Genpact Limited: 2016 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Genpact Limited is a Bermuda-based provider of digitally powered business process management and services. It reported unaudited U.S. GAAP results for the three months ended March 31, 2016, compared with the three months ended March 31, 2015. The company had more than 70,000 employees in 25 countries and served a few hundred strategic clients.
Financial Results and Key Metrics
| Metric | Q1 2015 | Q1 2016 | Change |
|---|---|---|---|
| Net revenue | $587.2 million | $609.7 million | 3.8% |
| Gross profit | $229.7 million | $236.9 million | 3.1% |
| Gross margin | 39.1% | 38.8% | Down 0.3 percentage points |
| Income from operations | $74.1 million | $75.6 million | 2.1% |
| Operating margin | 12.6% | 12.4% | Down 0.2 percentage points |
| Net income attributable to shareholders | $44.7 million | $58.6 million | 31.2% |
| Net margin | 7.6% | 9.6% | Up 2.0 percentage points |
| Diluted EPS | $0.20 | $0.27 | Increase |
| Cash flow from operations | $24.3 million | $(11.8) million | Decline |
Global Client revenue increased 6.1% to $502.3 million, while GE revenue declined 5.5% to $107.4 million. BPO revenue rose 6.1% to $489.1 million, while IT services revenue declined 4.4% to $120.6 million. Adjusted for foreign exchange, total revenue growth was 6.2%.
Cash and cash equivalents were $429.8 million at March 31, 2016, compared with $450.9 million at December 31, 2015. Accounts receivable increased to $605.6 million from $590.1 million. Days sales outstanding increased to 89 from 81 at March 31, 2015.
Total debt at March 31, 2016 consisted primarily of $766.7 million of net long-term term-loan debt, $39.1 million of current long-term debt and $81.5 million of short-term borrowings. The company also had a $350 million revolving credit facility, with $81.5 million of funded borrowings outstanding. Management stated that the company was in compliance with its financial covenants.
Investing cash outflows were $31.5 million, including $25.5 million for property, plant and equipment and $2.3 million for the SSE acquisition. Financing cash inflows were $22.6 million, including $60.0 million of revolving-credit borrowings, partly offset by $33.0 million of share repurchases and $10.0 million of term-loan repayment.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by Global Client BPO services and large transformational deals; GE revenue declined as work for GE Capital Corporate was phased out.
- Gross and operating margins declined modestly because of wage inflation, higher operational headcount, travel costs and increased SG&A spending.
- Net income benefited from lower foreign-exchange losses, lower net interest expense and a lower effective tax rate of 17.3%, compared with 19.9% in Q1 2015.
- Operating cash flow turned negative, primarily because of higher tax payments, bonus payments, upfront investments in large deals and higher trade receivables.
- SG&A increased 7.7% to $160.1 million, including investments in domain expertise, digital and analytics capabilities, professional services and a higher doubtful-receivables reserve.
- The company repurchased 1.36 million shares for $33.0 million during the quarter. The board approved an additional $250 million authorization, bringing total authorization since February 2015 to $500 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide a clear quantitative full-year revenue or earnings guidance figure. Management described expected future funding as sufficient for operations, growth, expansion plans and additional share repurchases, based on operating cash flow, cash reserves and debt capacity.
On January 8, 2016, Genpact acquired 51% of Strategic Sourcing Excellence LLC for initial cash consideration of $2.6 million. Preliminary purchase consideration was $14.5 million, including contingent earn-out consideration, and the transaction generated $14.5 million of goodwill. Potential earn-out consideration was up to $20.0 million. The company also has a future call option and the selling shareholders have a potential put option for the remaining 49% interest.
Unusual or material items included a $4.9 million impairment charge for a software intangible asset and a $9.5 million gain from changes in the fair value of acquisition-related earn-out and deferred consideration. The net effect was $5.1 million of other operating income, compared with $0.5 million in Q1 2015.
Principal risks include client retention and concentration, dependence on the United States and Europe and certain industries, GE-related revenue exposure, foreign-exchange volatility, wage inflation, employee attrition, competition, cybersecurity and technology disruptions, data privacy, acquisitions and integration, tax changes, interest-rate and LIBOR exposure, regulatory developments, and global economic conditions. GE represented 17.6% of Q1 2016 revenue and 18% of receivables at March 31, 2016.
As of March 31, 2016, contractual obligations totaled approximately $1.20 billion, including $829.9 million of long-term debt obligations, $141.1 million of operating leases, $81.9 million of short-term borrowings and $23.8 million of earn-out consideration. The company used $200 million of interest-rate swaps, with LIBOR fixed at 1.20% through June 2020.
Important Facts for Investors to Verify
- Whether revenue growth from Global Clients and transformational deals offsets continuing declines in GE and IT-services revenue.
- Whether gross and operating margins recover from the Q1 pressure caused by wages, headcount, travel and SG&A investment.
- Whether negative operating cash flow and the increase in days sales outstanding reverse in subsequent quarters.
- The repayment timing and liquidity impact of the $81.5 million revolving-credit draw and the large term-loan maturity concentration in 2020.
- The sustainability of earnings growth after excluding the $9.5 million earn-out fair-value gain, the $4.9 million intangible impairment charge and favorable tax items.
- The performance, earn-out exposure and potential future purchase obligation related to SSE.
- Progress under the expanded $500 million share-repurchase authorization and its effect on leverage and liquidity.
- Exposure to GE divestitures, currency movements, interest rates, client concentration, cybersecurity and employee-cost inflation.