Genpact Limited (G) Earnings Call Transcript & Summary

Thanks, everyone, for joining the Genpact session. My name is Tien-Tsin Huang. I cover the payments and IT services sector at JPMorgan, and really, really happy to have Genpact back with us again. We've got Tiger Tyagarajan, the CEO and President of Genpact that's nicely agreed to spend a few minutes with us and go through some questions that we have put together. We'll do fireside chat. We'll also take questions from the ask a question portal. So feel free to ask questions through that, and I'll be keeping an eye out on that. But Tiger, it's great to see you. Thanks for being with us today.

Tien-Tsin, as always, great to see you and a pleasure to have this conversation. Thank you. Thank you for inviting me.

Yes. No, of course. Let's get right into it. I'd say the first quarter results were definitely better than we had expected. I know you didn't alter fiscal guidance, which I know is customary for Genpact. But maybe if you want to elaborate on where you're seeing strength in the business and maybe where you're a little bit more cautious as well.

Yes. So as you know, we ended the fourth quarter last year with significant strength in the business, both in terms of inflows into our pipeline as well as conversion into bookings. And that momentum seemed to carry through -- right through into Q1, and that's what we saw through the quarter, both in our Managed Services, Intelligent Operations business as well as in our Transformation Services business. So the first thing I'll say is that growth was pretty pervasive. Overall performance actually exceeded our own expectations. You talked about exceeding your expectations, but it exceeded our expectations as well. And that expectation being beaten on our side was pretty pervasive across our various verticals. All verticals did really well. Banking delivered on what our outlook was, which was to be not growing, but that was driven by the contract that we called out in the fourth quarter that we said would be restructured as we start this year on the asset management side of one of the banking clients. And then Transformation Services continued its momentum that we saw right through 2020 into 2021, and particularly pleased with the performance of analytics. We've had 3-year great run in analytics. And the way Q1 has started, we feel very, very good about the trajectory of the analytics business. A little bit not of a surprise because that's the way the world is going, data, real-time insights, more predictive insights, et cetera.

All right. Great. I did want to ask about the supply side. I think, Tiger, that was sort of the biggest takeaway, I thought, for the whole group in terms of the earnings season was just the supply side. And of course, what's happening in India, and we're thinking about, obviously, everyone there. You've adapted to work-from-home very quickly. I remember talking to you about it this time last year. But are you concerned about absenteeism and that potentially rising and impacting delivery? What kind of plan do you have in place to deal with what's going on in the ground in India?

So Tien-Tsin, I'll start by saying that what's happening on the ground and what has happened on the ground so far is tragic. It is a humanitarian crisis. And I really feel for the teams, what they face on the ground, both in terms of the impact on them, the impact on their family, as well as in, many cases, when team leaders and managers have to deal with it in their teams, and someone on the team really falls ill and is not available or someone in the family falls ill. Having said that, as we look at the numbers, we track all of these numbers obviously on a person-by-person basis. That nonavailability of the person for work peaked about 10 days back. And the last 7 or 8 working days, we've seen a systematic reduction in the number of people who are not available for work, absenteeism. And for us -- by the way, the definition of absenteeism is a combination of 2 things: people who themselves have been impacted and therefore are unable to work as well as people whose close family members are impacted, and therefore, also unable to work. And therefore, we combine those 2 and track that. For us, in reality, whether you're impacted or your family members impacted or unable to work, the reality is, one, that's exactly what you should be doing. You should not be working. And two, our job is to then figure out how do you manage that. I think we've managed it really well so far. And I guess one way to think about it is, at least as far as the current wave is concerned, we think the light is getting closer and closer to being at the end of the tunnel and you're out of the tunnel. And vaccination continues to chug along in the country. More importantly, I think we are beginning to start vaccinating our population. It's still going to be a long haul because vaccines are not easily available, but we are beginning to launch vaccination campaigns in our campuses across the country. And so far, our clients -- I have to say, apart from our employees, being amazingly empathetic, both to each other as well as to the service to the client, our clients have been just phenomenal. It tells you that in the end, all of us are together in a journey like this. So clients have been very, very partnership-oriented, very, very considerate and empathetic towards the team as well as to the service delivery requirements. So overall, I think it once again demonstrates, I guess, the resilience of the business, the industry. So far so good.

I'm glad to hear it for many, many reasons, Tiger. So thinking about the impact, assuming hopefully everything continues to recover and the trends work in your favor, there's going to be some delay in return to office. I know a lot of companies are sort of dealing with that today. How does that impact the outlook as you think about it for Genpact?

So our game plan on return to office always had 2 significant components that we were looking at. One is a game plan that was going to be orchestrated country by country, city by city, with no one-size-fits-all journey. So as we speak, for example, we are already beginning to think about what is the right time when our U.S. operations comes back into office for the processes where it makes sense for them to come back to office. And that discussion is ongoing. It's ongoing with our clients, et cetera. And the same would apply to some of our European operations as the vaccination and the caseload in those countries, whether it's Romania or it's Poland, continues to drop. As it relates to a place like India, clearly, we knew that coming back to office will be a longer haul because the population is larger. The whole vaccination campaign will take longer. That is all known and given. I guess this particular wave has just extended that to a longer time horizon. It doesn't change much of the way we think about the business because that's where we think about the second bucket of return back to office, which is what types of services, what's the right design for what we are clearly calling a hybrid model and a flexible workforce model, which is some services being delivered by some people being in an office, some people being remote. Some services where people are in an office at a particular point in time, it could be a particular week, it could be a particular set of days for a variety of reasons. And for other times, they are working remotely. So it's this combination that I think we are -- we've created designs on each of our services and what's the right way to think about that combination and what are the puts and takes. The reality is it's going to be a discussion with clients. Different clients will land differently. After all, even after 20 years of being in this business, Tien-Tsin, some clients would like all of their services for Continental Europe to be delivered from a place like India. And some other clients would like all of their services in finance and accounting, for example, for Continental Europe delivered from one of our European delivery centers. And many clients fall somewhere in between, but there are both extremes, and I think that's going to happen even in those work-from-remote versus work-from-office environment.

Interesting. Yes. It sounds like it will be very client specific, obviously, cultural from that standpoint. But it does feel like, to me, Tiger, just to get an update from what I asked you last year, and I always hesitate because I don't want to celebrate the pandemic in any way, but it must be good from a productivity standpoint for you and your ability to tap into a wider talent pool, both on-site and offshore. Do you find that to be the case?

So I don't want to jump to the conclusion. I guess most of us, and I would put myself in the camp of saying, wow, this is really high productivity in the early days of moving to work-from-home. And part of that was also because our expectations were I don't know if this is going to work, question mark. Well, guess what, it worked, and it was highly productive. And I think what we've learned over the last 18 months is, number one, yes, of course, you can drive productivity of one kind, which is you don't have to travel. You don't have to get to office and all the overheads of moving around the time that you spend in traffic and traveling and so on, but you do miss the opportunity to actually a team of 10 people getting together and debating a better solution, debating a continuous improvement project, debating a new digital solution that will drive better working capital improvement or better cycle time for loan approval, various services that we offer and various innovations that we drive. I think when it comes to innovation, I think a mixture of being together in a room, combined with, clearly, some of these meetings can be on Zoom, can be on Teams. So it's the mixture that we are realizing actually works well. Any one of the extremes, I think, is a challenge. The other way to think about productivity, Tien-Tsin, is there is a view that real estate cost can be reduced in this journey. And again, I would be very cautious with that assumption for 2 reasons. One, real estate cost is a function of the dispersion of the people who occupy that real estate, and I don't think they're going to come into the same dispersed environment. It's going to be much more dispersed going into the future for some time. The second is we all managed to run 24-by-7 kind of operations where the same infrastructure was leveraged more than one shift in many, many cases. Not necessarily all 3 shifts, but certainly more than one shift. And that obviously is not the case when you go to work-from-home. And then you overlay that with all the [ infotech ] and security and privacy requirements of a work-from-home environment where every one of our people who's working from home needs to be in a protected firewalled environment versus if you're in an office, the whole office is protected. So I just think we are very clear that the movement to work-from-home is not a cost advantage. Hopefully, we can make sure that it is completely cost neutral. What it does is that it provides flexibility. It opens up a whole new talent base. It opens up a whole new way of just -- when I say productivity, I'm not saying productivity in terms of an individual doing more transactions. It's just work-life productivity. The fact that I -- when I finish work, I can actually be my family, does make a difference. Now I think we all know that in the world of Zoom and in the last 18 months, how do you draw that line is very tough. And that's something culturally, I think all of us are trying to drive. I think every company is trying to do that. And I think we all owe it to our teams to be able to find a way to do that.

Yes. No, that's all very well said. I'm going to have to go back and re-listen to it. That was very well said, Tiger. So thank you for that. I think I don't want to spend too much time on the supply side. Let's get into the sales pipeline. I know that's something that's close to your heart. What I remember from the call, the most is what you mentioned that [ sole source ] is doing quite well in terms of opportunity and seeking new business. Is client activity getting back to normal, Tiger? And do you feel like the visibility is getting back to prepandemic or better levels, visibility wise?

No. Actually, I would say that actually happened towards the latter -- it's certainly in the fourth quarter of last year. Both visibility and activity had gone back to prepandemic levels. If anything, I would say, our total addressable market seems to have expanded driven by 2 things. One, in a number of our existing relationships, many more buying centers being open to undertake change and transformation journeys. Because the moment you'll think about digital transformation and the acceleration of that transformation, you realize that actually, you can't make that work in a silo. If you want to digitize, let's say, the cycle of receiving an order from one of our clients' customers to then fulfilling that order and collecting the cash, typical order to cash cycle, you also need to think about digitizing how is that order being placed, and therefore, how does that work in an environment where you're managing warehouses and inventory and supply chain. So the intersection of finance and accounting with supply chain, supply chain with procurement and sourcing. The intersection of all of those with the importance of master data management and how do you use new technologies to actually make all of that much more digital and then the importance of experience. I think a number of these things are bringing a lot of new buying centers to be opened up in existing clients and then a whole bunch of new logos who historically haven't worked with partners like us on our kind of services and actually have had the view that they can do this all themselves. I think when you say that you want to accelerate your journey from 5 years to 2 years, you realize that actually, it might be better to have partners. So we are seeing many more of that happen. And our ability to actually have those conversations, create the design, create a target operating model, create the process reengineering upfront in Transformation Services engagements that then converts into Intelligent Operations is actually what we are seeing more and more play out. So we feel very good about what happened fourth quarter in terms of inflows, continues on in -- continued on in the first quarter. That led to historic levels of pipeline. Again, nicely distributed across our industries that we serve, including -- and this is the most interesting one, including banking where we saw pipelines start building up again in terms of new inflows and new deals.

You mentioned order to cash. I'm just trying to think as you answered that, things that were impacted by the pandemic, I would imagine that things like something as order to cash being harder to do during the pandemic, getting to the lockbox or whatever, I can imagine, might drive some incremental inflow, as you called it. Did you find that to be the case? I'm asking this because Genpact did hold up pretty well during the pandemic when you look back and benchmark. I'm curious if that's one of the reasons or is there something else that you would call out for why Genpact...

No. Actually, it's a great question, Tien-Tsin. So we -- I would say 3 reasons why I believe we held out really well versus the industry median on growth rates in 2020. Number one, the nature of our services once again demonstrated that they are predominantly nondiscretionary. That got demonstrated in the financial crisis of 2009, 2010. It again got demonstrated here. And in most of the industries that we serve since we don't serve too much of the deeply impacted industries and travel, et cetera, that actually did help us. Most of our services ended up being nondiscretionary. Second is when we went to work-from-home, the agility that our team showed in going to work-from-home and continuing the services, obviously, was very, very important because our clients were also going through the challenge of going to work-from-home themselves. And in that environment, to be able to close the books of everyone on time, and in fact, in most cases, actually slightly better than on time, to be able to continue to work on receivables and bring DSOs down for our clients, at a time when they were worried, that receivables will become a problem for them. I think all of those basically ended up raising our Net Promoter Score with clients and allowing them to say, actually, you know what, I should talk to you about more stuff because I want to accelerate some things. And then the last one would be in Transformation Services, we pivoted pretty quickly to understand what are the key drivers that our clients are looking for during the pandemic. And for example, order to cash. Receivables management was a big one. The other one was demand forecasting. Almost every industry realized that the old models to forecast demand were no longer valid. I mean how can a pharmaceutical company forecast the requirements for allergy medicines when no one is stepping out of the house? Or how can a food manufacturing and agriculture manufacturing company predict that the sale of yeast and wheat flour will go up, whatever, 5x because everyone is baking at home. So really, analytics within Transformation Services and then being able to parse that into, therefore, what does it mean for order management, therefore, what does it mean to supplier management and that whole flow, I think -- the 19 odd solutions that our team came up with and took them to market in about 45 days allowed us to keep the Transformation Services engine going. These are quick payback projects, real impact at a time when our clients really wanted it, cemented our relationship, in a few cases, opened up new logos. We had a very good 2020 in terms of opening up new logos, primarily driven by these types of efforts. And I think that's going to create the tailwind over the next few years as we grow those logos.

So those are good examples of transformation, Tiger. So do you think that, that's -- I don't want to say it's a new muscle for your clients to think about things that way, but do you feel like there's more to build upon here as you sort of expose that capability to some of these clients you're talking about?

Yes. Actually, Tien-Tsin, great question. And I think I'll start by saying it's certainly a much stronger muscle for us that got strengthened in 2020 and that, I think, played out in 2021 first quarter because we've been building that muscle for the last few years on Transformation Services, and I think it got tested significantly in 2020, the agility with which the teams moved, the utilization of resources, which we managed really well. And yet, we did not miss a single project. We did not miss a single deployment because apart from the fact that, obviously, for us, it would have impacted our ability to generate new business, but think about the client. The client is really saying I need to forecast demand. Otherwise, I can't run my factory. I can't deliver to my client. If we are not able to provide the right team and the solution, then actually, we failed our client. So we feel really good about that journey. And I think it's going to stand us in good stead into the future because, clearly, our clients would like more and more how do I leverage data to build predictive insights. We're going to see a lot of engagements on that topic, both in our Managed Services as well as our Transformation Services.

Okay. Good to track. We'll be paying attention to that. So what other parts of the business do you think, Tiger, benefited from the pandemic? We did hear a lot about content moderation, for example, is an area that did well. I believe you have some business there. So correct me if I'm wrong. I'm just curious if you think you might lean in harder on some certain disciplines as a result of what we learned from the pandemic.

Yes. So Tien-Tsin, if you go back 3 odd years, maybe 4 years, 3.5 years, when we did our big strategy exercise, refresh, 3 odd years back, we picked a few service lines to double triple down on. One of them was supply chain. That led us to the acquisition of Barkawi. We obviously did not think about the pandemic, but wow, supply chain has been a real home run. The second was we picked financial crimes and risk in banking, things like KYC, AML, fraud, both in institutional banking, small business and commercial banking and consumer banking. And we did the acquisition of riskCanvas this cloud-based technology that allows very nimble, agile cloud-based technology that allows KYC, AML to be done on the cloud. And that, again, has caught a tailwind as we went through the pandemic. Because when you have everyone distributed at home and doing all kinds of transactions for a bank, you have many more opportunities of potential fraud, KYC, AML requirements, and therefore, many more requirements that the banks have. The third one that I would pick is experience. 2019 November is when we announced the acquisition of Rightpoint. And the business has only one focus, which is how do you improve the experience of our -- employees of our clients and the customers of our clients in the use of technology and the use of digital as more and more digital technologies get implemented. The pandemic has just made that even more important than ever before. When you are working from home, you certainly don't want to be struggling through the technology that your employer has given you to operate. So we're seeing a pretty significant tailwind on improving employee experience in a number of our services, and the Rightpoint team is in the middle of all of those conversations with our teams. So I would say picking those and making those choices -- and then, of course, through the pandemic in 2020, we did 2 acquisitions. If you had asked me 18 months back, would I do an acquisition virtually, I would have said no. But we did 2 acquisitions. Very pleased with both acquisitions as we've gone through the first quarter. One was focused on digital commerce, helping CPG customers, manufacturing customers to go from off-line to online, implementing technology to do that. And the second is Enquero, where the team basically helps clients migrate their data on to cloud technologies so that then you can use that data to build analytical insights and then build them for them. So again, big tailwind on both those topics, very deeply connected to analytics and digital. And we see that again hopefully playing out over the next couple of years.

So Tiger, do you -- given the successful case studies you called out, Rightpoint, riskCanvas, do you feel a greater sense of urgency to do more of those kinds of sort of point solution of acquisitions?

So Tien-Tsin, I don't know whether I would say having done those, there's a greater sense of urgency to do more. I worry about having that feeling because that means you're doing acquisitions just for the sake of doing acquisitions. And I think what we've done pretty well over the last 5-plus years is our acquisitions have been driven by a pretty systematic view on what is our strategic intent. Coming from strategy is a set of road maps around each of our services and each of our industry verticals. And then saying, if that's the road map, what are the capabilities we need? And then saying which of those capabilities are we going to build organically? And we've done a whole lot of organic buildup capabilities. The second is, which ones do we partner? An example would be partnership with cloud-based technologies, an Anaplan or a BlackLine or a Kinaxis or HighRadius, all of whom have technologies that are incredibly valuable for the services that we offer. So we bundle them up and we offer those services with those technologies bundled in, and those are very good partnerships. And then a set of capabilities that we said, you know what, we need to acquire these. That allows our M&A leader to go out and search for the right companies that have those capabilities, the right teams that have those capabilities. And we evaluate, I guess, 10 times in the end of what we acquire. The ratio is not surprisingly 10 is to 1 or even better than that or worse than that, depending on your perspective because the cultural match of the teams is something that we really value because we really want the teams to come in and carry the torch forward and drive growth by adding those capabilities to our capabilities. And our strategy continues to be to look for adding more capabilities in specific areas. So we're very sharply defined in terms of what capabilities, while we keep refreshing those. And then having our M&A team go and search for those capabilities if acquisition is the route. And acquisition is just one of those routes. Partnership and organic build is clearly the other 2 routes.

Yes. No, you named a lot of good names on the partner side. So given that, I think last quarter, you retired about 2% of your shares out. You're getting back to repurchases after a period of pause. Is there a preference for share repurchase at this time, Tiger?

No, Tien-Tsin. No. Our capital allocation strategy hasn't changed, actually, for quite a few years now, which is continue to invest organically in the business, followed by making sure that we have a continued dividend and a good journey on dividend that we now have and then saying acquisitions -- continue to look for the right acquisitions driven by strategy. And then if after doing all of that, we have cash that is lying idle, that -- from our perspective, we think for the time frame that we are looking at and evaluating would be better deployed as a return back to our shareholders, and that's exactly what we do, and we keep -- and of course, I think Ed, as the CFO, continues to watch what's the right cash flow model to use, is our stock priced fairly in the marketplace. And obviously, when you see a good combination of those forces. But it starts with organic investments, continue to have a very nice dividend policy, have ammunition available to continue to do acquisitions and then, obviously, have share repurchase as one more of those 4 ways to utilize cash flow and capital in the company.

No. I cannot ask a margin question, right? So margins do flow into cash flow, which allows for those things to happen. And you did start out strong in the first quarter on margin. So I don't expect you to change your guidance with this session at all. But I think more philosophically, Tiger, just importance of margin expansion to you versus investing now in this sort of period of, I would say, heavy change in digitization.

Yes. So Tien-Tsin, I'm not sure that necessarily, I would say it's one versus the other because that's not the way we would think. We think we got to find a way to balance the 2. And the balance that clearly we have been striking is continue to drive global client double-digit growth -- I mean let's forget 2020. 2020 was an aberration. And then that flows into at least the first 3 quarters of 2021. And clearly, as we said that by the time we get to the fourth quarter, we should see back to double-digit growth in global clients. And then continuing to move our adjusted operating income margin by steady 10, 20 basis points. As we continue to grow and get leverage as well as -- as we continue to grow our Transformation Services portfolio, our digital and analytics portfolio, many more of our services being higher value-added services, many more of our services being much more deeply connected to what I would call middle office rather than just back office, many more of our services being connected to growth of our clients rather than just cost of our clients, many more of our commercial models being leveraged on driving outcome for our clients. And the more outcomes we deliver for our clients, the better our performance should be. I would say we should be able to drive margin improvement, and it should not be at the expense of growth. And that is the journey that we are on. And every year that passes by, the strength that we build in Transformation Services, analytics, digital, combined with the leverage of the scale and size that we drive, should continue to allow us to strike the right balance between those 2. So we feel very good about that balance. Obviously, first quarter had the benefit of lesser travel and some of those things, which will even out. We brought salary increases back. We brought promotions back. Both of those we had paused last year. But I continue to feel really good about the margin journey we are on, and I think some of the things around analytics and Transformation Services and digital and higher value-added services, I think, should only help that margin journey.

Okay. No, this is great. We're just about out of time. I'll ask you a final question here, Tiger. And again, thank you for being with us today. Always enjoy the conversation. Just looking out for another year when hopefully, we'll have you back in person, but where are your priorities now? I mean where -- what's changed for you, you're a your thought leader in the space. I mean where are you putting most of your energy, touch us up on that?

So I think it will be fair to say that we've always had a pretty intense focus on our team and talent and people. We really pride ourselves on our ability to hire, retain and drive a continuous skilling and upskilling of our talent. That's been our journey for 20 years. I just think the last 18 months has made it pretty obvious that, that is the journey that every company on earth has to go through. You've got to double down on that. You got to find a way to drive real empathy in the team, make them feel part of a company that has a real purpose that is driving real change for your clients in order to drive a bigger change in the communities you're in and in the world you're in. For us, that purpose is a relentless pursuit of a world that works better for people. And that people is employees. It's our clients. It's their people. It's their customers. And it's community and society. And the last 18 months has just made that so clear that I would say I think the entire leadership team is making sure that they strike the right balance on all those topics. And the second is this journey on digital transformation. And I think, finally, the phrase that people used to say that data is the ultimate nirvana is actually going to come real. It's beginning to happen. Predictive insights is the way the world is going to go. AI and machine learning are methods. AI and machine learning are technologies. But it's data and it's the insights that come out of that machine learning and AI and what do you do with that, that's where value gets created. So I think we believe that our understanding of the process and the domain and the meaning of that data and now applying digital technologies where you can actually leverage that data much better on a real-time basis and make the experience really enjoyable for people who are using it, I think we're going to see some real game-changing moves in our clients in disrupting their industries. And as a result, we're going to be participants in some of those transformational journeys of our clients. And that's what makes us really attain a purpose in our world.

No, it's going to be fun to watch, and thanks for calling out all the stakeholders. I mean that is important for sure. Tiger, thank you again for the time. It is great to see you. And like I said earlier, I look forward to seeing you soon in person.

Tien-Tsin, thank you very much. Always a pleasure talking to you. Thank you.

Thank you, Tiger.