Genpact Limited 10-Q Summary
Business context and reporting period
Genpact is a global professional services firm focused on digital transformation, business process outsourcing, analytics, information technology and intelligent operations. It employed more than 77,000 people in over 20 countries. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. All amounts are in U.S. dollars unless otherwise stated.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenue | $623.0 million | $609.7 million | 2.2% increase |
| Global Client revenue | $553.7 million | $514.2 million | 7.7% increase |
| GE revenue | $69.3 million | $95.5 million | 27.5% decrease |
| Gross profit | $239.7 million | $236.9 million | 1.2% increase |
| Gross margin | 38.5% | 38.8% | 0.3 percentage-point decrease |
| Income from operations | $79.1 million | $75.6 million | 4.6% increase |
| Operating margin | 12.7% | 12.4% | 0.3 percentage-point increase |
| Net income | $52.4 million | $58.5 million | 10.4% decrease |
| Net income attributable to shareholders | $53.3 million | $58.8 million | 9.3% decrease |
| Diluted EPS | $0.26 | $0.27 | Decrease |
| Cash flow from operations | $31.0 million | $(9.6) million | Improved by $40.7 million |
Revenue growth was driven primarily by Global Client BPO services, which increased 10.6%. IT services revenue declined 7.4%. BPO represented 82.1% of total revenue, compared with 80.2% in the prior-year quarter. Constant-currency revenue growth was approximately 3%.
Net income declined despite higher operating income because of increased foreign exchange losses, higher interest expense, a larger equity-method investment loss and a higher effective tax rate. The effective tax rate increased to 18.7% from 17.0%.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $388.2 million at March 31, 2017, down from $422.6 million at December 31, 2016. Approximately $379.2 million was held by foreign subsidiaries.
- Operating cash flow was $31.0 million. Investing cash flow was $(29.0) million, including $19.7 million of capital expenditures and $9.2 million for acquisitions. Financing cash flow was $(42.0) million.
- The company paid $219.8 million for share repurchases, including a $200.0 million accelerated share repurchase, and paid a $12.0 million quarterly dividend.
- Short-term borrowings declined to $15.0 million from $160.0 million at year-end. Current maturities of long-term debt were $39.2 million.
- Long-term debt, excluding the current portion, increased to $1.036 billion, primarily because the company issued $350.0 million of 3.70% senior notes due April 2022.
- The term loan balance was $727.5 million, with quarterly principal payments of $10.0 million and the remaining balance due in 2020. Total debt was approximately $1.09 billion, excluding capital leases.
- The company remained in compliance with its credit agreement financial covenants at March 31, 2017.
Material changes versus the prior comparable period
- Global Client revenue increased 7.7%, while GE revenue fell 27.5% as GE Capital-related work continued to phase out. GE represented 11.1% of revenue versus 15.7% in Q1 2016.
- Gross margin narrowed modestly because of wage inflation, higher operational headcount, infrastructure costs and lower IT-services utilization.
- Operating margin improved partly because Q1 2016 included a $4.9 million intangible-asset impairment charge; no comparable impairment was recorded in Q1 2017.
- Foreign exchange losses increased to $4.9 million from $1.0 million, primarily due to appreciation of the Indian rupee against the U.S. dollar.
- Net interest expense increased to $5.5 million from $2.8 million because of higher rates, revolving-facility borrowings, interest-rate swaps and the new senior notes.
- Average headcount increased 6.6% to approximately 74,900, while operational headcount increased approximately 5.2%.
- Common shares outstanding declined to approximately 192.7 million from 198.8 million at December 31, 2016, primarily due to share repurchases.
- Genpact acquired LeaseDimensions for preliminary estimated consideration of $11.6 million, including up to $3.0 million of contingent earn-out consideration.
Guidance, outlook, commentary and risks
The filing does not provide clear numerical revenue or earnings guidance. Management described growth opportunities in digital transformation, BPO, analytics and targeted verticals, while noting expected continued declines in services provided to GE. The company expects cash from operations, cash reserves and debt capacity to fund operations, growth, acquisitions, dividends and additional repurchases, but stated that future financing may also be required.
Subsequent to quarter-end, Genpact acquired Rage Frameworks for estimated cash consideration of $125.0 million to enhance artificial-intelligence capabilities and acquired BrightClaim and National Vendor for estimated cash consideration of $55.0 million to expand insurance services.
- Customer concentration remains relevant: GE represented 11% of Q1 2017 revenue and 12% of receivables at March 31, 2017.
- Key operating risks include client retention and new bookings, conversion of bookings to revenue, pricing and utilization, employee attrition, wage inflation, competition, technology disruption, cybersecurity and data protection.
- The business is exposed to foreign currency movements across numerous currencies and to variable-rate debt and LIBOR changes. Interest-rate swaps covered $456.8 million of notional debt at quarter-end.
- Debt covenants could restrict dividends, repurchases, acquisitions, additional borrowing and other corporate actions. Failure to comply could accelerate repayment obligations.
- Unrecognized tax benefits were $24.5 million at March 31, 2017, including $23.5 million that could affect the effective tax rate if recognized.
- Contractual obligations totaled approximately $1.485 billion, including $1.195 billion of long-term debt obligations, $181.9 million of operating leases and $24.1 million of earn-out consideration.
- The company had $6.8 million of capital commitments and $12.0 million of outstanding bank guarantees at quarter-end.
Important facts for investors to verify
- Whether Global Client growth can offset the continuing reduction in GE-related revenue.
- Whether BPO growth and digital investments can improve margins despite wage inflation and lower IT-services utilization.
- The effect of the new $350.0 million senior-note issuance and variable-rate debt on future interest expense and leverage.
- Final settlement of the $200.0 million accelerated share repurchase and the remaining authorization under the $1.25 billion repurchase program.
- Integration, funding and financial contribution of LeaseDimensions and the post-quarter-end Rage Frameworks and BrightClaim acquisitions.
- Future cash generation relative to dividends, repurchases, acquisitions, capital expenditures and debt maturities.
- The company’s final transition method and financial statement impact from adopting the new revenue-recognition standard in 2018.