Genpact Limited (G) Earnings Call Transcript & Summary

All right. Good morning, everyone. Good morning, everyone. I think we're live here. My name is Dave Koning. I'm a senior research analyst at Baird covering business process outsourcing. Very pleased to introduce Genpact today. We have CFO, Ed Fitzpatrick. I think many of you know Genpact. They've been around for many, many years now. They spun out of GE originally, but now do work -- probably 85%-plus of work is for non-GE clients. Highly, highly recurring back-office BPO work where they save clients a ton of money and have much better expertise because they've scaled this up to do this for many different industries, different processes. Maybe what I can do is just turn it over to Ed for a couple of minutes and kind of review the business, how you came through the pandemic and maybe describe a little bit of some examples of what you do.

Sounds good. Thanks so much, Dave, and good morning to everybody. Yes, so Genpact is a professional services firm. We're really focused on driving transformation for our clients, both in an advisory capacity, but as well as running the operations, finance, accounting, supply chain finance and the like operations, core operational services for our clients and the verticals that we've chosen to serve. We're about -- just shy of $4 billion in revenue is our outlook for the current year. And that is -- in the services that we provide, we talk about it in 2 areas. One is in running intelligent operations for our client. The other is in providing transformation services. And think about running the operations, typically, those are 5-year engagements that renew on a pretty high 90% basis. So it's in perpetuity, sticky type of annuity services work where we're running these operations for our clients in finance and accounting and supply chain and these core operations for our clients. And the Transformation Services really is a combination of digital, analytics and consulting services. So all of those, we wrap under the Transformation Services category. And it's pretty straightforward like automating the -- these processes for our clients through digital technology, tools and technologies, some that we develop, some that we partner with third parties and some that we acquire. And analytics is -- as you might expect, as we're digitizing and automating the data and managing that data for our clients, we're able to help clients with advanced analytics so they can make better decisions. So think about Transformation Services in that space driving improvements, transformational improvements in their processes. And consulting is the wrapper that -- where we discuss all of our services with our clients. You talked about the pandemic, what -- how do we kind of manage our way through the pandemic? I think we did it -- did pretty well, right? Because we talked about many years -- for many years that our business is resilient, right? In a recession, in a tough period, we would continue to grow, maybe not at the clip that we do in normal times, but we would continue to grow because our services are very nondiscretionary in nature. Think about the finance and accounting work. It's work that needs to take place. You need to pay your bills. You need to record your transactions, report to the SEC. All of those things need to continue to take place. So we grew, I think, 6%, 6% or 7% last year, even through the pandemic when many of our peers were flat, maybe down because of the nondiscretionary nature of our work. So we've managed through that pretty well. The one piece that impacted us, like it did with everyone, is bookings and orders slowed as we got in the second and third quarter. So for us, these orders, as you heard me say, some of these orders are 5 year -- 5 years in term. So they take a period of time to progress. As we get a new Intelligent Operations engagement, we're ramping up over a 12- to 18-month period. So if there's a couple of quarters of slower bookings for us, particularly in Intelligent Operations, it will take a couple of quarters for us to get back up to the growth rates that we're used to seeing in that double-digit to low-teens space for Global Clients. So -- and that's why we've said and we expect to get back to that double-digit to low-teen growth for Global Clients by the fourth quarter of 2021, if not sooner, given that we got out of the gate quicker than we had anticipated. So all of that is progressing well, and I never want to say business as usual. But in terms of order flow and how the pipeline is shaping up, and as you've heard us talk about on our last call, feel good that we're getting back to more normalcy in terms of the funnel and the progression through the funnel and deal cycles getting back to more normalized levels.

Yes. That's a great overview. Do you think the pandemic changed anything structurally in the business? And maybe is there some pent-up demand that sales activity in the next 12 months could be better than usual even?

We'll see. I mean I think -- I don't have a crystal ball. I do think Q1 of last year was probably our best quarter ever. We were firing on all cylinders in Q1 of 2020, and then the pandemic hit. So I do think that the market itself is attractive. It remains attractive. We do think that double-digit to low-teen growth for Global Clients is there for the taking because it's a 20% to 25% penetrated market, and we're a leading provider in that market. So as long as we maintain that leadership role, we think that double-digit to low-teen growth rate is there for the taking. What -- has the pandemic caused an acceleration in certain things? Again, I don't know that it's going to accelerate. And I feel like a double digit to low teens is a good place to be. But some of the trends that we did see that are -- that we think are attractive, and we're going to try to help our clients capitalize on, is that significant shift from online -- off-line to online, right? People are more comfortable with virtual communications. And the virtualization of technology, service delivery and solutions delivery is there. It's another way that we can serve our clients, right? In person is best, don't get me wrong, but we've all found a way to work virtually more effectively. That's just another way that we can help serve our clients. We've saved time, right? Traveling takes a lot of time, right, and time and energy. And to the extent that you can have better conversations, more frequent conversations with the client, that's a good thing. Cloud-based technologies are accelerating. And I think the virtualization of business, all that goes together, right? You're able to do more virtually. You're going to need to do more virtually. And the fact that you can do this on the cloud and have that data, that information be more ubiquitous is a positive. And the analytics you can then do, because that data is now available on a global basis for your teams, if you're able to provide -- if you're able to kind of manage that data more effectively and provide better analytics and solutions insights for your client, all that does bode well because these are the areas that we think predictive analytics and the like are areas we've been investing in. So we do think that's a positive thing for us. But again, double-digit to low-teen growth for Global Clients, I like that growth rate. It's robust. And those things only help me feel comfortable that the path forward, the growth trajectory we have going forward is every bit as good as it was 5 years ago, 7 years ago, when we were talking about that same growth rate over medium to long term. So we feel good about it for the future as well.

Yes. And it's clear that, I mean, the growth is good and you're winning in the market. I think you've talked before about, I think it's 50%-plus win rates. But why do clients -- why do they end up choosing you? Is it a different type of work? I mean it seems like your revenue per employee is a lot higher than a lot of your competitors. Like what is it that you're doing? Why do they choose you?

I think the one key thing that I always come back to is this is what we do. This is all we do. We're a $4 billion roughly revenue company, and this is the work that we do, finance and accounting, bread and butter, supply chain finance. All of this work is where we built our domain expertise, and we built it in very specific verticals, right? So we believe the verticals we've chosen are appropriate, and we're only going to provide the services that we're extremely good at that we could beat the competition at, and we're a #1 or #2 provider. I think that's the key. It's that domain expertise in those services that we provide and within the verticals that we've chosen. You need to know the industry, and you know the services you're providing better than anybody else. So we feel like we do that. And we do have scale, right? So we're $4 billion in revenue, but we're 100,000 employees. The revenue per employee, I think that's -- part of that is the nature of the work that we are doing, right, finance and accounting work. This is not commodity-type work, right? This is high-end work, SEC reporting, the analytics work that we do, high-end, insights-driven, the digital work that we're performing. So I do think -- and by the way, revenue per head count also rise as you do more digitization, right? Because tools and technology are doing some of the work that humans used to do, it's becoming more efficient. So the flow-through of our revenues per employee continues to grow. And that's just something we expect to continue to happen.

Yes. Okay. And how do you think about growth? You talked about double digits, low teens for Global Client. I know GE is still, what is it, 14% of revenue. How do you expect that like? And then how do you expect total company to grow?

Yes. So GE is actually below 10% now. So GE today in a -- particularly with some of the divestitures that GE has done over the past years, we talked about some of the Baker Hughes work and a few others. So GE is now going to be less than 10%. I think it was 9% now given the outlook that we've given for 2021. And we do expect GE to be roughly flat, right? We've -- penetration within the GE business is pretty high because, if you think about it, we were born within GE, right? We started within GE. So we're within all the businesses of GE, obviously, at the corporate center as well. So we do that work with GE. We said we continue to believe that something in a flat to plus or minus 2% range is a good place to be. As we get through some of the committed productivity on the new work that we won 3 years ago, we're still in that cycle of driving the productivity for GE. As we get into 2022, I do think we'll be closer to that range, flat to plus or minus 2%. And then that business will grow as GE goes, right? If GE has success, and they seem to be moving in a positive direction, our hope is that we can be on the positive side of that, right, in a plus 1% or 2% range. But if it's a challenge or it's a longer asset growth even, then we might be on the negative side of that. But I think it's -- the relationship is good, never been better, frankly. Ongoing dialogue and virtual communication has even stepped that up. So feel good about that stabilizes or stabilizing, and we'll continue to drive positive improvement as we do [indiscernible].

Great. Great. And how much of revenue do you view as recurring and nonrecurring? And part of the reason I ask the question, the Transformation Business I often think about as having nonrecurring components. But last year, I mean it really didn't slow down. You still grew the total business well. I think you grew that well. Is it really nonrecurring? Or how do you look at your whole business, too?

Yes. So a quick breakdown, think about intelligent -- running Intelligent Operations somewhere in a 70% range and Transformation Services being in the 30% range of the total, roughly. Intelligent Operations are longer -- have a longer tenure, about 5 years. And it -- and those get renewed on a very high 90% level. So we think of that as annuity. As long as you're doing a good job, that should be sticky annuity work. And Transformation Services, in and of itself, has become more annuity because the tenure has increased, right? So we -- the tenure used to be somewhere in a 6- to 7-month range, short cycle. That's grown to be somewhere between 1 and 2 years over the past few years because some of that work is becoming longer term in nature, and it's logical. Think about some of the digital tools and technologies that we're providing, those have licenses. A lot of times, they'll be a part of a larger Intelligent Operations deal. So that work has a longer time frame to go and becomes more annuity in nature. Some of the analytics work, the centers of excellence where we're providing analytics, are attached to these intelligent operations deals we do. So even that is extending. So I think our visibility is -- even though the Transformation Services has grown and has, in general, a shorter cycle or shorter term than the Intelligent Ops, overall, our visibility coming into any period is pretty consistent, right? We say coming into a year, we have somewhere between 70% and 75% of our revenue for the year in our backlog. And I think that's because of that dynamic of although Transformation Services is growing at a faster clip, the tenure of that has grown a bit.

Yes. Okay. Good. When we think about risk to the business, you mentioned automation. And I know a lot of investors will often say, "Well, if you automate more and more stuff, doesn't that just keep replacing people?" And I know Tiger's response was always like, "Well, that's been around for years and look how big we've gotten." So how -- yes, how do you talk just about automation in general and the risk of that?

Yes. Our whole business model is how do we make the process that we're taking over or advising on more effective? So more efficient, more cost-effective, better speed, better accuracy, all of those things and then keep it evergreen for the client, right? As new technologies come, we're continuing to keep them current. And it's just another tool in the toolkit. Tiger and I talk about that as another tool in the toolkit. At the beginning of time when we were part of GE, it was Six Sigma and process improvement. It's the DNA of the company. It's Six Sigma. Also, Six Sigma is removing waste in a process and continuing to improve over time, and there are many ways to do that. One of the key things that we used in the first 5 to 10 years was what we called Smart Enterprise Processes, as you've heard us talk about, which is really just our compendium of best practices from the several hundred clients that we had outside of GE, plus GE best-in-class processes. And that was another key tool that we've used. But as these digital technologies have come to the fore, that's just another tool that will allow us to take more cost out, add speed, add accuracy, get to the insights quicker, all of those things. So we view that as just another tool to drive those savings for our client. And if you look at the TAM as defined as in a fixed nature, does that mean the TAM is lower because it's more -- you're taking more cost out? The answer to that is yes, and we believe that. But what we haven't seen a shrink of the market, however, because we've gotten -- as these tools and technologies have come to the fore, we've realized we can deploy them in other areas that we didn't previously consider as part of our TAM. Think about supply chain finance and other supply chain areas, financial crimes and the like and the analytics we're able to do there. So all of this -- all these advancements in technology have opened up more doors to us, if you will. And clients have pulled us in, right? It hasn't been as much with us looking to get into other areas because growth was constrained. It was more clients seeing what we can do and bringing us into these other areas and even closer to the front-office work and customer experience and the like. So all these things, we view more as an accelerant as opposed to a decelerant of growth. And it's kind of played out that way. Penetration rates have stayed the same. The solution is even more compelling, as you heard me say. Whereas we might have been saving 40%, 50%, now we're saving 50% to 60% as an example. That's the kind of impact that automation has had on the solutions for our clients.

So basically, if we think about -- we're 20% to 30% penetrated already. So you're going to get just growth in that penetration, growth in types of work, meaning the TAM gets bigger, and just growth in the economy. So every year, the economy gets bigger, too. So those would be your 3 tailwinds, and your headwind would be some modest amount of efficiency improvement each year. But net, that's a growing pie, not a shrinking pie.

Exactly. I think it was almost 4 or 5 years ago, we were having our own internal conversations. And I remember hearing Tiger say, "I don't care. We're going. We're going down this technology path. We're going to destroy our revenue, right?" Every time a CFO hears that, he worries a little bit, right, about growth. And he said some of those things for effect for the teams. Don't hesitate. Go after that. Continue to drive the change. It will take care of itself. And I think I give him credit. As we progressed, exactly what he was thinking has kind of panned out. We've gotten into other areas, and growth has not slowed one bit. And we continue to have the opportunities. And we're innovating. So we're leading edge, and it's not -- no accident that we're a top provider in the services that we're providing.

And I mean, there's another way we can think about it. Finance and accounting, I mean we can think about all of the companies, all of us work for it. It doesn't feel like the finance and accounting staff ever really shrinks to start with. There's always like more things happening, and that's what you guys do. And so there's always more work in different things to always be kind of doing, right?

Yes. I think it's -- I think as a percentage, I always look at it as a percentage of revenue, right? So if the finance team stays the same size as an example, but the company has grown 5%, 10% per year, your percentage of revenue should be in line or better as you drive more efficiency. That's the way I look at it. But to your point, I think our finance teams are -- have moved from having to crunch numbers, seek data, consolidate data to be more -- to use the degrees that they've gotten in finance and accounting to say, "How do I assess this data so I can provide the right insights to my internal and external constituents?" So I just think it's -- the hunt and pecking of the past is definitely moving in our access to data. Cloud-based technologies, the layers on top of the ERPs that the clients use that we use ourselves, have matured in such a way that the technologies are able to accommodate. And you're able to have your finance teams, as an example, use their college degree, look at this -- look at the data and provide insights more timely with a better -- becoming business partners is what I always say to my teams. I want to hear that you're the best business partners when I talk to the business leaders, and I'm hearing more and more of that as a result.

Yes. Well, that's a great review of that. What about just regulatory fears? We have a new administration now. How do you think about -- like I usually think of the risks in a few buckets. One is, can you get enough people moving around the world wherever they need to be in terms of like visas? Then I think about, are companies allowed to even just outsource work to other companies or to other countries? And then third, just taxes. Like do we worry about just changes in tax rates? So what do you view the risks just along those types of lines?

Yes. So a few questions embedded in there. The visa situation has never really been a huge issue for us as we've been -- I think the information technology industry has been more impacted by that over the years, but we've never been constrained there given the nature of work that we do in finance and accounting and the way that we do that work. And a lot of the transition work that we do that used to be people would fly from our centers of excellence around the globe, Eastern Europe, India, Philippines, wherever it may be, to the U.S. as an example. And then they'd mirror the clients' work and say, "Okay, I think I can take over. Take a week." That's all happening virtually for the most part, right, as you might expect, even more efficiently than it was previously being in person. So I think that piece has not been a big issue for us over the years. Can you repeat the second part of the question as well, Dave? I apologize.

Yes. So then just companies being allowed to outsource to other countries and tax rates. Those are kind of 2 of the other ones.

I mean, that's kind of a higher level conversation between countries, right? Countries that have a hard time excluding other countries from being able to do work in their country, right? If you impose a -- it was there in the U.S., the BEAT tax, the base erosion taxes that were there back in the day, I think over -- I think what really needs to happen is that is there equal taxes on a global basis? And I think the conversations seem to be moving more towards that, right? And that's where I've always hoped things would end that, hey, somewhere in the 25% range is where effective tax rate should be on a global basis because that seems to be kind of the average where we are on a global basis. And we're just below that, right? We've guided just below 25%. I've been saying for 7 years that our tax rate is low. It will migrate towards the global rate of 25% over time, particularly with the India-based incentive getting to -- continuing to decline, especially in economic zones and other benefits we get in India. But I do think the overall corporate rate in India coming down from the mid-30% range down into the mid-20% range was appropriate, right, because they're competitive, they're aligned. That's why I think 25% is a good thing. There still is -- there's some protectionist conversations that continue to happen, and we've been able to modify and adjust appropriately. When the last tax law changes took place, we were able to modify and course correct through strategic planning and operational planning. And the good news is we're global, right? We have 100,000 people around the world, over 10,000 in the U.S. and thousands in just about every region of the world. So we're able to be nimble and take advantage of the global tax rate. I don't think we'll be any more adversely impacted by tax law changes than others that we're competing with. So kind of a long-winded answer, but I think we're nimble enough, global enough, diversified enough. But I don't think one country making one change moves the needle as much as you might think.

Yes. Okay. What about just employee considerations just in terms of -- it seems like, especially in the U.S., it feels like wage rates are rising. I guess I don't know as much internationally. Attrition seems to have picked up a little bit in different pockets of IT BPO. Maybe talk about just employee -- those things a little bit.

We've been able to manage the global annual salary increases pretty well. We include cost-of-living adjustments in our contracts. So we're kind of putting ourselves in the same space that our clients are in, right? And at the same time, when we're taking over operations, we're committing the savings, including those cost-of-living adjustments. So that's not been an impact to our business models. That remains pretty static. I don't want to say it's -- nothing changes. We're just able to be nimble. And if there's a bit higher increase, we factor that in. And we're able to manage that based upon where we're delivering the services from, where the client wants the services delivered from. And we factor in the rates that are appropriate for that particular region. So I think that's worked out. It's worked out pretty well. Don't see any changes in the way we do business. Attrition, you talked about. Attrition got to levels, really low levels during the pandemic, as you know, because I think we're just hunkering down effectively. I think the markets are starting to open up a bit. I'd say India has kind of gotten into kind of hunkering down again, as you'd expect, given the resurgence of COVID there. But I suspect as they -- as we work our way through that, God willing, the curves continue to come down quickly, I think you'll see that turnover start to get back up to the levels that we saw before. But we're still below that even in the first quarter of 2021, as you heard us talk about. So that's just part of running the business. And we think turnover is appropriate, right? You need to make sure you -- people move up into the next level of responsibility as they get higher salaries to perform that higher level work.

Yes. Yes. And maybe if we turn over just a little bit to the just financial kind of -- we talked already a bit about revenue growth. But margins, how do you see margins over the next several years? For a while, it's been kind of 10, 20 bps a year. Are there any costs kind of changing or profiles changing that could allow it to be a little better or worse?

Yes. As you know, we've improved our operating margins almost 100 basis points from where we were 7 years ago. And we said, "Hey, we're going to be on a deliberate operating margin improvement path for the next several years." And that's exactly what we've done. And that's come primarily through G&A leverage. You've heard me talk about if we're growing our top line around 10%, which is what we've done, there's no need for us to grow our SG&A spending, particularly G&A, the same level. So we've driven about 500 basis points over that time frame, somewhere between 50 and 100 basis points of savings a year on average to bring that down. And that's been what we've used to kind of improve the bottom line. Now we had invested a bit more in R&D and a bit more in selling and marketing to offset that, but also gross profits have come down a bit over that time frame, partially due to FX movements but as well as some of the large deals that we've done that were -- where we've added a lot of capabilities. And there was a rebadge element to that as you've heard us talk about these large deals where we start out lower in margin, then as we redeploy some of those folks to other engagements, whether it's procurement, with some of the work we've got with GE, some of the retail expertise we got with the Walmart transaction, FP&A with the Cardinal Health deal. So all those are starting to pan out. So we think going forward, gross profit is another area of improvement for us. And that's why we intentionally said we're going to improve our gross profit. We're looking to improve our gross profits 50 basis points this year as the driver of that operating margin improvement to 16% this year. And that is -- it's a combination of some of those large deals that we signed several years ago maturing, and we redeploy some of those folks that are there. And the margins improve in those deals as the savings continue to accrue for the client. But also, you heard me talk about analytics. Analytics is growing at a nice clip and one of -- the fastest clip within Transformation Services, and that is hiring work, right? It's providing insights for our clients, advanced analytics work using cloud-based technologies and the like, managing data to get to those insights quicker and more effectively. So we think that's a positive. You've also heard me talk about our digital solutions. Our digital solutions are still not to scale in the aggregate, right? Yes, we've been developing them over the years, but it takes time to scale those up and get to the operating -- gross margins of digital solutions, ultimately, when it gets to scale, typically are higher than company margins. And we have some of those situations where that's the case. But we're still developing a lot. So we're still in the development mode. I'd say earlier days. So I think there's a tailwind if we execute effectively on the digital side and the automation technologies we're providing for our clients. So all those things together, large deals maturing, analytics becoming a bigger part of what we do, digital getting to scale, consulting is focused on the utilization of that team. I think we've been doing a much better job of that over the last 3 years adding a discipline, having the tools and technology to manage teams more effectively and having that be a culture shift that utilization is extremely important. I think all of that has moved positively and I think will continue to as we move forward. So given all that, I think I'll be disappointed, I guess, if our operating margin improvement isn't being driven by gross profits as we go through the next several years.

Yes. That's good to hear. So if we take revenue growth probably around 10% plus a little bit dependent on what GE does in any year, but then we do margin expansion, so EBIT growth a little better than revenue, is there anything else kind of below the line? I know buybacks sometimes have been a little heavier. That could drive EPS growth even better than kind of that low double digit?

Well, yes, taxes we talked about. I think we're kind of close to where I think we need to be, and that's been somewhat of a -- even with that, we've been growing EPS at a double-digit clip plus over the past 7 years or so. Last year was the one exception given COVID, but we still did grow it. But I would say tax is an area that maybe there's another percent that needs to go because we're still below the 25% range. But I think that headwind, if you will, that we've been facing over the past 5 to 7 years dissipates as we get kind of to where I think the global rate settles in. So that's one kind of headwind. The rest of that, I think, is -- I think if we take care of our capital as we have done appropriately, making smart acquisitions to sustain or even improve that top line growth, and those acquisitions get to scale themselves and we dialed up our acquisitions probably 5 years or so where we've been adding $100 million to $200 million of acquisitions a year roughly, adding to our capabilities and they're kind of coming into getting the scale, if you will, in a Genpact environment. So I do think with that happening, all those things combined, that can improve our operating margins. We'll continue to look at -- obviously, organic growth is first and foremost. CapEx, I think CapEx has come down a bit. It's been about 3% of revenue for many, many years, and we've kind of taken it down this year to 2% to 2.5%. I'll be surprised to see it go back up to 3% a little bit just because we're -- a couple of things. One, I think the virtual nature of our work, I don't think it -- I think it may -- we may go back to the office for sure, but I don't know that we'd go back to the extent that we were before. So I think the capital expenditures necessary to support operations going forward, I think, will be lower as a percentage of revenue. So I wouldn't be surprised to see that being a 2.x range going forward. So that helps in terms of the capital-intensive nature of the business. And then so organic growth, first and foremost. I talked about inorganic growth. And then share repurchase, as you said, I mean, we'll be smart about the way we buy shares. We do our own valuation of the company based upon future cash flows. We have a pretty -- and we're pretty conservative about our view of, okay, even though we've grown somewhere in the mid-teen rate for the last 5- and 10-year period, my assumption is, hey, just make sure you grow 10% for at least 5 years. You do that and you look at our share price, I'm very comfortable with what we did in the first quarter, buying back a little over $140 million of share. So that's -- and a return on our invested capital. A return on those share repurchases has been in the 15% clip because the stock price has grown over the last 7 years at about a 15%, 16% clip, right? So those are things we'll continue to do. In terms of -- yes, we'll make sure that our net debt-to-EBITDA doesn't get too high. We said somewhere between 1 and 2. We've maintained that because we think investment grade is important to us and to our clients that expect us to be there forever into perpetuity providing these services for them. So all that together, long-winded answer, I do -- yes, I'd be disappointed if EPS doesn't grow in that -- aligned with top line growth, if not better, because of the path that we're on, on margins, maybe a little bit of offset with taxes. But if we take care of capital appropriately, again, I'd be disappointed if we're not higher than double digit or at least double digit, not into the low mid-teens.

Yes. Yes. No, that's great. And we actually hit our time, our time limit. So yes, thanks so much for joining us. And it's always great to see you, and have a great rest of the day.

Thanks. Best to you. Appreciate the engagement. Take care.

Thanks. All right. See you.