Genpact Limited — Form 10-Q Summary
Business context and reporting period
Genpact Limited provides business process management, analytics, consulting and information technology services. It reported unaudited consolidated results for the three months ended March 31, 2012, compared with the three months ended March 31, 2011. The company had approximately 56,500 employees, more than 600 clients and operations in 17 countries.
Key financial metrics
| Metric | Q1 2011 | Q1 2012 | Change |
|---|---|---|---|
| Net revenues | $330.6 million | $435.5 million | +31.7% |
| Gross profit | $116.1 million | $170.0 million | +46.5% |
| Gross margin | 35.1% | 39.0% | +3.9 percentage points |
| Income from operations | $46.5 million | $60.4 million | +29.9% |
| Operating margin | 14.1% | 13.9% | Down 0.2 percentage points |
| Net income | $37.9 million | $40.3 million | +6.2% |
| Net income attributable to Genpact shareholders | $36.1 million | $38.5 million | +6.7% |
| Net margin attributable to shareholders | 10.9% | 8.9% | Down 2.0 percentage points |
| Diluted EPS | $0.16 | $0.17 | + $0.01 |
| Cash flow from operations | $21.1 million | $4.9 million | Down 76.7% |
- Global Client revenue increased 46.8% to $319.6 million and represented 73.4% of total revenue, compared with 65.9% in the prior-year quarter.
- GE revenue increased 2.7% to $115.9 million, but declined to 26.6% of total revenue from 34.1%.
- Business process management revenue increased 14.6% to $330.2 million. Information technology revenue increased substantially, reaching 24.2% of total revenue versus 12.8% in the prior-year quarter, primarily due to Headstrong.
- Average headcount increased 25.4% to approximately 54,100; revenue per employee increased to approximately $32,200 from $30,700.
- Cash and cash equivalents were $405.9 million at March 31, 2012, compared with $408.0 million at December 31, 2011. Accounts receivable increased materially, with net total receivables of approximately $446.2 million, including related-party receivables of $0.2 million.
- Total debt was approximately $383.2 million, consisting primarily of $251.0 million of short-term borrowings and $103.2 million of long-term debt, excluding capital leases.
- Total shareholders’ equity increased to $1.568 billion from $1.433 billion at December 31, 2011, aided by net income and favorable foreign-currency and hedging adjustments.
Material changes versus the prior comparable period
- Revenue growth was driven by increased Global Client activity and the May 2011 acquisition of Headstrong Corporation. Approximately 59.5% of the Global Client revenue increase was attributable to Headstrong.
- Gross margin expanded because revenue grew faster than cost of revenue and because of higher realizations on contracted India rupee-U.S. dollar hedges.
- SG&A increased 55.7% to $105.0 million, raising SG&A as a percentage of revenue from 20.4% to 24.1%. Higher personnel, consulting, legal, facility and infrastructure costs, Headstrong-related expenses and stock-based compensation were significant contributors.
- Operating margin was broadly stable despite gross-margin improvement because of higher SG&A and acquired-intangible amortization.
- Net margin declined because of higher interest expense, a foreign-exchange loss compared with a prior-year gain, and higher income taxes following expiration of an Indian tax holiday and the higher tax rate applicable to Headstrong.
- Operating cash flow declined primarily because of a $41.1 million increase in accounts receivable, tax payments, new-site security deposits and higher bonus payments. The receivable increase was partly offset by a $33.0 million increase in other liabilities.
- Investing cash use decreased to $28.0 million from $60.0 million, although capital expenditures increased to approximately $21.7 million from $6.0 million.
Guidance, outlook, risks and unusual items
The filing does not provide a clear quantitative revenue, earnings or cash-flow guidance range. Management stated that cash from operations, cash reserves and debt capacity were expected to be sufficient to fund operations, growth and expansion.
- On April 25, 2012, after quarter-end, Genpact acquired Accounting Plaza B.V. for cash consideration of $38.7 million, subject to adjustments. Accounting Plaza provides finance and accounting, human resources and PeopleSoft ERP services.
- The company had $734.0 million of total contractual cash obligations, including $251.0 million of short-term borrowings, $103.2 million of long-term debt, $181.8 million of operating leases and $152.5 million of other long-term liabilities.
- Foreign-exchange exposure remained significant. Outstanding foreign-exchange contracts had aggregate notional amounts across currencies of approximately $2.31 billion and a net mark-to-market liability of $134.4 million at March 31, 2012.
- Unrecognized tax benefits increased to $24.2 million, of which $24.0 million could affect the effective tax rate if recognized.
- Key disclosed risks include client retention and pricing, dependence on U.S. clients and GE, employee hiring and attrition, wage inflation, foreign-exchange volatility, tax-law changes, Indian tax matters, acquisitions and integration, technology disruptions, data or intellectual-property breaches, competition and global economic conditions.
- The company reported no material legal proceedings and stated that its disclosure controls were effective. No material changes to internal control over financial reporting were identified.
Important facts for investors to verify
- Whether the strong Global Client and Headstrong-driven revenue growth can continue after normalizing for acquisition-related contributions.
- Whether higher SG&A, wage inflation, stock-based compensation and acquired-intangible amortization pressure operating and net margins.
- Whether the sharp decline in operating cash flow and elevated receivables represent temporary working-capital timing or a persistent collection risk.
- The repayment schedule, covenant compliance and refinancing requirements for the $251.0 million short-term borrowing balance and $103.2 million term loan.
- The potential earnings and cash effects of foreign-exchange movements, hedging positions and the $134.4 million net derivative liability.
- The impact of the expired Indian tax holiday, proposed Indian tax legislation, unrecognized tax benefits and other tax examinations.
- The purchase accounting, integration costs and contribution from the Accounting Plaza acquisition completed after quarter-end.