Genpact Limited 10-Q Summary
Business Context and Reporting Period
Genpact Limited is a global professional services firm providing business process management, analytics, consulting, digital solutions and information technology services. It served clients from more than 30 countries with over 90,000 employees. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the same periods in 2018.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Net revenues | $881.8 million | $728.6 million | $1,691.0 million | $1,417.5 million |
| Gross profit | $310.6 million | $265.7 million | $600.6 million | $510.3 million |
| Gross margin | 35.2% | 36.5% | 35.5% | 36.0% |
| Income from operations | $106.2 million | $79.5 million | $196.3 million | $143.3 million |
| Operating margin | 12.0% | 10.9% | 11.6% | 10.1% |
| Net income attributable to shareholders | $73.7 million | $64.6 million | $134.6 million | $129.3 million |
| Diluted EPS | $0.38 | $0.33 | $0.69 | $0.66 |
| Cash flow from operations | Not separately provided | Not separately provided | $121.0 million | $49.5 million |
Q2 revenue increased 21.0% year over year, while first-half revenue increased 19.3%. Constant-currency revenue growth was 22% in Q2 and 21% in the first half, both non-GAAP measures disclosed by management. BPO revenue grew 22.6% in Q2 and 20.7% in the first half; IT services revenue grew 13.2% and 12.3%, respectively.
- Client mix: Q2 revenue from Global Clients was $763.2 million, or 86.5% of revenue, while GE revenue was $118.6 million, or 13.5%. GE revenue increased 81.2% year over year, primarily from a large contract signed in late 2018 and increased transformation services.
- Cash and liquidity: Cash and cash equivalents were $378.0 million at June 30, 2019, compared with $368.4 million at December 31, 2018. Operating cash flow was $121.0 million for the first half.
- Debt: Short-term borrowings were $290.0 million; current long-term debt was $33.5 million; and long-term debt excluding the current portion was $959.2 million. Total reported debt was approximately $1.28 billion, excluding lease liabilities.
- Capital allocation: The company paid $32.3 million of dividends during the first half and declared a third-quarter dividend of $0.085 per share after quarter-end. No shares were repurchased during the first half of 2019; approximately $304 million remained available under the repurchase authorization at June 30.
- Balance sheet: Total assets were $4.01 billion and shareholders’ equity was $1.58 billion at June 30, 2019. Operating lease right-of-use assets and lease liabilities were recognized following adoption of ASC 842.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by transformation, analytics and consulting work, ramp-ups of large contracts, acquisitions and increased GE activity.
- Gross margin declined 130 basis points in Q2 and 50 basis points for the first half. Management attributed the decline primarily to lower initial margins on large onshore deals, wage inflation, increased onshore staffing and higher stock-based compensation.
- Operating margin improved 110 basis points in Q2 and 150 basis points for the first half, supported by operating leverage, improved utilization and lower SG&A expense as a percentage of revenue.
- Net income attributable to shareholders rose 14.2% in Q2 but only 4.1% for the first half. Net margin declined from 8.9% to 8.4% in Q2 and from 9.1% to 8.0% for the first half.
- The effective tax rate increased to 22.4% in Q2 from 20.9% and to 22.8% for the first half from 18.4%, primarily due to the expiration of certain Indian special economic zone benefits, internal restructuring tax costs and changes in the geographic mix of income.
- Other income declined materially because the company recorded $25.7 million of government incentives in the first half of 2018 versus $4.0 million in the first half of 2019.
- Operating cash flow increased by $71.6 million year over year, aided by higher earnings, working-capital changes and increased non-cash expenses. Financing cash use decreased to $60.1 million from $141.3 million, primarily because 2019 had no share repurchases.
- The company acquired riskCanvas Holdings for approximately $5.75 million in January 2019, adding fraud, anti-money-laundering and transaction-surveillance capabilities.
- Existing shareholders completed two secondary offerings totaling 20 million shares in February and May 2019. Genpact did not receive proceeds from either offering.
Guidance, Outlook, Commentary and Risks
The filing does not provide a clear quantitative full-year revenue or earnings guidance figure. Management stated that cash from operations, cash reserves and debt capacity are expected to fund operations, growth, acquisitions, dividends and potential additional share repurchases.
- Management highlighted continued demand for digitally enabled operations, transformation services, analytics, consulting and large-deal ramp-ups.
- Key execution considerations include initial margins on large onshore contracts, wage inflation, employee attrition, hiring capacity, utilization and the ability to convert bookings into revenue.
- GE concentration increased: GE represented 13.5% of Q2 and first-half revenue, compared with 9.0% and 8.7%, respectively, in the prior-year periods. Revenue classifications were affected by GE divestitures; certain businesses Genpact continues to serve were reclassified as Global Client revenue.
- Material risks include client retention and concentration, competition, economic conditions in the United States and Europe, foreign exchange volatility, cybersecurity and data-protection requirements, technology disruption, acquisitions and integration, tax-law changes, visa restrictions and employee compensation pressures.
- The company is exposed to LIBOR and interest-rate risk. Interest-rate swaps covered $492.5 million of notional debt at June 30, 2019. The 3.70% senior notes could incur up to a 2% rate increase if credit ratings decline.
- An Indian judicial pronouncement could result in additional historical defined-contribution obligations, but the timing and amount cannot currently be estimated reliably.
- Indian tax assessments related to 2009 and 2013 transactions totaled approximately $158 million including interest. Genpact had paid $23 million under protest and may be required to pay additional amounts pending appeals.
- At June 30, 2019, total contractual obligations were approximately $2.00 billion, including debt, lease obligations, purchase obligations, capital commitments and other liabilities.
- The company reported no material legal proceedings believed likely to adversely affect its business, results or financial condition, and management concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether GE-related revenue growth and the large late-2018 contract are sustainable, including the impact of GE divestitures and revenue reclassification.
- Whether gross-margin pressure from onshore delivery, wage inflation, rebadged employees and stock-based compensation moderates as large deals mature.
- Whether operating cash flow remains strong as accounts receivable and contract assets grow.
- The company’s ability to refinance or repay approximately $1.12 billion of long-term debt contractual payments and $290.0 million of short-term borrowings.
- The effect of higher Indian tax rates, pending tax assessments and expiration of tax incentives on future earnings and cash taxes.
- The potential financial impact of the unresolved Indian benefits judgment.
- Future acquisition spending, integration results and impairment risk related to approximately $1.40 billion of goodwill and $165.8 million of net intangible assets.
- Management’s future quantitative guidance, which is not clearly provided in this filing.