Genpact Limited (G) Earnings Call Transcript & Summary

Right. Maybe you give your I think a sense of when we talk about rebadge deals, what those are and why you find those attractive?

Yes. So rebadge deals are really bifurcated into 2 type of rebadge deals, right? So it's just taking existing for the folks who don't know what it is, it's exactly what the name implies. We're taking folks at clients who are currently doing the work, bringing them over, re-badging them to Genpact employees to work in a captive type solution for that particular client, right? And what Genpact brings to those employees technology, processes, Six Sigma, a whole bunch of solutions that will help drive that efficiency on a go-forward basis so you lead that organization. When I talk about there's 2 ways to do it, there's 1 view of these are current captive organizations that are run for large multinationals throughout the world. That's a component of it. But there's also a huge component that we're seeing a pickup that previously was somewhat quiet during the pandemic, which makes sense. These are actual functional organizations embedded in the companies in places here in the U.S. and in Western Europe that we're now going to be essentially rebadging or offshoring in some cases. Some of it we'll start onshore and over a period of time, we'll migrate it off. So it's all different kinds of flavors. There isn't really one particular trend.

And what do you need to do operationally like guardrails, you've got these larger deals, these transactions, what do you need to make sure to manage the execution risk around these?

Yes. So that's the secret sauce, what we do, right? And that's really partnering with the client, right, and doing a tremendous amount of solutioning of blueprinting work upfront, right? You just literally don't rebadge somebody and say do it this way, right? There has to be a long-term evolutionary transition process, which we will work to implement to get those operational efficiencies. Because at the end of the day, why are they doing this, right? We can talk about cost, right, but there's also service levels, you can cut cost and harvest the business, but -- and what detriment it is to what their actual output is. So we'll work with them, and we've done this time and time and time again, right, to transition over a slow period of time, right, and coupling with particularly using their existing technologies, layering on a layer on top that there's various things that can be -- there are so many flavors of an accounts payable process, right? Utilizing what's currently in their ERP, which they're not using, utilizing best-in-class practices that we have, maybe putting them into somewhat of a factory type setting, which we're doing volumes of other companies work that we do. Again, all different kinds of flavors. But at the end of the day, it's really focused on any of the service levels we need to deliver, right, because in some cases, we're underwriting it not metaphorically, but economically for them. But that's economic. But the ultimate output in terms of service quality, we're running real operations. This isn't a discretionary work. Companies have to close their books.

Are there any -- just in the pipeline now, maybe in the deals you just signed, any service areas or departments or functions that stood out more than others?

Yes, yes, it's a great question. Some are brand new for us, not in terms of the work, but brand new types of clients that want -- that have a combination of accounting technology, customer experience type work, right, and are more dramatically moving that middle and back office in one fell swoop over a transition period, a year or 2 to us as opposed to doing the silo type work. And those are everything from -- we're seeing them particularly in 2 large areas, our banking, capital markets, insurance operations, right? And then we're also seeing them quite a bit, and we have a high-tech and manufacturing world that we're seeing a big pickup in that. The consumer goods and lifestyle business, again, a little bit more developed. One would expect consumer goods businesses to be quite forward thinking in terms of that work already. So we're seeing less opportunities in that area, right?

And as we just think about the economics on these deals, can you just talk about how the margin profile of these rebadge tend to compared to the company average and maybe the life cycle of the margin profile?

Yes. So I think it's -- we'll start with the life cycle of it to somewhat from a gross margin perspective, you have to think about it from that perspective. They're somewhat dilutive early on, right? You're taking on all of these folks if they're a rebadge right component of it. You have to work on implementing the operational efficiencies, in some cases, relocation, a whole bunch of different components of that, that will sensibly work in over the period of time we get like an optimal revenue profitability mix. Revenue will pick, let's just say, it's a 5-year deal in year 3, profitability will just linear increase throughout the end of it, right? So you're ending with a smaller revenue base, the highest amount of profitability from that. So I always talk about the more large deals we get, you're going to see my gross margin go down, right? And that's the greatest kind of solution that they want, particularly when you do multiyear contracts and that every year entering into that 70% predictability into that revenue and that margin for the year is a great place to be as we move towards becoming a $5 billion revenue business.

Okay. So more of these large deals doesn't preclude your accelerated margin expansion plans?

Absolutely not. And so -- and we saw it in the first quarter, right? We have great margins. So a lot of that accelerated margin growth is just the lack of a better term, sure operating leverage that we get on -- in growing the organization. The strategic and targeted investments that we have in the businesses making sure we're diligent about doing that, right? And then we continuously have to reinvent our operation and delivery centers to meet future requirements, right? And that's really the balance that our CEO and myself and others make every single day. And what does that mean? Talk, talk, talk, right? It could be creating more efficient hybrid operating centers in low-cost areas, right? Being able to tap different talent bases through the new hybrid work environment that previously wasn't there, right, to access different skill sets throughout the world, investing in infrastructure to allow that to be done seamlessly. So all those kind of things are important for us to be able to execute on what we're doing because it fundamentally gets back to we are selling amount of operational efficiencies that we need to drive out over that period of time. And again, it's not by any stretch, human capital arbitrage or labor arbitrage doesn't get you nearly what you need to do. It's having using technologies and those operational processes that we've developed over the last couple of decades to drive that.

Okay. Now let's bring this back to the numbers now. Just refresh us on the outlook for this year as it relates to the growth and the embedded assumptions for operations and DTA.

Yes. So if you think about our growth this year, right, we'll take quick look back in May of last year, we laid out our multiyear plan, we call Blueprint 2026, probably not the most creative name, but putting that aside. And what that fundamentally said is we put together our road map on a go-forward basis that says, look, we are going to grow our AOI or for lack of a better term, our EBITDA-type margin in the business at a greater rate than historically. So we've historically grown at about 20 -- 10, 20 bps a year. We think we're going to grow that at a faster rate. We see sustainable growth at a CAGR basis of 10-plus percent throughout that period of time, some years better, some years worse. Last year was 11% right? This year, we're targeting that to be a little softer, 6% to 8.5% takes into account. We did have a large client of ours basically pull out some of the work they were doing in totality, that didn't go somewhere else. They just -- they're just not doing that. But putting that aside, we fundamentally think these large deals that we're selling right now and closing will perpetuate us from that growth -- on that growth model for multiple years. So going back to other question of, okay, well, how do you do that and maintain your margin, right? So the gross margin will be impacted, particularly these large deals, you get revenue in early, but you have all those costs associated will dilute your gross margin. Again, we have the natural operating leverage of our business. Our sales and marketing costs are certainly not linear to what our revenue growth has been. And then in addition to it, we keep investing in our own operational efficiencies in terms of our delivery centers, hybrid operating model, so on and so on. We feel really good about that. And there's enough levers in the business in terms of our investments that we allocate for the future. It will allow us to make sure we're on that track.

Okay. And then just within the year, as we think about first half, second half dynamics, you do have a healthy ramp in the second half. Maybe talk about what gives you the confidence in that ramp? And what do you have in hand versus go get revenue to hit that slope?

Yes. So we're in a better situation than we certainly were in January, right? So if you think about it from that perspective, we feel very confident about hitting that ramp. It's hard to say which 90-day cycle will it come in but these large deals that we closed in the first quarter, right, are certainly going to help, particularly in the latter part of the third and the fourth quarter and the same level of confidence we have on deals that we're currently doing right now. okay? The challenge for us is on those small Data Tech and AI deals, particularly on the experience side that we're seeing and some analytic work here and there that's a little bit more discretionary and also the small amount of work we do on tech has just been a little bit more fluid with a little less predictability. But putting that aside, if you just apply and discount or risk-weight historical conversion rates on that work that we've done, we feel really good about -- it's a dramatic hockey stick brand, particularly in the third and fourth quarter, but that should propel us really nicely into 2024. So much so when you were to average the -- we think when you average '23 and '24 particularly with the pipeline that we have, right, where we're filling the pipeline as quickly as we're looking at, right, in the first quarter, the bookings that we have, when you average them 2 together, you'll be well back on that Blueprint 2026 track that we have. So it's a good place to be.

Okay. We've gone about 25 minutes without talking about generative AI, but now we're going to do that.

Yes, yes. Let's do it.

So clearly, it's on interest in the space lately, a lot of perceptions around different services businesses, the stocks would say one thing. Do you think the fear and the perceived risk around business process management and services is off base? Is it fair? How should investors think about generative AI risks and opportunities for Genpact?

We think about it as an opportunity. We think about the TAM for us and the industry growing dramatically, right? We have never shied away from embracing technology changes. And that could be a couple of years ago, RPA, some of the blockchain technologies that we've got, that has just accelerated our growth, right? At the end of the day, we're -- again, I'm an insurance guy, so I'm going to keep trying. We're underwriting amount of operational efficiencies that we need these tools to achieve it. It is not a labor arbitrage business, right? So what kind of gets me is that if you talk to anybody or listen to anybody from Elon Musk or any of the big tech companies, where is -- let's just use the word generative AI, generative, right, is the keyword using large language model. So where do we think the immediate disruption will be, immediate maybe 3, 4, 5 years out, right? It's going to be in research, right? And that's a very broad term and it could be everything from legal research to writing contracts, helping us in procurement type space. Customer care, I think we can all probably say that now, listen, we all want the chatbots to work a lot better, right, get huge opportunity for us from that. We also think there's huge opportunities in terms of democratizing kind of coding or development type work that we've done, right? But again, it's all human-centric driven from what we're looking to do. It is a tool in the toolbox that we will utilize and continue to evolve and change our industry. Well, so the question we get the most of it is, what do your clients say? So if I talk to our CEO or others, we spoke to 150 CxO-level clients in the first quarter. It's certainly the first topic to discuss, they need help and they need it quickly, right? So the fundamental foundation of this, it's not that sexy, but it's the reality, data, data, data, right, getting your data organized, getting it cleanse, getting it to a central deposit or getting it to the cloud, right? If you just look at 70% of, I think, its Fortune 500 companies are certainly using on-prem ERP systems, right? So there's a lot of work to prepare to feed these models to do all of this work. We think we can be a disruptor in some of them. Customer care, small piece of our business, we think that is a place that's ripe for this technology, and we can use it right now, right? And we have a whole bunch of use cases, which we're using historical AI, new generative AI models that we have. We bought an AI company in 2017. That's where we've been using a lot of their technologies and the processes we do. So again, we need these tools, and we're ready to embrace them to hit the SLAs and the commitments that we're underwriting for our clients. We also have -- if you kind of think about it, we've been preparing for this, right? We have something like 24,000 trained data scientists and engineers in AI. We have another 60-plus thousand people that have gone through our DataBridge Gen AI training program. So we have a lot of skills and experience out there that we're using in old school work that we're doing. We're always with the mindset of how do we do it better, faster, more efficient. And so we wholeheartedly embrace this. I mean this is going to be great for the industry.

Is there any way it might influence the contracting and the pricing models?

Yes. So very -- not yet, right, because it's all talk at this point now. I think it will, hopefully, right, move to -- we use the word alternative commercial models, right? And move more towards output-based commercial models, right? Because it's going to be a lot less efficient to kind of think about how you price them. Okay. Today, we have 10 people doing this. You're going to put this technology in. We're going to have 6 people in the deck. Let's build the pricing model from there. I think that's going to change dramatically saying, with it, this is the cost for this function, right, to deliver this over this period of time, right, it will be this cost on a go-forward basis. That kind of internal imagination of people versus technology is going to become a lot more blended. Now where we have done that today, it's about 14% of our revenue is alternative commercial model. And historically, they're implemented at the end of a large deal cycle. So the client knows what they're getting, right, and what the costs are, right? The margin has been higher from that perspective. Also allows us to build what we call factories. So to the extent regulatory permitted, you can have a factory that does a particular function for multiple clients, utilizing these technologies. Sure, that's going to help as well. But we don't see any margin dilution associated with this by any stretch.

Does the -- all of the conversations you're having with clients on this now, does that translate the potential consulting type revenue around this in the second half of the year...

I won't say the second half of the year. I think they are aggressively trying to -- it's so new, right? Every client we talk -- it is a topic [indiscernible] at their Board meetings, these are billion-dollar companies, a multibillion dollar companies. They are trying to figure out where they're going to deploy their investments, their assets to do it. But today, we have to help them with the basic fundamentals of getting them organized and its data. Nobody will disagree with us on that. So again, we see this as Genpact has never moved away from the evolution in technology. We will embrace it. And I think it's going to be net-net good for us.

Okay. With that, we're out of time. So we covered a lot of ground, thank you, Mike. Thank you all for joining.

Pleasure. Thanks for having us.