Q2 2023 Genpact Limited Earnings Call
Good day, ladies and gentlemen, welcome to the 2023 second quarter Genpact Limited earnings Conference call. My name is Crystal and I'll be your conference moderator for today.
At this time all participants are in a listen only mode.
We will conduct a question and answer session towards the end of this conference call as.
As a reminder, this call is being recorded for replay purposes.
A replay of the call will be archived and made available on the IR section of Gentex website.
I'd now like to turn the call over to Roger Sachs head of Investor Relations at Genpact. Please proceed.
Thank you Crystal good afternoon, everybody and welcome to our second quarter earnings call to discuss results for the period ended June 30 of 2023, and we hope you had a chance to review our earnings release, which was posted to the IR section of our website.
Speakers on today's call are talking to you on the rationale.
Yeah, Mike Weiner, our Chief Financial Officer.
Tenda will be as follows.
Provide an overview of our results and an update on our strategic initiatives. Mike will then walk you through our financial performance for the quarter. So I will provide our current thoughts.
Full year 2023 Tiger will then come back for some closing remarks, and then we will take your.
We expect the call to last about an hour.
Some of the matters, we will discuss in today's call are forward looking.
A number of risks uncertainties and other factors that could cause actual results to differ materially from those in such forward looking statements such risks and uncertainties are set forth in our press release.
In addition, during todays call well refer to certain non-GAAP financial measures.
These provide additional information.
Standing on the way management views the operating performance.
You can find a reconciliation of these measures to GAAP in today's earnings release posted to the IR section of our website.
And with that.
Let me turn the call over to Tiger.
Thank you Roger good afternoon, everyone and talking about joining us today.
Second quarter of 2023 earnings call.
Before I get to the financial performance for the quarter I want to highlight that our strong bookings momentum continued in the second quarter. We currently expect 2023 full year bookings growth of 25% to 30% driven by large deal and you know how it works.
This positions us for strong topline growth in 2024 and beyond.
Along with a great bookings quarter, our adjusted operating income margin adjusted diluted EPS and cash flow from operations all exceeded our expectations.
While our cost reduction and digital transformation continued to remain high priority for our clients that.
Increasingly turning to us to help accelerate their data drylands highlighted by our desire to leverage any on this.
This will allow us to deliver more value to them, how AI augmented enjoying services.
Specifically during second quarter, great quarter, three we delivered on a constant currency basis total revenue of 1.106 billion up 3% year over year.
Competence revenue of $501 million up 3% year over year up digital operation services revenue of $605 million.
Oh, yeah yeah.
<unk> delivered adjusted operating income margin of 16, 8%, a 10 basis point year over year decline.
Adjusted diluted earnings per share of 72 cents up 3% year over year.
Our top line revenue during the second quarter was below our expectations.
This reflects the current environment backlogs across industry verticals continue to prioritize.
Large transformations, focusing on structural cost reduction and re platforming operations, while at the same time see incremental pressure on discrete pretty project spending in areas related to marketing I'm shocked cycle advisory work.
We also saw some volume reductions from our high tech clients driven by macro headwinds.
I'm going to talk about these near term challenges do not make Alex obviously, that's why we design our solutions to transform our clients' business grew 3% on a constant currency basis.
Thank you for your operation services wherever it gets really transform and run them all products operations was up 2% on a constant currency basis.
I'm going to talk about these trends, we now expect total revenue for the full year, two increased five 5% or six 5% Europe .
On a constant currency basis compared to our prior expectation of.
Six 5% to 8% growth.
Mike will provide greater detail on our updated full year outlook.
Despite the near term revenue pressure demand for our services remains strong.
And part of the deal momentum we saw earlier in the year.
Ill continue.
We set a new second quarter and first half of your record for bookings.
So already about deals remain long term in nature with approximately 70% being annuity base, which demonstrates.
The rest of our business model.
Win rates over the spirit board, well above historic averages at more than 60%.
Quarter, two we signed six large deals.
Oh Repositrak on your $50 million.
Following the five we signed in quarter one of this year.
On above historic levels.
Our client roster also expanded nicely as we added 24, new logos during the quarter, including three large deals.
Driven by robust new inflows our pipeline reached another all time high in putting several new large deal opportunities.
We are seeing an increasing trend of crimes focused on getting that data consolidated.
Proving its quantity migrated in orchestrating that data in the cloud.
All of this helps prepare them to use journey I lost language model got predictive AI and machine learning.
I live in a commodity business outcomes.
Given our year to date record bookings a robust pipeline. We currently expect 2023 full year bookings growth of 25% to 30% above last years level of $3 9 billion.
While we have not shared a bookings outlook in the past given the consistent strength. We are seeing we targets important to do so now as it shows the way our clients are thinking about setting themselves up to leverage AI in the future.
Let me add some color on the six large deals we signed in the quarter.
We're a large global insurance company, we will be managing all of their technology in coating infrastructure applications and platforms, while we transition to the cloud and integrate all of that disparate systems and processes from acquisitions.
For one of the largest global technology platform for a while I guess to financial institutions, we would run and transform their operations and deposits lending collections fraud charge backs and fraud alert management.
The whole contract is transaction based pricing.
Create a true win win at all that time, we even use gen AI and other technologies to run their operations.
Our domain depth was that were not yet.
We are partnering with an E Commerce company to run all of their corporate technology security operations Finance.
And accounting and customer care services.
Our objective is to modernize the technology ops moved them to the cloud and dramatically improve customer experience.
The ultimate plan is to create a capability to leverage any I can around the services.
We expanded our relationship with a global food company to standardize on transform their finance operations in EMEA.
To replicate our execution of the highly successful North America journey.
Next our objective here is to leverage our AI and predictive analytics from all of the streamlined data to drive competitive advantage in their markets.
And finally for a large industrial client, we will leverage digital technologies advanced analytics journey II.
To provide real time critical decision and start to grow that business reduce costs and improve cash flow.
We also expanded our relationship with a global financial institution that has bearing on the launch and our digital savings account option for their customers.
The combination of our experienced team.
Our backing Xbox I congratulate technologists designed and peg the front end user interface as well as customer service fraud detection and other back office functions, which we are not running.
During the quarter, we continued to make great progress on our <unk>.
Our strategic initiatives.
Revenue from our priority accounts grew 2% year over year during the quarter and represented approximately 62% October revenue.
Our investments in these clients are paying off.
70% of our first half bookings welcome our priority accounts, we continue to expect this portfolio to grow faster than the company average over the long term.
Second we continue to deepen our partnerships with the cloud technology players with whom we are co innovating and creating joint IP solutions. For example, with <unk> solutions, we launched our supply chain as a service offerings that leverage our G&A our company.
Companies navigate ongoing supply chain disruption.
Refinish. It provides real time scenario planning for our clients reduce supply chain costs eliminate excess inventory and drive top line growth.
Our new collaboration with Microsoft enables Gentex global talent to access Microsoft Azure opening as others. So we can build on and put them on Jennie O solutions embedded enough emphasis.
We are building our journey, our Doctor scheme, but Google cloud to help accelerate the deployment of cloud based solutions for businesses across our chosen verticals with a particular focus on financial services.
In close collaboration with AWS, we are building and bringing to market a jetty are bearish regulatory reporting solution for a large global pharma company.
We continue to strengthen our partnership with service now by bringing our deep domain and process capability that allows us now to be the workflow of choice across multiple buying centers outside of the R&D function.
So we're continuing to invest in new operating centers in tier three cities in India, providing us with access to larger and more diverse talent pools in July we opened our third new sector Gotcha.
Fourth we are seeing great momentum in our journey to non FTE based commercial models, such as transaction based pricing and outcome based pricing.
These now represent 16% of our revenues.
More importantly.
One third of our first half bookings, while non FTE pricing.
And we now believe that we will hit our original goal of 20% of revenue penetration well before 2026.
This has also been driven by the increase in our AI based solutions.
And finally, our recent investment in a large deal team are generating great results, both in bookings and backlog.
Thanks.
As expected our attrition level has stabilized and is now 25% for the second quarter significantly lower than the 38% during the same time last year.
Adjusting for any voluntary attrition and employers with less than three months of service our attrition rate was even lower at 20%.
Let me now spend a few minutes on our systematic approach to leveraging journey aren't in our business.
As I discussed last quarter, we started on our journey Cypress your stock and since then we have investor developed and refined our AI capabilities and solutions relevant for each of our services and industries.
We have prioritized our resources, our Jennie O actions in three areas first yeah.
We are using journey II.
Chris rock less penetrated areas for us that are wide open for new service models, we are calling this offense strategy for us.
Great examples of such services into customer care, FBA and sales of commercial digital marketing support.
This will allow us to gain market share and drive growth.
Second we are prioritizing services, where we are a recognized leader such as financial accounting pronouncement, Brian on risk services and supply chain services.
Infusing Jenny I can act as a catalyst to drive step function improvement in outcomes beyond just productivity.
We are rapidly deploying <unk> within our own walls in areas, such as HR training knowledge management and internal software coding.
This will help improve our margins and create use cases for our clients.
Let me now brings us to life with a few examples.
For one of the largest global consumer brands company than the one we have re imagined the revenue forecasting process, leveraging AI and machine learning models.
Scheduled level, that's significantly improve forecast accuracy from a 70% range to a 90% range.
At the same time cutting cycle time from weeks to minutes.
For our global automotive manufacturer, we are using AI to gather and summarize comparing our product features and real time, driving agility and their market response for.
For a global insurance company, where we run their end to end insurance claims process far household goods.
They're using <unk> to collect and analyze product and pricing information.
More accurately determine pricing used for claims reimbursement leading to faster and more accurate settlements.
Our digital financial execution, we are using Jennie aggregate government the true meaning of suspicious keywords in customer transaction notes, reducing false positive alerts architectural nefarious transactions.
C N Ams services.
For a global media and Entertainment company, we are using J R to help customer care agents quickly resolve customer disputes with ideal responses developed by analyzing online chalk data better understand customer sentiment.
Uh huh.
For our global medical devices company, we equipped our procurement team with a journey. Our engine that provides real time answer two questions related to contract cover and payment terms through aggressive vendor disputes with recommended actions.
For a large Japanese technology conglomerate.
And translating customer email or rapid responses, improving customer satisfaction and sales.
While it's still these are early days I'm. So excited that we have more than 60 specific generic producers either of industrial clients are internally developed.
These have led to 500 plus client conversations across verticals to create a journey our strategic roadmap for that.
We believe we are uniquely positioned competitor frameworks and playbooks for our clients to find you lost language models with client specific data on industrial demand data given our deep understanding of the domain and the data.
The other advantage we have is our historical focus on understanding end to end processes and delivering outcomes.
This allows us to partner with our clients on deployment change management and adoption of these new AI solutions.
All of this has quickly led to many new deal inflows embedded with G&A are opening up new opportunities for long term growth and margin expansion.
As I said before.
Every enterprise is grappling with accessing clean data and orchestrating data to the cloud to leverage of our model that loves language models.
We believe this will increase our total addressable market.
Every technology wave in the past has done.
Over the next three year plan to invest approximately $600 million, both organically and inorganically to continue to build out our AI capabilities.
This will include investing in our own innovation and R&D teams.
Slide core innovation programs.
<unk> skills training and creating deep expert groups as well as acquisitions focused on data analytics and IP and frameworks in the use of our data volumes.
With that let me turn the call over to Mike.
Thank you Tiger and good afternoon, everyone. Today I'll review, our second quarter results and then provide you with our latest thinking regarding our full year 2023 financial outlook Tony.
Total revenue was $1 $1 6 billion up 2% year over year or 3% on a constant currency basis data check in AI services revenue, which represents 45% of total revenue increased 2% year over year by 3% on a constant currency basis, largely driven by our ongoing demand for supply chain.
Services as well as automating clients core finance and accounting functions. This.
This performance was below our expectations due to lower short cycle discretionary tech spending primarily in our financial services vertical.
Digital operation services revenue, which represents 55% of our total revenue increased 1% year over year or 2% on a constant currency basis, primarily due to deal ramps from existing and recent wins, partially offset by a reduction in volume from our high tax accounts.
We expect digital operations performance to improve during the second half of the year relating to large deal ramps from large bookings that tiger referred to in his earlier remarks from a vertical perspective financial services increased 4% year over year, largely due to insurance client deal ramps and continued strong demand.
As for our digital solutions, partly offset by current clients lower discretionary project legacy Tech spending consumer health care declined 1% year over year, largely driven by the impact of one large deal cycles. We saw during the second half of last year as well as recent divestiture of businesses we.
Asleep classified as held for sale. This was partially offset by demand for our tech enabled finance and accounting process improvement solutions.
Hi, Tech and manufacturing increased 2%, primarily driven by supply chain engagements ramp ups and new logo wins. This was partially offset by the impact of reduced volumes in high Tech accounts that I mentioned earlier.
During the 12 month period, ending June 32023, we grew the number of client relationships with annual revenue greater than $5 million from 154 to 180.
Client revenues greater than $25 million expanded from 34% to 38 and clients more than $100 million increased from three to six.
Adjusted operating income margin was 16, 8% down 10 basis points year over year, and up 40 basis points sequentially due to higher gross margin and operational efficiencies as a reminder, our performance for the second quarter last year included the positive impact from a classification of a nonstrategic asset as held for sale.
Bill and excluded a $39 million restructuring charge related to actions, we took to reduce our run rate cost basis.
Gross margin for the second quarter expanded 90 basis points year over year to 35, 3% largely due to revenue mix operational leverage and the absence of the restructuring charge that was and that was partly included in last year's cost of goods sold.
SG&A as a percent of revenue improved 60 basis points year over year to 28% as the absence of the prior year restructuring charge more than offset the higher investment in sales and marketing during the second quarter of 2023.
Adjusted EPS was <unk> 72 up 3% year over year from 70 cents in the second quarter last year. The increase was primarily driven by higher adjusted operating income as well as the positive impact of lower outstanding shares of <unk> are.
Our effective tax rate was 22, 7% down from 24, 8% last year, largely due to a higher mix of discretionary tax benefits in the second quarter of 2023 compared to last year.
During the quarter, we generated $171 million of cash from operations up from $102 million. During the same period last year. The increase was primarily driven by sequential improvements in our dsos in the second quarter of 2023 versus an expansion during the same period last year on a year over year.
This is our Dsos improved two days to 82 days, we continue to expect our dsos to remain in the low 80 day range the remainder of the year.
Cash and cash equivalents totaled $491 million compared to $552 million at the end of the first quarter of 2023, largely reflecting the return of $145 million to shareholders. Our net debt to EBITDA ratio for the rolling four quarters was one three times with our undrawn debt capacity.
Existing cash balances, we continue to have ample liquidity to pursue growth opportunities and execute on our capital allocation strategy that includes reinvesting in our businesses strategic capability acquisitions and return of capital to shareholders. We continue to expect our net debt to EBITDA ratio to remain in our preferred.
One to two times range.
During the quarter, we continue to execute on our share repurchase program and bought back approximately three 2 million shares for a total cost of $120 million at an average price per share of <unk> $37 68.
We now have repurchased $150 million of our shares which is in line with our expectations set for the full year of 2023 with this activity and our projected full year dividends, we will pay out 50% of our expected operating cash flow.
Capital expenditures as a percentage of revenue was approximately one 4%, we anticipate a higher level of investment activity. During the second half of the year related to a large new deal wins as well as opening new operational centers and tier three cities now let me update you on our full year outlook.
Target discussed earlier clients have become more cautious on growth related to discretionary spending as they focus on their cost base agendas, which impacts our short cycle Advisory project at the same time, they are putting a priority.
Prioritizing large transformational deals this dynamic resulted in less near term revenue as bookings mix skewed towards large deals with revenue that gets recognized over a multiyear period.
As a result, we now expect total revenue to be between 459, and $4 six 4 billion representing year over year growth of 5% to 6% or five five to six 5% on a constant currency basis. We continue to expect our full year adjusted operating income margin to be approximately 16.
Eight including investments related to AI align with our strategy to drive margin expansion at a faster pace than we have done historically.
Given given many of our recent large deal bookings, having initial onshore delivery. We continue to expect our full year 2023 gross margin to be relatively flat to slightly down compared to 2022 levels. We continue to expect our full year 2023 effective tax rate to be in the higher.
And of our 24% to 25% range.
Given this updated outlook, we now expect adjusted earnings per share for the full year 2023 to be between $2 91, and $2 94, representing a year over year growth of 6% to 7%. This includes the positive impact related to our year to date share repurchases of four four per share.
But let me update you on our thinking and unexpected revenue adjusted operating income cadence for the second half of the year.
Due to deal ramp activity related to our new large bookings, we expect to build through the year with the remainder of the year as well as facing easier comparisons we expect the year over year revenue growth for the second half of the year to be slightly higher relative to the first half of the year. Therefore, we anticipate mid single digit quarter over quarter.
Growth for the third quarter expanding to high single digit growth in the fourth quarter.
We now expect our adjusted operating income margin to expand modestly with the sequential revenue growth that we absorbed higher levels of investments during the second half of the year. Lastly, we continue to expect our full year cash flow operations of approximately $500 million.
As <unk> discussed earlier, given our year to date record bookings and robust pipeline, we expect full year bookings for 2023 to grow 25% to 30% over last year's $3 9 billion with this anticipated growth. We currently expect to return to double digit topline organic growth in 2024.
With that said, let me turn the call back over to Jake.
Thank you Mike.
As we deal with the effects of the challenging macro environment, we remain very confident in our ability to achieve 10% plus organic revenue growth and adjusted operating income margin expansion at a faster pace than historic levels through 2026.
I wanted to point out a couple of very exciting trends, we have seen in our first half bookings.
Technology bookings are up 80% year to date on our part.
I kind of technology services deals with robust shorting the desire of our clients.
As a tech partner, who understands and drive business results.
The other exciting trend is that 51% of our deals.
Analytics kept an EI embedded in the solution clearly showing the domain of data, let strength, we have as a differentiated market position.
With clients striving for greater productivity from their tech stack, we see opportunities to leverage any eye dryness score optimize resource allocation system troubleshoot, what network configuration as well as the analyze vast amounts of information to generate unique insights to significantly enhance disk.
Mickey.
This we believe expand the total market for us.
It is clear that the opportunity to learn new skills, and digital and generate NII as well as work for an organization known for fostering an innovative culture is helping us attract and retain great talent.
At the heart of our journey our value proposition is a core group of highly skilled data scientists domain experts and engineers that make up our AI center of excellence.
Our data brake certification program, we trained more than 70000 global employees over the past three years and contextual data on efficacy.
This sets us up for our journey, our journey, where we recently launched a new air training program.
Currently has over 20000 enrollments and carve out and members of our workforce are completed the program. We have also trained approximately 10000 team members on prompt engineering.
Despite experiencing some near term pressure primarily related to discretionary spending.
<unk> remains very attractive.
Record year to date bookings and a growing quantity pipeline sets us up nicely to be back to a minimum of low double digit topline growth oscillate or any pad.
With that let me turn the call back to Roger.
Thank you Tiger.
I would like to open up our call for your questions. Bristow can you. Please provide the instructions.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby, we compile the Q&A roster.
Yeah.
And our first question will come from Ken Wong from Jpmorgan. Your line is open.
Hi, Thanks, Good afternoon, I just wanted to ask first on the.
On the revenue revision.
I Hope you can hear me, okay I'm in airport.
Can you hear me, yes, good area clearly.
Yes, great.
Hey, Thanks Tiger Yeah, just wanted to ask about the revenue revision in maybe the attribution between short cycle work being lower as well as the lower volume that you saw in <unk> and are you assuming any recovery in the second half outlook on on <unk>.
Either of those areas or is it really just the large deal ramp.
That's assumed in the second half outlook.
Yeah, So great question lockers or to one we're not assuming any recovery var. They're short cycle, because you need a crystal ball to actually get to come to that conclusion. So we're not doing that.
And.
Most of the growth that we're going to see in the second half is driven by the large deal ramps as well.
Continuing.
With the chaotic AI journey and.
The consulting technology advisory et cetera, all work that is ongoing right now we're not expecting a recovery from a second half on a as it relates to your earlier part of the question. The volume reduction that we saw in hi Tech clients, probably accounted for like 40% of the rep.
A new change on the other 60% would be advisory book Okay.
Thank you for the complete answer there Doug So just my quick follow on.
Question, just on the large deal momentum.
Obviously, great there.
Any comments on the margin profile.
Are those deals any re badging, that's associated with some of them.
I mean, there are some of the ramps how do they look versus.
What you're accustomed to seeing.
Yes, it's a great question again.
One.
Thank you.
About 40% of the deals have re badge, but it's only a component of each of those deals and the others don't and that's a typical mixture. We have so it's not dramatically different than typical large deals. It's always a combination of re badge and our regular ramp. So that's one two margin profile in this.
He is not any different with one.
With one clear significant.
That I called out more than a third of the deals or the first half first half.
<unk> transaction based pricing and non FTE pricing either.
Our commercial model and that is something that we have been pushing as you know it's pretty hard over many years, we think that the momentum that we're seeing in the marketplace around AI solutions Jennie O executions.
And our ability to begin to integrate those into our solutions allows us to create value propositions that makes it a win win between off and our client so.
The way I would think about the margin profile is the base case margin profile no different but actually the real opportunity here is that the margin profile will grow aggregate value for our clients I would just like to add on to that Tiger. If you think about your plan is increasing our margin year after year at a higher pace than we have we see no change in that at all you're putting through 2024.
On beyond.
No that's great to hear thank you.
Thank you.
Thank you.
Our next question will come from Keith Bachman from BMO. Your line is open.
Hi, many thanks.
Two.
Related questions. The first one tiger I'm trying to.
String together a strategy you talked about.
Bookings growth of 20% to 30% on the base.
Three nine.
And so 25, 30%, let's just use 25% per round numbers.
And topline growth.
Of low double digits in 2024 is that there was a very interesting statement, obviously expressing <unk>.
Confidence in your durability.
What's the difference I assume part of it is the bookings take while to manifest in the revenues, but it would seem that implicit within that there's also a certain amount of assumptions surrounding the short cycle work will be pretty weak, but I was just hoping if you could tie together to say that.
Just 25% to 30% versus.
Low double digit Rev growth and then I have a follow up.
Yes.
I think you partly answered the question Keith yourself.
Whereas when you Hello.
Long ago, they got to dig a little out of long cycle deal and aggregate deal signed you're obviously, making that five year contract and when that happens while at the same time.
Short term smaller advisory work.
And the deal momentum there is slower than really what you are seeing is a rotation of the booking portfolio from those short cycle two larger annually, therefore that 25% to 30% growth.
I'll translate automatically to an equal growth in the subsequent immediately or.
So that's part of the answer.
That you will see that come through.
Or are they yours.
On the first reflection of that is the fact that we are saying that we will get back to double digit growth in a in a very very full.
You go back to our history.
You will see many years, where this has played out exactly this way, where you have a bookings yard and I could I could pick about 2018.
Which is a great bookings that then.
Proceeded very strong revenue here, but the difference between the bookings growth that haven't abroad mirrors, the kind of numbers, we're talking about here.
Right right. Okay. My second question relates to that Tiger and I'm trying to ask many of our service provider companies. The same question, but.
How do you envision this supply disruption or efficiency gains associated with Jenna.
And specifically I think.
Genpact has a large customer service rep.
Presentation's I don't know what percent of revenues is but.
Many leading pundits are calling out significant efficiency gains and fee based models for customer service in particular.
And.
So there will be and most of that work is on an FTE basis. So there will be lower seats and just thinking about how you is that state.
Statements that you agree with MB.
How do you offset that and I know you talked about success based models.
Being a greater part of your journey I assume that would be part of the answer but at the same time as CFO would want to pay fewer dollars as AI is implemented at.
Customer service activity. So I'm, just trying to string together the various really how do you think about <unk>, whereas the disruption most likely and b. How does that work that youll use success based models to offset the efficiency gains with Jenny. Thank you.
So Keith everything that you said, we agree with except one data point, which which just to correct you customer care customer service work for US is sub 10% of our business if you remember.
Just for your insurance claims insurance underwriting lending underwriting risks officer I can go on and on supply chain of cost sales of commercial support so customer care very small proportion of our business as compared to a typical comparable.
Very large only customer camera lineup, which that actually provides an opportunity for us that I called out in my script, basically say customer care is going to be disrupted so completely agree with you for us. Therefore, it becomes offered strategy in Jennie O. So what we're doing as we speak is building.
Shouldn't that getting it to customers as we speak where they do not do customer care work for that.
Getting them, that's a new model and this is the way you should do it so you're absolutely right. That's one of the areas that will get disrupted we are already seeing that in pilots that we're running there.
A proportion of that work for us a small by the way even the work that we do in customer care is complex high value customer care, we do not do great.
What one would call typically commoditize easy customer care.
Less amenable to immediate disruption.
Elimination from Zhejiang.
The skills and the capabilities and that's exactly what we're doing which is why we called it offered as part of our strategy. The other place that I would add to that is what I concluded my remarks with us.
If you think about typical application development and simple coding.
I think they're not again it is very clear it out in the out in the marketplace that is again something that is going to get disrupted we ourselves have run pilots for internal coating work that we do and we're looking at anywhere from a low 40% to 70% potential disruption.
Not a big piece of our portfolio again, something that's into our clients, yes part of our offense strategy I think we had orders for you in a different way than the way, it's being done either by your current provider all by yourself.
Okay very interesting Tiger many thanks for your answer.
Aggregate.
Thank you.
Our next question will come from Maggie Nolan from William Blair. Your line is open.
Thank you maybe on the outcome based pricing since that was part of the last topic here can you provide a little more information on what types of engagements are seeing more of an uptick in this outcome based pricing and then any pattern in terms of which industry relationship length or anything like that in terms of your clients.
Our embracing outcome based pricing.
Again, great question.
I'll start the answer by saying the umbrella term to think about is non non FTE pricing, which is pricing that is not related to head count because underneath that I would start with transaction pricing.
And you know overall fixed pricing and then outcome based pricing.
Almost in that order and the reason I'm, saying that is because a lot of the transactional work that gets done in all kind of services lends themselves are very easily for transaction based pricing.
And simple examples of that would be let's start with accounts payable.
I was foreseeable they lend themselves then you move to financial services transaction work, whether it's insurance or the financial services technology provider clients that we called out.
Managing actual.
Customer service responses not on the phone, but actually in more elaborate fashion youre doing fraud alert management you are doing underwriting responses are doing insurance claim responses insurance claims management anything that is transactional lend themselves really well for transaction based.
The industry. That's most open for this is financial services.
Transaction based pricing or volume there have velocity and frequency of throughput. So we're seeing a real.
I think that's something that's changed in the marketplace literally in the last six months, but probably more in the last couple of years, because we've been pushing this agenda for five years.
There's a receptivity to tomorrow and understanding that actually creates a win win because it allows us to invest on various solutions that embed AI in Gen AI and machine learning and artificial technology that they can deliver great value for the customer and for us, but also for the end customer because when we do.
This really well.
Consumer off the back of a customer on the back because the one that most if I get through this journey.
That's really helpful. Tegra. Thank you.
And then.
There has been continued good large deal activity. So I'm wondering how you would characterize the competitive environment right now and then the pricing environment for a competitive deal.
The market the competitive environment is not that different from what it's been actually for quite a few years I would say two things that have always been important and probably have got elevated in importance and I would suspect both though.
Digital transformation journey coming out of the pandemic as well as now the journey a journey that people are thinking through is a big motivation for what's changing I see.
<unk> is our deep realization of the importance of understanding my industry. My data my processes that we've always believed there's one of the most important things in the journey I think most of our clients are beginning to recognize that and where it really comes home is when you'll start deploying Intel.
<unk> solutions that have intelligence built into it.
With these AI models, you really want to make sure that the data that is being consumed for that intelligence is fully understood and then when you apply guardrails around responsible AI around ethics around enforce second privacy. Once again I think the best people to actually bring all of that out and put that on the table on figuring out the right roadmap.
And playbook on journey are people, who understand the domain and process on the data.
And we shine in that in those conversations so I would say a competitor of ours, but not that different.
We are shining through our win rates are therefore, that's very clear we're shining through in winning every deal. The first callout that we get when we win if you guys, Sean Sweeney our domain on data understanding.
I think that's the one we are at and we really feel excited about that book.
Thank you.
Thank you Maggie.
Thank you.
Our next question will come from Ashwin <unk> from Citi. Your line is open.
Yes.
Hi, Tiger, Mike Reger Hope Youre well.
Yes, that's.
Thank you.
I guess wanted to ask if you could look at your two segments data take guarantee at labs to sort of <unk>.
Breakdown by.
By breakdown each segment by what portion of each.
Hence could be discretionary.
Clients can.
Pushed stuff around.
In terms of timing and the reason I ask is because while you prepared remark can I pointed out.
It's the shorter term more discretionary work.
Bad debt is.
That is being pushed out when I look at your two Q results versus consensus expectations.
The data take care that was in line, where they get lapse.
Was.
It was below expectation.
So if you could kind of break that down and kind of give us an idea of what part of each is discretionary and which functions that would be great.
I'll have Mike answer, which portion is discretionary on each of those segments, but a quick reaction to.
The revenue impact of.
The two things we called out we got out advisory.
And.
That front end type of work most of that almost all of that would reside in the data.
Yeah, and in fact that Arctic cat, but we also called out.
The volume production in a couple of the high Tech clients those are all industrial operations. So.
Absent the hijacked volume reduction we would have seen even more growth in digital operations with the soccer speed in versus our expectation our data take AI driven by the advisory work. So so if you parse out.
The impact the impact on the I guess, one is understood operations at that as a one off the data that there is a much more pervasive advisory work where people are re reorienting that discretionary expense, Mike, Yes, I would just double click on that a bit if you think about your arms around it all really coming from data checking AI.
Digital operations that volume that you alluded to or do you think about it. It comes three large kind of cohorts of work that we do one doing some legacy technology work now primarily was also affected in our financial vertical.
Digital marketing and our experienced work, which.
Too much indexes to the market as a whole and then the last one the Tiger just alluded to its the advisory work that we do which encompasses a lot of operational advisory work that we do blueprinting supply chain and procurement work that is just not at the level, we anticipated earlier on in the year.
And we're holding our outlook relatively flat for that exactly flat for that asset.
The remaining part of the year, but but I wanted to ask a friend and one of the interesting element.
If we double click on specific clients, where big transformation journeys are being.
Beginning to get undertaken.
Whether the deals we signed all the deals we are right now working on one of the most interesting things that we're noticing is that when one of those clients decided to undertake a big transformation journey, they actually call a stop to all kinds of little things happening in those arenas.
Stop that work because I don't want to spend that incremental dollars, there, but I'm not beginning to undertake a big transformation journey. So a little bit off this is a rotation even if our clients on where they spend their money not on little things, but on one big thing because I wanted to get hold of my data in order to be able to than I am.
To consume it in order to be able to deliver a much bigger value and I better do it now because otherwise I'll be competitively disadvantaged.
Understood understood. Thank you for that and then as I sort of clinker PQ versus poor Q I think EMEA you'd have set up with.
You know I hate using the word hockey stick, but.
It was a bit higher in Q.
Then then and thank you in terms of sort of the.
Through the year.
Are we to assume that that part of that.
Shape of that ramp is unchanged, it's still very very backend.
And then what's the confidence that some of those.
Implementations and.
Ramps will.
We've stayed away.
They were they were planned.
And kind of had asked the similar question I think last quarter, but just wanted to make sure what has changed.
In the interim.
So we're very comfortable with that kind of.
Ramp up of vertical associated with the revenue growth. It's really all tied to these large deals we've been talking about throughout the call and I think we feel good about them when where revenue recognition starts when we implement those those large deals, which we've side and again, if I could talk about theres, a large re badge component of them.
It allows us to start earning revenue on it sooner rather than later so it's just a project.
Projected timing on that from existing signed deals. So we feel really good about it.
Ashwin just to elaborate a little more color to what Mike said the shape of the call zero change in the shape of a pickup from what we talked in our second quarter.
Paul on our first quarter earnings versus today.
The same question last time, which is another question and I can tell you that compared to the call that we did was yesterday not one of those deals have changed their trajectory in their app.
There is no there've been no slippage at all which is why all of our revenue.
Revenue projection now on the change that we bought between what we've spoken to our Q2 earnings call.
Got it felt like we did in Q2 I know I think the other day. It is all driven by data advisory work and target volume production. None of that is driven by any changes around schedule.
Got it.
I'm, saying this as we speak today, so we feel good about desktop.
Yes.
No. That's good thank you.
Thank you Ashwin.
Thank you.
Our next question comes from Bryan Bergin from PD Cowen Your line is open.
Hi, Good afternoon. Thank you I wanted to start on bookings here first of all the 25% to 30% growth expectation are you tracking to that level through the first half are you above it or relying on material large deal wins that are yet to be signed for that.
I mean can we fill that Brian we're actually above it and the reality is that bookings are lumpy.
The good news is that.
I think we said in the first quarter.
We had a record bookings and actually the second quarter was even better than the first quarter. So not only is we're tracking above that in the first half, we're actually tracking second quarter better than first quarter.
Having said that we are not making that assumption for the second half. So it's actually a a good assumption, but not up but not exponentially called assumption. So we feel good about our 25% to 30% growth for the year.
Okay very good and then the follow up just on the 23 growth expectations. I may have missed this Mike can you talk about your updated segment growth outlooks for David that Guy and digital ops, and just anything worth calling out for each of those segments on exit rates within that high single digit growth total company right.
Yes, we didnt really address it from that perspective, we just really looked at that.
The.
The cadence in the patterning of that right. So you would expect you know mid to low single digit expansion growth and our digital operations business sequentially third quarter fourth quarter, and so on right and then a returning to <unk>.
Mid to high single digits.
And our data second half and then obviously well into the double digits high double digit growth rate in the fourth quarter and Thats. How it patterns out you then expect us to return to somewhat of a normal.
Pattern.
Revenue growth of mid to low single digits on our digital operations and mid teens data tech in AI as we move through 2024, as we are anticipating somewhat normalization, particularly in data tech and AI work that we're doing.
Okay understood. Thank you.
Sure.
Thank you.
Yeah.
And as a reminder to ask a question. Please press star one one.
And our next question will come from surrender thin from Jefferies. LLC. Your line is open.
Thank you.
Tiger is as you think about the <unk>.
Large bookings that you are experiencing.
How do you view the longer term opportunity here. It seems like the growth is elevated so should we expect at some point the cycle turn or do you feel like there may be a secular discussion or that youre, having with clients at this point.
I think further action by the way a great question, we've talked a lot about at insight.
Is this episodic or of the circular.
I think we are beginning to come to the conclusion that there is a secular trend here.
And the reason for that is the following one it's pervasive across all our industry verticals.
I don't think there's a single vertical that stands out as being different from the other than either direction second it's pervasive across geographies.
All of the geographic markets that they are involved in North America, which is the U S and Canada Western Europe .
And in places like Germany, and France.
Japan, and Australia. So it is cross geography, and the tuck <unk>.
Coming out of the pandemic across digital transformation.
It was.
I'll challenge leveraged.
Now its AI and I've got Howard of data on I don't have time, we think that is very circular.
As long as we all believe that this whole AI journey has now moved into a very secular trajectory, yes, there's a lot to be sorted out let's be very clear, it's still very early days.
It will get done there will be.
Disruption and inability to provide AI infused services and AI augmented services that deliver really step change in outcomes of all times and some of the examples that we gave so we think this is very secular across one of the most interesting things that we think has happened for us.
That actually is going to help us on this journey is that we may start with a client with finance and accounting or we may start as a client with customer care.
Also you know more complex customer care type of work.
Our ability to dedicate multiple services.
Across the enterprise to almost all the buying centers. The C suite, I think thats dramatically different today than five years back.
That means that priority accounts that we have called out a one.
Why don't we sign an account in a particular area.
As long as we execute our ability to then go and open up new buying centers with new services and keep growing that account.
It's a very nicely.
And then and then the partnership because all of these clients are looking for the ability to find a way to use data data cuts across multiple services.
So that's the other reason why we believe that our ability to take a combination of services over time, where data actually has traded between DS services and then you use AI to actually create great value all of that sets us up for a real secular trend deal.
That's helpful.
And a question more about just near term trends.
When we think about some of the volume reductions by your high Tech clients.
How should we view that in terms of the big picture here is that a little bit of a canary in the coal mine in the sense that.
It was the high tech clients that were the first to kind of start to lay off people to exhibit some caution.
And so now we also are starting to see some volume reductions there is there a chance that if theres a bit more macro weakness that this kind of spreads or is this just some conservatism that youre seeing on the part of those clients.
So actually the way I would think about Hy Tech is.
Duncan area in the coal mine actually sounded the alarm not now, but what 6789 months back.
And the actions that they took was looking at their own.
Headcount and <unk>.
Obviously, a bunch of announcements on that over the last six seven months.
I looked at the work that is being done most of them when I talk about volume production, it's basically saying I do not need to provide this white glove treatment to this customer I do not need to check this so much let's not.
Use this policy to check this content.
So it's in the area of <unk> therapy to the area.
Digital marketing and all the work that is done being in these high tech clients.
The flow through of stock into other industries, taking on the cost base has already happened.
Part of the reason why we talked about big deals. It's also because a lot of our clients have been focused on cost reduction for them. It's not about I'm going to do less work. They got that work has to be done and there is a high tech they've decided to do less work.
Actually believe.
Given that a number of these aren't our clients are actually have reset the cost base at least based on what we are all seeing in the public domain, but there will come a time when they will come back in stock.
Doing more work, particularly as it relates to data that they shouldn't getting ready for gen AI getting ready to actually fine tune their model.
A lot of new work that is going to come up from the same high tech clients.
Thank you.
I just don't know.
Thank you and we do have a follow up from Ashwin <unk> from Citi. Your line is open.
Thank you I appreciate the chance to ask a follow up.
It's on it's on margins and cash flow.
Normally when one sees slower them so without lamps.
It tends to be.
Positive for margins and cash flow.
And Conversely, when you see.
A lot of different.
These actually ramping that depends.
Tends to be pressure, so how should be corresponding to the.
That would be good.
Growth expectation for next year.
Two how should we think.
Margins and cash flow.
Yes.
In regards to that.
So.
In terms of that let's talk about cash flow personal talk about margins. So our cash flow guidance for the year hasn't changed at all approximately $500 million. What our conversion is I would anticipate that growing in line with what the business in totality as far as the margin growth for a huge piece of the margin expansion that we've identified this year with.
From I think last year was $16 five so our guide. This year is 16 eight about 30 bps largest component of that is going to be really driven by operating leverage of the business right as well as just the continued efficiencies that we drive on behalf of our clients that flow through in our business.
Offsetting lever to that and we've talked about is that our continuous investment or quote unquote organic R&D in our business. We continue to invest in new capabilities for future. So we'll continue to manage it to lever accordingly to continue to hit our commitment in terms of that margin expansion on a sequential basis.
So that's really what our operating plan.
What really works well from that perspective.
Yes.
And just to add one final final point Ashwin I remember that.
We are deliberately dialing up our investments we've already done that.
In the.
A part of Q2, we are doing it as we speak in Q3 in both.
The R&D side, particularly with all the <unk> discussions that we had.
Creating a center of excellence.
Creating the proofs proof of concept in the pilots.
As well as in sales and marketing and having teams take those to clients I talk about 500 conversations around our Jennie O. The topic with a range of clients almost every one of them convert into a second an adult conversation and then you have a set of okay. Let's try this pilot that then leads to actual pilot weather.
Each of ultimate production will have to wait and see when that happens. So we haven't seen a big inflow of revenue directly from Jennie O, but all of that requires.
A lot of really clever people to be deployed and we are.
Using our investment dollars to be able to do that.
Understood. Thank you.
That's helpful.
Thank you.
And our next question will come from Keith Bachman from BMO. Your line is open.
Hey, guys just thought I'd jump back in queue Tiger I wanted to hear if you could push that a little bit more about your experience in and non FTA related business and that is to say a couple of things.
One, whereas the adoption trends been most successful.
Two is.
Presumably there is some risk associated with the non FTE that is particularly if they are success based business models what are your experience been.
And actually.
Sure.
Running into some challenges.
And then third as you think about it.
Where do you expect that to go and why is it accretive to revenue growth if youre going with success based or non FTA business models why would it be accretive to growth rate. Thank you.
Yes, So let me answer the first part.
So.
Sure.
The success the aggregate success all are now 10 years, when we've had non FTE pricing.
Is that it is better than <unk>.
Just the RFT pricing from our ultimate.
Modern delivery perspective far jackpot.
And it is obviously hugely beneficial for our clients there's no question.
And I'm not about the aggregate by definition. Therefore, there are some that don't work.
And we learn from that and improve it and then we ultimately deliver so on the aggregate hugely successful. The reason for that is actually very simple.
The only places where we actually go in.
With those types of models is where we understand the domain understanding the industry understanding the process, obviously on the function. The more we understand that the more we know what levers to pull what processes to change what technology to implement our trained they are model.
That's been our best can we do that and therefore, what risk are we taking in that journey and and we've been successful.
Journey through that or many years actually.
The market has not been receptor and actually buying that enough. We're now beginning to see that change. So we feel really confident that one way to be able to deliver great value to our clients.
There's an alignment of goals that an alignment of innovation, there's an alignment of governance.
It also makes that happen I don't think it was around the estimate that we also should not underestimate how much change is needed in order I mean, if you take an AI implementation journey.
And doing service, that's not John just not a technology implementation, it's going to ask people to change the way they have done something for 2030 years that.
<unk> changed management agenda becomes so much easier if you have a full alignment of goals, which is what the model is actually ultimately give so.
We are very very happy that actually get started taking this journey because I think it'll be great for clients it would be accretive for us.
Tigers are a lot of difference in the up sell rate associated with once you do a success based on our non FTA model.
On the upsell rate overtime.
I don't know what else what are we going to call that out of any different.
Obviously, if we deliver more value than the guy who's going to be more than likely that therefore absorbed there could be more upsell, but that's right yes.
<unk> got a lot of the models not in the new deal bookings that we have right. Now. These these transaction are alternative commercial models that we've done have come at the end of a renewal of an engage correct right. So it's kind of hard to isolate that cohort. So we've learned the client has learned they're comfortable with it and now we're going to move to.
Our model and then just to also moving on to a tank or talking to you wanted to just look at pure profitability of the roughly 16% of total revenue that we have today associated with it the margin is substantially higher than our margin on average right.
And a lot has to do with we're never going to get to 100% right Alere is picking and choosing the models that will work for us and were underwriting those outcomes for the client and that's really the win win situation.
That we're in right now and we think we're going to as Tiger alluded to we have a 20% revenue goal for that in 2026, we should exceed that notably.
A little bit a little bit I want to call.
I'll call out a little bit our DNA of process six Sigma lean that I think makes a big difference.
We're trying to drive.
Defects down where theyre trying to estimate exact risk that you're taking and therefore on the aggregate. We ended up delivering obviously theres more risk. Therefore, the margin is higher and that really plays out in some of those deals not working out exactly that would be the way we wanted to but on the aggregate it actually at the portfolio works out really well.
Many thanks.
Thank you.
Thank you.
And I'm showing no further questions from our phone lines I'd now like to turn the call back over to Roger Sachs for any closing remarks.
Thanks, everybody for joining us today.
Speaking to you again next quarter.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
Yes.
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Yes.
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