Genpact Limited (G) Earnings Call Transcript & Summary

All right. Well, good morning, everyone. My name is Dave Koning. I'm a senior research analyst at Baird. Very pleased to introduce Genpact this morning. Genpact is a leader -- probably the leader in business process management in terms of pure-play -- as a pure-play provider. I have the CFO, Mike Weiner, today, who's been at the company now for probably close to 2 years now. So with that, why don't I turn it over to Mike, you can kind of walk through a couple of slides on Genpact and then we'll do a Q&A.

Great. Great. They said there was a clicker.

Yes. We need the clicker.

There we go. Thank you.

See if this works.

So let me just kind of more so really before we get into talking about who Genpact is so were about a $4.5 billion revenue company. What's unique about the company is a significant amount of recurring revenue. We'll talk about them a little while in terms of the long-dated contracts we have and how much of that annuity revenue stream is part of our business. And again, this company just generates a tremendous amount of free cash flow for the size of the company as -- so again, just a snapshot of the size of the company, and this information is a little dated, about 100 delivery centers in about 30 countries. We've got 140,000 employees at this point now, 20-plus years. The company's really was a subsidiary for General Electric that was spun out in the early 2000s and we'll talk a little bit about the lineage of the company and really all dates back to the Six Sigma trained employee base that we have with a huge focus on data and analytics and AI-trained employees. So what do we actually do? And how do we do it in terms of being a professional services group? What do we offer our clients, right? So if we think about our business, we're a little unique versus others in the field. We have a number of capabilities -- I'm going to go through the chart a little bit backwards here from domain and process experience that we have. Now we've acquired over the last 2-plus decades in data tech technology and cloud computing and now AI, right? And we focus on very deep penetration in particular named verticals: banking, capital markets, insurance, high-tech manufacturing, consumer, and health care, right, with some larger than the other. And then what do we actually do for these organizations in terms of our services, right? So we have our service offerings. #1 in the forefront isn't really what the company that is based on is the F&A. We are, by far, the #1 leader, # 2 in many case, in RFPs, in finance accounting work, supply chain, risk, sales and commercial work, customer experience, and then running industry-specific core operations, something like a claims organization or an insurance company. Again, the evolution of the company is really unique, and it's becoming a bit -- when we came up with this slide about a year ago, wow, is it a forward thinking in terms of some of the challenges that we're hearing in terms of the market with terms of headwinds of generative AI. So when you think about our evolution, the company has evolved itself over the last 25-plus years in terms of doing operational excellence in terms of process work, what does that actually mean? The company started off doing a lot of labor arbitrage work, then it implemented Six Sigma-related processes. I grew those process experiences, implemented rudimentary technologies 20-plus years ago and has evolved to utilizing everything that we've talked about, but building upon itself using data analytics, AI, the domain experience, industry experience and process experience to run those services that we talked about earlier, right? And this evolution will continue, which we'll talk about in a moment or so. Again, just slide chart here. Since 2008, 10% revenue CAGR, we've expanded our AOI margin about 70 bps, free cash flow conversion about 1.3x. So with that said, let's dive into some of the questions. I hope that gives some of the folks somewhat of an understanding of who we are.

Yes. Thanks for doing that. And maybe a couple of high-level things. We've probably never gotten as many questions. With the emergence of AI and that being in the discussion of, a, what are the risks and opportunities to that? And then, b, like what specifically would an employee do? Because I think people want to understand like, well, what could get displaced or what could an employee do to further AI, -- like -- so maybe walk through maybe both of those.

Yes. So much to talk about there. It came off of an AI leadership day yesterday here in the city. So a few things. We -- AI is not something new. I know it's a huge topic. We've been doing AI. We've bought an AI company back in 2017. Now there's very various generations. I mean, now we're talking about ChatGPT 4.0, right? In terms of the industry as a whole, they've also had RPA and automatic tools -- automated tools. So again, what we do is we run design and transform organizations using technologies, right? And so those technologies are evolutionary in terms of creating operational efficiencies for certain processes that we do across multiple domains. So if you think about the opportunities, when you talk to the folks that are out there, we had 150 CXO level discussions with Fortune 1000 companies just in the last quarter alone. Now when you sit down, we log all that and we go though and we said, "What are the key themes?" 50% of discussions are on AI, right? Clients and customers and Boards are asking for what is your strategy on a go-forward basis, right? Then the other half is, okay, that's all great, but what are we going to deliver now in terms of either sales or cost efficiencies that I can immediately deliver to help fund some of those things? So kind of splitting them apart is I think there's been a coalescence around generative AI is going to impact many, many things. We'll talk about the one, the low-hanging fruit that we'll talk about at the end of this. But what are the fundamental ingredients that you need in that? And it's no surprising the other is data, right? So I can assure you of one thing in talking to other CFOs in Fortune 500 companies, data isn't as centralized as others thought. Data is certainly not in the cloud. It is certainly not well orchestrated, right? Just 70% of ERPs are on-prem solutions. The reason I'm giving you this is somewhat -- there's a huge opportunity in expanding TAM for Genpact in the industry in terms of organizing individual data sets, consolidating them so that any of these tools will work, right, either large language models and proprietary sets of data, right, as well as just nonproprietary sets of data, right? Because the models have to be trained. So what can be disruptive from the stuff that we see earlier on than later on, right? CFO on a box, right, in terms of metaphorically, some systems going to close all of your books is probably far-fetched at this point right now. But what isn't far-fetched is some of the customer experience work that we see. So we have about little less than 10% of our work is customer experience. That could be call centers, chats, interaction with individual consumers, exception processing market. And we've been utilizing some rudimentary technologies compared to what we're seeing now in large language models over the last couple of years with some fits and starts, I think we all can probably think about some of the experience we've had with chatbots and a hotel like we're at today or something like that. And there's a lot of opportunity there. So we think the #1 opportunity set for us is in customer experience work. So what are we doing there? So we are working with our clients and new clients on how could we train these models and these tools become more and more efficient. And we think we can be a real disruptor in that space. We're not going to be cannibalizing our business because it inevitably grows throughout the years. We wouldn't be in the business if it was literally picking up phones without utilizing technology. But I think that's, by far, the #1 and easiest one to be impacted. And again, it's going to expand our TAM. Number two, we have a generic term, I would call research, right? So what is it really good at research, right? And I joke about it a little bit. I have 2 children, and they were writing papers using ChatGPT and then we go check it and my daughters [indiscernible], she runs the checking software that the high school teacher would use against to see if you would write it. And I'm like, wow, this is blowing my mind. But it's a really good tool in terms of research. We have cases now in terms of pharmaceutical diligence that we do, that we go out and we're using those tools, describe the Internet for adverse reactions to certain pharmaceutical or retail complaints, so we might have about something. So we think that type of research opportunity is going to be huge for us. In terms of the enhanced RPA or process automation work that we do, well, we'll ultimately see where that's going to go in terms of the industry. But for the next 4, 5, 6 years out, there's just going to be a tremendous amount of work in terms of getting data organized, centralized, developing these language models with our clients. And we think Genpact's [ business will ] benefit dramatically from this. We really think this is a tailwind for us.

And do you think it's a tailwind to because many companies still don't use back-office BPO type work. Also, it seems like -- I think you've said before something like 20% is outsourced. 80% that's not might -- this might be a huge cost for like, hey, we've got to figure out with a provider, how to do some of this with AI?

And that's what we're hearing. So 6 months ago, 9 months ago, we sealing a narrative from a competitor, the CFO is back at the table, right? Growing any cost is in the back seat. We're going to work on cost efficiency. We've all heard Meta talk about the year of the efficiency and that kind of circulated throughout the macro universe that we operate on. And a lot of the work we do in terms of outsourced provider is to reduce costs and help with efficiencies. But the new discussion that we're having is all about how do we help clients and what you clients need to prepare for what the challenges are going to be. So they are calling us for help, right? Their CIOs are saying, "Well, we got to get our data organized even more." Transformation is now back on the table, right? And change is going to be there. So we're in a unique balance of help us transform, help us get organized. But today, what are the immediate benefits you could have? But yes, you're right, roughly 1/4 penetrated in the current TAM of folks using this. We had -- I was talking to a client, a money center bank that we all know the name of that, in some instances, they're using paper faxes to process some mortgage work, right? I think there's a gross -- as I said earlier, a gross overestimation of how much of the business environment on the consumer side is still digitized. There's a lot of runway to go on this.

We can still do our health assessment screening for HSA. We can send the fax. And now finally, we're allowed to also send a PDF through the Internet, just e-mail, but we can still do that, too. It's amazing how much faxes.

Yes. I went to this bank's operating center, and I was fascinated to see fax machines. I don't -- again, don't -- I always [indiscernible] kids into the discussion [indiscernible] to know what that is. They have fax machines stacked up on a wall in Arizona. And so go through it. I previously came from the insurance world, which is notoriously still paper focused, right? But a learning that I took from the insurance world is data is key. Customer segmentation in terms of pricing of insurance is really, really important. Whoever has got the data, the most organized in a central location is going to be able to out select everybody, right? Now you'll all fight for terms of who is a better model to do that but there's opportunities in all organizations that might have a lot of data, but they're in disparate systems. And this data theme is talked about and with the migration of the cloud, it's all going to happen much quicker. This is a big catalyst that's happened in the last couple of weeks.

Good. And maybe you can describe a little bit about a year ago now, you kind of disaggregate your business into a re-segment and I should say, into the digital operations, about 55% of revs and then data AI tech, 45% of revs. What's in those different buckets and maybe why do you re-segment?

Yes. So when I came into the organization, I thought that our revenue disaggregation was kind of cumbersome in terms of what we actually do, right? So I said just putting it all aside, what do we do, right? We design and transform organizations, right, and provide insights on operations. And then we run operations. So we said, listen, how much of the work that we do is that design, transformation providing that analytics to them? And then how much of it is -- we then say, we can run this for you, right? So the legacy business was probably at one point 100% when we were part of GE running operations or digitizing operations and just running them would be everything from processing a claim or something like that. But that's all changed, as I said, quite dramatically. So we re-segment the business. And what we found and then our projections are, okay, this business is growing at a much faster rate, right? We're now getting scale. We've supported this business. That's the data tech and AI business with a number of acquisitions. And now we're at a unique spot that we graphed out. Our margin expansion is increasing in that and it's ultimately going to drive our margin expansion on a go-forward basis as it's doing -- as it scales up [ versus our ] digital operation.

Yes. And what would F&A, finance accounting has been kind of a big kind of horizontal work that you do, what would somebody kind of within digital operations, go to work, what would they work on day-to-day?

Yes. So we do accounts payable, accounts receivable work that we would do on behalf of a client. So we'll work on digitizing that and we do a lot of work in terms of exception processing with that. Now the way our contracts are often structured, right? Well, the FTE component of it is used for pricing, there's a fair amount of underwritten operational efficiencies that we need to implement digital tools to do that, right? So we're incentivized every single day to reduce it and automate it, right? And that's embedded in terms of the pricing of how us and the industry goes about doing these things. That's an example of it. But we will run an accounts payable, accounts receivable, cash to record. We do financial statement production. We do some SEC reporting on -- for some of our clients. So it's a whole host of services, mid-office, and back office finance and accounting work. We've now moved into over the last couple of years, FP&A, right? And this is really our analytical world that we do, right? And in providing forecast for our clients using machine learning to help doing that. Supplier? How do you choose suppliers? The whole host of activities that we do on behalf of the generic term of what is finance and accounting. All really is focused on how do we support, for lack of a better term, the front office CFO.

And it's very recurring in part because those financial statements kept to be printed every quarter or a year.

Yes. So our CFO says it all the time. The books still need to close, right? So we often get the question of -- how robust is your revenue? Can they just stop it in a quarter? Well, no, right? We're running critical operations particularly finance and accounting, on behalf of a whole host of clients, and that work needs to continue to happen. Good times or bad times.

That's great. And maybe can you talk a little bit about the growth rate of each segment? And I know the data AI business compared to when you guided first last summer, that slowed a little bit, but maybe talk about both and maybe why that has been a little slower.

Yes. So great question. So our data tech and AI business has slowed a bit. There's a component of the business we call experience or digital experience. So what is that, right? It's consulting-oriented revenue we have that helps organizations interact with their clients on a B2B basis or a B2C basis, either in terms of content creation, lead generation. Anything you would really think about in terms of the general world of digital marketing, right? And what we have seen is enhancements to our current clients in the future has been somewhat paused, right? Well, it would be nice if our interactive website with our client would do x, y, right? It's been on the road map to get to those enhancements. Maybe we delay that work here or there. In addition to, we've seen somewhat of a slowdown to and typically in the fourth quarter, we see the exhausting of small consulting type budgets that companies have. These are $3 million, $4 million, $5 million engagements that we do on a very project-oriented base, that work has somewhat slowed, right? And that's what you're hearing from others as well as nobody is canceling projects or canceling tech projects, they're just delaying them, right? And so yes, it's really a testament to the model of what is Genpact. How much of the business is annuity-based, how much of the business is somewhat recession-proof from that perspective, like we just talked about, the books have to close. So when you kind of think about it, we think of about 70% of this arguably $5 billion of revenue is annuity-based or recurring revenue, right? So in any given point of the year, we start the year with predictability for the next 12 months of 70%. We have to go out there. And if you just think about the size of our business and were target, about a $1.4 billion a year, we have to source, convert and earn to hit what our targeted growth rates are going to be at 10% in any given year.

And what's -- what are the growth rates of the segments again?

So on the digital operations business, historically and currently, it's growing mid-single digits, 4%, 5%, 6%,a year and that's day in and day out. We've seen a migration to some larger deals in the first quarter. We actually had record -- large deals in the first quarter. The data tech and AI business grows at a much faster rate, low teens, right? So if you think about it, we have 55% of our business in a good year, growing at 5% -- 45% of our business growing at, say, 14%, 15%. Obviously, that's slowed down a little now. As we talked about that consulting and experience work is but we think fundamentally, that's the trajectory we're going to go in, right? And now the margin enhancement of those businesses is a little different in that in terms of we alluded to earlier. We're going to get a little bit higher margin in terms of that data tech and AI business flowing through the bottom line as we continue to scale it up.

I think you said -- and maybe you can kind of talk to this a little bit. But this year, I think in total, like normally, you expect around 10% this year might be -- I can't remember 7% is the right number. But that next year because of those big deal signings next year might catch you up so that the average ends up around 10%.

Correct. So 2 things. So our guidance for the year is 6.5% to 8%, right? And there's really 2 -- I wouldn't say catalyst, but 2 factors that are impacting it. The first, we just to talk to some of that small -- maybe even a little medium deals that we've done, again, in data tech and AI, analytics, digital experience, consulting type projects are slower than we anticipated last year. So we anticipated them in our guide. The large deals are continuing to ramp up. These deals on average are 4-year deals. Many of these are rebadge opportunities. And we had a really good first quarter. We closed a lot of deals. They closed later in the quarter; we virtually had no revenue impact. But those deals will scale up. And we think if you wait till 2 years, it will be on that 10%. In addition to it is we had entered in our high tech and manufacturing a large client, descaled some of their work, right, which impacted us quite a bit. So if that client, again, the business we're in, wouldn't have done their large descaling, right? This year would have been in the higher single digits than that. So -- but again, it's really the durability of the model has been tested, right? Our margins continue to enhance. And our growth trajectory, as we laid out a year or so ago is 10% on average growth through 2026. We feel very good about it. Last year, we did 11%. This year, it's going to be a little shy of that. I think when you wait '23 and '24, we'll be back on there, all while generating a tremendous amount of free cash flow.

And I guess, any verticals? You obviously just mentioned high-tech manufacturing. But any other verticals where you're seeing particular strength, weaknesses?

Yes. Yes. So the high tech and manufacturing, we've seen a lot of strength even absence of this one descaling our banking, capital markets, insurance segment, we continue to see really strong demand for that, and it's only going to get stronger right now with, we believe, enhanced regulation, [ KYC ], a lot of work that needs to be done also in terms of transformational work. Where we've seen a little bit of a slowdown is our consumer goods, life science space, which kind of makes sense if you think about just the state of the consumer and the work that we do in that space. And again, we'll see ultimately where that goes. But 2 of the 3 verticals still continue to perform outstandingly.

Yes. Great. And GE used to be 90% plus. Like years ago, I think before we covered it, I think probably like around 2000s, there's 90% plus of your revenue, right? And now it's less than 10%. You don't even have to put it in the filings anymore.

Yes. So I think our -- that's correct. So again, we -- at one point, it was 100%, right? So the legacy of the business as this was the GE Capital captive, for lack of a better term, back-office operation. They ran the business. It was so efficient, so very GE mind and said, okay, now let's do this for our clients. Let's start a business doing this. And it ultimately became Genpact, right? And yes, when the company went public, I think it was something that the vast majority of it was GE. The last time we stopped reporting it was in the high single digits. Subsequent to that is GE itself has gone through a bit of a transformation and is now on their path to become 3 independent companies, which we have relationships to all of it. So from that perspective, they'll continue their great clients of ours, and we're going to continue to support them on their journeys as now 3 independent companies.

Yes. Great. And could this be a catalyst right now? There's 3 of them could they end up being coming 10% again but you'd never have to report it because it's 3 different ones all separate.

Sure, sure. I mean -- so said otherwise, if you were to reaggregate those businesses would they be growing or not growing? And the answer is yes, they're growing. So they have multiple -- it's a competitive world. We're one of many competitors there. We're somewhat of the incumbent. But we typically retain if not grow those businesses, and we're continuing to do it. So we talked about, again, prior to their announcement, we think GE's continue to grow for us and thus far it has.

Yes. Great. And maybe we can talk a little bit about labor characteristics, wage inflation, attrition, and then really, I guess, pricing is kind of a lever that's all kind of acted to all that. How are kind of those 3 dynamics?

Really interesting question. So if you look at we disclosed this, we look at our attrition until a historical level and it fell down precipitously, right? So attrition is a good proxy for us for wage inflation and wage inflation has gone down, right? It's certainly not there. Pricing in the vast majority, if not all, of our agreements, there are some type of COLA adjustments there. It's never been just in time. So last year, we held our margin constant from the year prior to it because we had a huge amount of attrition, wage inflation. We got some off-cycle pricing adjustments that help insulate us not 100% from that perspective. And now it's somewhat stabilized from there. And now we're able to expand our margins from that perspective. None of the off-cycle wage inflation, non-COLA adjustments we got would really flow to the bottom line. It's really just going to help insulate those costs pressures we have. But from running a business perspective, it's certainly a lot more stable than it has been.

And normally, margins historically, they were up kind of 10, 20 bps. Last year, you said flat. This year, I think, 40 bps, remember that?

Yes. So this year, we're guiding to 30 bps increase. So on average, the company itself prior -- has probably grown and 20 bps a year, right? Our stated goal through 2026 is, again, 10% CAGR organic revenue growth, expanding margins at a higher clip. So this year, we're looking to expand margins, and we're well on that trajectory of 30 bps. And again, we see no deviation from that when we think about the business from a long-term perspective.

And is the pricing amount -- maybe you could talk a little bit about it. It's mostly FTE-based, but don't -- once you have a client that you promised like 2%, 3% efficiency gain each year and then you kind of -- you probably get even more than that and you get to keep some of it for yourself, right?

Well, that's the ultimate. So yes, the answer is yes. There is a low single-digit efficiency gains. It's embedded on an annual basis in all of our agreements. The vast majority of our agreements, 85%, 86% actually are some construct of an FTE pricing model. And then ultimately, we move to an alternative commercial model, right, which is good for us and also good for the client. I think that we've targeted to take that over the next couple of years to 20% of our revenue, that's something we're probably going to have to revisit with generative AI, right? Because I think the paradigm over the next couple of years, year 4 plus is going to be moving away from that FTE pricing model and going something more towards a complete output-based alternative commercial model, which, again, not a perfect litmus test for that 13% of revenue that we have on alternative models that tends to be higher margin business that we have. So that's one thing we'll continue to shift as we go forward. But that's going to be something we look forward to over the next couple of years. Again, another great catalyst for the company.

Do you think -- now if you get 2%, 3% efficiency per your low single digits, whatever that number is, but all of a sudden, AI would allow you to get 30% efficiency in some projects could you keep the client and kind of keep a big chunk of that efficiency gain for yourself? Or does competition kind of come in? And like how does that work?

Yes. A big believer [ and it's ] a competitive world out there, and we're dealing with very sophisticated clients. These are names you know [indiscernible] component names as well. But they're not silly. There's a whole third-party ecosystem of analysts and advisers and consultants to do that. So I'm not naive to think that we would be able to keep it. It certainly will help, right? But the fundamental part of Genpact is that we don't look at anything in terms of a silo, right? If that was the case, we'd be out of business 20 years ago. So we are early adopters in terms of RPA, early adopters in terms of blockchain technology, early adapters in terms of basic AI work. And so we're going to continuously evolve. As we said, 45% of our revenue is data tech and AI business, right? I don't know, 15-plus years ago, that was zero, right? And now it's our fastest-growing higher-margin business. But again, deep penetration into the verticals we have, the CXO-level discussions, our track record of delivering operational excellence and performance, lowering costs and increasing service is going to be something that is going to be an additional demand. Again, today's we're 20% of the industry penetration rate. The TAM is only going to increase over the next couple of years. So I think this generative AI theme or technology is going to continue to be a catalyst for us.

Great. And maybe final question, just cash flow conversion is very good. It's been good for years. M&A, is that the -- other than after a dividend, obviously, you pay that, but M&A is that probably the big what you'll probably use mostly for?

No. So we have a stated capital allocation plan, right? So we have agreed or we've communicated that we hope to return 50% of our free cash flow from operations in terms of dividends and share buybacks. The other 50% we use for strategic capability acquisitions, M&A as well as supporting our business organically. We don't see that changing from that perspective. And again, M&A as a whole, we look for these capability-based M&As.

Great. Well, that's about all the time we have. Please join me in thanking Genpact and Mike.

Thank you for having us.