Genpact Limited (G) Earnings Call Transcript & Summary

Thanks, Michele, and hello everyone, good afternoon. Welcome to Genpact's Q3 earnings call, where we'll talk about what we achieved in the quarter that closed on September 30, 2020. Hopefully you've already had a look at our earnings release, which is up in the IR section on genpact.com. Joining us on this call are Tiger Tyagarajan, our President and CEO, along with Ed Fitzpatrick, our Chief Financial Officer. Here's how we'll proceed today. Tiger is going to give a rundown of our results and share where our strategic initiatives stand. After that, Ed will take you through how we performed financially this quarter and give our refreshed outlook for 2020. Tiger will return at the end for a few closing remarks. Following that, we'll open things up for your questions. We're expecting this to run roughly 60 minutes. A portion of what we cover today is forward-looking. Those forward-looking statements carry various risks, uncertainties and other factors that might lead actual results to diverge materially from what those forward-looking statements suggest. You'll find those risks and uncertainties laid out in our press release. Also, on this call we'll touch on some non-GAAP financial measures, which we feel give extra information that deepens understanding of how management sees the < > of our business. < > measures to GAAP in today's earnings release posted to the IR section of our website. With all that said, I'll hand things over to Tiger.

Thanks, Roger. Hello, everybody, and I appreciate your time this afternoon on our Q3 2020 earnings call. The results for the third quarter came in above what we had anticipated, and they keep showing how resilient our company is, since we provide vital services and solutions that are not discretionary. We're working alongside our customers in a tighter partnership to rethink and overhaul how they run things and how their businesses are structured overall, so they can handle the new normal — and that's fueling expansion in our digital Transformation Services. The strategic ties we already have are growing, and we picked up new logo wins at a faster pace during the quarter. We keep putting money into capabilities within the expanding experience economy, such as our acquisition of Something Digital completed not long ago, which strengthens our capacity to provide end-to-end digital commerce solutions at scale, with customer experience right at the center. We've realigned our costs and discretionary spending so we could hit our margin results for the quarter. Everything rests on the outstanding execution from our teams around the world. To break down the quarter specifically, total revenue reached $936 million, which is a 5% increase on a constant currency basis. Global Client revenue came to $824 million, rising 7% on a constant currency basis. We also posted an adjusted operating income margin of 17.1%, versus 16% in last year's third quarter, along with adjusted diluted earnings per share of $0.56. Growth in Global Client revenue was spread broadly, with our consumer goods, retail, life sciences, healthcare, high tech and insurance verticals leading the way. Since under 10% of our Global Client revenue comes from the sectors most severely impacted by the crisis, roughly 90% of our global client portfolio expanded at a rate close to double digits year-over-year during the quarter. The business climate right now is still very unpredictable. Given that reality, customers are concentrating on digital transformations; this creates a lot of fresh opportunities for us because clients, now more than ever, require partners who can assist them in crafting agile business models that don't just help them get past new obstacles, but also put them in a position to compete more successfully in today's and tomorrow's world. That has produced a robust pipeline, powered by new inflows, with a growing share of large, complex transformation deals that tie together several areas. Take, for instance, finance and accounting combined with supply chain and sales operations, or financial risk and crime linked with customer service and collections in banking. In many of these engagements, we're rethinking processes tied to several buying centers, which drives holistic change across a whole organization; we keep observing 5 trends that come up in every CXO conversation: first, a major shift from offline to online in every industry; second, the virtualization of all technology services and solution delivery; third, faster consumption of cloud-based services and solutions; fourth, exponential growth in real-time predictive analytics; and fifth, the shift toward human-centered design that produces better experiences for customers, users and employees; these trends are fueling demand for our Transformation Services solutions, which cover consulting, digital analytics, and the Rightpoint experience business, making up roughly 30% of Global Client's revenue, which grew by over 20%. Analytics played a major role again in driving our Transformation Services expansion, and it ties closely into offerings within our focus areas — supply chain, financial crimes, and financial planning and analysis among them. Today these Transformation Services offerings matter to our clients and assist in generating the change they require to better both near-term and longer-term business results. Here are a handful of illustrations. At a top personal care products firm, we boosted sales forecasting precision by over 40% and strengthened demand fulfillment, fueling growth via predictive insights drawn from pertinent social media digital data alongside conventional inventory data. Across several clients, we apply AI, RPA, and our own risk algorithms within our newly introduced post-payment audit solution to reduce and recoup excess payments made to suppliers. For a healthcare client of ours, we draw on a thorough grasp of that client's domain and technology to operate 200 applications on a cloud-based platform, encompassing AI and machine learning driven models that handle enormous volumes of unstructured data to generate insights supporting improved healthcare. One of the most thrilling developments I'd like to discuss is our recent introduction of Genpact Cora consumer banking solutions. Through multiple channels — calls, e-mails, and chats — these solutions deploy AI and advanced analytics to deliver superior customer service interactions. They also automate numerous portions of the end-to-end customer collections process, yielding quicker and more convenient resolution of delinquencies, which lifts customer satisfaction and lowers losses for banks. During the prior quarter, we had mentioned lengthening decision cycle times, especially on large deals of a more complex nature. With some of those deals progressing through the pipeline, decision making is coming back to normal. Within just the past few weeks, we secured 3 large deals plus a number of medium size deals, and we foresee a strong route toward broader scope over time. New logo wins are likewise showing excellent momentum. So far this year, the contract value from new logo wins has risen by over 80%. That reflects demand for our new solutions, above all in Transformation Services, which historically has resulted in later conversion into longer term annuity-based intelligent operations engagements that deepen these relationships. Though cumulative bookings remain below last year's level, we take encouragement from pipeline conversions now accelerating. Meanwhile, our pipeline sits at close to record levels, with a stronger than usual tilt toward early stage deals. Combine that with a solid quantity of maturing deals in the pipeline, and we feel we are well positioned to get back to a double-digit Global Clients revenue growth rate by the fourth quarter of next year, as I noted last quarter. Furthermore, our clients' need across every industry vertical to speed up change in their businesses, which is likewise widening our total addressable market, gives us confidence about returning to double-digit to low-teens growth for Global Clients across the medium-term horizon. The tailored approaches we take, the money we put in, and the growing network of partners we work with keep showing themselves to be more and more beside the point for our customers, who are grappling with difficulties in the operating climate. There are 4 areas that stand out right now as highly pertinent and sought after: our cloud solutions and services, supply chain services, financial crimes and risks, and end-to-end digital commerce services. Allow me to shed some light on each of these. To begin, we have intensified our commitment to cloud solutions and services, assisting our customers in crafting and rolling out plans that draw on our extensive domain and operations know-how so they can move solutions onto the cloud more successfully. Across every one of our primary fields of strength, we are supporting customers in putting that cloud strategy into action with rapidity and at scale. During the quarter just ended, we restructured our cloud solutions and services beneath a newly appointed cloud leader to assist in expanding what we offer in the market. To illustrate, for a worldwide asset management company, we constructed an analytics ecosystem and created a visualization interface running on the cloud, which gives field sales representatives a 360 degree picture of their customers, allowing them to deliver outstanding customer engagement that fuels retention and growth on their behalf. Next, we are witnessing strong momentum in supply chain services, with our pipeline climbing by over 30% compared to 2019.

Clients have been pushed by the swift move to digital plus fast-evolving consumer tastes to create a lot of agility across their entire supply chains, from start to finish. Better demand forecasting, planning, and fulfillment are needed to a much greater degree, and on top of that, today's conditions mean companies must rethink supply diversification and risk too. Take a worldwide CPG business, for instance: we rebuilt its information flow end to end, covering everything from sales and orders through manufacturing fulfillment and cash. We redeployed — we brought in robotic process automation — and we use sophisticated predictive analytics to build fresh models that optimize planning for the supply chain network, and that produced better order fulfillment along with higher customer satisfaction. Number three, it's becoming more and more critical for our clients to tackle fraud and financial crimes — not just banks anymore, but practically every sector, as digital commerce spreads further; drawing on deep domain risk know-how, our industry experts and data scientists are creating as-a-service offerings for fraud, anti-money laundering, and transaction monitoring to meet these expanding demands; take a worldwide bank, for instance: we boosted the precision of its financial crime detection models, applying AI and machine learning to strengthen regulatory compliance and the customer experience. And number four, with the move to digital and the expansion of digital commerce, we're also assisting clients in linking supply chain planning, order fulfillment, and online payment solutions so they can provide excellent digital experiences. Through buying the seasoned consulting company TandemSeven and afterward our purchase of Rightpoint, a digital consultancy, we strengthened our capabilities as well as customer experience, commerce, and mobile application development; and with the recent purchase of Something Digital, we've gained substantial digital commerce capabilities. Something Digital's front-end design strengths, joined with Rightpoint's experience innovation and embedded within Genpact's deep domain and operations expertise in the middle and back office, form a potent mix that boosts our already solid capacity to deliver end-to-end digital commerce solutions to the market. In a world where a work from anywhere model is a necessity for many organizations. Clients, we observe, aren't merely adapting to this shift — they're embracing it. Our own delivery models got disrupted, and via early, decisive moves, we managed to move our more than 90,000-strong global workforce to a remote work-from-home setup while keeping productivity and service level performance intact; this is no longer a short-term business continuity fix, but a more significant long-term flexible delivery model. We picture the future of work as a hybrid mixing offshore, onshore, near-shore, and remote working, depending on the kind of service, what clients need, what employees prefer, and regulatory factors. This simply creates far more degrees of freedom in business models. We keep taking a highly deliberate approach to bringing people back to offices throughout our global operating footprint. Our decision framework has always rested on the twin goals of protecting the health and safety of our global teams and keeping service going for our clients. Right now, under 10% of our workforce has come back to the office, with most of those people in China. I want to express how deeply impressed I am by the steadfast dedication shown by our teams around the world in assisting customers through the remarkable difficulties encountered over the last few months. Our business model's resilience has been thoroughly tested during this period. We have not merely restored complete delivery capability, secured 1 new deal—which includes new logos—and introduced new solutions into the market, all of which contributed to growth in our Transformation Services revenue exceeding 20%. In addition, we have invigorated our inflows, producing an all-time high pipeline. This instills in us the belief that we will keep generating upcoming bookings and revenue expansion; armed with improved visibility, we have begun directing resources once more into sales and marketing, as well as R&D, so as to seize the numerous long-term possibilities that lie before us. We have also removed the prohibition on salary raises that had been implemented earlier in the year, in acknowledgment of our staff's extraordinary dedication. I take great satisfaction in how we have performed so far this year, and in the fact that we are now elevating our 2020 full-year outlook for top-line adjusted operating income margin and adjusted EPS; having said that, I will now hand the call over to Ed.

Thanks, Tiger, and good afternoon, everyone. Today I'll walk you through what we delivered in the third quarter, and I'll also share our financial outlook covering the full year. Total revenue reached $936 million, up 5% from the prior-year period on both an as reported and constant currency basis; that increase came in ahead of our expectations and was driven by better-than-expected performance in our Global Client business as well as in GE. Global Client revenue accounted for 88% of total revenue and grew 7% year-over-year, once again on both an as reported and constant currency basis. Our quarterly results got a lift from stronger-than-anticipated growth in Transformation Services, mostly driven by client demand for our faster-ramp Transformation Services offerings in areas such as FP&A and supply chain. It's truly encouraging that our analytics revenue continued to grow at a rate above 20%. During the quarter, we kept expanding the scale of our Global Client relationships, and for the twelve months ending September 30, 2020, we grew the number of Global Client relationships with annual revenues exceeding $5 million, going from $124 million to $129 million. On the client front, accounts producing more than $50 million annually went from $9 million to $11 million, while those generating over $100 million annually increased from $1 million to $3 million versus Q3 of last year. Now turning to GE, revenue declined 8% compared with the prior year, which was slightly better than we had expected. That decrease was mainly due to softer project IT spending related to macroeconomic uncertainty. Adjusted operating income margin was 17.1%, up 90 basis points from the 16.2% we reported in Q2, and above the 16% posted in the third quarter of 2019. As for why results improved versus the prior period, most of it stemmed from a stronger gross margin this time. That was aided by the efficiency and utilization programs we launched during the previous quarter, and banking margins also recovered after COVID-19 initially struck and pulled them down last quarter. We also recorded a $5 million restructuring charge in the quarter, which we exclude from adjusted operating income. That completed the final remaining actions under the 2020 COVID-related restructuring plan. Gross margin was 35.2% for the quarter — 30 basis points lower than a year ago, yet 120 basis points higher than the prior quarter. The sequential improvement came primarily from moving past the issues we encountered earlier in the year, when clients in our banking and capital markets vertical were slow to approve remote work arrangements, along with better utilization in Transformation Services, which gained from higher revenues and fewer staff after the cost reduction steps we took. SG&A expenses, as a percentage of revenue, declined 70 basis points versus the same quarter last year, largely due to cost containment initiatives and because COVID-19 reduced travel spending. All of this translated into $3.59 per share. If we examine the sequential picture, total SG&A came in 50 basis points higher, which mirrors the investments we're accelerating to seize growth opportunities over the long haul. Adjusted earnings per share were $0.56, identical to what we posted a year ago. Strip out the negative impact of FX remeasurement, and that number climbed 7%. Quickly walking through the year-over-year bridge: adjusted operating income contributed $0.07. That gain was offset by an FX remeasurement loss of $2 million in the current quarter, against a $7 million gain in last year's third quarter, for a net $0.04 drag. Beyond that, taxes ran $0.02 higher while net interest expense cost us $0.01. Our effective tax rate for the quarter was 22.6%, compared with 20.5% a year earlier. This year's rate landed close to our expectations. Last year's rate sat below our normalized level, due to a more favorable jurisdictional mix of income plus certain discrete benefits. Turning to the balance sheet and cash flows. We closed with $803 million in cash and cash equivalents, down from $867 million at the end of the second quarter. That shift reflects $235 million of free cash flow, which was more than offset by a $250 million revolver repayment, $29 million used for share repurchases, and a $19 million dividend payment. Trailing 4-quarter net debt-to-EBITDA stood at 1.29 times, versus 1.63 times at the close of the second quarter. With liquidity improving and capital markets stabilizing, we paid down an additional $150 million on our revolving credit facility in October, leaving roughly $95 million outstanding. Our operations produced $252 million in cash this quarter, up from $220 million in the same quarter a year ago. That gain came from stronger adjusted operating income, better DSOs, and lower tax payments during the period. On a sequential basis, DSOs improved to 83 days from 87 days in the second quarter, thanks to better collections and a faster billing cycle. That faster cycle stemmed from an initiative we kicked off earlier this year. For the full year, we expect to end with DSOs in the low 80-day range. Capital expenditures in the third quarter were 2.2% of revenue, versus 1.8% in this year's second quarter, reflecting stepped-up investments supporting our COVID-19 work-from-home capabilities, including information technology and related information security. Our full-year capital spending outlook is now about 2.5% of revenue. During the quarter, $48 million of capital was returned to shareholders. Of that, $19 million came from the regular quarterly dividend of $0.10 per share; we also repurchased roughly 740,000 shares for $29 million, at a weighted average price of $38.59 per share in the quarter. From the beginning of the year through October 31, 2.9 million shares have been repurchased for a total of $116 million, at a weighted average price of $40.18 per share, including the 1.1 million shares bought in October at $38.41 per share, or $42 million. Since our repurchase plan kicked off in 2015, the count of shares outstanding on a net basis has dropped 18%. Over that period, we repurchased 40 million shares, paying an average of approximately $27.10 each, which came to $1.1 billion overall; roughly $158 million of authorized capacity remains unused under our repurchase program. Let me now turn to our outlook for the full year 2020; excluding currency effects, we expect revenue growth for the full year 2020 of around 5% to 5.5%, raised from the 3.5% to 5% range we gave before. That reflects stronger-than-anticipated outcomes from both our Global Clients and GE businesses. On Global Clients: on a constant currency basis, we now expect revenue growth in the 6.5% to 7% range, ahead of the 5% to 6.5% we had projected. For the full year, GE revenue is expected to decline roughly 5%, versus the 6% to 8% decline we previously modeled. Because our third quarter was so strong, we now expect an adjusted operating margin for the entire year of about 15.7%, better than the 15.5% we had earlier guided. As noted previously, during the fourth quarter we are restoring our R&D plus selling and marketing spending to more typical levels; once 2021 arrives and beyond, we expect to resume our trajectory of consistent margin improvement. With that outlook in mind, our revised estimate for adjusted earnings per share for the whole year is now $2.08 to $2.11 per share, raised from the $2.03 to $2.07 range we provided earlier. We have frequently discussed the resilience embedded in our business model, and this year demonstrates clearly how our services possess a nondiscretionary, recurring character. Consider that against the broader economy, in which U.S. and global GDP are each expected to contract by roughly 3% to 5%. I am truly pleased with our business's performance — not just because we are delivering top-line growth while numerous industry peers post declines, but also because our teams moved so decisively to boost utilization and keep costs contained. As a result, our adjusted operating margin is expected to slip only 20 basis points year-over-year; and looking ahead, we are well positioned and fully committed to sustaining appealing adjusted EPS growth, including reaching $3.59 per share. That said, I'll return the call to Tiger.

Thanks, Ed. What we achieved over this 12-month period shows how nimble we are and reflects a culture that welcomes change; people know us as a dependable partner in transformation, one that puts clients at the center and pairs innovation with operational excellence. In our view, the roughly 7% full-year constant currency Global Client growth forecast will rank among the strongest in the sector. Meanwhile, we adjusted our cost base so it fits better with the growth path for this year, which let us land an adjusted operating income margin near what we initially anticipated, even as we restored spending on the frontend and R&D. The jump in innovation makes me happy, especially with conditions shifting, as shown by more patent filings so far this year. Looking ahead, our medium- to long-term Global Client growth expectations remain the same, at a double-digit to low-teens rate. Four signals give us this confidence: 1, more CXO discussions aimed at driving change; 2, more new logo wins with excellent brands; 3, ongoing momentum and transformation services fueled by faster digital transformation journeys among our clients; and 4, big deal signings starting to return following a pause lasting a few months. Our strategic relationships worth more than $50 million and $100 million keep expanding, which proves how strong our business model is, how differentiated we are and how much value we create for clients. The strategic decisions taken during the past few years via organic investments and acquisitions — supply chain, financial crimes and risk, digital commerce and experience among them — are clearly highly relevant in the current climate. We believe we are in an excellent position to compete in 2021 and beyond. With that, I'll hand the call back to Roger.

Thanks, Tiger. At this point, I want to begin the Q&A portion of our call. Michele, would you mind giving the instructions?

Excellent. Hi there, everyone. Nice quarter. Well done.

Hello, Ashwin. Thanks a lot.

Hello. I wanted to ask something regarding the forecast for this year, though. I realize you mentioned the full-year guidance. Yet at least on first look, 4Q comes across as fairly conservative. So what's not clicking for me? It looks like you're building in a decline in the top-line as well as reduced margins. Should we be factoring in anything that isn't obvious at the outset?

No, Ashwin, I mean, to start with…

Well, I think — yeah, go ahead. Go ahead, Tiger.

Alright, Ed, let me start us off here, and then feel free to jump in. Ashwin, what I'd say is that we're operating in a climate of uncertainty. Reaching that judgment doesn't require much effort. Part of it reflects the conditions surrounding us and those our customers are dealing with. Secondly, when we examined quarter 3, we benefited somewhat from surge-related work performed for a group of clients, banking ones in particular, and we shouldn't presume that will happen again. And thirdly, GE along with companies similar to GE, plus other customers who experienced a reduction in activity caused by circumstances related to COVID-19, a portion of that wraps up during Q4. Regardless, Ashwin, the key point is that we truly don't view our business on a quarter-by-quarter basis; instead we consider it across a 12-month span, an annual timeframe, a rolling 4 quarters. So I'd avoid reading too much into comparisons between Q3 and Q4 — those figures fluctuate rather freely. Ed, would you like to touch on — anything you'd like to add there, and also…

I mean, I also just think that during last year's Q4, the expansion was strong as well, correct, which makes the year-over-year comparisons harder too.

Correct, there was a bit of a conflict there, yes, once more…

Regarding margin, we've begun turning back up — that is, ramping our sales and marketing plus R&D, both of which had been halted when we went through COVID-19's initial phase. And we've restored the standard salary and compensation raises that, once again, we had put on hold during those 2 quarters in the middle.

I see, I see. Understood. Then, regarding the strong cash flow from operations — first, I want to acknowledge that, but I also want to ask whether any one-time items played a role, or whether this reflects what you can achieve sustainably in terms of converting revenue and so forth.

I believe our growth so far this year, and probably for the entire year, will exceed what's typical, correct. I mean, even in an ordinary quarter for Q4, we'll probably see cash flow growth above 20% for the year, which is enormous. I'd love to claim all the credit for that. But I think some of it stems from working capital effects, right — just a general comment on that. At present, I'm pleased with, clearly, the teams' improvement in DSO that took place in the quarter, so that's excellent progress. That makes me happy. But looking more broadly, you'd also conclude that working capital has far less influence on cash flow growth this year than it would in a typical year. So normally, we should be expanding in line with net income, as I mentioned, right, at roughly a double-digit rate for cash flow; thus we're far above that — the largest portion of that ties to working capital, and the largest portion of that involves receivable balances, caused by the year-over-year growth comparisons.

Understood.

Although, Ashwin, we’d also like to claim a bit of recognition for how well we carried things out.

That works for me.

The results we've seen on cash flow have left us quite happy.

Yes, yes. My apologies, I was merely…

Correct. No, fellas, that's fine. All right, I appreciate it. Well, it's thoroughly earned. Thanks.

Thanks, Ashwin.

Alright, take care.

Sure. Hi, everyone. Appreciate it, and nicely done.

Hello, Dave. Thanks so much.

Yeah, so maybe, to start with, since we're now roughly 7 or 8 months into the COVID crisis, what sorts of things have you managed to notice about all this? And really, I suppose what I'm getting at is, what long-term benefits and headwinds to revenue and margins are you beginning to detect, just from watching your own experience of working through this?

So, Dave, saying there are benefits of COVID-19 would be a mistake, I think. And that's not what you're asking, I gather. The world and businesses have picked up quite a few lessons, I'd say. First, technology's leverage — whether for conducting business, for information flow, for work flow, digital transformation, collaborating via technology — all of it was already there. The pace of change along those lines, I believe, has sped up enormously. And I think that's a fantastic lesson the world has absorbed, our clients have absorbed, we have absorbed; and that will never shift, in my view. So today we're on a faster track of digitizing, of shifting services and solutions to the cloud, of being capable of reaching information and completing transactions from any location at any moment, on whatever device. The appetite for predictive insights and analytics — all of that represents change that has occurred which under ordinary circumstances would have required 5 years, and right now we're in the midst of a speeded-up transformation. And how could that be anything but positive, yet we shouldn't slip into thinking that the businesses we serve, the clients we serve, aren't facing an unpredictable world and enduring hardship. So I think there's a — it's somewhat a tale of two cities. Once we emerge from the crisis, and suppose, say, a vaccine appears, I think the world will have gained so much knowledge, that really one anticipates a world where you can genuinely take every learning of yours, return to a more typical manner in which we ran businesses and blend and combine all of it; hybrid delivery, hybrid collaborative pools, the capacity to truly accomplish far more and with far greater speed of decision making. So, many things that are lessons that I'm certain the world will discover a chance to blend and combine; and that shapes our capacity to deliver great value to our clients. It shapes the capacity to leverage technology. It shapes how far online is going to succeed, again an acceleration, so many things along those lines.

Great, great. Thank you, and maybe just one quick thing — what was the amount from acquisitions in Q3? My understanding is that only Rightpoint was adding to it. And then, what's your expectation for Q4, since Rightpoint, I believe, hits its anniversary and Something Digital comes out?

Rightpoint's contribution matches what we discussed previously — I think we mentioned roughly 200 basis points of growth for the entire year. That's unchanged, correct. The company felt the effect as Rightpoint, both roughly to the same degree; so that percentage is exactly the same as before. And you're correct, that anniversary wraps up at the end of November, I believe, which is when Rightpoint arrived; so you're right.

All right, and thank you, everyone. Nicely done.

Thanks, Dave.

Appreciate that, Dave.

Hi there, Puneet here, filling in for Tien-Tsin. I appreciate you fielding my question.

Hi, Puneet.

Tiger, given that lots of nations are set to enter lockdown once more and infections are climbing in every region, what do you think explains the better level of deal activity now, compared with the shock we experienced back in March and April? With the ongoing uncertainty you just described, are enterprise clients no longer putting off their decisions?