Genpact Limited (G) Earnings Call Transcript & Summary

Thanks, Michelle. Hello, everyone, and thanks for joining us on Genpact's Q1 2024 Earnings Conference Call. We trust you've had an opportunity to review the earnings press release we posted in the Investor Relations area of our site, genpact.com. Joining us today are BK Kalra, our President and CEO, and Mike Weiner, our Chief Financial Officer. BK will begin with a high-level look at the quarter, after which Mike will walk through our financial performance in more detail before we open things up for your questions. Please be aware that on today's call, we'll be making forward-looking statements, which include statements regarding our business outlook, strategies, and long-term goals. These remarks reflect our plans, predictions, and expectations as of today, and they may change over time. Actual results might differ materially because of a number of important risks and uncertainties, including the risk factors described in our 10-K and 10-Q filings with the SEC. Additionally, on this call, we'll discuss certain non-GAAP financial measures. We've reconciled those to the most directly comparable GAAP financial measures in our earnings press release. These non-GAAP measures aren't meant to replace our GAAP results. Lastly, this call in its entirety is being webcast from our Investor Relations website, and an audio replay along with a transcript will be available on our website within a few hours; with that, I'd like to hand it over to BK.

Thanks, Krista. Hi, everybody, and I appreciate you being with us today. I'll begin with a quick look at how Q1 went, then cover our revised outlook, and after that I'll pass things to Mike so he can walk you through the financials in greater depth. We got off to a good start this year, posting total revenues of $1.13 billion, which represents growth of 4% versus the same period a year ago; that figure came in above the top end of the range we had guided to, helped by initial indications that execution is getting better along with stronger-than-anticipated results from both Digital Operations and Data-Tech-AI. At 35%, gross margin likewise came in ahead of what we expected, which speaks to gains in operational efficiency as well as the revenue upside. Adjusted operating income margin reached 16.1%, matching our guidance and reflecting the investments we're making in our top priorities. During Q1, as I believe most of you are aware, we put our 3+1 Execution Framework in place, and it's already producing encouraging results. Within 3+1 there are three initiatives aimed at clients — partnerships, Data-Tech-AI, and simplification — plus a single internal one, Client Zero. The idea here is to make Genpact itself the strongest proof point for AI-driven transformation. Allow me to go through each in turn. Starting with partnerships: during the first quarter we made sizable additions to our partnership team and secured Tier 1 partnership status — the top tier — with AWS, Salesforce, and Adobe. On top of that, we've teamed up with Microsoft. Marrying Genpact's strength in finance and accounting to Azure OpenAI technology lets us take finance organizations to best-in-class standing by making use of data and AI solutions. Next, regarding data tech AI, we're pushing hard on go-to-market engagement spanning data engineering, analytics, and AI, with particular emphasis on GenAI. That effort produced a meaningful rise in client conversations during Q1 and helped data tech AI revenue beat what we had expected. Together with clients, we're embedding GenAI into the processes at the heart of their businesses. GenAI additionally acts as a catalyst for foundational work, since we assist enterprises in constructing the wider data and system architecture that must be in place to thrive in the AI era. Genpact's part here is essential. What we do is close the distance between the ready-made offerings that platform providers bring and the domain knowledge that operates at a keystroke level. That enables clients to stand up an AI-first, end-to-end business process, together with the data and systems underneath it, inside their production environments. There are five main reasons clients pick us: 1) Deep domain expertise. 2) End-to-end capabilities from strategy and design all the way to delivery and transformation. 3) Strong partner ecosystem. 4) Client centricity; and 5) Full-stack data, technology, and AI stack, including our pre-built accelerator, the Cora platform. Let me share a few illustrations. Novva Data Centers, which supplies cutting-edge data centers, relies on our AI solution to boost the functionality, integration, and operational efficiency of its Boston Dynamics Spot robots. Through natural language processing and hardware integration with OpenAI interfaces, those robots now have capabilities including AI-powered anomaly detection, facial recognition, license plate monitoring, and the capacity for human-like interaction. With these capabilities, their robots will be able to strengthen security further and keep watch over critical infrastructure. Alternatively, when it comes to Volkswagen Financial Services, we've brought GenAI into the production environment. That allows agents to handle servicing requests far more efficiently. Our GenAI translation capabilities are now live in three European nations and scaling up quickly. Thanks to this solution, agents can much more effectively handle account modifications, loan disbursements, and customer complaint resolution, all while providing a more tailored experience and achieving higher customer satisfaction. Beyond that, we're creating responsible AI centers of excellence for our clients, which is a major priority for us. Let me share a few illustrations. A large IT firm's finance department sought to automate many of its operational finance tasks; we handle some of their finance and accounting work along with other operational processes. Drawing on lessons from our own internal practices, we set up a responsible AI center of excellence for them, contributing deep functional domain expertise, adding data engineering skills, and facilitating AI implementation; this is assisting them in getting multiple use cases into production quickly. We likewise set up an AI center of excellence for a prominent life insurance firm. With this client, we're developing a platform employing sophisticated AI methods that combine historical data, product details, and future forecasts to support a variety of decisions. The initial use case will enable full end-to-end automation of pricing and renewal choices through AI with human oversight; these represent only a handful of the examples. Although it remains quite early, we're observing growing momentum in GenAI-related revenues and bookings, and we feel we're well positioned to work alongside enterprises to generate competitive advantage going forward. Third, regarding simplification within 3+1; during Q1 we streamlined our sales and go-to-market leadership structure, shifting from a heavily matrixed setup to 12 units, which aligns with our client organization. This is improving execution and accountability through standardized scorecards, internal management reporting, and sales and post-sales activities, all underpinned by a fresh governance structure that monitors key performance indicators at the unit level. We're currently working to simplify several other key elements that will let us scale more effectively. Lastly, the plus one in our 3+1 Execution Framework is Client Zero. That's the effort we're undertaking to make Genpact its own strongest proof point for AI-led transformation; we've pinpointed and are proceeding with over 50 internal use cases spanning IT, finance, HR, legal, sales, and marketing to fuel growth, boost client employee satisfaction, cut costs, and enhance cash flow, all through applying the very same AI tools we deploy for our clients. It's early stages here too, but the progress we're achieving is exciting to us. Now, shifting to our guidance, Mike will walk through the specifics, though I wanted to highlight a few key items first. As I noted before, we're observing initial indications of better execution, with results for Q1 exceeding expectations. Because of this, we're raising our revenue outlook for the entire year by 50 basis points, moving to growth of 2.5%-3.5% on an as-reported basis, which is up from the earlier 2%-3%. Nothing in our guidance factors in any betterment of the macro purchasing climate. What we're doing is carrying the roughly $20 million of Q1 revenue upside, taken at the midpoint of the range, across the whole year. We're likewise lifting our full-year gross margin expectation by 30 basis points to 35.3%, versus 35% before, which mirrors what we delivered in Q1. For the full year, our AOI margin projection stays where it was, at 17%, since we keep putting money into our leading priorities, partnerships, and GenAI to fuel faster growth over the long term. To wrap up, Q1 gave us a strong beginning to the year, with revenue and gross margin landing above the top of our guidance range, which shows early evidence of better execution; the progress we're seeing is exciting, and we think our 3+1 Execution Framework will be a crucial element in setting us on the road to achieving our full potential. So with that, I'll hand the call to Mike.

Thanks, BK. Good afternoon, everyone. I'll start by walking you through our results for the first quarter, and after that I'll share how we're thinking about the second quarter and the full year 2024 outlook. Starting with Q1, we're still seeing pressure when it comes to discretionary work with short cycles, but demand remains robust for our annuity-based services that run over the long term. To be specific, our pipeline hit record highs, driven by strong inflows. During the quarter we booked 3 large deals. That's fewer than the count in last year's first quarter, but our total bookings came in close to what we booked during the same period a year ago. We also signed 30 new logos this quarter, with an average TCV of roughly $4.5 million, versus 17 new logos at an average TCV of about $5.6 million a year ago. Sole source deals made up about 40% of bookings, and win rates stayed high at 62%. Revenue came to $1.13 billion in total, rising 4% year-over-year, on both an as-reported and constant currency basis. That result beat our expectations, showing early signs of better execution and stronger-than-expected performance across Digital Operations, Data Tech and AI, and every segment. As we mentioned in our press release, we refined the revenue breakout for Data Tech and AI and Digital Operations so that revenue from certain solutions is reflected more accurately. We've also included historical comparison results in the press release and in our financial fact sheet, both of which were posted before this call. For Data Tech and AI and Digital Operations, the figures I give below use the prior methodology, so you can compare them accurately against the guide we shared on our year-end call. Data tech and AI revenue, which accounts for 44% of total revenue, rose 3% year-over-year on an as-reported and constant currency basis. The performance came mostly from service lines in finance and accounting, supply chain, and risk. Digital operations revenue, which accounts for 56% of total revenue, rose 4% year-over-year on an as-reported basis and 5% on a constant currency basis, mainly reflecting deal ramps tied to the large booking wins from last year. Outcome and consumption-based models grew to roughly 19% of first quarter revenue, up from 13% of total revenue in the first quarter a year ago. Revenue from priority accounts rose 4% year-over-year and held at 63% of global revenue, while 43% of first quarter bookings came from priority accounts. Looking at it by segment, Financial Services rose 3% year-over-year, mostly due to the ramp of large deals and growth in financial crimes, partly offset by continuing pressure on client discretionary tax spend. Consumer and Healthcare rose 5% year-over-year, thanks to large deal ramps and growth in supply chain engagements. High-tech and Manufacturing rose 4% year-over-year, mainly driven by a ramp of new logos in both Digital Operations and Data-Tech-AI, moderately offset by a partial descoping of a high-tech priority client that we noted last year. Our adjusted operating income margin came in at 16.1%, which represents a decline of 30 basis points compared to the prior year, largely because we ramped up investments aimed at fueling growth. For Q1, gross margin stood at 35%, an increase of 100 basis points versus a year ago, mainly attributable to reduced upfront spending on large deals as well as decreased severance expenses. Just to remind everyone, severance costs ran high during last year owing to workforce cuts within our short-cycled advisory business. SG&A as a share of revenue rose 90 basis points from the prior year to reach 20.8%. That year-over-year rise stemmed mostly from the greater investments supporting growth that I referenced earlier. Keep in mind, we also saw reduced stock comp expense, which has no effect on our adjusted operating income margin. Our effective tax rate landed at 25.2%, versus 23.4% in the comparable period a year ago, chiefly caused by smaller tax deductions tied to stock-based compensation along with the rollout of Pillar 2 global minimum tax rates. GAAP net income reached $117 million, a 10% improvement year over year. GAAP diluted EPS came to $0.64, rising 12% from a year earlier. Adjusted diluted EPS was $0.73, up 7% compared to the prior year and exceeding revenue growth for the quarter. That gain was mostly attributable to the effect of a lower outstanding share count of $0.02, greater adjusted operating income of $0.01, an FX remeasurement gain versus the same period last year of $0.01, and reduced taxes of $0.01. Relative to the first quarter of 2023, we expanded our count of relationships generating annual revenue above $5 million, going from 175 to 187. In addition, clients with yearly revenue exceeding $25 million grew from 36 to 40, while those at roughly $100 million of revenue held steady at five. Now moving to cash flow and the balance sheet. In the quarter, we consumed $26 million of cash from operations, versus consuming $34 million in the equivalent period a year ago. Days' sales outstanding widened to 91 days, up from 83 days in 2023, because of collection delays and longer payment terms on new accounts. Credit quality across our portfolio remains extremely solid. Cash and cash equivalents amounted to $478 million, down from $584 million at the close of the fourth quarter of 2023, which mirrors the return of $57 million to shareholders plus an annual incentive compensation payout made during the first quarter. As of quarter's end, our net debt-to-EBITDA ratio covering the trailing four quarters was 1.1 times, consistent with our preferred 1 to 2 times range. Given our undrawn debt capacity along with existing cash balances, we retain substantial flexibility to chase growth opportunities and carry out our capital allocation strategy. Over the quarter, we bought back around 865,000 shares for a total outlay of $30 million, at a weighted average price of $34.67 per share. Capital expenditures as a proportion of revenue worked out to roughly 1.8%, matching what we had anticipated. Our dedication to giving back capital to investors stays firm, carried out via a steady rhythm of share repurchases and dividends paid each quarter. Throughout the year, we still intend to distribute roughly 50% of the cash we generate from operations to shareholders, and that includes no less than 30% of operating cash flow allocated for buying back stock. Now, before I move on to an update regarding our guidance. Let me share a few fast figures on attrition. Attrition came in at 23% for the quarter, which matched the level we saw in Q4 and sat at the lower boundary of what we've historically experienced. Once you strip out involuntary departures and those who have been with us under three months, the attrition figure for the quarter lands at 17%. Last, I want to bring you up to speed on what we expect for the entirety of 2024 and what we're projecting for Q2. Here's how Genpact sees the whole of 2024. Revenue should land somewhere between $4.59 billion and $4.63 billion, which works out to roughly 2.5% to 3.5% growth compared with last year on a reported basis — an increase from the 2% to 3% we'd previously guided. Within that, digital operations revenue is expected to climb about 3.6% versus last year, while data tech and AI revenue should rise around 2.3% year over year, measured at the midpoint of the range on a reported basis. That compares with earlier midpoints of 3.1% and 1.7%, respectively, under our updated classification approach. For the full year, gross margin should come in near 35%, adjusted income from operations margin near 17%, and adjusted EPS between $3.01 and $3.04. That translates to 1% to 2% growth compared with a year ago, and it factors in $0.09 of higher adjusted operating income, a $0.06 benefit from a reduced share count, partly offset by a $0.04 hit from a greater expected tax rate, $0.04 more in interest expense, and a $0.02 negative FX swing year over year stemming from the $4 million remeasurement gain we booked a year ago. As we've said before, if we manage to generate revenue beyond what we've planned during the year, we'll lean toward putting some of that extra back into the business so it can fuel more revenue growth down the road. For 2024, our effective tax rate should remain where we've been expecting, at 24.5%, versus the 23.4% we reported for the whole of 2023. That bump comes from putting the new Pillar 2 global minimum tax rates into effect, plus smaller year-over-year tax benefits tied to stock-based compensation. We still anticipate operating cash flow of roughly $500 million. Capex as a share of revenue should stay around 1.5% to 2% for 2024, and that figure includes spending on upgrades to our internal systems. Here's what we're looking at for the second quarter of 2024. Revenue should fall between $1.143 billion and $1.148 billion, which means roughly 3.4% to 3.8% growth over last year on a reported basis. That includes digital operations revenue rising about 5.4% compared with a year ago, and data tech and AI revenue up 1.6% year over year, at the midpoint of the range on a reported basis. Gross margin should be around 34.8%, a sequential decline of 20 basis points, driven by how our yearly compensation refresh for employees lines up in Q2. We anticipate an adjusted operating income margin of 16.5%. So with that, I'll hand the call back to Krista.

Alright. Thanks, Mike. At this point we'd like to begin the Q&A portion of the call. Michelle, would you mind sharing the instructions?

Hello there. Nina here, filling in for Puneet. Great work on these results. Obviously, we're still at an early stage, but given that you're now sort of witnessing a few of the gains from your fresh initiatives, like the 3+1 payoff on the P&L, is it premature to begin considering revenue targets further out? Right now I believe we're modeling you at high single digits, though I'm aware the earlier goal sat nearer to low double, so any insight on this would be welcome.

Okay, this is Michael speaking. I'll get us started, and after that I'll hand things over to BK. At this moment, our main emphasis is squarely on how we execute during 2024. So as things stand now, I'd say we feel good about the ranges we've given for this year. Once we gain more clarity later in the year, we'll share more detail going forward.

Yes. If I could jump in on that, nothing has shifted as far as the broader economic picture goes. What we've assumed for the macro backdrop largely mirrors conditions from the latter portion of last year, though our initial progress has us excited, and we'll keep refreshing everyone as things develop.

Great. Thank you.

Hello, I'm Bradley Clark, filling in for Keith Bachman. I appreciate you taking my question. I'd like to focus on what was said regarding GenAI for your clients. I believe you mentioned revenues and bookings in the quarter came in above expectations. Could you offer any additional detail that might help us gauge the size or depth of this business, and where you're seeing early traction with clients?

Brad, I'll make three points. First, clearly it's still early days — not only for us, but also for our clients and for the industry as a whole. At this stage, we're noticing a great deal of interest from clients compared with many of the technology waves we witnessed previously. Second, because of that, I think we're having deeper conversations. Some of those discussions turn into bookings and revenue. Others do not convert. There remains enthusiasm and potential that we can capture, and we need to guide our clients through this as we proceed. Finally, what we've observed in bookings and revenue is still a very, very small piece; so we've built our systems to track that consistently. As it becomes more solid, as it moves forward, at some point we will shed more light on it.

Sure. BK, let me expand a bit on a few of those points, okay? Even though we aren't giving any quantitative benefit to the question, I find it quite interesting, right? Right now, we're positioned between the client and the hyperscalers, the big enterprise technology companies. And almost all of our discussions with clients center on how we can assist in the middle of those two things. And we believe that's going to be a genuine driver for us for future growth.

Yeah. Great. Thank you.

Hi. Thank you. Could you break down for me in somewhat greater detail what drove the beat in Q1? Is any of it one-time or non-recurring, or are there timing factors we ought to bear in mind when considering how Q2 may compare with Q1?

No. From that standpoint, I think it's Mike here with the answer. Hey, Maggie, how are you? So during the first quarter, right, when you look at our business, our two revenue disaggregation units, our Digital Operations revenue, right, we saw improved execution relative to expectations, especially on the deal ramps from the large deals we brought on in Q3 and Q4 of last year. We kept executing very well there. When it comes to our data tech and AI business compared with what we expected, project work, especially in finance and accounting, supply chain, truly fueled a lot of that beat.

If I could jump in here, Mike, what's driving this in the early stages really comes down to our 3+1 framework, Maggie. Let's use partnerships as an illustration. Within partnerships, which is one of the key attributes in 3+1, we brought in genuinely strong talent, a leader plus a team, and began working with technology partners. Looking at it more closely, the inflows are approximately 2.5x-3x compared with the same period a year ago. Or, to pick up on what Mike mentioned regarding data tech AI, our employees are increasingly getting behind this pivot, and there are growing numbers of conversations taking place with clients around data and AI. Some of that is already visible in our results in data tech AI. It's clear that the investments we're making and the pivot we're pursuing are producing some early results, along with the rhythm of governance and execution we've established.

Thanks; I'm glad to hear that. Considering every one of those adjustments you're implementing across the company, and with a portion of that already in motion — especially regarding the sales team — could you share a bit about how people are receiving them, and about culture? Has voluntary attrition shifted at all in that group? I appreciate you answering my question.

Yes. Thank you, Maggie. What I'm able to share with you is that on the whole, the team feels a degree of enthusiasm, enthusiasm since everyone is eager to produce stronger outcomes — that's the first point — and they witness their work being rewarded, although I believe we're all conscious that a bit more is arriving from simpler comparisons. That's what I'd say. Second, I think through these routines and rituals — and a handful of routines and rituals are being established for the present and going forward — those routines and rituals are producing outcomes, and many of our colleagues are watching the fruits of their labor materialize; so I'd say there's a great deal of enthusiasm I can sense in a tangible way. We also brought on more than 50 leaders at a senior level over the past 90 days, or in the first quarter, with additional emphasis on data, technology, AI, and partnerships as well. All of that backing is helping our current employees move further along with clients.

Thanks.

Hi there. I appreciate you fielding my question. It was encouraging to observe the strong performance and the resumption of quarter-over-quarter expansion that the 2Q guidance suggests. That said, I wanted to ask whether you might share your thoughts on the level of confidence you hold regarding this 2Q result and the rest of the year. Do you anticipate quarter-over-quarter expansion continuing beyond 2Q for the balance of the year? Also, what sorts of presumptions have you built in concerning areas such as discretionary spending, which, as I understand it, can weigh more heavily with certain clients when it comes to data tech and AI?

Okay, Mike here. I'll get us started on this, then hand things over to BK. Regarding how we see things beyond this year, into 2024, we aren't actually aiming to give extra detail. What I will address is our back half, specifically what the guidance rests on, especially on the revenue side, since I believe that's what you're getting at. To be fully candid, it's a conservative guide, correct? We haven't built in any meaningful shift to the macro backdrop, especially between the latter portion of 2023 and continuing across Q1 2024, right? The sizable deals we closed are working their way through. And sure, you could argue it comes off an easier comparison, but that is genuinely what our back-half revenue ramp captures.

Right. And Ryan, the one thing I'd tack on is that with the second quarter guidance, since we're obviously here on May 9th, we can see more clearly what's coming over the next 55 days. As for the second half, Mike already addressed that question.

All right. Moving on, a quick question regarding the productivity pledges we're getting from customers — could you give us a bit more detail on what patterns you've noticed in that area? Given the macroeconomic situation or the growing buzz around AI, are clients now requesting greater productivity gains from your main offerings than they did previously?

Clients are showing plenty of curiosity about AI, yet when we talk with them, when renewals come up, or when new deals get signed, we aren't seeing productivity assumptions rise. The truth, Ryan, is that a substantial amount of productivity tied to AI tools was already factored into our thinking from the start. Sure, GenAI is a recent development. What we're finding is that clients want to understand the mechanics better. That part has definitely shifted, though the numbers behind those mechanics haven't.

Yes. We've also observed — and we covered this during our prepared remarks — a solid level of expansion in alternative commercial models, correct, shifting away from pricing tied to FTEs, all of which backs the rollout of a great deal of this new technology.

Understood. Appreciate it.

Hi, everyone. Good afternoon, and thanks. Regarding the go-to-market shifts Maggie brought up, I'd like to ask something further. To be specific, when it comes to the alterations in your sales and go-to-market teams, have those been completely carried out by the time you finished the first quarter, or are there additional sorts of adjustments you're currently chasing during 2Q and across the rest of this year?

Thank you, Brian. Well, here's how I see it — quite a few modifications have been made by us, and we'll keep evolving them as the year moves along, as 3+1 gains traction, and as we keep interacting with customers and discovering more about what they require; so this is an ongoing evolution, and nothing about it is new. My sense is that what we've done amounts to a wave of shifts that we've pushed through. Yet at the core — take simplification as an illustration — we went from a matrix setup to 12 finite units that genuinely deal with clients, and a great deal of decision-making authority got shifted into those 12 units. Those shifts took place in Q1. Still, as we keep moving forward, my expectation is that we'll keep refining things at the margins, plus add fresh talent who can advance the data, technology, and AI agenda even more.

Yes. Up to this point, things have gone really well; we saw solid expansion when it came to both our inflows and our bookings, though there's still more ahead.

All right, that's clear. Now let's shift over to gross margin. So to start, I want to double-check something about the first quarter. I believe you mentioned that upfront spending on big deals was lower. Assuming that's correct, what effect does that have? And after that, could you walk through what's driving things across the rest of this year — how gross margin will trend? I realize you raised the full-year gross margin guidance somewhat, but I think there's a dip in the second quarter first, before a rebound in the back half. So please walk us through the pieces as the year unfolds for gross margin.

Certainly. Our gross margin in Q1, as I recall, rose roughly 100 basis points, correct? And what I think you're pointing to is the comparison with last year. We had reduced severance costs and fewer big-deal investments compared with the previous year, plus lower stock-based expense, and those factors truly produced that gain; and regarding how we've lifted our gross margin as we progress through the year, we're passing through the revenue from Q1 that came in above what we expected. And we've got improved operating leverage, which we're carrying through into the gross margin for the rest of the year in our guidance.