Genpact Limited (G) Earnings Call Transcript & Summary

Thanks, Nika, and good afternoon to all of you. I'd like to welcome everyone to this earnings call, where we'll be discussing the results for the quarter that closed on September 30th, 2021. We hope you've had the opportunity to look over our earnings release, which is available in the IR section of our site, genpact.com. Joining us on today's call are Tiger Tyagarajan, who serves as our President and CEO, and Mike Weiner, our Chief Financial Officer. Here's how today's agenda will go. Tiger will give an overview of our results and bring you up to date on our strategic initiatives. After that, Mike will take you through our financial performance for the quarter and share our current thinking regarding the outlook for the full year 2021. Tiger will then return with some closing remarks, and following that, we'll open things up for your questions; we anticipate this call running about an hour. A number of the topics we'll cover today are forward-looking and carry various risks, uncertainties, and other factors that might cause actual results to differ materially from what's expressed in those forward-looking statements. Those risks and uncertainties are laid out in our press release; additionally, on today's call, we'll reference certain non-GAAP financial measures that we believe offer extra information to deepen the understanding of how management views the operating performance of our business. A reconciliation of those measures to GAAP can be found in today's earnings release, which is posted in the IR section of our website; with that, I'll hand the call over to Tiger.

Thanks, Roger. Good afternoon, all, and I appreciate you being with us for the Q3 2021 earnings call. Our results in Q3 show that momentum keeps building throughout our business. Global client top-line performance rose 11% on a constant currency basis, once again powered by robust need for transformation services, which consist of analytics, digital, and consulting. The strategic bets we've placed over time in capabilities and talent — among them ongoing training and development for our worldwide workforce — leave us well positioned to meet the urgent challenges and opportunities our clients confront. In this quarter, we hit the milestone of surpassing the threshold of $1 billion in quarterly total revenue for the first time. For Q3 of 2021, total revenue came in at $1.02 billion, an 8% increase on a constant currency basis. Global client revenue reached $921 million, rising 11% on a constant currency basis. Adjusted operating income margin was 16.6%, versus 17.1% in Q3 of 2020. Adjusted diluted earnings per share came to $0.66 per share, climbing 18% year-over-year. Global client revenue growth this quarter spanned nearly every industry vertical we serve, with double-digit gains in consumer goods and retail, life sciences and healthcare, high-tech, and manufacturing and services. As anticipated, growth in banking and capital markets stayed muted, the result of a restructured relationship with one client that resized its asset management business in late 2020. Our pipeline is still healthy, with a blend of large and regular-sized deals. We keep scaling revenue and bookings from existing relationships while adding new logos, which lays the groundwork for future growth. In Q3, we signed four large deals spanning life sciences, CPG, banking and capital markets, and high-tech services. As our role as a trusted advisor to clients deepens, sole source deals — for many quarters above 50% of our bookings — have now climbed above 60%. We're also witnessing strong traction building in fintech, digital banking, and other fast growth tech companies, where our domain strength plus agile development and deployment help them scale rapidly. Global client transformation services keeps expanding at a 30%+ rate and now represents more than 35% of total global client revenue, including the contribution from the Enquero acquisition. Year to date, roughly 70% of global client bookings carry a component of analytics, digital or consulting. As a reminder, about half of transformation services bookings are annuity-based and frequently lead to large long-term intelligent operations engagements. Analytics isn't just the biggest component of transformation services, contributing over half of its revenue across the last several quarters — it's also the fastest growing component, consistently expanding well above 30%. A great many of our analytics solutions are tightly linked to high growth areas where we're strategically focused, such as sales and commercial, supply chain, financial crimes and risk, and FDNA. What sets us apart is how we bring together data and analytics in the cloud alongside deep knowledge of industries and processes. Being able to access high-quality data and turn it into actionable insights through analytics that guide decisions matters more now than it ever has. It's precisely at that point—turning insight into action—that we stand out the most. With our intelligence platform, Genpact Enterprise360, clients can do exactly that. Genpact Enterprise360 draws on the strength of data and insights from our operations, built on proprietary metrics and benchmarks that we've developed and put in place across 20 years within our digital Smart Enterprise frameworks. Thanks to this, clients gain radical transparency into their operations. AI is then applied by the platform to produce predictive insights. That gives clients even more ability to act—whether on their own or alongside us—to achieve stronger results now and to identify transformation opportunities that open up future growth. A further point of differentiation is how we deliver outcome-oriented value to clients that goes past cost and productivity alone—things like revenue growth, reduced receivables and inventory, fewer losses and less fraud, and improved pricing. That's among the main reasons our transformation services solutions connect so strongly with clients. Take a few examples: for a big global CPG client, we draw on our experience and design thinking approaches, applying analytics to support improved sales targeting and to automate things like contract management and payment reconciliations. As a result, its sales teams can devote a far greater share of their time to business development. For a major fintech client, we designed and implemented—and now operate—a best-in-class anti-money laundering and transaction monitoring process, strengthening their regulatory risk compliance as they go through hypergrowth. For a big high-tech client, through our Cora SalesAssist solution, we apply data and analytics to proactively create and rank advertising leads for small and medium business segments, growing the client's top line. And for a major client in the semiconductor ecosystem, we deploy digital and analytics solutions to sharpen supply and demand forecasting, broaden their supplier base for greater resilience, carry out global inventory analysis, and perform spot price forecasting so purchase timing can be optimized. These cases mirror the five trends we keep hearing in every CXO conversation. Those five trends are: 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, a move toward human-centered design that delivers superior experiences for customers, users, and employees. Clients keep telling us that our approach—combining expertise in digital and cloud-based analytics solutions with deep industry and process depth to drive actions that deliver outcomes—is different. We keep seeing momentum behind commercial models tied to those outcomes rather than traditional input-based models centered on the cost of FTEs. With these commercial structures, our interests and those of our customers stay pointed in the same direction — take, for instance, compensation tied to exceeding set benchmarks, usage-based transaction pricing, or flat-fee arrangements. Given how the planet keeps adjusting to the shifts witnessed across the past 18 months, organizations in every sector are battling fiercely to secure talent worldwide. That sizzling market for talent does pose difficulties for a company like ours, yet it undeniably opens up a fascinating array of possibilities for us. We encounter numerous engagements in which we're able to assist customers in reaching and cultivating talent around the globe, thanks to our capacity to expand across many skill sets and locations, plus our dedication to reskilling. Through the money we've put into Genome, our online, on-demand learning platform, we're developing the essential capabilities that businesses seek in digital data and analytics, industry- and process-specific expertise, application of Lean Six Sigma, and soft skills along with personal growth. For instance, our certification program in data and analytics gives our people the abilities needed to deliver impact right away once the course ends by pulling insights out of complicated data sets. So far, close to 70% of our workforce has signed up, with over 43,000 completely trained and tested; that's analytics delivered at scale for our clients.

During the peak of the pandemic in 2020, our attrition rates were at historic lows. In the third quarter, as we anticipated, our attrition rate climbed higher than our typical average. This pattern is being seen around the world and is affecting both our competitors and our customers. Still, thanks to how we manage talent, up to now there has been no effect on the engagements we run for clients or on our capacity to turn new bookings into business. So far this year, we have brought on board nearly 30,000 new colleagues, with roughly 10,000 of them arriving during Q3 by itself. That speaks to how strong our culture of curiosity, innovation, and learning is, along with the numerous chances for learning, development, and career growth that we offer our people, made possible by things like Genome and our redeployment platform, Talent Match; we're thrilled to have received a burst of recent accolades as a fantastic place for talent to land in the marketplace, including Forbes 2021 World's Best Employers list, Refinitiv's 2021 Diversity and Inclusion Top 100, 28 Excellence Awards in total from Brandon Hall Group, International SOS's Duty of Care Award for Diversity and Inclusion, Avtar's Top 10 Best Companies for Women in India, and earlier today, Forbes 2021 America's Best Employers for Veterans. We're likewise gaining recognition for the efforts we're making to better our communities. Take, for instance, being included on Fortune's Change the World list as one of 100 companies honored for making a positive societal impact; we hold a deep commitment to our environmental, social, and governance initiatives and take pride in having recently earned a gold medal from EcoVadis, which acknowledges our work in environment, labor and human rights, ethics, and sustainable procurement. We also just wrapped up our yearly Greenathon event, which drew over 25,000 participants to fund the planting of over 14,500 tree saplings, highlighting our dedication to environmental sustainability. ESG matters not just as a key internal priority for us as a business, but also in what we deliver for our clients. With our sector expertise, capabilities in data and analytics, and thorough understanding of our clients' processes, we're well positioned to assist our clients in making headway on their own ESG goals. Via domains such as responsible sourcing, supply chain optimization, financial crimes, climate footprint of equipment usage, and plenty of others, we can help our clients create positive social and environmental impact. We're extremely enthusiastic about the work we're doing as we pursue a world that works better for people. Finally, with our teams starting to come back to the office around the globe and traveling more often to collaborate face to face or meet with clients, we're taking every precaution to keep ensuring the health and safety of our own employees and their families. We're glad to share that a large and growing share of our employees are being vaccinated worldwide. To illustrate, within India — the biggest delivery ecosystem we operate — roughly 80% of the people working for us have gotten a minimum of one COVID vaccine shot, and we keep urging the remainder of our team to take part. Having said that, I'll now hand things over to Mike, who will walk through our Q3 results in detail.

Thank you, Tiger, and hello to everyone this afternoon. Today I'll take you through the results for our third quarter and give you where we currently stand on the outlook for the whole of 2021. On the top line, we brought in $1.02 billion, representing a 9% increase from the same period last year, and 8% if you look at it on a constant currency basis. The share of revenue coming from global clients reached 91% of the total, rising 12% year-over-year, or 11% in constant currency, driven mostly by ongoing momentum in transformation services, with analytics leading the way at more than 30% growth for the quarter, together with sustained strength in our intelligent operations business. Inside that overall global client growth, about 1 percentage point was attributable to revenue from certain divested GE businesses that entered our global client portfolio as of January 1st. We continued to expand our global client relationships over the quarter. As an example, during the twelve months ending September 30th, the number of global client relationships producing more than $5 million in annual revenue increased from 129 to 142, which is a 10% gain year-over-year. That number includes clients with annual revenue above $25 million, which moved from 23 to 26, up 13% year-over-year. GE revenue declined 15% year-over-year, which reflects the committed productivity we delivered as well as the wider macroeconomic impact on GE. Excluding the revenue from those divested GE businesses I just referenced, GE revenue would have dropped 6% for the quarter, in line with what we had anticipated. Adjusted operating income margin was 16.6%, below the level of the first half of the year, primarily due to the increase in investment activity we flagged to you last quarter, along with higher travel costs. As we move into the latter part of the year, we expect travel-related activity to increase as the macro environment continues to stabilize. Gross margin for the quarter stood at 35.6%, compared with 35.2% in the prior-year period, largely because of improved productivity from higher revenue and a more favorable mix. We continue to expect our full year gross margin to expand 70 to 75 basis points year-over-year. SG&A as a percentage of revenue was 21.3%, up 10% year-over-year and 63 basis points sequentially, as we increased investment activity in order to capture long-term growth opportunities. Adjusted EPS came to $0.66, an 18% rise year-over-year from $0.56 in 2020. That $0.10 improvement was mostly due to higher adjusted operating income of $0.04, lower taxes of $0.03, a $0.02 impact from FX re-measurement, and a $0.01 impact from a lower year-over-year share count. Our effective tax rate was 17.3%, versus 22.6% last year, mainly as a result of discrete benefits in the quarter and a non-recurring prior period tax refund related item. If you take out that one time tax benefit, which amounts to $0.03 per share, our effective tax rate for the quarter would have been 21.4%. Now let's move on to cash flow and the balance sheet. During Q3, cash generated by our operations reached $210 million, which means free cash flow ended up at almost twice our net income. Let me quickly recall that in 2020, the pandemic held back revenue growth, so working capital's impact on our cash flow was unusually modest, helped by improved days outstanding, and that lifted cash from operations to $252 million in Q3 of last year. Days outstanding remained in a consistent range, coming in at 84 days for Q3 2021. Cash and cash equivalents totaled $922 million, an increase from $753 million at the close of Q2 2021, and that amount includes $350 million associated with the 1.75% bond we issued in Q1; we continue to monitor market conditions carefully to identify the ideal time to retire our 3.7% bond, which comes due in April 2022. Over the trailing four quarters, our net debt to EBITDA ratio was 1.1 times; with about $500 million in undrawn debt capacity along with the cash on hand, we retain ample liquidity to pursue growth opportunities and execute our capital allocation strategy. We continue to invest in growing the top line organically, our M&A pipeline remains strong, and we remain diligent in seeking out companies that would strengthen our capabilities and our selected service lines. Our history demonstrates that when capital is available, we plan to repurchase shares, particularly when the valuation appears attractive relative to our view of the firm's intrinsic value. As we expected, capital expenditures as a percentage of revenue rose above first-half levels, reflecting investments related to deal ramp-ups and the measured pace at which our global workforce is returning to the office. Taking our year-to-date spending into account, we now anticipate capital expenditures as a percentage of total revenue for the full year to fall within 1.5%-2%. Let me now provide an update on our full-year outlook. We continue to expect total revenue in the range of $3.96 billion-$4 billion, representing year-over-year constant currency growth of 5.5%-6.5%; for global clients, anticipated growth remains in the range of 10.5%-11.5%, or 9%-10% on a constant currency basis. Our full-year GE outlook is likewise unchanged at roughly a 20% year-over-year decline. Excluding the impact of approximately $40 million in revenue from the GE divested businesses, we still expect GE full-year revenue to decline 10%-12%. We continue to expect our adjusted operating income margin to expand to 16.5% for the full year. Incorporated into this outlook is the impact of ongoing ramp-ups in investment activity across both sales and marketing and research and development, higher Q4 travel, and an increased level of transaction costs resulting from recent large deal signings. To be clear, our approximate 16.5% adjusted operating income full-year margin remains the baseline we use when considering our trajectory for 2022. Because of the one-time tax benefit in Q3 I referred to earlier, we now expect the effective tax rate for the whole of 2021 to be about 22.5%-23.5%, compared with the 23.5%-24.5% we had previously anticipated for last year. That shift reflects a sequential improvement of 60 basis points. Given the guidance I just described, our full-year adjusted EPS target is now $2.40-$2.43, up from the prior $2.36-$2.39 range, which captures both the favorable impact of that non-recurring tax item and the balance sheet re-measurement gains recorded this quarter. In addition, based on our results so far this year, full-year operating cash flow is now expected to reach at least $550 million, up from the $500 million we had forecast earlier, and we continue to anticipate free cash flow from operations at roughly 1.2 to 1.3 times net income, above the 1-to-1 ratio historically. With that, I'll turn the call back to Tiger.

Thanks, Mike. What we delivered in Q3 shows the long-term strategic decisions we've committed to. The skills we've developed on our own and brought in through acquisitions across the years are getting a strong reception in the marketplace. We feel good about how we performed, and in our view it confirms the path we've laid out over the medium and long term — worldwide client revenue expanding at a double-digit to low-teens percentage pace, powered by ongoing traction in transformation services, especially analytics, alongside a widening adjusted operating income margin and adjusted diluted EPS rising faster than overall revenue, with robust cash flow generation underpinning all of it. No matter which industry they're in, clients increasingly want to tap data and analytics for predictive insights that guide their actions and put them in position to compete in this new environment. That secular shift aligns with where we excel — transformation services, which keep fueling our revenue growth, with analytics, its biggest segment, consistently expanding at over 30%. Most of the work we do in transformation services consists of longer-term annuity engagements, which frequently open the door to bigger intelligent operations deals that are, by their very nature, annuity based as well. Clients respond well to our outcome-focused offerings, since we concentrate on delivering value that goes past mere cost and productivity gains, and that helps us secure a great many sole source wins — both with existing client relationships that keep expanding and with new logos. When it comes to pioneering fresh approaches to how work gets done, we're leading the way. All around the world, we're running numerous experiments with and for our clients involving various hybrid flexible models, which let our talent enjoy the advantages of working from home while also gathering as a team on a set rhythm to collaborate, innovate and strengthen the strong team culture we're recognized for. Clients appreciate our talent practices and our capacity to reskill on a global scale and at scale. In the talent market we find ourselves in today, these strengths set us apart even more. This creates openings for numerous opportunities to assist clients in transforming their business models through new cloud-based digital solutions that take advantage of newer commercial constructs, reflecting how work is shifting away from traditional FTE models. I'd like to thank our global team of more than 100,000 people for their continued dedication and their tireless effort toward a world that works better for people. The work we're doing makes me very proud, as does the impact our global teams have on our clients, our colleagues, our shareholders and the communities where we live. The opportunities in front of us excite me greatly. Thank you. With that, I'll hand the call back to Roger.

Thanks, Tiger. At this point, we're ready to take questions from all of you on the line. Nika, would you mind walking us through how to participate?

Yeah, nice work, everyone.

Thanks, David. Appreciate it.

Yeah. So I suppose the first thing is that the momentum has been really strong. You reached 10% plus global client two quarters ahead of schedule. You hit that mark last quarter. And you're keeping it up this quarter. What I'm trying to figure out is whether your post-ramp-up, post-COVID phase is now fully scaled, so we can simply count on that level continuing, or whether there's still more ahead. I recall you mentioning that low teens is achievable. Do you fully anticipate that type of recurring growth carrying into next year as we look ahead to next year?

David, thank you. Let's discuss the medium- to long-term a bit instead of next year. As I repeated in my script, for the medium- to long-term, we still believe global clients at double-digit to low teens% is the path we have returned to. Clearly, last year with the pandemic, we didn't grow as much. Apart from that, we've been on that long-term path for many years now, and we believe we are back on it. We feel very good. I agree we arrived there a couple of quarters sooner than we originally thought when we wrapped up last year and began this year. So we feel good about inflows, about our pipeline, about bookings, about the mix of our business and the fact that it's widespread across all our industries, including, by the way, banking and capital markets, which, if you remove the impact of the one client we discussed at the end of 2020, is actually performing very well.

David, thanks for that. Perhaps just the second item. I understand how you typically frame guidance so that Q4 comes in with a thinner margin compared to the other quarters. When we consider the gross margin piece being reduced in Q4, does any portion of that relate simply to wage inflation? Or is it possible to take this year's baseline and consider the full year as a better way to frame next year, instead of how the trends carry into Q4?

Yeah. Apologies, David. This is Mike. That is precisely our approach. During our conversation, we referenced a baseline for our AOI at 6.5%. The same argument applies to our gross margin going forward. We observe quite a few developments in the later portion of the year. Most notably, what interests us most is that travel and activity are rising, investment in our accounts is rising, and all of that is pushing that margin forward; we intend to use it as a baseline as we move into next year.

Fantastic. Thanks. Nice work, everyone.

Thanks, David. Appreciate it.

Thank you and congrats.

Maggie, back to you.

I'd like to expand a bit on what David asked earlier regarding how sustainable this growth is. Tiger, when you mentioned 30%, were you referring to the analytics portion of TS, or to TS overall? And then, could you speak to whether that pace can hold, since it's fairly high and we've been seeing more demand for analytics emerge after the pandemic?

Sure. For global clients, TS as a whole has grown 30%. Analytics is clearly performing above that level. It serves as a primary driver of our expansion, and in fact, for a number of quarters now, it has been the biggest piece of TS. It's always a positive when the biggest piece of your Transformation Services business is also the one expanding most quickly. Transformation Services on its own is expanding at 30%. All of that is very encouraging. Naturally, as that business keeps scaling, I'm not—I don't want to assume that this 30% rate is something we can count on over a longer horizon. My sense is it will unfold the way we've outlined it, which is that every enterprise across every industry we serve is working out how to use data and analytics to generate insights and take action on a real-time predictive basis, so they can bring more value to their customers and stand apart in the market. That's the environment we're operating in today. That secular trend, in my view, is going to remain in place for the coming 10 years. That covers the entire analytics engine, along with the value we deliver to clients by generating those insights and benchmarks, then turning them into actions and decisions and ultimately producing outcomes—that's where our real differentiation lies. It isn't merely the insights we generate; it's the outcomes we produce. Increasingly, some of our commercial constructs are structured so we get paid for those outcomes. That's what gives us a lot of confidence.

All right. Thank you, Tiger. The two of you mentioned the GE divestitures and what came of them, and clearly that client has further changes ahead. Could you discuss how, when big customers go through major restructurings or similar events, you've handled the danger and the chance that arises from that over time?

Well, Maggie, that's an excellent question, and understandably, following this morning's news involving our big client, GE, it's an obvious one to ask. Something quite fascinating about our past is that we've built what amounts to a remarkable playbook, one that lets our clients enjoy genuine flexibility when they buy businesses, spin businesses off, or break apart into standalone companies. We've witnessed this repeatedly across many industries. Take a group of consumer goods companies where we took part in that split — they broke into separate companies, with some listing on their own. Pharma companies: a few of our biggest pharma clients have spun out independent companies in recent times, within the last 3 or 4 years, and we were involved at the center of every one of those splits. That's thanks to the work we perform in finance, procurement, and supply chain, plus certain regulatory tasks, and then, naturally, we come to GE. As GE carried out its divestiture of the different GE Capital businesses and afterward a number of the industrial businesses across the last 3 to 4 years, in close to a majority of those, we wound up holding new contracts, with new clients, and then positioned that for growth. We truly possess a very solid playbook. Our ties with the GE businesses remain very strong, and we keep discovering ways to bring value to GE. I believe we're positioned quite well to keep bringing value to GE as they move through their transformation journey.

All right. Thank you, Tiger.