Genpact Limited — 2016 Q3 Form 10-Q Summary
Business context and reporting period
Genpact Limited is a Bermuda-based provider of digitally powered business process management and services, serving a few hundred strategic clients with more than 75,000 employees in 25 countries. The filing reports unaudited results for the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Change |
|---|---|---|---|
| Net revenues | $648.8 million | $617.8 million | 5.0% |
| Gross profit | $256.4 million | $242.0 million | 5.9% |
| Gross margin | 39.5% | 39.2% | +0.3 pts |
| Income from operations | $87.1 million | $87.3 million | (0.3%) |
| Operating margin | 13.4% | 14.1% | (0.7 pts) |
| Net income attributable to shareholders | $68.8 million | $68.1 million | 1.1% |
| Diluted EPS | $0.33 | $0.31 | Increase |
| Metric | Nine months 2016 | Nine months 2015 | Change |
|---|---|---|---|
| Net revenues | $1,889.0 million | $1,814.5 million | 4.1% |
| Gross profit | $740.0 million | $714.9 million | 3.5% |
| Gross margin | 39.2% | 39.4% | (0.2 pts) |
| Income from operations | $242.7 million | $250.7 million | (3.2%) |
| Operating margin | 12.8% | 13.8% | (1.0 pt) |
| Net income attributable to shareholders | $192.6 million | $175.4 million | 9.8% |
| Diluted EPS | $0.91 | $0.80 | Increase |
- Global Client revenue increased 7.9% in Q3 and 6.5% year to date, while GE revenue declined 7.8% in Q3 and 6.0% year to date. GE represented 16.3% of Q3 revenue and 17.1% of year-to-date revenue.
- BPO revenue increased 8.7% in Q3 and 6.8% year to date. IT services revenue declined 8.4% in Q3 and 5.8% year to date, primarily because of weaker healthcare, investment banking, and capital markets engagements.
- Q3 SG&A expense increased 8.5% to $157.0 million, raising SG&A as a percentage of revenue to 24.2% from 23.4%. The increase reflected wage inflation, investments in digital and analytics capabilities, and higher doubtful-receivable reserves.
- Cash provided by operating activities was $222.9 million for the nine months, down from $253.6 million in 2015. Capital expenditures were $64.4 million, and cash used for investing activities was $95.6 million.
- Cash and cash equivalents declined to $419.1 million from $450.9 million at December 31, 2015. Approximately $391.6 million was held by foreign subsidiaries.
- At September 30, 2016, the company had $115.0 million of short-term borrowings, $39.2 million of current long-term debt, and $707.9 million of long-term debt. The term loan matures in 2020 and bears interest at LIBOR plus 1.50% based on the company’s current credit rating.
- The company remained in compliance with its debt covenants. Interest-rate swaps covered $438.6 million of notional debt as of September 30, 2016.
Material changes versus the prior comparable period
- Revenue growth was driven by Global Clients and BPO services, partially offset by continuing GE Capital business phase-outs and lower IT services revenue.
- Operating margin weakened because SG&A grew faster than revenue and because Q3 2016 included a $5.4 million intangible-asset impairment charge. Q3 2015 included a larger $10.7 million impairment charge but also a $7.3 million gain from changes in acquisition earn-out values.
- Year-to-date net income benefited from lower interest expense, including the absence of the $10.1 million debt-extinguishment charge recorded in 2015, lower equity-method losses, and a lower effective tax rate.
- Net income in Q3 included a $5.2 million gain from the sale of the company’s cloud-hosted technology platform for the Indian rural banking sector.
- The company repurchased 9.6 million shares for $242.6 million during the first nine months of 2016, compared with 7.1 million shares for $159.0 million in the prior-year period. Total repurchase authorization increased to $750.0 million.
- The company acquired PNMSoft, Endeavour Software Technologies, and a 51% interest in Strategic Sourcing Excellence. Aggregate contingent earn-out obligations were material, including up to $9.0 million for PNM and up to $20.0 million for SSE.
Guidance, outlook, commentary, and risks
The filing does not provide a clear numerical revenue or earnings guidance range. Management expects cash from operations, cash reserves, and debt capacity to fund operations, growth, acquisitions, and additional share repurchases.
- Management highlighted continued growth in targeted verticals, including banking and financial services, consumer products, life sciences, insurance, and high technology, while noting weakness in certain IT services engagements.
- Key risks include client retention and new business wins, dependence on U.S. and European clients and selected industries, GE relationship changes, pricing and utilization, wage inflation and employee retention, foreign exchange volatility, LIBOR and financing costs, acquisitions and integration, data security, technology disruptions, competition, tax changes, and global economic conditions.
- Accounts receivable increased to $609.5 million, and the doubtful-receivable reserve rose to $16.0 million from $11.5 million at year-end.
- Contractual obligations totaled $1.18 billion, including $808.0 million of long-term debt obligations, $115.7 million of short-term borrowings, $134.0 million of operating leases, and $27.1 million of earn-out consideration.
- Unrecognized tax benefits were $21.0 million at September 30, 2016, of which $20.2 million could affect the effective tax rate if recognized.
- Between October 1 and November 8, 2016, the company repurchased an additional 2.9 million shares for $68.1 million.
- Management reported effective disclosure controls and no material change in internal control over financial reporting, although controls for the 2016 acquisitions were excluded from the evaluation.
Important facts for investors to verify
- Whether Global Client growth can offset the continuing decline in GE-related revenue.
- Whether IT services weakness, lower utilization, wage inflation, and higher SG&A continue to pressure operating margins.
- The sustainability and cash impact of substantial share repurchases relative to operating cash flow and debt balances.
- Integration, performance, and contingent-payment exposure from the 2016 acquisitions, including SSE’s future put or call arrangements.
- Receivables quality and the increase in doubtful-receivable reserves.
- Foreign-exchange, interest-rate, tax, data-security, and client-concentration risks, including GE’s 15% share of receivables and 17% share of year-to-date revenue.