Genpact Limited 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Genpact Limited is a global professional services company providing digitally led business process management, analytics, consulting, digital solutions and information technology services. It had more than 93,000 employees serving clients in over 30 countries. The filing covers the unaudited three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net revenue | $888.8 million | $748.0 million | $2,579.8 million | $2,165.5 million |
| Gross profit | $315.1 million | $266.6 million | $915.8 million | $776.8 million |
| Gross margin | 35.5% | 35.6% | 35.5% | 35.9% |
| Operating income | $113.6 million | $94.0 million | $309.9 million | $237.3 million |
| Operating margin | 12.8% | 12.6% | 12.0% | 11.0% |
| Net income attributable to shareholders | $88.1 million | $73.6 million | $222.7 million | $202.9 million |
| Diluted EPS | $0.45 | $0.38 | $1.14 | $1.04 |
| Operating cash flow | Not separately provided | Not separately provided | $341.3 million | $202.8 million |
Revenue growth was driven principally by business process outsourcing and transformation services, including large deals signed in late 2018 and early 2019. Q3 revenue from Global Clients increased 12.3% to $767.7 million, while GE revenue increased 87.7% to $121.1 million. GE represented 13.6% of Q3 revenue and 13.5% of nine-month revenue.
As of September 30, 2019, cash and cash equivalents were $456.9 million, accounts receivable were $863.2 million, and total shareholders’ equity was $1.606 billion. Funded short-term borrowings were $245.0 million, current long-term debt was $33.5 million, and long-term debt excluding the current portion was $950.9 million. Reported operating lease liabilities totaled $328.5 million, following adoption of the new lease standard.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 18.8%; nine-month revenue increased 19.1%.
- Q3 operating income increased 20.8%; nine-month operating income increased 30.6%, with operating margin expanding by 20 basis points and 100 basis points, respectively.
- Gross margin declined modestly because of lower initial margins on large new deals and higher stock-based compensation, partly offset by improved utilization and operating leverage.
- Net income attributable to shareholders increased 19.7% in Q3 and 9.8% for the nine months. Nine-month net margin declined from 9.4% to 8.6%, reflecting higher interest expense, lower other income and a higher effective tax rate.
- Operating cash flow increased 68.3% to $341.3 million, supported by higher earnings, working-capital improvements and increased non-cash expenses.
- Investing cash outflows decreased to $86.0 million from $199.8 million, primarily because prior-year acquisition spending was substantially higher.
- Financing cash outflows increased to $154.2 million from $52.1 million, principally because 2019 included net debt repayments, dividends and earn-out payments.
- The company repurchased 608,285 shares for $23.9 million during the nine months and paid $48.5 million of dividends. The quarterly dividend increased to $0.085 per share.
- Average headcount increased 15.4% in Q3 and 14.3% for the nine months, contributing to higher personnel costs.
Outlook, Commentary, Risks and Unusual Items
The filing does not provide a clear formal revenue or earnings guidance figure. Management expects cash from operations, cash reserves and debt capacity to fund operations, growth, expansion, dividends and potential share repurchases. A definitive agreement to acquire Rightpoint Consulting LLC was signed on October 15, 2019; closing remained subject to customary conditions.
- GE concentration increased materially, creating greater customer-concentration risk. GE accounted for 16% of receivables at September 30, 2019.
- The company is exposed to foreign-exchange movements, particularly involving the Indian rupee, euro and U.K. pound, and uses forward contracts and interest-rate swaps for hedging.
- Debt includes a LIBOR-linked term loan and revolving facility. The company reported compliance with its debt covenants; LIBOR phase-out and credit-rating changes could affect interest expense.
- Nine-month effective tax rate increased to 21.9% from 20.8%, primarily because certain Indian special economic zone benefits expired and the jurisdictional mix changed.
- Other income declined sharply because the Indian export subsidy generated $4.0 million in 2019 versus $30.9 million in 2018 and was no longer generally available after March 31, 2019.
- The company recorded a $3.5 million write-down of technology-related intangible assets during the nine months ended September 30, 2019.
- A February 2019 Indian judicial pronouncement could require additional retrospective defined-contribution payments. The company stated that the timing and amount could not yet be reliably estimated.
- Other principal risks include client retention and bookings conversion, employee attrition and wage inflation, cybersecurity and data protection, international operations, competition, acquisitions, regulatory changes, political and economic conditions, and dependence on U.S. and European clients.
- Adoption of ASC 842 on January 1, 2019 added $328.5 million of operating lease liabilities and $299.9 million of operating lease right-of-use assets at September 30, 2019; the filing states that comparative periods were not adjusted.
Most Important Facts for Investors to Verify
- Whether elevated GE revenue growth and concentration are sustainable without increasing customer-dependence risk.
- Progress toward improving the initial margins of large transformation deals and controlling personnel costs.
- Cash conversion, accounts-receivable growth, doubtful-receivable reserves and the sustainability of the $341.3 million nine-month operating cash flow.
- Debt maturities, LIBOR exposure, interest-rate swap coverage, covenant headroom and the company’s ability to fund dividends, acquisitions and repurchases.
- The closing, purchase price and integration risks associated with the proposed Rightpoint acquisition.
- The eventual financial impact of the Indian benefits-related judicial pronouncement and any changes to Indian tax incentives.
- The company’s detailed annual and quarterly outlook, since this filing does not state a clear formal guidance range.