Q1 2024 had total revenues of $1.13 billion, marking a 4% year-over-year increase, driven by early signs of improving execution and performance in digital operations and Data-Tech-AI.
Gross margin exceeded expectations at 35%, and adjusted operating income margin was 16.1%, aligning with guidance.
The 3+1 Execution Framework was established, focusing on client-facing initiatives and internal transformation, showing promising early results.
Strategic Initiatives and Partnerships
Strengthened partnerships achieving Tier 1 status with AWS, Salesforce, and Adobe, and joined forces with Microsoft to integrate Azure OpenAI technology in finance and accounting.
Focused on driving go-to-market engagement in Data-Tech-AI, particularly in GenAI, leading to increased client conversations and contributing to revenue.
Highlighted successful AI integration examples with NOVA Data Center and Volkswagen Financial Services, showcasing Genpact’s role in AI-driven transformation.
Financial Performance and Metrics
Reported a 4% year-over-year increase in total revenue to $1.13 billion, with both digital operations and Data-Tech-AI segments performing better than expected.
Digital operations revenue, representing 56% of total revenue, increased by 4-5% year-over-year. Data-Tech-AI revenue, accounting for 44% of total revenue, grew by 3% year-over-year.
Adjusted operating income margin was 16.1%, with a gross margin of 35%, reflecting operational efficiencies.
2024 Outlook and Guidance
Increased full-year 2024 revenue growth guidance to 2.5% to 3.5%, up from the prior 2% to 3% range, without assuming improvement in the macro buying environment.
Raised full-year gross margin outlook to 35.3%, with adjusted operating income margin outlook remaining unchanged at 17%.
Full-year 2024 revenue is projected to be in the range of $4.59 billion to $4.63 billion, with adjusted EPS in the range of $3.01 to $3.04.
Capital Allocation and Shareholder Returns
Repurchased approximately 865,000 shares at a total cost of $30 million during Q1 2024.
Plans to return approximately 50% of operating cash flow to shareholders, maintaining a commitment to regular buybacks and quarterly dividends.
Operational Highlights
Booked 30 new logos in the quarter, with sole-source deals comprising about 40% of bookings.
Adjusted for involuntary attrition, the attrition rate was 17% for the quarter.
Cash flow from operations expected to be approximately $500 million for the full year, with capital expenditures projected to be 1.5% to 2% of revenue.
Question and Answer
Long-Term Revenue Targets
Question
Is it too soon to start thinking about longer-term revenue targets, considering the benefits of new strategies such as the 3+1 payoff on the P&L?
Answer
The company is currently focused on executing its 2024 plans and is comfortable with the provided ranges for this year.
Additional clarity on longer-term revenue targets will be provided as the year progresses.
The macro environment is stable, and the company is encouraged by its early execution and will continue to update on future growth.
GenAI Business Performance and Traction
Question
Can you provide more color on the performance and traction of the GenAI business, including the size, depth, and early client adoption?
Answer
It is still early days for the GenAI business, both for Genpact and its clients, but there is significant interest, particularly in the middle ground between clients and large enterprise technology companies.
While some client conversations have led to bookings and revenue, the current contribution is still relatively small, and the company will provide more information as the business solidifies.
Q1 Outperformance and Potential Timing Considerations
Question
Can you provide a more detailed breakdown of the Q1 outperformance and whether there were any one-time or non-recurring factors to consider for Q2?
Answer
The outperformance in Q1 was driven by better-than-expected execution in both the digital operations and Data-Tech-AI businesses.
The 3+1 Framework, particularly the focus on partnerships and employee engagement in the data and AI pivot, has shown early positive results.
Sales Team Reception to Changes and Culture
Question
How has the reception been to the changes within the organization, particularly on the sales team, and have there been any changes in voluntary attrition?
Answer
There is a high level of excitement within the team, driven by the desire to deliver better results and seeing the payoff from their efforts.
The introduction of routines and rituals, as well as the support from new senior leaders and increased focus on data, technology, and AI, has contributed to a positive culture.
Visibility and Assumptions for Q2 and Beyond
Question
Can you comment on the visibility into Q2 and the remainder of the year, including expectations for sequential growth and assumptions around discretionary spending, particularly in the Data-Tech-AI segment?
Answer
The company is not providing detailed visibility beyond 2024 but states that its second-half guidance is based on a prudent outlook, considering the macro environment and the flow-through of large deals from the previous year.
The Q2 guidance is based on better visibility for the next 55 days, and the company will continue to assess and update as the year progresses.
Client Productivity Commitments and AI
Question
Can you provide more color on trends in client productivity commitments, particularly with the increased interest in AI, and how this is impacting your core services?
Answer
While there is heightened interest in AI, there has not been an increase in productivity expectations from clients in discussions, renewals, or new signings.
The company has always incorporated productivity gains from AI tools in its offerings, and the interest from clients is primarily in understanding the “how” rather than a change in quantitative expectations.
The company has seen growth in alternative commercial models, moving away from FTE-related pricing, which supports the implementation of new technologies.
Go-to-Market Organization Implementation
Question
Have the changes to the sales and go-to-market organizations been fully implemented as of the end of Q1, or are there incremental changes planned for Q2 and the rest of the year?
Answer
The company has made significant changes to its go-to-market organization, moving from a matrixed structure to 12 client-facing units with increased decision-making authority.
The company will continue to evolve its approach as the 3+1 framework takes hold and as it gains more insights into client needs.
Gross Margin Drivers and Outlook
Question
Can you clarify the impact of less large deal upfront investments in Q1 and discuss the drivers of gross margin as you move through the year, including the Q2 downtick before a second-half recovery?
Answer
The increase in gross margin in Q1 was driven by lower severance, reduced large deal investments, and lower stock expenses compared to the previous year.
The company expects continued improvement in gross margin throughout the year due to better-than-expected revenue and enhanced operating leverage.
Sales Win Rates and Drivers
Question
The 62% win rates seem elevated; what factors are contributing to this, such as the pitch or go-to-market strategy?
Answer
The high win rates are primarily driven by a combination of small and medium-sized deals with sole source components and follow-on larger deals that are also sole source.
The company acknowledges the importance of maintaining a healthy pipeline and is focused on further increasing it.
Operating Margin and Profitability
Question
Why has the company increased gross margin but not adjusted operating margin? Can you discuss the factors at play, particularly the Q2 margin guide?
Answer
The company plans to reinvest the benefits from better revenue performance and operating leverage into generative AI investments and overall business growth.
The Q2 margin guide is consistent with the company’s seasonal pattern and reflects the current macroeconomic environment and budget conditions.
Impact of Outcome-Based Pricing on Model and Profitability
Question
How will the shift towards outcome-based pricing and non-FTE-based pricing models impact the company’s model, including profitability and headcount?
Answer
The company has observed that the average margin on alternative commercial models is higher than the company average, and it anticipates an enhanced decoupling between revenue and FTE-related costs.
The company is actively working to accelerate this decoupling through the development of IP and repeatable assets, which will further dissociate revenue from FTE headcount.
Discretionary Work in Genpact’s Revenue
Question
What portion of Genpact’s revenue is considered discretionary, particularly in the context of the current environment and client budgets?
Answer
Over 70% of Genpact’s revenue is annuity-based, coming from long-term contracts in both the digital operations and Data-Tech-AI segments.
The discretionary portion of the business is primarily related to the strategy and design component of end-to-end capabilities, with a focus on agility and responsiveness to client needs.
Shift Towards Non-FTE Revenues and Future Outlook
Question
How should we think about the shift towards non-FTE revenues on a go-forward basis? Was this shift driven by specific projects or clients, and is it expected to be lumpy in the future?
Answer
The company is actively pushing the agenda of non-FTE revenues in both large deals, renewals, and smaller/medium-sized deals, and this shift is expected to continue.
The company is implementing architecture and infrastructure elements to support this decoupling of FTE headcount from revenue growth and will report progress over time.
Generative AI conversations with clients and the development of IP-related assets are acting as catalysts for discussions and implementations of non-FTE pricing models.
Quality of Guidance and Methodology Changes
Question
How should we think about the overall quality of the guidance provided, considering the challenging environment and potential changes in client behavior? Have there been any methodology changes or adaptations to lower visibility?
Answer
The company’s methodology for providing guidance remains consistent, and it continues to refine its approach based on experience and insights gained each quarter.
The guidance is considered prudent, reflecting the assessment that the macro environment, particularly for discretionary and shorter-duration work, has not significantly improved.
The company has good visibility into its annuity-based business, which comprises over 70% of its revenue, and will update guidance as the macro environment and client budgets evolve.
Demand Environment and Macroeconomic Factors
Question
Can you discuss how the demand environment for new business has evolved throughout the quarter, both for shorter-duration discretionary deals and larger deals, and provide insights into the outperformance relative to macroeconomic factors?
Answer
The company has seen a record-level pipeline across all segments, driven by increased agility, proactive partnership engagement, and a deep understanding of client needs and execution.
While the company’s execution has been strong, there has not been a significant improvement in the macroeconomic environment or client budgets, which is reflected in the company’s prudent guidance.