Genpact Limited (G) Earnings Call Transcript & Summary

Hello, everyone. Thanks for joining in. This is Tien-Tsin Huang. I cover the payments and the IT services sector at JPMorgan. And super happy to have with us Ed Fitzpatrick, the CFO of Genpact, to give us an update. And like the other sessions, we're going to do a fireside chat format, again, with the questions that I've gathered from the investment community. And if you have any questions, feel free to log in through the portal in the Ask a Question section here. And I will be monitoring the questions and happy to ask Ed, especially the hard ones, as I get them. So Ed, great to see you. Thanks for joining us today.

Thanks for having me. Glad to be with you.

No, it's great. I know you guys are really busy. So we'll get right into it, if that's okay. I thought we'd just start. I know coming off your earnings that you disclosed a lot already. But maybe just get everybody on the same page here and just maybe quickly walk us around the globe, talk about what trends you're seeing from a client priority standpoint and how well you've been positioned here, especially given where we are in the pandemic.

Sure. Sure. I think I'd say just first, broadly, the market is every bit as attractive as it has been. The demand, as you've seen, there's been an elongation of our bookings that we talked about in the last quarter -- or last quarter or half or so. But broadly, the priorities are similar for our clients as they were before the pandemic, right? Need to find ways to transform their own businesses, right, and keeping a competitive advantage. That's continuing. And COVID, in many ways, just kind of accelerated certain things. And we do expect over the long haul that this is probably more of a tailwind for us, even though right now, it's been a struggle for most companies. But we do view this as another impetus to say, "How can I run my business more effectively and efficiently?" And there's a few -- I'd say a few trends or things that we're helping our clients deal with, right? So -- and one is, you heard Tiger talk about the shift from off-line to online across every industry. It's just happening, right? And the virtualization of technology and the solutions. Everyone is having to deal with that, right, with the virtual environment that we're all in. And that accelerated consumption of cloud-based services, is also a necessity in this environment. So these are all areas that we're doubling down in, making investments both organically and inorganically. And on top of that, you heard us talk on the quarter call about analytics continuing to grow at an accelerated clip. And I'm really thrilled to see that happening as all of this data, the digitization of data is now getting organized, and data management and the prevalence of that is allowing us to do a better job of doing real-time predictive analytics on clients' data. And that's been a big demand that we continue to see, and we expect to see it going forward as well. And then you kind of wrap that all together with the customer experience, the customer and user experience, whether that's B2B or B2C. For our clients, they're focused on it, and we're dialing up our investments in that space. So all that, you bring that all together, it's the investments that we've made in digital and analytics capabilities, both organically that we've been building, but also by M&A and through our partnerships. It helped us drive these solutions for our clients and position them to better compete in this environment.

Yes. And I'd like to think Genpact seems to be in a good spot here, given where we are in the cycle and the type of work that you can do with the clients, especially with some of the digital and with some of the analytic investments you've made. But I wanted to maybe kick off a little bit here just asking about sales cycles. I know you talked about activity is back to pre-pandemic levels, but bookings are expected to be down. So maybe if you could just elaborate on what that means for the P&L here, both in the short term and the midterm?

Yes. I'd say that although bookings have elongated and are taking longer to get through the funnel, if you will, the good news is, is our pipeline of deals has grown, right? As you might expect, it's good. You're seeing the pipeline growing to record levels, near-record levels, and we're happy with that. And it's a combination of later-stage deals because of that elongation, right? There's more kind of back-ended, if you will, but also a healthy dose of front end, right? The middle is kind of where it was the weakening point, but the front end is heavy -- or the beginning of the funnel is heavy, and the later-stage pipeline is also heavy, which is good. So we see that coming through. So the sales cycle is definitely elongated during that period, necessarily so and just as expected, frankly. It shouldn't be a big surprise. What we're seeing happening is the conversations with clients, the number of conversations are increasing dramatically. Part of that purposeful, right, where Tiger and our leadership team has said, "Look, we need to have more conversations with our clients, and it needs to be virtual." But those conversations are happening because just about everybody has more time on their calendar, right? Nobody's traveling, so they're able to take meetings that used to be, wait a minute, I'm traveling. I can talk to you this week or next. And schedules just couldn't meet up. That isn't happening. And clients are engaging with us more and more so now than they ever have. Tiger has talked about his own calendar. Hard to imagine him busier than he was before, but he is, right? I'm having more conversations with CFOs and CXO level than I ever had before because I have the time and they have the time. So I think that's been helpful. So I think this engagement has actually increased, believe it or not, because of the frequency, because of the number of our people who are also dialing up their time. People that didn't even have conversations to the extent they had before, having people like me, even more so than previously. So I think that's helping. Does that equate to in-person meetings? Maybe not. But the frequency of it, the number of conversations does help. And when things do start to return to somewhat more normal levels where you can do some meetings in face-to-face, I think the combination of the 2 actually leads to a better environment to be able to maybe even speed up the pace of deals getting closed. We'll have to see how it plays out. I don't have a crystal ball, but I do think the engagement has not lessened, it's only increased. The in-person engagement has been less, as you'd expect. But when things come back, I think the combination will be even more powerful.

Yes. No, that makes sense. I know leading up to the pandemic, Genpact had a lot of momentum. You had some large wins in Walmart and in Bridgewater. Then of course, COVID hits. And we transitioned. But you just mentioned your engagement level, it is up. But I'm curious, like that momentum going into the pandemic, do you feel like you're sort of back on that kind of pace? And what -- have those wins opened up maybe more doors for you to talk to maybe larger clients or other clients that you otherwise wouldn't have talked to?

Well, I think for sure, when you land iconic names like those as customers, there's definitely a eyebrow raise from our customer base in those -- particularly in those particular verticals, right, where we serve them. So that's certainly been positive for us. And we're -- we've used those as references in the past and expect to continue to in the future. And obviously, the capabilities there that we're looking to leverage and build, we're definitely looking to leverage those. So that -- I think that definitely has helped. Is the momentum back to where we were in Q1? Hard to imagine because Q1 was probably the -- probably in my career, was probably one of the best quarters that I've seen. Not just the numbers were great, and they were growing in the mid-teens in terms of growth, both GE and GC, but then the pervasiveness of the growth across all of our verticals was just so good, and then this pandemic hit. So disappointing that, that happened because it's kind of stalled some of the momentum that we had. But it doesn't change the attractiveness of the services that we're providing to our clients. It just doesn't, right. So the market is every bit as attractive. And that's why we feel very strongly that, as the bookings get back to that normalcy of coming -- of flow through the pipeline, we'll build back up to that double-digit-plus growth rate that we've seen for a long, long time in Global Clients because the penetration rates are just similar to where they've been for a long time because we continue to add services to our skill set, like supply chain and financial planning analysis and others, right? So with that penetration rate being so low, we do see growth returning to normalized levels over the next several quarters. We think that will happen.

Yes. I mean, it seems like it's set up that way for you to get back to that double-digit growth hopefully sooner rather than later. But we'll see. I think it's just a matter of time. I get that. But how about just backlog conversion, Ed? I mean, your ability to convert the backlog, both from a delivery standpoint, but also the client willingness to move here. Is that -- do you have good visibility on that?

I think it is improving, Tien-Tsin. I think it's -- but it's kind of aligned with what we thought, right? When Tiger said 1.5 quarters ago on our Q2 earnings call, that he expected it would take a few quarters to get back. The back part of the Q4, effectively, of 2021 until we get back to 10%. He was thinking that it would be a gradual improvement. It wasn't all going to get solved overnight. Like all these deals coming through the funnel and getting done in 1 month just isn't practical, right? It's going to take several quarters. And the good news is the next quarter when we just gave the guidance with a little more specificity in terms of the rollout, bookings have started to come in again, right? We talked about the 3 large deals that happened in the quarter, and that's good news. And we expect -- we're not expecting it to all again happen in Q4, but we expect that, that trend to continue of, hey, we ought to be able to get a few large deals in the quarter. And if that trend continues, 2 deals per quarter in a large deal stage, that's where the growth comes from, right? That's where we get back to, okay, when you do a big deal, that gives you growth for the whole year, right? Because it starts out smaller. Each quarter, you build up on that particular account, and that's what fuels that growth. That's why when you have a bookings pause like we saw in Q2 into Q3 at lower levels, that has a longer-term effect on our business. We come down slower than most, but we'll return slower than most because of that long-term nature of that build.

That's helpful to know. So let's -- just sticking with the delivery theme. I know Genpact, you were very quick to move to work from home. I commend the company for that. I know we've heard you and Tiger say you learned quickly from what you saw in China and moved on that information. So can you execute these contract ramps effectively based on what you know now from working from home for some months now? And then more importantly, your ability to hire, train, right, staff, as things ramp up here in this virtual world, not knowing when we get back to normal. Can you update us on that?

I think we're all kind of in this mode now of virtual engagement, whether that's supervising your team or hiring or training and retaining your crew, that's kind of -- that's the world we're in right now. So we'll have to see how it plays out. I'm pretty confident that we'll be able to ramp the deals that we need to because it's a core competency, right? We're able to ramp large deals pretty quickly. Our HR team, it's a core competency of the company, right? It's -- you don't get to close to 100,000 employees without knowing how to hire, how to retain, how to train your crew. So I think that's something that our teams have a great handle on. They've been doing it virtually even in this environment. And I suspect as growth kind of returns and continues to build throughout 2021, that we'll be able to handle the ramps. Some of those ramps will also be rebatched in nature as you've seen us do, where we're stepping into the shoes of our client because we like the capabilities they have in particular areas, and areas that you talk -- that we've talked about where we want to build our own competency. So I think that will also be part of it. But there will also be a ramp in hiring that we'll see throughout 2021 if our forecasting holds true, and we expect it will.

Good. So let me ask you sort of back to a bigger-picture question. Based on what we learned from COVID and what you said where we've adapted to this virtual world. This -- the pendulum of outsourcing versus in-sourcing and captives and the importance there, do you feel like there's a shift here towards outsourcing? That's our sense, Ed, but would love to hear your thoughts because the world is getting more complex and uncertainty levels are high, but outsourcing can cure a lot of that.

Yes. I don't have a crystal ball, but I definitely would say that it's more of a tailwind than a headwind for us, I think, Tien-Tsin. I think it's -- the comfort level of dealing with people virtually has just significantly accelerated, right, because everyone has had to go to a virtual environment and virtual engagement with their own teams. They used to be sitting right next to them in the office next door, whereas now, they're closing the books, they're doing their financial planning analysis, supply chain analytics, all of that is happening virtually with their own teams. So that discomfort of working virtually with someone that might be halfway around the world, but they're talking to them on the Zoom call, has just been -- the myth you can't do that effectively has been blown. And I do think that, that will be an impetus for people to say, "Wait a minute. If I can do this now virtually, why can't I work with someone in another company, by the way, that gives me a little bit more diversity?" Also that has a full focus in driving improvements in this area. We'll drive investments in technology to keeping evergreen on the latest and greatest technologies in this space at scale. I think those types of things will resonate even more with our clients. Again, I don't have a crystal ball, but I would definitely view it more as a tailwind than a headwind for us going forward.

Okay. Got it. So in your -- in the beginning here, you talked about the accelerated consumption of cloud. I know on the call, you talked about cloud quite a bit. I get this question a lot, too. Just how does cloud and digital transformation directly and indirectly impact Genpact? Because we're all trying to -- we hear this theme a lot, right, modernizing the core and automation and everything else. And then you've got the business processes that sit on top, where Genpact also historically has been, that might be impacted. So how does Genpact get impacted by this theme?

Well, it's -- there's a lot of technologies that are coming out, right, that are helping everything in digital, whether it's RPA, artificial intelligence, machine learning, now cloud-based technologies, right? Whatever the technology is, we're aware of it, right? Because our whole mantra is to improve process, right? It's relentless pursuit of process improvement, right? That's what we're all about. So continuing to look at a better way to do things, right? It's the Six Sigma way. That's what we do. So -- but it's a combination, right? It's not just what is this new technology? What does it do? It's what is the process that you're doing today? How can it be run most effectively, right? What's the end game in terms of the process and the problem you're trying to solve? So if you don't know the domain and the process that you're running, you can't just port it to some new technology, and all of a sudden, your problems are solved, as you know. But we do think that with all these technologies that are coming, they are allowing us to accelerate the process improvement and get to scale in terms of some of these solutions. And the cloud is just another example of that, right? You think about server-based -- physical servers and capacity constraints and/or having to have them regionalized. And if you can go to the cloud and distribute analytics to the teams in the field at a touch of a button, that's better, right? In my own financial planning analysis team, we're actually able to deploy a workflow based -- or whoever is allowed to have access to certain data, we're able to distribute these analytics to that particular vertical or service line that should be seeing that data now much more. It's not an Excel spreadsheet push anymore by e-mail. It's using data -- cloud-based solutions on top of our data to be able to give access to our global teams to the data real-time. And those things -- those are real solutions, right? To improve the speed of getting data to our -- in the hands that need it.

And then just on the automation side, for clarity, just thinking about the risk and the opportunity. So automation, you can do the work as you've talked about. But you could argue also reduces some of the TAM as well in terms of more efficiency. And I know we've talked about this for years, Ed, but given what we've learned with COVID and the embrace of automation here, is the viewpoint different?

Not really. I mean, it's really -- it's, again, another tool to make a process more efficient. And every time we make a process more efficient, that eats into a predefined market or TAM, right? So that's what we do. That's part of our being. And what we found is it hasn't shrunk our TAM at the end of the day, where it's actually grown our TAM because we've been pulled into other areas that is very process-centric. Like how do you improve this process? How do you improve my end-to-end experience, both for my own employees and for our customer base, right? So the supply chain and supply chain finance end-to-end that we're doing for clients was not even in our servable TAM a few years ago. And then we got pulled into that. Financial planning analysis has not been an area that we've really focused on. We're now getting much more pulled into that because we've been a -- we've been getting through and digitizing the data for our clients, getting into data management, helping them organize their data better and using our own data scientists to help them analyze the data and do predictive analytics. Those are areas that have kind of dialed up meaningfully for us because we're applying that domain plus that technology, that new technology, to take us to the next level and improve the processes for our clients. So I said it probably 6 years ago when I first came: I look 5 years forward, and I see hey, can this company grow? What's the rate that I think is the right, reasonable rate for us to assume? And I thought double-digit was about right 5, 6 years ago when I joined because it was Global Clients could grow at double-digit plus, and GE would be flattish over that time line. I feel the same way now, and even better about our growth prospects, 5 years forward than I did 5 years back. So that just speaks to the TAM not really shrinking because there's other areas that we're getting pulled into. And the TAM, I view, is not even something I'm worried about at this point.

Okay. No, we share that for view as well. So maybe just maybe bringing it to a sort of CFO-level question. I think given everything we've talked about, automation and some of the cloud trends and work from home, are clients asking for different types of SLAs and sort of pricing models now, given sort of the new world that we're in? What are you seeing as you're negotiating these contracts financially? Any change?