Genpact Limited (G) Earnings Call Transcript & Summary

Thanks, Cherie. Hello, everyone, and good afternoon. It's great to have you join Genpact's Q3 2024 earnings conference call. We hope you've already looked at our earnings press release, which is available in the investor relations section of our site, genpact.com. With us today are BK Kalra, our President and CEO, and Mike Weiner, our Chief Financial Officer. BK will begin with a high-level review of the quarter, and after that, Mike will walk through our financial performance in more detail before we open things up for your questions. I'd like to point out that on this call, we'll be making forward-looking statements, including ones about 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 could 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 serve as a substitute for our GAAP results. And lastly, this call in its entirety is being webcast from our investor relations website, and an audio replay and transcript will be posted on our website in a few hours. With that, I'd like to hand it over to BK.

Thank you, Krista. Hello to all of you, and thanks for being with us today. I'm happy to share that we've delivered yet another robust quarter, with revenue growth speeding up and market share continuing to expand. Revenue came in at $1.21 billion, which is 7% higher than the same period last year, landing above the top end of the range we had guided to, with that acceleration fueled by Data-Tech-AI and solid accompanying growth from Digital Operations. A gross margin of 35.6% and an adjusted operating income margin of 17.6% likewise came in ahead of what we expected, as we put money into growth while at the same time achieving operating efficiency; here at Genpact we discuss execution frequently, and our attention is just as much on innovation. Both are producing results. Let me give you some detail on innovation and how it is driving faster growth. At the midpoint, we are now positioned to achieve 6% revenue growth in 2024, an increase from 2% in 2023, and adjusted EPS should outpace revenue growth for a fourth consecutive year. Steady execution against our 3+1 framework is producing results, and we'll keep strengthening our execution and innovation capabilities, concentrating intently on partnerships, comprehensive Data-Tech-AI solutions, simplification, and the plus one within our 3+1 framework, which concerns making Genpact its own strongest proof point for AI-led transformation. Allow me to take you through the main highlights for each. To begin with partnerships, we keep seeing a substantial chance to speed up revenue growth as our partner relationships grow stronger. We began increasing investments in our partnership organization early in the year and are still making solid progress. Several significant announcements have come since our previous earnings call. I'll mention a couple of the recent ones. First up is our own finance data hub, which runs on Databricks' Data Intelligence Platform. Thanks to this AI-driven tool, CFOs and their staff can reach reliable data more quickly, which sharpens their decisions and lifts operational performance. We're especially proud to have achieved GenAI competency in AWS consulting services. That's a significant milestone, and we now hold every competency AWS provides across data analytics, machine learning, AI, and GenAI. Turning to Data-Tech-AI, our focus on providing end-to-end solutions is driving faster expansion — revenue there climbed 9% versus the same period last year, which is over double the rate we recorded in Q2. Both innovation and execution are behind this result. Generative AI is driving a major expansion of our addressable market. The dollar figures are still fairly small, but bookings for GenAI rose sharply quarter over quarter. Right now, about 130 GenAI solutions are either running in client production settings or in the middle of being launched, which marks a gain exceeding 60% versus the previous quarter. This technology is not just a productivity story — it also builds value over the long term. By bringing together Genpact's strong technology capabilities, sector expertise, and operational strength, we help clients accelerate their GenAI efforts and achieve transformative results. That kind of innovation was the focus of our AI Day, which took place in early October. Over 100 clients and partners came together at the event to hear about the newest developments in generative AI, machine learning, data, and analytics at Genpact. AI of Now served as the theme, with particular emphasis on the ways Genpact is converting innovation into direct business outcomes for clients right now. We take pride in the fact that several of our valued clients and partners took the stage, including Cisco, Advantage Solutions, Resolution Life, and others, and it was our clients who described how our solutions are generating meaningful value within their organizations. Let me share a few examples. Mondelez International, one of the world's biggest consumer packaged goods businesses, talked about the Genpact CFO Action Hub. That tool provides predictive insights in real time via a chat-style interface, plus suggested next best actions. Our custom AI offering, which we developed using Google Gemini Pro, makes finance work smoother, identifies insights you can act on, and improves the customer experience overall. Each client shared a unique perspective on how they apply our solutions to address their own specific issues. Penske Transportation Solutions, a top player in transportation and logistics, spoke about Genpact's demand planning and forecasting solution powered by AI. Genpact's approach takes into account every aspect of a fleet — details, what vendors can provide, what things cost, storage at the site, and shipping coordination — in order to increase the time vehicles stay operational and bring down the expense of holding inventory. Insurance happens to be a major area for our business, so Liberty Mutual Insurance, which ranks among the biggest property and casualty insurers worldwide, came on to talk about resolving claims and the offering we created for them, which relies on Amazon Bedrock together with Genpact's own data to make claim handling more efficient. Alongside those customer accounts, we presented quite a few AI-driven offerings during AI Day that touched on numerous areas of expertise, including finance and accounting, supply chain, and insurance, showing how bringing together sector expertise, information, and artificial intelligence can reshape how businesses operate and deliver greater value. Let me highlight a single example among these offerings: the agentic tool we've built for managing payables. This product runs on an LLM that we developed ourselves, and it applies machine learning alongside GenAI to drive greater automation throughout that entire business process from start to finish, yielding far more productivity than what's already on the market. It brings down operating costs, strengthens working capital, and makes things better for the finance user. Now back to the third item in our 3+1 framework — simplification. We continue to make our operations more efficient so we're able to scale with greater efficiency. As an example, we've implemented changes to streamline how cash converts into collections, and that's producing gains in both time to bill and operating cash flow. On top of that, we're streamlining our accounts payable operations while adding more automation, which also frees up working capital. And lastly, regarding our push to position Genpact as the strongest proof point for AI-driven transformation, we keep achieving solid results. Here's an illustration, something we also went into depth on during AI Day: a suite of AI agents known as Scout is now at the disposal of all Genpact staff. Scout delivers AI capabilities into routine tasks, like condensing documents or converting text between languages. In more specialized domains, including HR and IT, we are similarly customizing our agents so they can take on tougher, more complex problems. Adoption remains at an early point, yet we currently have more than 20 agents live in production, and plenty more are being built. While creating Scout, we additionally established our own agent development lifecycle — distinct from the traditional software development lifecycle — placing particular emphasis on choosing, training, and managing models, which lets us produce AI agents faster and more precisely. Moving now to guidance. Since we posted yet another quarter of results exceeding expectations, we're once again lifting our full-year outlook. At the midpoint, we're pushing revenue guidance up by 150 basis points, and we now expect 6% growth on an as-reported basis, compared with 4.5% before. For the full year, we're also raising gross margin and AOI margin by 10 basis points apiece, and we're taking adjusted EPS guidance to $3.24, roughly a $0.08 lift at the midpoint of the range, reflecting strong performance so far this year. Looking toward 2025, we feel optimistic about what we can achieve for both our clients and our shareholders. Even so, plenty of hard work lies ahead. What we're doing at Genpact isn't merely about bringing in the newest technology. It's about rethinking from the ground up how we provide transformative value and operational excellence to our clients. We've begun well, yet we stay heads down, concentrated on execution and innovation, and on creating what comes next for Genpact. To wrap up, a bright future lies before us. GenAI is widening our total addressable market, and we think our distinctive blend of data, technology, and domain leaves us well-positioned. We're also proud of what we've achieved so far this year. The shifts we're making, though difficult, are sharpening execution and innovation everywhere, and maybe most crucially in Data-Tech-AI, where we've seen 45% of the impact. Every day I see the remarkable commitment of the Genpact team and the enormous value we deliver to clients. I want to thank all of our employees for their extraordinary passion. With that, I'll hand the call over to Mike.

Thanks, BK, and good afternoon, everyone. We're glad you could join us while we walk through our third-quarter performance and give you our view of how the remainder of the year is shaping up. Across the board, the third quarter demonstrated strength — revenue rose 7%, adjusted diluted EPS increased 12%, and cash flow generation accelerated. Our pipeline remains at record levels, and it reflects a healthy mix of deal sizes; win rates stood at 43% for the quarter, and sole-source deals accounted for about 42% of total bookings. In addition, we added 21 new logos and signed three large deals during the quarter. As a reminder, a large deal refers to a total contract value of $50 million or more. Our footprint continues to expand. Clients generating more than $5 million in annual revenue hit a record 188 this quarter. We also increased the number of clients producing over $25 million to 43, and five clients now bring in more than $100 million annually — a sign of how much solutions contribute to their success. Turning to the income statement: total revenue was $1.211 billion, up approximately 7% from a year ago, on both a reported and constant-currency basis. That strong result underscores our disciplined execution. Data-Tech-AI revenue came to $569 million, a 9% increase year-over-year on both a reported and constant-currency basis. Growth was driven by every component within Data-Tech-AI, and this segment represents 47% of total revenue this quarter. Digital Operations revenue totaled $642 million, up 5% as reported and in constant currency, largely due to continued new deal additions. Digital Operations accounted for 53% of total revenue during the quarter. Revenue from outcome and consumption-based deals, excluding fixed-fee contracts, made up 20% of total revenue, which is up 17% from a year earlier, while Priority Accounts contributed 62% of total revenue and grew about 4% year-over-year. All three segments grew at a healthy rate. Consumer and Healthcare revenue increased roughly 8%, and both High Tech and Manufacturing and Financial Services were each up around 6% compared with last year. New deal ramps, advanced tech services, data, analytics, and AI benefited all three segments. Moving from revenue to profitability, gross margins expanded to 35.6%, 10 basis points above the same period last year; in addition to driving faster revenue growth, we also enhanced our productivity. Our efforts reduced SG&A expense by 10 basis points year-over-year to 20.1% of revenue, demonstrating that higher sales investments were more than offset by G&A optimization. Adjusted operating income margin also increased 40 basis points year-over-year to 17.6%. Our effective tax rate was 24.3%, compared with 24.1% a year earlier. Net income for the quarter reached $133 million, up 13% year-over-year. Diluted EPS rose to $0.74, or 16% year-over-year. During the first 9 months of the year, we returned nearly $0.25 billion. Adjusted diluted EPS on a non-GAAP basis came in at $0.85, up 12% compared with the same period a year earlier. And what's key is that in each quarter of this year, EPS growth has outpaced revenue growth. For the year to date, adjusted diluted EPS was up 10%, while revenue grew 6%. Operating cash flow rose 41% from a year ago, reaching $228 million, as higher revenue contributed to improved working capital; on the balance sheet, cash and cash equivalents stood at about $1 billion, an increase of $541 million versus 12 months ago, largely reflecting funds raised via a debt issuance in the prior quarter that we will deploy to retire a bond maturity at the end of this month. As a result, our net debt to trailing 12-month EBITDA ratio for the quarter remained at the low end of our range, at 0.8 times. DSOs were 90 days. Credit quality across the portfolio remained strong. Even as we continue to invest for long-term growth, we are returning a meaningful amount of capital to shareholders through dividends and buybacks. Over the first nine months of the year, we returned close to $250 million. That number comprises $75 million used to repurchase 1.9 million shares, along with $27 million in dividends paid during the third quarter. Our capital allocation discipline remains intact — no less than 30% of operating cash flow returned via buybacks and 20% via dividends — demonstrating our commitment to shareholder value creation while keeping flexibility for strategic growth investments. Attrition in the quarter was 25%, 100 basis points lower than the prior period. I'll turn now to guidance; given improved visibility for the remainder of the year, we are raising our outlook. For the full year, we are increasing our revenue guidance by about 150 basis points, to 6% at the midpoint. In addition, we are raising our projected growth and AOI margin by 10 basis points each, to 35.4% and 17.1%, respectively. Our adjusted diluted EPS target is also moving up by roughly $0.08, and is now expected to reach $3.24 at the midpoint. Full-year operating cash flow is being increased by $35 million, bringing our total forecast to $560 million. Let me now walk you through the full year and fourth quarter guidance in detail, starting with the next quarter. For the fourth quarter, we expect total revenue to land between $1.222 billion and $1.233 billion, with Data-Tech-AI and Digital Operations growth of 9% and 5.4%, respectively, at the midpoint of that range. Gross margin should be 35.6%, while adjusted operating income margin should be 17.6%. For the full year, we anticipate total revenue between $4.740 billion and $4.751 billion, as reported. That equates to 6% revenue growth at the midpoint of our range, up from the 4.5% we previously projected, driven by our strong results so far this year and continued momentum across our business. Looking ahead, we now expect Data-Tech-AI to be up 6.2% and Digital Operations to be up 5.9% for the entire year, measured at the midpoint of the range. Our adjusted diluted EPS guidance is going up by about $0.08 at the midpoint, bringing it to $3.23-$3.24. That amounts to an increase of roughly $0.26 versus the prior year, and we expect it to come primarily from adjusted operating income that's $0.19 higher, along with a $0.09 benefit related to diluted share count, partially offset by $0.02 from higher interest expense and anticipated tax effects. During the first 9 months of the year, we returned nearly $0.25 billion. To close, these results leave us encouraged, because we delivered profitable growth while also making significant investments for the future. With that, I'll turn it over to Krista.

Great. Thank you, Mike and BK. Cherie, we're ready to take questions.

Yes. This is Jared Levine, actually, filling in for Brian this evening. During the past 90 days, have short-cycle projects and advisory work shown any improvement? It was encouraging to see that robust DTA growth, but I'm just wondering whether that gave it a boost.

Yes. I believe, on the whole. I believe that's the case. Am I coming through clearly?

Yeah.

Alright. I'd say, on the whole, solid execution is what's powering this outcome. We keep observing a steady business climate, yet improved execution is what's allowing us to produce stronger results.

BK, allow me to jump in briefly on that point. When you talk about the Data-Tech-AI piece driving our growth, we keep delivering strongly on solutions led by advanced technologies, and those also bring in plenty of generative AI and AI-related efforts. So within Data-Tech-AI, our results for this quarter leave us quite satisfied.

All right, that's helpful. Could you also share where things stand with your efforts to grow revenue from partnerships? Which partners matter most to you right now, and which ones are expanding the quickest?

Sure. The best frame here is to picture the hyperscalers — whether that's AWS, Microsoft, or Google, as you'd expect. Those companies remain solid allies for us, along with names such as ServiceNow and Salesforce, plus highly specialized vertical-oriented offerings where we engage several of these partners. With every one of them, what sets us apart is that we layer our own differentiated products on top, and that can create a multiplying impact as we keep boosting how relevant we are and keep feeding in what we know about operational keystrokes, and our grasp of those keystrokes, into these industry-specific solutions for our customers.

Right, I’ll tack this on briefly. When you consider partnerships and the amount of revenue they bring into the business, that share remains fairly small relative to the industry overall; so what we’re putting into partnerships, including the ones BK mentioned a moment ago, is genuinely generating a great deal of revenue for us right now, and we’ll see how that develops down the line. Sorry, I interrupted you.

Great. Thank you.

Hi, Mike. This is Kate, filling in for Maggie. Congratulations on the strong results today. To start, which areas within the Data-Tech-AI business do you think are connecting best with clients at the moment, and are really fueling that faster growth?

Every piece of Data-Tech-AI matters, and I wouldn't single out AI or GenAI alone. Sure, that's definitely giving us a lift, but beyond that, no GenAI discussion can be whole without data, and after that, clearly it comes down to the foundational technology plus the many applications, our insight into that space, and the way those applications must keep advancing — so it's a broader, more integrated view across Data-Tech-AI, that's my first point. Second, across all of our Digital Operations, I'm not aware of a single big engagement, or even a mid-sized one, that we put in front of clients, carry out, and close without Data-Tech-AI. Within every one of those Digital Operations engagements, Data-Tech-AI is consistently a major or quite substantial element, and those two characteristics together are transforming how we compete in Data-Tech-AI.

All right. That’s helpful, BK. Building on that point, after the AI day you hosted, do you feel like customers are becoming somewhat more at ease with generative AI as time goes on?

Yes. I’d say we’re still in the early stages, but it’s obvious that adoption is increasing much more. There’s definitely been a shift away from mere curiosity or a proof of concept toward placing these solutions into production settings; and something that felt really encouraging to us was having many of our clients and operators from our clients up on the stage, discussing how this is creating meaningful value. That tends to carry more credibility, since other clients hear those accounts and see how that replicability can occur. So yes, it’s still progressing quite well. I’d still call it early days.

All right, that's excellent. Thanks so much, everyone. Nice work on the quarter.

Appreciate it.

Yeah. I appreciate you answering my question. If we look at Q4, it suggests roughly 6% growth in organic constant currency terms compared to last year. Would that be a reasonable baseline when considering what to expect for 2025, or are there any unusual items we ought to keep in mind going into next year?

I'll start things off and then pass it to you, BK. So regarding our business, right, I believe you're talking about the outlook for the fourth quarter as well as the entire year, which reflects that 6% and 7% expansion we anticipate for Q4 if you work backward from those figures. We'll give official guidance at our meeting three months from now. However, we still observe a steady purchasing climate that serves as our foundation. Once more, it was a solid year for us, so the comparison to grow from will be tougher; but once again, we feel quite confident about our position for Q4 and for the whole year as well.