Genpact(G)2023-05-11 02:20Financial Performance - Total revenue for Q1 2023 was $1.089 billion, up 4% year-over-year on a constant currency basis [6] - Data-Tech-AI services revenue grew 6% year-over-year to $485 million, while Digital Operations services revenue increased 3% to $604 million [6] - Adjusted operating income margin expanded by 140 basis points to 16.4%, and adjusted diluted EPS rose 13% to $0.68 [6] - Gross margin for the quarter was 34%, down from 35.8% in Q1 2022, primarily due to higher severance costs and travel expenses [27] - SG&A as a percentage of revenue decreased by 230 basis points to 19.9% [28] - Cash flow from operations improved, with $34 million utilized compared to $114 million in Q1 2022 [29] Business Line Performance - Data-Tech-AI services grew 6% year-over-year, driven by strong demand in supply chain, sales, commercial, and risk services, which collectively grew 9% [12] - Digital Operations services grew 3% year-over-year, supported by steady demand and deal ramps from recent wins [12] - Emerging services, including supply chain, sales, and risk, grew 9% collectively, partially offset by a slowdown in discretionary advisory work [12] Market Performance - Financial services revenue increased 9% year-over-year, driven by strong demand for risk management services leveraging data, analytics, and AI [26] - Consumer and Health Care revenue declined 4% year-over-year due to longer deal cycles and lower Data-Tech-AI services revenue [26] - High Tech and Manufacturing revenue grew 3%, supported by new deal ramps, though partially offset by a reduction in operational scope for a priority high-tech account [26] Strategic Initiatives and Industry Competition - The company signed a record level of Q1 bookings, including 5 large deals with total contract values exceeding $50 million, with nearly 75% of bookings coming from priority accounts [7] - The company is investing in generative AI, large language models (LLMs), and machine learning technologies to drive client transformation and operational efficiency [5][15] - Strategic partnerships with cloud technology providers like ServiceNow and Kinaxis are enhancing the company's AI capabilities and expanding its global reach [13] - The company is expanding its operating centers in Tier 3 cities in India to access talent pools, with two centers operational and a third set to launch in Q3 2023 [14] Management Commentary on Operating Environment and Future Outlook - Management highlighted the growing urgency among clients to leverage generative AI and LLMs, with a focus on cost reduction and operational efficiency [7][15] - The company expects full-year 2023 revenue to be between $4.64 billion and $4.71 billion, representing year-over-year growth of 6% to 7.5% [31] - Adjusted operating income margin is expected to be approximately 16.8% for the full year, with gross margin expected to improve by 30 basis points, offset by lower margins from new large deals [32][33] - Revenue growth is expected to be back-end loaded in 2023, with low single-digit growth in Q2 and mid-to-high single-digit growth in the latter part of the year [34] Other Important Information - The company hired 8,000 new team members globally in Q1, with attrition dropping to 24%, and involuntary attrition adjusted to 19% [14][15] - The company repurchased 631,000 shares for $30 million and paid $25 million in dividends during the quarter [30] - The company published its 2022 Sustainability Report, highlighting progress on ESG initiatives and supporting clients in achieving their ESG goals [40] Q&A Session Summary Question: Large Deal Ramp and Risks - The company expects the five large deals signed in Q1 to ramp up in Q2 and continue into H2 2023, with some deals extending into H1 2024 [42] - Management expressed confidence in the ramp-up process, citing experience with similar rebadge deals and no significant risks anticipated [42] Question: Generative AI Opportunity - Generative AI is seen as a significant opportunity, with initial use cases focused on help desks, customer service, and research work in unregulated industries [45][46] - The company believes generative AI will expand the total addressable market (TAM) and create value for clients, similar to the impact of RPA in previous years [46] Question: Pricing and Margin Impact of Generative AI - The company expects generative AI to drive productivity and efficiency, with alternate commercial models (transaction-based or outcome-based pricing) becoming more prevalent [52] - These models are expected to be margin-accretive over time, supporting the company's long-term margin expansion goals [52] Question: Revenue Growth and Discretionary Advisory Work - The company expects revenue growth to accelerate in H2 2023, driven by large deal ramps and a recovery in discretionary advisory work [59][60] - The slowdown in advisory work in Q4 2022 and Q1 2023 was anticipated and factored into the company's guidance [59] Question: Financial Services Performance - Financial services revenue grew 9% year-over-year, driven by strong demand for risk management services and increased deposit flow from large banks [88] - The company has limited exposure to smaller regional banks and has not been materially impacted by recent banking sector challenges [88] Question: Generative AI Adoption Timeline - Initial generative AI use cases are expected to focus on help desks, customer service, and research work, with broader adoption in areas like accounts payable and receivables taking longer due to data complexity [91] - The company anticipates a multi-year journey for clients to fully leverage generative AI in more complex operational areas [91] Question: Service Line Composition and Emerging Services - Emerging services, which grew 9% in Q1, now represent more than 25% of total revenue and are expected to continue growing faster than the company average [93] - Customer service and help desk operations represent less than 10% of the company's business, presenting a significant growth opportunity with generative AI [94]