Q4 2019 Earnings Call
Good day, ladies and gentlemen, welcome to the 2019 fourth quarter and year end Genpact Limited earnings Conference call. My name is GGP and I'll be your conference moderator for today at this time all participants are in listen only mode. We will conduct a question and answer session towards the end of this conference call. We expect this call.
To conclude in about an hour as a reminder, this call is being recorded for replay purposes. The replay of the call will be archived it made available on the IR section of Gen facts website I would now I turn the call over to Roger Sachs head of Investor Relations a genpact. Please proceed sir.
Thank you di di and good afternoon.
Nobody had welcome to Gentex fourth quarter earnings call to discuss our results for the fourth quarter. One full year ended December 31st 2019.
I Hope you had a chance to review our earnings release, which was posted to the IR section of our website Genpact outcome with me in New York Today, our Tiger Tyagarajan that president and Chief.
Executive Officer, if it's Patrick I would chief financial Officer.
And it for today will be as fathers target will provide a high level overview of our results and update you on our strategic initiatives that will then discuss our financial performance in greater detail.
Better outlook to set for 2020.
He will then come back with some.
Closing comments and then we will take your questions and if you could you just mentioned, we expect a call to last roughly an hour.
Some other matters, we will discuss in today's call. Our forward looking these forward looking statements about number of risks uncertainties and other factors that could cause actual results could differ materially those in such forward looking statements.
Such risks and uncertainties first that's what that's really.
During our call today, you will refer to certain non-GAAP financial measures. We believe these non-GAAP measures provide additional information to enhance the understanding of the weight management deal with the operating performance of our business.
Find a reconciliation of these.
Just a gap in today's earnings release posted to the IR section of our website and with that let me turn the call over to tightness.
Thank you Roger.
Soon everyone and thanks for joining us today for 2019 fourth quarter on yard and earnings call.
Outstanding execution on continued transformation so it.
This is when GAAP golf went up our best revenue growth you O'donnell.
That's translated into a healthy adjusted EBITDA and operating cash flow growth for 2019.
Metrics will all above the high end up our expectations.
Gone to desire for transformational change is accelerating.
Expanding our addressable market a garden, great opportunities for us to drive profitable long term growth.
We continue to improve their regarding the geopark portfolio evaluation process, allowing us to quickly reallocated investment on top of the sources. So best friend agreed I got areas.
Sure.
One of your 2019 results on a constant currency basis.
Total revenue increased 18%.
<unk> revenue increased 12% on global Blind be Bureau revenue increased 14%.
We also delivered adjusted operating income margin of 15.9% I'll then.
Based on an adjusted EBITDA.
All of that five cents up 14%.
During 2019, we were increasingly recognized by offline on industry on live.
Reported bought no to drive transformational change.
By leveraging disruptive digital technologies.
I'm real time predictive insights we are re imagining the we work gets done this all critical business problems for offline.
With the relentless speed some technological innovation, it's been a competitor macroeconomic and geopolitical pressures corporate leaders must accelerate their decision making process and make.
Board decisions based on insights derived from our analytics.
We believe walk on drunk driving gene to meet these heightened expectations from the C suite on board the huge difference here to in the market how does one of the reasons we run.
During 2019, we drove global brand growth across all chosen verticals.
Led by growth of more than 30% in transformation services.
Consulting digital and analytics transportation services rooted in domain and process expertise I said the tip of the skill for many large long drawn from somebody from engagements.
Our consistent growth performance over many years.
Supports my longer view that digital analytics comes to life when implemented with a deep understanding of domain and process.
I think the impact on transmission services on our business office is growing relationships are greater than 40% of revenue coming from proclamations obviously.
These are not.
Not growing up more than doubling the company average.
During 2019 for the second consecutive year, we signed total new bookings close to $4 billion.
I bought a high quality by blocking that remains near historic highs, which dirty wouldn't rigs.
For comparison during 2016.
2017, new bookings averaged approximately $2.7 billion.
No it would imply bookings how to solid growth in 2019 with proactive sole source deals accounting for roughly half of our new wins.
Do you continued to be a meaningful contribution to total bookings and almost three quarters of Bob.
Bookings on translation. So this is embedded in them up from 60% range in 2018.
As expected de bookings declined in 2019, given the large deal we signed late in 2018.
Let me call out some key highlights for do them I'd.
We continue to iconic brands block.
Blank list in our focus industry verticals.
We closed two acquisitions to enhance our capabilities in critical areas financial bronze and risk management and digital experience.
Supply chain services, a strategic focus area, so dramatic growth in influenced by blood bookings on revenue during the euro.
We successfully launched you know a recycling and training platform for our global workforce that I've been a huge.
We continue to leverage new commercial models.
Things are changing nature of what we do for offline.
And finally through the last phase of the large Gd you we significantly.
Our strategic sourcing capability.
Expanding on some of these.
During the year, we elevated our brand recognition and solidified our reputation as a thought leader, providing innovator bronchitis solutions for a growing roster of iconic line.
For instance, as discussed last quarter, we entered into a strategic.
Throughput God knows what our deep expertise in finance and accounting and ability to leverage due to our analytics to provide insights will help transform their BNN onyx function to drive timely as well as insightful decision making.
Be any represents another REIT area for disruption.
Slides.
These for growth.
These relationships are creating a heightened level of new inbound fees, we called accompanied want to explore engaging with us for transform their businesses.
We expect to fully leverage such new skill sets from a number of these relationships that I've added significant new capabilities over the last.
Lastly on these include highly leverageable genes and financial planning and analysis or amount, it's been in supply chain, particularly in consumer goods retail commercial on pricing analytics on sourcing and got to be management.
A lot of this depth in market on onshore.
We are.
At risk on but early in 2019, which bodes chart, our already strong market offerings and financial crimes and risk management services for bags large opportunity for growth.
Our expanded capabilities in this space already showing results.
We were selected by our global bond for transform back your wife he brought this fall.
Our wholesale banking business to better defined costamare risk profiles on improved regulatory compliance.
Hi, rich domain team, along with our digital Analytix exports.
Along Apostrophes guide I think of it solution with a transaction based commercial model.
This unique offering leverages the.
Just gone, but proprietary cloud platform to collector and organized customer data published customer profile templates I provide risk scores.
Replacing the banks garlic manual processes with a streamlined visits or other SaaS model. This solution is expected to got broad Pink Diamond Hall, and provide an industrialized skills.
He brought her with much higher accuracy and timely regulatory reporting.
During the fourth quarter, we closed the acquisition all right point to deepen our capabilities and experience, which is becoming increasingly important do offline.
Well, it's still early days were already seeing the volume, bringing together our processes.
In a way from underwrite barn experience innovation.
Supply chain management now led by the deem that joined US from Bobby in late 2018 is allowing us to better traction in a vastly underpenetrated market.
Hi, Brian has expanded more than three times during the beginning of from since the beginning of 2019.
And we recently won a new engagement with a large global consumer goods company for her to transform and run their end to end supply chain operations.
Redesigned operating model is aimed at helping the blind drive better customer relationships improved fulfillment grades accelerate new product introductions and optimize.
Promotions, thereby driving higher revenue and better working capital levels for them.
I'm excited to report that we now have three global relationships that crossed $100 billion, an annual revenue up from just one at the end up 2018.
We expect many more apart relationships to hit that milestone overtime.
As our solutions increasingly leverage AI and machine learning robotic process automation on cloud based solutions, our commercial models are becoming more outcome based.
The end of last year more than 40% about total revenue is from newer constructs not just based on ft pricing up from the mid thirties.
It's a grade only a couple of goes back.
Our government has always been the most important believable Africa.
Like many of our clients, we are going through our transformation in the way, we exceeded our workforce to reschedule and help them contiguous ilan.
The launch of our genome platform early last year.
The right do that matter extra upskill on 95000, plus global team members with relevant digital transformation on other professional skills at scale.
Well, then I'll wait to achieving our first your goal of reaching 70% penetration with the amount of learning our continuing direct fund.
As we move into.
Great ready, we continue to expect our overall demand to be a robust on continued to be led by transformation services.
Copper, but the ballpark domain and process expertise. We believe we are uniquely positioned to leverage innovative new digital technologies as well as data analytics in a focused way to solve for specific.
This outcomes.
This allows us to drive end to end the transformation for clients and unprecedented with delivering significant outcome a proven.
Superior experiences.
We have been building these solutions through a combination of internal development.
Partnerships acquisitions.
To targeted carve outs from offline.
We now have an active portfolio of solutions that we manage allowing us to leverage them for scale.
Overtime, we will continue to take decisions to proactively pull the plug on some of these.
Recent examples of this include our mortgage origination platform the key Whitey JV.
And the wealth management platform.
This proactive calling allows us to double down on areas such as dynamic what flows in the cloud customer experience solution supply chain optimization financial crimes and risk solutions and many others that are demonstrating market traction.
With that let me turn the call over to Ed.
Thank you Tiger and good afternoon, everyone.
Today I'll review, our full year results in detail then briefly touch upon some highlights our fourth quarter performance as well as provider financial outlook for 2020.
We began with a review of our full year 2019 results.
Total revenue was 3.2 billion up 17% Europe.
A year or 18% on a constant currency basis total growth was greater than expected with transformation services, leading the way.
BPL revenue, which represents approximately 84% total revenue increased 19% year over year total IP services revenue was up 10% year over year.
Global client revenue.
Which represented approximately 86% of total revenue increased 11% year over year or 12% on a constant currency basis at high end of our expected range.
Within global clients BPL revenue increased 13% year over year or 14% on a constant currency basis led by growth in transformation services.
Upward and 30%.
He services revenue increased 3%.
During the year as we become a bigger transformation partner for an increasing number of global clients. We have meaningfully expand at the size of a number of our client relationships.
During 2019, we increased the number of our global clients with annual revenues over 15 million.
To 49 from 45.
This included clients reporting 25 million in annual revenue growing to 25 from 21.
T revenue increased 78% year over year above our expectations largely due to incremental scope at it during the year related to the large deal we signed late.
2018.
Adjusted income from operations grew 18% year over year to 559 million.
Recall that we had assumed approximately 22 million at the beginning of the year related to the India export subsidy in our adjusted operating income outlook.
As it became clear throughout the year that we would only receive approximately 4 million.
No that expected benefit you put plans in motion to cover the $18 million shortfall with other items.
During the fourth quarter, we were able to finalize the plans to monetize property, we owned in India, which generated a gain of approximately 31 million included in other operating income.
This gain was partially offset during the quarter by certain other.
Including an $11 million nonrecurring impairment charge in cost of revenues related to a European wealth management platform that we no longer plan to leverage beyond the current scope.
Adjusted operating margin of 15.9% with 10 basis points were $4 million lower than our 16% target primarily due to a $4 million.
From a charge recorded in the fourth quarter related to certain retirement plan assets in India.
Gross margin was lower year over year, primarily due to higher stock based compensation of 20 basis points at approximately 50 basis points due to the nonrecurring charges I just mentioned.
Better than expected revenue growth with higher on onshore scope.
And the additional GE revenue also impacted margins.
She expenses totaled 795 million compared to 694 million last year.
As a percentage of revenue Destiny expenses were down 50 basis points year over year, driven by operating leverage despite a 50 basis point dilution related to higher.
Year over year stock based compensation as well as a 10 basis point impact right point acquisition related expenses.
Adjusted EPS of $2.05 was up 14% year over year compared to $1.80 in 2018.
This 25 cents increase was primarily driven by higher operating income.
34 cents, partially offset by lower foreign exchange Remeasurement gains higher tax expense and higher net interest expense of three cents each.
2019 represent the fifth consecutive year of double digit adjusted EPS growth.
That produced a 15% compound annual growth rate over that period.
This.
They are driven by solid revenue growth and disciplined cost management that is consistently driven increase operating income and related operating margins in each of those periods inline with our stated key strategic objective objectives.
Our effective tax rate was 23.7% compared to 22.3% last year driven by the expiration of special economic.
On a core sewn benefits in India changes to the jurisdictional mix of income and the impact of India tax law changes.
Let me I'll provide some additional color around or fourth quarter performance.
Global client revenue increased 7% year over year for 8% on a constant currency basis, largely driven by continued growth in.
Our consumer goods retail banking capital markets in high Tech verticals.
Recall that our growth rates during the fourth quarter last year made for a tougher comparisons this year.
GE revenues were up 61% year over year, driven by the large deals signed late last year, an incremental scope of work at it during the quarter.
Adjusted operating margin during the quarter was 16.9% largely in line with the level reported during the same period last year, but slightly lower than we expected primarily due to the nonrecurring impairment of the India retirement plan assets in the quarter that I mentioned earlier.
Gross margin for the quarter was approximately 33% compared to 35.5.
Percent level, we generated during the first three quarters of 2019.
The decline was primarily driven by the two nonrecurring charges I referred to earlier that total approximately 14 million.
In addition, lower margin on the incremental GE scope and lower margin on the ramp up of a new account in our banking vertical negatively impacted gross margin levels during the.
The new banking account margins are expected to return to more normalized levels in the first quarter 2020.
We also expect overall GE full year 2020 gross margins to be largely aligned with GE is 2019 levels.
So 2019 was impacted by nonrecurring charges of approximately 50 basis points, we are expecting full year gross margins to be.
50 basis points in 2020.
Total as gene expenses were 213 million compared to 179 million from the same quarter last year and included approximately 7.4 million of nonrecurring right point related acquisition expenses and approximately 60 million related stock based compensation.
Adjusted.
Yes for the fourth quarter was 57 cents compared to 52 cents last year.
If I did increase was driven by higher operating income of seven cents as well as one cent related to the impact of higher foreign exchange balance sheet remeasurement gains, partially offset by higher effective tax rate of two cents, an increase share count of one set.
Our effective tax rate was 28.1% compared to 25.8% last year due to the expiration of special economic zone benefits changes in that jurisdictional mix of our income and the impact of India tax law changes.
Turning to our balance sheet and cash flows.
During the quarter during the year.
Returned 95 million of capital to shareholders. This included approximately 65 million in the form of our regular quarterly dividend of 8.5 cents per share, which increased by 13% in comparison to the prior year.
We also repurchased approximately 766000 shares totaling $30 million at a weighted average price 30.
$9 in 16 cents per share during the year.
Since we initiated our share buyback program in 2015, we've reduced our net outstanding shares by 17%.
Over this period, we repurchased 37.4 million shares at an average price of approximately $26 per share for a total.
176 million.
Dollars.
The weighted average annual return on these share repurchases has been approximately 18% from 2015 through the end of January this year.
We currently had approximately $274 million of authorized capacity under our share repurchase program.
Cash and cash equivalents.
467 million.
Fair to 368 million at the end of the fourth quarter of 2018.
Our net debt to EBITDA ratio for the last four rolling quarters was 1.7.
With Undrawn debt capacity of 428 million, an existing cash balances, we continue to have sufficient liquidity to pursue growth opportunities.
And execute on our capital allocation strategy.
Day sales outstanding were 86 days, which were down from 87 days sequentially and increased three days in the last year driven by delay collections on certain accounts were catchers received in early January.
Despite the higher Dsos were able to generate 428 million of cash from operations in two.
The 19 up 26% year over year exceeding the high end of the range, we expected for the year.
The majority of this outperformance was driven by higher adjusted operating income.
Capital expenditures as a percentage of revenue was 3.3% in 2019 inline with our expectations.
Finally, let me update you on our.
For 2020.
We expect total revenues to be between 3.89 billion and 3.95 billion representing year over year growth of 10.5% to 12.5% on a constant currency basis.
We expect to write point acquisition to contribute approximately 250 basis points to total company growth in 2020.
This impact is approximately 100 points higher and the contribution from acquisitions to our topline in 2019.
For global clients, we expect revenue growth to be in the range of 12% to 14% on a constant currency basis.
We expect GE revenues to normalize and be approximately flat year over year.
We.
Today, we will continue our strategic objectives to expand our adjusted operating margin expect to drive 10 basis points of improvement to 16%.
As I mentioned earlier, we are expecting our full year gross margins to improve by approximately 50 basis points in 2022 to the impact of nonrecurring charges incurred in 2019.
We believe our gross margins have stabilized.
The impact of large deals has driven even higher revenue growth than we expected and thus has had a greater impact on gross margins in the wheel than we initially expected.
Even a tremendous amount of capabilities, we have been we've been adding to our team from these I kind of companies. We made the strategic decision to accept initially lower gross margins on these deals.
We plan to fully leveraging skill sets well into the future.
Due to the historic seasonality, we see in our business. We currently expect or adjusted operating margin for the first quarter 2020 to be in the 14% to 15% range. We have seen in the last two years.
We also expect the ramp of operating margins to be more in line with the trajectory we've seen over the past two years.
Our 2020 effective tax rate is expected to be approximately 23.5% to 24.5% up from 23.7% in 2019, driven primarily by the expiration of special economic zones in India.
We continue to expect our effective tax rate to stabilize in a mid 20% range as especially economics own.
Reduce over time.
Given the outlook I just provided we're estimating adjusted earnings per share for the full year 2020 to be between $2.24 in $2.28. This increase in earnings per share of 9% to 11%.
Includes the negative impact of higher tax rate of approximately one cents per.
Here in 2020 and includes no FX remeasurement related impact.
Recall that we recorded a gain of three cents for FX remeasurement gains in 2019.
We have assumed or ending share count as of December 30, Onest 2019 in this estimate.
We are forecasting forecasted cash flow from operations to.
So by approximately 10% largely in line with total company revenue growth.
Capital expenditures as percentage of revenues are expected to remain at approximately three to 3% to 5%.
We continue to expect.
The free cash flow to net income ratio to be approximately one to one on average over time.
And.
Finally, we just announced an increase to our quarterly dividend from 8.5 cents to 9.75 cents.
For share, which equates to annualized dividend of 39 cents per share up 15% year over year.
With that let me turn the call back over to Tiger.
Thank you Ed.
We saw a terrific momentum in our business in 2019.
Driven by disciplined strategic choices and strong execution.
Our investments in our service lines, along with the successful integration about acquisitions, particularly in digital analytics has positioned us well for a multiyear growth trajectory.
A large deals with iconic brands has solidified.
Fine our reputation as a transformation partner of choice, leading to higher levels of inbound activity beyond our traditional buying centers.
As we enter 2020.
We are seeing the experience economy rewrite the rules of digital transformation.
We are extremely excited about how we have bolstered our capabilities in this area.
Through the acquisition on right point on the heels of the addition of the tandem 17, a few years back.
We have also been able to leverage our automation to AI platform Genpact Cora in many up our engagement solutions and we see it being a huge differentiator.
Core allows us to bring more.
And at Ares repeatable offerings to the market.
Clients increasingly need predictive insights to make more informed decisions with the acceleration of the digitization of data and a maturation of data management, our opportunity and analytics has expanded dramatically.
We thought terrific growth in analytics in 2019.
And we expect this trajectory to continued to be a key driver our transformation services growth going forward.
I have noted earlier, we will continue to be monopoly focused on reallocating investment than talent resources to high growth areas and we'll continue to be talk full and I'll try says.
Summary, we have a growing top line.
[noise], primarily made up of sticky long term global relationships with the inherent operating leverage driving long term margin expansion on the ability to GAAP, our cash flows and balance sheet to take advantage of opportunities under penetrated market.
We have the right leadership team and talent base to go after this.
I'm pleased with our 2020.
Outlook, which is very much aligned with our long term growth on profitability goals.
Thank you Tiger.
Now I'd like to open up the call to your questions. Gigi can you please provide instructions.
As a reminder to ask a question you will need to press star one on your telephone towards draw your question press.
The found key please stand by what we compile the Q and a roster.
And our first question comes from the line of Ashwin Shirvaikar from Citi. Your line is now open.
Thank you.
Hi.
Good quarter trend.
[music].
Yes, so what you know what I was hoping for was maybe a bridge to connect.
2019 performance to 2020 expectations revenue basis.
I get the 250 basis point contribution from right point, but total contribution from.
Acquisitions, the G as to how to think about that.
How much is existing client growth versus new client Sam.
And I might've missed the FX comment you had.
So let me let me take that are threatened to begin with an AD with Dr. dock.
On top of GE GE.
As I mentioned, I think and added what will be.
Broadly flat as we look at 20 Watts is 19, which is kind of the way we've thought about g. for many years onto emeritus changes happen.
So that's one way to think about GI and then that leads to global clients. If you back off.
The 250 basis points.
Driven by.
Acquisitions, which is about 100 basis points more than 19 that doesn't know talking about a building client growth that is just a little bit above 20, Grundy was as 2019, which is a great with this is a being under the confidence.
That is driven by obviously the pipeline.
We have a hard which we continue to execute on.
I'd also say that all the execution during thing Youre also various.
You know large complex deals that we won have gone very well and it's important to call that article that sets the stage.
For continued growth both in both relationships.
That does to other relationships us repetitious until.
And on that on FX really expecting no rate right now the as reported and constant currency is consistent so it's kind of a small difference. So no change if anything changes during the year, we'll we'll update.
John on maybe the final Robert did not comfortable documents will be.
Visibility to revenue kind of very similar as we look at great ready as it was at the beginning of 2019.
Got it that's very helpful. And then the second question just drilling down on.
Unlike point.
The good sized acquisition.
How much was the for Q contribution first a follow my guess and then.
Any talks on what the core margins are worse. This integration costs in terms of margin impact any of the views on what clients has said.
One.
Pushback I do get from investors is people, who tried to compare they point to headstrong from years ago and.
Not necessarily a fair comparison, but I want to hear your viewpoint.
Yes, I started the last one because I think easiest one that is that and I believe.
Disconnected comparison.
Yes, no comparison at all not even remotely.
Yeah, right bond as a business that is focused on improving.
Consumer experience for our BDC companies, but Mr business experienced fall business card business to business companies and user experience.
In log employee bases of large enterprises.
Monotype article.
It's.
We're working with clients to drive change from design strategy to digital execution to bring that strategy to life and then when you combine that with our capabilities.
Came to us through tandem seven.
And our capabilities on process and I wish and that's where we already beginning as I said to see.
We had conversations with our existing clients.
And actually interesting conversations with right points owned client base. So so that part of the easy one contribution to what's going on now it's about a 100.
80 basis points on that one.
I wonder what it onto one and Oh.
100, 150 basis points of contribution to revenue.
Margin broadly similar to our margin not operating margin level like I think with with the integration expenses. It definitely was a bit more to lose all in with the integration expenses it probably caused pressure to do.
To the extent of about 50 basis points, a total for the fourth for the fourth quarter as we get into next year. The impact is lesser but it will be below company average next year, because we'll continue to do the integration that were supposedly right. So but overall, we're managing that in the 60% operating margin guidance that we get.
Thanks for that I sufficient.
Thanks trend. Thank you.
Thank you Sir our next question comes from the line of Dave Koning from Baird. Your line is now fan.
Hey, guys, thanks, and nice year.
Good day, Thank you, yes, and I guess, so first of all just one.
Sure thing on right point.
So it seems like you know based on where you were in Q4 and then the way you guided 2020, it's probably in the ballpark of a $90 million or so run rate.
How do you see that growing over the next couple of years between cross selling different products to the Genpact organization and vice versa like is that something that might grow.
Well faster like 25% or something.
So so Dave actually.
This call is it's pretty is pretty good.
I would say that starting part of that of course is right.
The demand is right and.
One what one would think about right born in the same way one thinks about transmission services.
It is new new digital skilled its new skills it consulting.
It's experience.
Therefore, it should lead the company growth for sure.
And it should get builder to though Tom friction services type of wrote that would be our expectation.
Combination now well there.
Our capabilities brought into our client base and our capabilities taken into their client base.
Okay, great. Thanks, and then just a couple of quick modeling ones.
You know typically from Q4 to Q1, you fall off for a 40 50 million or so this quarter is this Q1 I would assume it's going to be a little less than that just.
Because the incremental right point acquisition. So is it is it more like a 30 40 million fall off sequentially in an interest expenses the other on.
As we look at it we're still somewhere in a range of two and had to three of 3% to 5% has kind of what we what we've seen I would I wouldn't model different than that I'd say two and at the three net.
It is about the rate range data it will help a bit but.
Just.
I would stick to that range.
Okay, and then interest question the class the sequential declines Yep Yep Yep.
And that now for historically, so many are they have that.
It's a good bit of most of the business.
Okay.
Thank you.
Thank you that.
Thank you Sir our next question comes from the line of Joseph Foresi from Cantor Fitzgerald airline is now fan.
Hi, This is Stephen chain coming on for Joe. Thanks for taking my question.
So maybe just.
Just maybe more.
More of just any other it more color on right point I'm, just wondering if possible maybe you could quantify how much of that vision of revenue growth. You saw was due to integrating right points as you've seen so far and maybe how you look on that like moving forward.
The repeat I didn't I didn't get did you get it.
It's a question what how much of what we've seen so far in digital growth is because of right point I would say.
By the time be.
He knows that aren't acquisition, we went into the middle of though fourth quarter. So I wouldn't say a lot of the.
It's all the fourth quarter came from.
The capabilities.
Given that the company to write point.
However, if the question of the broader question around how much of his experience and how much have you seen experience being important far digital growth in the last couple of yes. The answer is quite a lot.
Andy.
Bottoms up that as one of the reason that gave us confidence to go forward and bring right point in that conferences with the tandem 17.
That FEMA Bina talked now for more than two years.
Feedstock, we see that we saw that Lialda and banking, we saw that play out an insurance.
Got it seemed that play out in a number up all the verticals that that's the confidence that we have with white barn, as we look at Fannie Freddie and beyond.
Okay, Great. That's helpful and just one more follow up moving on to kind of.
Your pipeline on large deals are you you see any slowdowns in the future expecting inflows to kind of continue at the same rate.
And maybe if you could provide some color on these deals in specific vertical is there any clients, especially if you can touch on maybe digital please thank you.
I would say we haven't seen any change in the behavior of clients, we haven't seen any change in inflows.
Pipeline.
Yeah.
Global job, which is bookings.
As we've gone through the Youre, the only thing I would call out.
Yes.
Question Mark is recent events around grown up Iris and what does that mean, you haven't seen anything so far but I think it's prudent for us and think about.
If if that kind of all epidemic.
Continues to play out in a certain way then what does that mean to global travel what does that mean declines ability to to travel and while I'm one of that due to decision, making we just want to be watch for then cautious and obviously we are in discussion the plans we haven't seen anything so far.
Okay, great. Thank you.
Thank you see.
Thank you. Our next question comes from the line of Tinson Hong from JP Morgan. Your line is now fan.
Yes, Hi, this is funny sitting in for Tenzing.
So it doesn't 19 clearly was a banner year for.
In terms of ramping up most of philosophy.
As we look forward and unit growth. They can do not realize life's gross margins not expect expected to expire by more than embedment benefit of 50 basis points as some of those deals ramp up what is back to roughly.
And that's mode of long term leverage.
Gross margin expansion.
Yes, I think as I said in my prepared remarks, we believe that margins have stabilized, but as you heard Tiger say to you know the pipeline is still pretty robust in the level of large deals in the pipeline have not decreased right. So so we're pleased with.
That level into the except that we do more more large deals kind of if margins stay in and around this range, we'll all be very happy because we'll be able to drive through incremental operating margin as well as income and free cash flow right. So our view is to the extent the.
Services that we provide for our clients provide higher value absolutely we should see appreciation.
In gross margins for right now our view is stable seems like the right place to be given the pipeline and the extent of large deals that are there. So for now we were we think it's reasonable to assume flat and as you make progress and that will update you on two other things to add to what I just said.
If you go back to the commentary on.
Good client growth.
After you removed the impact of right barn.
Doberstein growth is actually just a tad bit better I'm 2020 went to 2019, which means the ramps continue and we are.
We have no you don't based on our pipeline of inflows we.
Hi, more deals that come in that need to continue to ramp.
As you know take time to ramp. So therefore, I think we would not we will not be able to use that Rob forget the steady state gross margin even yard twentytwenty itself.
Obviously over time that that should.
So through the second one is on transmission services, particularly if you peel off into digital.
Most commentary from most group companies would tell you that digital takes time to go live on margins as you scale and that scaling that part is not a single October part, it's a multiyear effort.
And we are still in that journey of scaling. So I think if you put those two together longer term margin trajectory should be positive I don't think we expect to see that in 2020.
Yes, yes, as you've seen.
But he that as you see has managed to we're really looking at driving EPS growth driving.
Free cash flow growth for the value of the from the dry devalue the firm, we do that by driving operating margin right. So the operating margin is where we've been sort of unlikely focus as well in making sure. We're definitely improving the you'll see some geography, where maybe maybe gross what we might we might make call that it goes one will be a bit lower on that deal, but if we're able to drive operating margins up we'll take that will take that every day.
In fact, you heard us talk about a lot of lot of what we've done some eight gross margins being lowered the onshore skill sets you heard tiger talk about that were more than happy to do it. It's effectively building out new service lines. If you will were where we'd be dealt developing then at our R&D line right. So these are calls that we've made consciously and strategically and we're happy with them.
Absolutely.
Okay and can you also talk about potential impact from the recent India Bucks or Tony your tax rate and subsidies.
What any of this line item in operation.
And we'll start on framework been NPV your ability to move cash in or out of India.
Sure a couple is a few different things happening.
So I'm, just just recently announced some kind of a little bit a little bit enough little bit earlier in the first one as the tax rate that India has announced in the elections that companies are able to take.
Going forward with the reduction of the overall corporate tax rate is somewhere in the mid thirtys.
To mid 2020, 5% range or thereabouts.
That was one of the reasons why you saw actually our tax rate increase this year, because we had to revalue were deferred tax assets at that lower rate. So the tax increase that you saw happened a little bit higher than what we expected even in the quarter was due to the revaluation of the deferred tax asset at that lower tax.
Right. So a good thing for the company.
Stem tax increases going forward.
For us actually led to a bit of a write down of the assets, which seems counterintuitive, but it makes sense on the other tax provision that talks about dividends related tax and be able to get cash.
Got to be more fungible.
That's certainly a positive at least it gives more flexibility or less your penalized less if you want to take cash out of the jurisdiction potentially so thats. It thats a potential positive, but we've been able to manage that without much impact over the years, but it's certainly another.
Central positive in terms of flexibility it gives us and that's.
No that's still on the table to be passed by Parliament, if I remember right. So we'd have to wait and see ultimately what happened, but but it gives us more flexibility. That's that's the way it turns out with right.
Got it thank you.
Thanks for me.
Thank you. Our next question comes from the line of Mackie Nolan.
From William Blair. Your line is now fan.
Hi, Thank you.
Okay. So you've obviously done that.
Hi.
Flexibility in the balance sheet to do some acquisitions in 2020, but you're already coming into the year with pretty decent inorganic contribution. So I'm just wondering can you update.
Yes on your appetite for M&A in the coming year on what you're looking for.
Yes.
Got it off and at Canaccord.
Our appetite Maggie has never been driven by.
How much growth contribution it it would have or should have.
We've always driven our M&A.
Our strategic choices.
Yeah.
We have set up as head of strategic choices Baby would love to find our rights target to bring in just had we've done over the last four to five yards around certain specific digital capabilities analytics capabilities certain domain capabilities.
Across the various geographies.
So we do have pretty good M&A pipeline.
As you know a number of those while they are in the pipeline never ultimately get done because if a variety of reasons, including in our business a match up cultures and so on so I wouldn't necessarily say that are.
Emanate decisions are based on.
And what contribution to growth do we expect from acquisitions.
We have the fire power available to do the right acquisition, if you find one and on our M&A team.
Continues to look for the right ones and engaging those conversations that yes. That's a good points I just had two other things that were at one Dodd said and net debt to EBITDA, so feel pretty good.
Good about our flexibility to do more as we see appropriate but again, it's all based upon what we think makes sense not for growth because it's been in it right around one to one of the head percent right point was bigger right. We said, it's about two and half of that and it was bigger but also kind of I was happy to do it because it was probably one of the more profitable companies that we've acquired right. They can't.
They are coming in with largely aligned operating margins could be a little bit lower the first couple of years because of integration related expenses, but we love the the product we love the profit margins, they're driving so at the end today EPS.
Impact of this of this business is going to be accretive to three cents.
And we love that right and that will grow over time, so that one was bigger in.
We kind of like the fact that it was bigger.
Okay, Great and then.
Hey had a strong quarter in Q4.
Clearly the core.
BPM business is doing well.
It has slightly weaker performance out of global client IP.
Just wondering if there any.
I said that we should be keeping an eye on and what your expectation is for.
Global client IP and GE in 2020, and any kind of quarterly considerations there Kim.
Got it.
The G.I.D. one very quickly Maggie overall, we are assuming.
As I said Flak G.
Specifically within that I'd et cetera is dependent so much on jeez old and budgets to single client et cetera. So so.
Predicting that in a very specifically is more difficult I think overtime is that a better conversation because it's a portfolio on global client I'd.
Over the years, we've talked about making our choices and I'd and narrowing them down to the areas, where we think we have a real strength in connecting it to our process and domain on industry understanding and we've been undertaking that Jody for many years.
Good luck of which we are now back to growth.
What's is.
Having.
You know quite a few years wherever you are declining.
As we continue to undertake that journey, we are finding mckeegan pieces of our IP, but now that are getting closer and closer to our digital business.
And in fact that lines up differentiation between those two are blurring.
So I would be.
Go forward, we expect some portions of the IP business will actually start moving some of our digital business growth.
I'd add that keeps expanding the portions of our IP business that are more unconnected to all those when it becomes smaller and smaller and less material and have left but due to the back on the overall company and that's already beginning to show itself.
And in the numbers if you look at the numbers today, one Centsfive goes back and I think that's right I would just as a result of this you've heard me say art, we're talking about it separately. It seems unusual because of how this has all been cut it coming together, particularly over the past year too. So as we move forward. Our plan is to not talk about ITD separately given how.
That has has come together.
Well covered on this call, but going forward you shouldn't expect us to cover it the Maggie to answer your specific question in the fourth quarter part of it was a couple of things. We had some we had some larger impacts and a good IP or good comparison year over year.
Because we had some fourth quarter and GE was part of that so that was part of the year.
Every year shrinkage in the full year actually we did we had some some of the large deals had some IP associated with it and that wound down a bit as we've gotten to the fourth quarter. So to say it's yours.
And some mild capital markets related banking related customers and you heard that commentary from most of our appeal group.
That obviously.
To the extent that we have some portion of our business that that altogether, but.
Got it thank you.
Thank you Mike.
Thank you Sir our next questions from the line of Jetson Donati from Wells Fargo airline is now fan.
Hi, Thanks for taking my question.
Just had more does can you talk about how many transformation service professionals, you have and if you're having any issues finding talent.
No itself, it's an interesting question, Justin we don't count.
Headcount based on specific number of transmission services.
Thresholds, because that's a combination of people who are deep in a particular industry.
All of them by the way come from our operating teams across the globe.
And now we have 100, plus operating centers across the globe some of them our subject matter experts in specific services and domain finance supply chain.
Financial crimes and so on.
And then a number of them come from our digital teams, who are kind of bogs all capabilities.
Machine learning the experience group.
On a number of them, sometimes our deep inside of transmission services engagement.
Think about that have consultant.
Actually.
Solutioning.
Every large.
Managed services deals, which has not been engagement. So so we.
I don't think we'll be able to specifically onto the question are often which is headcount and prospects in southern says, we don't monitor and manage frontrunners itself. This is as a specific separate headcount.
Got it and then if I could sneak one more in.
Are you seeing a greater percentage of revenue coming from transaction and outcome. This work.
Are you getting better margins in that area. Thank you.
So, though symbolically question as we shirt and we will but it takes time, but.
Clearly because indoors outcome based contract depending on the nature of the contract Aldema transaction based pricing of a transaction based pricing then we start getting better margins pretty already particularly as we start driving.
Digital technologies in driving productivity automation and so on.
Some of them all fixed price.
And again as we drive productivity, we sure but that takes some time and then we have truly outcome based contracts, where if you drive better.
Reduce fraud, if you increase revenue if you improved on time fulfillment in supply chain. Those take significant time, you got to hit milestones. So those.
And then don't show up at better margins immediately they take time to shore.
Understood. Thank you.
I just.
Thank you. Our next question comes from the line of Bryan Bergin from Cowen. Your line is now fan.
Hi, guys. Good afternoon. Thank.
Thank you.
Hi, Brian.
I was curious I wanted to ask on first consulting transmission services can you just give us some color on how you're thinking about managing resource utilization as you move past the year end, particularly as you are adding this this right point consulting workforce.
On here in Fourq, you certainly your confidence in making sure to avoid any potential air pockets going on.
Resource utilization as you're moving through the early parts a 2020.
That's a great could be though because I was going to answer that on the last Chris and the Justin was asking to kind of added on to that wasn't exactly aligned with what his question was.
Yes, because you were met you do remember too that coming into 2018, we had that we kind of got ahead of ourselves in the hiring in I think are.
I used words that were less than.
Complementary and how we managed it but said we're getting after it and the company has gotten after the meaningful way I think a lot of brute force as we got through 2018, we saw those margins improvement and we saw further improvement has begun to the 19 and we now have the system I think largely in place where.
We're measuring those resources and measuring utilization and weve improve utilization significantly that is no longer a appoint an issue for us. So now there's more to come up significantly as we expected and we're continuing to drive utilization.
Metrics in drive those metrics positively up to improve margins. So that is definitely a positive for us as we move forward.
Forward in terms of our ability to improve margins and utilize those resources not just not just utilize them better but get visibility to the skill sets of the folks we have so we can deploy them on the right jobs at the right time. So that is happening I would say we've been impressed with how right point is managing their own resources using a similar system that we've deployed.
So we're kind of in lock step in terms of the way that we're thinking about managing those resources.
Okay, all right good and then just on bookings.
Actually translate that the 3.9 billion a bookings being comparable let's say in 2018 I heard the G comments about obviously the new work that you had one back in in late 18, but otherwise anything to call.
Call out in the nature of bookings Savage duration any metrics you can share there.
No nothing nothing other than.
In the prepared remarks, I had said that.
If you look at two years.
16, 17, and compare them to 18 19, and the reason why.
Two years is the way we would look at it is because.
It becomes very lumpy an episodic.
Well booking gets done in the last week of December 1st week of January and Saturday beyond our control when you're talking about 100 million dollar to you so to that extent, we prefer to look at and all our modeling we look at too.
Cohort of bookings and if you look at that you know the previous two we got 2.7 billion average the last two years 4 billion average.
Within that opened in average 2018, having a higher proportion of GE that 2019, therefore by definition Gilbert lines being hired in 19 months of 18, all that good metrics.
So look at and that's one of the reasons why our guidance and outlook for 2020 is what it is what we said Brian too is that we do think overtime that it that it should align with our overall growth of the from right as we look back.
We are looking at it today or yesterday and saw that it was largely aligned with company look we'll pass you could do your own cagar over the past five.
As it's been in the in the low double digit range, which kind of allied with total company growth.
Okay. Thank you.
Thanks, Brett Thanks Bye.
Thank you. Our next question comes from the line of Mayank Tandon from need him airline is now fan.
Thank you good evening, Tyler just given some.
Some of the industry sources. It would suggest that the market is probably the held this it's been in a long time, maybe ever so what are the constraints to growth in other words why can't you grow faster would just love here about.
What might be limiting your growth potential I'd, just given the health of the market backdrop.
So.
Mine.
Hi.
I'll start by saying, we love the gross stack, we have seen not just a 19, but actually pretty consistently in global primes, all our four or five years. So on a question that are asking is under global client growth by itself. If you leave the volatility that.
We've seen over 570 odd for GE has been.
Very very good and predict Gabon, BBM, it's been pretty industry leading.
Well I kind of would be higher I'll start by saying execution is at the forefront of continuing to drive that growth reputation is incredibly important when we bird My guide.
Decade relationships that allows us to drive growth with that relationship and these relationships, where we get growth even after 10 years and it allows US then to get.
You know phone conversations between climbed who then want to engage with us because they heard something from someone else. So I would start and end with.
Execution and the importance of execution under the point at which the ability to execute complex deals.
Execute complex solutions in globally that every environment across multiple markets that we typically deal with in many of these plans situations.
Becomes saw becomes a constraint that he ought to think about and make sure that you don't have you don't do something that then hotel repetition and we are very conscious of that we've been conscious of that from the David became an independent company in 2005, it's one of the guiding principles of the company net promoter score is that we have imagined.
Right that makes sense unrelated.
Basis, I was wondering given the shift to more digital type work analytics all the newer technologies like you mentioned that are clearly impacting the became an analytic space are you seeing a change in the.
The typical productivity gains that you Oh you see.
The headwinds you see in any given your as you pass on the productivity.
The benefits to your end clients.
Fine yes.
I wouldn't call that headwinds.
Focusing on productivity benefits to clients using new technology is a good thing and we feel proud about that I think offline.
You know things that we already got that have always been.
Now we have new technologies to do that so we don't think about another headwind, but obviously outgrow how should take into account that and it does take into account. That's another way to think about it as if traditional ways of driving productivity used to drive 3% to 4%.
Annual productivity in the same kind of work then for day that should be.
7% to 8% on the average across all the work that we do.
Now some of that becomes 20% in some cases and some of that has nothing because there's nothing new we can do because if the everything has been done.
Obviously changes depending on the type of work and that takes into account the final growth that'd be done about so to deliver drug testing.
Got it means order growth has to be off the order of magnitude 20%.
Right, great that makes a lot of sense. Thank you for the color appreciate it.
Thanks, Mike.
Thank you. Our next question comes from the line of Moshe Katri from Wedbush Securities. Your line is now fan.
Pardon me Moshe Katri from Wedbush Securities. Your line is now fan.
Please check and see if your line is on now.
Our next question comes from the line just internationally.
From Wells Fargo. Your line is now fan.
Hi, Thanks for the follow up just wondering does the 2020 guidance embed anything for.
Actually taking market share in some social media content.
From competitors, who are exiting that business.
So just to know we start by saying that content moderation trust and safety as a service line.
A couple of years back we chose a very important southern signed on a strategic service line for us.
And we've been investing we've been created capabilities, we haven't settled great relationships there.
So we obviously have planned for continued growth in that sell this line having seen growth over the last few years and thats overtime, and we have a fantastic team with a great reputation in the marketplace with the clients that we felt.
Do some of the things that have happened in the marketplace provide opportunities beyond says, yes, but is that the only.
Opportunity that is the answer is no into the space that has changing rapidly it's providing a lot of opportunities across a range appliance, so weve factored and growth in that service line as part of our strategy, but it's not dependent on one event.
Thank you.
Thanks, Justin.
Thank you at this time I'm showing no further questions I would like to turn the call back over to Roger Sachs for closing remarks.
Thank you everybody for joining us today, and we look forward to speaking to you again next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now.
Disconnect.
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