Genpact Ltd. Earnings Call Nuggets: Headstrong, Margins

On Wednesday, Genpact Ltd. (NYSE:G) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Headstrong

Jeff Rossetti – Janney Montgomery Scott: This is (Jeff Rossetti) calling on behalf of Joe, thanks for taking my question. I was just wondering, Mohit would it be possible to find out exactly what was the organic growth for BPO excluding EmPower and also the growth rate for Smart Decision Services excluding EmPower?

Mohit Bhatia – CFO: So the EmPower acquisition was actually very, very small. In our own measurements we don’t even measure that separately. Our organic growth for the first quarter was 13.4%. I suspect if I would remove EmPower it would be like 13.3%. It was very marginal and non-material to our numbers.

Jeff Rossetti – Janney Montgomery Scott: Could you maybe also talk about how Headstrong is progressing with the year? I know there is Tiger had mentioned the challenging markets in investment banking. Just tried to see how that business is performing.

Mohit Bhatia – CFO: Sure, the first quarter results of Headstrong are very satisfactory, given the fact that one of their clients had filed for bankruptcy towards the end of last year. The fact that Headstrong in first quarter came in flat compared to last year despite losing that client is something that was very satisfactory. I think like, Tiger alluded to the fact, the uncertainty remains in capital markets. There is pressure on discretionary spends from a lot of the investment banks. While that is a risk, the opportunity really is that these financial institutions and banks are also looking for partners who can help them try and variabilize their cost base and to help them with more transformative end-to-end improvements that would make them more effective.

NV (Tiger) Tyagarajan – President and CEO: Couple of other points that I would add to what Mohit said, clearly discretionary spend is what – it’s coming under scrutiny. At the same time, the intensity of dialog around larger transformative engagements have gone up, and with our process expertise and our reengineering capabilities, I think we are very well positioned to have those dialogs. We continue to win a large number of analytics and Smart Decision Services cross-sell engagements. The last point I would make is the addition of that leadership team to the Company has really helped us drive our technology business, our IT business in a forward direction and which is why we are beginning to see growth in that business after many years of not more than probably single-digit growth.

Jeff Rossetti – Janney Montgomery Scott: So if I could just squeeze one more last question. Mohit, I know you mentioned about the receivable. Could you maybe give a little bit more color about how the payments might – can progress with that particular client? I know you mentioned there was an upfront investment made.

Mohit Bhatia – CFO: Sure. So like I said, as part of the commercial terms with the large client, they agreed to pay us a pretty substantial upfront payment which will be used amongst other things to improve and upgrade and refresh the infrastructure and technology use to serve that client processes. That clearly changed the DSOs because it came in as a receivable but the cash given only a few days later in the second quarter and that impacted our DSOs by over seven days. If I were to exclude this one client which caused a swing in the DSOs, the rest of the company DSOs worsen only by about a day or about 1.4 days. I think if we look at the business as usual of increasing DSOs of just 1 to 1.5 days, it is really a quarter one thing, it’s about timing. There’s lot of new contracts that came in, in the fourth quarter of last year. It’s normal while we iron out the billing complexity, et cetera, for these new logos. A lot of these are timing issues which will get normalized in the second quarter which is why we’re confident as a company that our DSO should be back in control at the same levels of 2011 or the balance part of the year. Just for ample clarity, the one big receivable for this client that I alluded to has already been received in cash, so it will reflect in our quarter two AR getting normalized as well as our cash flows being up.

Margins

Tien-tsin Huang – JPMorgan: Good results. Just wanted to ask on the margin side, it sounds like it implies down to flat margins after a good start to the year. So, how the year progressed? Is it really more just ramping up some cost as new clients come and just (wonder) if you could give a little bit more color?

NV (Tiger) Tyagarajan – President and CEO: Tien-tsin, let me just take that and then I’m going to ask Mohit to jump in. We actually have not been able to drive as much investment as we thought we would in the first quarter. As we’ve been saying a lot of the investments are in the front-end, these are domain expertise, people being brought in, it takes time to ramp these people up, and to some extent the margin that we delivered in the first quarter is a reflection of that. As we go through the year, we expect those investments to be done and that’s one of the reasons why we would expect our margins probably to look flat as we go through the year. Mohit?

Mohit Bhatia – CFO: No, absolutely, Tiger, I completely agree. Just peeling the onion a bit on that between gross margin and SG&A. Gross margin at 39% is very high. I think you should see it come down a bit over the next few quarters, maybe by 100 basis points approximately, but we’ll keep updating you. On the contrary, SG&A which is 24% of revenue should improve over the next three quarters again by 5,200 basis points, but those are some of the trending that we can all hope for as we walk down the rest of the year.

Tien-tsin Huang – JPMorgan: Good to know. Just quickly on the capital markets, thanks for the color on that as well. I was curious, maybe your peers have talked about a lot more weaknesses, it sounds like you’re seeing something little bit different, a little bit better. I’m curious what’s perhaps driving the delta there, Tiger?

NV (Tiger) Tyagarajan – President and CEO: I can answer only for ourselves, I suppose. It’s probably a reflection of the type of services that we offer. Clearly, most of what we offer, not all of it, most of it is non-discretionary. Most of what we offer is annuity streams and is sticky. I mean, it’s classic business process management and even a substantial portion of Smart Decision Services. I think that has to be done. So I suspect, part of it is a discretionary component, which is why, in capital markets where clearly the businesses are finding a new way of dealing with the world. Some of those discretionary spends are coming under pressure. I suppose it’s that, all I can say is that given the way the world is looking and most corporations saying, this is the way it’s going to be for quite some time to come. They are very actively in dialog saying, we need to run our businesses differently. So it seems to be great conversations that we are having.

Tien-tsin Huang – JPMorgan: Last one for me and I’ll jump off just on Japan, has that stabilized at this point and little bit weak last quarter?

NV (Tiger) Tyagarajan – President and CEO: Yes, it’s stable. It is stable. Interestingly, lots of new conversations, but as you know probably Japan, decision cycle times are much, much longer than anywhere else in the world, but to specifically answer your question, stable.