Genpact Limited (G) Earnings Call Transcript & Summary

Citi Tech Conference. I'm Bryan Keane. I cover the IT services group here for Citi. And we're excited to have Genpact. And in particular, we have BK here, who is the CEO and long a time, how many years at Genpact?

Let's say, over 2 decades.

So a couple of decades, yes from the beginning. So BK, he knows Genpact from the beginning. So, what we'll do is I'll ask a series of kind of fireside chat questions, and then if there's any in the audience, just go ahead and feel free to raise your hand, and we'll get to it. So with that, BK, thanks for being here.

Thank you. Thank you for having me here, Bryan, I really appreciate that.

So let's start with the most obvious place to start, which is just the overall demand environment for IT services. And maybe you could talk a little bit about the last 12 to 18 months and kind of where we are today and maybe any kind of vision going forward for just demand for IT in general.

Sure. So look, I think maybe let's just a little bit go back to what are in many client conversations that I have been and what our clients seeing? What are they saying? And if I was to summarize Bryan, clients are talking a lot about value creation, not only about cost of productivity. They are not. Yes, they always talk about it, but they are talking more and more about value creation. Clients are talking a lot about AI. It's a change over the last 12 or 18 months. It wasn't there prior to 18 months or 24 months ago. And I think from AI standpoint, if I just go take a little bit of that particular leg of conversation, more and more about the conversation in technology or AI is, hey, how does it create more value? And that's where a little bit of our resonance is increasing because we've been known for process. We've been known for data. We've been known for domain specific functional areas or verticals or sectors like insurance or banking or consumer goods or manufacturing. And there is -- I often say, internally now externally as well that there's no artificial intelligence without process intelligence. And that has begun to resonate a lot with the clients. And clearly, as we see it in our pipeline, and we shared with investors about advanced technology solutions. We are seeing more and more of conversations in that area and how advanced technology solutions or how all of that particular conversation is enabling clients to be on the journey of artificial intelligence or the client conversation that is happening.

So the move now towards value creation, does that bring in a little more top line growth thinking? And is that a little more discretionary spend? Or how would you characterize that?

Yes. So I think when I talk about value creation, I think from a client standpoint, there is certainly a conversation on how they gain market share in their spaces, in their end markets. And therefore, conversation is a lot around -- top line conversation is a lot around value creation by generating more cash from them -- for them from a DSO, DPO standpoint. So there is a more conversation as to how AI or any of these new technologies, along with the process can enable better value for them. Obviously, cost is always stable stakes.

So Genpact, I think, has consistently outgrown the IT services peers over the past couple of years. When you look at some of the peer growth rates in IT services, versus the way you guys are growing, especially on the top line. What do you think are the differentiating factors that's caused Genpact to be kind of a leader in some of the growth rates?

So look, I think we have had a very strong foundation, strong foundation of the capabilities of process and data, strong foundation of operational discipline, a strong foundation of client centricity, a very strong culture. And a combination of that, along with this turn and recognition of how domain is enabling, the ROI of investments is helping us put great scores on the run board. And really thrilled and proud of the team as to how execution is stacking up as we progress. And it is, be it in the pipeline, be it in the conversion, really feel glad as to how team does technical.

Great. I wanted to go back to the Analyst Day in June where Genpact unveiled the new go-forward growth strategy, I think GenpactNext was a particular focus on the Advanced Technology Solutions, ATS that you mentioned in the previous question. And ATS now consists of data AI, digital technologies and the agentic solutions. My first question is just how did the growth of these businesses grow lower than the company growth rate for the first 3 quarters of fiscal year '24 and now is growing mid-teens at 17% in the second quarter. I guess that's a dramatic shift and I would have thought that those businesses would have still been growing at a higher rate.

Yes. And GenpactNext, we all collectively looked at our business and GenpactNext represents a very clear growth model, growth model, which is centered around our capabilities, our clients, our catalysts that enable these clients on a foundation of a strong culture. And the shift that you're talking about, Bryan, is clearly the shop shift that you saw is based on our recognition along with our clients as to what are their needs, where we are aggressively investing, which is advanced technology solutions. You named a few of the key capabilities in there on data and AI or digital solution where a lot of partner revenue happens or all of the advisory related to how to create value for our clients and emerging agentic solutions. So all combination of this is really shaping the business in a very significant way, almost building a new Genpact within Genpact. And again, core business services, including digital ops, continues to be a very strong foundation where we run mission-critical processes for our clients. So it stays at a very critical foundation as we are continuing to progress. So I really feel proud about how Advanced Technology Solutions, we actually reported last quarter that grew 17% year-on-year. And we have also mentioned for '26 and '27, it will grow at least 15%, and we feel really good about that.

I noticed that there was some moderating inside of data tech and AI since you're -- the Advanced Technology Solutions, it's accelerating. What is the call out there that might be moderating inside Data-Tech and AI?

I think overall, what is advanced technology solutions. It represents our highest value, highest revenue generating for FTE and a pretty strong margin profile. That is the bouquet of services that is getting classified and getting accelerated growth. All of -- a lot of core business services and some sit in Data-Tech-AI and decision support services are still FTE-based models, a lot of advanced technology solutions, 70% of it is non-FT-based model. And in core business services, be it decision support, some of the technology work or digital ops work that we do is still based on FTE-based model, which we are progressing towards a lot of as non-FTE, but they are mission-critical processes, and I think we are also rotating a number of that into advanced technologies.

Yes, I was going to ask about that because I think the percentage of revenue from ATS has increased a couple of points over the past year, but it's still a small component of the business. But at the same time, we've seen a small change in that mix of non-FTE and core business services, especially digital ops. So you basically see it offset in the total revenue mix. So with that said, over time, I think you're alluding to, we would expect the non-FTE to become a larger part of the mix as ATS also grows as a larger part of the mix. Is that -- would that hold true?

You're exactly right. We are nearly -- half of our business, actually, 46% of our business is non-FTE. And when we say non-FTE, it is fixed transaction-based and outcome-based in that order. And this proportion is increasing, but advanced technology solution already represents, Bryan 70% as non-FTE. And as that accelerates, you will see acceleration on non-FTE in the entire franchise.

Got it. So let's get to the big debate in IT services, which is how GenAI is going to impact the IT services industry. I know you heard when GenAI first came out, it was -- BPO was going to be the #1 market that was going to change and potentially be for the worse. You guys seem to have held that off pretty well. And then there's a lot of peers in IT services seem to be struggling and growing revenue. So there's kind of this cloud over the whole industry. Can you just talk about how you see the debate where it started with BPO as being a call out in particular? And then -- are there some areas inside of IT services that are definitely going to be impacted more negatively for deflationary revenue purposes from GenAI versus some other areas of strength that you guys might be showing?

So many questions in that.

Yes. Yes.

So look, all of this conversation is AI conversation is far more nuanced than just one paint brush. And as we've been consistently talking about because we are seeing that in our pipeline, actually, we've been talking about that for almost last 6, 8 quarters. That AI is a clear tailwind for us, and we have now started to demonstrate that a little bit more. And I spoke about -- first I'm just more responding to us, and then I can talk about the industry that there is no artificial intelligence without process intelligence. You have heard this term technology that a lot. And the conversations that I have always with clients is about the process debt, of the data debt, unless until that process debt and the data that is liquidated, you don't get ROI on the technology debt. You don't liquidate the technology debt. And that's what we are consistently seeing that in our pipeline and kind of aligns with our strategy. I mean if I recent -- I'm pretty sure all of us have seen that recent study that came out of MIT. It exactly is -- that came in maybe last month. And in June, we were exactly talking about it. It's just using different words. It's talking -- what we spoke about in our June Investor Day. Now they are going back to the -- and I think that's why you see our conversion. But if I go back to now specific things like coding, customer experience, these are not work that we do in codes, but those are the things that are possibly getting impacted a little bit more from an IT services standpoint, if you said just about the application coding or whichever way. But clearly, domain is shining. The last mile -- understanding the last mile understanding the nuances, understanding the flow of work, understanding the friction points, how the flow of work will evolve, you cannot identify if you do not understand the exceptions. And you don't need to just understand the exception, you need to be following a rigorous methodology and I'm referring to Lean, Six Sigma and many of the methodologies that we have followed over years, over decades, you need to be benchmarking them. You need to be figuring out how to standardize. And all of that domain expertise, all of the data expertise that process geekiness is shining as what you see as a differentiation from us.

So the original comments that came out about and you still hear it in the industry that BPO is in trouble because of GenAI because of all the cost savings and synergies, how come we haven't really seen it as a major negative in your guys' results? And is there some fear that in some BPO areas that there could be cannibalization of some of the revenue?

Look, I think, again, I'll go back to the mission-critical processes that we run. When I say mission-critical processes, we showcased many of them as real client examples on our Investor Day, Bryan, as an example, running supply chain for a large CPG company, running or doing closing of books of many large Fortune 500, 400 clients that we do for living. Some of these mission-critical work and which is less -- which is different than a customer experience or taking call. And at a broad level, you can just call everything a particular thing. How do you identify those mission-critical processes and build trust with clients? And that's where the domain expertise and how you run some of these processes is different versus more transaction-based processes, which are, hey, maybe taking calls or coding, which is not what we do.

And when you think of GenAI and the productivity gains, do you do you need to pass some of those savings along to the client as well and then maybe make it up with either other projects or more volume?

Yes. So I think again, we shared some of the experience on the Investor Day, where -- as we are identifying and I must say it's early days, we are seeing the volume, our scope or new logos increase our TAM and SAM, while -- and therefore, revenue accretion certainly our gross margin accretion and operating margin incretion. Now having said that, I think we have been pioneers in sharing productivity and giving productivity to clients, and we will continue to be holding that position. But again, this is a one science that Genpact has, where as we give more games to our clients, how do we continue to raise the revenue profile as well as margin profile for them.

Yes. I want to talk about partnerships. That growth has been a big part of the outperformance for Genpact. I guess the first question I always get to, is why wasn't Genpact doing partnerships earlier. It's not a brand-new company. So -- and it's obviously had a big impact. So how did that become such a focus and turn the growth engine for you guys?

So look, I think it's a fair question, and partnership was always part of Genpact. I think our approach changed. Earlier partnership was solving for our particular client problem. And we have now, for the last, let's say, a couple of years adopted approach that it is a catalyst of our growth. With all the innovation that is happening in the partner ecosystem, we are just bringing that as a key catalyst of our own growth also creating more value for clients, more value for partners, certainly more value for Genpact. And I think it is changing the approach, I won't say partners were not part of our ecosystem. They were part of our ecosystem for a long time. Our approach was to solve our particular client problem versus kind of scaling it up and using that as a catalyst for growth of both our top line.

And it's certainly -- you've seen it in the results it's had a delta change. Is there more room to grow there to keep that kind of that delta change growth for you guys, partnerships being a big avenue of growth going forward?

Yes. So partnership grew last quarter at 70%, 70, but on a small base. We are about 10% of our total revenues are now partner influence. And I think we are in very early innings of that. We'll see continued momentum in this direction.

And maybe get up to 20% or more of total revenue?

Yes. We are -- I think we are in very early innings of it, very early innings of it.