clients, for our employees and for our stockholders.

With that, I will turn the call over to Maurizio.

[Maurizio Nicolelli, EVP & CFO]

Thank you, Rohit, for that warm welcome. I'm very excited for the opportunity to be part of EXL. Over its 20-year history, EXL has established itself as a well-managed forward-thinking company that has built significant shareholder value. I believe there is tremendous growth potential in the years ahead, and I look forward to working with a great team. Thank you for joining us this morning. I will provide insights into our financial achievements for both the fourth quarter and the full year 2019, followed by our outlook for 2020.

We had a strong quarter with revenues of $256.9 million, up 9.4% year-over-year, and adjusted EPS of $0.79, up 6.8% year-over-year. On a full year basis, we generated revenues of $991.3 million, up 13% year-over-year on a constant currency basis, and adjusted EPS of $3.09, up 11.6% year-over-year.

As you are aware, we completed the process of winding down the Health Integrated business by December 31. My discussion of the financial results encompassing revenues and expenses will be excluding the impact of Health Integrated in order to underscore performance of the core business. I will discuss Health Integrated separately later in my remarks.

All revenue growth numbers mentioned hereafter are on a constant currency basis. For the quarter, we generated revenues of $254.1 million, up 10% year-over-year. This is the highest growth rate in 14 quarters. Sequentially from the third quarter, revenues grew 2%. Revenues from our Operations Management business, as defined by 5 reportable segments, excluding Analytics, totaled $160.3 million, up 10.7% year-over-year. This growth was driven by double-digit growth in Healthcare, Insurance, and Finance & Accounting segments.

Healthcare showed strong improvement with a year-over-year growth of 34.2%. This growth was driven by the ramp-up of new client wins in 2018 and the expansion of existing client relationships in the area of clinical care management. Insurance continued its double-digit revenue growth performance with 15.6% year-over-year growth. This growth was driven by expansion in existing client relationships in both our P&C and L&A businesses.

Finance & Accounting grew 10.6% year-over-year driven by the ramp-up of new client wins in both 2018 and 2019. Analytics continued to perform well with revenues totaling $93.7 million, up 9% year-over-year. This growth was driven by new client wins and the expansion in existing client relationships in banking and financial services and insurance. Sequentially, Analytics grew 5.3% over Q3.

Adjusted operating margin for the quarter was 14.2%, down 50 basis points year-over-year due to investments in digital capabilities. Our GAAP tax rate for the quarter was 10.8%. Our adjusted EPS for the quarter was $0.83, up 3.7% year-over-year.

Now moving to our 2019 performance, excluding Health Integrated. Our revenues for the year were $978.8 million, up 13.9% year-over-year. On an organic basis, we grew 9.8%, which is the highest growth rate in 4 years. This growth was driven by double-digit growth in our Insurance, Healthcare, Analytics and Finance & Accounting segments. Our Operations Management business on an organic basis grew 8.1% year-over-year. This is also the highest growth rate in 4 years. Analytics grew 25.6% year-over-year and on an organic basis grew 13.9%.

Our adjusted operating margin for the year was 14.6%, down 40 basis points year-over-year, driven by the increased investments in digital solutions and capability developments. Adjusted EBITDA for the year was $173 million, up 8.4% from the 2018 year.

Our GAAP tax rate for the year was 18.3%. Excluding the impact of discrete items, namely excess tax benefit on stock compensation, prior period benefits and the revaluation of our deferred taxes, our normalized tax rate was 26.1%. Adjusted EPS for the year was $3.31, up 10.7% year-over-year. We exited the year with a very strong balance sheet. We generated $168.4 million in cash flow from operations compared to $92.4 million for the same period last year, an increase of 82%. The increase was due to higher EBITDA and better working capital management.

Contributing to our strong cash flow was an improvement in our days sales outstanding by 3 days to 59 days. Uses of cash during 2019 included: $40.1 million expended on capital expenditures; the repurchase of 643,000 shares at an average price of $62 amounting to $39.9 million; and the reduction of $51 million in our revolving credit facility. We ended December with $321.4 million of cash and short-term investments and borrowings of $249.9 million, resulting in a net cash position of $71.5 million at year-end.

Now I would like to briefly discuss the Health Integrated business. I'm happy to reconfirm that Health Integrated has been wound down as of December 31, as we completed our contractual commitments. Revenues for Health Integrated were $12.5 million for the year. Health Integrated diluted our adjusted operating margin by 120 basis points, leading to an adjusted EPS loss of $0.22 for the year, $0.03 better than we indicated last quarter. In addition, for the year, we recorded impairment and restructuring charges of $8.7 million. As the exit costs are onetime costs, they are excluded from adjusted EPS.

Now moving to our guidance for 2020. We are providing revenue guidance of $1.04 billion to $1.065 billion at current exchange rates. This represents year-over-year constant currency growth of 5% to 8%. Excluding Health Integrated, this represents a 6% to 9% year-over-year constant currency growth. The main drivers for this revenue growth are expansions in existing client relationships as we increased our digital transformation footprint within our client universe and 2019 client wins.

We expect foreign exchange gains between $2 million and $3 million, net interest income of $2 million to $3 million, amortization of intangibles between $14 million and $15 million, and stock compensation expenses ranging between $30 million and $32 million. We expect the effective tax rate to be in the range of 25% to 26%.

Our free cash flow allocation in 2020 will be a combination of acquisitions that expand our capabilities and geographic reach, investment in our operations with capital expenditures in the range of $40 million to $48 million, the repayment of debt and the execution of our share repurchase program.

We announced in December that our Board had authorized up to $200 million in share repurchases covering the years 2020 through 2022. Our intention is to keep our weighted average share count flat over this period. Based on the above factors, we expect our adjusted EPS for 2020 to be in the range of $3.42 to $3.58, which amounts to an increase of 11% to 16%.

In the first quarter, we expect flat sequential revenue and adjusted EPS growth excluding Health Integrated due to the outperformance of the fourth quarter. As mentioned in our press release, starting from the first quarter of 2020, we will report our results based on 4 strategic business units: Insurance, Healthcare, Analytics and Emerging business to align with certain operational and structural changes inherent in our business. For more details on the change in segment reporting, refer to details built in our press release and our 10-K that will be released after the market closes today.

In conclusion, as Rohit mentioned, the business is very healthy and growing in insurance, healthcare and analytics with solid traction in 2019. We delivered organic revenue growth of 9.8% year-over-year on a constant currency basis and adjusted EPS of $3.31, up 10.7% year-over-year. All of our verticals are performing very well with strong visibility into 2020, and we are confident with meeting our revenue and profitability goals.

Now, Rohit and I would be happy to take your questions.

[Operator]

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

[Ted Starck-King, William Blair & Company]

Ted, on for Maggie. So as you shift more towards transformational work and they become larger and more complex, how has that changed the types of contracts that you have with clients? Are you seeing changes in the amount of transaction or outcome-based contract? And how does that - how does the margin profile of outcome-based contracts compared to FTE based?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

Sure. So as we do more digital transformation work that is end-to-end, one of the things that happens is that these become much larger size contracts and these expand across multiple buying centers within existing clients. The nature of the commercial arrangement also shifts and it becomes a lot more focused on delivering tangible business outcomes. Our experience has been that as we engage with clients in commercial constructs involving business outcomes, it actually is a win-win situation for our clients as well as for EXL. We are very confident of being able to deliver and execute to those business outcomes and make tangible improvements to our clients' businesses and participate in the value that we create by doing so.

The margin of our outcome-based businesses, in general, is higher than those, which are on structure on a pure FTE basis. However, there is, of course, a lead time for us to be able to get to that efficiency level and that contribution. So this is a very favorable trend that is playing out in the marketplace, and I think EXL is very well positioned to take advantage of that.

[Ted Starck-King, William Blair & Company]

Great. That's really helpful color. So then switching over to healthcare here as a follow-up. So now that the wind down of Health Integrated is substantially complete, could you talk about the best opportunities for expansion within the Healthcare segment? And then how does the segment change your go-to-market approach within the vertical?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

Yes. So we are very, very pleased with our investments in healthcare and the franchise that we've built up in the healthcare insurance of industry vertical. The healthcare market, as you all know, is extremely large and broad-based marketplace. We think that there is a huge amount of opportunity for us to be able to serve clients with our capabilities around operations management and data analytics. With Health Integrated behind us, the entire leadership team of the healthcare industry vertical can focus our attention on growing and developing our relationships with existing clients and adding on new client relationships out here. We have a leadership positioning in clinical operations within healthcare, particularly amongst the payers, and we work with 6 of the top 10 payers in this particular industry vertical.

We are looking to expand our capability set and our customer base more towards the provider space as well as get much more engaged in pharmacy and other related areas. The opportunity for us in healthcare is one which will allow us to actually provide a much faster growth rate in healthcare as compared to the rest of EXL and allow us to propel the growth rate of EXL going forward. So we're very excited by the opportunity in healthcare.

We've also invested very significantly in leadership talent, which understands the healthcare domain really, really well. So in 2019, we added a number of senior executives in our healthcare industry practice and, of course, with the acquisition of SCIO, we brought on very, very talented senior executives that are healthcare industry experts. So we think we are very well positioned for this industry vertical and we are excited about what we can do in 2020 and beyond.

[Operator]

Your next question comes from the line of Mayank Tandon with Needham.

[Kyle Peterson, Needham & Company]

This is actually Kyle Petersen, on from Mayank. Just wanted to start on the margin progression. I appreciate the color with the drag from Health Integrated and how that should benefit margins this year. How should we think about the margin benefit from those operations being wound down? Is that going to be a big step up? Or is the expansion going to kind of build throughout the year? I just want to make sure we're thinking about that the right way.

[Maurizio Nicolelli, EVP & CFO]

Yes, it's Maurizio. So our adjusted operating margin for 2019 ended at 14.6%. We - Health Integrated hurt our margin during the year by about 120 basis points, and that's behind us. We see adjusted operating margin right around 15% with a 30 to 40 basis point improvement for 2020. And that's really a result of us going through our planning process earlier in the last couple of months for 2020 looking at different areas to really find efficiencies and improve it, and then that's slightly offset by incremental investments, specifically in digital that we're making.

[Kyle Peterson, Needham & Company]

Great. That's good color. And then I noticed that the utilities in the U.K. revenue seemed a little soft compared to a lot of those strong trends you guys are seeing elsewhere in the business. Just want to see, are those two things connected? Or is there anything kind of specific going on in either of those you might want to call out, just wanted to see if you guys could expand on that a little bit?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

Sure. So our utilities practice is largely U.K. based and it is focused out there. Our U.K. business in 2019 was pretty much flat as compared to 2018. We have invested in more leadership in U.K., and we expect to be able to take advantage of a much stronger pipeline in the U.K. - in our geography, so that's something, which we will be focused on. We don't think this is something which is going to continue. We think that there's a growth opportunity for us in the U.K. market, and we'll continue to focus in on that. The utilities industry vertical has been folded in along with other industry verticals into our Emerging business unit. And we think that this will allow us to actually get some size, scale, it will allow us to be able to refocus our go-to-market efforts in a consolidated manner and be able to actually provide this the focus and attention that it deserves. So we think there's a huge opportunity for us to create a new growth engine for EXL going forward.

[Operator]

Your next question comes from the line of Joseph Foresi with Cantor Fitzgerald.

[Joseph Foresi, Cantor Fitzgerald & Co.]

Rohit, I can't believe we're headed to $1 billion in revenue. I'm not sure how that - what that says about how old both of us are. But I remember the Invesco, that's how for back - Conseco, I'm sorry, how far back I go. Anyways, I wanted to ask about Analytics. I think you talked about some of the partnerships that were being developed in that business. I know you said you're divesting some of the kind of low-quality business you do there. It seems like you're kind of reevaluating the direction of that business. Maybe you could talk about why you're doing that now? Why the realignment now? And your expectations of growth rate short-term and long-term?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

Sure. So, Joe, yes, it's been a while, but it's been quite a journey, and we're really delighted with where we are ending up right now and the fact that we continue to build and grow this franchise is really exciting. The Analytics business for us is a great opportunity for us to be able to deliver really value-added services to our clients. It's a segment that we invested early on, and we've built up a market-leading position in data analytics. And we think that going forward, over the next 3, 5, 10 years, the opportunity set in data analytics is going to be tremendous. So it's just a great place for us to be in, and it matches very well with the skill set and the talent and the capabilities that we've got internally, and it aligns very well with the market opportunity that we've got going forward.

One of the things which we are doing in Analytics, which is part of healthy portfolio management, is to prune down our portfolio such that we can focus in on larger strategic accounts and the more profitable and growth-oriented accounts. This is something which, I think, needs to be undertaken after several years of very, very rapid growth in this business and making sure that we've got a very healthy portfolio that can continue to build and grow going forward.

We also have a tremendous opportunity to expand our Analytics business on the dimension of data and data management, and we are focusing on that. We are also focused in on building up capabilities around advanced analytics that really leverage AI and machine learning. And again, we've got strong capabilities of that.

Now many of these capabilities, we will develop internally, but a few of them we will develop in partnership with other providers and other partners that are externally available to us. Over the past few years, we've built up partnerships with a number of credit rating agencies. We've built up partnerships with some of the analytics infrastructure providers. We've built up great win and partnerships with providers that allow data to be migrated to the cloud. And so a number of these partnerships that we've created are going to allow us to expand the playing field in which we operate. We think going forward, analytics is going to become really, really big and huge. And with our market-leading position, we should be able to take advantage of that. And so we are very excited about that.

[Joseph Foresi, Cantor Fitzgerald & Co.]

Okay. And then, Maurizio, I guess our past meet again, any particular area of focus as you make your initial way into the business? And then any thoughts specifically on M&A? There's been, obviously, with Health Integrated, a spotty track record there. Any thoughts on how you're planning on going about that particular practice?

[Maurizio Nicolelli, EVP & CFO]

Joe, so a couple of things to just mention, given that I'm 4 weeks in. Couple of areas that really are kind of high focus for me are really working with the team on our strategic initiatives to really grow the business. We've gotten to $1 billion, but the opportunity for us to really scale the business and really double it is significant. And it's one of those things that is really staring right at us. And my opportunity is really to work with the group and really help with growing the business with internal growth, but then also supplement it by M&A. And we've had a number of discussions regarding M&A, and we're getting our arms around kind of our strategy really for the go forward. And you'll see us growing the business going forward really as a combination of both internal growth supplemented by M&A that will help us accelerate the rest of the business.

And another focus area for me, but this also will be the return of capital, it's really ensuring that we're getting our highest return of capital in the various businesses, in the various projects that we implement and then also in M&A going forward. So I would say, initially, those are really 2 big areas for me to really focus on. On the M&A front, that's one whereby we look at all the different businesses, and now that we restructure ourselves, we are really working with each of the leaders to really home in on our strategy for each particular piece of the business.

[Operator]

Your next question comes from the line of Bryan Bergin with Cowen.

[Bryan Bergin, Cowen and Company]

I wanted to start on revenue growth. Can you give us a sense of what the Analytics and the Ops Management ranges are that are baked into the fiscal '20 growth range? And given you've had the accelerating organic growth to 9.8% ex HI here, can you help us bridge starting at 6% to 9% for fiscal '20? Just wondering the level of prudence in there, if there's anything else to call out?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

Sure, Bryan. So as we stated previously, our expectations are that we provide growth rates for the medium term, we would expect Operations Management to grow at between 5% to 7% on a constant currency basis. We would expect Analytics to grow at between 12% to 14% on an organic constant currency basis, and the blended growth rate for the enterprise would be between 8% to 10%. And that's our expectation for the medium term. If you take a look at our growth rate in 2019, that was 9.8%, and so it was at the very top end of that range. The guidance that we've provided for 2020 is a growth rate on an organic constant currency basis between 6% to 9%, so it's right in the middle of that ballpark. As the year progresses, we'll provide updated guidance in terms of where we think we're going to end up.

[Bryan Bergin, Cowen and Company]

Okay. Can you give us a sense or quantify the amount that the pruning within Analytics weighed, whether it was second half or in 4Q?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

It's difficult to provide a quantification of that, Bryan. That's not something which we do. As we mentioned in the last earnings call, this is something which we began in the third quarter, it continued in the fourth quarter. And our expectation is that this will continue in the first quarter of 2020 as well. By that time, we will be fully complete with this portfolio rationalization. And our expectation for the full year for Analytics in 2020 is going to be - that it will be consistent with our longer term projections.

[Bryan Bergin, Cowen and Company]

Okay. Now just on gross margin, and Analytics that you had a nice uptick there. Can you just talk about your view for sustainability? I heard your investments in digital, just curious, is that more so in the Ops Management piece? Or is it both?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

Sure. So one of the advantages of portfolio rationalization is getting a better margin, and that's the reason why we would rationalize our Analytics portfolio. And even though it hurts our growth rate and our revenue growth rate in the short term, it improves our profitability, and you can see that clearly being demonstrated in the fourth quarter for the Analytics business. Our expectation is that on a go-forward basis that we will continue to be able to sustain the margin improvement in our Analytics business and be able to manage that transition. Going forward, the digital investments that we're going to make, these are going to be made across both Operations Management and Analytics. In Analytics, we're going to be focusing on lot more around data management and advanced analytics, and we think the digital investments will all fall into those buckets. And in Operations Management, again, it's going to be across multiple technology levers, across robotic process automation, across other ways and smart workflow solutions, so they're going to be across a number of different capabilities that we will be using across Ops Management and Analytics.

[Operator]

Your next question comes from the line of Puneet Jain with JP Morgan.

[Puneet Jain, JPMorgan Chase & Co.]

Rohit, as we pursue multiple buying centers within client organization, will that require changes in the structure or focus of sales and business development teams?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

Yes, Puneet, I think it definitely will require a change of our go-to-market strategy. First of all, the conversations that we are having is now more with the C-level executives of our client organizations. And therefore, we need to have more senior and more seasoned professionals having those conversations with the C-level executives of our existing clients. Second, it's going to be a much more of a strategic conversation that cuts across business lines and cuts across new buying centers, so we've got to be able to articulate our vision for digital transformation that is much more applicable for the entire client enterprise rather than just for a piece of it. It will also mean that our investment in client relationship managers, that's something which we will significantly enhance as we start to do a lot more work with our existing clients. So definitely, there is going to be a shift in profile, in the quantum of client relationship managers and our investment on the front end associated with our existing clients.

[Puneet Jain, JPMorgan Chase & Co.]

Got it. And are you seeing any impact, whether positive or negative, from coronavirus in your travel or any other vertical? And any impact on direct volume or any derivative impact on clients' decision-making or sales cycles from that?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

So let me address coronavirus and its impact on EXL and its clients in a comprehensive way since you've asked that question. First of all, we are extremely focused on monitoring the situation, which, as you know, is rapidly evolving, and it needs to be dealt with the utmost urgency. Our number one priority is to make sure that we ensure the safety and security of our employees and that we are great custodians of our client businesses. So that's our focus. So far, we've not seen any real impact associated with coronavirus for our business or for our clients. Fortunately for us, our client portfolio is geared and hence pretty well diversified. We don't have a concentration of clients in the travel in our industry, so that's not really something that's impacting us.

A few things, which you should all know. One, in order to keep our employees safe, we've adopted a number of precautionary steps. So we've started to provide sanitizers at all of our facilities, there's temperature monitoring, which is done through temperature guns at our facilities now. And we've got preparedness plans in place to be able to address this. We also have stepped up our communication with our employees in a very, very significant manner letting them know what are some of the do's and don'ts, and these are being displayed at vantage points. And of course, we have a travel advisory in effect.

We don't do any business with clients in China or in any of the impacted countries currently. And therefore, the impact to us is not there at all. We do have contingency plans in place, which are adopted on the basis of best practices recommended by the World Health Organization. And these plans, we are in state of constantly monitoring these, updating these and sharing it with our clients. The one industry vertical, which is likely to have an impact is our healthcare industry vertical. And should there be a spreading of this virus in the U.S., I think the healthcare industry vertical will likely get impacted. And so we are developing contingency plans so that we are just prepared to be able to address this with our clients, should the need arise. At the current moment, like I said, there's nothing that has happened, and there's no real impact that we're seeing. But we're just going into a very high state of preparedness so that we can react to it and keep our employees safe and help our clients out to the best extent possible.

[Operator]

Your next question comes from the line of Dave Koning with Baird.

[David Koning, Robert W. Baird & Co.]

Nice job. And I guess, my first question, it seems like the new clients are driving a lot of growth. Clearly, it seems like the momentum is good and everything. The one question, the new clients this year were about 28, I believe. I think last year, there were 50. Is there just a different composition like the clients you're winning in the last year just are a lot bigger than the ones in the prior year?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

Yes, Dave. I think there's no real change in terms of the new client wins. If you take a look at the quality of new clients that we've signed up and the growth prospects of the 28 new clients that we've signed up in 2019, we think it's as good as the clients that we signed up in 2018. You can see that in terms of our growth rate that, that traction is playing out really, really well. We're also seeing, obviously, much more growth take place from existing clients. So the mix and the balance between new clients and existing clients is actually very good and very healthy. And we think that our track record of growth should continue out here.

[David Koning, Robert W. Baird & Co.]

Okay, great. And then on the new segmentation, what's interesting to me is you think where the new segments are going to be. Healthcare, you've had tremendous kind of reacceleration there; great acceleration in Insurance; analytics is strong; and Emerging is the last group. And typically, we think of Emerging when we think of most companies as being the faster growth. I think it's going to be maybe even by far the slowest growth part of the business. Is that the right way to think about it?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

So presently, the way our Emerging business unit is set up, it is a slower growing portfolio. But keep in mind, it is our most profitable portfolio as well. We do think there is an opportunity for us to be able to fix this portfolio and get it on to a growth track. And by the focus and by the leadership attention that we are putting into place on the Emerging business, we think we'll be able to do that. We also have an opportunity to go into some new industry verticals within this portfolio that will act as catalysts for growth. And so we are really excited about going into some of these new areas and creating opportunities of growth for us. And our expectation over the mid- to long-term is that the Emerging business unit will also be a growth-oriented unit for us, apart from being a highly profitable business unit.

[David Koning, Robert W. Baird & Co.]

Okay. Great. And just one final one. Free cash flow like you crushed it, I think it was the best conversion you've maybe ever had, like is that - I wouldn't assume that's sustainable, but is maybe 100% conversion roughly kind of what you're thinking?

[Maurizio Nicolelli, EVP & CFO]

Yes, about that - it's Maurizio. So we had a very strong year of free cash flow at $168 million versus the prior year $92 million. We had significant benefits from our operating line, especially in our DSOs, you saw free cash flow go up because of that. But overall, we should see steady positive growth in our free cash flow, maybe not as strong as this year because we had a couple of one-timers in there, but still significantly benefiting the business going forward.

[Operator]

Your next question comes from the line of Vincent Colicchio, I'm sorry, with Barrington Research.

[Vincent Colicchio, Barrington Research Associates]

Yes, Rohit, most of mine were answered, but the 5 clients you added in the quarter, are you particularly excited about any of them becoming a large strategic client potentially?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

So Vincent, I think, for us, like I said, the new clients that we've been adding on, we think the quality and growth opportunity of these client relationships is very meaningful and very significant. You can see that in Analytics, we now have clients. We have 4 clients, which are well above $25 million in annual revenue. In our Operations Management business, we have several clients, which are of that kind of magnitude. And we do think that some of these clients that we've added on as new clients, well over the years, grow and expand their relationships and get to those types of levels.

[Operator]

Your next question comes from the line of David Grossman with Stifel.

[David Grossman, Stifel, Nicolaus & Company]

So Rohit, I know you don't really speak specifically about bookings. However, can you maybe just share with us the booking trends in 2019 versus 2018? And perhaps talk a little bit about the cadence of bookings throughout the year?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

Sure, David. So first of all, I guess, the best color I can provide to you is that when we take a look at our pipeline, the pipeline has become much larger in size and scale as compared to the previous year, and so that's something which is very positive. It's - the pipeline has broadened out, the pipeline has become a lot more mature, and in terms of value has significantly increased in size.

The second part of it is, in terms of our win rate, we are actually quite pleased with how we are winning new deals. Of course, if it is a new deal with a new buying center at an existing client, our win rates are very high, and that obviously is driven from the high levels of customer satisfaction and trust and credibility that we've established with our existing clients, and so that's working really well. And then our ability to win new clients, that's continuing on at a good pace as well.

So when you kind of think about the bookings and the amount of business that we have won in 2019, we are very pleased with how that has shaped up and played out. And when we think that's reflecting in a much faster growth rate for us in 2019, and then we expect to be able to maintain that growth rate as we've provided in our guidance in 2020.

[David Grossman, Stifel, Nicolaus & Company]

Right. But any - can you give us any color on how that - those bookings, how they ran through 2019 versus how much you expect to run through in 2020? And how much visibility you have on 2020 right now vis-à-vis where you were last year at the same time?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

Yes, David. We just don't provide that data externally. And even internally, for us, it's very difficult to be able to get a real grip on that data because it depends on the tenure of the contract, it depends upon how quickly the clients want to ramp up. And therefore, we think that there is a fair amount of inconsistency with that data and it's just something which we don't feel comfortable in terms of sharing externally and buying ourselves for that.

[David Grossman, Stifel, Nicolaus & Company]

Okay, fair enough. So just - I think this question came up earlier about the healthcare vertical. And now that Health Integrated and the wind down of that is behind you, can you give us any more specificity about really what are you really going after in the healthcare business? What are the core offerings today? And how do you expect that - those offerings to evolve? What are you really focused on driving here in terms of areas that you think you can be relevant and grow?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

Yes. So first of all, if you take a look at the healthcare vertical, and you break it up by the type of clients that we're going after, we would break it up into 3 groups: Number one is the payers; number two would be the providers; and number three would be the pharmacy and the PBMs. And we've got a strongest penetration of our existing business on the clinical care and care management side with the payers; we've got a pretty strong practice on data and analytics with the providers; and the business that we have with pharmacy, PBM and some of the life sciences companies is nascent and developing. So those are the 3 broad segments that we would go after.

The kind of services and the kind of capabilities that we are providing out here, number one is care management services or clinical services. What these are is it requires a registered nurse or a qualified nurse or a doctor to be able to help in processes like utilization management, utilization review, precertification of certain procedures, all the way to the claims settlement that we are helping our clients out with.

The second area that is in the healthcare area is around data and analytics. We do a lot of work around fraud, waste and abuse, as you know, in our payment integrity programs and as well as helping our clients with population health management and being able to see what kind of risk are they are really underwriting, and as they move towards self-insured plans for the providers, how should they think about managing that risk. We are - we also have a population health management platform and, therefore, the ability for us to provide end-to-end and delegated authority on taking some of these decisions on behalf of our customers, that is a new capability that we've added on. We've also added on capabilities that provides a lot more transparency and visibility to our clients in terms of the type of requests that are coming in from their - the groups that they've ensured. So it's a whole variety of service offerings that we have for the healthcare industry.

And I think there are very few players, which are the traditional players, that play in the healthcare space, and this is a rapidly evolving marketplace, and we hope to be able to benefit out here. And certainly, the growth rate in 2019 validates our investment in the healthcare industry vertical.

[David Grossman, Stifel, Nicolaus & Company]

Okay. And just 1 last question. Just you had mentioned that you have some partners in Analytics. And you talked about that, I can't remember in the Q&A or your prepared remarks. So are those partners just adding capabilities? Or are they actually acting as a channel partner as well?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

So they do both. So let me give you an example. We have a partnership with TransUnion and we are taking out to market capabilities around CECL and they will act as a distribution partner as well as a capability partner along with EXL. We've - as you know, we've invested in a company that provides for a smart decisioning platform for analytics, and that becomes a capability as well as a distribution channel for us for analytics. We've also partnered with a client, like HSBC on KYC, and there it is much more about the capability development and providing a test ground for implementing some of these advanced analytics capability in a comprehensive manner and then expanding it to other clients. So we're going to use multiple formats in terms of partnerships with providers and clients in the analytics space. And I think that's a very fast-evolving space as such.

[Operator]

Your last and final question comes from the line of Justin Donati with Wells Fargo.

[Justin Donati, Wells Fargo Securities]

The first one, if I heard you correctly, you ended the year at $3.31 of EPS, excluding Health Integrated. And when I look at the guidance for $3.46 to $3.58, it seems a little bit low relative to revenue growth, given that you're projecting margin expansion. So can you walk me through kind of some of the headwinds and tailwinds there?

[Maurizio Nicolelli, EVP & CFO]

It's Maurizio. You have that correct. So we ended the year at $3.09, adding back the loss of $0.22 gets you to $3.31. Our guidance is $3.42 to $3.58, which is our initial guidance for the year, it is based on the 6% to 9% growth of revenue. And so right - that middle 7.5% with revenue growth gets you to right around $3.50, with a little bit of margin improvement up to right around 15% for our adjusted operating margin. And given all the other items below the line that I gave ranges on will get you to right around that $3.50, the middle of the range. And again, that is still our initial guidance. And as the year goes along, we'll update it.

[Justin Donati, Wells Fargo Securities]

Okay. And then just last question for me. You talked a lot about the technology investments that you're making in both sides of the business. I think previously, you've sized that at about $100 million over the past 3 years. So should we think about a level consistent with that run rate on an annualized basis or higher, lower?

[Rohit Kapoor, Co-Founder, Vice Chairman & CEO]

Yes. So I think our investment on that is pretty much going to be consistent with that hypothesis. We will be stepping up our investments as we grow the size and scale of the company and as we see traction build up in terms of the commercialization of some of those digital investments. So you should expect a tick up in terms of those investments as we go forward.

[Operator]

There are no further questions at this time. Mr. Barlow, are there any closing remarks you would like to make?

[Steven Barlow, VP, IR]

Thank you, Carol. No. We are concluding the call, and we look forward to presenting our Q1 '20 earnings at the end of April. Thank you all for listening.

[Operator]

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