Q1 2020 Earnings Call
Ladies and gentlemen, please standby your conference call will begin momentarily. Thank you for your patience and please standby.
[music].
Good day, ladies and gentlemen, welcome to the 2021st quarter Genpact Limited earnings Conference call. My name is Bridget Nobody your conference moderator for today.
This time, all participants are in listen only mode.
We will conduct a question and answer session towards the end of this conference call.
As a reminder, this conference calls me recorded for replay purposes.
A replay of the call will be archived made available on the IR section of Gen X. website.
I'd now like to turn the call Overture, Roger Sachs head of Investor Relations at Genpact. Please proceed.
Thank you Bridget and good afternoon, everybody and welcome to Gentex first quarter earnings call to discuss our results for the quarter ended March 31st 2020.
Okay chance to have you ever earnings release, which was closer to the IR section of our website Genpact dotcom.
Peakers on our call today, our Tiger Tyagarajan, our president and CEO, who is joining from at home in New York City, They Fitzpatrick Chief Financial Officer, joining from here at home in Pennsylvania.
We have a lot to cover during today's call, including Genpact responsible for a little bit 19 crisis.
Positioning for its half the longer term growth a review of our financial performance. We will also provide some color later, our expectations for our second quarter results.
Prepared remarks will be somewhat longer than usual, but people to provide extra time to answer all your questions.
As a reminder, somebody matters, we will discuss in today's call are forward looking you still are looking statements involve a number of risks uncertainties and other factors that could cause actual results could differ materially from those in such forward looking statements such risks and uncertainties are set forth in our press release. Additionally.
During our call today, he will refer to certain non-GAAP financial measures that we believe provide additional information to enhance the understanding of the weight management to use the operating performance of our business you can find a reconciliation of these measures to gap in our 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. Thank you for joining us today for all 2024th quarter earnings call.
Well I'm extremely proud of the passion and dedication of the Genpact team around the globe well work tirelessly to support outlines the little phenomenon. So that's on how communities on each of these unprecedented times.
The Golden Monkey and prices have just Tropic Watson lives businesses on economies around the world in a very short period of time.
Today I'm, sorry, just a quick review <unk> fourth quarter results gunshot an update on August form so far the Golden Monkey.
I will then discuss the shot at the fog and agreed upon.
Learnings from our journey to work from home.
I'm talking about seeing on offline on that industries.
I would also called the new opportunities not seen in the market.
While we are well positioned to wendy's opportunities on how our strategic focus over many young I, particularly over the last five allows us to be a resilient and these times I took your thoughts fallback for longer job growth in the post overnight did one.
Despite the challenges the word France, starting the second half of March we got strong fourth quarter results demonstrating a continuation of the momentum be Sol throughout 2019, all about industry verticals consumables recap life Sciences, healthcare banking and capital markets in children's Hi Tech.
On industrial manufacturing and services grew nicely.
Transmission sell this is what was once again, the leading engine with particular strength in analytics on significant new traction in our cloud services.
That's perfectly total revenue was $942 million up 14% on a constant currency basis on global clients revenue increased 15% on a constant currency basis.
He also delivered adjusted operating income margin of 14.7% and adjusted diluted EPS of 53 cents, 23% year over year.
Inspection services, including the contribution from breakpoint grew more than 30% in the quarter and accounted for approximately 30% of doldrums Robert large revenue.
We were off to a strong start to the young as we continue to see traction and I'm going to create a target markets.
We saw all these signals all the Golden Monkey in prices in our China operations.
More than 4000 associates solving a number of Pablo blogs, and China, Japan, South Korea, and all the nation economies.
Wandered with an average of switched to work from home.
Our goal, but like doing began to spread throughout the world and the second how much we reacted quickly across our global footprint, including Europe, U.S. Latin America, Philippines on India without trying all playbook in Honda is a great starting point.
We estimate a loss of about $7 million in first quarter revenue, Robert your driven by supply constrained in the transition to work from home.
Much of that up and you lost in the supply side was related to delays in approving from all from many of our banking adopt the market's launch due to regulatory constraints on privacy and security concerns.
From the very beginning of the crisis, our decision making for him because he focused on to keeping us one ensuring the safety health and wellbeing on 95000, plus global team members to continuing to deliver so others to walk blogs, knowing that the work we do for them as essential in many cases to make their businesses.
Economies in which they operate function effectively.
On day, one we established a global Golden Monkey in response Das force with eight specific work streams with responsibilities to one proposition operations to walk from home to orchestrate enjoy no I'm like communications three refresh all financial outlook with a high frequency to drive actions.
For drive superior operational delivery performance on property, you know virtual luck environment.
Hi, designed and implemented comprehensive employee well be program for this new and Bachman six developed frame Watson Playbooks for transmission services engagements digital implementations collaboration solution design and transition in a bunch of ward seven barrels a day to market new transmission services.
Digital offerings.
And finally eight develop a point of view on the for school would might be like.
Each walk stream of led by one of my vetoes across businesses functions on jobs, He's doing show Rockford rugs, Don decision, making.
As you look back over the last six weeks, the speed and agility with which we have transitioned to a new virtual walk from all model for all up also this is can be okcupid or to our early adoption of virtual collaboration and communication tools to deliver building solutions over many years.
Okay cultural of running the company with a globally distributor leadership team made the transition easier.
Yes.
Today more than 95% off our overall revenue coverage is being delivered.
The single biggest GAAP to reaching 100% virtual isn't our banking a drop in the markets vertical where client approvals to walk from home and processes that manage highly sensitive customer information has taken time and has varied by regulatory jurisdiction in which these lines operating.
The protect the long term health of our business and allow us to continue to invest strategically in areas that when fuel growth in the future. We have taken decisive action to reduce our cost base such us.
We just go freeze on all salaries across the organization, including our executive leaders on a whole different promotions for the y'all after paying all 2019 bonuses unfold.
In a temporary ban on all team member traveled around the Globe Glen Charles If you up our employees and volumes as well as a pullback on all discretionary spending.
I'm sorry, the deployment of Brightree foam dollar's much set on the loudest larger department available for redeployment to other parts of our business as the needs of our clients change. This combined with our general re skilling platform has been a home run in these times.
The strength of the portfolio choices, we made a thought about 2013 strategy excite and dawns a boat industry verticals until this line is making a huge difference. Additionally, the global diversity up our delivery footprint between onshore north shore on offshore.
Major driver our resilience in these times.
We have rapidly develop to assign so virtually running ourselves as efficiently and effectively the uptake or not end to end smartphones the price process Sep frameworks and refresh them for this new model focusing on security controls monitoring service level that yards and maximizing employee productivity in a walk from woman bottoming.
I have an example for the most recent quanta close using these updated free bugs, we closed the books opting to dance quicker for 98% of clients that we closed the books for with the balance being closed in nominal soccer times.
Broader level, we have seen better service level performance for more than 50% about services and only a small single digit percentage of our services.
Fall below par.
Yes, that's followed that led to fly delight, even in these difficult times.
Very early in this transition to work from home, we started developing programs and initiatives to help our employees manage the stress of this new wells Lucky.
We set up 24 by seven helpline with mental health professionals to provide assistance or employees shared best practices on working from home I'm self care. During this crisis and conducted globally webinars with exports on a variety of topics, including health and wellbeing.
We'd also leveraging our yard driven employee sentiment just bought to capture a daily boot across our global workforce.
Many of us going into price services, including finance, and accounting sourcing and procurement and supply chain as well as industry specific sub since I've talked financial crimes and risk insurance underwriting and claims on content moderation on non discretionary in nature.
We estimate that more than 85% of our portfolio is positioned to weather the shock don't economic challenges on the current environment.
Our exposure to the hardest hit in the street, such a struggle hospitality and measure and energy is limited.
We are seeing heightened demand for our solutions and supply chain management consumer banking collections small business lending to government support programs and analytical services to a range of industries witnessing volatile demand and supply problems all of which we have strengthened.
On the last two yards, we refocused spiky services walk to specific areas connected to our domain depth on digital capabilities, providing us with a springboard to accelerate our digital transformation on cloud engagements of these times.
Two recent examples are large technology from moving all of that analytics engines to the cloud on for a global pharma company implementing luckier finance across an enterprise.
Our transmission fell because engagements did not miss a heartbeat. Most of these engagements have continued demonstrating both our ability to deliver these virtually I've been asked the essential nature or some of the change programs, we need for our clients.
The last couple of months have reinforced the importance of flawless execution blind intimacy and net promoter score.
True not startup our culture.
As you look at our overall portfolio revenue more than two tell it comes from a cohort of clogs went on relationships have strengthened throughout this crisis.
We believe this extra stage for growth would be saved clients as they emerge from the crisis and look to significantly transform their businesses.
As expected we are seeing the progression of our large deal pipeline slowdown our clients manage disruption and uncertain DDIC business as.
With the exception appliance and the hardest hit industries all other deals in the park and continued to be active although at a much lower pace at the same time, we're seeing that number of new deal opportunities in many cases triggered by the challenges of the current environment. That's got off the CEO CFO level.
These are large scale March I function transmission deals in the hundred billion dollars plus range.
Just in the last three weeks, we were awarded new relationship with a large global insurance line and are also significantly ramping up within existing large global banking client as they both reconfigure that location, but no operational footprint.
We are solutioning and transitioning this book directly to a work from home team as we speak.
I would also remarks, solutioning and seamlessly transitioning more than 2000 people for more than four feet line across both existing and new engagements.
As I said earlier, we are now executing on transmission services engagements in a virtual setting with the slowdown of the movement of velocity and pipeline transmission. Phil. This is embedded in these do you have also naturally slow down the.
The problems of the notion that lines engaged with US you know transmissions books of business has significantly changed we are seeing heightened demand for a range of new translations of it solutions that help quick payback and are very relevant in the current environment.
We have recently developed and dig into market 17, new transmission services solutions and eight new Digitization solutions, all as rapid response offerings.
A few examples of these are for healthcare companies using real time predictive analytics to ensure rapid deployment of lifesaving devices and personal protective equipment to the right locations at the lifetime.
Well pharma companies using predictive analytics to help them adopt their end to end supply chain to changing demands in their portfolio of medicines. For example demand for allergy relief medications are down as fewer people going up we're helping with monkeys unfortunate capacity planning and logistics orchestration.
For banks monitoring credit risk and protecting financial crimes and fraud, we're providing expertise to fend upsurge operations at various regions of the word and helping manage the record high volume of small business known applications as part of the paycheck production program a key element of the Kazakh by streamlining a digitizing known obligation.
Funding process.
For consumer goods retailer in manufacturing companies using supply chain analytics to redesign distribution networks in order to balance volatile supply and demand.
It's been a supporting offline to online transformation through rapid digitization, given increasing volumes on like John's.
And finally for a range of manufacturing companies, we are up and running supply risk assessments softening programs benchmarking digital interventions and segmentation on customer behavior analytics to drive receivables down to improve cash flows.
The broad themes that cut across these new opportunities on an increased consumption of cloud based services automating on digitizing for rapid payback.
Analytics that deliver a real time predictive insights.
In times of uncertainty strategic partnerships with deep intimacy need more than ever and Cxos and boards continue to look for ways to drive change in that organizations to achieve outcomes in both the shot under long term.
The essential Nondiscretionary annuity based nature of the services, you're not industry provides resiliency. During these uncertain times with a strong balance sheet and solid cash flows the underlying fundamentals of our business remained very healthy.
Geographical concentration risk is also got them on concern for many of our clients.
Broad robust global delivery footprint allows for a balanced mix offshore near shore on onshore delivery.
This diversity is a huge strength that helped us win the large insurance client I talked about earlier, who selected us to de risk their delivery concentration in the middle of the crisis.
Our stepped up investments in digital Analytix over the last five years, both organic I spent a through partnerships and acquisitions have positioned us well to offer specific solutions for Oh, he's looking for immediate value creation.
The capabilities, we acquired through the acquisition of the AI and machine learning business.
On the dynamic cloud work flow business that provides a digital layer of Genpact corridor are examples of these.
When we acquired Lifepoint late last year, our thesis was that we ought in a unique position to bring process and experience together in an unprecedented way there has popped lines drive true end to end digital transformation and win in the growing accidents economy.
We believe our ability to connect shrunk to middle and back offices would make a huge difference to offline as we help orchestrate digital transformation journey.
In this virtual world the importance of customer and user experience has gone up dramatically.
Offline businesses accelerate the journeys to online it further reinforces the need for a focus on digital experience.
This positions us well to leverage these capabilities in the post Golden 19 was where digital transformation become center stage.
A quick note on GE.
Our relationship remains strong across the multiple GE businesses, we so.
As gene drives cost improvements to deal with a reduced marketplace for a number of their businesses as always we are responding with our own productivity initiatives to deliver value Buck.
Do you want to the impact of go with 19, we are currently anticipating second quarter revenue could be down 3% to 5% year over year on a constant currency basis.
Lastly, due to the uncertainty caused by covert 19, we have decided to withdraw twentyth ready financial outlook issued on February to fix 2020 until visibility improves with that let me turn the call over two and.
Thank you Tiger and good afternoon, everyone.
Total revenue for the first quarter was 923 million up 14% year over year, both on an as reported as well as on a constant currency basis.
We saw broad momentum in our business in revenues exceeded our expectations. Despite some lee headwinds driven by Cotai team.
As Tiger mentioned earlier the impact from the cobot virus onset only impacted the last few weeks or the first quarter.
Due to the comprehensive and rapid global shutdowns, we lost approximately $70 million as revenue and his last two weeks. The majority of this was related to the shift in delivery capabilities to a virtual operating environment.
Putting certain clients in banking initially limiting work from home execution.
Global client revenue, which represented 87% total revenue increased 14% year over year were 15% on a constant currency basis, largely driven by broad growth across our portfolio.
Transmission services continued to lead the way, we're strong contributions from our analytics and digital solutions.
During the quarter, we continue to expand the size of a number of our global client relationships with a 12 month period ended March 31st 2020, because a number of global client relationships with annual revenues for over 15 million to 52 for 49.
Clearly class for the 50 million annual revenue growth to 10 for eight.
Gee revenue increased 12% year over year inline with our expectations.
Adjusted operating income margin was 14.7%.
Fair to 15% during the same period last year.
Leverage from strong revenue growth in cost efficiency initiatives, we drilled during the quarter were partially offset the impact of Cobiz 19 disruption.
The destruction included and utilize intelligent operations resources, resulting from limits place in our ability to work from home that I mentioned earlier as well as charges associated with India retirement fund caused primarily by lower equity values for the period ended March 31st 20.
Absolutely Covis related impact our adjusted operating income margin to the first quarter would have come in ahead of prior year margins, which as you will recall included $4 million, India export subsidy income, which did not recur issue.
Our work from home capacity and approval levels continue to progress throughout April and into early May and as Tiger mentioned, we're now at 95% overall revenue coverage.
Gross margin for the first quarter was 35 point, 34.5%, which included the impact to the covert related costs I just mentioned.
Without these charges are gross margin would've been largely aligned with the prior year margins of 35.8%.
As a percentage of revenue at Genie expenses were down 230 basis points year over year to 21.4%.
Largely driven by operating leverage as well as efficiency and cost containment actions, we initiated earlier in the year.
Adjusted EPS for 53 cents up 23% year over year compared to 43 cents in 2019.
Tencent increase was driven by higher operating income contributing success for share foreign exchange Remeasurement gains contributing seven cents, partially offset by higher taxes and higher share count without one cents each.
Our effective tax rate during the quarter was 22.5% compared to 23.3% last year.
Largely driven by higher discrete benefits in the current period compared with last year.
Turning to our balance sheet and cash flows.
During the quarter, we returned 64 million of capital to shareholders. This included approximately 19 million related to our quarterly dividend 10 cents per share, which increased 15% comparisons to prior year.
We also repurchased approximately 1 million shares totaling $45 million at a weighted average price of $43, an 18 cents per share during the quarter.
Since we initiated our share buyback program in 2015, we've reduced our net outstanding shares by 18% over this period, we repurchased 38.4 million shares at an average price at approximately $26, a 60 cents per share for totaled $1 billion.
We currently have approximately 229 million of authorize capacity available under our share repurchase program.
Due to the Cobiz 19 crisis, you have temporarily suspended our share repurchases to augment our liquidity position.
When you try to provide a bit more color.
On liquidity.
We are sure. This is the subject is top of mind for many investors.
We are investment grade rated at both major rating agencies.
Our cash cash equivalents total 402 million compared to 325 million at the end of the first quarter 2019.
Our net debt to EBITDA ratio for the last four rolling quarters was 1.85 times.
Total debt balance at the end of quarter was approximately 1.5 billion.
We had no scheduled maturities due until the 350 million.
Our bond repayment in the second quarter 2022.
In terms of debt covenants are outstanding term loan and revolver included net debt to EBITDA coverage ratio of three times at a minimum interest coverage ratio of three times.
Not expecting to reach these covenant levels given the significant Cushing had based on our current earnings and balance sheet profile.
In order to maximize our crude flexibility and enhance our liquidity, we drew down our low cost bank facility during the second quarter, providing an incremental $330 million of cash at this time, we're not expecting to use the additional cash.
Our cash balance as of April Thirtyth.
Was there for $700 million.
We estimate the incremental interest expense related to the drawdown is approximately $2 million per quarter.
Day sales outstanding during the quarter improved 89 days compared to 93 days last year.
Recall that last year was impacted from certainly payments we received at the beginning of the second cool.
Each of our accounts receivable has remained relatively consistent over the past several years.
Given the current environment would expect to see some deterioration in our region.
To date, we've not seeing any meaningful movement in the aging did he ended April but we'll continue to monitor this very closely.
During the first quarter, we utilize 90 million of cash for operations compared utilizing utilization of 5 million during the same period last year.
This was driven by higher annual bonus payments due to a strong performance in 2019 as well as the tax deposit age related to 2013, India task.
Capital expenditures as a percentage of revenue was 2.7% in the first quarter, which included approximately $3 million to bolster our work from home capabilities necessitated by the Cobiz 19 crisis.
Year to date duty ended April we have said approximately 11 million on equipment related to the transition to remote service delivery.
The majority of these expenditures are associated with the purchase of laptop computers.
For the full year, we now expect capital expenditures to be between 2.5% to 3% compared to our prior estimate of three to 3% to 5% of revenue.
Let me now provide you with our current thoughts regarding our full year outlook.
Tiger mentioned given the many uncertainties surrounding the could 19 crisis, we decided to withdraw our full year outlook until we have better visibility.
Let me provide some color on expectations for the second quarter.
We are currently anticipating second quarter revenue could be down 3% to 5% year over year on a constant currency basis.
Arrange considers variables, including the timing of work from home approvals received from certain clients.
Tiny easing as a lucky and restrictions in the countries, where we operate.
The progress of conversion of our pipeline as it relates to large deals decision, making and the time to get infusion of new transformation services deals.
Given the revenue levels. We're now expecting we had moved quickly to reduce our run rate costs.
The actions we have taken include but are not limited to.
Freeze on salary increases.
Right sizing and active redeployment of resources throughout the company to drive improved utilization and reduce bench.
And close to zero travel discretionary related expenses.
We will continue to assess the overall business environment and will be agile with our cost profile to ensure we balanced the need to drive current financial results with the need to support long term growth initiative.
The district is such that we're well prepared to ramp up and even accelerate our growth as business conditions improve.
Given what we're seeing today, our global operations, we believe second quarter revenues will be the lowest revenue cougar for the year.
We experienced greater disruption to revenue delivery in the first half the people compared to second half and we have line of sight to an improving revenue profile in both May and June based on increased client work from home approvals.
We will continue to assess the market dynamics hopefully be in a better position to provide our full year outlook during our second quarter earnings call.
There is no change to our long term outlook as our total addressable market continues to be very attractive and growth in our pipeline continues to be at close to record levels and we remain a leader in our target markets with that let me turn call back over to Tiger.
Thank you Ed.
As we look beyond these unprecedented an uncertain times, we expect to see permanent changes to the way the word as Ron.
In order to succeed in this new normal businesses will lead to find new ways to lead very resilient connect across ecosystems and adapt to a changing book fourth and bachman.
We believe our culture of embracing change our entrepreneurial spirit are passionate can do attitude and are focused on client outcomes will be a huge differentiator in the market and as one of the key reasons we've been.
With a more than 20 your track record of operational excellence, we have developed strong relationships across an enviable client portfolio, including many of the world's leading brands, we believe our agility responsiveness and innovative idea that strengthened our position as a trusted advisor with many of our key relationships.
We're already seeing this in the quality of our conversation thinking too that change agenda with them and how we can partner with them on execution.
They don't find ways, we think the world of business will change as a result of learning coming out of the crisis.
First a significant shift from offline to online. It every industry second virtualization, all technology services I'm solution delivery.
Oh, sorry.
Accelerator consumption of cloud based services and solutions for an exponential growth in real time predictive analytics.
All of the above with a human centered design process and collaboration experience.
With our ability to access gallon no longer constrained by geographical boundaries, we will be able to find the right people for the right line of the right process.
Not only from the outside but within Genpact as well.
Today, our employees are able to re skill and prepare themselves for future opportunities using our internal learning platform genome.
This allows us to redeploy these resources to new client opportunities using our talent much platform.
Just in the last four weeks, we have completely re skilled and redeployed close to 2000 people globally.
We have stronger and more relevant for Clinton on industry than we have been I no longer don't financial goals, we shared in the past remain intact.
To close I want to once again recognize the amazing work under domination of our teams that have come together, so well in these difficult times.
Our values are cartridge.
After 10 sites of mess on a bedrock up integrity have been the guiding principles that 95000, plus team members across the globe rallied around the shed purpose to help our clients continue the critical but they do.
We are proud of the role we play to keep the global economy running, especially in these difficult times.
Also would like to tank our board of directors for their support commitment on invaluable guidance, particularly over the last few months.
And finally, I want to tank appliance for their tremendous partnership over the last several weeks, it's a difficult times like these that two partnerships trying to.
In addition to the work we have done with our clients. We have also engage directly with the communities from which we provide our services.
Our teamed up for lighting food and hygiene products for displaced migrant workers on children in India Latin America.
We donated medical grade maass to local hospitals and go on China on New York City, we're working with nonprofit organizations across India to keep them running when that pool of older drugs have declined.
We are supporting organizations that provide food and housing for the homeless in the U.S.
We are providing first responder than many of the cities we operate from with local called set us apart.
And our teams are creating content and tutorials for virtual classroom enablement to allow more than 10000 children across Europe in India to continue the education during locked down.
I believe by working together with our clients in our communities, we will emerge from this crisis stronger company ready to navigate through the postponement Monkey Lloyd.
With that let me turn the call back over to Roger.
Thank you Tiger would now like to open our calls for your questions Bridge. It would you please provide instructions.
As a reminder to ask the question at this time, Please press star and the number one and you touched on telephone. If your question has many answered we wish to lose their so from the Q. Please press the pound key.
Our first question comes from the line of Ashwin Shirvaikar with Citi. Your line is open.
Thank you hi taken Hyatt.
Sure.
Hey.
So I appreciate the commentary and hope you guys are doing well.
Thank you.
Yes.
I wanted to start, but you know when compared to one key performance plus the 7 million that dimension quote let's call. It a deficiency type losses.
Related to lock down it's simply a very modest sequential decline from Q.
Which is actually quite good relative to you in a normal sequential pattern.
Let alone one affected by pandemic. So first of all what's driving this said there one off project Sidney I want to make sure that aren't onetime revenues or pull forward Sir.
You know.
Some kind and could you also talk about the inorganic contribution.
Yes so.
I'll start off I shouldn't by saying that we did have a really good first quarter.
Every one of our verticals.
Delivered transmission services delivered and that included right point.
And we were really.
Off to a really good stock for the yard and the first quarter and then of course covert 19, the last two weeks or not and we talked about that so.
I have to say that we did have already got first quarter. There are no onetime sitting in that Ed.
Yes, I think the one thing that was noteworthy to me is we're going through it had to check it a couple of times, but it was every sub vertical saw nice growth during the quarter. So it was probably the most pervasive growth quarter that we've had typically we'll call. It the ones that grew more strongly than others and that was a pretty pervasive growth quarter. So yes. It was it was.
We thought it would be good it was even better than we expected which is great.
For the headwinds that everybody started to see towards the latter part of March.
Okay got it so basically had a really good start.
The the revenue trend you mentioned going from one Q2, Q and you mentioned the cost actions, you're taking could you size those they let's call. It roughly in that 15 17 million for corporate type Blaine benefit so that maybe you could be.
In the ballpark for what one would consider normalized margins maybe.
And any any kind of siding timing impact.
No cash where she is noncash what would be helpful.
Thanks, Let me start than you can then you could add yeah, we're going to cut it refrain from giving a lot of lot of guidance, but I think your question is fair I think as we've looked at the key to it is going to be a meaningful meaningful dropped and I think the actually that we've taken that I think are appropriate primarily as it relates to whats the right utilization levels to tissue for what.
We know a lot of this year as things recover.
Coming back a big chunk of what we're losing two was the approval to work from home for many clients, which we expect will come back so Q2.
As you heard me say, we think there'll be some of the locally but we had done taking rate actions, we think such that going forward, even at a lower level for at that level. You will you would expect to see.
Operating margin improve a bit because we brought utilization levels up to a point, where you know given the size that we saw that we're seeing for Q2, if things kind of stay there for a period of time, maybe actions that we're taking that we've taken.
Now beginning the second quarter will help Q3 in Q4, such that you by the by the yet I don't know that we get back to the levels that we thought right away. We do think long term that does happen, but we'll be able to resizable condition for the long term to get back to levels that we talked about just harder to do in a quarter, even two quarters, but I do suspect at a time.
We get to the fourth quarter.
Yes, the action taken more local will flow through integrated add that no I'll, just say ashwin that.
We are very clearly that we would like to make sure that we balance actions that actually delivers to financial performance in the short run with making sure that we continued to birds strengthen muscle as the word cages and outlines requirements change. So that we actually are in a position to deliver.
Due to them in that changed world and I feel really good that that balance it's being struck low because our client requirements are beginning to change on where we've seen some of the benefits of that.
Got it by the way I should mention in the beginning appreciate the good work you guys had doing any community.
Thank you. Thank you.
Yeah.
Thank you and your next question comes from the line of David Koning with ended the year landfill thing.
Hey, guys impressive quarter could that good to catch up with you. Thank you David.
Yeah, I guess, a little bit on on Ashland's question to you know, we think of the sequential decline it kind of imply 75 to 90 billion or so.
How much of that is just that 7 million losses, but some of the banking clients. Obviously the information how much of it. It's just that 7 million being kind of amortize over though the whole quarters that like half of the decline, which will just come right back when when you know people can work again.
Yeah, I would say it's great question.
That's great question, David I would say about 40%.
What would you know one would characterize as supply driven.
Do you think about the 7 million off the first quarter, that's all supply driven.
The transition to work from home et cetera.
And then the other 60% is demand driven and I would.
Count that as two things, one, though slow down and decision making on large deals.
And the embedded conservation subject to endorse zogby and then the second one is off the new transmission services and the pace at which that comes in also slowing down we are ready for a lot of new services, a new solutions and transmission services, but it does that just show volume that obviously has slowed down.
As people basically dealing with this new world of disruption.
That's that's though rich off the impact of the core.
Okay, No that's really helpful and then.
And then I guess, just you know right point, obviously, a pretty big acquisition for your recently, how big was that in Q1 in how how is that done.
During the crisis kinda relative to your core business.
Yes, it's in line with what we had said for the full year, David If we said 2.5% roughly of revenue. It's in that it's in that ballpark, it's probably just by close to 3% for the first quarter, but largely aligned with our expectations and as we look.
No change really impacted that business versus the rest of the core business Tiger anything else that no I think I think like the rest of the company actually Lifepoint had a pretty pretty really good first quarter.
Given everything that's happening in experience and the economy.
Are we already see that will go but my team and into postcode 19 toward.
Some of the services and engagements that Lifepoint has as it relates to you know experience in this new Virtualized economy is going to really better traction again as well as some of the commerce, what they do on online.
Services on digital online services that ultimately is going to help right point and I think if you think about the whole yard the proportion that we expect or term brightpoint. We would take that continues to be the proportion we would expect in the revised doctorates something else.
Gotcha, great well thanks, good job.
Thank you David Thank you.
Thank you and our next question comes from the line and 10, San Juan with JP Morgan Your line is open.
Okay. Thanks, so much actually got disconnected. So forgive me. If this was addressed already but when you commented on the existing pipeline.
Moving I think you also mentioned that a new pipeline created by the pandemic was picking up so I'm curious if the qualified pipeline or or bookings as you define it.
How that looks now versus pre cobot anyway to frame that and the timing of course will matter, but just curious about size that that makes sense.
Sometimes enough again very good question I start off by saying.
Cash costs by squawking bookings at a very nevertheless number to look at because it's so it's so episodic.
So lumpy.
Obviously, but the slowdown in the pipeline on large deals.
Those large deals bookings have slowed down on that one would expect for those bookings to be slower than normal and that does impact that order booking number in the Meanwhile, we've seen do these enter the pipeline and doors.
Yes, so specific about today's economy, and the challenges and opportunities that clients see today those tend to accelerate through the pipeline obviously the balance between the to determine the overall booking.
It's not balance because the slowdown is bigger than the new pipeline coming in which is why you're seeing a decline in revenue in the second quarter of so obviously that will have an impact on that or show through in bookings as we go through the balance of the yard.
And then in transmission services, we think a lot of new traction being built on top of the new solutions, we've taken to market as it applies to you know wasn't capital liquidity.
The cares that.
Insurance claims insurance underwriting supply chain and a whole lot of youth services.
Understood. Okay that helps us just thinking about the second half and I think I heard you say quick paybacks I wasn't sure if some of these.
Feels overall might come in a little bit quicker and make up for some of the the second quarter.
Pause.
But my other question was just curious and on the larger clients GE included.
Are they very different from the rest of the business I'm. Just curious if this is isolated to your larger existing.
Accountant in your visibility into those thank you that's all.
No Tonight, I would say I mean.
In fact that covert 19 as hot as you can.
As you know I've seen is pretty pervasive.
Across all industries across all clients. Obviously, there are a set of industry verticals that are much harder than the other Fortunately our exposure to those industries has limited, but if you take a broad portfolio outside of those industries.
And as I've sat at about 85% classified revenue I would say all of them are dealing with this new work and.
Some of them are dealing with.
Volatility as well as a shift to online as well as production and total amount of volume. So it's a combination of all three.
Yeah, I think as did poorly telegraph, sorry, I missed that your existing clients because they know you can they flick up and down a lot faster.
That was sort of the spirit. The question no actually actually interestingly. It isn't the reality is if you take that insurance contact me one.
They don't don't want stacked well.
It's a new loan.
It's a large insurance new logo.
I think we believe that.
Trust in that very short timeframe would the intensity of the we're now in that.
Virtual World you can build a density including remote exposure to our operations that they got comfortable in moving work from one job agreed to another one operating center to I've walked from all the work from home.
Amazing everything is much wells I, we're beginning to see quite a bit of that I'm talking about getting really clever with framework that methodology is to do that.
That's great. Thank you always learning thank you.
Your attention.
Thank you and our next question comes from the line of nagging only with William Blair. Your line is open.
Hey, this is cut on for Matt. Thanks for taking our question I'm just wanted to ask real quickly how you're balancing quiet quest for discounts that rig count profitability things like payment terms and push out there already discussed you are thanks, maybe just touch on kind of balance with the client quest.
Yeah, I would say you know.
Clearly these are times when it is important to keep.
Total value that you're creating for clients in mind and make sure that you are focused on solving for their challenges and opportunities if that requires flexibility that's exactly what we are really good luck.
When we went through the global financial crisis, many years ago, that's exactly what we did with certain tied up industries.
We are doing the same thing with a number up although industries here and that allows us to create new opportunities.
Allowed us to bring new technologies to actually drive that productivity pot lines and generate value for them. So it's not necessarily just price concessions straight out of the gate, it's actually creating value and we also seeing traction in value creation deals, where we get paid based on value creation or do you want.
To add anything to that.
Just a couple of things I think it's I think it's been.
Handful of places, where we we've had conversations about turns that was I think the terms, we give our reasonable unfair.
You know or are working capitals is accounts receivable write we pay payroll for the most parts. So that a lot of room for us to extend turns if you will see and there's there's there's been has been minimal and that just to add a little bit what tiger, we're saying typically what we are doing is making making.
The clients operations, even more efficient and effective and saving money versus their existing run rate. So we're taking we are actually helping them become more efficient cost effective so it kind of the discount lardy, we're already kind of giving them a cost reductions on.
Having all those conversations because they know we're taking cost out to answer.
Got it did have a different dynamic but.
Here and there is tiger said with the relationships if they're in a tougher spot we're absolutely looking for covenants as you'd expect.
Okay, that's very helpful.
And then in terms of 95 kind of your coverage that that's currently being delivered.
And your staffing India. Aside is there a point, where you maybe expect demand to be the limiting factor rather than supply constraint on Nathan maybe just talk about.
In the next quarter here and maybe what you saw in April and May about how those different supply and demand trends.
And progressing.
Yeah absent absent any new.
You know macro change based on what we know what all of US no I would say going forward. We have a good handle on on a you know the impact driven by supply.
It's really now demand and the pace at which bought.
Our regular intelligent operations deal demand continues to progress in our pipeline.
Which as I pointed out is pretty record levels and transmission services.
Great that pipeline progressive and new transmission services deals enter the pipeline. So it's all dimont.
Yes, I think I think it's it speaks to the type of service that we're offering to is not discretionary nature. It's a what happens is estimated to go away. It doesn't go away. So in terms of customer service.
Customer service levels were seeing Arclight interesting your customer service level decline backlog going to levels that are acceptable. So at a certain point yet this has to come back right under the work has to get done. So it's oh, we do they get to temporary demand decline as opposed to a change in dynamic.
Alright, thank you.
Your next question comes from the line of Edward case, though with Wells Fargo. Your line is open.
Hi, good evening, great quarter here I'm curious about I'm curious about your ability to get work back in the facilities challenges in India in the Philippines and elsewhere are you allowed to get back in and.
And when and if you can get back in.
Do you will that resolve some of your capital markets challenges and then maybe longer term.
You know the there's hope to reduce square footage, but at the same time you up to socially distance more so are you spending money to out to retrofit your facilities. Thanks.
We also had a great question, we do have a as you guys. You would imagine we are Oh, we have created on our creating playbooks all moving back work to office it'd be a very deliberate systematic move back to office as location by location city by city.
Jurisdiction by jurisdiction opens up with various stages of opening up.
We will prioritize walk that currently we are unable to do.
Work from home environment in order to bring that back to office for us.
That is going to be a buddy staged gradual uptick as jurisdictions open up.
We can't predict exactly when that's going to happen as you prioritize bring back what could be trick on deleveraging to bring that back we do believe that longer term.
Oh proportional of the work will actually remain to be done virtually that's our view I think what will.
Over time, depending on the type of book would have a certain proportion that will be done virtually will allow us to access new talent it'll allow us to drive better performance and property in some of those services.
And I think on number of those will get played out not just by us, but by the industry and by clients.
Propensity to do that and.
Risk profile to do that so I think a lot of things have to play out we have the flexibility to move in different directions. I think we are creating solutions that allow clients to choose we will flex, which social does sensing in our offices. The first desktop added as we bring some of these banking clients back available at a loud and that's how we are going up there.
My other question this around consolidation and in sourcing have you had clients come to you and give you incremental work because some other maybe other weaker vendors haven't been able to get the job done and.
Yes.
Just slightly different question have you seen clients start the process of moving work back in house or more so onshore it's an in house.
The first one we have seen.
We've seen in quite a few instances I taught out referred to the banking client. The banking client is that you are.
Ramp up that we are doing it's an existing client of ours credit relationship and we are ramping up significantly in different parts of the word because they have to have us ramp up.
Because some of the other partners could not you know do the work Oh, we.
I have seen some clients actually move walk from that GAAP trips to us the insurance lines. As an example, because they realize that gets too much concentration just would that captive.
We haven't seen yet any movement back into the clients own operations. I guess, you don't really did that could be some plans will pick that mix I think the most important question that client on debating is exactly that target operating model between onshore near shore offshore work from home the.
Flexibility to be able to move things around those are more important topic than you do that although I do this.
Great. Thank you congrats aggregate and today, we have seen some incremental work from others not able to cover so so yes yep.
Thank you. Our next question comes from the line of Bryan Bergin with Cowen Your line is open.
Hi, Good afternoon help everybody is doing well.
Hi, Brian Thank you yes.
I hope you're too.
Thank you I wanted to ask here you know within this to Q view that you're you've provided can you just give us a sense, whether you see global client and GE being similar in their trajectory or or dramatically different.
I don't think.
We need to go there yet.
With the breakout.
I think will provide more color on that as we get as we get into the.
In the second suffice to say.
Both are experiencing a declining growth that seemed before that when we get into the the percentages of one versus the other at this point.
I would yeah, I'll, just say that given my color on.
Fly being 40% demand being 60% and the other color that on supply a lot of the supply was banking capital markets related.
You can see that in the end I think it'll broadly workout to not that different type trajectory between global times and Angie.
Right.
Got it from Kim from from Q1 to Q2 the growth written the GE would it would be coming down right just because of the timing of the work that we brought in from GE last year. So.
The growth my first quarter as we expect it was over 10%, but for the full year, we've got closer to flattish right. So we knew that the growth rates and you're going to be lower so.
More pronounced just because of that and then on top of that what's happening we also.
Kirkpatrick try that color yes.
Okay, Okay that makes sense.
And then I wanted to ask and supply chain and procurement opportunity.
What do you see if you could talk about what you're seeing this area. This is certainly when you highlighted in the fall at the Investor Day, and it seems like you would have a broader view now that can you kind of just talk about some the deal he may be seeing come into that pipeline and any sense of the scale of where that businesses.
So Brian Dell, though.
Recall that 19 word was supply chain is important because it's it's one of the core.
Ways to drive agility in a business.
It makes growth happened for a number of companies both in the consumer goods retail space life Sciences, healthcare space and manufacturing industries, and we work very well position both with the acquisition that we had done a but kabi as well as with a number of solution that redbird with the initial.
Clients that we had engaged with over the last 15 tough years, including GE.
In the fourth score with 19 Board supplied you entered one of the area that is actually coming on to our of big.
Oscar off dealing with supply volatility supply risk and demand volatility. So when you put that together that demands on supply chain to become even more edge on the reconfiguration all next looks.
The reconfiguration and revisit off.
Flyers and footprints.
Manufacturing footprint and finally.
You know revisit of all our gardens.
Company that use algorithms to actually blonde, both demand manufacturing and supply.
I have to revisit although Martin.
We're seeing a lot of that traction buildup in the marketplace with the capabilities.
Okay. Thanks, guys.
That's right.
And next question comes from the line of Bryan Keane with Deutsche Bank. Your line is something.
Hi, guys. Thanks for taking my questions I guess, just first it if I look at the month of E.
Look at the month of Ah April is it is it down 3% to 5% constant currency and you're expecting that to streamline or does it drop or get stronger I. Just don't know the trajectory of the revenues baby by month.
In my prepared remarks, I talked a little bit about.
And I guess, what I'm thinking about Tigers, what does that that recovery look like I mean, I guess this is the major question everybody's trying to figure out but does it does it come back quickly and we get too you know more normalized levels in third quarter fourth quarter, just how long does it take to get back that demand since I'm you know it's dropped off here, but.
For the you know the market feels like it's feeling like it might be a quicker recovery just trying to get your thoughts on how you think about it.
It's very difficult to answer Brian otherwise, that's one of the reasons why we have suspended.
Original guidance for the year I think there are lots of variables here and the most important variables talks with the virus. So so you know depending on how are the virus plays out on the response to the virus by various governments.
By businesses and economies and by citizens.
And how they get back to work I think both our lots of big questions deep questions varies by economy.
It's tough to predict shaul.
Don't know exactly how to answer your question and the only thing I can think that.
We have people who are constantly in conversation with clients and I think that the best thing, we can do and those conversations out of the C suite and the board level. So we know when climbs begin to actually see changes in their business. That's when we responded rapidly.
Got it got it and the last question I've been thinking about is is this delivery model and you guys have done a wonderful job to keep up a you know the supply levels and and move virtually but does that mean anything about the modeling going forward and maybe higher margins at some point given some of the learning.
Things that are you know, it's it's kind of been forced upon you here with the rise of Cowen 19.
I'd start by saying higher margins is not God Drybar all the operating model in the future I think operating model in the future will be a combination of.
Our onshore near shore offshore and now virtual working as well.
Depending on the service that proportion will be different there'll be some services backlog only be from the office there'll be some services, where you can do 95% of everything some work from home. So that will play itself out we actually building our thinking on frame, but but every service line on it does your driver for having some proportion of virtual delivery in ARPU.
End of a business and actually in every business is a pick up on what it does to the ability to attract talent think about what it has to be to extract.
Talent that otherwise one could not attract because they were not willing on capable of computing and our twog each direction to work.
The productivity levels that we are seeing it did away by which we can make that assigns a then that burden of Greg. If you can keep employee engagement employee culture, and a mental health and all of those issue that other people have experienced as some of this block from only happen then some proportional work well.
Mhm.
To be part of a work from home Oh, I see that happened and we think that's the we ultimately but sobi doesn't have a benefit on margins I'm not so sure that would be the driver.
Hi, collateral benefit over the long haul, but there wasn't because I've talked about.
Got it thanks, so much they stay a safe and healthy here Crazy time QNX much mutual tankage. Thank you took that spread.
And our next question comes from the line of Mayank Tandon with Needham Your line is open.
Hey, good evening on execution on for Mike. Thanks for taking the question I'm trying to get a little bit more color and delivery capacity.
You guys supplementing the.
Approvals and their capacity it seems to have been increasing in April may.
Do you think as things on do you think there's scope that you might be able to squeeze it a bit higher than that makes a percent or do you think that last five is really going to be dependent on.
Being able to have some of these cobot concerns ease a little and gets with go back and sort or facilities.
Well the percentage of it really is our is approvals from customer choice at the biggest disconnect is tiger mentioned that I mentioned them on my prepared remarks, so we're starting to get some of those and that's the piece that we said is improving so that it's really getting approvals from customers. If we get all of them to approve.
We're we're very high 90% and maybe a percent or two left this not came from Oh. So we're it's really those approvals that we need to get.
And then to an end the demand.
Plus or minus is going to be transmission services related and how does that has that proceed as we as we progress throughout the balance the quarter.
But it really sad too, but it referred to as you move that Oh, you know given the amount of time that we've been working at this Oh, we're getting close to.
The edge of what I think that will reach I mean can you can move a little bit incremental tropicana.
But it's not it's aren't gonna be that would you know that's why we have a range.
Our our.
Projection for Quanta too.
Great that's helpful.
I guess, just one quick follow up on our own brilliant thoughts on capital allocation in this environment you guys mature suspending the buyback and are you guys have been acquisitive and passed.
In valuations probably have come down from central targets, just wanted to get your thoughts on.
On the right fit.
Would you guys pursue M&A right now what would you be looking for or is it possible you pretty structure out of some of the the deal terms before earn out or equity driven and just kind of want to get sort of get some color on that.
God I'll start off with the M&A side, and then maybe you can wrapping around the overall capital allocation.
Look M&A M&A, the M&A team continuous and look for opportunities.
Our strategic focus on what kind of capabilities are going to bring in have been pretty clear and we continue to explore.
Bringing.
The right opportunities and look at is the environment challenging to actually begin and do proper due diligence is the advance challenging in terms of specific valuations yet.
But I don't think we've stopped looking at those types of opportunities and as some of those come closer to fruition. If they do then we will think about structuring them differently.
You know connecting them too.
Maybe et cetera, but.
Our M&A pipeline continues to be focused on what we were focused on.
Particularly with with our.
Digital analytics.
Data engineering cloud I mean, all of those vivo anyhow focused on and we continue to be focused on looking for opportunities.
That's correct around capital allocation.
Yes, yes, no. This what's happening now has not affected our view of the long term priorities that we need to go after right. It's driving growth for the firm organically, obviously attractive M&A as Tiger talked about first and foremost and then obviously the dividend paid hours as a percentage of meaning that income as we grow.
And share repurchases is there for the excess cash and.
Good question on that is what's what's excess cash today right. So we obviously love devaluation, but.
But we're in an environment right now that.
We need to see how this plays out before we feel comfortable.
Moving there so I think this no change to long term health of this of this.
Of this business is very strong it's really were all impacted by what's happening anymore in the world, but we think it rebounds any bounce back to where we were before this all started hopefully sooner rather than later.
Great. That's good color thanks, guys.
Thank you.
Thank you and I'm not showing any kind of fashion. So I'll now turn the call back over Roger Sachs for closing remarks.
Thanks, Bridget Thank you everybody for joining us on our call today and look forward to speaking with you again next quarter.
Ladies and gentlemen, this does conclude the program you may now disconnect everyone have a great day.
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