Genpact(G) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics - Total revenue for Q2 2023 was $1.106 billion, up 3% YoY on a constant currency basis [7] - Data-Tech-AI services revenue was$ 501 million, up 3% YoY, while Digital Operations services revenue was $605 million, up 2% YoY [7] - Adjusted operating income margin was 16.8%, a 10 basis points YoY decline [7] - Adjusted diluted EPS was$ 0.72, up 3% YoY [7] - Full-year 2023 revenue growth is now expected to be 5.5% to 6.5% YoY, down from the prior expectation of 6.5% to 8% [8] - Cash flow from operations was $171 million, up from$ 102 million in the same period last year [28] Business Line Performance - Data-Tech-AI services grew 3% YoY, driven by demand for supply chain services and automation of finance and accounting functions [23] - Digital Operations services grew 2% YoY, primarily due to deal ramps from existing and recent wins, partially offset by volume reductions from high-tech clients [24] - Financial services vertical grew 4% YoY, while Consumer and Healthcare declined 1% YoY [25] - High-tech and Manufacturing grew 2%, driven by supply chain engagements and new logo wins [25] Market Performance - The company signed six large deals in Q2, each with a total contract value of $50 million, following five large deals in Q1 [9] - 24 new logos were added during the quarter, including three large teams [9] - The pipeline reached an all-time high, with several new large deal opportunities [10] Strategic Initiatives and Industry Competition - The company is focusing on leveraging Generative AI (Gen AI) to disrupt less penetrated areas and enhance services in areas like customer care, FP&A, and digital marketing [17] - Investments are being made in non-FTE based commercial models, which now represent 60% of revenues [16] - The company is deepening partnerships with cloud technology players like Microsoft, Google Cloud, and AWS to co-innovate and create joint IP solutions [14][15] - The company plans to invest$ 600 million over the next three years to build out AI capabilities, including R&D, training, and acquisitions [22] Management Commentary on Operating Environment and Future Outlook - The company expects to return to double-digit top-line organic growth in 2024, driven by strong bookings and a robust pipeline [34] - Management remains confident in achieving 10%+ organic revenue growth and faster margin expansion through 2026 [35] - The company is seeing a secular trend in demand for AI and data transformation services across all industry verticals and geographies [78][79] Other Important Information - Attrition levels stabilized at 25% in Q2, significantly lower than 38% in the same period last year [16] - The company repurchased 3.2 million shares for $120 million during the quarter [30] - Capital expenditures as a percentage of revenue were approximately 1.4%, with higher investment activity expected in the second half of the year [30] Q&A Session Summary Question: Revenue Revision and Large Deal Momentum - The revenue revision was primarily due to lower short-cycle discretionary work and volume reductions from high-tech clients, with no recovery expected in the second half [41][42] - Large deals are expected to drive growth in the second half, with 40% of deals having rebatching components, but the margin profile is expected to grow as more value is delivered [43][44][45] Question: Bookings Growth vs Revenue Growth - The difference between 25%-30% bookings growth and low double-digit revenue growth is due to the rotation from short-cycle to larger annuity deals, which take longer to reflect in revenue [47][48] Question: Impact of Gen AI on Customer Service - Customer care represents less than 10% of the company's business, and Gen AI is seen as an opportunity to disrupt this area, with pilots already showing potential for significant efficiency gains [51][52] Question: Outcome-Based Pricing Trends - Non-FTE pricing, including transaction-based and outcome-based models, is gaining traction, particularly in financial services, where clients understand transaction-based pricing well [57][58][59] Question: Competitive Environment and Pricing - The competitive environment remains stable, with the company's domain expertise and data understanding being key differentiators in winning deals [61][62] Question: Discretionary Spending Breakdown - Discretionary spending reductions were primarily in Data-Tech-AI services, while Digital Operations was impacted by volume reductions from high-tech clients [64][65] Question: Large Deals and Secular Trends - The company views the current demand for large deals as a secular trend, driven by the need for data transformation and AI across all industries and geographies [77][78][79] Question: High-Tech Volume Reductions - Volume reductions from high-tech clients are seen as a lagging indicator of broader cost-cutting measures, but the company expects a rebound as these clients prepare for Gen AI [83][84] Question: Margins and Cash Flow - Margins are expected to expand modestly, with cash flow guidance remaining unchanged at$ 500 million for the year [86][87] Question: Non-FTE Business Models - Non-FTE pricing models have been successful, with higher margins and better alignment of goals between the company and its clients [93][94][95]