Genpact Limited (G) Earnings Call Transcript & Summary

Thanks, Bridgette. Good afternoon, everyone, and welcome to Genpact's first quarter earnings call, where we'll discuss results for the quarter that ended March 31, 2020. Hopefully you've had an opportunity to look over our earnings release, which went up on the IR section of genpact.com. Speaking today are Tiger Tyagarajan, our President and CEO, who joins us from his home in New York City, and Ed Fitzpatrick, our Chief Financial Officer, who joins from his home in Pennsylvania. There's plenty to get through on today's call, among it Genpact's response to the COVID-19 crisis, how we're positioned for a path to longer-term growth, and a review of our financial performance. We'll also offer some color on what we expect for our second quarter results. Our prepared remarks will run somewhat longer than they typically do, but we'll set aside extra time to answer all of your questions. As a reminder, certain matters we'll discuss today are forward-looking. These forward-looking statements carry a number of risks, uncertainties and other factors that might cause actual results to differ materially from those in such forward-looking statements. Those risks and uncertainties are laid out in our press release. Also, on today's call we'll refer to certain non-GAAP financial measures that we believe offer additional information to enhance understanding of the way management views the operating performance of our business. A reconciliation of these measures to GAAP can be found in today's earnings release posted to the IR section of our website. With that, let me hand the call over to Tiger.

Thank you, Roger. Good afternoon to all of you, and thanks for being with us on our earnings call for the first quarter of 2020. The passion and commitment shown by Genpact colleagues worldwide fills me with immense pride — they've labored relentlessly to assist our customers, provide outstanding service, and support communities, all of them during these extraordinary times. In a remarkably brief span, the COVID-19 crisis has upended personal lives, companies, and economies across the globe. I'll begin today with a brief look at how we performed in Q1, then provide an update on what we've done so far in response to COVID-19. After that, I'll talk about where things stand with delivering for our clients, what we've learned from shifting to work-from-home, and the effects we're observing on our customers and the sectors they operate in. I'll also address the fresh possibilities emerging in the marketplace, the reasons we're positioned strongly to capture them, and how our strategic focus sustained over many years — especially across the past 5 — enables us to stay resilient during these times and lays out an obvious route toward longer-term expansion in a world after COVID-19. Even with the difficulties the world encountered beginning in the latter part of March, our first quarter performance was solid, showing that the momentum from throughout 2019 carried forward. Every one of our industry verticals — consumer goods, retail, life sciences, healthcare, banking and capital markets, insurance, high tech, and industrial manufacturing and services — achieved nice growth. Once again, Transformation Services served as the primary growth driver, with standout strength in analytics and substantial new momentum in our cloud services. To be specific, total revenue reached $923 million, a 14% increase on a constant currency basis, while Global Clients revenue rose 15% on a constant currency basis. In addition, we generated adjusted operating income margin of 14.7% and adjusted diluted EPS of $0.53, which was up 23% year-over-year. Transformation Services, which includes the contribution from Rightpoint, expanded by more than 30% during the quarter and represented roughly 30% of total Global Clients revenue. We got off to a robust start for the year, continuing to see momentum in our underpenetrated target markets. We noticed early indicators of the COVID-19 crisis within our China operations — where over 4,000 associates serve a number of our Global Clients across China, Japan, South Korea, and the Northern Asian economies — and we responded by nimbly transitioning to work-from-home. When COVID-19 started spreading globally in the second half of March, we moved swiftly across our worldwide footprint, covering Europe, US, Latin America, Philippines, and India, using our China playbook as an excellent foundation. We estimate roughly $7 million in lost first quarter revenue, mostly caused by supply constraints during the shift to work-from-home. A large portion of that supply-side revenue loss stemmed from delays in securing work-from-home approvals from many of our banking and capital market clients, owing to regulatory restrictions along with privacy and security worries. Since this crisis first hit, the way we make decisions has revolved around two main pillars. First, we're safeguarding the health, safety, and well-being of more than 95,000 team members worldwide. Second, we keep serving our clients, since the work we perform for them is often vital to keeping their businesses and the economies they operate in running effectively. Right away, we set up a global COVID-19 response task force with eight distinct work streams, each carrying responsibilities. First, shift operations to work-from-home. Second, coordinate communications both internally and with clients. Third, update our financial outlook frequently so we can drive actions. Fourth, achieve strong operational delivery performance and productivity within a virtual setting. Fifth, create and roll out a thorough employee well-being program suited to this new environment. Sixth, craft frameworks and playbooks for Transformation Services engagements, digital implementations, collaborative solution designs, and transitions in a virtual world. Seventh, build new transformation services and digital offerings and bring them to market. And finally, eighth, form a point of view regarding the post-COVID-19 world. One of my leaders across businesses, functions, and geographies heads each work stream, which ensures fast, real-time decisions. Looking back at the past eight weeks, the pace and agility with which we moved all of our services to a new virtual work-from-home model stems from how early we adopted virtual collaboration and communication tools for delivering global solutions. For many years, running this company with a globally distributed leadership team has been part of our culture, and that made embracing the transition simpler. As of now, over 95% of our overall revenue coverage is being delivered. The largest remaining gap on the path to 100% virtual sits in our banking and capital markets vertical, where getting client approvals to work-from-home for processes handling highly sensitive customer information has taken time and differed depending on the regulatory jurisdiction where those clients operate. To safeguard the long-term health of our business and keep investing strategically in areas that will drive future growth, we acted decisively to lower our cost base. That includes freezing all salaries company-wide, our executive leaders included, plus halting internal promotions for the year, after paying out 2019 bonuses in full. Second, a temporary ban on all team member travel worldwide, protecting our employees and clients, along with cutbacks on all discretionary spending. And three, creating a proprietary platform, < > TalentMatch, which lets us spot talent available for redeployment elsewhere in our business as client needs shift; paired with our Genome reskilling platform, it has been a home run during these times. The strength of the portfolio choices we made under our 2013 strategy < >, across both industry verticals and service lines, is making an enormous difference. On top of that, having delivery locations spread across onshore, nearshore, and offshore around the world has played a big part in keeping us resilient through this period. We moved quickly to establish what it looks like to run our services efficiently and effectively in a virtual setup. We took our end-to-end smart enterprise process, the SEP frameworks, and updated them for this new model, with attention on security controls, monitoring adherence to service levels, and getting the most out of employee productivity when people are working from home. To illustrate, in the most recent quarter that closed, applying these revised frameworks, we finished the books as much as two days faster for 98% of the clients whose books we closed, while the remainder closed within their usual cycle times. Looking more broadly, we've observed improved service-level performance across over 50% of our services, and just a small single-digit percentage of our services came in below par. That has generated even more client delight despite these challenging times. Quite early in this shift to working from home, we began creating programs and initiatives aimed at helping our employees cope with the stress of this new way of working. We established 24/7 helplines staffed by mental health professionals to support employees, to share best practices around working from home and self-care throughout this crisis, and we ran global webinars featuring experts on a range of topics, health and well-being among them.

On top of that, we're using an AI-based chatbot that gauges employee sentiment, letting us track how our worldwide staff is feeling day to day. A large share of our main enterprise offerings — finance and accounting, sourcing and procurement, supply chain — plus vertical-specific work like financial crimes and risk, insurance underwriting and claims, and content moderation, are the kind clients can't easily cut. Our estimate is that over 85% of what we hold is set up to ride out the near-term economic pressures of today's climate. When it comes to industries taking the biggest hits — travel, hospitality and leisure, and energy — our exposure is small. Demand has been climbing for what we offer in supply chain management, consumer banking collections, small business lending backed by government support programs, and analytical services for a variety of industries facing wild swings in demand and supply — and we've bolstered all of it. During the past 24 months, we've redirected our IT services efforts toward particular domains tied to our sector expertise and digital strengths, which gives us a launchpad to speed up our digital transformation and cloud work right now. Two fresh illustrations: a big technology company shifting every one of its analytics engines to the cloud, and a worldwide pharma business rolling out < > finance company-wide. Nothing stalled in our Transformation Services work. The bulk of that work has kept going, showing both that we can deliver it remotely and that certain revamped programs in these product lines are mission-critical. These past couple of months have driven home how much flawless execution, closeness to the client, and Net Promoter Score matter as the genuine North Star of our culture. Looking across our entire revenue mix, over two-thirds stems from a group of clients whose ties to us grew stronger during this crisis. We think that lays the groundwork to grow with those very clients once they come out the other side, as they set out to overhaul their operations in a major way. As anticipated, our pipeline of large deals is moving along more slowly while clients deal with disruption and uncertainty in their businesses. Apart from clients in the sectors hit hardest, every other deal in the pipeline remains live, though proceeding at a far slower tempo. Meanwhile, we're spotting quite a few fresh deal possibilities, often sparked by the difficulties of today's climate, that originate at the CEO and CFO level. These are big, multi-function transformation deals worth $100 million-plus. In just the past 21 days, we landed a new relationship with a major global insurance client, and we're also scaling up considerably with an existing large global banking client, since both are reworking their location and partner operational footprints. We're designing the solution and moving this work straight to a work-from-home team right now; we're also remotely solutioning and smoothly shifting over 2,000 people serving more than 40 clients, spanning both current and new engagements. Like I mentioned before, our Transformation Services work is now being delivered remotely. Because the big deal pipeline has slowed its movement, the Transformation Services tied to those deals have, understandably, also decelerated. The sorts of challenges and answers clients bring to us through that business have shifted considerably; there's much stronger appetite for a set of fresh transformation offerings that pay back quickly and fit today's conditions well; we've just built and launched 17 new Transformation Services solutions along with 8 new digitization solutions, all positioned as rapid response offerings. Here are a few illustrations: for healthcare organizations, applying real-time predictive analytics so life-saving devices and personal protective equipment get deployed swiftly to the correct places at the correct moments; for pharmaceutical firms, applying predictive analytics to assist them in adjusting their end-to-end supply chain to shifting demand across their medicine portfolios; allergy relief medication demand, for instance, has fallen since fewer people are venturing out; we're assisting with material purchasing, capacity planning, and logistics orchestration; for banks tracking credit risk and uncovering financial crimes and fraud, we're supplying know-how to stand up surge operations across different parts of the globe, and assisting them in handling the record-high flood of small business loan applications under the Paycheck Protection Program, a central piece of the CARES Act, by streamlining and digitizing how loans are applied for and funded; for consumer goods, retail, and manufacturing businesses, applying supply chain analytics to rework distribution networks so they can balance unpredictable supply and demand, plus backing offline-to-online transformation via swift digitization as our online channels see growing volumes; and lastly, for a variety of manufacturing businesses, we're conducting supplier risk assessments, sourcing programs, benchmarking, digital interventions, and segmentation and customer behavior analytics to bring receivables down and strengthen cash flows. Running through all these fresh opportunities are some common threads: greater use of cloud-based services, automating and digitizing for fast payback, and analytics that yield real-time predictive insights. When things are uncertain, strategic partnerships built on deep client intimacy matter more than ever, and CxOs and boards keep seeking ways to push change through their organizations so they can achieve outcomes both near-term and long-term. The fundamentally nondiscretionary, annuity-based character of what our industry provides delivers resilience amid these uncertain times. Thanks to a strong balance sheet and solid cash flows, our business's underlying fundamentals stay very healthy. For many of our clients, geographical concentration risk is also a top concern. Our wide, robust worldwide delivery footprint enables a balanced blend of offshore, nearshore, and onshore delivery; that diversity is an enormous strength that helped us land the large insurance client I mentioned earlier, who chose us to reduce their delivery concentration risk in the middle of the crisis. Over the past 5 years, we've ramped up what we put into digital analytics — organically, and also by way of partnerships and acquisitions — and that has put us in a good spot to deliver tailored solutions to clients who want value created right away. Among the examples are the skills that came to us when we bought the AI and machine learning operation, plus the dynamic cloud workflow company that supplies a digital layer for Genpact Cora. Our thinking when we bought Rightpoint late last year was that no one else is positioned quite like we are to unite process with experience in a way never seen before, so that clients can achieve genuine end-to-end digital transformation and come out ahead in the expanding experience economy; we felt that being able to link the front office with the middle and back offices would matter enormously to our clients as we guide them along their digital transformation path. In a virtual setting like today's, customer and user experience carries far more weight than it used to. With offline companies speeding up their moves to online, the case for concentrating on digital experience only grows stronger. That leaves us well placed to put these capabilities to work in the post-COVID-19 world, where digital transformation takes center stage. A brief word about GE: across the many GE businesses we sell to, the relationship is still solid.

While GE pursues expense reductions to cope with a smaller market for several of its units, we continue, as ever, to answer through our own efficiency programs so that value flows back. Because of COVID-19's effects, our present expectation is that second quarter revenue will decline 3% to 5% versus the prior year on a constant currency basis. Finally, given the uncertainty COVID-19 has created, we have chosen to pull our 2020 financial outlook that was issued on February 6, 2020, until visibility gets better. With that, I'll hand the call over to Ed.

Thanks, Tiger, and hello everybody this afternoon. For Q1, total revenue came in at $923 million, representing a 14% increase versus the prior-year quarter, and that holds true whether you look at as reported or constant currency figures. Momentum was widespread throughout our operations, and we beat our own forecasts even though COVID-19 created some headwinds late in the period. As Tiger noted before, the coronavirus outbreak only affected the final few weeks of Q1. Because shutdowns happened quickly and globally in such a thorough manner, roughly $7 million in revenue was lost during those final 2 weeks. Most of that stemmed from moving delivery capabilities into a virtual operating setup, which included certain banking clients initially restricting work-from-home execution. Global Client revenue accounted for 87% of the total and rose 14% compared with the prior-year quarter, or 15% at constant currency, primarily fueled by widespread expansion throughout our portfolio. Transformation Services remained the front-runner, with analytics and digital solutions delivering robust results. Throughout the quarter, we kept growing the scale of several Global Client relationships. For the 12 months concluding March 31, 2020, we raised the count of Global Client relationships generating yearly revenue above $15 million to 52, up from 49. This figure encompassed clients exceeding $50 million in yearly revenue, which grew to 10 from 8. Revenue from GE climbed 12% versus the prior-year quarter, matching what we had anticipated. Adjusted operating income margin reached 14.7%, versus 15% in the equivalent quarter a year earlier. Benefits from robust revenue expansion and the cost efficiency programs we launched during the quarter were partly counterbalanced by COVID-19 disruption. That disruption encompassed underused intelligent operations staff caused by restrictions on our capacity to work from home, which I referenced before, plus expenses tied to an India retirement fund, mostly stemming from reduced equity values for the period concluding March 31, 2020. Excluding the COVID-related effects, our adjusted operating income margin in Q1 would have surpassed the margins from the prior-year period, which, as you may remember, featured $4 million in India export subsidy income that failed to repeat this year. Our work-from-home capacity and approval levels kept improving across April and into early May; and, as Tiger noted, overall revenue coverage now stands at 95%. Gross margin during Q1 was 34.5%, reflecting the COVID-related costs I just referenced. Excluding those charges, our gross margin would have been mostly in line with the prior-year figure of 35.8%. SG&A expenses, measured as a share of revenue, declined 230 basis points versus the prior-year quarter, landing at 21.4%, mainly because of operating leverage along with the cost containment efficiencies we began implementing earlier in the year. Adjusted EPS came to $0.53, a 23% gain versus the prior-year quarter, up from $0.43 in 2019. That $0.10 rise was fueled by greater operating income, which added $0.06 per share. Foreign exchange remeasurement gains added $0.07, partly offset by increased taxes and a larger share count, each subtracting $0.01. For the quarter, our effective tax rate came in at 22.5%, versus 23.3% a year ago, mostly because of larger discrete benefits this period than we saw last year. Now moving to the balance sheet and cash flows. We returned $64 million of capital to shareholders in the quarter. That figure included roughly $19 million tied to our quarterly dividend of $0.10 per share, which rose 15% from the prior year; we also bought back about 1 million shares for a total of $45 million, at a weighted average price of $43.18 per share in the quarter. Since launching our share buyback program in 2015, we have cut net outstanding shares by 18%. Over that stretch, we acquired 38.4 million shares at an average price of roughly $26.60 per share, for a total of $1 billion; at present, about $229 million of authorized capacity remains available under our share repurchase program. Because of the COVID-19 crisis, we have temporarily halted our share repurchases in order to bolster our liquidity position. I want to give a bit more color on liquidity, since we know this topic is top of mind for many investors; we hold investment grade ratings at both major rating agencies. Cash and cash equivalents came to $402 million, versus $325 million at the close of the first quarter of 2019. Our net debt-to-EBITDA ratio across the last four rolling quarters stood at 1.85 times. Total debt at quarter end was about $1.5 billion. No scheduled maturities come due until the $350 million bond repayment in the second quarter of 2022; regarding debt covenants, our outstanding term loan and revolver carried a net debt-to-EBITDA coverage ratio of 3 times, plus a minimum interest coverage ratio of 3 times; we do not anticipate hitting these covenant levels, given the significant cushion we have based on our current earnings and balance sheet profile. To maximize our current flexibility and strengthen our liquidity, we drew down our low cost bank facility during the second quarter, which provided an incremental $330 million of cash. At this point, we do not expect to use that additional cash. Our cash balance as of April 30 was over $700 million. We estimate the incremental interest expense tied to the drawdown is approximately $2 million for the quarter. Days sales outstanding in the quarter improved to 89 days, versus 93 days a year ago. Keep in mind that last year was affected by certain late payments we received at the start of the second quarter. The age of our cash receivable has stayed relatively consistent over the past several years. Given the current environment, we would anticipate some deterioration in our aging. So far, we have not seen any meaningful movement in the aging through the end of April, but we will keep monitoring this very closely. In the first quarter, we used $19 million of cash for operations, compared with utilization of $5 million during the same period last year. The increase stemmed from larger yearly bonus payouts tied to how well we performed during 2019, plus a tax deposit we made in connection with an India tax issue from 2013. In Q1, capital expenditure worked out to 2.7% of revenue, and that figure included roughly $3 million aimed at strengthening our work-from-home setup, which the COVID-19 crisis made necessary. From the start of the year through the close of April, we've laid out about $11 million on equipment tied to shifting toward delivering services remotely. Laptop computer purchases account for most of that spending; looking at the whole year, our updated expectation for capital expenditures is now somewhere between 2.5% and 3%, whereas previously we had projected 3% to 3.5% of revenue. Now let me share where our thinking stands on the full-year outlook. As Tiger noted, because so many uncertainties stem from the COVID-19 crisis, we chose to pull our full-year outlook until visibility improves. Let me add some detail on what we expect for the second quarter. At present, we anticipate second quarter revenue declining 3% to 5% versus the same period last year, measured on a constant currency basis. Several variables feed into our range: when work-from-home approvals come through from certain clients, when lockdown restrictions ease and at what pace across the countries where we operate, how quickly our pipeline converts when it comes to decision-making on large deals, and when new transformation services deals begin contributing. With the revenue levels we now foresee, we've acted swiftly to bring down our run rate costs. Steps we've taken include — though they aren't limited to — halting salary increases, rightsizing and actively redeploying resources across the company to boost utilization and shrink bench, and pushing travel and discretionary-related expenses down to nearly zero. We'll keep evaluating the broader business environment and stay nimble with our cost structure, making sure we strike a balance between delivering near-term financial results and funding long-term growth initiatives, so that we're ready to ramp up and perhaps even speed up our growth once business conditions get better. To repeat, based on what we're currently observing across our global operations, we think second quarter revenues will mark the lowest revenue quarter of the year. Revenue delivery faced more disruption during the first half of April than in the second half, and we can see a path toward an improving revenue picture across both May and June, thanks to more client work-from-home approvals. We'll keep monitoring market dynamics and hope to be better positioned to give our full-year outlook when we hold our second quarter earnings call. Our long-term outlook remains unchanged, since our total addressable market is still highly attractive and expanding, our pipeline remains near record levels, and we continue to lead in our target markets. With that, I'll hand the call back to Tiger.

Thanks, Ed. When we consider what comes after this period that has no precedent and is full of uncertainty, we anticipate lasting shifts in how the world operates. To thrive in this new normal, companies must discover fresh approaches to leading, to becoming more resilient, to linking up throughout ecosystems, and to adjusting to an evolving workforce landscape. Our belief is that our culture of welcoming change, our entrepreneurial drive, our deeply felt can-do mindset, and our dedication to client results will set us apart enormously in the market, and this stands as one of the main reasons we prevail. Having a track record of operational excellence spanning more than 20 years, we have cultivated robust ties throughout an enviable roster of clients, encompassing numerous leading global brands; we believe our nimbleness, our responsiveness, and our creative concepts have reinforced our standing as a trusted advisor within many of our most important relationships. We are already witnessing this through the caliber of our discussions, working through their transformation plans alongside them, and exploring how we might join forces with them on implementation. Five ways, in our view, will define how the business world transforms because of lessons emerging from this crisis: first, a major move from offline toward online across every sector; second, the virtualization of all technology, services, and solution delivery; third, faster uptake of cloud-based services and solutions; fourth, explosive expansion in real-time predictive analytics; and all of this paired with a human-centered design for processes and collaborative experiences. Since our capacity to reach talent is no longer limited by geographic borders, we can locate the ideal individuals for the ideal client and the ideal process, drawing not just from outside, but from within Genpact too. At present, our staff can acquire new skills and get ready for upcoming opportunities through our in-house learning platform, Genome. That enables us to shift these resources toward new client opportunities via our < > TalentMatch platform. Over just the past four weeks, we have fully retrained and shifted nearly 2,000 individuals around the world. We are stronger and more pertinent to our clients within our sector than at any point before, and the longer-term financial objectives we outlined previously stay unchanged. In closing, I wish to acknowledge once more the incredible effort and resolve of our teams, who have united so effectively during these challenging times. Our principles of courage, curiosity, and incisiveness resting on a foundation of integrity have served as our compass while our more than 95,000 team members worldwide unite behind a common mission to assist our clients in carrying on the essential work they perform; we take pride in the part we play in keeping the global economy going, particularly during these challenging times. I would also like to express gratitude to our Board of Directors for their backing, their dedication, and their invaluable direction, especially across the past few months. And last, I want to thank our clients for their extraordinary partnership throughout the past several weeks. Moments this hard are exactly when genuine partnerships prove their worth. Alongside everything we've accomplished alongside our clients, we've also reached out straight to the communities where we deliver our services. Teams of ours are supplying food along with hygiene items to migrant workers who've been displaced, and to kids, in India and Latin America; we gave medical-grade masks as donations to hospitals locally in Wuhan, China and New York City. Across India, we're collaborating with nonprofit organizations so they can keep operating even after the number of volunteers available to them has shrunk. We're backing groups that supply food and housing to people without homes in the US. In a lot of the cities where we run operations, we're giving first responders support through local call centers; plus our teams are building content and tutorials aimed at enabling virtual classrooms, which lets over 10,000 children throughout Europe and India keep up their schooling while lockdown lasts. My belief is that through joining forces with our clients and our communities, we'll come out of this crisis as a stronger company, prepared to steer through the world after COVID-19. So with that, I'll hand the call back to Roger.

Thanks, Tiger. At this point, we're ready to take questions from everyone on the line. Bridgette, could you walk us through how to do that?

Thank you. Hi, Tiger. Hi, Ed.

Hi, Ashwin.

Hello there. We really value the remarks you shared, and trust that all of you are faring well.

Yes indeed. Thanks so much.

I suppose my first question is this — if I look at how you performed in 1Q and then factor in that $7 million you cited for what we might term efficiency-related losses tied to the lockdown, the sequential drop from 4Q is really quite small, and that looks strong even measured against a typical sequential trend, never mind one shaped by a pandemic. So to begin with, what is behind that? Were any one-off projects involved? I'd like to confirm there's no onetime revenue or some sort of pull-forward, and could you also address what the inorganic piece contributed?

Yes. Let me begin, Ashwin, by noting that our first quarter was genuinely strong. All of our verticals performed. Transformation Services performed, Rightpoint included; we got off to a genuinely strong start to the year during the first quarter, and then naturally COVID-19 arrived, those final two weeks, which we discussed; so I would say our first quarter was genuinely strong. Nothing onetime is embedded in there. Ed?

Yes. One item that stood out to me while we were reviewing the results — I actually had to verify it twice — was that each sub-vertical delivered solid expansion in the quarter. That made it likely our broadest-based quarter of growth so far. Normally, we would highlight whichever one expanded at a faster pace than the rest, yet this was a fairly widespread quarter of growth. So yes, it was — our expectation was that it would be positive, and it turned out even stronger than what we had anticipated, which is excellent, though the headwinds are a factor, and everyone began noticing them as we moved into the later portion of March.

All right, understood. Essentially, you're off to a strong beginning. Regarding the revenue trajectory you referenced shifting from the first quarter into the second, plus those cost measures you're implementing — can you quantify them? Would they land somewhere around $15 million to $17 million each quarter in terms of benefit, which might put you near what someone would view as typical margin levels? Whatever detail you can give on scale, when it hits, and whether it's cash or noncash would be useful.

Tiger, I'll kick things off, and then you can — go ahead and chime in. We're going to avoid providing extensive guidance, though I believe your question is reasonable. From how we've examined this — the second quarter will see a significant decline. And the steps we've implemented, I believe, make sense, mainly concerning, hey, what utilization targets are right to aim for given what we know about much of this. Once conditions improve, we'll be returning. A significant portion of what we're giving up, as well, involves permission to work remotely for numerous clients, and we anticipate that returning. So, the second quarter, as I mentioned earlier, we believe some of that will be local input. We have completed — enacted the proper measures, in our view, so that moving forward, even at a reduced level, should we remain at that level, you'd — operating margins ought to tick up somewhat since we've elevated utilization to a level where, given the scale we're — that we're observing for the second quarter, if circumstances remain steady for some stretch, perhaps the steps we're — that we've already taken at the start of Q2 will benefit Q3 and Q4, meaning that by year-end, I'm not sure we return to the figures we initially anticipated immediately, yet we do believe, over the long run, that will occur. Still, we can adjust the organization's size for the future to return to those figures we discussed. It's simply more difficult to accomplish within one quarter, or even two. That said, I do expect that by the time the fourth quarter arrives, the measures we've enacted will take effect. Tiger, anything you'd like to include?

Let me just respond to that, Ashwin, by saying we're quite clear on wanting to strike a balance between steps that genuinely show up in short-term financial results and making certain we keep developing capability and resilience as the world shifts and what our clients need shifts, so that we're genuinely able to bring them value in that transformed environment. And I feel quite positive that this balance is being achieved effectively, since what our clients need is starting to shift, and we're already witnessing a few of the gains from that.

Understood. Also, I ought to have said this at the start — I really value the positive contribution you folks are making where you live.

Right. Hello, everyone. What a strong quarter. Great to reconnect.

Thanks, David.

David Koning here. So, um... Ed Fitzpatrick speaking, hello there.

I want to touch a bit on what Ashwin asked as well. When we look at that quarter-over-quarter drop, it suggests somewhere around $75 million to $90 million. Of that amount, what portion is simply the $7 million we lost from certain banking clients — clearly, you know, that < > information? And what portion is just that $7 million essentially spread across the entire quarter? Would that account for roughly half the decrease, which should return as soon as people are able to work again?

Yeah. I would say...

That's a fantastic question, David. I'd break it down this way: roughly 40% of it you could call supply-related. Take the $7 million from the first quarter — every bit of that stems from supply factors, like the shift to working from home and so on. The remaining 60% comes from demand. I'd split that into two pieces. First, there's a slowdown in how quickly decisions get made on large deals, along with the Transformation Services baked into those deals. Second, the new Transformation Services themselves are coming in more slowly. We're prepared with plenty of new offerings and solutions for Transformation Services, but when it comes to pure volume, things have clearly decelerated as everyone grapples with this new era of disruption. That's the breakdown of how the quarter was affected.

All right. Understood; that helps a lot. Then, I suppose, regarding Rightpoint specifically, clearly a fairly significant purchase you made not long ago. What size was it in Q1, and how has it performed through the crisis compared with your main business?

Yes. It matches what we'd planned for the entire year, David. As we mentioned, around 2.5% of revenue, so it falls within that range. For the first quarter it's likely < > 3%, yet mostly consistent with what we anticipated; and from what we see, there's really no difference in how that business has been affected compared with the remainder of the core business. Tiger, anything further to add?

Right, no. Actually, I'd say Rightpoint, similar to the entire company, delivered a quite strong — truly solid opening quarter considering all the other circumstances and what's going on in the economy. With COVID-19, we're already witnessing this, and once we're past COVID-19, certain offerings and projects Rightpoint provides tied to experience within this newly virtualized economy are going to gain real momentum once more, plus some of the commerce assignments they handle around online services and digital online services — that too will benefit Rightpoint. And when you consider the full year, the share we had anticipated coming from Rightpoint, our expectation is that it remains the share we'd anticipate under the updated outlook for the year.

Hi there. Many thanks. I lost my connection, actually, so please excuse me if somebody already covered this, but regarding your remark about the current pipeline decelerating, I believe you also said a fresh pipeline formed because of the pandemic was gaining momentum. So I'd like to know, for the qualified pipeline or bookings the way you characterize it, what does it look like at present compared with before COVID? Is there a way to put that in context? Timing will obviously be a factor, I realize, but I'm just asking about the magnitude, if that's a fair question.

Yes; Tien-Tsin, once more, that's a really good question. Let me begin by noting that when you examine bookings on a quarter-to-quarter basis, it's an extremely vague figure, since it arrives so irregularly and unevenly. Naturally, given the deceleration in the pipeline for big deals, those sizable deal bookings have decelerated, and you'd anticipate those bookings would come in below usual levels, and that affects the overall booking figure. Meanwhile, fresh deals have been entering the pipeline, and since they're so tailored to the current economy along with the difficulties and possibilities a client faces right now, they tend to move quickly through that pipeline. Naturally, the overall booking is set by the equilibrium between those two. Naturally, it isn't in equilibrium, since the deceleration outweighs the fresh pipeline arriving, which explains why you're observing a revenue drop in the second quarter. So naturally, that will create an effect, and it will become visible in bookings over the rest of the year; and after that, in Transformation Services, we're witnessing considerable new momentum developing around several of the new solutions we've introduced to the market concerning working capital, liquidity, the CARES Act, insurance claims, insurance underwriting, supply chain, plus a great many additional services.

Got it. Alright, that's useful. So I was mainly considering the back half of the year, and I believe I caught you mentioning fast payback periods. So I wasn't certain whether a number of these agreements in general could land somewhat sooner and offset a bit of that slowdown we saw in Q2. My second question was simply out of curiosity regarding the bigger customers, GE among them — do they look very different compared with the remainder of the business? I'm just wondering whether this is confined to your larger established accounts and what visibility you have into them. Thanks. That was everything from me. No, Tien-Tsin, I'd say — I mean, the effect COVID-19 has produced, as you can — as you've witnessed yourself, is fairly widespread across every industry...

Okay. Across every client, clearly certain industry verticals have been impacted far more severely than others. Luckily, the amount we're exposed to in those sectors isn't large. However, looking at our wide-ranging portfolio beyond those sectors—which, as I mentioned, represents around 85%-plus of what we earn—I'd say every one of them is navigating this new environment, and a number are facing volatility, plus a move toward online, plus a decrease in overall volume. So it's all three of those things combined.

Yeah. My phrasing was off, Tiger, and I apologize for that. What I was getting at is whether your current customers, since they already have a relationship with you, are able to scale up and scale down much more quickly. That captures what I was trying to ask, if that comes across clearly.

No, and here's the interesting part, Tien-Tsin: the truth is, look at that insurance customer we brought on board — they aren't very familiar with us. This is a brand-new logo. A big new insurance logo. My sense is that trust got established over an extremely compressed period, given how much intensity is possible now in this virtual environment, and that includes them being exposed remotely to how we run things, which made them at ease with shifting work between geographies, moving an operating center over to us, and going from work-from-home setups to other work-from-home setups. Remarkable. All of it happens virtually. And I — we're starting to observe a fair amount of this, plus our teams are becoming genuinely inventive with the frameworks and methodologies that make it possible.

Hey. Ted here, filling in for Maggie. Appreciate you taking our question. I just wanted to ask very quickly how you're striking a balance between what clients are asking for in terms of discounts and — account profitability, things such as payment terms and push-outs. I know you mentioned that you're seeing some of that, but maybe you could just speak to that balance with what clients are requesting.

Yeah. I'd say, clearly, these are times when keeping the total value you create for clients top of mind matters, and making sure you stay focused on solving for their challenges and opportunities. If flexibility is what's needed, that's precisely what we're really good at. When we went through the global financial crisis many years ago, that's precisely what we did with a certain set of industries. We're doing the same thing with a number of other industries here. And that lets us create new opportunities, lets us bring new technologies to actually drive that productivity for our clients, and generate value for them. So, it's not necessarily just price concessions straight out of the gate, it's actually creating value. And we're also seeing traction in value-creation deals where we get paid based on value creation. Ed, do you want to add anything to that?

Only a few points. There have been, I believe, a number of instances where terms came up in discussion, yet I believe the terms we provided are sensible and equitable. Our working capital, as you're aware, consists of accounts receivable, correct — we cover payroll largely; therefore, there isn't much flexibility for us to lengthen terms, so to speak. Those have been somewhat limited; and then, simply to build a little on what Tiger mentioned, what we usually do is make our clients' operations still more efficient and effective, and reduce their costs compared with the run rate they currently have. So we're adopting — we're genuinely assisting them in becoming more efficient and more cost effective. So it's sort of the discount we're already sort of providing them cost reductions on, we aren't having many of those discussions since they understand we're removing cost; so it's a — to obtain a — somewhat of a different dynamic. But occasionally, as Tiger noted, with the relationships, if they're in a more difficult position, we're certainly cooperating with our clients, as you would anticipate.

All right, that's quite useful. Now regarding the 95% of your coverage that is presently being delivered, with the largest shortfall sitting in BFSI, is there some stage at which you might anticipate demand becoming the restricting element instead of the supply limitation? Perhaps you could simply discuss, for the upcoming quarter, what you observed during April and May concerning how those various supply and demand patterns are evolving? That would be useful.

Yes. With no fresh macro shift, given what we know and what everyone knows, I'd say moving forward we have a solid grasp of the effect caused by supply. What matters now is truly demand, plus the speed at which demand from our regular intelligence operations keeps advancing through our pipeline — which, as Ed mentioned, stands at pretty record levels — and as the Transformation Services pipeline moves ahead, and fresh Transformation Services deals join the pipeline. So demand is everything.

Right. I believe that also says something about the kind of service we provide — it isn't optional in nature. It's a matter of, hey, what becomes of this demand, does it disappear, and it doesn't disappear. So when it comes to customer service, given the service levels we're observing, our clients are watching service levels drop, with backlogs expanding to points that can't be accepted; so eventually, yes, this has to return, right, the work still needs to be completed; so it's — our view is that this is a temporary drop in demand rather than a shift in the dynamic.

Okay, thanks. Ed Caso here — hello, and good evening. That was a strong quarter. Appreciate it, Edward.