Genpact Limited (G) Earnings Call Transcript & Summary

All right. Great. Thanks, everyone, for joining. My name is Tien-Tsin Huang. I cover the IT services and the payment sector, and wouldn't be a tech conference if you're not going to have Genpact with us. So Tiger Tyagarajan, the CEO is with us, been grateful to have Tiger join us. Thank you. Hope you're doing well.

Doing well. First big conference of attending in 2.5 -- whatever. 2 years and change months.

Yes, which is well. And I got to think it's great to see everyone. It took a little bit of time to get used to seeing everyone, shake hands, but really grateful to have you, Tiger, really. It's always -- I look forward to chatting with you. And I thought if you don't mind, we'll go right into the questions. We'll take questions from the audience and from the ask-the-question portal. So for those listening, please utilize that. So I thought we'd start with just the quarter. First quarter at the gate, very, very strong. Raised so early in the year, which I think is a little out of character for Genpact, which is great.

Just the bottom.

Just the bottom. Either way. But just having covered the name for quite a long time, Tiger. I thought that was a little bit of a change in the pattern. So talk to us about the demand environment, what gives you confidence here? I know you're getting a lot of questions on the macro. How do you feel?

Yes. So let's talk about demand first. And I just think the momentum that we saw towards the end of the third quarter through the fourth quarter of last year, just continued into the first quarter, momentum on new deal inflows, the pipeline, converting into bookings and then converting it to revenue. So we saw that flow through nicely. So I'd say that is one. Second, we saw pervasiveness, which is, I can't call it a single industry vertical that we serve that didn't participate broadly in that momentum. The momentum was driven by what we've always said for the last couple of years, which is a deep desire for most enterprises to try and find a way to change their business models using new technologies. And I think that has always been a secular change. The last 2.5 years has further highlighted it. And we've seen we've always called out 5 trends. Those trends still seem to hold the movement to the cloud, the movement from offline to online, pretty much in almost every industry. The virtualization of technology and work, obviously accelerated by the pandemic . The desire for enterprises to really use data that now sits in the cloud, that is virtual to drive decision-making that is based on predictive analytics from that data. And all of this package with a user experience and a customer experience that makes use of that technology real because more and more we find enterprises actually struggle in their transformation journeys, not because of the wrong choice of technology or that it is actually not delivering value is that people are not using it. So I think experience is becoming a big thing in the way you approach digital transformation. And we think every enterprise start undertaking that journey realize that if they want speed, they have to have partnerships. And then, of course, the macro comes in. And in that macro, if I want 20 people as a large enterprise to undertake my digital transformation journey, no longer can I say I'm going to get the 20 people and hold on to them. I have to reach out to partners, whose job it is to get thousands of such people, and manage that demand and supply of 1,000 people, 2,000 people, 5,000 people. So we're seeing very good demand tailwinds.

So that's well said, right, because you touched upon a lot of things, digital transformation, cost savings, outsourcing. So -- and you and I have debated this over the years, Tiger, in terms of where we are in the cycle, what does it mean for BPO versus IT services and project-based work? And you touch a lot of that now still with -- and I'm sure we'll talk about it. But where are we in that? I mean, you have such a great pulse on what clients are saying? Is it changing?

So again, it's a change that's been ongoing. It's not a change that happened just in the last few months. I mean, very clearly, the divide between the CIO deciding technology and choices on technology without very strong business ownership and input, those days are over. So you either have CIOs who actually get it, Chief Digital Officers who get it or you have people in those roles who partner very well with the CFO, the Supply Chain Officer, the Chief Risk Officer, the COO, Growth Officer, Marketing Officer, all of them because technology really is in the service of them. The second is, I think there's a deep realization across a whole range of our clients that technology -- I'm going to say this, and it's going to sound really odd. Technology is the easiest thing in terms of solution. You either pick this technology or that technology, a lot of them. And yes, one is different from the other, but only at the margin. It's really, do you know how to implement it, you know how to use it.

Yes. Business process.

But before that, what -- where is your data? And what's the quality of your data? What's the -- do you understand the meaning of this data versus that data? How do you want to use this data to create the insight? What are the insight you're looking for? What are the outcome you're trying to deliver? And once you figure that out, then what is the change in the underlying process that gets that data the right data, clean, to the right people at the right place at the right time with the right models. And all of that, you can use technology. But more and more, we are finding clients understanding that the choice of technology is just 1 step in a multistep equation. It's necessary but hardly sufficient condition. And our strength is, number one, all the other leaders in an organization, not just a CIO. And our understanding of the domain, our understanding of the data, our understanding of how do you look for the right data and then clean that up and then building the models and then delivering outcomes because we run these things. So we're finding the language that we've been using for 15 years is actually resonating.

Okay. Good. And I know there's a lot of orchestration given everything you just described in terms of the people that you touched and with transformation services, Puneet and I always think of that as a good gauge on an effective business. It's quite big. Now it's over 1/3 of the business and Global Clients growing very, very fast. Is this a good climate for that to continue?

I think so. So if I go back to pre-pandemic, it was already growing at 30% plus at that time. And the driver of that growth was the combination of data and technology and the intersection of those 2, would tell me what I need to do, so let's call it, advise and consult in order to undertake these journeys. The pandemic just accelerated that, brought more technologies into play. We enhanced our capabilities over the last 5 years through the acquisitions we've done and the organic builds we've done. They've been very, I would say, a rifle shot coming from our strategy of saying that's the capability we want. Therefore, that's an acquisition we need. Therefore, let's go search and therefore, closing on the acquisition and then integrating it into the overall suite of solutions. And then it goes back to, are you close enough to the client to understand what is the right solution today? So early in 2000 -- late '17, early '18, the conclusion we came to is that the world is going to undertake a journey on supply chain transformation. We don't know the pandemic was coming. And we didn't know the semiconductor industry is going to go through whatever they went through. But that led to the acquisition of Barkawi. Connecting Barkawi up to our existing intelligent operations and supply chain that we used to do for a range of manufacturing companies starting with GE. And then undertaking that journey in opening up supply chain as a service with conversations with the CFO, the supply chain leader and the growth leader of companies and of course, the CIO. The pandemic does just took off. And the way it took off was we need better forecasting. That's it. So we put together solutions that actually allow different companies in different industries to better forecast demand. Actually, on a daily basis, on a weekly basis versus let's just forecast for the year. And then that led to supply chain, supply forecasting and supply planning actually not forecasting, supply planning. And then the flow of everything between demand and supply, logistics. And then you run into the last 12 months of transportation and logistics problems and then inflation. I mean you put that whole equation together, supply -- and also no wonder supply chain is our fastest -- one of our faster growing service lines.

So how do clients -- prospective clients know that Genpact can do all of this. I know you've talked for a while about reference accounts. And I think when we had you last time, virtually, we talked about Bridgewater, Walmart, et cetera. How -- I mean is the awareness level where you think it should be?

You know the awareness level is never where you would like it to be. But I think it will be fair to say, Tien-Tsin, that our awareness level is dramatically different than what it was 5, 10 years back?

How do you measure that?

When we were small, we do awareness measurements by reaching out to not our customers, but a broad ecosystem of C-suite and mid-level leaders on an annual basis and gauging unaided recall. I mean this is very classic marketing, unaided recall. And then on a topic, does our name come up? And then when our name comes up, where does it rank and stack on different topics? Is it only technology? Is it only process? Is it only analytics, data, et cetera. So the tide for us has been rising. That's good. There's still enough way to go when we compete with much larger enterprises with much deeper history. Our real trajectory over the last 5 years has been to double, triple down on the clients who we think are undertaking major transformation journeys themselves. The weapons we go into the marketplace with is broader than it's ever been. Our ability to actually have conversations with every one of the C-suite I described, with something that's relevant for them is way better than it was. 5 years back, we didn't have an opportunity to have a supply chain conversation. Today, we have a conversation with the sales leader of a company, a marketing leader of a company, either to find a way to improve their sales targeting or sales conversion through a combination of data and analytics and actually sales support operations, which more and more clients are actually looking at in order to take away non-value-added work and time from the sales team to get that extra lift on the revenue side. Or it's -- talking to the marketing leader who's very concerned about all these digital technologies are getting deployed. What's the customer satisfaction on their use, how delighted is our customer? Because more and more, people are talking about consumer-grade technology being available to enterprises and enterprise customers. So I think the combination of all of that allows us to double, triple down on a set of existing clients. And we're seeing that grow faster than our overall base. And I think that's going to be our game plan going forward as well.

So you talked about on the call on large clients in the pipeline.

Yes.

I'm assuming these are all names that are going through transformational changes. But how far along are they in the decision process? And are these large enterprises from a local standpoint up there with a Walmart you pick your example of some of the big clients that you've had?

So I would say, Tien-Tsin there are -- it's a tale of 2 cities. So city #1 is large enterprises who are undertaking these large transformation agendas to change their business model as an offensive -- offense response to everything else that's happening in the macro as well as in their industry and dealing with disruptors in their space. I don't think it matters which industry you talk about. Every industry has disruptors, which then brings me to the second category that we also have as our target and our clients, which is disruptors in every industry, FinTechs and Shortex, e-commerce players, new SaaS technology players, who once they gather momentum, you're talking about, I mean, JPMorgan Chase conference here today is a reflection of that you just had to pull out the whole list. I mean, these are people, some of whom are growing at 30%, 40%, 50%. For -- on a multiyear growth journey, and our objective there is really to help those companies scale. If you think about our regulated industry, be it health care or insurance or banking, financial services, as these companies scale, they need to figure out a way to deal with regulations better than they had to when they were smaller. Scaling that takes time, effort and you can't fall behind. And neither can the investors and the Board and the C-suite of that firm get caught up and I'm going to not grow at the growth rate I wanted because I'm dealing with getting ready to deal with regulators. Now can you guys help me deal with the regulators, put everything together, bring all your capabilities, and that will help me to continue to scale the way I am. So we're winning a number of logos on both those cities. I call it the tale of 2 cities. Objective 1 here is to bring all our capabilities to play in order for them to get the better outcomes on a range of topics so that they can transform themselves. Objective here is I'm going to help you scale. And as you scale, I'll be able to grow business with you. We've seen so many such examples. So our focus is win new logos that belong to these 2 categories. These will start growing. These grow because you're scaling. By the way, some of these bets may not work because those companies don't scale the way they had intended to. That's okay. So -- and then, of course, on both the buckets, doubling and tripling down on our investments and our capabilities and bringing all those capabilities to play with those clients so that we can dramatically increase growth with them as a cohort as compared to the whole company.

Now do these deals look like Walmart in the sense that there's a rebadging or an asset takeover?

I think as a proportion, it feels very similar to the way it's been actually for 5, 7 years now, we've done 20-plus such transactions. The names you just picked are the names that I think are more in the public domain and resonate, but we've had similar 20-plus transactions. We kind of pride ourselves on being probably the best in the world at this. No surprise because we carved ourselves out of a large enterprise in 2005. So we know what it means. And we -- every one of those have been successful, 100%. So we have a similar proportion. It's not disproportionately higher, neither is it is property lower.

And then -- go ahead.

And one last thing I'll say is, when we do it, we're very careful that it's a space that we want to scale. So we did a transaction that allowed us to build supply chain capabilities in Europe by doing a carve-out with a large consumer goods company. That gave us 500 people with deep supply chain capabilities in Eastern Europe that then is now available to all our other clients. So the geography and the service has to match with the growth vector that we've picked up as long as it does, we're all in.

Good. One more on this subject because when we talk to investors about this, it always comes up, right? Are these RFPs that you're competing against? Who are the typical players you are competing against? And people just presume they're much larger organization, so how do you beat against them if they have more scale and potentially can win on price?

So the last presumption is right. It's not a presumption. It's real. Most of the time barring a couple of exceptions, our competitive landscape, our enterprises pick number a 5, 7, 8, 10x larger than us. But that's been the case for us for 17 years now since we spun off from GE in 2005. So that's not new story. The new story is that when we compete on these larger relationships and deals, the most important topic as a ticket to enter the party is do you have global delivery capabilities that spans across the ability to serve 120 countries where I have business. Obviously, I'm not talking about a bank because there aren't any banks these days that have 120 countries that they operate in. But most of the industries, can you deal with 120 countries for me? Can you consolidate it into 5 countries? And that journey of consolidation into 5 countries means those 5 locations better be deep in that capability, in that geography. I think there are only some companies that actually have that spread, and they are the usual suspects. And those are the people we end up competing with on literally day 1. So I'm not talking about the last day, day 1, in a competitive process. Now when you double and triple down with a set of enterprises and you deliver excellence to begin with, then the follow-on work that you get tends to be sole source. And then if you combine that with 37% of our business being transformation services, so you don't necessarily have to lead with a big deal. You do -- you set up a relationship. And then you enter supply chain, you enter sales in commercial operations, you enter if it's a bank, then the financial crimes and risk space, with a transformational, I'm going to change the way you run your business. I want to bring in a technology that's going to help you. And that could be a 9-month engagement, a few million dollars. But now you have a seat at the table, at the top of the house on that topic that then gets you a sole source whenever that happens in that space. That's really worked out in the last 5 years. So our theory that the data analytics, digital and that journey of clients to change the way they run connects very deeply with running operations for them using digital and technology and data and analytics, which we call intelligent operations. And the two are kind of virtuous cycles. Our clients now see it as a virtuous cycle. We're seeing it as a virtual cycle, we've always said that our clients now see that.

No, it's a good playbook. It seems like it's one is working and evolving. So you mentioned the delivery network. So we should definitely talk about people really quickly, if you don't mind. And Genpact was very early, right, and getting ahead of the work from home. I remember interviewing you and you had exposure to China and you saw things and organize quickly and learn from that and obviously pay dividends. So catches up now, where are you with getting folks back to office? And then, of course, the attrition question, do you feel like there's good visibility on that front?

Yes. It's interesting you point out China. So we did learn from China in the first few weeks of the pandemic in the first quarter of 2020. And we decided that this is going to happen, and we were ready to flip to work from home across the globe. So we did go after the races quickly there. Interestingly enough, as you probably know, most of our clients as well as our competitive landscape and us in China came back to the office in 2020 itself. And have been in office since then, but for the last 4 to 6 weeks when the whole China team went back to home. When everyone else is beginning to return back to office. So right now, most of our China team is operating from home. The interesting thing was that flip back to home happened on a weekend. It was literally a flip of the switch. So it now tells us that the world has understood how to go back and forth very easily. So it actually has given us another dimension of resilience. In the rest of the world, we are in a journey where I think we are now crossed the double-digit mark in terms of return back to office broadly across the globe. And I'm talking about the intelligent operations side of the space. And that's on a trajectory where I expect by the end of the year we'll be heading towards the 50% mark. At a longer-term level, I think the world of work has changed forever. It is going to be a hybrid. That is the nature of work. Now the definition of hybrid doesn't mean everyone comes to office on a specific 2 days, and it's 2 days or 3 days or whatever, no. It's depending on the type of work, it could be a certain number of days in a week, in a month, in a quarter. If we have a team of 100 people who are closing the books for one of the largest enterprises in the world, between the client and us, we could decide that actually that team should be in office. The whole of the last week of the quarter and the whole of the first 2 weeks of the next quarter or the beginning of the quarter because that's when all the heavy lifting happens. By the way, I can tell you that there are other clients who in the same situation says, that's why I want the team working from home in that period because then their ability to be not caught in a commute is better. Same situation, 2 different answers depending on the client and depending on the solution. So I think there is no cookie cutter answer. Very clearly, I think we're going to be in a hybrid world. And I think our opportunity here is talent access in that hybrid world and flexible work, et cetera. However, I think you were then leading the conversation to attrition. It does create a real challenge in creating and holding on to culture, which we all know is important, which we believe is incredibly important to the team. And therefore, whatever we do, our objective here is to bring the teams back on a specific rhythm to build a culture, to do the training, to do the workshops, to do the innovation. All the things that we are really good at and want to continue to do to add value to our clients. So it's going to be that journey. And we're going to learn. We're doing an experiment right now as we speak in Europe. It's been going on actually for a year, where we have thousands of people working from home pretty much on a permanent basis across -- pick a number, I think, 150 cities in Europe. So if you ask me, is our European team center of gravity, Bucharest, which it is, the reality is actually now that the team that's spread out across 150 cities. And this is in conversation with clients where we are actually doing -- driving that experiment to see if it actually drive better value. Now when we do that, we'll still bring the teams back on a regular rhythm as a team with the leaders. Attrition, we saw Q1 stable versus Q4. Q4 was actually higher, as you know, than the pandemic days, which is not a surprise, but it was higher than pre-pandemic, but not by a large number. Our band of attrition has interestingly remained at the low end, in the -- or the lowest end, it was low teens in the height of the pandemic. But it's always gravitated to the 25% to 33% is what we reported in Q1. So -- and obviously, there are specific areas where we've seen it more and no surprise that it's the technology team in India. It's the call center team in Philippines. It's the -- some of the work that we do for technology customers and the banking customers in the U.S. and operating centers in the U.S. So our ability to manage that global workforce, our ability to get talent fresh into the system and then train them up to deliver over the longer-term career. I think those are our weapons that we've used in the past, and we continue to use them. So we're very comfortable in dealing with the current talent environment, which -- the interesting thing is we don't know how that's going to change given the last few weeks of all the turbulence in the marketplace.

Yes. Yes. I know it's complicated. And I know you're very thoughtful about it again. I mean that because you've been on top of the supply stuff. So let me ask 1 follow-on to that, and then we'll take questions. Just -- and I've been asking your counterparts the same thing, Tiger. To combat the attrition, right, there are other weapons of promotions, wage increases, training, everything else. But you're also bringing in, I presume, more lower and labor -- cheaper labor as well to backfill. Given that, is it more challenging to have pricing conversations with your clients? Because they recognize you see more attrition, there's more activity on the back end. They may not want to absorb the price increases to offset the wage increases. I know it's a sort of a vicious cycle, but I'm just trying to understand how that balances out between the pricing that you're trying to get back from clients, but also perhaps the labor making it more difficult for you to have that conversation?

So you use the word balance. It is a balance. I don't think there's a silver bullet. I mean, if anyone assumes that pricing is a silver bullet, it's wrong. At the same time, if you assume that just bringing in fresh talent from the outside or there's a bullet, no, it's not. We still need deep expertise. We still need deep expertise in data and data science in people who can really understand the domain and the technologies and build the analytical models on the cloud. We need people to understand the technologies. We need people to understand financial crimes and supply chain. So I think yes, you can bring in people, which we've always done, by the way, the industry has always done into the bottom of the pyramid. You grow people through the pyramid, and then you retain people at the expert level in the pyramid and you lose some of them. That equation, which had become steady state at a certain level, that equation has rebalanced itself to a new level. That new level of rebalance requires a pricing rebalance. A pricing conversation with the customer is not a pricing conversation with the customer. The pricing conversation with the customer is actually a value-generating conversation with the customer. So our approach is never price. It's actually value for the customer. And therefore, our teams are really challenged with, let me figure out what's the best way that I can drive incremental value for the customer at a time when they are dealing with exactly the same problem that I'm dealing with, apart from actually dealing with manufacturing and supply chain problems, et cetera, et cetera. So I have to find more value for them. And in the context of that, I also will get my share in this current macro environment. And I think our clients are amazing. They actually do want to have a sit-down conversation on that. Starting with, yes, if you can find a way to drive more value for me, I want to have a conversation. And of course, also starting with you guys have always delivered. So I will have a conversation with you. And we are finding more value. The value could be increase in scope. The value could be more complicated upstream work. The value could be, you guys actually build the data models and analytics for me. You guys take these applications to the cloud and then orchestrate them in the cloud. Yes, I'm going to bring you into my sales leader to actually drive sales operations because that's a new capability you seem to have, which I like. But that person takes the decision. So I'm going to expand the scope. So we are actually finding pricing conversation to be the basis of a value conversation. And then, of course, outcome-based pricing. I think some of the conversations are gravitating to, can we generate more outcome for you, reduce fraud, reduce working capital, increase your sales and sales support, reduced customer churn. I mean, a number of our customers who used to be just core product sellers, no surprise have become product and SaaS sellers and have also, therefore, gravitated to renewals being important. So we have an opportunity to actually bring analytical strength and operating strength to that renewal journey and then get paid for better renewals. So a lot of our conversations are therefore pivoted, not just on vanilla price because that will not be a good conversation.

No, it's very clear. Very clear. Any questions from folks in the room or online? Happy to take them or I'll keep going. So with all that said, Tiger, with the margin question, I have to ask you that visibility on margin with everything going on mix of business and different client priorities, intelligent ops and attrition. We just talked about inflation and pricing. How is the visibility on what you've set from a margin standpoint this year?

The margin expectations that we set of 16% to 16.5%, I think we have a good visibility to that margin expectation. I think the bigger question, I guess, Tien-Tsin, you're asking is what does that mean for the medium term? Forget this year. So this year, 16% to 16.5%, and we did call it out early. We did say that the world is at a place where we need an adjustment. So -- and the adjustment is what I just talked about because there's a timing difference in all of these things. As we get into the next few years, we expect that 16.5% and we said that in the Q1 earnings call as well as the base from which we will build. So really, if you think about the prior 5 years and the next 5 years, the way to think about it is that 2022 was a margin adjustment year as the world adjusted. But other than that, the trajectory is kind of on that trajectory. We will -- as we continue to grow, we are getting leverage. As we go up into higher value-added services, our margin is going up. As we get smarter and larger in scale in many of our digital analytics and data services, then that scale itself improves gross margin that then flows into adjusted operating income. So all of those are expected to play out as we continue to go forward.

Okay. Good. So let me ask one more. I always like to bring it back big picture since we have -- you only have what, less than 3 minutes left. But just thinking about the big tech waves and you've seen a lot of different ways at Genpact and obviously a GE before, just thinking about what you see now, forget about the macro. What's real? What are you trying to jump ahead of 2, 3, 5, 10 years down the road here from a tech perspective?

Yes, I think there's enough to do for the next 3 years, not to jump right ahead into the 10-year category. I think we're in the early innings of moving to the cloud, virtualization, leveraging data and analytics to take predictive decisions at every step of an enterprise. Not to talk about the usual suspects of automation and everything being touchless, et cetera. And the shift, except for a few industries, everyone is trying to build a business model within their bigger business of being online. I mean, the businesses that are only online but many, many businesses that have been traditionally very strong off-line are actually building businesses within those businesses and sometimes separate, online. And obviously, when you get to supply chain and things like that, those start merging. Those journeys, I would say, innings #1, maybe entering the second innings now of a 9 inning baseball game. So we see that rising tide in spite of the macro still being true. And I would argue for the right enterprises that do not have deer in the headlights, that do not have basically an existential crisis. This is the time when they're actually saying, "I will change now." Because if I was sitting in a large enterprise and trying to drive change in the company, I don't think there's a better time than now to drive that change. I think they'll be buying. I mean, that buying by the way, changed dramatically during the pandemic when people -- the statement that said, I don't think this work can be done from anywhere or this work needs to be done by my team. That conversation is over. The pandemic killed it. So now the conversation is about how do I drive that change faster. So everything is about speed. The one statement I would make is I think the definition of speed and the definition of payback has again changed forever. Now what does that mean for technology? I think technology journeys cannot be 5-year journeys where payback comes at the end of 5 years or 4 years or whatever. It's much faster cycles of payback. Digital technologies actually do allow you to do that. And that's what our clients are looking for. I think that's what enterprises will keep in.

Good stuff. Tiger, it's always a pleasure. It's always fun talking to you. So thanks again for the time.

Thank you very much. It's the first one -- my first conference in 2.5 years as I said.

Like I said.