Business Context and Reporting Period
Genpact Limited is a global professional services firm providing digitally enabled business process outsourcing and information technology services. It had more than 87,000 employees in over 25 countries. This unaudited Form 10-Q covers the three months ended March 31, 2019, with comparisons to the three months ended March 31, 2018.
Revenue was generated primarily from business process outsourcing services, which represented 84.2% of first-quarter 2019 revenue, and information technology services, which represented 15.8%.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2019 | Change |
|---|---|---|---|
| Net revenue | $688.9 million | $809.2 million | 17.5% |
| Gross profit | $244.6 million | $290.1 million | 18.6% |
| Gross margin | 35.5% | 35.8% | Up 0.3 points |
| Income from operations | $63.8 million | $90.1 million | 41.3% |
| Operating margin | 9.3% | 11.1% | Up 1.8 points |
| Net income attributable to shareholders | $64.7 million | $60.8 million | Down 6.0% |
| Net margin attributable to shareholders | 9.4% | 7.5% | Down 1.9 points |
| Basic EPS | $0.34 | $0.32 | Down 5.9% |
| Diluted EPS | $0.33 | $0.31 | Down 6.1% |
| Net cash used in operating activities | $(27.3) million | $(5.4) million | Improved outflow |
| Net cash used in investing activities | $(27.7) million | $(26.8) million | Broadly stable |
| Net cash used in financing activities | $(26.5) million | $(5.9) million | Improved outflow |
Cash and cash equivalents were $325.4 million at March 31, 2019, down from $368.4 million at December 31, 2018. Accounts receivable increased to $839.0 million from $774.2 million, while the allowance for doubtful receivables increased to $25.9 million.
Gross debt was approximately $1.32 billion at March 31, 2019, consisting primarily of $320.0 million of short-term borrowings, $34.0 million of current long-term debt, and $966.9 million of long-term debt. The company also reported $294.0 million of operating lease liabilities and $31.7 million of finance lease liabilities. The $500.0 million revolving credit facility had $320.0 million of funded borrowings outstanding, and the company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher transformation services revenue, large contracts signed in 2018, acquisitions, and stronger GE revenue.
- GE revenue increased 87.8% to $109.0 million and rose to 13.5% of total revenue from 8.4%. Global Client revenue increased 11.0% to $700.2 million but declined to 86.5% of total revenue from 91.6%.
- BPO revenue increased 18.7% to $681.3 million, while IT services revenue increased 11.4% to $127.9 million.
- Operating profitability improved due to better utilization of transformation-services resources, operating leverage, foreign-exchange benefits, and lower relative SG&A spending.
- Net income declined despite higher operating income because of a higher effective tax rate, a foreign-exchange loss compared with a prior-year gain, higher net interest expense, and lower government incentives.
- The effective tax rate increased to 23.3% from 15.7%, primarily due to the expiration of certain Indian special economic zone benefits, internal restructuring-related tax costs, jurisdictional mix, and a first-quarter 2019 discrete tax expense.
- Government incentives declined to $4.0 million from $15.5 million, primarily because of lower income from an Indian export subsidy.
- Operating cash outflow narrowed, but cash conversion remained negative. The primary working-capital pressures were a $64.8 million increase in accounts receivable and continued investment in other operating assets.
- Genpact adopted ASC 842, Leases, on January 1, 2019. The adoption added approximately $309.7 million of operating lease right-of-use assets and $329.0 million of lease liabilities and increased reported balance-sheet assets and liabilities.
- Genpact acquired riskCanvas Holdings for approximately $5.7 million in cash, expanding fraud, anti-money-laundering, transaction-surveillance, and financial-services consulting capabilities.
- No common shares were repurchased during the quarter. Approximately $304 million remained available under the share-repurchase authorization. The company paid a quarterly dividend of $0.085 per share, totaling $16.1 million.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide a clear formal full-year revenue or earnings guidance figure. Management stated that cash from operations, cash reserves, and debt capacity are expected to be sufficient to fund operations, growth, acquisitions, dividends, and potential additional share repurchases.
- Management identified risks related to client retention and bookings conversion, competition, pricing and utilization, employee attrition and wage inflation, acquisitions, cybersecurity and data protection, technology disruptions, international operations, foreign-exchange rates, interest rates and LIBOR phase-out, tax-law changes, and economic conditions.
- GE represented 13% of first-quarter revenue and 14% of accounts receivable at March 31, 2019, increasing customer-concentration exposure.
- The company has substantial contractual obligations, including approximately $1.14 billion of long-term debt obligations, $323.1 million of short-term borrowings and related interest, $382.7 million of operating lease payments, and total contractual obligations of approximately $2.00 billion.
- An Indian judicial pronouncement could increase defined-contribution benefit payments for certain India-based employees if applied retrospectively. The company stated that the timing and amount cannot currently be reliably estimated and no provision was recorded.
- Unrecognized tax benefits were $26.8 million at March 31, 2019, of which $25.6 million could affect the effective tax rate if recognized.
- The company uses foreign-exchange forwards and interest-rate swaps. Interest-rate swaps covered approximately $499.9 million of notional borrowings at March 31, 2019. A downgrade of the senior notes could increase their interest rate by up to 2 percentage points.
- There were no legal proceedings that management believed were likely to have a material adverse effect. The company reported effective disclosure controls and no material changes in internal control over financial reporting.
Investor Verification Points
- Determine whether the sharp increase in GE revenue is sustainable and assess the effect of higher GE concentration on customer risk.
- Reconcile revenue growth with accounts-receivable growth and monitor future operating cash flow and collections.
- Assess the durability of the 11.1% operating margin given wage inflation, higher onshore staffing, stock-based compensation, and utilization trends.
- Verify the impact of Indian tax-benefit expirations, export subsidies, and the unresolved Indian employee-benefit judgment on future tax rates and cash payments.
- Review debt maturities, LIBOR and refinancing exposure, covenant headroom, and the availability of the revolving facility.
- Evaluate the effect of ASC 842 lease liabilities and approximately $2.00 billion of total contractual obligations on liquidity.
- Assess acquisition integration and returns, including the riskCanvas, Barkawi, and Commonwealth Informatics acquisitions.
- Confirm future capital-allocation priorities among dividends, share repurchases, acquisitions, debt reduction, and investment in digital capabilities.