Genpact Limited (G) Earnings Call Transcript & Summary

Thanks, Gigi. Good afternoon, everyone, and welcome to Genpact's Q4 earnings call, where we'll go over what we delivered in the fourth quarter and the full year that closed on December 31st, 2019. Hopefully you've had an opportunity to look through our earnings release, which went up on the IR section of genpact.com, our website. Here in New York with me today are Tiger Tyagarajan, our President and Chief Executive Officer, and Ed Fitzpatrick, our Chief Financial Officer. Here's how we'll run today's agenda. Tiger will give you a high-level look at how we performed and bring you up to speed on our strategic initiatives. Ed will walk through our financial performance in more depth and share our outlook for 2020. Tiger will then return with a few closing remarks, after which we'll open things up for your questions. As Gigi said a moment ago, we're expecting this call to run about an hour. A portion of what we discuss today is forward-looking. These forward-looking statements carry a number of risks, uncertainties, and other factors that might lead actual results to differ materially from what those forward-looking statements suggest. Those risks and uncertainties are laid out in our press release. Also, on today's call we'll reference certain non-GAAP financial measures. It's our view that these non-GAAP measures give you extra information that deepens your understanding of how management sees the operating performance of our business. A reconciliation of these measures to GAAP can be found in today's earnings release, which is posted to the IR section of our website. With that, I'll hand things over to Tiger.

Thank you, Roger. Good afternoon to all of you, and thanks for being with us on this call covering our fourth quarter and year-end results for 2019. Exceptional delivery and an ongoing string of wins in transformation services made this one of the strongest years for revenue growth we have ever posted. That fed through to solid increases in adjusted EPS and cash flow from operations for 2019. Each of those measures came in past the top end of what we had guided. The appetite among clients for transformational change keeps building, which widens the market we can serve and gives us more room to pursue profitable growth over the long term. Our portfolio review process keeps getting sharper and more nimble, which lets us shift investment dollars and talented people quickly toward the areas with the strongest growth. Now for our full-year 2019 numbers, all stated on a constant currency basis. Total revenue rose 18%, global client revenue rose 12%, and global client BPO revenue rose 14%. We also posted an adjusted operating income margin of 15.9%, a gain of 10 basis points, along with adjusted EPS of $2.05, which was up 14%. Over the course of 2019, more and more of our clients and the analysts who track our industry saw us as a partner of choice for driving transformational change. By putting disruptive digital technologies and real-time predictive insights to work, we are reshaping how work is performed so we can solve mission-critical business problems for our clients. Given how relentlessly technology keeps innovating, plus the competitive, macroeconomic, and geopolitical pressures at play, corporate leaders have to speed up how they make decisions and act decisively, guided by insights that come out of analytics; our culture of pushing for change in order to meet these raised expectations from the C-suite and boards is, in our view, a major point of differentiation in the marketplace and one of the reasons we come out on top. Across the verticals we have chosen, we generated global client growth during 2019, with transformation services growing more than 30% and leading the way. Our transformation services in consulting, digital, and analytics, grounded in domain and process expertise, serve as the leading edge for many of our big, long-running transformational engagements. The steady growth we have delivered over many years backs up what I have long believed: that digital and analytics truly come alive when they are implemented alongside a deep grasp of domain and process. To show how much transformation services matter to our business, our relationships that are expanding fastest draw greater than 20% of their revenues from transformation services; those accounts are growing at more than twice the company average. In 2019, for a second year running, we booked total new business of close to $4 billion, supported by a high-quality pipeline that stays near historic highs with consistent win rates. For context, new bookings during 2016 and 2017 averaged roughly $2.7 billion. Global client bookings grew solidly in 2019, and proactive sole source deals made up about half of our new wins. Big deals remain a significant piece of total bookings. Nearly three-quarters of what we booked had transformation services built into it, compared with the 60% range in 2018. As we had anticipated, deal bookings fell in 2019 because of the large deal we had signed late in 2018. Let me point to a few important highlights from 2019. We keep bringing famous brands onto our client roster within the specific industry verticals we target; we completed 2 acquisitions that strengthen what we can do in key areas — financial crimes and risk management, plus digital experience. Supply chain services, one of our strategic priorities, delivered striking gains in influence, pipeline bookings, and revenue throughout the year. We rolled out Genome successfully — a reskilling and training platform built for our worldwide workforce — and it has been enormously popular. We keep making use of fresh commercial models that mirror how the work we perform for clients keeps shifting. And lastly, by working through the final stage of the sizable GE deal, we meaningfully upgraded our strategic sourcing abilities. To go deeper on a few of these points: over the course of the year, we boosted how well our brand is recognized and reinforced our standing as a thought leader, delivering creative transformative solutions to an expanding list of famous clients; for example, as we talked about in the prior quarter, we formed a strategic relationship with Cardinal Health, in which our extensive finance and accounting know-how and our capacity to apply data analytics for generating insights will assist in transforming their FP&A analytics function so they can make decisions that are both timely and insightful. FP&A is yet another area ripe for disruption and offers growth opportunities; these relationships are generating a higher volume of new inbound C-suite calls, since companies are eager to look into working with us to transform their businesses. We anticipate making full use of these new skill sets from a number of these relationships, which over the past 2 years have brought in considerable new capabilities. These encompass highly leverageable teams and financial planning and analysis, order management and supply chain — especially in consumer goods retail — commercial and pricing analytics, and sourcing and category management. Much of this depth sits in market and onshore. We bought riskCanvas early in 2019, which reinforced our already robust market offerings in financial crimes and risk management services for banks — a sizable growth opportunity. Our broadened capabilities in this space are already delivering results; a global bank chose us to transform their KYC process for their wholesale banking business, so they can better define customer risk profiles and improve regulatory compliance. Our risk domain team, together with our digital and analytics experts, are rolling out a first-of-its-kind as-a-service solution using a transaction-based commercial model; this distinctive offering draws on the riskCanvas proprietary cloud platform to gather and organize customer data, fill in customer profile templates, and supply risk scores. By swapping the bank's existing manual processes for a streamlined digital as-a-service model, this solution should reduce processing time by half and deliver an industrialized KYC process with far greater accuracy and timely regulatory reporting. In the fourth quarter, we completed the acquisition of Rightpoint to deepen our capabilities and experience, which matters more and more to our clients. Though it's still early days, we're already witnessing the value of combining our process innovation with Rightpoint's experience innovation. When it comes to supply chain management, the group that came aboard from Barkawi in late 2018 now runs it, and that's letting us gain real traction in a market where penetration is vastly lower than it could be. Since the start of 2019, our pipeline has grown by more than 3x, and not long ago we secured a fresh engagement with a sizable worldwide consumer goods firm, helping them overhaul and operate their supply chain from end to end. Through the redesigned operating model, the goal is to assist the client in fostering stronger customer relationships, boosting fulfillment rates, speeding up new product introductions, and refining trade promotions, which in turn should lift their revenue and improve their working capital levels. I'm happy to share that 3 global relationships have now surpassed $100 million in annual revenue, whereas at the close of 2018 there was only 1; over time, we anticipate many additional relationships will reach this milestone. Because our solutions increasingly draw on AI, machine learning, robotic process automation, and cloud-based offerings, our commercial models are shifting toward being more outcome-based. As of the end of last year, over 40% of our total revenue comes from newer constructs rather than being priced purely on FTE, compared with the mid-30% range just a couple of years ago. The most important pillar of our success has always been our talent. Much like many of our clients, we're undergoing a transformation in how we inspire our workforce to reskill and keep learning continuously. With the launch of our Genome platform early last year, we have the right tools and methods to upskill our more than 95,000 team members worldwide in relevant digital transformation and other professional skills at scale. Our first-year goal of hitting 70% penetration is well within reach, and learning hours keep growing. As we enter 2020, we continue to expect overall demand to be robust and to remain driven by transformation services. Combined with the strength of our domain and process expertise, we believe we're uniquely positioned to apply innovative new digital technologies, along with data and analytics, in a focused manner to address specific business outcomes; this lets us drive end-to-end digital transformation for clients in ways never seen before, delivering substantial outcome improvements and superior experiences. We've built these solutions through a mix of internal development, partnerships, acquisitions, and large targeted carve-outs from our clients. Today we have an active portfolio of solutions under management, which lets us use them for scale. Over time, we'll keep making decisions to proactively pull the plug on some of these. Recent examples include our mortgage origination platform, the KYC JV, and the wealth management platform; this proactive culling lets us double down on areas such as dynamic workflows in the cloud, customer experience solutions, supply chain optimization, financial crimes and risk solutions, and many others showing market traction. With that, let me hand the call over to Ed.

Thanks, Tiger, and good afternoon, everyone. In today's remarks, I'll walk through our full year results in detail, then spend a little time on a few highlights from our fourth quarter performance, and also share our financial outlook for 2020. I'd like to start by reviewing how we did in full year 2019. Revenue came in at $3.52 billion in total, which was up 17% compared with the prior year, or 18% when measured on a constant currency basis. Growth overall exceeded what we had anticipated, driven primarily by transformation services. Total BPO revenue, representing roughly 84% of overall revenue, rose 19% versus a year ago, while total IT services revenue grew 10% year-over-year. Global client revenue, which accounted for approximately 86% of total revenue, was up 11% compared with last year, or 12% in constant currency terms, landing at the high end of the range we had expected. Inside global clients, BPO revenue climbed 13% year-over-year, or 14% on a constant currency basis, with transformation services growing more than 30% and leading the way, while IT services revenue was up 3%. Over the course of the year, as we became a larger transformation partner for a growing set of global clients, we substantially increased the size of several client relationships. In 2019, the count of global clients with annual revenues above $15 million rose to 49, up from 45. That group included clients generating more than $25 million in annual revenue, which grew to 25 from 21. GE revenue was up 78% year-over-year, exceeding our expectations, mainly because of additional scope brought in during the year tied to the large deal we signed late in 2018. Adjusted income from operations rose 18% year-over-year, reaching $559 million. Keep in mind that at the start of the year, we had assumed roughly $22 million related to the India export subsidy in our adjusted operating income outlook. As the year progressed and it became clearer that only about $4 million of that anticipated benefit would come through, we set plans in motion to make up the $18 million shortfall using other items. In the fourth quarter, we were able to complete plans to monetize a property we owned in India, which produced a gain of approximately $31 million that was included in other operating income. That gain was partly offset in the quarter by certain other costs, among them an $11 million non-recurring impairment charge within cost of revenues tied to a European wealth management platform that we no longer intend to leverage beyond the current scope. Adjusted operating margin came in at 15.9%, which was 10 basis points, or $4 million, below our 16% target, mainly because of a $4 million impairment charge taken in the fourth quarter on certain retirement plan assets in India. Gross margin declined year-over-year, largely driven by higher stock-based compensation of 20 basis points plus approximately 50 basis points from the non-recurring charges I just referenced. Revenue growth that came in better than expected, along with higher onshore scope and the additional GE revenue, also had an impact on margin. SG&A expenses were $795 million in total, compared with $694 million last year. When looking at SG&A as a share of revenue, those costs declined 50 basis points versus the prior year, which came from operating leverage even though we saw a 50 basis point hit from greater stock-based compensation compared with a year ago, plus a 10 basis point effect tied to Rightpoint acquisition costs. Adjusted EPS came in at $2.05, which is 14% higher than a year ago and compares with $1.80 in 2018. That $0.25 gain came mostly from $0.34 of additional operating income, partly offset by reduced foreign exchange remeasurement gains, greater tax expense, and $0.03 more in net interest expense from each of those latter items. For 2019, this marks the fifth straight year of double-digit adjusted EPS growth, which generated a 15% compound annual growth rate across that stretch. The expansion came from strong revenue gains and tight cost discipline that has reliably lifted operating income and the associated operating margins in every one of those periods, consistent with the key strategic objectives we have laid out. Our effective tax rate stood at 23.7% versus 22.3% a year earlier, due to Special Economic Zone benefits in India expiring, shifts in the jurisdictional mix of income, and consequences of India tax law changes. Now let me offer a bit more detail on how we performed in the fourth quarter. Global client revenue rose 7% from a year ago, or 8% in constant currency terms, mainly from continued expansion in our consumer goods, retail, banking, capital markets, and high tech verticals. Keep in mind that our growth rates in last year's fourth quarter created a harder comparison for this year. GE revenues climbed 61% compared with a year ago, thanks to the large deal signed late last year and additional scope of work brought in during the quarter. Adjusted operating margin for the quarter was 16.9%, essentially matching what we reported in the same period a year earlier, though a bit below our expectations, chiefly because of the non-recurring impairment of India retirement plan assets during the quarter that I referenced earlier. Gross margin in the quarter was roughly 33%, against the 35.5% level we delivered across the first three quarters of 2019. That decrease stemmed mainly from the two non-recurring charges I mentioned before, which together come to about $14 million. Beyond that, weaker margin on the added GE scope and weaker margin as a new account in our banking vertical ramped up both weighed on gross margin during the quarter. We expect margins on that new banking account to move back toward more normalized levels in the first quarter of 2020; we also expect overall GE full year 2020 gross margins to be largely aligned with GE's 2019 levels. Because 2019 absorbed non-recurring charges of approximately 50 basis points, we anticipate full-year gross margins rising by 50 basis points in 2020. Total SG&A expenses reached $213 million, up from $179 million in last year's same quarter, and included roughly $7.4 million of non-recurring Rightpoint-related acquisition expenses and about $16 million tied to stock-based compensation. Adjusted EPS for the fourth quarter was $0.57, compared with $0.52 a year ago. That $0.05 gain came from operating income rising by $0.07, plus $0.01 tied to bigger foreign exchange balance sheet remeasurement gains, partly offset by a higher effective tax rate costing $0.02 and a larger share count costing $0.01. Our effective tax rate reached 28.1%, versus 25.8% a year earlier, because Special Economic Zone benefits expired, the jurisdictional mix of our income shifted, and India tax law changes took effect. Now on to our balance sheet and cash flows. Across the year, we handed back $95 million of capital to shareholders; roughly $65 million of that came through our regular quarterly dividend of $0.085 per share, which rose 13% from the prior year. We also bought back about 766,000 shares for $30 million, at a weighted average price of $39.16 per share, during the year. Since launching our share buyback program in 2015, we've cut net outstanding shares by 17%. Over that stretch, we repurchased 37.4 million shares at an average price of roughly $26 per share, spending $976 million in total. From 2015 through the end of January this year, the weighted average annual return on those share repurchases has come to approximately 18%.

Right now, we have roughly $274 million in authorized capacity available through our share repurchase program. Cash and cash equivalents came to $467 million, which compares with $368 million as of the close of the fourth quarter of 2018. Over the trailing four quarters, our net debt to EBITDA ratio stood at 1.7. With $428 million of undrawn debt capacity plus existing cash balances, we still have ample liquidity to go after growth opportunities and carry out our capital allocation strategy. Day sales outstanding came in at 86 days, a decrease from 87 days on a sequential basis, but an increase of three days versus the prior year, largely because collections were delayed on certain accounts where the cash arrived in early January. Even with those higher DSOs, we produced $428 million of cash from operations during 2019, a rise of 26% year-over-year, which beat the top end of the range we had anticipated for the year. Most of that outperformance came from higher adjusted operating income. Capital expenditures represented 3.3% of revenue in 2019, consistent with what we had expected. Now let me bring you up to date on how we see 2020. We anticipate total revenues landing somewhere between $3.89 billion and $3.95 billion, which would mean year-over-year growth of 10.5%-12.5% on a constant currency basis. From the Rightpoint acquisition, we expect a contribution of about 250 basis points to total company growth in 2020. That figure is roughly 100 points above what acquisitions added to our top line in 2019. Within Global Clients, we anticipate revenue growth in the 12%-14% range on a constant currency basis. For GE, we expect revenues to normalize and come in approximately flat year-over-year. We will keep pursuing our strategic objectives to expand our adjusted operating margin, and we expect to deliver 10 basis points of improvement, bringing it to 16%. As I said earlier, we anticipate full year gross margins improving by roughly 50 basis points in 2020, reflecting the impact of non-recurring charges taken in 2019; we believe gross margins have now stabilized. Large deals have produced even stronger revenue growth than we had expected, and as a result, they have affected gross margins more than we originally anticipated. Given the enormous amount of capabilities these iconic companies have allowed us to add to our team, we made the strategic choice to accept lower gross margins on those deals at the outset. We intend to fully leverage these skill sets far into the future. Because of the historic seasonality in our business, we currently expect our adjusted operating margin for the first quarter of 2020 to fall in the 14%-15% range, the same range we have seen over the last two years. We also expect the ramp of operating margins to align more closely with the trajectory observed across the past two years. Our 2020 effective tax rate should come in at approximately 23.5%-24.5%, an increase from 23.7% in 2019, mainly because Special Economic Zones in India are expiring. Our expectation remains that the effective tax rate will settle into a mid-20% range as Special Economic Zone expirations decline over time. Based on the outlook I just gave, our estimate for adjusted earnings per share for the full year 2020 is $2.24-$2.28. This earnings per share growth of 9%-11% incorporates the negative effect of a higher tax rate of roughly $0.01 per share in 2020 and incorporates no FX remeasurement-related impact. Keep in mind that we recorded a gain of $0.03 for FX measurement gains in 2019. In this estimate, we have assumed our ending share count as of December 31st, 2019. We forecast cash flow from operations to grow by about 10%, largely in line with total company revenue growth. Capital expenditures as a percentage of revenues are expected to remain at approximately 3%-3.5%. Our expectation continues to be that the free cash flow to net income ratio will be approximately one to one on average over time. Finally, we just announced an increase to our quarterly dividend from $0.085 to $0.0975 per share, which equates to annualized dividend of $0.39 per share, up 15% year-over-year. With that, let me turn the call back over to Tiger.

Thanks, Ed. In 2019, our business generated fantastic momentum, fueled by strategic decisions made with discipline and solid execution. The money we put into our service lines, plus the smooth bringing-together of the companies we bought — especially in digital and analytics — has set us up nicely for a growth path spanning multiple years. The big contracts we signed with famous brands have strengthened our standing as the go-to transformation partner, which has brought in more inbound interest from places outside our usual buying centers. Looking ahead to 2020, the experience economy is changing the playbook for digital transformation. We could not be more thrilled about how we have strengthened what we can offer here, first by adding the TandemSeven team several years ago and then through buying Rightpoint. Beyond that, we have managed to put our automation to AI platform, Genpact Cora, to work across numerous engagements and solutions, and we view it as a massive point of differentiation. Through Cora, we can deliver offerings to the market that are more standardized and repeatable. More and more, clients require predictive insights so they can make decisions with better information. Thanks to data being digitized at a faster pace and data management reaching maturity, the chance we have in analytics has grown enormously; analytics delivered fantastic growth in 2019 for us, and we anticipate that this path will keep serving as a major engine behind growth in transformation services down the road. As I mentioned before, we will stay maniacally focused on shifting investment and talent resources toward high growth areas, and we will remain thoughtful when making those choices. To wrap up, our top line is expanding, built mostly on sticky long-term relationships around the globe that come with inherent operating leverage, which pushes margin expansion over the long term, along with the capacity to draw on our cash flows and balance sheet so we can seize opportunities in a market where we are under-penetrated. We possess the right leadership team and talent base to pursue this. Our 2020 outlook pleases me, and it lines up very well with our goals for long-term growth and profitability.

Thanks, Tiger. At this point we want to turn the call over to you for questions. Gigi, would you mind giving the instructions?

Hello, and thanks. Hey, Tiger. Hey, Ed. Solid quarter. What I wanted to get was perhaps a bridge linking what you did in 2019 with what you expect in 2020, looking at it through revenue. I understand the 250 basis point piece coming from Rightpoint, but what about the overall amount from acquisitions, the GE Delta — how should we frame that, and how much comes from growth among current clients as opposed to new clients starting to ramp? Maybe I missed what you said about FX.

Ashwin Shirvaikar, allow me to handle that first, and then Ed will chime in. I'll begin with GE. As I said, I believe, and Ed also noted, GE will be roughly level when comparing 2020 against 2019, which is essentially how we viewed GE across many years before a range of shifts took place. That's a way to look at GE. From there, that brings us to global clients. Once you set aside the 250 basis points coming from acquisitions, which is roughly 100 basis points above what 2019 had, then what you're really describing is global client growth in 2020 that sits only slightly higher than 2019, and that's a terrific spot to be in. The assurance behind that comes from, clearly, the pipeline, the widths we've had, which we keep delivering on. I'd add that everything we did through the year on the many large, complex deals we secured has gone extremely well. It matters to point that out, since it lays the groundwork for ongoing growth, both within those relationships and in terms of what it does for other relationships when it comes to reputation.

Regarding FX?

Where FX is concerned, right now we're really not anticipating any. It's consistent on both a reported and a constant currency basis, so the difference is fairly minor. Nothing has changed. Should anything shift as the year goes on, we'll bring you an update.

Yes, and perhaps what ties both of our remarks together is that clarity around revenue looks quite comparable when we consider 2020 to how things appeared at the start of 2019.

Understood, that's quite useful. For my follow-up, let's dig into Rightpoint a bit more — clearly a sizable deal. First, what did it add to Q4, roughly? And then, how do you see core margins stacking up against integration costs when it comes to the margin effect? Do you have any initial sense of client reaction? One concern I hear from investors is that they draw a parallel between Rightpoint and Headstrong from back in the day, which isn't really an apples-to-apples comparison, but I'd like your take.

Let me take that final point first, since it's the simplest; those two things are entirely unrelated. They're not alike in any way, shape, or form, not even slightly. Rightpoint's business centers on enhancing the consumer experience for B2C organizations, the business-to-business experience for B2B firms, and the user experience across large workforces at big enterprises. It spans multiple verticals. It partners with clients to push transformation from design strategy through digital execution, turning that strategy into reality. Once you pair that with what we gained via TandemSeven, plus what we can do around process innovation, that's precisely where we're already starting, as I mentioned, to have genuinely strong discussions with clients we already serve, and frankly fascinating discussions with Rightpoint's own customer base. That piece is straightforward. The Q4 contribution comes to roughly 150 basis points-

Yeah, one to one and a half.

A contribution to revenue of between one and one and a half percent, or 100 to 150 basis points. At the operating margin level, margins are roughly comparable to ours.

Well, I think with the integration expenses.

Breaking it out

it came in somewhat more diluted. When you add in everything related to integration costs, that likely weighed on things by roughly 15 basis points altogether during Q4. Once we move into the following year, the effect will be smaller, yet it's still going to sit under the company average for that year, since we'll keep carrying out the integration work we're meant to complete. Correct? On the whole, we're handling all of that within the 16% operating margin guidance we provided.

Thank you. Appreciate it. Well done.

Thank you, Ashwin. I appreciate it.

All right, hi there. Appreciate it, and congratulations on a solid year.

Thanks, Dave. I appreciate that.

Yeah. So I suppose, first off, just one additional point regarding Rightpoint. Looking at where you stood in Q4 and how you then steered 2020, it appears likely to land around a $90 million run rate, more or less. Between pitching various products to the Genpact organization and the reverse, how do you expect that to expand across the coming 2 years? Might it be a case that grows quite a bit quicker, perhaps 25% or so?

Dave, honestly, your zip code is fairly accurate. The zip code's beginning point, I'd say, is correct. The math checks out. Rightpoint ought to be viewed the same way transformation services are viewed; it brings new digital skills, new age skills, consulting, experience. So it definitely should drive company growth, and it ought to move nearer to the sort of growth transformation services see. That's what we'd anticipate. Their capabilities combined and introduced to our client base, plus our capabilities carried into theirs.

All right, that's helpful. Thank you. There are just two quick questions about modeling. Normally, between the fourth quarter and the first quarter, there's a drop of roughly $40 million to $50 million; for this Q1, my guess would be somewhat smaller than that, purely due to the added Rightpoint acquisition. Would it be closer to a $30 million to $40 million sequential decline? The other item is interest expense.

From our perspective, we continue to see something in the neighborhood of 2.5% to 3.5%. I wouldn't put anything different into your model. In my view, 2.5% to 3.5% is roughly the correct band, Dave. It's going to provide a little bit of help. That band is what I would stay with.

Okay. Interest expense.

It's sequential decline.

Yeah, Dave, we've been watching that play out for so many years now that modeling the business that way just makes sense.

Okay. Thank you.

Thank you, Dave.

Steven Chang here, filling in for Joe — thanks for having my question.

Hello there, Steven.

Hello. Is there any additional detail you can share regarding Rightpoint? I'm curious whether you might be able to put a figure on what portion of that increase in digital revenue came from bringing Rightpoint into the fold, based on what you've observed up to now, and perhaps how you expect that to develop going forward?

Could you say that again? All right, did you catch that?

Yes. If you were asking how much of the digital growth we've recorded up to now can be attributed to Rightpoint, my answer would be that when we completed that acquisition, we were already deep into the back half of Q4. I wouldn't claim that a significant portion of Q4's expansion resulted from the capabilities Rightpoint brought into the organization. But if you're asking a wider question about the role experience plays and how much we've observed experience mattering for digital growth over the past 2 years, the answer is a great deal. That significance is among the factors that gave us confidence to move ahead and acquire Rightpoint. The TandemSeven team helped build that confidence. That group has now been part of our company for over 2 years. We witnessed it work in banking; we witnessed it work in insurance. We began to see it work across several of our other verticals; that's the confidence we have regarding Rightpoint as we consider 2020 and beyond.

All right, that's useful. One additional question, shifting to the large-deal pipeline. Might there be any deceleration ahead? Do you anticipate that incoming volume will keep flowing at the same pace? Perhaps you can give us some detail regarding these deals by specific vertical or any customers, particularly if you might address digital. Thanks.

What I'd say is that client behavior has shown no shift at all. Throughout this year, we've observed no movement in incoming volume, the pipeline, or closures — that is, bookings. The single item I'd flag as an open question is the latest developments surrounding coronavirus and what those might imply. Nothing has surfaced yet, but I believe it's wise for us to consider that, should an outbreak of that sort keep unfolding in a particular manner, what would that mean for worldwide travel? What would it mean for customers' capacity to travel, and what effect would that have on how decisions get made? All we want is to stay observant and careful, and clearly, we are talking with customers. Nothing has come up yet.

Okay, great. Thank you.

Thank you, Steven.

Hello, I'm Puneet, and I'm here on behalf of Tien-Tsin.

Hey there, Puneet.

In terms of scaling up several significant agreements, 2019 was obviously an outstanding period for your company. Looking ahead, as your growth starts to settle, why shouldn't gross margins rise by more than the 50 basis point impairment advantage when some of those contracts scale? Or perhaps it's too soon for that, meaning it's a longer-term mechanism for improving gross margin?

Yes. As I mentioned during my prepared comments, we feel margins have reached a steady state. Like you also heard Tiger mention, the pipeline remains quite strong, and the number of big deals in that pipeline hasn't dropped, correct? That volume makes us happy; and if we pursue additional large contracts, provided margins remain near this level, everyone will be quite pleased since we can generate added operating margin along with income and free cash flow, correct? Our perspective is that if the offerings we deliver to our customers bring greater value, certainly, we ought to witness an increase in gross margins; at present, our stance is that stability appears to be the appropriate position considering the pipeline and how many large deals exist; for the time being, we consider it sensible to expect no change, and as we advance on this, we will provide an update.

Yes. Puneet, there are a couple more points I want to make on top of what Ed mentioned. When you look back at the discussion about how our client count grew worldwide, once you strip out what Rightpoint contributed, the increase in global clients during 2020 is really only slightly ahead of 2019. That tells us the ramps are still ongoing, and given the deals in our pipeline and the inflows we're seeing, additional engagements will keep coming in that still need to ramp. As you're aware, our deals require time before they ramp, so because of that, I don't believe we can rely on that ramp to reach steady state gross margin within 2020. Naturally, as time goes on, that ought to work its way through. The other point concerns transformation services, especially when you break out digital. You'll hear from the majority of companies in our peer group that margins in digital take time to materialize as you scale. That scaling work isn't something you complete in one or two years — it takes many years; we remain on that scaling journey. I think if you combine those two factors, the margin trajectory over the longer term ought to be positive. What I don't think we anticipate is seeing that during 2020.

Understood.

Yes. As you have observed, Puneet, and as you have watched us steer things as well, our true aim is to push EPS upward and expand free cash flow so that the company's worth rises; the way we accomplish that is by expanding operating margin, correct. Operating margin is the area on which we have concentrated with such intensity too.

Yes.

It keeps getting better. There are certain geographies where we may decide, "Look, this deal's gross margin is going to come in somewhat lower," yet should we manage to push operating margins higher, that's a trade we'll accept. We'd accept it any day of the week. As a matter of fact, you've heard us discuss much of what we've already accomplished around some of those reduced gross margins — the onshore skill sets Tiger mentioned — and we're glad to take that on; essentially, what's happening is the creation of new service lines, so to speak, which we would nurture within our R&D line, correct? Those decisions were deliberate and strategic on our part, and we feel good about them.

Yes, definitely.