Q1 2024 Exlservice Holdings Inc Earnings Call

Participants

John Kristoff; VP of IR; Exlservice Holdings Inc

Rohit Kapoor; Vice Chairman of the Board, Chief Executive Officer; Exlservice Holdings Inc

Maurizio Nicolelli; Chief Financial Officer, Executive Vice President; Exlservice Holdings Inc

Bryan Bergin; Analyst; TD Cowen

Ryan Potter; Analyst; Citigroup Inc.

Marie Nolan; Analyst; William Blair & Company LLC

Surinder Thind; Analyst; Jefferies LLC

Puneet Jain; Analyst; JP morgan

Moshe Katri; Analyst; Wedbush Securities Inc.

David Koning; Analyst; Robert W. Baird & Co., Inc.

David Grossman; Analyst; Stifel Europe

Mayank Tandon; Analyst; Needham & Company LLC

Presentation

Operator

Good day, and thank you for standing by, and welcome to the first quarter 2024 Exlservice Holdings Inc., earnings conference call. (Operator Instructions) Again, please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, John Kristoff, VP of Investor Relations. Please go ahead.

John Kristoff

Thanks, Justin. Good morning. Thank you for joining EXL's first quarter 2024 financial results conference call. On the call with me today are Rohit Kapoor, Chairman and Chief Executive Officer, AmerGen Nicoletti, Chief Financial Officer. We hope you've had an opportunity to review the first quarter earnings release we issued this morning. We've also posted an earnings release 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. The 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. A 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

Thanks, John. Good morning, everyone, and welcome to EXL's first quarter 2024 earnings call. I'm pleased to be with you this morning, sharing our strong financial results as we've had a solid start to the year. In the first quarter, we generated revenue of $436 million, an increase of 9% year-over-year, and we grew first quarter adjusted EPS by 9% to $0.38 per share.
Our data and ALM strategy has generated a sustainable competitive advantage for for the sound execution of this strategy, it enables us to continue our growth momentum in analytics. We delivered revenue of $191 million for the quarter, up 5% sequentially and year over year. I am encouraged by the first quarter performance in our analytics segment, which has been relatively flat for the past three quarters.
This is the result of continued strong double digit growth in health care, payment services and data management. Our banking analytics business stabilized during the quarter, while marketing analytics remains challenged. As discussed previously, in our digital operations and solutions business.
During the first quarter, we generated revenue of $246 million, with growth of 6% sequentially and 12% year over year. This was driven by continued strong double-digit growth in our insurance and emerging business segment.
Looking at the overall demand environment, our new and existing clients remain focused on lowering costs improving efficiencies and enhancing customer experience and growth. Our data and AI lead strategy, combined with our deep domain expertise, is helping them achieve these goals, we have been able to significantly increase our total addressable market by offering innovative new solutions and expanding into new buying centers.
This is reflected in the continued strength of our sales pipeline as clients increasingly turn to us for end-to-end solutions. We have also grown our average deal size, which is fueling our above industry revenue growth. Based on our strong performance in the first quarter, we have raised the lower end of our full year guidance range for both revenue and EPS.
Brazil will review the details in a few minutes. We recently held our I. in action, virtual customer symposium where attendees heard from EXL and industry leaders on the future of business models and how they are scaling the use of enterprise data to bridge the gap between strategy and operations to make AI real.
The event included live demonstration of practical applications and use cases of embedding AI across all our business segments. The event was attended by over 2,300 clients, prospects and advisers and partners and feedback has been very positive. A replay of the event is available on our website.
Let me share a couple of recent examples of how we are bringing to life all our capabilities at the intersection of data, AI and domain expertise for our clients to deliver meaningful value.
First, we developed a Gen Y I. based conversational business intelligence solution for a leading life and annuity insurer. The solution is designed to help them better understand their captive and independent advisers, interest behaviors and demographics.
This helps them optimize, targeting and message development to improve their experience and increase sales and return on marketing investment, effectively developing the solution for the client required, bringing together our talented team of Gemini experts, data engineers, business, subject matter experts and AI deployment specialists to work as an integrated team.
We harnessed large volumes of both external and internal client data assets to build a 360 degree profile of each adviser. We fine-tuned our lens to generate personalized insights for distinct advisor groups with unique traits.
Finally, we developed a conversational interface for an easy and intuitive user experience. This solution is highly scalable and delivers on-demand real-time natural language insights across all our clients' sales and marketing functions by leveraging additional data sets and embedding digital into our clients' marketing and sales processes.
They have created significant value by enabling them to double the new business volume. In another example, EXL has become the preferred AI and data partner for a UK-based leading retailer. We accomplish this through the successful implementation of multiple AI based solutions to transform their online sales operations.
For example, we deployed our proprietary Gen Y I. based smart agent as a solution at scale, which is currently running live across 1,100 customer agents handling 6 million calls annually in the client's captive operations as well as those outsourced to EXL. Our solution provide real-time speech-to-text I. nudges or Next Best Action customer sentiment and vulnerability detection and call summary, early results include a greater than 90% reduction in customer repeat calls or double digit agent productivity gain and vulnerability detection accuracy rates of over 95%.
In addition, we have helped our clients reduce returns streamline orders and refunds and improved overall customer experience. We also deployed EXL viruses solution, which utilizes Gemini and natural language processing to generate insights from disjointed and unstructured data from 40 different sources across the web, social media, online reviews and catalog.
Our solution is adept in handling data in any form via text images or videos and feeds it into our buyer assist recommendation engine by presenting our clients' buyers with customized recommendations, we help them better predict which items to procure based on potential future demand. This has resulted in a 2% to 3% increase in sales, a 30% to 40% improvement in buyer productivity and enhanced customer satisfaction due to our success with this client, EXL is now their strategic business transformation partner in deploying AI across their enterprise, thereby expanding our TAM, enabling us to continue our growth momentum.
These are just a few examples of the proprietary AI based solutions. We have developed and deployed that combine data and AI with our deep industry experience to deliver meaningful business benefits to our clients and the end customers.
I am pleased to highlight two key appointments we made recently within our senior leadership team because Vela and Vivek Jaitly have each been promoted to President of EXL. In addition to their current roles of Head of Insurance and Head of Analytics, respectively.
In their expanded roles, they will take on broader company-wide responsibilities, including being more involved in driving overall corporate performance and executing on our data and AI lead strategy as we implement our data and AMS strategy, it is important that we continually optimize our leadership structure to execute on our strategic objectives because And Vivek, our highly talented and strategic leaders who have built strong, sustainable growth businesses and have created tremendous impact for EXL over the past two decades in their expanded roles.
I look forward to their continued leadership as we transform EXL to the data and AI partner of choice one offline, we will be holding an Investor Strategy Update event next Tuesday, May seventh, to provide an in-depth overview of our strategy, our pivot to being a data and AI lead company and our growth opportunities. Registration for the event is available on the Investor Relations page of our website.
And we look forward to seeing you there.
In summary, we delivered strong results in the first quarter, and we are encouraged by the continued momentum in our digital operations business as well as the growth in our analytics business. Our winning data on here. That strategy, combined with consistent execution by our exceptionally talented and dedicated team, position us well to deliver industry-leading performance for the remainder of 2024 and beyond.
With that, I'll turn the call over to Mauricio to cover our financial performance in detail.

Maurizio Nicolelli

Thank you, Rode, and thanks, everyone, for joining us this morning. I will provide insights into our financial performance for the first quarter, followed by our revised outlook for 2024. We delivered a solid first quarter with revenue of $436.5 million, up 9% year-over-year on reported basis, 8.8% in constant currency and 5.4% sequentially.
Adjusted EPS was $0.38 a year over year increase of 8.9%. All revenue growth percentages percentages mentioned hereafter are on a constant currency basis. Revenue from our digital operations and solutions businesses as defined by three reportable segments, excluding Analytics, was $245.8 million, representing year over year growth of 12.3%. Sequentially, we grew revenue 5.9%.
In the insurance segment, we generated revenue of $145.1 million, an increase of 15.6% year over year and 4.4% sequentially. This growth was driven by the expansion of existing client relationships and new client wins. The insurance vertical, consisting of both our digital operations and solutions and analytics businesses grew 12.1% year over year with revenue of $183.1 million in the emerging segment we reported revenue of $74.4 million, growing 11.9% year over year and 10.7% sequentially. This growth was driven by new client wins and expansion of existing client relationships.
The emerging vertical, consisting of both our digital operations and solutions and analytics businesses grew 0.4% year over year with revenue of $155.6 million. The healthcare segment reported revenue of $26.3 million, down 1.7% year over year and an increase of 1.1% sequentially. The year-over-year decrease was primarily due to onetime revenue in the first quarter of 2023.
The health care vertical, consisting of our digital operations and solutions and analytics businesses grew 18.1% year over year with revenue of $97.8 million. In the analytics segment, we generated revenue of $190.7 million, up 4.6% year over year and 4.7% sequentially. Growth in Analytics was driven by higher volumes in health care, payment services and growth in our data management business. This was partially offset by a decline in marketing analytics, reflecting an ongoing trend we have highlighted in previous quarters.
SG&A expenses as a first point as a percentage of revenue. We're up 140 basis points year over year to 20.4%, driven by investments in generative AI, digital solutions and front end sales partially offset by operating leverage.
Our adjusted operating margin for the quarter was 18.9%, down 50 basis points year over year, driven by increased SG&A investments. Our effective tax rate for the quarter was 23.2%, down 80 basis points from 24% in the first quarter of 2023. This was driven by higher profits in the lower tax jurisdictions. Our adjusted EPS for the quarter was $0.38, up 8.9% year over year.
On a reported basis, our balance sheet remains strong our cash, including short and long-term investments as of March 31, was $246 million and our revolver debt was $345 million for a net debt position of $99 million. Our first quarter cash flow from operations was an outflow of $21.9 million compared to an inflow of $16 million in the first quarter of 2023.
This is due to higher working capital requirements and one-time earn-out payments related to a prior acquisition. During the quarter, we spent $11.3 million on capital expenditures and repurchased approximately 4 million shares at an average share price of $30 for a total of $119.4 million. This includes 3.35 million shares received upfront as part of our previously announced $125 million accelerated share repurchase plan. We expect to receive the remaining shares in the third quarter.
Now moving on to our outlook for 2024. Although the macro economic environment remains unpredictable, we are raising the bottom end of our guidance ranges for both revenue and EPS. Based on our strong first quarter results, we now anticipate revenue to be in the range of $1.79 billion to $1.82 billion representing year over year growth of 10% to 12% on a reported and constant currency basis.
This represents an increase of $5 million at the midpoint and $10 million at the low end of our previous guidance of $1.78 billion to $1.82 billion. We expect a foreign exchange gain of approximately $41 million net interest expense of approximately $4 million to $5 million and our full year effective tax rate to be in the range of 23% to 24%. We anticipate our adjusted EPS to be in the range of $1.58 to $1.62, representing year-over-year growth of 10% to 13%. We expect capital expenditures to be in the range of $50 million to $55 million.
In summary, we started the year strong and are encouraged by the continued double digit growth momentum in our digital operations business and the growth in our analytics business by effectively executed executing our data and AI lead strategy, including the significant investments we are making to further grow our competitive advantage. We are confident in our ability to maintain our double digit growth trajectory.
With that, Rhod and I will now be happy to take your thoughts.

Question and Answer Session

Operator

(Operator Instructions)
Bryan Bergin, TD Cowen.

Bryan Bergin

Hi, good morning. Thank you and congrats to Vivek and because a lot of data analytics have performed a bit better than expected here sequentially. Can you comment on how you now see analytics growth progressing over the balance of the year. I heard the comment on banking stabilization, which is good. Can you just dig in a little bit more there on what you're seeing? And then customer marketing analytics just to be clear, is it bouncing along the bottom? Or are clients kind of stuff?

Rohit Kapoor

Sure, Brian. So first of all, we're very pleased with the progression of our analytics business. And this is a first quarter where we are seeing sequential growth take place quarter on quarter after three years of flattish revenue for the analytics segment, two quarters.

Maurizio Nicolelli

Two quarters three quarters you said two years?

Rohit Kapoor

Yes, yes, three quarters because the analytics business, as you know, for us, is made up of different buckets. We've got the analytic services we've got a data management capability and we've got marketing analytics as part of the portfolio. The data management part of our portfolio is very strong and continues to grow very nicely.
And we feel we are well positioned to take advantage of the secular trends that are taking place out there and particularly with the adoption of Gen Y I., the demand for data management has only increased, and we feel that we are well positioned to participate in this growth. We are very happy that the analytic services part of our portfolio has now stabilized and recovered nicely.
This was being impacted by banking analytic services where discretionary spend was being cut back and spend on analytic services was being cut back. That seems to have now stabilized and we would expect this to continue to move up as we go forward.
Marketing analytics for us continues to remain challenged and it continues to decline in our in revenue and it is actually a headwind for us at this point of time. We do expect that this will stabilize and that this will be something that will bottom out. But at this point of time, it continues to decline and it continues to be a drag for us for our business.
If you take a look at the overall analytics business, our expectation is in calendar year '24, we would expect to see sequential growth take place in the absolute dollar value of our analytics revenue quarter on quarter and what that would also imply is that our growth rate year on year is likely to continue to improve from Q1, which was at 5%. And we would expect this to continue to improve sequentially quarter on quarter as well as year on year for 2024. I hope that's helpful for your question.

Bryan Bergin

Yes, very good. Okay. And follow-up here on MiR for near term workforce resourcing plants. Obviously, the recent media report report drove some share price volatility. So just wanted to give you a chance to clarify anything around that understanding your net headcount was up in the quarter here. But do you still bench to optimize any areas of talent? You're deemphasizing versus areas you're leaning in?

Rohit Kapoor

Sure. So the workforce rationalization and optimization for us per se is a very, very small piece of our overall employee headcount, and it represents less than 2% of our overall headcount. As you rightly pointed out, we've been growing our headcount quarter on quarter as well as year on year. If you just compare where we ended up at the end of Q1 and '24 versus end of Q1 in '23.
There's been a net addition of 7,000 employees at EXL, and that's consistent with the growth that we are experiencing and our ability to continue to add on top, we would expect in 2024. We would continue to add employees on a net basis to the Company as we continue to build and grow our revenues by 10% to 12% in calendar year '24 over '23.
So this through both force rationalization that was done was predominantly done because of our skill set mismatch. And this is something which we had to undertake a onetime action. This is obviously something which we are very careful about. But with the volatility of how the demand is shaping up and what kind of skill sets are needed. We needed to optimize it. And this is part of our prudent management of our business. And I think this is something which will take it in stride and we'll continue to build up what we've got.
The important thing is the revenue for us continues to scale up. And as our revenue scales up, we're going to need more and more people to do that work. And so we'll be adding staff as we go along.

Bryan Bergin

Very clear.

Operator

Ryan Potter from Citi.

Ryan Potter

Hey, thanks for taking my question and congrats on the good quarter. Nice to see the strong start to the year on a sequential basis across both segments. And I know last quarter you called out sequential growth rates improving through the year, but with the unchanged top end of the outlook, it appears to assume some sequential growth rates stepping down from 1Q levels.
So first, I want to be clear, was there anything one-time or timing-related that drove some of the 1Q outperformance? And then is there anything to call out on why sequential performance may decelerate going forward? Or is it just being cautious around macro-related assumptions?

Maurizio Nicolelli

I write them right, Joe, and thanks for the question. It's a when you look at the quarter, we did outperform during the quarter based on the Street consensus and we did take a look at our guidance.
Now looking at our guidance, we did increase the bottom end of our guidance because we think that the where we were it was a very low probability of that occurring this year and also implied in doing that, the midpoint of our guidance also comes up. It is not a in overall, given that it's still early in the year, we've only completed one quarter of the year, and we have the rest of the year still to perform.
And there's still a bit of uncertainty in the overall marketplace, even though we are very confident on 10% to 12% growth going forward. We thought it was prudent right now to remain our high end of where it is or to our bottom end comes up from where we were. Our midpoint of the range also comes up from where we were both right now, given we're only one quarter into the year, we felt it was prudent to keep our top end of the range where it was when we were when we gave guidance in February.

Rohit Kapoor

So Ryan, let me add a couple of things to this number one are there is nothing as one-time revenue in the first quarter. This is part of our normal progression of our business, and we're very happy to see both digital operations analytics start grow and kind of performed well as number two on a quarterly basis. And we would expect year on year growth rate to continue to improve as we go forward.
In '24. Obviously, quarter on quarter growth rate in Q1 was exceptionally high over Q4 of '23, but we'll still expect to see quarter on quarter growth in absolute dollar terms in '24, though, the percentage growth rate quarter on quarter is going to be lower than the 5% that we experienced in Q1. So I hope that's helpful to you to to understand how we are seeing our business.

Ryan Potter

Yes, that's helpful. I guess kind of shifting to the visual ops business, where I've heard there has been very impressive and you've consistently outperformed peers and using that performance on your expectations, what would you attribute some of the largest drivers of this outperformance to be? Do you think it's more reflective of the more cost focus, demand environment, where do you believe you're gaining momentum and taking share in the marketplace?

Rohit Kapoor

Sure. I think it's because of a couple of different fundamental factors that are driving the growth, and we are very pleased with our digital operations and solutions business growing at 12% in this quarter, year on year and for the past several quarters, continuing to grow at these elevated levels. First and foremost is our ability to integrate in digital with operations and analytics with operations that creates a ability for us to win much much more in terms of the pipeline and drive the growth rate of this business a lot faster.
The second part of this is we are winning larger deals and the average deal size has increased for us because clients now expect us to create business impact across a larger part of their portfolio and to handle the business for them end to end and the third part of this is because we come at it from a lens of applying domain data and AI, our ability to go into new buying centers within the same clients and with our new prospective clients is a lot better.
So frankly, the integration of digital and analytics with operations where we believe we are very strongly positioned and uniquely positioned the larger deal size and the ability to go into new buying centers is allowing us to grow the digital operations and solutions business at a faster rate. And this is our basically our business model resonating very strongly with our clients and for us to stand out in the marketplace.

Ryan Potter

Great. Understood.

Operator

Marie Nolan, William Blair.

Marie Nolan

Maybe just piggybacking off of that conversation around digital ops. Can you talk about recent volume and pricing trends in the digital ops business? And any kind of recent or updated thoughts on the health of key client accounts?

Rohit Kapoor

Yes. Sure, Maggie. So first of all, we are very fortunate that the portfolio that we have in our business in digital operations is in very steady and stable industry sectors. So for us, our insurance, our emerging and our healthcare business verticals. These are stable and growth-oriented verticals. And so we're not really seeing any change in volume in these verticals. We're seeing continued traction take place in terms of the growth and the volume and these are in our verticals.
As far as pricing is concerned, that is something that we are seeing some of our competitors work on on trying to use price as a lever. But our focus with our clients is always been about how can we deliver exceptional value to them and then be able to charge them appropriately for that. So our existing clients know the execution and the value delivery that we have demonstrated to them. So they continue to give us more volume of business are there.
But there are times with new customers where we do get challenged on pricing because some of our competitors are resorting to a lower pricing given the lower growth rates. And that's something where we have to stand out and differentiate and be able to demonstrate our capabilities on digital, on analytics and the ability to create overall better value for products.

Marie Nolan

Thank you. And then on the full year guidance, I think I heard the commentary that you expect the sequential growth, and that's great to hear. I'm wondering what part of the business and what provides upside to get you to the high end of the guidance? Is it our recovery in marketing analytics? Is that additional wins in digital optic combination? How do you get there? And what are some of the assumptions baked into the higher end of that guidance range?

Rohit Kapoor

So as you know, in our digital operations for us represents 55% of our business and it's a very stable and have a steady growth oriented business for us. And any new wins that we have out there tend to have have a revenue impact in out quarters and out years so that there isn't very much that we would expect in our digital operations business momentum to change.
The big change could happen in our analytics business and certainly with some of the engagements that we've started to undertake with our clients around Gemini, I think those are the two opportunity areas for us to be able to track and get to the top end of the range for the guidance that we provided.

Marie Nolan

Thank you very much, and thank you.

Operator

Surinder Thind, Jefferies LLC.

Surinder Thind

I think you in terms of just looking at some of the Gemini implementations or the potential types of projects that you're working on. Obviously, there are some good demonstrations on the A., I believe, in our day. Can you talk about some, for example, like in the customer service area or others, where I think there's been some concerns around headcount reductions. How is that model evolving from like what kind of productivity are you guys able to provide at this point? Or do you have any benchmarking or data how we should think about the value that the client is receiving at this point?

Rohit Kapoor

Chaucer. And so look, I think our Gen Y I. and the application of digital is certainly arms in allowing our clients to be able to have greater cost efficiency, but at the same time, have a much better end customer experience and to be able to target this towards generating growth. What we are finding is because our penetration and our share of wallet within each of our clients is still relatively low.
It's in a less than 15% to 20%. Anytime we are able to deploy JNI for our clients' benefit. We actually gain overall volume and we gain in terms of revenue with that same client, even though we are providing them with greater efficiency and we're providing them with a greater ability to create impact. And the example that I shared in my prepared remarks are that's a classic example where we've had an amazing experience with our clients, and we've been able to deploy our proprietary Gemini based solution across the enterprise.
And in fact, 1,100 in our customer service agents and 6 million calls a year. But what's happened is that the customer has given us more work because they want us to deploy this in other areas in other business lines and across other providers that they work with as well as on their own captive operations. So the net impact of that is that our business relationship with Oscient becomes a lot more strategic and it increases in size and value.

Surinder Thind

That's helpful. And then just related to that, as you think about implementing these solutions or more from the perspective of clients, what are those how are they getting across or thinking about things like what's an acceptable error rate for implementation? And it seems like so the solutions on operate to various extents in terms of the quality of the end result here, obviously there are some low-risk cases. There are some high-risk cases. How do we think about the time line on some of these types of projects of going from this proof of concept, you actually that live and what they actually mean from a revenue perspective.

Rohit Kapoor

That's a great question, Susan. And that's I think the crux of how clients and prospects are thinking about using our generic. So first and foremost, accuracy of the results is critically important. And second, the adoption of that solution, it's critically important and the adoption only takes place if the accuracy levels are high enough that they're providing you with a distinct competitive advantage.
Our goal is to make sure that we can deliver high quality service and high accuracy and at the same time enable change management so that the adoption of using these tools is a lot better and a lot more sustainable now there is a fair amount of risk sharing that we undertake with our clients and align ourselves to the end outcome.
So there are there is a fair amount of investment that we are making in terms of having prebuilt accelerators and prebuilt solutions that we can bring to bear to our clients. And they don't need to invest in that early adoption capability. And then there's a lot of fine-tuning and a model change that we need to do to get to those levels of accuracy so when we start with a with a new solution, the accuracy levels are very low.
They are like 65% to 70%, but we have to drive that up to 90% to 95%. And that is driven by a strong understanding of the domain and understanding of how what the data is telling us and therefore, the fine tuning of our algorithms and our ability to embed this into the workflow so that it is actually usable useful for every single person that is adopting the solution.
And that's where we are unique, and that's where we stand out and that's how we are deploying this. But but at the end of the day, our clients are partnering with us to be able to get to those levels of high accuracy and high adoption.

Operator

Puneet Jain, JP morgan.

Puneet Jain

Hey, thanks for taking my question and thanks for doing the webinar last week. It was very helpful. A quick question on that. Like are you seeing like it's clear like that. And AI and Gemini is helping drive some of the new conversations, new use cases for the XLS, and you are well positioned. But could it also be driving clients to take longer in deciding project awards like because it's new like the use cases might be new, like you mentioned, Rohit, just now the accuracy levels required are also high. So could they be taking longer in deciding those project awards when it's about AI implementation and debt processes?

Rohit Kapoor

Yes, I think I think there is a longer lead time in terms of decision making by clients because they are looking at a number of proof of concepts and they are looking at experimenting as to where these technologies are going to be impactful and where actually the return on investment is not very high. So there is a fair amount of experimentation and doing pilots and proof of concepts that is there.
And the decision making on enterprise-wide scale up deployments of these solutions, it's definitely taking time off. We are in a fortunate position because when we do these proof of concepts for our clients, we are able to very quickly demonstrate our ability to create impact and as soon as our clients see that and that's very visible and transparent to them.
And the deployment of that across the enterprise becomes a much easier decision for them and a much quicker decision for them. And so we are in now, I think, benefiting from an ability to kind of take some of these initial proof of concepts and deploy them across the enterprise. So I would expect in 2024, this is going to be something that is going to result in active decision making by our clients and our ability to be able to implement and deposits for them.

Puneet Jain

Okay. That's very helpful. And the prior guidance assumed I think that macro will remain unpredictable in the first half and a potential normalization in second half, particularly in analytics. Is that still your assumption? And do you expect marketing analytics to stabilize when you say that does that mean it will stabilize on a sequential basis from here on?

Rohit Kapoor

So are two parts to your question. One, from a macro economic standpoint, our viewpoint is that while the macroeconomic environment seems to be somewhat stabilizing, it continues to remain a challenge. And therefore, our assumption is that the macroeconomic environment and our clients will remain cautious in terms of how they think about making investments and how they think about investing in new areas.
As far as marketing analytics is concerned, that business for us is declined and but it has a seasonality to it. And the seasonality is that the marketing analytics is typically stronger in the first quarter and in the fourth quarter and in the second and third quarter, it's actually much lower. So we're going to see that play out in oh four, 2024 as well. But calendar year '24 over calendar year '23, it would still be a decline budget.

Puneet Jain

Thank you.

Operator

Moshe Katri, Wedbush.

Moshe Katri

Hey, thanks for taking my call of the numbers. In your opening remarks, you spoke about the sales pipeline strength through the expanding average deal sizes.
In that context. Can you talk a bit about maybe our TCV ACV. How is that moving? Is there any way to kind of quantify those movements? And then any have there been any changes in the pace of sales cycles of our pipeline conversion rate? Thanks.

Rohit Kapoor

Sure. So much of that, our sales pipeline continues to remain strong, both across our digital operations and our data analytics business. I think from a PCB standpoint, we are seeing larger deals come in, so the TCVs are certainly higher. And the way we would characterize this is 70% of our pipeline is made up of large deals. We also and the conversion between a TCV and ACV that remains pretty much constant are typically our digital operations deals are between three to five years in term and the analytics deals are typically one to one to two years in term.
So that SAC ratio remains pretty much the same as far as the win rates are concerned, we've been fortunate that we've been winning in all at a healthy rate over the last few quarters, and that's what is giving us an elevated rate of growth in our digital operations business as clearly, we need to have a lot more in our analytics business because the discretionary spend out there is somewhat curtailed.
And that decision making on discretionary projects is still are suppressed and being held back. So as soon as that kind of comes back to normalcy, we would see that go up. I think what we are seeing is that the banking and financial services sector seems to have stabilized. So that's a good sign for us because that's a large part of our business. And we would expect that as that stabilizes and returns back to growth, we would be able to benefit from that.

Moshe Katri

And then just the follow up on the marketing analytics piece, obviously, we're looking for a decline year-over-year this year. Is there a way to kind of quantify that decline in terms of expectations? And then maybe in general, what drives this segment? Maybe talk a bit about what funds it, how do you how to clients funded and what are kind of the reasons to kind of you have to contract EXL for these kind of services?

Rohit Kapoor

Sure. So what should we are we don't quantify this service line for us because it's a small service line. But I think the way to think about this is our marketing analytics business is largely focused in with insurance carriers trying to acquire new customers and by banks and financial institutions trying to acquire new borrowers.
Clearly, with the interest rates going up, the acquisition spend by banks and financial institutions in terms of acquiring new borrowers are that the propensity has declined? And with the insurance carriers, given some of the inflationary pressures that were there, their outreach to acquire new customers has also declined. And that's the reason why the marketing analytics business for us has declined sequentially.
Now what we are doing with our marketing analytics business is our two fundamental changes. Number one, we are diversifying our customer base. So actually we are broadening out our customer base and now we have clients from healthcare. We have clients from our emerging business unit and other clients that are taking advantage of the proprietary data assets that we have in marketing analytics and being able to benefit from that in terms of the next best thing to sell to their customers and their ability to cross-sell so that that diversification is helping and we are expanding the work that we do in marketing analytics from just customer acquisition to much more of an end-to-end customer engagement profile.
So that that's been helpful as well. And obviously, it's going to take us some time to do this, but the diversification of marketing analytics across industry verticals and customers as well as we are broadening out of that service line in marketing analytics, he's going to help us manage the volatility of this business.

Moshe Katri

Understood.

Operator

David Koning, Baird.

David Koning

Yes, hey, guys, thanks and Yes, great. Great results on health analytics, like if we just take total health last year help on operations, that business line has been remarkably strong and stable I think I look back for like eight quarters or so, it's been growing kind of 25% to 36% each quarter. What's what's so consistent about that? I mean, it seems like it's not having any impact from kind of the macro slowdown?

Rohit Kapoor

Yes, Dave, thanks for that of you. As you know, the healthcare industry vertical is actually a huge vertical. And number two, it's got huge challenges with data. And as you know, payers and providers and participants in the Healthcare Services business start to embrace a lot more data and start to embrace a lot more of a I we are certainly benefiting with that.
Our healthcare payment services has been growing very, very nicely. But the reason it is growing very nicely is because of our ability to leverage data to leverage AI and to leverage digital, alongside with our strong understanding of the payment services process allows us to be able to deliver superior impact for our clients and our clients love that, and they are embracing more and more of that. We're also seeing a lot of growth take place in health care analytics.
And this is a huge opportunity for us to continue to build upon because leveraging data in health care analytics can be very, very impactful for all of the major participants in this industry space. So we are very pleased with what we have built out here, the kind of impact we are creating and the kind of traction that we're getting. But I can tell you our penetration in this vertical is still very small because the healthcare business by itself is a $4 trillion business. Ma vertical.

David Koning

Yes, yes, no, that's helpful. And then if I might ask just the super nerdy question on on the cash flow statement. You mentioned in the prepared remarks about the contingent contingent consideration payment. It was split both between the operations and the financing. I'm never seen as an operations before. Maybe I think $11 million was in operations and $4 million of the payment was in on financing what why was that?

Maurizio Nicolelli

And so we're following acquisition accounting date, and that's the recommendation that we have from our auditors that we work very closely with. And so that's where that's where we ended up on looking, we had a higher outflow because of that during the quarter. But when you look at free cash flow for the year, we still expect it to be comparable to net income for the year. So we had a what we had this one blip in Q1, but we do see the full year being free cash flow being comparable to net income.

David Koning

Now that's helpful. We always look at that as a positive when you're paying out, it usually means the results have been pretty good from us.

Operator

David Grossman, Stifel.

David Grossman

Thank you. Good morning. I'm wondering if we could just go back to some of the more fundamental things around your commentary in China and a I think I understand and what you've been saying about how it's impacting the demand from your customer base and some of the use cases.
And perhaps you can spend just a few minutes on what you see as being the secular impact that may have in your business model on the I'm picking contracting risk on margins and just how the businesses operated overall and how that flows through the P&L and the balance sheet and maybe there's no change. Maybe this is just another technology wave that will impact the business model in a similar way. Curious whether or not this may be different and if so, how

Rohit Kapoor

So, David, so you're absolutely right. Look, the two fundamental changes taking place. One is the macroeconomic environment. And the second is the adoption of G&A on G&A. I think our business model is certainly going to evolve and change. Certainly there'll be a lot more investment that's going to be required to be able to create some of these adapters and solutions that clients will expect to be prebuilt and that they will not be funding themselves. And at the same time, there will be a lot more risk sharing that will be there. So it's going to be a lot more contingent on us being able to deliver the outcome and the business benefit to our clients.
I do think the shift in the commercial models will take place gradually. But perhaps the first change is going to be the shift from a time and material type of contract towards more fixed-price contracts or even our initial upfront investment by us on repeatable adapters and accelerators that we lead to invest in from a margin standpoint, I think initially because of the investment and because of our ability to demonstrate impact for our clients.
The margins would be initially low, but over a period of time, because the value that we can deliver, Virginia is significantly higher we would expect the margins to actually go above our corporate average. So as we scale up the business, I think this becomes a much more attractive business for us to be kind of going into it's much higher value added. It's much more defensible and it's going to have a much better margin characteristics.
Of course, it's dependent upon our ability to execute and our ability to demonstrate the results. It's also a business that's going to involve a lot of continuous change because with Jenny, I as you know, the LLM. models keep changing every couple of weeks. And so you're going to see more models kind of come in. We're going to see more and different ways in which these are going to get adopted. So the obsolescence is also going to increase in this space.
And therefore, the ability to remain nimble and modular, I think, is going to be critical for the long-term success in this space. So it's certainly got very different characteristics. And I think as Jenny I continues to evolve over the next one, two, three, five years, it's going to look at the business is going to look and feel quite different as we go along.

David Grossman

And have you experienced the margin dynamic at through a full cycle meeting that you had to kind of go through the process of building or pre building a solution or untapped or and seeing the deployment and then seeing the margins lift above the corporate average or is it still going to be kind of your expectation based on what you're seeing in the market, but we're just not there yet.

Rohit Kapoor

I know, David, we've seen that. So one of the solutions that we built is is payment or which helps our clients collect their receivables and it's entirely digital and an EI. based solution. We had very low margins on that piece of our service line initially. And now that we are operating that at scale across multiple clients, our margins on that piece are higher than the corporate average.
So we are seeing this on solutions that are getting adoption and which are getting to size and scale. But obviously, in all those solutions that do not get to size and scale and those investments are, I think that we'll have to recover to the ones that are successful. So it's going to be a portfolio approach for us.

David Grossman

Any metrics that you can disclose in terms of where the portfolio is today on that journey to reserves on the ATR.

Rohit Kapoor

It's a it's a it's still too early for us on that, David, to be able to disclose that. But all in all, when we meet for our Investor Strategy Day on May seventh, we will be actually a unpacking some of this for you.

David Grossman

Great. Thank you. Just one little quick thing. So I know we're going over here.
Just on the working capital comments in terms of the cash flows in the quarter, is that related to this dynamic of having to invest and some of these prebuilt solutions? Or is that something just totally different in a quarter?

Maurizio Nicolelli

No, no, David. It's a it's more kind of one-time items that came through in the quarter and more working capital requirements is not really related to our investment process. Our investment process is ongoing, where obviously we're investing more particularly into AI this year, but it's not related.

David Grossman

Got it. Okay. Thanks very much.

Operator

Mayank Tandon, Needham.

Mayank Tandon

Thank you. Good morning. Thank you for squeezing me in here. I have just a couple of quick ones. One, Robert, you mentioned earlier about rightsizing the workforce given the news out there earlier in the month. I just wanted to get a sense of as you think about upskilling and reskilling our workforce in anticipation of some of these agenda IT related engagements who are you looking to hire? And where are you finding the talent from just any sense in terms of your recruiting engine and of what some of the changes might take place over time as you position for growth from Toby's JNI platforms?

Rohit Kapoor

Sure. So a mantra for us to be able to successfully deploy Gemini what we need our AI experts and what we need are engineers, the GNER exports are things that we think we need to develop on our own because there isn't a very readily experience in our skill set of them. But the engineering talent is something that we can acquire from the outside and add on to our capabilities.
We are obviously investing very heavily in terms of reskilling and upskilling our existing employees. And that's being done not only through Academy coursework that we're making available to our employees, but also through their direct involvement in projects. And in POCs that we're developing so that they get the practical experience as well.
And today, almost two-thirds of our employees have taken advantage of AI training and development tools. We have a core team of about 1,500 Gen Y I. experts in the company. And we are going to continue to add the engineering talent alongside with this, our AI expertise that we have.

Mayank Tandon

Got it, Tom, very helpful. And then just finally from my side, where your any thoughts around M&A pipeline, how the opportunities in the market are you seeing more attractive valuations and then just in general capital allocation priorities as you move forward?

Maurizio Nicolelli

Sure, Mike. So we're in a very good spot in terms of capital allocation. You know, we when you look at our when you look at our position as a company, we've got right around $250 million in cash. No, our debt now is right around $345 million. And we're generating adjusted EBITDA this year projected will be somewhere between $375 million and $400 million.
So we have plenty of capital to allocate. And we're fairly under-leveraged as a company, which puts us in a very good spot. So for us going forward, our allocation of capital really will be to be between share repurchase and M&A. And in the M&A pipeline, we are seeing more opportunities for us going forward, particularly in the core areas that are most important to us. It's capabilities within AI, particularly Gen-i data management.
Those are really the core areas of capabilities for us in the segments we really operate in to really build out and further develop our overall business within those two areas so that we're seeing more opportunity there.
In terms of valuations, we do see valuations becoming a bit more reasonable than they have been in the past. So that gives us more opportunity to really be more active in the M&A market. And you probably see that in the next 12 to 24 months as we go forward. And we have the ability to lever our capital allocation between share repurchase and M&A, meaning if we do more M&A, we can reduce, if needed our capital, our share repurchasing. But it's our intention to really push forward on both upside.

Mayank Tandon

Great color. Thank you so much.

Operator

And I'm showing no further questions. I would now like to turn the call back over to John Kristoff for closing remarks.

John Kristoff

Thanks, Justin, and thank you, everyone, for joining our call today. And I would again remind you to please register for the investor event on May seventh on pre-registration is required. So please, if you have not done so I'll go ahead and do that. And as always, for any follow-up questions, feel free to reach out to me directly. Thank you. Have a good day.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.