Genpact Limited (NYSE:G) Q1 2024 Earnings Call Transcript

Genpact Limited (NYSE:G) Q1 2024 Earnings Call Transcript May 9, 2024

Genpact Limited misses on earnings expectations. Reported EPS is $0.643 EPS, expectations were $0.69. Genpact Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen. And welcome to the 2024 First Quarter Genpact Limited Earnings Conference Call. My name is Michelle, and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. As a reminder, this call is being recorded for replay purposes. The replay of the call will be archived and made available on the IR section of Genpact’s website. I would now like to turn the call over to Krista Bessinger, Head of Investor Relations at Genpact. Please proceed.

Krista Bessinger: Thank you, Michelle. Hi, everyone, and welcome to Genpact's Q1 2024 earnings conference call. We hope you’ve had a chance to read our earnings press release posted on the Investor relation section of our website, genpact.com. Today we have with us BK Kalra, President and CEO; and Mike Weiner, Chief Financial Officer. BK will start with a high level overview of our quarter, then, Mike will cover our financial performance in greater detail before we take your questions. Please also note that during this call, we will make forward-looking statements, including statements about our business outlook, strategies and long-term goals. These comments are based on our plans, predictions and expectations as of today, which may change over time.

Our actual results could differ materially due to a number of important risks and uncertainties, including the risk factors in our 10-K and our 10-Q filings with the SEC. Also during this call, we will discuss certain non-GAAP financial measures. We have reconciled those to the most directly comparable GAAP financial measures in our earnings press release. These non-GAAP measures are not intended to be a substitute for our GAAP results. And finally, this call in its entirety is being webcast from our Investor Relations website. An audio replay and transcript will be available on our website in a few hours. And with that, let me turn the call over to BK.

BK Kalra: Thank you, Krista. Hello, everyone, and thank you for joining us today. I'll start with a brief overview of Q1 performance, our updated outlook and then hand the call over to Mike to take you through our financial performance in more detail. Q1 was a solid start to the year with total revenues of $1.13 billion up 4% year-over-year. This was above the high end of our guidance range driven by early signs of improving execution and better-than-expected performance across both digital operations and Data-Tech-AI. Gross margin of 35% also exceeded expectations reflecting operational efficiencies and better-than-expected revenue performance. Adjusted operating income margin was 16.1% in line with guidance reflecting investments in our top priorities.

In Q1 as most of you know we established our 3+1 Execution Framework and it is driving promising early results. 3+ 1 consists of three client-facing initiatives partnerships Data-Tech-AI and simplification and one internal facing initiative Client Zero. This is about establishing Genpact as our own best credential for AI-led transformation. Let me walk you through each one of them. First on partnerships. In first quarter we significantly strengthened our partnership team and achieved Tier 1 partnership status the highest level with AWS Salesforce and Adobe. We have also joined forces with Microsoft. By combining Genpact's leadership in finance and accounting with Azure open AI technology we are transforming finance organizations to best-in-class leveraging data and AI solutions.

Second on Data-Tech-AI, we are aggressively driving go-to-market engagement across data engineering, analytics and AI with specific focus on gen AI. This drove a significant increase in client conversations in Q1 and contributed to better-than-expected Data-Tech-AI revenue. We are working with clients to integrate gen AI into their core business processes. gen AI is also serving as a driver of foundational work, as we help enterprises build a broader data and system architecture that is a prerequisite to succeed in the AI world. Genpact plays a critical role. We've bridged the gap between off-the-shelf solutions, delivered by platform providers, bringing domain understanding at a key stroke level. This helps clients install an AI-first end-to-end business process, with underlying data and systems in their production environment.

Clients choose us for five key reasons: one, deep domain expertise; two, end-to-end capabilities from strategy and design all the way to delivery and transformation; three, strong partner ecosystem; four, client centricity; and five, full stack data technology and AI stack including our prebuilt accelerator the Cora platform. Let me give you a few examples. Novva Data Center a provider of state-of-the-art data center is using our AI solution to improve the functionality, integration and operational efficiency of the Boston Dynamics Spot robots, using natural language processing hardware integration with OpenAI interfaces these robots have been given features such as AI powered anomaly detection, facial recognition, license plate monitoring and the ability to have human-like interaction.

These features will allow their robots to further enhance security capabilities and monitor critical infrastructure. Or in case of Volkswagen Financial Services, we have integrated gen AI into the production system. This enables agents to manage servicing requests with significant efficiency. The gen AI translation skills are already launched across three countries in Europe and rapidly expanding. This solution has significantly enhanced agent's ability to manage account changes, loan disbursements, addressing customer complaints, while delivering more personalized experience and improved customer satisfaction. We are also building responsible AI centers of excellence for clients. And this is a significant focus for us. I'll give you a couple of examples.

The finance organization of a major IT company wanted to automate a range of operational finance activities. We run a portion of their finance and accounting and other operational processes. Taking a page from our own best practices, we established a responsible AI center of excellence for them, bringing functional domain debt, supplementing it with data engineering capabilities and enabling AI deployment. It is helping them put various use cases in production, at speed. We also established an AI center of excellence for a major life insurance company. For this client, we are building a platform that uses advanced AI techniques that stitches together historical information, product specifications and future projections to enable a range of decisions.

The first use case will drive the end-to-end automation of pricing and renewal decisions using AI, with humans in the loop. These are just a few of the examples. While it is still very early days, we are seeing increased momentum in gen AI -related revenues and bookings and believe we are in a strong position to partner with enterprises to drive competitive advantage moving forward. Third, on simplification as part of 3+1. We simplified our sales and go-to-market leadership structure in Q1, moving from highly matrix organization to 12 units, which mirrors our client organization. This is strengthening execution and accountability with standardized scorecards, internal management reporting, sales and post-sales activity, all supported by a new governance structure that tracks key performance indicator at the unit level.

We are now in the process of simplifying a number of additional key elements that will allow us to scale more efficiently. And finally, the plus one in our '3+1 Execution Framework,' is Client Zero. This is the work we are doing to establish Genpact as our own best credential for AI-led transformation. We have identified and are moving forward with more than 15 internal use cases across IT, finance, HR, legal, sales and marketing to drive growth, improve client employee satisfaction, reduce costs and improve cash flow all by leveraging the same AI tools we use on behalf of our clients. It's early days here as well. But we are excited by the progress we are making. Now turning to our guidance. Mike will go through the details but I wanted to cover a few important points upfront.

As I mentioned earlier, we are seeing early signs of improving execution with expected results for quarter one. As a result, we are increasing our full year revenue guidance by 50 basis points to 2.5% to 3.5% growth on as-reported basis, up from 2% to 3% previously. Our outlook does not assume any improvement in the macro buying environment. We are simply flowing through the revenue upside from Q1 of approximately $20 million at midpoint of the range through the full year. We are also increasing our gross margin outlook for the full year by 30 basis points to 35.3%, up from 35% previously, reflecting outperformance in Q1. Our AOI margin outlook remains unchanged at 17% for the full year, as we continue to invest in our top priorities, partnerships and GenAI to drive accelerating long-term growth.

In closing, Q1 was a solid start to the year, with revenue and gross margin above the high end of our guidance range reflecting early signs of improving execution. We are excited by the progress we are making and believe our 3+1 Execution Framework will be team ingredient in putting us on path to reach our full potential. With that let me turn the call over to Mike.

Mike Weiner: Thank you, BK good afternoon, everyone. Today I'll review our first quarter results and then provide you with thoughts on our second quarter and full year 2024 outlook. Beginning with our first quarter results. While we continue to experience pressure in our discretionary short-cycle work, demand for our long-term annuity-based services continues to be strong. Specifically, our pipeline achieved record levels fueled by strong inflows. We booked three large deals in the quarter. While this was lower than the number in the first quarter of last year our overall total bookings level was near the level we booked in the same period last year. We also booked 30 new logos in the quarter with an average TCV of approximately $4.5 million compared to 17 new logos with an average TCV of approximately $5.6 million last year.

Sole sourced deals represented approximately 40% of bookings and win rates remain elevated at 62%. Total revenue of $1.13 billion was up 4% year-over-year both on an as-reported and constant currency basis. This performance was above our expectation reflecting early signs of improved execution and better-than-expected performance across digital operations Data-Tech and AI and all segments. As noted in our press release, we made an enhancement to our Data Tech and AI and digital operations revenue breakout for more accurate to more a reflect revenue from certain solutions. We have also provided historical comparison results in our press release and in our financial fact sheet which were posted prior to the call. The results I will provide for Data-Tech and AI and digital operations below we'll leverage the prior methodology so that you can accurately compare the results to the guide we provided on our year end call..

Data-Tech and AI revenue which represents 44% of total revenue increased 3% year-over-year on an as reported and constant currency basis. Performance was largely driven by service lines in finance and accounting, supply chain and risk. Digital operations revenue which represents 56% of total revenue increased 4% year-over-year on an as reported and 5% on a constant currency basis. primarily reflecting deal ramps related to last year's large booking wins. Outcome and consumption-based models expanded to approximately 19% of first quarter revenue compared to 13% of total revenue in the first quarter last year. Revenue from priority accounts grew 4% year-over-year and remained at 63% of global revenue with 43% of first quarter bookings from priority accounts.

From a segment perspective, financial services increased 3% year-over-year primarily driven by the ramp of large deals and growth in financial crimes partially offset by continued pressure around client discretionary tax spend. Consumer and Health care increased 5% year-over-year due to large deal ramps and growth in supply chain engagements. High Tech and manufacturing increased 4% year-over-year primarily driven by a ramp of new logos in both digital operations and Data-Tech and AI moderately offset by the partial descoping of a high-tech priority client noted last year. Adjusted operating income margin was 16.1% down 30 basis points year-over-year primarily due to increased investments to support growth. Gross margin for the first quarter was 35% up 100 basis points year-over-year primarily driven by less upfront large deal investment and lower severance costs.

As a reminder, severance costs were elevated last year from workforce reductions in our short-cycled advisory work. SG&A as a percentage of revenue increased 90 basis points year-over-year to 20.8%. The year-over-year increase was largely due to higher investments to support growth that I mentioned earlier. Note, we also had lower stock comp expense which does not impact our adjusted operating income margin. Our effective tax rate was 25.2% compared to 23.4% during the same period last year primarily driven by lower tax deductions related to stock-based compensation and the implementation of Pillar 2 global minimum tax rates. GAAP net income was $117 million up 10% year-over-year. GAAP diluted EPS equivalent of $0.64 up 12% year-over-year. Adjusted diluted EPS of $0.73 up 7% year-over-year and outpaced revenue growth for the quarter.

The increase was primarily driven by the impact of lower outstanding share count of $0.02, higher adjusted operating income of $0.01, and FX remeasurement gain compared to the same period last year of $0.01, and lower taxes of $0.01. Compared to the first quarter of 2023, we grew the number of relationships with annual revenue greater than $5 million from $175 million to $187 million. Additionally, clients with annual revenue greater than $25 million expanded from 36 to 40 and clients with approximately $100 million of revenue remained at 5. Turning to cash flow and balance sheet. During the quarter, we utilized $26 million of cash from operations compared to utilizing $34 million during the same period last year. Days sales outstanding expanded to 91 days from 83 days in 2023 due to collection delays and higher payment terms in new accounts.

The overall credit quality of our portfolio continues to be very strong. Cash and cash equivalents totaled 700 -- excuse me $478 million compared to $584 million at the end of the fourth quarter of 2023, reflecting the return of $57 million to shareholders at an annual incentive compensation payout that occurred in the first quarter. At the end of the quarter our net debt-to-EBITDA ratio for the prior four quarters was 1.1 times in line with our preferred one to 2 times range. With undrawn debt capacity and our existing cash balances, we have ample flexibility to pursue growth opportunities and execute on our capital allocation strategy. During the quarter, we repurchased approximately 865,000 shares at a total cost of $30 million and at a weighted average share price of $34.67 per share.

Capital expenditures as a percentage of revenue equated to approximately 1.8% in line with our expectations. We remain committed to returning capital to shareholders through a regular cadence of buybacks and quarterly dividends. We continue to plan to pay out approximately 50% of our operating cash flow to shareholders during the year including a minimum of 30% of our cash flow from operations for share repurchases. Before I provide an update on our outlook for some quick stats on attrition. Our attrition rate for the quarter was 23% in line with fourth quarter levels and the low end of our historic range. Adjusted for involuntary attrition and employees with less than three months of service, our attrition was 17% during the quarter. Finally, let me update you on our full year 2024 outlook and our second quarter guidance.

Genpact's outlook for full year 2024 is as follows; total revenue in the range of $4.59 billion to $4.63 billion, represents year-over-year growth of approximately 2.5% to 3.5% as reported, up from prior guidance of 2% to 3%. This includes digital operations revenue growth of approximately 3.6% year-over-year and Data Tech and AI revenue growth of approximately 2.3% year-over-year at the midpoint of the range as reported compared to the previous midpoint of 3.1% and 1.7% respectively on an updated classification basis. Full year gross margin of approximately 35%, full year adjusted income from operations margin of approximately 17%, and full year adjusted EPS in the range of $3.01 to $3.04. This represents a year-over-year growth of 1% to 2% and includes higher adjusted operating income of $0.09, positive impact related to lower share count of $0.06, partially offset by the impact of higher expected tax rate of $0.04, higher interest expense of $0.04, and the negative year-over-year FX impact of $0.02 due to the $4 million remeasurement gain recorded last year.

As we've communicated in the past, to the extent, we're able to deliver revenue upside over the course of the year, our buys will be to reinvest a portion of that upside back in the business to drive future revenue growth. Our 2024 effective tax rate continues to be in the expected of 24.5% compared to 23.4% reported for full year 2023. The increase reflects the implementation of new Pillar two global mineral and tax rates, as well as lower year-over-year tax benefits related to stock-based compensation. We continue to expect cash flow from operations to be approximately $500 million. Capital expenditures as a percentage of revenue continues to be expected to be approximately 1.5% to 2% in 2024, which includes investments related to internal system upgrades.

Our outlook for the second quarter 2024 is as follows. Total revenue in the range of $1.143 billion to $1.148 billion, representing a year-over-year growth of approximately 3.4% to 3.8% as reported. This includes digital operations revenue growth of approximately 5.4% year-over-year and Data-Tech-AI revenue growth of 1.6% year-over-year at the midpoint of Marinas reported. Gross margin is expected to be approximately 34.8%, down 20 basis points sequentially and the alignment of our -- due to the alignment of our annual compensation refresh of employees in 2Q. Adjusted operating income margin is expected to be 16.5%. With that let me turn the call back over to Krista.

Krista Bessinger: Great. Thank you, Mike. We would now like to open the call for questions. Michelle, could you please give the instructions?

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