Good day, ladies and gentlemen. Welcome to the 2023 Third Quarter Genpact Limited Earnings Conference Call. My name is Dee Dee [ph], and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference call. As a reminder, this call is being recorded for replay purposes. The replay of the call will be archived and made available on the IR section of Genpact’s website. I would now like to turn the call over to Roger Sachs, Head of Investor Relations at Genpact. Please proceed.

Thank you, Dee Dee. Good afternoon, everybody, and welcome to our third quarter earnings call to discuss results for the period ended September 30, 2023. We hope you had a chance to review our earnings release, which was posted to the IR section of our website, genpact.com. Speakers on today’s call are Tiger Tyagarajan, our President and CEO; Mike Weiner, our Chief Financial Officer; and BK Kalra, our next CEO. Today’s agenda will be as follows: Tiger will provide an overview of our results and update you on our strategic initiatives. BK will follow with a few brief introductory comments. And Mike will walk you through our financial performance for the quarter as well as update you on our full year 2023 outlook. Mike and Tiger will then take your questions. We expect the call to last about an hour. Some of the matters we will discuss in today’s call are forward-looking and involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those in such forward-looking statements. Such risks and uncertainties are set forth in our press release. In addition, during today’s call, we will refer to a certain non-GAAP financial measures that we believe provide additional information to enhance the understanding of the way management views the operating performance of our business. You can find the reconciliation of these measures to GAAP in today’s earnings release posted to the IR section of our website. And with that, let me turn the call over to Tiger.

Thank you, Roger. Good afternoon, everyone, and thank you for joining us today for our third quarter 2023 earnings call. I know you’ve all seen the exciting news that BK Kalra has been appointed as Genpact’s next CEO. As I’ve announced my retirement in February of 2024. I will share more about this announcement and BK will share a few words. But first, let’s review the quarter. At a high level, we saw increasing pressure in short cycle advisory and other project work in quarter three as clients remained sharply focused on large transformational deals that prioritize cost reductions. This resulted in total revenue being below our expectations. However, bookings remain strong and are on pace to grow at least 25% in 2023. In addition, we continue to make significant progress in the use and deployment of gen AI as we move into live production environments with early demonstrated results. This is leading to many new inflows as clients prepare to embed large language models into their operations. Turning to our performance in more detail. We delivered on a constant currency basis total revenue of $1.14 billion, up 2% year-over-year. Data-Tech-AI services revenue of $500 million, down 2% year-over-year and Digital Operations services revenue of $636 million, up 6% year-over-year. We also delivered adjusted operating income margin of 17.2%, up 10 basis points year-over-year, and adjusted diluted earnings per share of $0.76, up 1% year-over-year. Our third quarter revenue grew less than expected. We saw ongoing pressure in short cycle projects and advisory work, driven by three things; one, fewer small deals converted; two, longer decision cycle times for those small deals; and three, lower demand for smaller tech deals in our financial services and consumer healthcare verticals. These challenges were predominantly felt in our Data-Tech-AI services, where we design…

Thank you, Tiger. I consider it an honor to be selected as Genpact’s next CEO, and on behalf of the entire Genpact team. I want to express our immense gratitude for your leadership. As many of you know, I have been with Genpact since our early days. I look forward to leading this talented team and building on the strong foundation that Tiger has established. I’m excited to step into the CEO role early next year. Over the next several months, I’ll be reviewing every aspect of the business and spending time listening to our clients, employees, partners and investors. The focus for us right now is navigating the current macro environment. I’m confident the headwinds are temporary and our business model remains robust. We expect to see our top line improve in 2024. We participate in underpenetrated and high growth market and with unparalleled dedication of our global team, we are extremely well positioned to drive sustainable long-term growth for all our key stakeholders. With that, let me turn the call over to Mike to go over the quarter in more detail.

Thank you, BK, and good afternoon, everyone. Today, I’ll review our third quarter results and provide you with our latest thinking regarding our full year 2023 outlook. Total revenue of $1.136 billion was up 2% year-over-year, both as a reported and as a constant currency basis. DataTech and AI services revenue, which represents 44% of total revenue, declined 2% both on an as reported and a constant currency basis. This performance was below our expectations, largely due to incremental pressure related to short cycle discretionary tech spending that escalated during September for both their financial services and consumer and healthcare verticals. Digital Operations services revenue which represents 56% of total revenue, increased 6% year-over-year, both on an as reported basis and a constant currency basis, reflecting on time deal ramps related to recent large booking wins. From a vertical perspective, financial services increased 6% year-over-year, largely due to large deal ramps, partly offset by clients lower than expected discretionary tech spending. Consumer and healthcare declined 2% year-over-year, largely due to pressure on short cycle growth oriented digital marketing projects and discretionary tech spending, as well as the impact from the recent divestiture of a business we had previously classified as held for sale last year. High tech and manufacturing increased 4% year-over-year, primarily driven by ramp ups related to recent new logo wins, partly offset by the impact of reduction of scope of a priority high tech client mentioned earlier in the year. Despite our disappointing third quarter top line performance, during the 12-month period ending September 30, 2023, we grew the number of client relationships with annual revenue greater than $5 million from 158 to 182. Additionally, clients with annual revenue greater than $25 million expanded from 34 to 38 and clients more than 100 million increased from 3…

Thank you, Mike. We’d now like to open up our call for your questions. Dee Dee, can you please provide the instructions?

Thank you. [Operator Instructions] And our first question comes from Tien-Tsin Huang of J.P. Morgan.

Hey, thank you. Wow, Tiger, it’s been an amazing run. So it’s weird to hear that end of an era here come February, but congrats on that news. And of course, congrats to BK. Well, I’m sure we’ll get a chance to speak again next quarter as well. But let’s just get into the business for a second here. Just thinking about the comments around short cycle as well as large deals, it’s been a pretty common theme, Tiger, that we’ve been hearing throughout this resort season. So maybe can you talk a little bit about ACV versus TCV? I’ve been trying to understand that dynamic better for a lot of the companies. I’d love to hear your thoughts on that because it sounds like the backlog is strong, but the short cycle work isn’t filling out. So that must be having an impact on the level of bookings that convert this year or in year, so anything to walk us through that dynamic.

So, Tien-Tsin, first of all, thank you. And your question nailed the answer itself. It’s exactly the dynamic that we are seeing. Very strong long cycle annuity deals with multi-year TCV. Typically, as you know, in our business, that ranges in the order of magnitude of three to slightly above three-year terms on the average, actually closer to four years. And then on the short cycle, you could have three months, six months, nine months, one year, et cetera. And those short-term projects are the ones that have been challenged. And we’ve heard that across the industry. In fact, we’ve heard both dynamics across the industry. What then happens is, we see the 25% at least bookings growth that we talked about, which sets the stage nicely, particularly for digital operations, but also for half of our DataTech-AI, because half of our DataTech-AI is long cycle in nature. It sets it really nicely for the long haul. The short-term bookings that don’t get done immediately translates to impact on revenue not coming through for the year, and that’s the dynamic we are seeing. Mike, you want to add anything?

Yes. What it adds to that is that, if you actually play out what you just said, Tiger, with regard to about 25% projected year-over-year bookings growth and how it manifests itself in the financials for the third quarter, and how we’re thinking about the fourth quarter as well. Our digital operations business grew 6%. We’re expecting it to continue to grow, which the vast majority of the large deals was reflected in there as well as, as you said earlier, about half of the DataTech and AI business is there. So it is a tale of two cities as you kicked off the discussion with incredibly strong transformational large deal wins that make up the vast majority of the pipeline, with some shorter near term non-annuity DataTech and AI pressure that we’re seeing in the third and projected into the fourth quarter.

Great. Thanks for going through that. So just my quick follow-up then, if we’re – so no budget flush, assumed this year makes sense. I heard the comments around 2024 and the acceleration in 2025. But what are you looking for? Is there anything that you can do to maybe catalyze the short cycle work, short of pricing. I imagine changing over the calendar year sometimes helps, but at this stage, it’s probably too early to call. Is there anything that can be done on your side to maybe catalyze that?

Yes. The way we’re kind of thinking about it, without getting any specific numbers today with regard to 2024 and how we’re thinking about entering the year. There’s a number of key variables we think about in our business. Obviously, the basis of it with the digital operations business growing strong will act as a fundamental base for us with these large deal signings we had, including the two we had this particular quarter. But really, the variability really comes from our DataTech and AI business that we talked about earlier. Few just points. The pipeline in DataTech and AI remains incredibly strong and growing. So that means there’s huge demand there. The large deals that I mentioned earlier also have a DataTech and AI component into it will continue to ramp up through next year. But specifically, what could we do and what are we seeing right now? So there’s a huge opportunity associated with generative AI. Specifically, while we didn’t see the budget flushing that we traditionally see in the third and particularly into the fourth quarter, we are not hearing any degradation in terms of generative AI budgets going into next year. So when you think about it, those dollars are what we’re going to go after with our huge focus and investment on data engineering solutions. I think that’s going to be a nice tailwind for us as we go to help us through, particularly in the DataTech and AI to help drive our growth next year above the level that we had this year, certainly.

And just to add finally to what Mike said in terms of some of the specific actions we’ve already taken, we now have a Gen AI set of offerings on the back of the 90 projects and pilots that I talked about, of which 10 are into getting closer and closer to production mode and two are in full production. The more that progresses, the more we get into replication mode. And as you can imagine, Gen AI is a conversation that if you can replicate and start rolling out those solutions, it gets lacked up pretty quickly. So we expect that to be a tailwind. Second, generative AI itself begs the question for our clients as to whether they have all the data lined up. And that’s where Mike’s comment on data engineering is a big one. We expect data engineering to be one of the tailwinds in our DataTech-AI as we compete this year and enter this year. And those specific actions we are doing in terms of resource allocation into the specific buying centers, industry verticals, and geographies, where we see the most uplift.

Thanks for walking through that.

Thanks, Tien-Tsin.

Thank you. [Operator Instructions] Our next question comes from David Koning of Baird. David, your line is open. Please check, you’re mute. Please rejoin using the call me feature. [Operator Instructions] Our next question comes from Maggie Nolan of William Blair.

Thank you. I’m hoping you could comment a little bit, it’s great to have you regularly provide kind of that non-FTE percentage that you’ve been giving. Can you give a little bit of color on the traction of that non-FTE work within your high priority accounts and how widespread that is being adopted within those particular accounts?

So, Maggie, actually, it’s a great question. At the total revenue level, our non-FTE commercial models, the penetration is 16%, as you heard in my remarks. And as you remember, we had said that over the long-term 2026 horizon, we’d like to get that to at least 20%. And last quarter I had reiterated that there is a very high probability that we’ll get there faster, because our bookings seems to be tracking, in terms of its penetration of alternate commercial models, higher than that 16%, which is great. And therefore it’ll keep accreting. Within priority accounts, though, that penetration of non-FTE pricing models is higher than the company average. The exact number I wouldn’t be able to give right away, but it’s tracking higher than the company average. And the reason is very simple. Often in the smaller relationships, you don’t have enough of a combined scale to be able to drive the kind of non-FTE pricing and value brace pricing that you can, when you do finance and accounting, with order management, with supply chain, and when you put all that together, our ability to drive real value is tremendous and we participate in that value creation.

Thank you. And then on the margins, do you anticipate that this current dynamic with the short cycle work versus the longer term kind of cost optimization projects is going to have an impact on where gross margin or operating margin can come in over the next couple of quarters?

Well, there’s two separate dynamics that are going on associated with our gross margin. As you know, when we have these large deal ramp ups, particularly when we take onshore delivery and move it offshore, tends to have a dilutive effect on the business in the near-term and gets accretive from a gross margin perspective. With a countervailing view on that as well, is that our DataTech and AI gross margins, when we have slower revenue growth, disproportionately benefit us on a gross margin basis. So with that said, and our projections going into next year, with the recovery in DataTech and AI, I think they’d be relatively flat on a go forward basis with those two counter things going in different directions.

Got it. Thank you. And congrats, Tiger and BK, on your announcements.

Thank you, Maggie.

Thank you. [Operator Instructions] And our next question comes from Ashwin Shirvaikar of Citi.

Hey, guys. Tiger, congratulations on the long run, and it’s been a pleasure working with you. And BK, congratulations, very well deserved and look forward to working with you.

Thank you, Ashwin.

Yes. I guess the question I have is, as you look at Data-Tech-AI and Digital Ops, right, the Digital Ops business should still, I would imagine, even without sort of a budget flush and without things like that, should still be sequentially growing most quarters, right? And so that would imply kind of Data-Tech-AI can shrinks to the 475, 480 kind of range for December. So when I kind of think of the carry forward from that, the – I just want to try to get better color on the less – not quite double-digit kind of comment. Is that more of a mid-single digit type of comment? Better or worse? What kind of visibility do you have by line? Any thoughts there?

Mike, go ahead.

Let me kick off. Yes. There’s two things to really unpack there. So your sequential observation, third quarter into fourth quarter regarding Digital Operations is 100% correct both on a notional dollar basis and our year-over-year percentage basis, also off of a tough fourth quarter comp from that perspective. So correct by definition, our Data-Tech-AI business will be weak going into the fourth quarter. Okay. So with that said and the full ramp up that I’m going to build on some of the other comments we said earlier, with the full ramp up of the Digital Operations business that we have on the large deals we’ve won through the year, that’ll provide a nice base for next year, right? Now if you then think about our digital – our Data-Tech and AI business with some of the drivers that we’re talking about, particularly that regarding generative AI, right, and being able to utilize some of those budgeted numbers that are out there, particularly, again with the data engineering solutions that we’re offering, we think that’s going to help propel our Data-Tech and AI business. So at the end of the day, logic would dictate that next year will be somewhere between our full year 2023 guidance, but less than our initial double-digit view that we had then. So we’ll have to ultimately see where it goes. We’ll provide additional information about that in early February. But the obvious other thing that we have to think about, the variable out there that’s creating a little less visibility than a normal is the macroeconomic environment. Does it remain stable? Does it improve? Does it deteriorate, right?

The one other thing that I would add, Ashwin – the one other thing that I would add to what Mike said, Ashwin, on Digital Operations, is that going into the third quarter actually probably even finishing off the second quarter going into the third quarter, the big discussion that we all had was confidence in the ramp of the wins that we’d had as we go through quarter three and quarter four. And one of the most pleasing aspects of our business is that ramp has exactly delivered what we had expected on Digital Operations. So even in this environment, we are really confident, not just with your comment that it’s a natural thing to come through, but even the risk associated with those types of ramps hasn’t played out at all. So it’s actually really, really solid.

Right. And that’s sort of where I was going to go next is with regards to the expectations that you had. Just to confirm, you’re not necessarily seeing delays with regards to sort of rebadging type deals. What types of deals and decision making are you seeing delays with? I mean, I know the broad classification is short cycle discretionary, but if you can be more granular with regards to what you’re seeing by vertical, by geography, any details there would be helpful?

Yes. I’ll take the easy ones because I guess the whole industry would be seeing this. And you would agree with that because you probably see more of it as you talk to the peer group technology project work, where teams are allocated, let’s say to financial services firms, banks. And as those projects get completed, the question of what’s the next project comes up? And if the leaders in the firm decide that actually we don’t want to spend any more money on the next set of projects, so instead of spending X billion dollars, we’ll spend X divided by two, that means that those projects, new projects don’t come in to utilize the same set of people who built the expertise, who built the domain, et cetera. It’s a really tough decision for that bank to take because the moment that happens, we move those teams into great projects with other people. Those people don’t sit idle, but everyone in banking, a number of people in retail, consumer goods and in manufacturing are clearly taking those decisions, have been taking those decisions. That’s one example. Another would be in the front end, improvement of marketing experience, improvement of digital marketing, some of those are coming under the radar and under the lens of is this really needed? And is the payback immediate? Those are the two questions that get asked, particularly as you get to the end of the year, budget flushing, not available, et cetera. So those are two examples. I’ll give you examples where we are not seeing that at all. Supply chain is a great example where we are not seeing any degradation of I need to improve my supply chain, I need to get a diversification of my supply chain driven by all macro factors. Another one would be get my data ready for gen AI. Two examples where we are not seeing any degradation.

I would just quickly like to add to that too, Tiger, that our pipeline associated with that type of work has not reduced, it’s actually increased. The quality of the pipeline increases. So that’s going to be again a nice driver for us as we go into 2024. We work hard on converting that pipeline into revenue.

Thank you. [Operator Instructions] Our next question comes from Bryan Bergin of TD Cowen.

Hi guys, thank you, Tiger. Been good working with you. Congratulations on retirement. BK, congrats on the promotion here. My first one is a clarification. So I just want to be crystal clear. The Digital Ops, it sounds like there’s really nothing change. You feel good about the ramp. So as you were thinking about what you would grow in 2024, just to be clear, is there any change on how you were feeling about the business? Fully understand that the DTA business is flattened out here, but just on the Digital Ops to start.

No. What we said in the first and second quarter in our last has played out exactly, I would – Ashwin asked a moment ago if you saw any degradation in terms of Digital Operations projected ramp, no. Worked out quite well. And that’s really, as I talked about earlier, we’ll continue to provide the base for fourth quarter and into next year. We’ve seen no degradation.

Okay. Very good. And then just on the margin expenses, so you’re obviously able to offset. I get the mix aspect of this, but as you’re kind of leaning into reduced cost, did you talk about how you’re balancing efficiency here versus the need for growth investments?

Yes, we’re not – it’s very simply, we’re not pulling away from growth investments. In my prepared comments, I tried to articulate we’re not pulling away from sales and marketing investments for R&D. There’s natural efficiencies in our business, particularly in a down cycle, particularly in Data-Tech and AI on that small cohort of work that we do. But we’re not pulling from those investments for the future.

All right. Thank you.

Thank you. [Operator Instructions] And our next question comes from Mayank Tandon of Needham and Company.

Great. Thanks. Hey guys, this is Sam on for Mayank today. Thanks for taking the questions. Just a quick one from me. The 32 new logos this quarter was good to see. Could you guys talk about which verticals had the strongest new logo additions this quarter?

Actually, Mayank, it was actually nicely distributed across all our verticals. And we are very pleased with what I called in my prepared remarks, a bounce back. Because if you remember the first half of the year, it had come down versus the prior few or four quarters. And the reason for that one was a reduction in some of the smaller, faster growing technology companies that we saw withdraw for all good reasons that we all know in the first half. Got replaced by other larger clients across all verticals and interestingly, across GEOs as well, whether it’s Europe, Asia, or North America.

Got it. Okay. Thanks, guys.

Thank you.

Thank you. I’m showing no further questions at this time. I would now like to turn it back to Roger Sachs for closing remarks.

Thanks, everybody, for joining us today. And we look forward to speaking to you again in early February.

This concludes today’s conference call. Thank you for participating. And you may now disconnect.