Genpact Limited (G) Earnings Call Transcript & Summary

Thanks, Howard. Hello everybody, and good afternoon as we kick off Genpact's Q1 2025 earnings conference call. Hopefully you've already looked at our earnings press release, which is up in the Investor Relations area of our site, genpact.com. Joining us today are B.K. Kalra, our President and CEO, along with Mike Weiner, Chief Financial Officer. B.K. will kick things off with a high-level view of the quarter, after which Mike will walk through our financial performance in more depth, and then we'll open it up for your questions. Just a note 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 shift over time. Actual results might differ materially because of a number of important risks and uncertainties, including the risk factors in our 10-K and 10-Q filings with the SEC. Also, on this call, we'll be discussing 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 be a substitute for our GAAP results. Lastly, the entirety of this call is being webcast from our Investor Relations website, and an audio replay and transcript will be up on our website in a few hours. With that, I'd like to hand it over to B.K.

Thank you, Krista. Hello, everyone, and good afternoon — appreciate you being here with us today. We kicked off 2025 carrying real momentum forward, building on the execution, innovation, and discipline that shaped how we performed in 2024. In Quarter one, total revenues came in at $1.215 billion, which represents 8.3% growth year-over-year in constant currency, and that landed above the top end of the guidance range we had provided. Gross margin and adjusted operating income margin likewise came in ahead of what we expected, and the driver was revenue that performed better than anticipated. Adjusted EPS was up 16% year-over-year, hitting $0.84, which is $0.04 higher than the top end of our range. The fact that we could beat expectations in Q1 even as the macro environment softened really demonstrates how strong our execution is and how highly annuitized our business has become. During Q1 we signed two large deals, and more than 80% of the revenue tied to them is accounted for as annuitized data-tech-AI revenue. That speaks to how well our pivot toward data, AI, and other advanced technologies is working. That said, several additional very large deals — ones weighted more heavily toward digital operations — got pushed out during the latter part of March and into April because of uncertainty related to supply chains and tariffs. So we're choosing a conservative posture: we're widening the range of our guidance and bringing total revenue down to account for slower cycle times. Worth noting is that these large deals remain very much active. A number of them are sole-sourced or sitting in the final stages of contracting, and we're being deliberate, meeting clients where they are. Our pipeline has never been higher, and we think our capacity to drive productivity, optimize costs, and accelerate transformation for clients through AI and other advanced technologies is a key differentiator — as is our ability to help clients rethink the way their global supply chains are configured and operated. Our focus is laser-sharp on execution and innovation, while we go deeper in client relationships. When we operate consistently for clients, we capture greater market share and build a stronger business. That is precisely what we plan to do right now as well. Disciplined execution is where everything begins. Here at Genpact, the 3 + 1 execution framework we brought in during 2024 has made our foundation stronger. It spans partnerships, data-tech-AI, simplification, and the +1 within our 3 + 1 framework — which is about establishing Genpact as our own best credential for AI-led transformation. Let me briefly take you through the key 3 + 1 highlights from the first quarter, beginning with partnerships. Partner-related revenues got off to a very strong start in 2024, rising 80% year-over-year and more than 10% quarter-over-quarter, and reached 10% of total revenues in Q1. We see partnerships as a significant ongoing opportunity for Genpact, since technology service and solution companies whose partner operations are mature typically bring in 20%-50% of revenues through partner channels. Second, on data-tech-AI, our emphasis on delivering innovative solutions is producing results, with revenue up 12% year-over-year on a constant currency basis in Q1. At this point, over 215 GenAI offerings are live in client production settings, whether already deployed or in the process of going live — that's up roughly 50% versus the prior quarter — and GenAI revenue has almost doubled compared with Q4. We're also noticing initial momentum behind our agentic solutions. Back in February of this year, we rolled out our first agentic offerings aimed at accounts payable, and they're driving solid productivity improvements for clients through less manual work and quicker processing. Although we do pass along AI-fueled productivity benefits to clients through fresh commercial structures, the extra revenue arrives via broader scope, higher volumes, or a mix of the two, which adds up to net revenue growth for Genpact. Engagement around our AI Gigafactory is strong too. It's already operating in manufacturing, retail, and financial services, and more vertical service offerings will arrive in Q2. Since the January launch, over 30 current clients have been brought on board as they seek to scale AI more widely throughout their operations. Third, our simplification work keeps producing results. For instance, we've substantially cut time to bill — the typical count of days needed to kick off client billing. That shows tighter alignment between our sales and delivery groups, plus real headway on making our internal processes simpler. Last, regarding client zero, Q1 brought meaningful strides. Let me cover two fronts. First, efficiencies driven by AI let us trim headcount in IT and HR, which safeguarded margins and built a leaner cost structure for the long term. Second, client zero is turning into a more and more powerful sales instrument. Clients are showing considerable interest in gaining access to Scout, the set of AI agents we built in-house and rolled out across our IT, HR, and finance teams. Now, going deeper into our guidance: our outlook from the start of the year presumed a macro backdrop that was steady compared with the second half of 2024. Since that point, the operating environment has shifted considerably. Because of that, we're proceeding with caution. Our revised guidance rests on three main pieces. First, we're broadening our range to capture heightened uncertainty in particular industries stemming from shifts in global trade. Second, despite a deal pipeline that's the largest we've ever had, we're trimming our digital operations and data-tech-AI outlook to account for the handful of sizable deals that slipped into the latter part of March and April. When big deals are delayed early in the year, digital operations feel it disproportionately, since in-year revenues lean more heavily on early signings; on data-tech-AI, even though momentum has been solidly built and we haven't seen any deceleration so far this year — with robust demand and conversion rates persisting through the end of April — we're bringing data-tech-AI numbers down out of an abundance of caution. As noted before, our pipeline for large deals sits at record levels, up over 80% year-over-year, which speaks to healthy long-term demand and a greater emphasis on cost takeout, something that frequently occurs amid economic downturns. Every one of these agreements is currently in motion, and we're making sure we connect with our customers right where they are, keeping up with their tempo amid this uncertain climate. And on top of that, our guidance for gross margin and AOI margin has not changed at all, since we remain strict about managing costs while we keep putting money into our most important priorities so that long-term growth speeds up, and EPS keeps rising at a quicker rate than revenue; to wrap up, we kicked off 2025 carrying real momentum, turning in a first quarter that shows how strong our business is, built on execution, innovation, and dependable client partnerships. Even though the conditions we operate in have shifted, our confidence in the strategy hasn't wavered. The pipeline is still robust, and we keep carrying out our plans with discipline, remaining closely in step with our customers and assisting them in thriving within today's fast-moving landscape. Our dedication to execution, innovation, and creating value over the long haul has never been more evident. We've proven we can speed up growth in revenues, margins, EPS, and cash flow, and we'll sustain that momentum by picking up market share as the operating environment gets better. So with that, I'll hand the call over to Mike.

Good afternoon, everyone, and thanks for being with us today. We're happy to share that the first quarter came in strong, with results exceeding what we had anticipated. That said, as B.K. noted, certain end markets are showing signs of slower decision-making, especially those feeling the effects of changing global trade conditions. Because of that, we're opting for a cautious stance and revising our outlook for the full year, which I'll detail for you in a moment. Now, looking at the quarter, adjusted EPS rose 16%, comfortably above the 7% growth in net revenue, which came to $1.215 billion. That makes it the sixth quarter in a row where adjusted EPS grew faster than revenue. Net revenue was up 8% in constant currency terms. Our pipeline improved versus the fourth quarter and hit a record level, with a solid balance across deal sizes. Win rates came in at 40% for the quarter, and sole-sourced deals made up roughly 54% of total bookings, compared with 35% a year earlier. We brought on 18 new logos and closed two significant new deals during the quarter. Just to clarify, large deals mean a total contract value of $50 million or more. Data-tech-AI services made up 48% of total revenue, or $582 million, fueled by demand for our tech services and data modernization. That represented an 11% gain over the prior year, and 12% in constant currency, beating the top end of our guidance. Digital operations revenue reached $633 million, rising 4% year-over-year, or 5% in constant currency. That result matched what we had expected. Digital operations made up 52% of total revenue. Revenue from priority accounts rose about 6% versus the prior year and accounted for 62% of the total. Growth was even across our segments, led by high tech and manufacturing at 11%, then financial services at 7%, and consumer and healthcare at 4%. Outcome and consumption-based deals, leaving out fixed-fee contracts, made up 22% of first-quarter revenue, compared with 19% a year earlier. Now on profitability, gross margin expanded 30 bps year-over-year to 35.3%, thanks to operating leverage and ongoing cost discipline. SG&A expenses came to 19.8% of revenue, down from 20.8% a year earlier; that reflects both revenue growth and operating leverage, even while we keep investing strategically throughout the business. Adjusted operating income was $210 million, up from $182 million, while adjusted operating income margin expanded 120 basis points to 17.3%. Our effective tax rate for the first quarter was 25.3%. That's against 25.2% a year earlier. Net income for the quarter was $131 million. Diluted EPS was $0.73, and adjusted diluted EPS reached $0.84, a notable 16% increase annually. Operating cash flow improved to $40 million, compared with a $26 million outflow a year earlier. Now on our balance sheet and capital allocation, we closed the first quarter with a solid balance sheet, shown by $562 million in cash and cash equivalents, up from $478 million a year ago. Also, our days sales outstanding came in at 88 days, which is a decrease of three days compared with the previous year. We gave back $93 million to shareholders during the first quarter, consisting of $63 million used for share repurchases along with $30 million paid out as dividends. Across every deal cohort, our pipeline has reached record highs and keeps advancing favorably. That said, during the latter part of the first quarter and the beginning of the second quarter, we noticed growing caution in how buyers are behaving, especially within end markets that are exposed to global trade. Several sizable deals that were supposed to close during the first quarter have slipped; that slippage has shifted the timing of revenue into later quarters, and the effect shows up more clearly in digital operations. Because of these developments, we are adopting a more cautious stance for our full-year guidance, and specifically: first, we are broadening the range to reflect a shifting operating environment relative to 2024, with uncertainty rising noticeably. Second, we are bringing down our expectations for digital operations to reflect the postponed decision-making that is affecting when revenue lands in upcoming quarters. In addition, we are slightly trimming our expectations for DTAI, even though momentum remained solid through April. This revision reflects prudence given the conditions we currently face. Third, we are holding firm on our outlook for gross margin and adjusted operating income margin. To be clear, we have not observed any deals being canceled, deleted, or cannibalized. For the entire year on an as-reported basis, we now anticipate net revenue landing between $4.862 billion and $5.005 billion, which equals growth of 2%-5%, respectively, or 3.5% at the midpoint. At that midpoint, revenue growth for data-tech-AI and digital operations is projected at roughly 5.1% and 2%, respectively. Based on that estimated range, our adjusted diluted EPS should come in between $3.41 and $3.52, which represents 5.7% growth year-over-year at the midpoint, and once again is projected to outpace revenue growth for the fifth consecutive year. To give a bit more detail, hitting the midpoint of our full-year revenue guidance of 3.5% requires us to generate $166 million of growth. Out of that amount, $84 million came through in the first quarter, and we estimate $45 million for the second quarter. That leaves $37 million that we would need to deliver in the second half of the year in order to reach the 3.5% revenue growth target for the year. On a constant currency basis, we expect net revenue growth between 1.9% and 4.9%, which works out to 3.4% at the midpoint, translating to revenue growth of approximately 5.1% and 1.9% for data-tech-AI and digital operations, respectively. Turning to the next item, full-year gross margin stays at 36%, which is 50 bps higher year-over-year, backed by our operating leverage. Adjusted operating income margin stays at 17.3%, up 20 bps versus the prior year. Operating cash flow should reach roughly $610 million. Regarding capital allocation, we keep aiming to return no less than 50% of cash flow to investors via a mix of share repurchases and dividends, while preserving flexibility for strategic investments. Now looking at the second quarter, on an as-reported basis, we expect net revenue between $1.210 billion and $1.233 billion, which is growth of 2.8%-4.8%, or 3.8% at the midpoint. That works out to roughly 7.6% growth in data-tech-AI revenue and about 0.6% growth in digital operations revenue. When you strip out currency effects, our expectation for net revenue growth sits between 2.5% and 4.5%, which puts us at 3.5% at the midpoint — and that means data-tech-AI revenue growth of approximately 7.4% alongside digital operations revenue growth of approximately 0.1%. On gross margin, we're looking at 35.5%, and adjusted operating income margin should come in at 17.3%, which is a 40 bp expansion versus the prior period. And finally, our guidance for adjusted diluted EPS is $0.84-$0.86, roughly an 8% increase at the midpoint versus last year. With all that said, I'll hand the call over to Krista.

Alright, thanks, Mike. Howard, I believe we're all set to move on and open things up for questions.

Hey everyone, thanks for taking my question. I'd like to begin with growth and the updated guidance, especially within digital ops. The size of the shift over such a brief window caught us off guard. Could you walk us through the various components at play, and provide a bit more detail regarding those agreements that have been postponed — specifically, what number are we discussing? When we consider it, as the year progresses, they've slipped. Do you need them to be executed at some stage in the near future in order to justify the sequential improvement implied for the back half? Or have you essentially taken them out entirely, and you're now steering toward modest expansion off the current business base?

Hi Brian, Mike here. I'll kick things off, and perhaps B.K. can jump in shortly. You're right to say that for digital operations, essentially all—or at least the overwhelming bulk—of that decline comes from these big deals slipping. As a quick reminder, when we talk about big deals, we mean anything above $50 million, and those have been delayed. We're far beyond that threshold; the hit was significant, especially for the business in the back half of the year, correct? Our guidance doesn't assume those deals close within any reasonable timeframe. And again, something signed late in Q4 or during Q4 simply won't deliver the material revenue lift it would have under the assumptions we made back in Q1, right? From that angle, we feel quite confident about the outlook and our position; hopefully we can get those deals closed as quickly as possible. Once more, not one has been called off. They've merely slipped. What's somewhat intriguing here is when you dig into what these deals actually are, and who's involved, right? It's curious. Every one of them sits in manufacturing, consumer goods, or high-tech hardware, right? Go even deeper and examine the services supporting those, and a good number involved supply chain-related work that we provide, right? That connects directly to the macro picture we're observing—heightened uncertainty tied to tariff-affected industries, which sadly is hitting us disproportionately this quarter. I'm not sure whether B.K. wants to build on that.

A couple of additional items. Brian, appreciate it. Regarding every one of those agreements Mike mentioned, there are only a handful of them, Brian, and discussions around them remain quite lively. Several of them, in fact, are one-on-one negotiations. Because our customers are simultaneously grappling with many different challenges, things are moving slower than we had anticipated, and that's what the guidance captures. I'd also like to highlight that the handful of sizable contracts we closed during Q1, which we've just reported, contained a bigger share of data-tech-AI, and that speaks to how robust the solutions we've built are. Looking at the guidance at a detailed level, it leans toward backing data-tech-AI. That said, I believe we should focus more heavily on overall revenue, since our go-to-market approaches address customer needs at scale. DO, digital ops, and data tech AI serve more as a description of the capabilities we apply. We're quite confident about hitting the range for total revenues, which includes data tech AI and DO.

All right, let me make sure I've got this straight, and I'll build on what you just asked. Those transactions you're still waiting to close — is there any scenario in which they might fall through? Have they progressed far enough along, and since they're clearly putting forward certain efficiency initiatives, do you not perceive a danger that those could wind up being called off?

What I'd say is that we see no danger here, since what's really going on is that a greater quantity of discussions is taking place. Naturally, we had thought they would have put pen to paper by now. Quite a few people from our side are currently sitting with these two big firms. Those firms understand that these initiatives — these sizable contracts — carry a lot of significance for them. The possibility of either one being scrapped looks nonexistent to me. In fact, our total pipeline for big contracts stands 80% above YOY, and that kind of figure hasn't shown up for quite some time; overall, we're feeling very positive about demand.

This is basically a timing-related issue for us.

All right. All right. My apologies — let me just address the margin point briefly. When we consider it, you're reaffirming the guidance for both gross margin and operating margin. That does suggest a fairly significant increase in gross margin during the second half. Could you just assist us in getting some reassurance regarding what's behind that increase?

Okay, from that angle it does feel somewhat backwards. To start with, we beat our own projections in Q1, on both gross margin and AOI, and that beat is going to roll through the rest of the year, correct? In our plus one and operational operations, we keep performing extremely well. What's fascinating is that without those big contracts landing — and big contracts usually land early; they run multiple years, five to seven — they arrive carrying a gross margin below average. When some of those contracts don't show up, or show up later than we had expected, that keeps propping up the gross margin we're guiding to.

Okay. Makes sense. Thank you.

Hello, and thanks. I'd like to ask more about those big contracts that got pushed back. With the situation shifting the way it is, is there anything suggesting they're coming under pressure on price?

No. Yeah. Okay. You go right ahead.

Nope, that's not it — my apologies. The two of us agreed that this is definitely not the case. Honestly, it isn't tied to how the deal is structured, nor to how the deal is scoped in any manner whatsoever, nor to any competitive strain surrounding it. It is purely a matter of timing: we expected these deals to close early in the year, correct? We continue to expect them to close in the later portion of the year. Sadly, given the way revenue cadence works here, it is hitting our business growth rates for the year in a disproportionate way. In particular, that applies to digital operations.

Yes. Yes, that's precisely correct; and Maggie, closing these deals isn't necessary for us to hit the range in our guidance. Clearly, we've grown more conservative given the macro environment we've been in since this quarter started. No pricing pressure is showing up, and in fact our solutions are gaining stronger traction.