Genpact Limited (G) Earnings Call Transcript & Summary

Thanks, Lisa, and good afternoon, everyone. Welcome to the call where we'll go over the results for our second quarter, which ended June 30, 2022. Hopefully you've had the 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 how today's agenda looks: Tiger is going to give an overview of the results and bring you up to date on strategic initiatives, then Mike will take you through the quarter's financial performance and share our current thinking on the outlook for the full year 2022. After that, Tiger will return with some closing remarks, and then we'll open it up for your questions. As always, we expect this to run roughly an hour. A number of the matters we'll cover today are forward looking and carry risks, uncertainties and other factors that might cause actual results to differ materially from those in such forward-looking statements. Those risks and uncertainties are laid out in our press release. Also, on today's call we'll reference certain non-GAAP financial measures that we think give additional information to enhance understanding of the way management views the operating performance of our business. A reconciliation of these measures to GAAP can be found in today's earnings release posted to the IR section of our website. With that, I'll hand the call over to Tiger.

Thank you, Roger. Good afternoon to each of you, and I appreciate you being with us for the call covering our results from the second quarter of 2022. I trust that each of you was able to take part in the Investor and Analyst Day we held in New York City back in June, or that you found time to hear the recorded webcast posted within the Investor Relations area of our site. What we achieved in Q2 supports the multi-year strategic roadmap we presented; the momentum that carried over from the end of 2021 has, to our satisfaction, persisted across the opening six months of this year. Strong appetite for our Data-Tech-AI offerings, which is what we anticipated, served as the main engine behind the 12% top-line increase we posted for the quarter on a constant currency basis compared with a year earlier, while our Digital Operations services turned in a stable showing. Growth of 17% came from our priority accounts, which made up 65% of total revenue; despite a difficult macro backdrop, our adjusted operating margin widened by 190 basis points, driven by a set of strategic moves tied to our long-term roadmap that also create greater agility going forward. To be specific, in the second quarter of 2022 our total revenue reached $1.089 billion, which is 12% higher on a constant currency basis. When it came to Data-Tech-AI services, the revenue reached $489 million, which represents a 22% increase in constant currency. Digital Operations services generated $601 million in revenue, marking a 5% constant currency gain. Our adjusted operating income margin was 16.9%, which is 190 basis points higher than in the first quarter. Adjusted diluted earnings per share reached $0.70 cents, reflecting a 6% year-over-year rise. Companies around the globe continue to face numerous challenges, including inflation at a 40-year high, continuously rising energy prices, persistent supply chain disruptions, and high talent attrition. Clients are therefore working with us both to steer through near-term issues and to strengthen their long-term resilience, especially in fields like supply chain, sales and commercial, and risk. Looking toward the back half of the year, demand on the whole is still solid, which our robust pipeline reflects. Amid all of this macroeconomic uncertainty, we have observed unmistakable indications that client priorities are changing, with cost now occupying the central role. Bookings in Q2 stayed robust and matched what we had anticipated. Most of the deals we sign remain long-term by nature, with roughly 70% structured as annuity based and close to 50% still sole sourced. During this quarter, we finalized quite a few deals in the small and medium range, and growth in that segment is now faster than it used to be. Over the past four quarters, I've also seen deal cycles get shorter, because customers are looking for faster payback on their spending. In Q2, we additionally closed three large engagements, and every one of them had a total contract value exceeding $50 million. Banking accounted for one, insurance for another, and high tech for the third. Beyond that, we added 30 new logos, whereas the average across the 12 months that ended March 31st of this year was 26 new logos. During this quarter, our overall revenue increased by 12% on a constant currency basis versus the prior year's comparable period, and growth was spread evenly across all of the industry segments we operate in. The financial services segment especially delivered robust growth in the double digits. As was discussed during our latest Investor and Analyst Day, we offer two sets of services that work together to generate concrete results for our clients. The first one is Data-Tech-AI services, through which we design and build solutions that leverage data and contemporary technologies to assist in reshaping our clients' business operations and processes. These address the most important challenges our clients face, bring them into closer alignment with their strategic objectives, and drive better outcomes for them. Next up is Digital Operations. With this service, we overhaul how customers run their operations and manage those operations worldwide, which drives stronger performance across the entire process. Since our business has changed over time, we've reexamined the way we'll present our results so they match up more closely with what clients require and with the way we view our own path forward. From here on, our revenue reporting will be split into these two offerings: Data-Tech-AI and Digital Operations. On top of that, we're doing away with the GE Global Client split, since GE now accounts for under 9% of what we bring in. In Q2, our Data-Tech-AI offerings expanded 22% compared to the same period last year, measured in constant currency, driven by the momentum we continue to observe in newer services such as supply chain management, sales and commercial, and risk. For the quarter, Data-Tech-AI services made up 45% of overall revenue, an increase from 44% in Q1 of this year and 42% for all of 2021. Digital Operations services maintained steady growth, rising 5% year-over-year in constant currency, roughly matching Q1 of this year and improving from a 1% decrease across full year 2021. Digital Operations services represented 55% of total revenue in the quarter. I'd like to walk through a couple of situations that show how clients are getting stronger results thanks to what we provide. To start, one of the world's largest food and beverage businesses was dealing with wildly unpredictable demand, which caused far bigger write-offs of perishable goods than anyone had anticipated. For those product lines, we created and implemented fresh demand forecasting models, using machine learning and analytics to bring major gains to supply and demand planning and to supply chain efficiency, which improved margins and cut inventory by $400 million. These days, we handle that company's supply chain operations ourselves. Turning to the second example, tech firms are working to shift into new business models, moving away from asset based revenue toward consumption based revenue. On this call, we're seeing businesses struggle with customers leaving and with money slipping away in their license revenue. For a client in that situation, we put together a proprietary analytical model. It pulls together internal information — things like customer bookings and how much they use their licenses — along with outside information, including what competitors offer and what share of the customer's wallet they hold. The goal is to match their sales organization, which is 9,000 people strong, with the best opportunities at the best moment, using offerings and prices built specifically for each case. For this client, that produces meaningful gains in renewals and in profit. To close, a large equipment manufacturer based overseas, one that offers service and maintenance agreements lasting many years, is dealing with rapid inflation. That inflation touches more than 50,000 parts that get used when equipment service in the field is repaired or replaced. We create sophisticated algorithms to fine-tune its pricing models for service and maintenance, drawing on outside economic and comparative data along with internal data on parts cost margin and reliability. This pricing and servicing model, based on dynamic market conditions, should enhance the client's overall revenue growth and profitability. Every one of these cases tackles difficulties that are highly pertinent in the current macro environment and can be readily replicated among clients and throughout industries. We are putting a disproportionate amount of investment into our priority accounts. There's a group of customers going through big transformation efforts, and that's where we see the best opportunity to deliver significant results for them — results we believe carry above-average growth potential for our business. During Q2, sales from these priority accounts grew 17% and accounted for 65% of overall revenue, matching what we saw in Q1 of this year. In the twelve months through June 30, 2022, the number of relationships generating more than $5 million annually increased from 137 to 154. Accounts bringing in over $25 million a year went from 27 to 34. And those above $50 million rose from 12 to 14.

This quarter we kicked off a number of strategic moves aimed at getting our cost structure in line with our long-term plan, while also becoming more nimble so we can react better to what's happening in the macro environment. To start, through the ongoing process of reviewing how our business is performing, we've refined where we play, concentrating on services offering the biggest opportunities, and we've pulled back from assets that don't fit our strategy or that hurt profitability over the long haul. We've flagged one small business that we plan to divest, since we think its value could be maximized more effectively under a different owner; it's now classified as held for sale, which frees us to direct our resources, capital and leadership bandwidth toward opportunities that are more clearly defined strategically. Beyond that, we've been rolling out a flexible, hybrid global delivery model built for the long term, blending offshore, onshore, near-shore and remote work depending on what clients need, the kind of services involved, regulatory factors, and what employees prefer; this let us squeeze more out of our real estate footprint by combining locations, which will produce savings down the road, and, just as important, it gives us added flexibility to help clients achieve concrete results. Because we've narrowed our focus, we ended up making some intentional workforce decisions in the second quarter, mostly affecting positions tied to services outside our strategic core, or the right-shoring of those roles. Services outside our strategic core make up roughly 10% of total revenue right now, compared with 21% back in 2018, and they're expanding more slowly than the company overall. These moves led us to book a restructuring charge in the second quarter. Mike is going to walk through how these actions affect the numbers for the quarter and our revised outlook for the full year. Let me take a few minutes to talk about talent. Just as we anticipated, quarterly attrition ticked up to 38%, compared with 33% across the previous three quarters; it's a pattern we've consistently seen, with attrition rising in the second quarter after the annual bonus gets paid out every March. Most of this attrition came from the lower levels of our organizational pyramid, where we can fill positions quickly to keep up with demand. Our attrition rate counts every employee who exits the company, no matter how long they've been here or why they left, and if you adjust for involuntary attrition and for employees still in training who have under three months of service, the rate for the quarter would have come in at 34%. Like we've said all along, we handle attrition skill by skill and geography by geography; take our call centers in the Philippines and the Americas, for instance, where attrition has consistently run above the company average. Conversely, attrition among our mid-senior level and specialist expert groups matches what we saw before the pandemic. Thanks to our global talent management practices, which let us hire, refill and redeploy people at scale, we saw no effect on client engagement or on our capacity to convert new bookings. Over the course of this quarter, we brought on board close to 10,000 fresh colleagues worldwide, which speaks to how strong Genpact's brand is in a talent market that's extremely competitive. Also in this quarter, our people logged over 2.5 million hours of training, making use of Genome, our online on-demand learning platform — that's up from roughly 2 million training hours in the prior quarter. Through Talent Match, our internal redeployment platform, we managed to move nearly 6000 reskilled staff members into new positions, responding to what our clients need as those needs evolve. Being able to reskill people, upskill them, and offer fresh opportunities is essential when it comes to keeping attrition in check. Those who are active on Genome, along with those who shift into different internal roles, see attrition rates that are at least 50% below the company average. That's a competitive edge we deliver to our clients, especially given the current macro environment, since our clients themselves are finding it hard to secure the right talent. Looking ahead to the second half of the year, I think we're positioned well to keep meeting our clients' shifting needs. Thanks to strategic investments made over the past several years, we've broadened what we offer to encompass numerous emerging services, building on top of strong core services such as financial accounting. This broad range gives our clients access to capabilities that assist them in handling many kinds of challenges tied to today's deeply volatile environment, while at the same time helping them develop resilience going forward. That covers cost, working capital, growth, risk, and supply chain challenges — every one of which represents a non-discretionary need. In all these areas, we can work alongside our clients to produce improved outcomes on their behalf. Underpinning all of this is our agility and nimbleness, which lets us bring these varied services to our clients and join forces with them quickly and at scale; with that, I'll hand the call over to Mike.

Thanks, Tiger. Good afternoon, everybody. In my remarks today, I'll go over what we delivered in Q2 and share where we now see the full year 2022 shaping up financially. We brought in $1.089 billion in total revenue, which is 10% higher than a year ago, or 12% if you strip out currency movements, and that matched what we had expected. Revenue from Data-Tech-AI services made up 45% of the total and rose 20% versus the prior-year period, or 22% in constant currency terms, mostly on the strength of our cloud based data solutions in key focus areas such as supply chain, sales and commercial and risk. Digital Operations services accounted for 55% of total revenue and grew 3% year-over-year, or 5% on a constant currency basis, mainly thanks to deal rounds from wins we closed recently. Looking at it by vertical, financial services was up 17% from a year earlier, driven largely by fintech and digital banks, where we assist them in working through a range of regulatory challenges and growing their operations, plus sustained appetite for our risk services among traditional banks. Consumer and healthcare rose 9% year-over-year, mostly because of sales in commercial and supply chain engagement against a very strong growth rate in the prior year; and our high tech and manufacturing climbed 13%, chiefly on supply chain finance and accounting engagements with new clients as well as existing ones. Adjusted operating income margin came in at 16.9%, which is 100 basis points lower than the second quarter of last year, though it was 190 basis points better than the prior quarter. Results for Q2 reflected a favorable effect from classifying certain non-strategic assets as held for sale, which Tiger mentioned earlier, since we intend to divest a small business. On top of that, adjusted operating income margin in the quarter got a lift from growth tied to operating leverage and from our cost containment initiatives, which brought SG&A down. Keep in mind that our unusually high adjusted operating income margin in the second quarter of 2021 was mostly the result of reduced travel expenses and because certain planned R&D and sales and marketing investments were pushed to the second half of 2021 owing to COVID-19. We booked $39 million in restructuring charges during the quarter. Most of that was roughly $20 million recorded in the other operating income line of our income statement tied to certain lease properties we no longer intend to occupy, along with $17 million of severance costs from employee actions. We expect most of the savings from these moves to help our results going forward. These restructuring charges are left out of our second quarter adjusted operating income and are consistent with the margin drivers we laid out at our recent Investor Day. Gross margin in the second quarter was 34.4%. If you set aside the restructuring costs I just described, gross margin for the quarter would have come to 35.2%, versus the 35.8% we reported in the first quarter of 2022. The drop we saw from one quarter to the next comes mostly from attrition that ran high during the period, exceeding the usual seasonal uptick, which mirrors what's happening in the market right now, plus greater travel expenses — though that was partly countered by off-cycle price changes and improved utilization tied to the sustained demand we're seeing for Data-Tech and AI services. As we move through the rest of 2022, we anticipate gross margin getting better as Data-Tech-AI services keep scaling. SG&A came in at 21.4% of revenue, which is 70 basis points higher than a year ago, mostly because of the sales and marketing plus R&D investments we ramped up during the latter half of 2021, partly offset by G&A leverage. If you take out the restructuring charges I referenced earlier, SG&A as a percent of revenue would be down 10 basis points versus a year ago. Adjusted EPS reached $0.70, a 6% gain year-over-year compared with $0.66 in last year's second quarter. That $0.04 improvement came mainly from adjusted operating income that was $0.02 higher, the effect of fewer shares outstanding at $0.02, and lower taxes plus net interest expense at $0.02, partly offset by $0.02 from smaller FX re-measurement gains booked this quarter versus the same quarter a year ago. Our effective tax rate stood at 24.8%, versus 24.2% a year ago. That rise stemmed primarily from the mix of reduced benefits booked this year, partly offset by certain jurisdictions offering new lower tax rates. Now on to cash flow and the balance sheet. We brought in $102 million of operating cash during the quarter, compared with $161 million in the same quarter a year ago. That fell short of what we had anticipated, since higher interest rates prompted a number of clients to rethink how they've historically handled payments, which pushed DSOs out to 84 days, up from 82 days in the first quarter of 2022, and compared with 83 days in the second quarter of 2021. The overall quality of our portfolio hasn't changed. On top of that, operating cash flow for the quarter also took a hit from severance payouts tied to the restructuring charge I mentioned before. Cash and cash equivalents come to $460 million, versus $862 million at the close of the first quarter, mostly because we repaid a $350 million dollar bond during the second quarter of 2022. Our net debt-to-EBITDA ratio across the trailing four quarters rose to 1.7 times from 1.5 times at the end of the first quarter of 2022, which mirrors the effect of the second quarter restructuring charge that gets factored into our EBITDA calculation. Given the debt capacity we still have and the cash balances on hand, we remain well positioned with plenty of liquidity to chase growth opportunities and carry out our capital allocation strategy; we still expect our net debt-to-EBITDA ratio to stay within the preferred one times to two times range. As we covered at a recent Investor Day, here are our capital allocation priorities for driving long term shareholder value. First, we're putting money into our businesses to back organic long term growth initiatives. After that, we'll keep looking for strategic, disciplined M&A opportunities that strengthen our domain capabilities in the areas we focus on strategically. And finally, we remain dedicated to a strong capital return initiative, directing 45% to 50% of operating cash flow toward dividends and share repurchases to support TSR. Through the quarter, we kept carrying out a more consistent rhythm for buying back shares, repurchasing roughly 1.8 million shares at an average price of $42 each, for a total outlay of $76 million. Dividends paid came to $23 million. Capex represented about 1.2% of revenue; our expectation remains roughly 1.5% to 2% for the whole of 2022, with heavier outlays in the rest of the year as staff come back to the office under a hybrid delivery approach; now I'd like to give you an update on our outlook for the full year. With the strong beginning to the year, we now anticipate revenue in the range of $4.32 billion to $4.37 billion, which equals reported year-over-year growth of 7.5% to 9%. That figure accounts for bigger than anticipated currency headwinds totaling $21 million, larger than what we gave you in last quarter's full year outlook, driven by the stronger US dollar. It also factors in roughly $28 million in expected full year revenue tied to a business held for sale, versus a comparable amount in 2021. We now anticipate total revenue growth on a constant currency basis of 9.5% to 11%, up from our earlier full year outlook of 9% to 11%. Thanks to our performance so far this year and the favorable effects of the strategic moves we described earlier, we now anticipate our full year 2022 adjusted operating income margin landing near the upper portion of our previous 16% to 16.5% outlook range. We now anticipate adjusted earnings per share for the whole of 2022 landing between $2.68 and $2.74, versus our earlier outlook of $2.60 to $2.76. Notably, additional currency headwinds reduce the top end of our adjusted EPS range for the full year outlook by $0.02. Finally, we now anticipate generating full year cash flow from operations nearer to $500 million, as clients increasingly prioritize near term cash flow to bring down cash flow expectations, which isn't tied to any business slowdown since overall demand stays strong; with that, I'll hand the call back to you, Tiger.

Thanks, Mike. The results we posted for the first half really underscore how resilient our business model is, how lasting our competitive edge remains, and how much our services matter in today's market. You can see that in the bookings momentum we've kept up and in the opportunity pipeline that keeps getting bigger. Because we've developed close relationships with our clients — not only with the CFO and CIO but all across the C-suite — we gain deep visibility into what's going on inside their companies and their sectors, which lets us spot signals early and act quickly to create value for them. That matters especially right now, when deal cycles are getting shorter and clients want a fast return on what they invest. What distinguishes us as a strategic partner — someone who can guide clients through today's difficulties and help them become more resilient going forward — is how we blend deep industry and domain know-how with the ability to turn insights into action that produces measurable results; leading analyst firms and partners keep acknowledging the capabilities we've built and funded. Take IDC, for instance, which recognized our proprietary, one-of-a-kind data and analytics certification program, DataBridge, as the biggest upskilling data program of its type anywhere in the world, with over 58,000 employees trained; Everest Group named us a leader in its 2022 supply chain management services, advanced analytics and insight services, and Financial Crime and Compliance Operations PEAK Matrix; ServiceNow chose us as its 2022 Financial Services Global Partner of the Year; HFS put our experienced business Rightpoint in the Winner's Circle of its Top 10 Employee Experience Services, 2022, and ranked it #1 for outstanding voice of customer; and Microsoft named Rightpoint its 2022 US Partner of the Year for Employee Experience, along with runner up for its Worldwide Partner of the Year for Employee Experience. Recognition also keeps coming for our dedication to ESG efforts — EcoVadis gave us a platinum rating, placing us among the top 1% of over 95,000 organizations measured on sustainability parameters — and we were just recently given the CSO50 Award for the sixth consecutive year in recognition of our ongoing excellence in cybersecurity. What we delivered this quarter is consistent with the multi-year strategic plan we presented at our recent Investor Day. Between now and 2026, we intend to generate sustainable organic revenue growth of 10% or more, widen our adjusted operating income margin faster than we have historically, and keep producing robust cash flows; our confidence rests on our strong position and an appealing, high-growth, underpenetrated market where recurring revenue is significant and client relationships run deep. Our operating leverage, solid free cash flows and healthy balance sheet let us keep making strategic investments in the areas we prioritize, such as services, capabilities, and client accounts. As we think about the remainder of the year and what comes after, we're confident we can carry out this plan and build even more durable value for our stakeholders. Having said that, I'll now hand things back over to Roger.

Appreciate that, Tiger. At this point we'd like to begin the Q&A portion of the call. Lisa, would you mind giving everyone the instructions?

Thanks. Tiger, you mentioned that the time clients take to make decisions has been shrinking, and I think you've noted the same thing not long ago. What I'd like to know is whether this pattern is appearing unevenly across Data-Tech-AI versus the Digital Ops segment?

Maggie, I — no, in fact it's turning up in equal measure in Data-Tech-AI and in Digital Operations. And what's interesting is that we're seeing it in big deals and, clearly, in smaller and mid-sized ones too. You'd normally figure smaller and medium sized deals would move through the cycle more quickly, yet it's appearing in bigger deals as well. I suppose the plain explanation is that our clients right now are extremely focused, which surprises no one. Cost has returned as a major item on the agenda. And they're looking for a very rapid payback on what they invest. So I'm only slightly taken aback. But this pattern has held — steadily — for roughly 4 quarters.

All right, that sounds good. Could you share a bit more detail about the type of operation we're selling off? And what makes it not strategic? Then, just so I'm clear, I think you mentioned that roughly 10% of rev is more or less non-strategic revenue. Does that figure take in this operation, or is it on top of the operation you've already said you'd divest?

Yeah, I believe the last — let me handle the final portion of those questions, which covers this operation, but the real subject here is a particular operation that that holds an asset; so as far as I'm concerned, Mike, you could also cover the details regarding the operation itself.

Well, we aren't going to get into the details about that particular business. It's something we put money into and developed over a number of years, and our view is that it's now well positioned to be in better hands, while we can keep supporting it and putting capital into it going forward. Hopefully we can get a deal done in the not too distant future, and we did include some financial information in our press release about how big the deal is. And again, if you want to frame it the way your first question did, with it being roughly 10% of our business, we're over $4 billion business — that's about $400 million, and this is about $21 million. So for us it's a very, very small business.

All right, and as for the rest of that $400 million, is it currently under active review?

No, no, no. That's a great question, actually. The other portions still in play -

Regarding that $400 million figure that's under active review?

No, no, no, no. That's a really good question. What's left of that $400 million continues to be handled and deployed in a suitable way. Once more, this represented a portion within that $400 million that was directly connected to a standalone assets — a standalone operation; and I believe we're now positioned well to turn it into cash, since doing so aligns with the strategy we're pursuing going forward.

Understood. I appreciate you answering my questions.

Thank you, Maggie.

Thank you.