Genpact Limited (G) Earnings Call Transcript & Summary

Thanks, Michelle. Hello, everybody, and good afternoon. It's great to have you join us for Genpact's Q2 2024 Earnings Conference Call. Hopefully you've had the opportunity to look at the earnings press release we issued, which is available on the Investor Relations page of our site, genpact.com. Joining us today are BK Kalra, our President and CEO, and Mike Weiner, our Chief Financial Officer. BK will kick things off with a broad look at the quarter, after which Mike will walk through our financial results in more detail, and then we'll open it up for your questions. I'd also like to remind you that on this call, we'll be making forward-looking statements, including ones regarding our business outlook, strategies and long-term goals. Those remarks reflect our plans, predictions and expectations as of today, and they may shift over time. Actual results might differ materially because of a number of significant risks and uncertainties, including the risk factors described in our 10-K and 10-Q filings with the SEC. In addition, we'll be discussing certain non-GAAP financial measures during this call. 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 entire call is being webcast from our Investor Relations website, and an audio replay and transcript will be posted on our site within a few hours. With that said, I'll hand things over to BK.

Thank you, Krista. Hi, everyone, and I appreciate you being with us today. It's a pleasure to share that we've delivered yet another robust quarter, and we keep executing well against our 3+1 Execution Framework. Q2 revenue came in at $1.18 billion, which is 6% higher than the same period last year and above the top end of the range we guided to, with stronger results than anticipated in both Data-Tech-AI and digital operations. A gross margin of 35.4% and an adjusted operating income margin of 16.9% likewise came in ahead of what we expected, thanks to efficiencies in how we operate. We're headed in the right direction, and momentum keeps growing. To put things in perspective, during FY 2023, our absolute revenue increase was approximately $100 million. During 2024, we've already reached $100 million of incremental revenues within the first half, accompanied by a higher gross margin, and we've done that while still investing in our top priorities. Our relentless focus on the 3+1 Execution Framework is speeding up growth, and throughout the back half of the year we'll keep strengthening our execution capabilities, staying focused on: one, robust partnerships; 2, thorough Data-Tech-AI solutions; 3, a streamlined go-to-market approach; plus our plus one, which is positioning Genpact as our strongest credential for AI first innovation. Allow me to take you through the main highlights for each. Starting with partnerships: we see a major chance to speed up revenue growth by making our partner relationships stronger. To give you a sense of it, IT service and solution companies whose partner operations are mature usually bring in 20% to 50% of their revenue through partners. In our case, partner-related revenues sat in low single digits during 2023. That's a major opportunity for Genpact. We began increasing our investments in the partnership organization early this year; and by the close of the second quarter, the percentage of revenue generated by partners has more than doubled, and we have line of sight to generate considerably more in periods ahead. Up to this point, our expansion has been fueled by putting money into a top-tier leadership group, raising visibility, improving how we activate our go-to-market efforts, and expanding what we can deliver together with several hyperscaler allies — Microsoft, AWS, and GCP among them — plus other important partners including ServiceNow, Salesforce, and Databricks, to cite just some. Turning to Data-Tech-AI: during quarter 2, our focused route to market continued to produce revenue growth that kept speeding up. Generative AI has substantially expanded the total market we can serve, and it is steadily becoming something that powers our business. Even though the dollar figures are still modest, bookings for Gen AI in the opening six months of 2024 have grown by a factor of more than ten compared with all of 2023, and more than 95% of the Gen AI bookings we've signed so far this year were contracted on a basis other than FTE. In addition, we currently have more than 80 Gen AI solutions either deployed or in the process of going live in client production settings. Integrating AI into enterprise systems is a substantial endeavor. It requires threading AI through an organization's core, touching data engineering, conversational interfaces, and existing IT systems, and ultimately connecting AI to end-to-end business processes. For Genpact, that represents a significant opportunity. AI is central to how we help clients transform their businesses, since our deep domain knowledge and understanding at the keystroke level matter when putting AI-first, end-to-end processes into live production. Here are some illustrations. A major worldwide financial technology solutions provider picked Genpact to lead a company-wide transformation, boosting scalability and efficiency via Gen AI. That's among the big deals we closed in Q2, with Gen AI playing a major role in the design. We're drawing on our banking know-how, end-to-end process frameworks and technology skills, together with ServiceNow, to provide a set of AI offerings. These solutions plug into a client's existing IT infrastructure, drawing on enormous volumes of unstructured data to drive competitive edge and expansion; this kind of rollout might serve as a model other sectors could adopt. As I've said before, our deep domain expertise enables us to bridge the gap between off-the-shelf products and what customers truly need in practice to transform their business operations using Gen AI. That's exactly what this case study demonstrates. A further example is our work with Mondelez, addressing their demand for reskilling and quicker onboarding of new employees. Through Genpact's Cora knowledge assist platform, we deliver faster access to information, insights and standardized operating procedures. Consider ALDI SUD, for instance. So over there, we're redoing their retail operations across the U.S. and Australia, using data, tech, and AI to get agility and cost leadership. Ultimately, that creates a great customer experience and drives competitive growth. Then there's our work with Amazon — another solid example of AI in action. For Amazon's out-of-warranty device customer service throughout Europe, we used AI and Amazon Connect to create an end-to-end solution. It combines AI-powered chat bots, supports logistics management, our repair partner network, end-to-end tracking, and proactive customer notification — all with very few human interactions. And those are just a few examples. In the end, there are five primary reasons customers choose us: our extensive industry knowledge, our proficiency in data and AI, our holistic offerings, our growing partner network, our focus on the client, and our cutting-edge technology, which includes ready-made AI accelerators. As sophisticated technologies increasingly influence the world, these developments are more significant than ever and enable us to deliver solutions that help our clients stay ahead. Turning back to simplification, the third component of our 3+1 Execution Framework, we continue to refine our go-to-market strategy to achieve more efficient scaling. To illustrate, we have made our rate cards uniform throughout our Data-Tech-AI services, and we are reducing complications in our end-to-end sales process through workflow automation and the use of AI contracting tools. Finally, when it comes to demonstrating that Genpact itself is the strongest proof of our ability to drive AI-based transformation, Q2 brought several significant achievements. Two particular instances come to mind. First, we introduced the new Cora AI assistant across our worldwide IT help desk. User satisfaction has risen twofold since launch, while staffing on the service desk has dropped 30%. Looking ahead, our plans include a Cora AI assistant for HR, finance, sourcing, and many additional areas, and we aim for similar improvements there. Second, AI Guru, our Learning Coach built on Gen AI, now provides customized learning recommendations to over 60,000 employees, boosting productivity and amplifying the collective knowledge of our in-house experts. Now, on the subject of our workforce: our employees are the backbone of everything we achieve. Since the start of the year, we've gained substantial ground, broadening our technology capabilities across the board as part of the larger Data-Tech-AI initiative we're investing in. Turning to Foundational Gen AI, more than 100,000 team members are in active learning mode, entry-level training has been completed by 70,000, and advanced coursework has been finished by 18,000. Regarding our capacity to deliver Gen AI, we now have 3,000 AI practitioners spread across the organization. And on the applied AI leadership front, a significant shift is underway at our highest ranks: by the close of 2024, certification from institutions like MIT will have been earned by 85% of our senior leaders. As we look ahead, we'll continue making aggressive investments in our people, focusing especially on how cutting-edge technologies can be put to practical use. Turning now to guidance. Since we've delivered another quarter that beat expectations, along with a robust performance in the first half, we're increasing both our revenue and EPS forecasts for the entire year. Our revenue outlook is moving up by 150 basis points, now calling for 4% to 5% growth on an as-reported basis, compared with the 2.5% to 3.5% range we gave before. Just like we did three months ago, we aren't building in any easing of the purchasing climate. What we're doing is purely capturing the stronger execution we've achieved in our projection for the full year. For the entire year, our gross margin and margin guidance stays the same, at 35.3% and 17%, respectively. We're going to keep putting money into what matters most to us — our partnerships and the advanced technologies within Data-Tech-AI — so that we can speed up long-term growth. Looking at the whole year, we're also lifting our guidance for adjusted diluted EPS, which reflects how well we did in the first half, with a $0.14 bump at the midpoint of the range. To wrap up, I want to say a sincere thank you to all of our employees. Because of your hard work, our clients are getting outstanding value, and Genpact is achieving success and growth. As we keep innovating and growing, your dedication is the foundation of everything we accomplish. Thank you — and we'll keep honing our competitive edge as we write the next chapter of Genpact. Okay, I'll hand things over now to Mike.

Thanks, BK, and good afternoon to all of you. I'm grateful for the time you're giving us today as we go through how we performed financially in 2Q 2024 and share what we see ahead for Q3 and the entire year. It's my pleasure to say that Genpact turned in yet another robust quarter, one that featured a record-high income from operations totaling $170 million. We keep making the foundational upgrades required to generate lasting growth and efficiency gains. Our pipeline hit an unprecedented level during the second quarter, fueled by a balanced blend of small, medium and large deals. Generative AI's contribution to that pipeline likewise doubled across the first half of 2024. Everything here positions us nicely for growth down the road. In the quarter, we brought on 23 new logos, which lifted our first half count to 53 new logos — a 29% rise versus the same period last year. We additionally secured 4 large deals during the quarter. Our win rate came in at 51%, and sole-source deals made up roughly 45% of total bookings. Underlining the strength of our value proposition, we keep deepening and widening our client base. In the second quarter, relative to the prior period, we grew the count of client relationships producing yearly revenue above $5 million, moving from $180 million to $185 million. We likewise raised the count of clients whose annual revenue surpasses $25 million, going from $38 million to $42 million, and 5 of those clients bring in over $100 million in revenue. Moving now to our income statement. Total revenue for the quarter reached $1.176 billion, a 6% increase year-over-year as reported and 7% on a constant currency basis. That result, which came in above what we expected, stems from a renewed emphasis on delivering results in Data-Tech and AI and digital operations. Data-Tech and AI makes up about 46% of total revenue in the second quarter and expanded 4% year-over-year on both a reported and constant currency basis. Supply chain and risk management service lines were the main growth drivers. Digital operations revenue rose 9% year-over-year on both a reported and constant currency basis, largely because of ramp-ups on large deals. Digital operations represented 54% of total revenue in the quarter. Revenue coming from outcome and consumption-based deals, which leaves out fixed fee contracts, keeps growing relative to the prior year. It now accounts for 20% of second quarter revenue, a milestone we reached at the close of 2023; hitting it again shows our dedication to fulfilling our long-term objectives. Growing these deals lets us pursue profitable growth and deliver more value to our clients. Revenue from priority accounts climbed roughly 7% year-over-year and made up 62% of total revenue; turning now to our 3 segments, each of which posted strong results. Revenue in Consumer and Health Care rose 7%, while revenue in financial services as well as high-tech manufacturing was up approximately 6% year-over-year. The main revenue growth drivers across all 3 segments stayed largely the same as in prior quarters, which speaks to stability and consistency in how we run our business. Now shifting from revenue to gross margin, which came in at 35.4%, an increase of 10 basis points compared to the same quarter a year ago. The drivers were operational leverage and somewhat reduced stock-based compensation expense, partially offset by our yearly compensation cycle. Adjusted operating income margin reached 16.9%, which is 10 basis points higher year-over-year. SG&A relative to revenue fell 40 basis points from a year earlier, landing at 20.4%, thanks to greater operating leverage — a portion of which comes from our continued simplification initiatives — offset by higher investments. Our effective tax rate came in at 24.9%, compared with 22.7% in the equivalent quarter last year, which had included a discrete tax benefit. GAAP net income totaled $122 million, marking a 5% year-over-year gain. GAAP diluted EPS increased to $0.67, which is a 6% rise compared to a year ago. In a similar vein, adjusted diluted EPS reached $0.79, climbing 10% versus last year and growing faster than revenue; we keep generating substantial cash from operations. We produced $209 million, versus $171 million during the same period a year earlier. Turning now to the balance sheet. Cash and cash equivalents stood at $914 million, an increase of $491 million from the close of the comparable period last year. This cash growth mainly reflects proceeds from our recent bond issuance, which we will use to pay off upcoming bond maturities. Days sales outstanding went down by 2 days compared with the previous quarter; we achieved a net debt-to-EBITDA ratio of 0.9x this quarter, sitting at the low end of our target range; that puts us in a strong position for strategic investments in future growth opportunities. During the second quarter, we bought back roughly 1.9 million shares for a total cost of $63 million. We additionally distributed $27 million in dividends. All told, we gave back about $90 million to shareholders during just the second quarter; we stay dedicated to returning capital to shareholders and directing at least 30% of operating cash flow toward share repurchases, on top of the 20% annual dividends. Attrition is still at historic lows, registering 23% in the second quarter, which is 200 basis points below — lower than the equivalent quarter a year ago. Now moving to our third quarter outlook. We provided guidance for total revenue between $1.18 billion and $1.186 billion, representing roughly 3.9% to 4.4% year-over-year growth as reported. That breaks down into digital operations and Data-Tech and AI revenue growth of approximately 3.8% and 4.6%, respectively, versus the same period last year, at the midpoint of the range as reported. We expect gross margin for the quarter to be around 35.4%, in line with the prior quarter. Adjusted operating income margin should come in at 17.2% as we keep investing for long-term growth. For the entire year, we are lifting our adjusted diluted EPS guidance; we now expect adjusted diluted EPS in the range of $3.14 to $3.18, which is a $0.14 raise at the midpoint of our earlier guidance and will represent the fourth straight year of delivering EPS growth that exceeds revenue growth. The year-over-year EPS increase comes from adjusted operating income of $0.14 along with a $0.09 benefit from a reduced share count. Those gains should be partly canceled out by $0.03 in additional interest costs and a $0.01 hit from the expected tax rate. Like BK said, we don't see market conditions getting any friendlier as we move through the year. What we're mainly doing is folding the strong first-half results into our outlook for the whole year. To put a number on it, we now expect total revenue of $4.656 billion to $4.701 billion, which works out to 4% to 5% growth year over year as reported. That upward revision comes from 5.2% growth in digital operations revenue and roughly 3.8% growth in Data-Tech and AI revenue at the midpoint. Our full-year gross margin expectation stays at about 35.3%, with an adjusted operating income margin of 17%, which shows we can keep profitability intact while dealing with an uncertain economic and business environment and still putting money into the business. We now expect to bring in around $525 million of operating cash flow this year; along with our focus on results, our strategic investments, solid client relationships and operational excellence leave us well placed to handle the shifting market landscape effectively. These moves are meant to boost shareholder value, support sustainable growth and deliver long-term returns to our shareholders. With that, I'll hand the call back to Krista. Thank you.

Operator, we're ready to go ahead and poll for questions.

This is Kate, sitting in for Maggie. To start off, I realize your updated guidance doesn't factor in any gains when it comes to client demand; even so, could you share anything fresh regarding how customers feel in general at this moment, and the way that has shifted across the latest quarter?

I'll handle that one. Speaking as BK, regarding what clients are feeling, I can say it has — for the most part remained unchanged from what we've been seeing across the previous 6 months, or perhaps I should say across the previous 12 months as well. To give one illustration, with discretionary spend, we have not witnessed any uptick. At the same time, there's been no worsening either. And our customers keep being extremely careful, extremely vigilant, and keep sitting in practically the identical position, considering every one of the uncertainties surrounding them.

Then for my follow-up, it was good to learn about the ongoing rise in consumption and outcome-based deals. Has your long-term thinking shifted in any way regarding how high that percentage might ultimately climb?

Sure, Mike here, and I'll handle that one. You've got it right — we hit the target we announced earlier than planned on that front. We don't have specific figures to offer at this point, though you should expect that figure to be somewhat larger as the year progresses. What matters most about it, I believe, is that since we're sitting at roughly 20% today, it's also worth considering that this isn't only assisting us in shifting toward this new economic model. Looking at that 20%, though, the margin associated with it stays strong and better than average. So there's more to share later on that.

Bryan, perhaps a question at a high level. You've now held this position for more than 6 months. Could you share your perspective on which initiatives you believe have performed very well here, compared with any that are progressing more slowly? And also, what areas — additional areas — will you be emphasizing as you work through the latter part of '24?

Certainly, Bryan, and thank you. As we stated clearly, our predominant focus is on these 4 initiatives, which we refer to as a 3+1, and I'm constructing that through line across the entire company too, together with every colleague at Genpact. And I'd happily tell you that each of these 3+1 initiatives — whether it's the plus 1, which is Genpact, establishing Genpact as the strongest credential on the AI first journey, or the 3 that face clients: the first being partnership, the second being Data-Tech-AI, and the third being more simplified go-to-market motions — all are advancing very well, and a few I've already discussed. What we've also done, Bryan, is fill many initiatives, and that has helped us concentrate on these initiatives that are meaningfully better for our future as well as our present, and we are witnessing results. That said, we are also pushing hard into innovation, innovation embodied by data and Gen AI, and we remain at the early stages of that, with more to come on that front.

Turning to digital operations — there was a good sequential increase in 2Q. When we set that against what you're projecting for 3Q and 4Q, could you pull apart whether anything shifts, since the outlook levels off somewhat? Did something occur in 2Q that made such a strong ramp possible — anything nonrecurring, or is it simply the careful stance you've shown?

It's the more cautious stance, Bryan. What I'd say is that we keep seeing big contracts land in every quarter, in fact right on time or slightly early. And we're genuinely happy about that, genuinely happy with how the rhythm goes across all sorts of contracts this year too — whether they're small, medium, or large; and it is — we are — yet at the same time we want to hold to a careful stance through the rest of the year.

Regarding those big contracts you mentioned at the close of 2023, could you discuss how revenue from them is coming through during 2024 and 2025, and perhaps what the pluses and minuses of those bigger contracts are for EBIT and gross margins in '24?

I'll start us off, and perhaps BK, you can add your thoughts. So during the latter portion of 2024, we saw a significant number of sizable contracts begin to scale up, and that carried on across the first 2 quarters of — 2023 into 2024. Those are still doing quite well, and we've reached the stage where they are scaling. Such contracts usually arrive initially with a reduced gross margin and ultimately land at an elevated gross margin as they progress along the pipeline and reach maturity. Bear in mind that for us, a big contract generally has a duration of roughly 5 years. So when you consider our guidance for the rest of the year, it genuinely captures that shift as we continue onward.

Very well said, and I think we'll continue with the momentum overall, Robbie.

Great. Now, regarding those Gen AI agreements, you mentioned that 95% of Gen AI bookings come through on a non-FTE basis. Could you elaborate on how you price these non-FTE contracts with your clients? Do they carry better margins compared to typical contracts?

Indeed. Several of these Gen AI arrangements—something also visible in the quarter-end figures we just discussed—are structured on a non-FTE basis. By non-FTE, we mean they're predominantly tied to outcomes, the results we deliver for our clients and the way we're compensated for that. And the majority of our outcome-based engagements yield greater profitability. That's the foundation we're building the whole company around.

Bala, you said the Gen AI opportunity makes your TAM bigger. Could you give us a sense of how that happens? Is it simply creating new paths for growth that clients haven't looked into previously? Perhaps a bit more information about how the TAM gets expanded, and if possible, could you put a number on it?

Yes; so putting a number on it might be difficult at this early stages, but what's clear, Mayank, is that our TAM is growing, whether we look at the bookings we're seeing, or even our pipeline, or the count of solutions we're building for clients right now. And the TAM grows for 2 or 3 reasons. First, it widens the scope of the opportunity we're discussing, that's point #1. Point #2, since — especially with Gen AI and AI has always been around for at least a decade, I'd say; but with Gen AI, many of our clients have also awakened to this transformative opportunity. And so, they're engaging while we engage with them across different buying centers. And because of our intensely client-centric approach, we get invited into some areas where previously we weren't invited; so those clearly contribute to opportunities too. So our TAM within a particular client as well as TAM within a particular opportunity inside the client. And if you take the example I gave in my prepared remarks, in that financial services industry case, overall, the deal size, it's a large deal, when we call large deals are greater than $50 million, it's much bigger than $50 million. The deal size pre-Gen AI or post-Gen AI is a much bigger in TCV.

Just to jump in quickly with a point I also mentioned during my remarks: our pipeline hit a record level in Q2, correct? And then, if you factor in the Gen AI piece of that, it has more than doubled across the 6 months of this year compared with the full year next year. So what we're seeing is a net gain in our quality pipeline, and that backs up the idea BK referred to—that there's a TAM in answer to it. Then, if you take that further, as BK mentioned, with outcome-based deals and considering that the margin on those is higher, we feel quite positive about this as both a net TAM enhancer and a net revenue enhancer for our business within our franchise.

Turning to margins, though, I'm interested in whether this could give you a helpful boost and perhaps assist you in narrowing the distance relative to your competitor, which operates at somewhat greater adjusted EBIT margins. My understanding is that the typical margin range sits in the high teens to low 20s. It seems to me there's additional room for you to reach that level. Could this serve as a longer-term advantage allowing you to shrink that gap?

There are 2 points here. So in theory, sure, correct. Yet you should also remember that our adjusted operating income margin, correct, keeps holding steady since we've captured the flow through from the operating leverage present in our business and have directed significant investments toward our franchise going forward, matters BK mentioned before, such as improved training, investments along with partnerships and all of those items, which we believe form a crucial element of our company for producing long-term sustainable growth. So we will continue doing that, at minimum through the foreseeable remainder of this year, and our figures show that.

Let me begin by asking about the partnership. It's pretty unexpected that revenue coming from partnerships on your end is so modest. Could you walk us through the reasoning behind that strategy, especially since the gap versus your competitors is so large? And what timeline do you see for eventually narrowing that distance and reaching the level where your peers perhaps sit?