Genpact Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2024

There are 13 speakers on the call.

Operator

Everyone, and thank you for joining us today for

Speaker 1

our Q4 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 $4,480,000,000 up 2% year over year and 3% on a constant currency basis, driven by Datatech AI Services revenue of $1,990,000,000 up 2% on both an as reported and constant currency basis And digital operations services revenue of $2,480,000,000 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 2 60 basis points year over year and adjusted operating income margin of 17%, up 50 basis points year over year.

Speaker 1

And diluted earnings per share of 3 point and $0.41 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 $4,900,000,000 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 $50,000,000 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.

Speaker 1

1st, revenue from priority accounts grew 4% year over year and expanded to 63% of total revenue. 2nd, we strengthened and expanded relationships with key cloud technology partners to co innovate and develop joint IP solutions. 3rd, we opened and scaled 3 new operating centers in Tier 3 cities in India. 4th, we continue to drive non FTE commercial models with non FTE deals reaching 20% of total revenue in the 4th quarter and 17% of total revenue for the full year. 5th, investments in our large deal team generated the strong bookings and pipeline that I described earlier.

Speaker 1

And finally, for the 4th consecutive year, our global workforce completed approximately 10,000,000 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 Genvac'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 5 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 that insatiable curiosity and desire to learn has become our cultural foundation and has been a source of endless inspiration for me.

Speaker 1

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 its 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 $2,800,000,000 in revenue in 2023. I am very excited to see him lead this next evolution of GenTAC. 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 lead team's guide and mentor.

Speaker 1

With that, let me turn the call over to BK.

Speaker 2

Thank you, Raigar, and good afternoon, everyone. Let me start by saying that I am excited and humbled to lead our 1 125,000 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 macroeconomic environment challenge us and the industry as a whole.

Speaker 2

I am very proud of the team and the long term accomplishments outlined a moment ago. But I must also say where we must improve our execution to reach our full potential. Digital Operations and Data Tech AI together represent a $750,000,000,000 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 long standing member of the Genpact team, I have a clear point of view about where we can improve execution.

Speaker 2

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 of examples. 1st, we have simplified our sales and go to market leadership structure, Moving from highly metrix organization to 12 unit leaders that mirror our client organization and roll us into 3 vertical segments we report externally.

Speaker 2

2nd, we have unified data, Tech and AI under 1 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 1st 100 days, I am prioritizing: a, spending more time with clients as we partner with them to shape the future, better than ours By leveraging data, technology and AI first principles, I have already met a number of our clients since the announcement And I'm committed to meeting with 100 plus clients in my 1st 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'm committed to continually identify and fill gaps quickly.

Speaker 2

Reaching our full potential will require Optimizing our talent and driving greater accountability across the organization. And CEE, 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.

Speaker 2

It will take time And investment. In 2024, we plan to invest in 2 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. 2nd, 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 With regards to GenAI, 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 1st AI Innovation Center in London and more than 50 GenAI use cases in testing And 30 GenAI solutions in production environment with clients either deployed or going live.

Speaker 2

Turning now to our 2024 outlook, And Mike will go through more details, but I would like to provide a high level overview upfront. 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% 17% respectively. With regard to any revenue upside we are able to achieve over the course of the year, our buyers will be to reinvest a portion of the back into the business to drive future revenue growth.

Speaker 2

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 domain 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 teams at Scale through platforms like Genome is inspiring.

Speaker 2

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'm 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.

Speaker 3

Thanks, B. K. 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.

Speaker 3

Today, I'll review 4th quarter results And brief highlights of our full year 2023 performance, I will then provide our outlook for 2024. Beginning with 4th quarter results, total revenue of $1,150,000,000 was up 4% year over year, both on and as reported in 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.

Speaker 3

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 tech spend. 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 in 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 in 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 Q4 last year Included the positive impact from businesses designated as held for sale that has been divested.

Speaker 3

Gross margin in the 4th quarter expanded seventy 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 and 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 Q4 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 $170,000,000 Benefit related to intercompany transfer of certain intellectual property rights.

Speaker 3

Excluding this impact, our effective tax rate would have been 23.4%. GAAP net income was $291,000,000 up 2 25 percent year over year. GAAP diluted EPS was $1.59 up 2 31% 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 Q4 of last year.

Speaker 3

The increase was primarily driven by higher adjusted operating income of $0.07 The impact of lower taxes, dollars 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 re measurement gains compared to the same period last year. Lastly, our attrition rate for the Q4 was 23%, near the low end of our historical levels. Adjusting for involuntary attrition And employees with less than 3 months of service, our attrition rate was 19% during the Q4. Now let me provide you some color around full year 2023 performance. Total revenue was $4,480,000,000 up 2% year over year or 3% on a constant currency basis.

Speaker 3

Data Tech and AI Services revenue, which represents 45% of total revenue increased 2% both on and 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 $5,000,000 from $158,000,000 to $185,000,000 Additionally, Clients with annual revenue greater than $25,000,000 expanded to $34,000,000 from $39,000,000 clients with more than $100,000,000 increased from $3,000,000 to 5. 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.

Speaker 3

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 and A as a 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 percent, 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 $631,000,000 up 79% year over year and our full year GAAP diluted EPS was $3.41 up 81% year over year.

Speaker 3

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 $0.04 benefit related to lower taxes, partially offset by lower FX remeasurement gains during 2023 compared to 2022 of $0.05 Turning to cash flow and our balance sheet. Year end cash and cash equivalents totaled $584,000,000 compared to 647,000,000 at the end of the Q4 of 2022. We reduced total debt by $161,000,000 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 and A and returning capital to shareholders.

Speaker 3

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're able to generate $491,000,000 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 a percentage of revenue was approximately 1.4% in line with our expectations.

Speaker 3

During the Q4 and full year 2023, we returned $100,000,000 and $325,000,000 of capital to shareholders respectively. This included dividend payments $25,000,000 in the 4th quarter and $100,000,000 for the full year. We also repurchased 2,200,000 shares at a total cost of $75,000,000 at a weighted cost of $34.27 per share during the quarter and a total of 6,000,000 shares at a total cost of 225,000,000 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.

Speaker 3

Finally, let me provide you some color on our outlook. First, I want to acknowledge that as you can see in our press release, we've adopted a new guidance structure heading into 2024. Specifically, we are now providing full year revenue guidance for digital operations and DataTech and AI Services revenue along with Q1 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.

Speaker 3

Genpact's outlook for full year 2024 is as follows. Total revenue is in the range of $4,570,000,000 to 4 point $1,000,000,000 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.

Speaker 3

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 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 $4,000,000 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 Stock based compensation. We are forecasting cash flow from operations to be approximately $500,000,000 Capital expenditures as a 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 Q1 is as follows: total revenue of $1,108,000,000 to 1,114,000,000 represents year over year growth of approximately 1.75 percent to 2.25% as reported or 1.95 to 2.45% on a constant currency basis.

Speaker 3

This includes digital operations revenue growth 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 in 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 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 Q1 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.

Speaker 3

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 Q1 of 2017. With this expected activity, we plan to distribute 50% of our operating cash flow to shareholders during the year.

Speaker 3

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 Raj.

Speaker 4

Thank you, Mike. We now like to open up the call up for your questions. Michelle, would you please provide the instructions?

Speaker 5

Thank you. And our first question is going to come from the line of Puneet Jain with JPMorgan. Your line is open. Please go ahead.

Speaker 6

Hey, thanks for taking my question. Congrats, BK for the new role. And Tiger, thank you so much for your thought leaderships and all the discussions we have had over the last More than 12 years actually.

Speaker 1

Thank you.

Speaker 6

So I'd like to start with like the question on the guidance. Like looking at the guidance for Q1 and the full year, looking at this ranges, it doesn't look like you expect like a steep ramp from Q1 levels rest of the year In terms of like the absolute dollar number for revenue. So I know you mentioned that it will be like a year of buildup. Can you double click on those comments like will like all those changes like the simplification which all it seems like makes sense. Could they have any impact on revenue?

Speaker 6

What do you expect like for trends rest of the year?

Speaker 3

Yes. Let me start with talking about the guide in totality, and I'll turn it over to BK if you want to provide some additional color, right? So as we think about the guidance, yes, you're correct in the 2% to 3%. I want to tell I want to give you a little more color on how we're thinking about it. I think we took a prudent approach in creating that guide, right.

Speaker 3

What we did this year, We took a more detailed bottoms up planning approach at a very granular level. The key change in our assumptions was really is regarding the macro. We assumed no improvement from the second half of twenty twenty three with regard to the macro. Now that being said, We have some good tailwinds coming into the year at the 20% 26%, I should say, growth in bookings, remembering that growth in bookings comes in over a 3 to 5 year period. Unfortunately, that is netted against the weak macro that we have seen notably hitting us in small deals.

Speaker 3

As we extrapolate the what we've seen in the second half of twenty twenty three, we're not predicting any recovery in that in the guide, right. That's also netted against the typical productivity and changes in scope that have been factored into our guide. With that said, a better macro and execution, we can do better. And as far as your other comment with regard to I believe you're asking about the cadence of the revenue earning in, we gave some general guidance in my comments That'll be more skewed towards the second half than the first half of the year. And what we're committed to do, we've given you a Q1 guide, we'll continue to do that on a quarterly basis as we move through the year.

Speaker 3

Do you want to add anything, Puneet?

Speaker 2

Well, you said it very well. Puneet, thanks so much. And I think you mentioned macro Thank you, Shun, Mike. And I would say, look, macro, we don't control. We will deal as we progress.

Speaker 2

Execution we do and the simplification comment that you made Puneet. As we execute, I do see more potential, but for now we are wanting to stick to this guidance and we'll provide you more color as we progress.

Speaker 6

Got it. That's helpful and fair. And can you also share your thoughts on Genpact's long term guidance that was issued a few years? I think The prior goal was like to hit double digit top line growth over the medium term. Is that still doable beyond this year?

Speaker 2

So let me take that. And look, I think how I'll think about that is following Puneet. My clear mission is to have Genpact achieve its full potential. And in that full potential, Do we believe that we will we can grow at market or above market? The answer is yes.

Speaker 2

And it needs improvement in our execution And that is what I am focused on. And as we improve execution, we can certainly come back to overall Steer of growing atorabovemarketrates. Mi if you're specifically asking is 2026 we are holding to, I think we are in early stages of my innings here. And as we progress, we will update you more on that.

Speaker 6

Got it. Thank you, And all the

Speaker 2

best. Thank you.

Speaker 5

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Keith Bachman with BMO. Your line is open. Please go ahead.

Speaker 7

Hi, thank you very much. And a couple. You've mentioned a few times during your prepared remarks About improving execution. And I'm just trying to understand, I don't want to steal thunder from any future conversations or presentations, But what type of things do you think need improvement on in terms of execution that might translate to Better growth?

Speaker 2

Great question, Keith. How I think about that is How do we strengthen our foundation? We have a very high quality foundation, foundation of domain and data, foundation of trusted client relationships, Foundation of global talent. And when I speak about execution, it is how we strengthen and buttress it further. So take an example of clients.

Speaker 2

We are wanting to change our conversation and we are changing the conversation as we speak to include data And technology in making the conversation more holistic and making our solution far more holistic. Or if you think from Our competency of data and domain, how do we bring in solutions of partners and that's where we are investing in, So that again we are more focused on growth oriented solutions and front to back solutions for our clients. And this is what I mean by execution. Simplification is an integral part of it and we are driving quick changes as I come into this chair and that is My thesis is it will improve our agility and accountability and I'm seeing early results of that. That's what I mean by execution.

Speaker 7

Okay. And my follow-up question relates to that is, how do you think about either Expanding existing fill sets or getting into new market opportunities in terms of using M and A in particular. And so you mentioned 50% I think of free cash flow to capital allocation projects. But how do you think about the changing nature Or changing the strategy as it relates to M and A or is it more of the same? Thank you.

Speaker 7

And that's it for me.

Speaker 2

Thank you. Thank you, Keith. Look, I think how I'll think about it is following. M and A continues to be a key strategic lever for us. It always has And it would be.

Speaker 2

And as I think of M and A and I want to connect it back to execute, I think we have done Reasonably well in finding assets. Can we improve our execution and integrating the assets is the other attribute of execution. But is M and A integral part of our strategy? The answer is yes, yes, yes. And we will continue to be disciplined From ROIC standpoint and as we execute more and but we will update you as we go along Keith.

Speaker 3

Mahesh, I'll answer. Our number one thing that we're looking for is in addition to the financial discipline and everything else PK just alluded to is how we're building additional capabilities for the organization inorganically. So to the extent those capabilities, Gen AI related or AI related come about, you will be deploying capital there to build upon that build the franchise.

Speaker 7

Okay. Many thanks, gentlemen.

Speaker 2

Thank you.

Speaker 5

Thank you. And one moment as we move on to our next question. And it looks like our next question is going to come from the line of Maggie Nolan with William Blair. Your line is open. Please go ahead.

Speaker 8

Hi, thank you. Can you elaborate on the simplification of the go to market Strategy and what you hope the outcomes of this are for the business?

Speaker 2

Sure Maggie. So clearly, I think As organically you fill the organization, you Somehow start orienting yourselves to various dimensions. And that is what happened with us as well. And me coming in from inside, really understood from the client perspective as well as from our internal teams as to how we can increase the agility and accountability. So from multiple metrics to organization, what we have done in last 60 days Is oriented ourselves to 12 business units that mirror client organization.

Speaker 2

When I say that, so take an example of Orienting with consumer goods and retail companies or orienting with we always had, but we had other dimension. And I think we clarified it for the organization and oriented everybody to be in the service of clients as we build the capabilities, as we build data or AI capabilities. And similar simplification exercises we'll report back, but this is what I mean by simplification what you specifically asked.

Speaker 3

Yes, I think I'll just quickly add on to that. Ultimately, what we're hoping for with all that is speed and clarity to be able to move quicker And quite frankly, grow our revenue at just faster pace. The opportunities are out there.

Speaker 8

Thank you. That's helpful. And then specifically on the DTAI segment, did something change between 3Q and 4Q that allowed you to grow Sequentially. And then, how should we think about any potential change in the context of 2024 and how you incorporated that into the guidance?

Speaker 3

Yes. So let me quickly talk about the sequential movement in deal from 3Q to 4Q. We had the impact of the new deal new deals we talked about. They've ramped as expected. They actually ramped even a little bit better.

Speaker 3

That was offset by higher productivity and change in scope on existing work, which is typical within our historical average, right. As we move into our Q1 guide, we still have the positive impact of those new large deals, now quarter 3, as they continue to move through on a year over year basis. However, when you look at the vintage or the historical vintage of existing contracts, We've hired deal related productivity on those existing contracts, which is typical in terms of the timing, which pulls down some of that growth, As well as with the absence of second half of twenty twenty three, which had a largest fewer large deals flowing in, Which is going to affect us in the first half of the year. They're lumpy in nature. As well as DTII just has a seasonal low in the Q1.

Speaker 8

Okay, got it. And congrats BK and thank you Tiger.

Speaker 2

Thank you, Maggie.

Speaker 1

Thank you, Maggie.

Speaker 5

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Ashwin Shirvaikar with Citigroup. Your line is open. Please go ahead.

Speaker 9

Hey, thanks. Congratulations, BK and Tiger, on the Formalization of the changes that you guys had announced last quarter. Maybe I can start with asking a question on margins. Normally, we do see sort of year over year Margin improvement, you're kind of holding the line on that. Is that a very Specific signals with regards to wanting to invest for growth.

Speaker 9

And then the part 2 of the margin question is, You're starting out with 16%. What's driving in 1Q, what's driving that? And what kind of a margin cadence Should we then expect to see?

Speaker 3

So I'll start off and I'll talk to you. I'll turn it over to BK at the end of it. So it will expand at a normal cadence throughout the year based on the historical patterns, right? So it will expand also as we have the revenue That will earn in on the growth that we have in the business as we're projecting. But yes, you're right, we're holding our dollar fixed cost relatively constant.

Speaker 3

What we're doing with those additional monies is we're putting in into the business quite notably in terms of investments that are staged throughout the year.

Speaker 2

And what I'll add, Ashwin, and thanks so much for your comments earlier. Yes, we are investing to grow And we always have. Are we infusing more? The answer is yes. But as we go along, we will inform more About as I understand, as I listen from clients, we'll inform you more about our thesis.

Speaker 2

But clearly, we are wanting to invest To make sure that growth stacks up at or above market rates.

Speaker 9

And BK, that's sort of where I wanted to go with my next question. You mentioned that you have on your schedule meeting 100 plus clients in the 1st 100 days. That period obviously started already. You met a number of clients. Could you Share maybe with some granularity what sorts of commentary you are getting back From the clients with regards to your capabilities, where you might need to incrementally invest and perhaps even thoughts on M and A?

Speaker 2

Great question, again. So look, I'll say 3 comments, Ashwin. Point number 1, More broadly, clients still are seeing the uncertain environment. And that's what you see in our Macro comments that Mike alluded to, point number 1. Point number 2, very quickly, every conversation Certainly has componentry of data and AI, which wasn't the case just 6 months ago, 8 months ago.

Speaker 2

And therefore, a lot of conversation is about transforming them, Front to back transformation and thinking about, hey, how do we generate value, not just in our particular function, but across the board in the sectors we operate in. And I think we have demonstrated to them in many number of ways. You take an example Of our recent press release that we did for ADDvantage Solutions, where we announced a partnership With Advantage Solutions, a leading provider of sales and marketing services in consumer goods space, and We are delivering to our front to back solution along with sales force. Our AI led the seasoning process for them, And it is one of the larger deals that we announced recently. So conversations like these are taking shape in a more significant way.

Speaker 2

And like Mike earlier alluded to, we are constantly looking in our pipeline from an M and A standpoint to buttress our capabilities, Now while staying disciplined on the various pieces of M and A as well as integrating them. But really exciting time for us, We believe we are ahead in the AI conversations and really feel excited about our capabilities and the ones that we are going to visit.

Speaker 9

Thank you. All the best.

Speaker 2

Thank you.

Speaker 5

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Bryan Bergin with TD Cowen. Your line is open. Please go ahead.

Speaker 10

Hi, thank you. And Tiger and BK congrats again. My first question, Appreciate the details you shared here on the sales simplification and the DTA leadership consolidation. Those really seem to center more on driving Consistent growth execution. So I wanted to ask you about your view on the cost side of the equation.

Speaker 10

I understand you've got growth investments you're going to lean into here. Are there any structural changes in the organization you may also be considering to improve profitability?

Speaker 2

Thanks, Brian. So look, I think I'll answer that in 2 parts, and Mike, feel free to chime in. Point number 1, are we constantly focused on improving profitability? The answer is yes, yes, yes. You see that in 2023 and you see that consistently over last 5, 6, 7 years Year on year and you see the cadence improving.

Speaker 2

So we have acute focus on improving profitability while Clearly investing to grow and ramping our top line growth, point number 1. Point number 2, As we go through the cycle, we will constantly evaluate how to invest our dollars. And also, At least for this year, we are thinking if we are able to grow better, we want to stay in the range, so that we are investing to grow.

Speaker 3

Yes. I'm going to parse into the 2 things, right? I think you hit it really well when you talk about what we're trying to do in the 2024 guide about reinvesting in our business. But one of BDK's mantras in the organization is we are an AI first company, right? So what does that mean?

Speaker 3

He is pushing every functional area, my own included in finance on how we can adopt AI solutions embedded in our own organization That will drive cost efficiencies as well as production efficiencies and we can be our own test cases for that. So I can foresee ourselves in the future years Being able to leverage that from a productivity and cost perspective. But for 2024, we're going to take all of those efficiencies that we're having and we're just at the beginning of manual And we're looking to plow a lot of them into it and we have a laundry list of investments to execute on all really supporting our capabilities that ultimately result in an increased level of sales.

Speaker 10

Okay. That's clear. Thank you. And then my follow-up is just on large client performance. So Are there any large client ramp downs that are weighing here as you enter 2024?

Speaker 10

We know you had the high-tech client last year. Curious if there's any further reductions like that this year as you enter the year that may be offsetting the ramp of new bookings?

Speaker 3

No, nothing more than the typical cadence that we have on that. So nothing to call out. We look at it. It's all within the same historical average. So there's nothing like we had last year or nothing pending that we're aware of.

Speaker 3

So not planning for any of that.

Speaker 10

Okay. Thank you.

Speaker 5

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Sean Kennedy with Mizuho. Your line is open. Please go ahead.

Speaker 11

Hi, everyone. Thank you for taking my question and congrats on a strong quarter. I was wondering how you see your client gen AI Readiness and overall reception to it, are there any specific barriers to overcome? And do you see a difference depending on the type of client and project? Thank you.

Speaker 2

Thank you, Sean. So overall, I'll pass This into 2 parts. Is there a lot of excitement with every single client, which wasn't the case 6 months ago? I'll say the answer is a resounding yes. Every single client conversation before we provoke and We are always the ones who are wanting to provoke, but they are wanting to have the conversation.

Speaker 2

So the doors are open is point number 1. However, just take the example of data. Data is not as structured that AI can result Into outcomes that they expect in a good fashion. So all of that is helping us bring our data capabilities As well as our AI framework that we have. We have been into AI for last 7 years since the time we acquired Data FrameWorks back in 2016, 2017 timeframes.

Speaker 2

So we have honed frameworks on AI. So that is really helping us with this turn on AI. And that's where I reported in my prepared remarks that we had 3,000 conversations. So many conversations are we record every single conversation that we have As a disciplined company, but I also reported the numbers that have gone into production, but we do increased velocity of that, we really feel good about that.

Speaker 11

Great. Thanks for all the detail.

Speaker 7

Thank you, Sean.

Speaker 5

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Spencer Lebov with Wedbush Securities. Your line is open. Please go ahead.

Speaker 11

Hey, thanks. It's actually Moshe Katri from Wedbush. BK, welcome. And Tiger, Good luck on whatever you're planning to do next. So a question, Vikki, when you're looking at your portfolio, Are you happy with the client base, I.

Speaker 11

E, do you think that you need to prune some of those customers that are not really Maybe worth the attention that you have and maybe that also could potentially at least temporary impact top line growth for this year? That's my first question.

Speaker 2

Thank you, Spencer. So what we feel exceptionally good about is all of our clients, Not just Fortune 50, Fortune 100 clients that get named, but all of our clients, We are very disciplined in onboarding every single client, but we are very, very proud of all the client base that we have. And in their own right, they are iconic companies. So no, there isn't any plan, Spencer, that you specifically asked.

Speaker 11

Understood. And then the follow-up is more about for the next 6, 12 months and kind of going back to Tiger's commentary on win rates. So win rates had a pretty nice uptick. Maybe you can talk a bit about what drove that uptick And what do we need to do to kind of keep on moving that win rate number higher? It's a pretty impressive kind of improvement on a year over year basis?

Speaker 2

It's a great question. I'll say 3 specific things, So one, yes, we are very, very proud of the win win that we achieved. And there are few reasons, Tiger also Talk about large deals and we increased our focus on large deals and that has helped us increase The win rate percentage in a significant fashion. And this was in 2023, we had 14 large deals greater than $50,000,000 that is reflected in the 60% win rate that Tiger spoke about. Point number 2, we are increasing our focus on data and tech and that is making our solutions far more holistic.

Speaker 2

That is also helping us improve our win rate. And point number 3, we are increasing our investment and focus on partners and that is again will bring you see some results. I already spoke about Salesforce. We also announced another press release just couple of days back on Dropbox where ServiceNow and Genpact came together To streamline their procurement function. So partner is also helping us increase our win rates.

Speaker 10

Understood. Thanks.

Speaker 5

Thank And our next question comes from the line of Surinder Thind with Jefferies LLC. Your line is open. Please go ahead.

Speaker 12

Thank you. BK, as I think about The transformation journey that you're about to kind of take Genpact on at this point. Can you talk about how maybe Structural it is and how you're going to evaluate the change in terms of the key metrics And the timeframe that you're thinking about, is it just on the sales side or do you really have to kind of rethink about Delivery here and part of the question is also is that given all of this conversation about generative AI, Are clients asking for a lot more productivity commitments at this point as well?

Speaker 2

There are many questions in your question, Surinder. So If I don't answer any, you can call that out, but let me pass that. Today, formally is my first day as CEO. So I think I would just say that, yes, I've been here For many, many years, so I understand our clients and Genpact exceptionally well. So therefore, speed is of essence.

Speaker 2

Having said that, point number 1, what we are talking about is front to back transformation for us as well, not just for our clients. If you would note that this morning, we announced Chief Technology and Transformation Officer for first time in Genpact history. And that particular role is to transform Genpact internal processes With AI First Lens that Mike was earlier alluding to. So it is not just at the front end of the business, But also our own middle office, back office and how 127,000 of us interact with one another as well as with clients. And I think we are looking at specific I also do not want to launch 55 Initiatives just want to stay focused on execution and discipline.

Speaker 2

And as we progress, there are stage 1 and stage 2 Initiatives that we are together coming on as the management team and committing to it and there will be specific Lead indicators that we will have internally and at appropriate time we will expose it to all of you.

Speaker 12

That's helpful. And then I guess just on the last part of this is related to the commentary earlier about the conversations with clients focused On the data component, the AI component, how does that impact maybe the productivity commitments that they're looking for? And then additionally, let's say that there's deals that you signed a year ago before there was all of this Excitement about some of these new offerings. Are some of those clients also revisiting some of that? Is that what's maybe causing a slower ramp?

Speaker 12

Or Do clients have an opportunity to revisit maybe what they had wanted 6 months ago in light of how fast technology and Processes and things are changing. How do we think about that dynamic?

Speaker 2

So I missed answering that question. Thanks for reminding me. I appreciate that. So I'll answer that in 2 parts, Surinder. 1, there is we've been AI as a conversation for us, as I mentioned just a while ago, is not new for us.

Speaker 2

Yes, it is new for clients, Well, we were always baking all of that in our solutions. And we are now our pipe has opened up a lot more For having those conversations. Short answer to the question that you're asking, is there more productivity therefore? No, we are not Seeing that because I think we've been in a fairly competitive place and competitive market. And I think we are leaning in upfront in our contracts that we are demonstrating to clients.

Speaker 2

And there isn't a new conversation opening up with clients that, hey, Now GenAI has come in because we've been demonstrating them that in our solutions. And I think we are building actually More holistic solutions, including data, that is, as I mentioned, opening up newer conversations for us. Short answer, Surinder, no, we are not seeing any different productivity curve. And if at all at any point it happens, we will authentically share with all of you.

Speaker 12

Thank you.

Speaker 5

Thank you. I'm showing no further questions. And I would like to turn the conference back over to Roger Sachs for closing remarks.

Speaker 4

Thank you everybody for joining us today and we look forward to speaking with you again next quarter.

Speaker 5

This concludes today's conference call. Thank you for

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Earnings Conference Call
Genpact Q4 2023
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