Genpact Limited (NYSE:G) Q4 2023 Earnings Call Transcript February 8, 2024
Genpact Limited beats earnings expectations. Reported EPS is $0.82, expectations were $0.74. G 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 2023 Fourth 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 Roger Sachs, Vice President of Investor Relations at Genpact. Please proceed.
Roger Sachs: Thank you, Michelle, and good afternoon, everybody. And welcome to Genpact’s fourth quarter and full year 2023 earnings conference call. We hope you’ve had a chance to read our earnings press release posted on the IR section of our website, genpact.com. Today we have with us Tiger Tyagarajan, our outgoing President and CEO; BK Kalra, our incoming President and CEO; and Mike Weiner, our Chief Financial Officer. Tiger will start with a high level overview of our performance for the full year 2023. BK will then speak to our strategic priorities and outlook. And finally, Mike will cover our financial performance and outlook in greater detail before opening the floor to 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. And 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 Tiger.
Tiger Tyagarajan: And I was on mute. Thank you, Roger. Good evening, everyone, and thank you for joining us today for our fourth quarter and full year 2023 earnings call. I will start with a brief overview of our 2023 financial results and then hand the call over to our incoming CEO, BK, to take you through our strategic priorities and outlook for 2024. For the full year 2023, we delivered total revenue of $4.48 billion, up 2% year-over-year and 3% on a constant currency basis, driven by Data Tech AI services revenue of $1.99 billion, up 2% on both an as-reported and constant currency basis, and Digital Operations services revenue of $2.48 billion, up 3% year-over-year as-reported or 4% on a constant currency basis. Gross margins of 35.1%, which was flat year-over-year, income from operations margin of 14.1%, up 260 basis points year-over-year and adjusted operating income margin of 17%, up 50 basis points year-over-year.
And diluted earnings per share of $3.41, up 81% year-over-year and adjusted diluted earnings per share of $2.98, up 9% year-over-year. Bookings for the full year reached $4.9 billion, up a strong 26% on a year-over-year basis, as we signed a record 14 new large deals, each with total contract value greater than $50 million. Inflows remained healthy, resulting in a high-quality pipeline that reached near-record levels as we exited the year. Win rates increased to 60% versus 51% in the prior year and we added 91 new logos. Sole sourced deals represented 40% of bookings below our typical 50% level, reflecting the much higher number of large deal wins, which tend to be more competitive. Throughout the year, we made progress on our key initiatives for 2023.
First, revenue from priority accounts grew 4% year-over-year and expanded to 63% of total revenue. Second, we strengthened and expanded relationships with key cloud technology partners to co-innovate and develop joint IP solutions. Third, we opened and scaled three new operating centers in Tier 3 cities in India. Fourth, we continued to drive non-FTE commercial models, with non-FTE deals reaching 20% of total revenue in the fourth quarter and 17% of total revenue for the full year. Fifth, investments in our large deal team generated the strong bookings and pipeline that I described earlier. And finally, for the fourth consecutive year, our global workforce completed approximately 10 million training hours on Genome, our on-demand learning platform.
Finally, before I turn the call over to BK, I want to take a moment to reflect on Genpact’s major accomplishments during these last 12 years. During that time, we grew total revenue at a compounded annual growth rate of 9%, driven by a number of important strategic pivots, including our decision to double down on a chosen set of industry verticals, services and geographic markets; our decision to extend beyond business process management with significant investments in Data Tech and AI; and finally, our move over the last five years to the middle and front office with our emerging service lines in supply chain, risk and sales and commercial services. All of our success would not be possible without the tireless efforts of the Genpact team.
Their constant passion and focus on driving client outcomes and value and their insatiable curiosity and desire to learn, has become our cultural foundation and has been a source of endless inspiration for me. It is my daily interaction with them that I’ll miss the most as I transition to the next phase of my journey. With regard to BK, our Board could not have picked a better person to be Genpact’s next CEO. His deep understanding of our business, the trust and relationships he has built with our clients, and his strategic leadership with a strong bias for technology and AI has been a key driver of our success, driving the significant expansion of our consumer healthcare and financial services verticals that collectively generated $2.8 billion in revenue in 2023.
I am very excited to see him lead this next evolution of Genpact. And finally, I want to sincerely thank our Board for being such great stewards of the company through multiple cycles and on so many occasions, being my and my team’s guide and mentor. With that, let me turn the call over to BK.
BK Kalra: Thank you, Tiger, and good afternoon, everyone. Let me start by saying that I am excited and humbled to lead our 125,000 talented people around the world that make up Genpact. I have seen firsthand the incredible dedication of the Genpact team and the significant value we add to our clients, designing, implementing and running mission-critical operations for some of the world’s biggest brands. In preparation for stepping into the CEO role, I have been carefully assessing our senior leadership team and the strategic priorities we must pursue to put us on path towards accelerating growth. As I reflect on 2023, there is no doubt that a macroeconomic environment challenges us and the industry as a whole. I am very proud of the team and the long-term accomplishments outlined a moment ago.
But I must also say that we must improve our execution to reach our full potential. Digital Operations and Data Tech AI together represent a $750 billion market, growing at high single-digit growth rate, well above the 3% constant currency growth we delivered in 2023. My number one goal as CEO is to make sure that we realize our full potential. As a longstanding member of the Genpact team, I have a clear point of view about where we can improve execution. We need to sharpen our focus and drive simplification to increase speed and accountability throughout the organization. In 2024, we will be laser-focused on changing the conversation we are having with clients by bringing more data and technology to bear to deliver more holistic and growth-oriented solutions.
We will also drive simplification to increase speed and accountability. Let me give you a couple examples. First, we have simplified our sales and go-to-market leadership structure, moving from highly matrixed organization to 12-unit leaders that mirror our client organization and roll it into three vertical segments we report externally. Second, we have unified Data Tech, and AI under one leader, which matches how clients operate and buy. Both of these changes will increase speed and accountability, driving improved sales execution in 2024, particularly in Data Tech AI. In my first 100 days, I am prioritizing, A, spending more time with clients as we partner with them to shape the future, theirs and ours, by leveraging Data Technology and AI first principles.
I have already met a number of our clients since the announcement and I am committed to meeting with 100-plus clients in my first 100 days to further inform our strategy. B, continuing to build our senior leadership team. We have made a number of important additions to our leadership team in the last few months across operations, finance, marketing and I am committed to continually identify and fill gaps quickly. Reaching our full potential will require maximizing our talent and driving greater accountability across the organization. And C, strengthening our partner relationships to deliver holistic solutions. I believe we are in a unique position to further leverage our domain and industry expertise, access to Data and CXO relationships to deliver improved performance for clients and thereby improve revenue growth and profitability for Genpact.
I want to be clear that doing business as usual, just doing what we have done in the past, only slightly better, is not acceptable. That said, improving execution will not happen overnight. It will take time and investment. In 2024, we plan to invest in two key areas, partnerships and AI first. I mentioned partnership a moment ago and we will continue to invest in deepening our relationships with various platform providers, broad and specialized, as well as with enterprise application and cloud workflow technology partners. Second, we are moving quickly to embed AI in all our solutions that we bring to market and investing to make our internal operations AI first as well. For the first time, we have appointed a chief technology and transformation officer who will lead the charge on embedding AI in our internal operations.
With regards to gen AI, we continue to make rapid progress. Last year, we had more than 3,000 client conversations, more than 80,000 Genpact team members enrolled in AI training programs, the launch of our first AI innovation center in London, and more than 50 gen AI use cases in testing and 30 gen AI solutions in production environment with clients, either deployed or going live. Turning now to our 2024 outlook, and Mike will go through more details, but I would like to provide a high level overview up front. First on revenue, 2024 will be a year of building as we strengthen our foundation for future growth. Therefore, we are setting our revenue guidance for the full year at 2% to 3% year-over-year growth on as-reported basis. On profitability, we expect to keep gross margin and AOI margins roughly flat in 2024 at 35% and 17%, respectively.
With regard to any revenue upside we are able to achieve over the course of the year, our bias will be to reinvest a portion of the upside back into the business to drive future revenue growth. Before I hand it over to Mike, I want to say a few words about Tiger. We have been exceptionally fortunate to have Tiger lead us for the past 12 years. He shaped the company to be one of the world’s leaders in domains like finance and accounting, procurement and supply chain to name a few. His commitment to clients is unparalleled and will always act as a guide for all of us at Genpact. And his focus on building the capability of our team at scale through platforms like Genome is inspiring. On behalf of all of Genpact, I do want to thank Tiger for his enormous dedication and leadership.
Finally, I want to conclude by saying that I am confident that we will achieve our full potential delivering the revenue growth and profitability we believe we are capable of. That said, I also want you to know that I understand that actions speak louder than words, and on that point, I look forward to providing more details and progress reports to you in the coming quarters. With that, let me turn the call over to Mike.
Mike Weiner: Thanks, BK. I want to congratulate you on being named Genpact’s new CEO. Having worked closely with you over the last few years, I’ve seen firsthand your strong focus on execution, financial acumen and the ability to energize teams. I believe we are very fortunate to have you as CEO. Today I’ll review fourth quarter results and brief highlights of our full year 2023 performance. I will then provide our outlook for 2024. Beginning with fourth quarter results, total revenue of $1.15 billion was up 4% year-over-year, both on an as-reported and constant currency basis. Data Tech and AI services revenue, which represents 44% of total revenue, increased 3% year-over-year or 2% on a constant currency basis. This performance was largely driven by increased sales of Data and Analytical service solutions in notable focus areas, including supply chain and risk.
Digital Operations services revenue, which represents 56% of total revenue, increased 5% year-over-year or 4% on a constant currency basis, primarily reflecting on schedule deal ramps for recent large booking wins. From a vertical perspective, Financial Services revenue increased 4% year-over-year, largely due to large deal ramps, partly offset by continued pressure around client discretionary tax debt. Consumer and Healthcare revenue increased 2% year-over-year, largely due to ramping of finance and accounting and supply chain engagements, partially offset by pressure and discretionary tech spending, as well as the impact of the recent divestiture of business classified as held for sale last year. High Tech and Manufacturing revenue increased 6% year-over-year, primarily driven by ramp of new logos within finance and accounting engagements across both Digital Operations and Data Tech and AI services, partly offset by the impact of reduction of scope from a High Tech client in early 2023.
Adjusted operating income was 17.7%, up 70 basis points year-over-year, primarily due to higher gross margin and general operating leverage. As a reminder, our performance during the fourth quarter last year included a positive impact from businesses designated as held for sale that has been divested. Gross margin in the fourth quarter expanded 70 basis points year-over-year, primarily reflecting cost management actions implemented early last year. Better utilization and greater mix of Digital Operations revenue offset by the impact of ramping up of recent large deal wins. SG&A as a percentage of revenue improved 80 basis points year-over-year to 20.7%. The year-over-year improvement was largely due to the absence of expenses related to the non-strategic business that was divested, as well as the overall operating leverage, offset by higher investments in sales and marketing and research and development in the fourth quarter of 2023.
Our effective tax rate was negative 83.8%, compared to 27.1% during the same period last year, primarily driven by a non-recurring $170 million benefit related to intercompany transfer of certain intellectual property rights. Excluding this impact, our effective tax rate would have been 23.4%. GAAP net income was $291 million, up 225% year-over-year. GAAP diluted EPS was $1.59, up 231% year-over-year. These growth rates reflect the impact of the tax benefit I just mentioned. Adjusted EPS was $0.82, up 17% year-over-year from $0.70 in the fourth quarter of last year. The increase was primarily driven by higher adjusted operating income of $0.07, the impact of lower taxes, $0.05 each, lower outstanding shares of $0.02 and a $0.01 benefit related to lower interest expense, partly offset by a 2% impact from lower FX remeasurement gains compared to the same period last year.
Lastly, our attrition rate for the fourth quarter was 23%, near the low end of our historical levels. Adjusting for involuntary attrition and employees with less than three months of service, our attrition rate was 19% during the fourth quarter. Now let me provide you some color around full year 2023 performance. Total revenue was $4.48 billion, up 2% year-over-year or 3% on a constant currency basis. Data Tech and AI services revenue, which represents 45% of total revenue, increased 2% both on an as-reported and constant currency basis. Digital Operations services revenue, which represents 55% of total revenue, increased 3% year-over-year or 4% on a constant currency basis. During the year, we grew the number of client relationships with annual revenue of greater than $5 million from 158 to 185.
Additionally, clients with annual revenue greater than $25 million expanded to 34 from 39. Clients with more than $100 million increased from three to five. As expected, gross margin for the year was flat versus 2022. This was largely due to the impact of ramping of new large deal wins with significant portion of onshore delivery that exhibited lower gross margin in their early years. Despite our flat gross margin, adjusted operating income margin expanded 50 basis points year-over-year to 17%, primarily driven by cost efficiencies and operating leverage. SG&A as percentage of revenue declined 110 basis points to 20.4%, largely due to the absence of expenses related to the non-strategic business that was divested, as well as overall operating leverage, offset by higher investment activity during the latter half of the year.
Our full year tax rate was negative 4.8%, down from the 24% in 2022, largely due to the non-recurring benefit from the IP transfer I mentioned earlier. Excluding that transaction, our full year 2023 effective tax rate would have been 23.4%. Given this tax benefit, our full year GAAP net income was $631 million, up 79% year-over-year and our full year GAAP diluted EPS was $3.41, up 81% year-over-year. Adjusted EPS was $2.98, up 9% year-over-year from $2.74 in 2022. The increase of $0.24 was primarily driven by higher adjusted operating income of $0.18, lower share count of $0.05, lower net interest expense of $0.02, and a $0.4 benefit related to lower taxes, partially offset by lower FX remeasurement gains during 2023 compared to 2022 of $0.05.
Turning to cash flow on our balance sheet. Year-end cash and cash equivalents totaled $584 million, compared to $647 million at the end of the fourth quarter of 2022. We reduced total debt by $161 million and exited the year with a net debt-to-EBITDA ratio of the last four rolling quarters of 0.9 times. With undrawn debt capacity and existing cash balances, we have ample flexibility to pursue growth opportunities and execute on our capital allocation strategy of reinvesting back in our business, pursuing M&A and returning capital to shareholders. Days outstanding expanded to 88 days from 81 days in 2022 due to increased penetration of non-FTE pricing models and client cash management practices as interest rates remain elevated. The overall credit quality of our portfolio continues to be very strong.
Despite the higher DSOs, we were able to generate $491 million of cash from operations, exceeding our expectations for the year. The majority of this outperformance was driven by higher adjusted operating income. Capital expenditures as percentage of revenue was approximately 1.4%, in line with our expectations. During the fourth quarter and full year 2023, we returned $100 million and $325 million of capital to shareholders, respectively. This increase — the increase — this included dividend payments of $25 million in the fourth quarter and $100 million for the full year. We also repurchased 2.2 million shares at a total cost of $75 million at a weighted cost of $34.27 per share during the quarter and a total of 6 million shares at a total cost of $225 million at a weighted average price of $37.48 for the full year.
Our buyback during the 2023 and our net share count outstanding reduced by 3%. As we continued to exceed our expectations, we initially set for full year, as we took advantage of the meaningful discount in our intrinsic value calculations. Finally, let me provide you some color on our outlook. First, I want to acknowledge that, as you can see in our press, we’ve adopted a new guidance structure heading into 2024. Specifically, we are now providing full year revenue guidance for Digital Operations and Data Tech and AI services revenue, along with first quarter guidance for total revenue. Digital Operations and Data Tech and AI services revenue, gross margin and adjusted operating income margin. Let me review the details. Genpact’s outlook for full year 2024 is as follows.
Total revenue is in the range of $4.57 billion to $4.61 billion, representing year-over-year growth of approximately 2% to 3% as reported and 2.1% to 3.1% on a constant currency basis. This includes Digital Operations services revenue of approximately 3% year-over-year, and Data Tech and AI services revenue of approximately 1.9% year-over-year at the midpoint of the range as reported. And Digital Operations services revenue of approximately 3.1% year-over-year, and Data Tech and AI services growth of approximately 2.1% year-over-year at the midpoint of the range on a constant currency basis. I would also like to note that based on our bookings mix and timing associated with deal ramps, as we expected — as we expect year-over-year revenue will be higher in the second half of the year related to the first half, which is in line with our historical patterns.
Full year gross margin of approximately 35%, full year adjusted income from operation margin of approximately 17% and full year adjusted EPS in the range of $3 to $3.03. This is — this represents year-over-year growth of 1% to 2% and includes the positive impact related to lower share count of $0.06, offset by the impact of higher expected taxes 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 we recorded last year. Our effective tax rate is expected to be 24.5%, compared to 23.4% reported for the full year 2023. The increase reflects the implementation of new global minimum tax rates, as well as our lower year-over-year benefit related to stock-based compensation.
We are forecasting cash flow from operations to be approximately $500 million. Capital expenditures as percentage of revenue are expected to be approximately 1.5% to 2% in 2024, which includes investments related to our internal systems upgrades. Our outlook for the first quarter is as follows. Total revenue of $1.108 billion to $1.114 billion represents year-over-year growth of approximately 1.75% to 2.25% as reported or 1.95% to 2.45% on a constant currency basis. This includes Digital service — Digital Operations revenue growth of approximately 2.8% year-over-year, and Data Tech and AI services growth of approximately 1% year-over-year at the midpoint of the range as reported, and Digital Operations services revenue growth of approximately 3% year-over-year, and Data Tech and AI services growth of approximately 1.3% year-over-year at the midpoint of the range on a constant currency basis.
Gross margin is expected to start the year at approximately 34.5% in the first quarter and increase over the course of the year as we make progress with offshoring delivery, improving utilization and the continued adoption of non-FTE pricing commercial models. Adjusted operating income margin is expected to start the year at approximately 16% in the first quarter and increase steadily over the course of the year as gross margin improves. Our expectation is that investments in partnerships and AI that BK spoke about in his opening remarks will be funded largely through efficiency gains with little to no increase in full year operating expenses in terms of absolute dollars on a year-over-year basis. That said, as BK noted, to the extent we’re able to deliver revenue upside over the course of the year, our bias is to reinvest a portion of that upside back into the business for future revenue growth.
Lastly, we remain committed to returning capital to shareholders through our regular cadence of buyback and quarterly dividend payments. We currently anticipate approximately 30% cash flow from operations for share repurchases during 2024. Additionally, our Board of directors approved 11% increase in our regular dividend to $0.153 per quarter or $0.61 on an annual basis. Our dividends increased at a compounded growth rate of approximately 15% since we began paying dividends in the first quarter of 2017. With this expected activity, we plan to distribute 50% of our operating cash flow to shareholders during the year. In closing, I’m confident that the path BK is laying to drive increased focus, speed and accountability through the organization will put us in strong position to drive long-term shareholder value.
With that said, let me turn the call back over to Roger.
Roger Sachs: Thank you, Mike. We’d now like to open up your — the call for your questions. Michelle, would you please provide the instructions?
Operator: Thank you. [Operator Instructions] And our first question is going to come from the line of Puneet Jain with JPMorgan. Your line is open. Please go ahead.
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