Genpact Limited (G) Earnings Call Transcript & Summary

Thanks, RJ, and good afternoon, everyone. Welcome to this earnings call, where we'll go over the results for Q1, which closed on March 31st, 2022. Hopefully you've had an opportunity to look at the earnings release we put up in the IR section of genpact.com. Joining us today are Tiger Tyagarajan, our President and CEO, and Mike Weiner, our Chief Financial Officer. Here's what today's agenda looks like. Tiger will give an overview of how we performed and share an update on our strategic initiatives. After that, Mike will take you through the quarter's financial performance and share our current thinking on the outlook for the whole of 2022. Then Tiger will return with some closing remarks, and after that we'll open things up for your questions. We anticipate this call running roughly an hour. Certain topics we'll cover today are forward-looking and carry a number of risks, uncertainties, and other factors that might cause actual results to differ materially from what those forward-looking statements suggest. Those risks and uncertainties are laid out in our press release. Also, on this call we'll mention certain non-GAAP financial measures that we think offer extra information to deepen your grasp of how management sees 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 said, I'll hand things over to Tiger.

Thanks, Roger. Hello, everyone, and thanks for being with us this afternoon for the call on our Q1 2022 results. The year got off to an excellent beginning, since top-line growth, adjusted operating income margin, and adjusted diluted EPS all exceeded what we had originally anticipated. Thanks to the money we've put into our strategic choices, we're well placed to assist clients in dealing with the numerous difficulties presented by this macro environment. Once again we enjoyed a quarter of robust appetite for the data and analytics, digital, and consulting operations that comprise transformation services, along with sustained momentum in our intelligent operations business. In Q1 2022, total revenue came to $1.1 billion, which is 14% higher on a constant currency basis. Global clients revenue was $973 million, an increase of 15% on a constant currency basis. Adjusted operating income margin stood at 15%, a gain of 60 basis points versus the fourth quarter. Adjusted diluted earnings per share were $0.60, which is 2% higher year-over-year. The macro environment remains difficult, with inflation climbing to a 40-year high, energy prices spiking enormously, supply chains still disrupted, a talent market that's hot, and the Ukraine-Russia war, to mention only some factors. Our Eastern European delivery footprint — concentrated in Romania, Poland, and Hungary, and numbering roughly 7,000 employees — has seen no operational interruptions; nor are we observing any material shift in client behavior regarding our global business. Client demand is still healthy, building on the momentum from last year, especially as every company looks for ways to carry out the transformation required in these times. Bookings hit their highest first quarter level since quarter one 2019, with 60% being annually based deals and 50% sole sourced. Although we normally don't provide color on quarterly bookings, in light of the environment we felt this was a good signal to share. This encompassed two large engagements with total contract value greater than $50 million, both within the banking and capital markets industry. We also brought on 32 new clients during the quarter, compared with an average of 24 new clients per quarter in 2021. Our quarter end pipeline and the inflows during the quarter both set all-time highs. Combined with strong bookings momentum, this clearly shows that our total addressable market is expanding and that our solutions and services offer a differentiated value proposition. Global client revenue rose 15% year-over-year on a constant currency basis, driven by continued strong performance from our analytics, digital, and consulting businesses that make up transformation services, which grew 29% year-over-year and now account for 37% of total global client revenue. Thanks to deal ramps from recent wins, intelligent operations grew 7% and accounted for 63% of total global client revenue. Global client revenue growth was broad-based across all our chosen verticals, including double-digit growth in consumer goods and retail, life sciences and healthcare, high-tech, banking and capital markets, and insurance. Revenue from our GE businesses in the first quarter was up 2%. Like we said during the previous quarter's call, our view hasn't changed that splitting GE into three standalone businesses creates chances for us to capture additional assignments tied to those spin-offs. The pull for the analytics, digital, and consulting offerings that together form transformation services is being driven by robust momentum across 4 distinct service lines. Those lines are sales and commercial operations, supply chain management, financial crimes and risk, and financial planning and analysis. Within every one of those areas, we apply tools such as AI, machine learning, and the cloud to work through complicated data sets and construct flexible analytical models, which in turn generate insights. Those insights are then translated into actions producing substantial business results that go past mere cost productivity. Taken as a group, these 4 service lines rose 47% during the first quarter, and the weight clients place on them for their transformation agendas in the current environment supports the considerable growth of our pipeline. In financial crimes and risk, for instance, we bring to bear our cloud-based financial crimes and regulatory compliance offerings, together with solutions built on AI and digital technologies, to strengthen the customer experience our banking clients deliver. We are likewise experiencing strong momentum with New Age Fintechs, assisting them with pressing matters involving customer fraud and risk management while giving their operations scale as they expand. The 2 sizable deal wins I mentioned before illustrate this point. Everything described here is fueling expansion in our banking and capital markets vertical. Our global client analytics business posted a very healthy 40% increase versus the prior year. Allow me to share several illustrations of how we assist clients in applying data and analytics to strategic choices while producing better results. We are partnering with a major luxury consumer goods brand to substantially enhance its data quality by harmonizing key performance metrics across its online and physical channels and creating models that optimize inventory levels. In addition, our Rightpoint experience team is assisting in lifting consumer experience on e-commerce websites through product marketing updates aimed at boosting the client's e-commerce growth by as much as 15%. For a major global insurance company, we created an AI and machine learning model drawing on both internal and external data to evaluate risks swiftly and precisely and to rank policies for underwriting so that lost opportunities are minimized. Our solution cuts the client's response times dramatically, from days down to hours, and should generate incremental low double-digit growth for that client. For a major global sporting goods brand, we constructed sophisticated machine learning models drawing on an enormous volume of consumer transaction and demographic data to identify the optimal price, promotion assortment, and inventory levels for personalized consumer engagement. Guided by our Enquero data and analytics team, this solution is expanding the client's direct-to-consumer market share while also boosting their profitability. Every one of these solutions, which produce tangible impact extending beyond cost and productivity alone, can be replicated for other clients. We keep seeing traction when it comes to running commercial models around the outcomes we provide, rather than relying only on FTE-based pricing, which builds stronger strategic ties with our clients; we're uniting colleagues who possess deep industry and functional domain knowledge with data scientists and digital technology specialists to roll out tailored solutions that deliver value for our clients during these times. Three particular examples follow. To address the inflationary climate, we've built a set of services and solutions, each drawing on data and analytics, to assist clients in taking proactive steps across sourcing and procurement, sales and marketing, and supply chain, so their financial health is strengthened. Among these offerings are supplier prioritization, consolidation, pricing and promotion optimization strategies, plus more precise dynamic and real-time forecasting of supply and demand. With the Russia-Ukraine war having reached its third month, we're working with clients on cybersecurity matters, business continuity planning, and geographic diversification of operations, thanks to our extensive global delivery model. Third, and most importantly, the war for talent has companies hunting for inventive approaches to fill critical roles. Our Center of Excellence hubs let clients tap our highly skilled global workforce in sought-after areas, among them data scientists and digital practitioners who also bring deep domain expertise in services like finance and accounting, supply chain management, and financial crimes and risk.

That all contributed to a major increase in how large our worldwide client relationships have become. Across the twelve months that concluded on March 31st, 2022, the count of global client relationships generating yearly revenue above $5 million rose from 132 to 149. Those producing more than $25 million yearly went up from 24 to 30. Accounts bringing in over $50 million climbed from 11 to 12. Our biggest client relationships are expanding at a quicker pace than the overall company, as we establish additional buying centers and extend more end-to-end solutions to them. The enthusiasm and commitment our global teams show in delivering excellent service to clients remains at the heart of what we achieve. What we invest in learning and development for our people doesn't just help us secure sought-after skills — it also equips them with the essential capabilities to advance their careers in a transforming world. In Q1, we brought on board nearly 15,000 new colleagues, which speaks to the strength of Genpact's brand amid a fiercely competitive talent market. Also in Q1, our staff logged more than 2 million training hours through Genome, our online on-demand learning platform. That figure covers our Data Bridge program, which builds employee skills in data analytics, decision making, and storytelling so they can generate actionable insights for clients. IDC recently acknowledged Data Bridge as an industry-leading data literacy program at scale, possibly among the biggest of its type. To date, we have trained and certified over 50,000 employees via this initiative. Through our internal talent match platform, we successfully shifted more than 5,000 recently upskilled people to meet client needs. Attrition for Q1 held at 33%, matching what we reported across the previous two quarters. Thanks to our capacity to reskill, redeploy, and recruit at scale, we still observe no effect on client engagements or on successfully converting new opportunities. We view this as a vital competitive edge, especially since talent supply pressures everywhere have left clients needing partners such as us more than at any prior point. Moving forward through the year, we anticipate overall demand staying strong, driven by our data analytics and digital businesses. We are likewise in active discussions with clients about pricing changes tied to today's inflationary conditions, and we keep making consistent headway so far. Such conversations are complicated and require time, yet they also create chances to generate greater value for clients and reach a win-win result for all; with that, I'll hand the call to Mike for a thorough review of our first quarter.

Thanks, Tiger, and good afternoon, everyone. In my remarks today, I'll go over the financial results we posted for the first quarter, then give you an update on what we expect for the full year 2022. Revenue came in at $1.1 billion in total, which is a 13% increase compared with a year earlier, or 14% if you strip out currency effects, and the driver was stronger than anticipated results in both Global Client and GE Revenue. Global Client revenue accounts for 91% of the total we brought in, and it rose 14% versus the prior-year period, or 15% in constant currency terms, mostly because demand stayed robust for transformation services, which grew 29% during the quarter, along with 7% growth in intelligent operations, chiefly tied to deal ramps. GE Revenue was up 2% from a year ago, mainly on short cycle project work in the quarter. Our adjusted operating income margin came to 15%, which is 220 basis points lower than what we recorded in the first quarter a year ago. Keep in mind that the unusually elevated adjusted operating income margin we saw in the first quarter of 2021 was mostly a function of reduced travel costs and the pushing of some planned R&D and sales and marketing investments into the second half of that year, which reflected how COVID-19 affected us. The adjusted operating income margin beat our expectations this quarter, and the main reason was strong top-line results across our businesses. Gross margin for the quarter fell 70 basis points from a year earlier, landing at 36.1%. That said, it was up 130 basis points in sequential terms versus the fourth quarter; the quarter-on-quarter improvement came largely from the favorable effect of scaling up the investments we made in the fourth quarter tied to deal activity, plus the pricing improvement Tiger mentioned earlier. SG&A represented 22.2% of revenue, an increase of 100 basis points year-over-year, mostly reflecting the sales and marketing and R&D investments we ramped up late in 2021. Adjusted EPS reached $0.60, which is 2% higher than a year ago, when it was $0.59 in the first quarter. That $0.01 gain came mostly from a $0.01 benefit of a lower share count and $0.01 from lower taxes, partially offset by a $0.01 hit from substantially lower operating income and income. The $4 million FX remeasurement gain we booked in the first quarter had no material effect on adjusted EPS, since our adjusted EPS for the same quarter last year included a $3 million FX remeasurement gain that was slightly smaller. Our effective tax rate was 23.5%, compared with 24.1% in the equivalent period a year ago, mainly because certain jurisdictions where we operate had new, lower taxes in the first quarter of 2022 relative to 2021. Now let me move to cash flow and the balance sheet. We used $114 million of cash from operations during the quarter. Using cash rather than generating it is normal for the first quarter in most years. But in the same period last year, we actually generated $77 million of cash, which was atypical, thanks to higher adjusted operating income as well as better days outstanding and overall working capital levels. Just to remind everyone, in Q4, our days sales outstanding got a lift from a greater volume of short-cycle work booked during that period than we had expected. Looking at it year over year, DSO came down to 82 days, versus 84 days in the first quarter of 2021. Following our usual pattern, we anticipate days outstanding will get better each quarter in sequence, since we still think DSOs will finish the year in the high 70-day range. Cash and cash equivalents come to $862 million, down from $899 million at the close of the fourth quarter of 2021. Our net debt-to-EBITDA ratio across the trailing four quarters rose to 1.5x from 1.1x at year-end, which relates to general cash management. Thanks to our undrawn debt capacity and the cash balances we hold, we still have plenty of liquidity to chase growth opportunities and carry out our capital allocation strategy; we anticipate the net debt-to-EBITDA ratio will stay within our preferred 1x-2x band. On April 1st, we paid off a $350 million-dollar bond carrying a 3.7% coupon. With the market as volatile as it is right now, we're quite happy that close to 80% of our total debt carries a fixed rate. During the quarter, we followed through on our programs for a more regular cadence of share repurchases and capitalized on attractive valuations for our shares, buying back 1.6 million shares at a total cost of $76 million, which works out to an average of $46.61. We also distributed dividends amounting to $23 million. Capital expenditures came to roughly 1% of revenue. We still anticipate that this percentage will land somewhere around 1.5% to 2.2% for the full year 2022, with heavier spending over the rest of the year as employees come back to the office under our hybrid delivery model. Now let me give you an update on our outlook for the full year. With the strong start we've had, we now anticipate total revenue landing between $4.325 billion-$4.4 billion, which represents 8%-9% growth year over year. This factors in a larger expected currency headwind than what we gave you in our full year outlook back in early February, reflecting heightened market volatility; we now anticipate total revenue growth of between 9%-11% on a constant currency basis, up from a previous full year outlook of 8%-10%. Global client revenue for 2022 should grow in the range of 9%-11%, or 11%-13% on a constant currency basis, up from our earlier outlook of 8%-11%, or 9%-12% on a constant currency basis. There's no change to our earlier full year 2022 outlook for G of roughly a 5% decline year over year. Given how uncertain the climate is, we still anticipate our full year 2022 adjusted operating income margin falling within the range of 16% to 16.5%. As visibility improves over the course of the year, we expect to tighten that range. We fully anticipate our adjusted operating income margin will expand in line with our strategy over the medium term. Our projection for adjusted earnings per share across all of 2022 now sits in the range of $2.60 to $2.76, which is an increase over the earlier guidance of $2.53 to $2.71. This takes into account a boost at the bottom end of our range for the outlook, the effect of FX re-measurements in the first quarter that were mentioned or alluded to previously, plus what we are assuming about share repurchases during the year. And finally, our forecast for cash from operations stays at $600 million for the whole of 2022. Having said all that, I'll hand the call back to Tiger.

Thanks, Mike. The robust beginning we've had this year shows how well our business model holds up and how much value we bring to clients in the marketplace. Hoodoo Digital and Enquero, the two companies we acquired, have come together smoothly and strengthened what we can offer in digital experience and data analytics — two essential fields that push end-to-end digital transformation forward for clients. The rest of the targeted deals we've completed — Rightpoint, Something Digital in digital commerce, Barkawi in supply chain management, and riskCanvas in financial crimes — have each driven growth across the service lines and capabilities we focus on. Annuity-based revenue streams form the bulk of what we do, coming from designing, transforming, and running mission-critical operations for clients within the industry verticals we've chosen. As we grow into a trusted partner of choice, we're able to assist clients more in driving change so they can compete more effectively in their markets. Be it cutting fraud, fine-tuning inventory, generating overall operational efficiencies that lift profitability, or delivering an improved employee or customer experience that helps revenue grow, we guide clients through the numerous difficulties that come with economic cycles; we take pride in how far we've come on environmental, social, and governance; our 2021 sustainability report came out recently and spotlights some of that progress, among it 41% global gender diversity, a 44% reduction in scope one and scope two emissions since 2017, surpassing 10 million learning hours logged by our employees for a second consecutive year, and 11 million lives touched through our corporate social responsibility initiatives. Our dedication to ESG initiatives keeps earning us recognition. Being included on the Forbes list of Best Employers for Diversity 2022 is something we're delighted about, since it shows we can cultivate a diverse, equitable, and inclusive environment in which our employees flourish; in addition, Ethisphere has named us the World's Most Ethical Company for the fourth time, which acknowledges our dedication to the highest levels of ethical behavior in line with our purpose. Creating a more sustainable world, we understand, is complicated and calls for partnerships. As a company we'll handle our share, yet we also see the enormous chance we have to generate outsized impact by assisting our clients with theirs. Leveraging our industry knowledge, our strength in data and analytics, and our deep familiarity with our clients' processes to help them advance along their own ESG journeys — in areas such as responsible sourcing, supply chain optimization, and financial crimes, to name just a few — is an opportunity that excites us. In our view, ESG is a lever for driving transformation that can give our clients a competitive advantage while simultaneously producing positive environmental and social impact. Before wrapping up, I'm happy to share that on June the 23rd we'll hold an in-person investor and analyst day in New York City. Genpact's vision for 2026 will be presented there, laying out our strategic blueprint for success and financial outlook. Information about registering will be shared soon; we can't wait to see you all there. With that, I'll hand the call back over to Roger.

Appreciate that, Tiger. At this point we're ready to have the lines opened so you can ask what's on your mind. RJ, would you mind walking everyone through how to participate?

Hello, Bradley Clark here, filling in for Keith. Thanks for letting me ask. My question is regarding the pricing landscape. You clearly mentioned that you are returning to customers to talk over pricing in order to, you know, counter wage inflation along with other inflationary strains. Could you talk about, you know, what chances exist right now versus over the next, you know, 2 months and the remainder of the year to talk about pricing? You noted that you observed some effect on gross margin during this first quarter coming from pricing. How do you anticipate that rhythm to unfold across the year, since, you know, it is still fairly early in the discussions? Thank you.

I will begin, and then I will ask Mike to build on what I am going to say. We only kicked off late last quarter, and then late in the fourth quarter, and then across the first quarter. The ties we have with our customers are long-standing ones, and we grasp the worth we deliver to them. We are quite clear that in a lot of these discussions, what we aim for is really to seize the larger chance of generating value for our customers alongside them. Our customers are likewise dealing with a comparable inflationary climate and a comparably heated market for talent. They too recognize that the capabilities required to produce that value now carry an inflationary cost. That gives us the chance to sit down and hold those discussions. As I noted in my prepared remarks, they take time, they call for an alignment of goals; we think that across the year and in fact into the following year, we will manage to navigate that. The initial indicators from the initial moves we have made with certain customers appear to indicate that this is the path we are on. Regarding the effect on margin for the year, Mike, perhaps you could speak to that and for the rest of the year.

Sure. To start with, the pricing changes we saw during the quarter were fairly minimal. As Tiger mentioned, they will build on each other as the year goes on. They will even extend into next year. There is really no effect on margin for this quarter. Potentially, there is clearly a great deal of back-and-forth that will influence us going forward.

Okay. Thank you very much.

Thank you.

Yes. Hi, everyone. Excellent work on every front. So, perhaps to start with, just.

Hi, Dave.

Yeah. Yeah, happy to. I suppose, to start with, when it comes to verticals, I'm aware that the BFSI vertical had a somewhat tough time last year and you mentioned that throughout the year, but it seems like it got back to truly strong growth. Perhaps you could talk a bit about what sort of drove that return to really strong growth.

No, Dave, that's actually a great point. A year ago we had mentioned that a single client in the asset management business was going through a restructuring. Consequently, you know, our relationship with them was also restructured; that created a full-year effect that in fact was felt even in Q1 of 2022, the tail end of it. As that has faded away, our underlying growth in the banking vertical is showing up. Even across the past 2 quarters, in the prepared remarks for our earnings, we had discussed the momentum accumulating in our pipeline and in our bookings for the banking vertical. We are now starting to see that materialize as the effect of that restructured client, you know, comes to an end.

Yes. Actually, I want to build on what was just said. It won't be this quarter when we completely lap it—we'll do so once the second quarter comes to a close.

Yes.

The decline is happening in a straight line, so when you compare like for like, it will actually be Q3 and Q4. That works in our favor as a helpful tailwind.

Another point I want to make concerns a specific one of those service areas we mentioned — financial crimes, risk, anti-money laundering, KYC. The reality we're operating in is one where plenty of banks around the world are grappling with the need to, well, adopt technologies and put data and analytics to work so they can meet the proper regulatory compliance, and at the same time accomplish that in a way that keeps both customer experience and employee experience genuinely strong. A piece of the challenge the overall environment and the banking sector has faced is that generally, in those kinds of compliance scenarios, the experience isn't strong. Being able to harness technology — which is exactly what we offer — makes a substantial difference.

Yes. That's genuinely useful. For my follow-up, I want to revisit gross margins. Typically, it appears that an attrition surge plus inflation produces an instant blow, yet afterward pricing tends to arrive somewhat later. Would it be reasonable to describe this as roughly a 6 to 9 month delay between the point all of this began and the point this pricing is now beginning to take effect, such that in the second half your gross margins could once again rise compared with the prior year as you automate and simply manage the strain?

Yes. I'd say that's likely accurate; it would likely be closer to 9 to 12 months, once these adjustments begin in the first quarter. Yes, it would move through there. It would come alongside some of the replacement costs running above our expectations that we're facing at present, making up for that.

Another point I'd make is that, you know, we've also got to acknowledge that right now the inflationary situation is still with us; it hasn't eased. So, Dave, that means we need to stay careful when we look ahead, because you know, it hinges on how favorably that unfolds. At the same time, we keep collaborating with our clients to arrive at the appropriate price point for each of the services we offer.

Understood. Alright, I appreciate it, everyone. Excellent work.

Thanks, Dave.

Hello everyone; Jesse here, filling in for Maggie. Nice work on the quarter. We were hoping to explore the talent landscape. You mentioned that attrition has held steady across the last 2 quarters, yet are you noticing it running hotter in particular geographies?

On the whole, that figure sits at a steady 33%, though naturally, once you break it down by segment, we find attrition sitting at that raised mark, more so among the junior ranks of the company and the less skilled portions of the company than when you move up to more advanced skills at leadership tiers. As a matter of fact, at the more advanced skills and leadership tiers, we have in fact observed attrition numbers that have not yet gotten back to where they stood before the pandemic, which is great. Secondly, we have noticed attrition within customer care call center style settings in the U.S. and in Philippines climbing sharply. Some of the steadiness we observe in the total attrition figure contains inside it a rise in attrition across those 2 geographies and those categories of skills. A particular challenge in the Philippines involves the government's requirement to return to the office for every service provider, which every one of us will be compliant with over the coming few months. That is generating anxiety among certain staff members and the attrition, and the entire industry is grappling with it. Naturally, I would add that specialized technology skills along with specialized data science and data analytics skills come as no shock. That is an extremely in-demand skill, and attrition numbers remain, you know, just as elevated as they were in the fourth quarter, carrying over into the first quarter.

Got it. One brief follow-up before I move to my next question. What's the headcount for Genpact in the Philippines? And then, how has your thinking on wage inflation shifted from the start of the year?

In the Philippines, we've got 5,000 employees. That's a really solid hub for us. Still, it isn't as large as a few of our other hubs, such as Eastern Europe, which I mentioned earlier, where 7,000 employees are spread across three countries. Service out of the Philippines is good and excellent, yet that's 5,000 employees within a company of more than 110,000. On wage inflation during the first quarter, once again, it was largely stable. In fact, it was quite stable across nearly every skill cohort. A handful of skill cohorts have in fact declined. They appear to be starting to trend downward; even so, they remain higher and elevated compared with three or four quarters ago. We haven't identified any specific skill set where the rate in Q1 exceeded what we saw in the fourth quarter.