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Genpact Ltd. (NYSE:G)

Q2 2011 Earnings Call

August 3, 2011 8:00 AM ET

Executives

Shishir Verma – Head, Investor Relations

Tiger Tyagarajan – President and CEO

Mohit Bhatia – Chief Financial Officer

Analysts

Tien-Tsin Huang – JPMorgan

Rahul Bhangare – William Blair & Company

Dave Koning – Baird

Jeff Rossetti – Janney Montgomery Scott

Vincent Lin – Goldman Sachs

Arvind Ramnani – UBS

Manish Hemrajani – Oppenheimer

Kunal Tayal – Bank of America-Merrill Lynch

Matthew McCormack – BGB Securities

Operator

Good day, ladies and gentlemen. And welcome to the Second Quarter 2011 Genpact Limited Earnings Conference Call. My name is [Erica], and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Mr. Shishir Verma, Head of Investor Relations. Please proceed.

Shishir Verma

Thank you, [Erica]. Hello, everyone. And welcome to Genpact’s earnings call to discuss our results for the second quarter ended June 30, 2011. My name is Shishir Verma, Head of Investor Relations and with me I have Tiger Tyagarajan, our President and Chief Executive Officer; and Mohit Bhatia, our Chief Financial Officer. We hope you had an opportunity to review our earnings release. If not, you will find it on our website at genpact.com.

Our agenda for today is as follows. Tiger will begin with an overview of our results, our perspective on the current environment and an update on the integration of our Headstrong acquisition. Mohit will discuss our financial performance in greater detail and then Tiger will have some closing comments. Finally, Tiger and Mohit, will be available to take your questions. We expect the call to last about an hour.

Please note that some of the matters we will discuss today are forward-looking. These forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those in such forward-looking statements.

Such risks and uncertainties include, but are not limited to, general economic conditions and those factors set forth in our press release and discussed under the Risk Factors section of our annual report on Form 10-K and other SEC filings. Genpact assumes no obligation to update the information presented on this conference call.

In our call today, we will refer to certain non-GAAP financial measures, which we believe provide additional information for investors and better reflect the way management views the operating performance of the business. You can find a reconciliation of those measures to GAAP, as well as related information in our news release on the Investor Relations section of our website, genpact.com.

Please also refer to the Investor Factsheet on the front page of the IR section of our website for further details on our quarter results, which we hope you will find useful. This includes, among other things, geographic, industry vertical and BPM and ITO revenue details.

With that, let me turn the call over to Tiger.

Tiger Tyagarajan

Thanks, Shishir. Good morning, everyone, and thank you for joining us on our call today. Genpact delivered a great second quarter with strong growth in revenues, adjusted operating income, earnings per share and cash flows. This growth was led by global client business process management and Smart Decision Services in line with the strategy we discussed at our recent Investor Day.

We closed the acquisition of Headstrong during the quarter where the integration is progressing well and we have already signed five cross-sell deals. This quarter we increased the number of clients contributing $1 million to $5 million in annual revenues to $103, including $25 from Headstrong from $52 in the prior year quarter, giving us a great run rate for future growth.

We achieved these results despite challenges in the global environment notably Japan and U.S. consumer facing financial services. Our business is highly diversified by geography, industrial and service offerings, so we were able to mitigate the revenue impact of these events through continued strength in other areas of our business, such as in Europe, Australia and China, as well as offerings in finance and accounting, insurance operations and Smart Decision Services.

Here are the highlights. Quarter two revenues were $398 million, representing 29% growth year-over-year and 20% growth sequentially, with organic revenues increasing 15% year-over-year and 7% sequentially.

Global Clients continue to grow with organic Global Clients BPM revenues increasing 22% from last year second quarter and 5% sequentially. And the Global Client ITO business is growing organically by 10% year-over-year and 8% sequentially.

Adjusted operating income increased by 40% from quarter two of last year to $65.3 million, overall, AOI margin improved by 130 basis points, driven by improvements in costs, productivity and efficiency. Headstrong was AOI margin neutral for the quarter.

Net income increased by 40%, diluted earnings per share increased by 39% and adjusted diluted earnings per share increased by 42%.

Growth was broad-based across geographies and most industry verticals driven by Global Clients and Smart Decision Services. Global Clients BPM growth of 24% was led by 54% growth in Smart Decision Services, which is comprised of our reengineering, analytics and enterprise risk consulting businesses.

We also saw a solid demand for core offerings such as finance and accounting services and in key growth verticals such as capital markets, consumer products, retail, insurance and pharma. Geographic growth was also particularly strong in Europe, Asia-Pacific and India.

Our unique combination of process thought leadership captured in our Smart Enterprise Processes framework and our ability to re-engineer these processes is resonating with clients.

As an example, we leveraged our SEP, Smart Decision Services and IT offerings to help our U.S-based manufacturer our furnishings and economic products, who was having difficulties realizing the financial benefits of implementing an ERP system.

First we use SEP to identify and benchmark their performance and key metrics such as inventory management, vendor payment and overtime.

Second, we use Smart Decision Services to re-engineer that procure to pay order cash and distribution purposes.

Third, based on this engagement, our ITO team won the contract to implement Oracle R12 ERP Solution. Our assessment and recommendations built a self-funding business case for the company that will add $19 million of EBITDA for the client.

Our business with GE increased this quarter by 5% over last year, driven by BPM growth in commercial finance, infrastructure businesses and finance and accounting and reflected the continuing strength of this relationship.

Adjusted operating income and margin expanded this quarter as lower gross margins were more than offset by improved SG&A as a percent of revenue. We continue to reinvest recent cost savings in expanding our front end teams, new product innovation, new geographies and increased training for our employees.

As we go through the second half of the year, we expect to increase our investments in these areas. Investment and talent always takes time to ramp up, but so far this year we have added 24 professionals across our business development and relationship management functions.

These individuals have on an average over 20 years of experience in key growth industry such as banking, insurance, pharmaceutical, healthcare and technology and are from some of the largest global companies in each sector. We expect to add an additional 36 business development professionals across the U.S., Europe and emerging markets.

The current demand environment remains stable and we are continuing to win new business. We added 23 logos in the quarter, including one from Headstrong. This compares to 16 in quarter one of 2011 and 22 in the prior year second quarter.

This quarter’s wins were broad based and included a large U.S. consumer electronics company where we are delivering high-end customer support and won the deal because of our ability to use analytics to improve process performance and drive effectiveness.

We won a large U.S. healthcare company in the pharmacy benefits management space where we will leverage our Smart Decision Services capabilities to help the company transform its claims management data base to include more consumer centric data. This involves completely redesigning their ERP data warehouse.

Strong client demand is now being driven by several trends. The first is the desire to go beyond cost reduction and process optimization to focus on growth opportunities all of which require up front transformation.

Second, companies are focused on becoming more competitive and mature slower growth economies by building business and sites to drive smarter decision-making and better business outcomes.

In both cases, clients are looking for a partner that can bring them global delivery capabilities to help fuel growth and generate effectiveness gains across the enterprise rather than simply providing efficiency gains within a function.

Clients are also looking at emerging markets that’s sources for growth and expansion. We see strong demand for BPM services in Asia and Europe and have expanded our presence in China, India and Latin America.

For example, we just announced our new delivery center in Brazil on August 1st. We have a global pharma company as our anchor client, but we also leverage the center for other global clients looking to enter the Brazilian market, as well as for high growth Brazil to Brazil companies.

Turning to the pipeline, overall the pipeline is relatively flat and cycle times are stable. The pipeline continues to show strong demand for our core offerings and finance and accounting and insurance, as well as Smart Decision Services.

With ongoing softness and services related to U. S. consumer credit such as collections and mortgage originations. Regionally the pipeline has shown exceptional growth in Europe and Asia-Pacific particularly Australia and China. Deal sizes are stable, but smaller than they were three years ago.

As we enter relationships with clients through Smart Decision Services in many instances this opens up the opportunity to cross-sell additional services. As deals have much shorter cycle times and give us an opportunity to quickly demonstrate our breadth and depth of services and our execution capabilities.

For example, late last year, we won an opportunity to use SDS to provide sales reporting analytics for our U.S. division of our global pharmaceutical client. Since then we have expanded the scope of this relationship to include BPM services are preoccupied pay an HR and IT support for Europe. Discussions are underway for Genpact to assume global responsibilities for these processes, as well as others such as order to cash.

Much of this expansion including into new geographies were sole sourced, as a client gain confidence in our consistence and seamless delivery capabilities, short through value in leveraging our Smart Enterprise Processes

thinking and framework and realize the benefits of our global partner.

We are making great progress in integrating Headstrong and to date have hit all our internal milestones. Headstrong is a complementary high growth business that has an excellent fit strategically, financially, operationally and culturally.

Strategically we have gained critical deep domain and technology expertise in the complex but highly attractive capital markets industry vertical, as well as Headstrong’s strong client base that includes nine of the top 10 investment banks, two of the top five asset managers and other Fortune 500 companies.

Additionally, the Headstrong team is contributing their experience and expertise to new product innovation such as collateral management and end-to-end fund administration, as well as to broader strategic discussions including further building domain expertise and virtualization.

The primary growth opportunity is to cross-sell Genpact’s products and services and process expertise to the capital markets vertical and Headstrong services to Genpact’s clients.

As mentioned earlier, we have won five cross-sell deals. These include, one, for a large banking company, which has been a long standing Headstrong client, we are providing risk analytic services where we will implement process, data governance controls and monitoring as part of their overall Basel II initiative.

Second, with the Asset Management division of one of the world’s largest banks, we are leveraging our analytics and asset servicing capabilities to mitigate risk exposure and monitoring and remediating felonious data in complex asset classes, such as loan, structured products and ODC derivative portfolios.

Three, with a large financial services client, Headstrong capabilities won a strategic assessment project, where we will review the documentation and workflows of corporate action event processing, as well as a longer-term engagement to implement the proposed improvements.

And finally, two engagements for one of the largest commercial leading companies in the world where we leveraged Headstrong’s core technology strength to manage their application services and infrastructure services organization and increase overall IT efficiency and effectiveness.

In addition, we are actively working on 50 other opportunities with large investment banks and asset management clients to cross-sell business process management services to Headstrong clients. These will take time to mature but we are very encouraged by the nature and quality of these discussions.

With that, let me turn the call over to Mohit.

Mohit Bhatia

Thank you, Tiger, and good morning, everyone. Today I will speak about our second quarter results in detail, including a summary of key highlights from the balance sheet and statements of cash flow.

On a year-to-date basis, our revenues for the first half of 2011 were $728.2 million, up 22% compared to the first six months of 2010. Our adjusted operating income for the first six months of 2011 was $116.5 million, up 29% compared to the same period last year, representing a margin of 16%, up 80 basis points.

Overall, the second quarter of 2011 was a very good one for us, where we saw growth in revenues, earnings and cash flows. Our revenues for the quarter were $397.6 million, representing 29% growth, with Genpact organic revenue increasing 15% year-over-year, including approximately 2% benefit from foreign exchange.

Our business process management growth was 18%, driven by strong global client BPM growth of 24%. Our IPO business delivered 5% organic growth with our Europe IPO operations now stabilizing.

Adjusted income from operations increased 40% to $65.3 million, representing a margin of 16.4%compared to 15.1% in the second quarter of 2010. This improvement reflected a better cost structure, favorable foreign exchanges compared to last year and timing of certain investments that are now planned for the second half of the year.

The contribution of Headstrong was adjusted operating income margin neutral in the second quarter and this is expected to continue for the rest of the year.

Our gross profit for the second quarter totaled $144 million and represented a margin of 36.1%. As in the first quarter of 2011, our growth margin in the second quarter were lower than last year, primarily due to investment in resources for new accounts, local delivery for new client win, growth in emerging markets including Latin America and the Middle East and investments in employee training, career enhancement and rewards.

Sequentially, our gross margins improved 100 basis points and as we said during the first quarter earnings call, we expect continued sequential improvement as we go through the balance of the year.

SG&A expenses totaled $87 million in the second quarter of 2011, representing 21.8% of revenues versus $75 million or 24.5% in the second quarter of 2010. The improvement of 270 basis points was driven by leverage from higher volumes and better cost run rate.

In the second half of 2011, we intend to increase spend and investments in front-end sales, account management resources, new products and services, as well as a new global delivery center and these investments will get affected in SG&A.

As of June 30, 2011, Genpact had approximately 51,300 employees worldwide, including Headstrong employees up from approximately 42,500 as of June 30th last year.

Genpact employee efficient rate increased 3% year-over-year largely driven by expected growth trends in emerging markets such as China and India, where we have many of our delivery centers.

However, attrition remain stable at 29% compared to the first quarter of 2011 and declined 2% from the end of 2010. We expect the efficient rate to improve slightly over the course of this year. Headstrong efficient rate especially at the senior ranks have remained relatively stable post the deal closing.

Our annualized revenue for employee for the six months ended June 30, 2011 was $34,500, up from $30,300 for the six months ended June 30, 2010, reflecting higher end offerings such as Smart Decision Services and the Headstrong business.

Our tax expense for this quarter was $14.4 million, compared to $4.9 million in the second quarter of 2010. Our effective tax rate was 26.9% for the second quarter of 2011, up from 14.9% in 2010 in line with our expectations.

As we indicated last quarter, we expect Headstrong to add a few percentage points to our original full year estimate of 23% to 25%. We now expect our effective tax rate to be in the range of 26% to 28% for the full year due to the jurisdictional mix of revenue post acquisition and the sunset of the [SCBI] tax holiday.

Net income was $39 million or $0.17 per diluted share in the second quarter of 2011, compared to $27.8 million or $0.12 per share in the second quarter of 2010. The 40% increase in net income was primarily due to higher revenue and higher operating income and also reflected a $2.6 million contribution from Headstrong net of their share of deal expenses.

Additionally, we had higher interest income and a foreign exchange measurement gain that is reflected below the income from operations line. After these related expenses, Headstrong represented approximately $0.01 dilution on a GAAP basis in the second quarter. However, we continue to expect Headstrong to be marginally accretive on a GAAP EPS basis for the full year of 2011.

I will now turn to our balance sheet. As of June 30th, our cash and liquid assets totaled $336 million compared to $481 million at the end of the first quarter. This balance is after utilizing approximately $187 million of our cash for acquisition, $20 -- $21 million for debt repayment and $6 million for capital expenditure.

Our days sales outstanding in the second quarter of 2011 stood at 83 days, an improvement of one-day sequentially and the same as in the second quarter of last year.

Turning to operating cash flows, we generated $61 million of cash from operations in the second quarter, compared to $30 million generated in the same quarter last year. This improvement of $31 million was due to increased earnings and better management of working capital aided by certain statutory refunds received this quarter. On a full year basis, we continue to expect cash flow from operations to grow at least in line with revenue.

Our capital expenditure continue to benefit from efficiency and utilization improvement in infrastructure and technology virtualization and represented 1.3% of revenue for the first half of 2011.

In conclusion, we’ve had a terrific quarter with strong topline and margin performance contributed both by the underlying business and by the recent acquisition of Headstrong. We continue to make planned investments that will allow us to build the business for the future.

I will now turn the call back to Tiger for his closing comments.

Tiger Tyagarajan

Thank you, Mohit. In closing, the foundation of Genpact was built on a culture of driving operational excellence and efficiency to Lean Six Sigma, that’s in our DNA. As we look at our challenges -- as we look at the challenges our clients face today and in the future. There are three things that differentiate us from competition.

First, we have built the signs of processes through our innovative SAP framework that cut across silos and an organization and drive effectiveness, generating business impact that can be three to five times the savings when compared to efficiency.

Second, is Smart Decision Services, where we build insights from data and analytics to help clients make smarter decisions and run their businesses better.

And the third is to actually implement the recommendations from the insight and run the processes for clients. It is the interaction of these three capabilities that allows us to deliver unique value to our clients.

Our acquisition of Headstrong is off to a great start and while it’s still early days, we are focused on leveraging cross-sell opportunities in both directions, all Genpact’s services to Headstrong clients and Headstrong services to pre-existing Genpact clients.

The combination of Headstrong’s deep domain and technology expertise coupled with our leading business process management and Smart Decision Services offerings is resonating with clients. The cross-sell pipeline for new opportunities is growing and we anticipate a typical decision cycle time for these BPM deals of approximately nine to 12 months.

We delivered a terrific second quarter and first half of 2011, despite some concerns in the global environment the tragic tsunami in Japan and the slow recovery of U.S. retail banking and consumer credit. Thanks to the diversity and strength in most of our business. We continue to expand our global delivery capabilities and see good momentum.

Therefore, we continue to expect full year revenue growth of 23% to 25% and adjusted operating income margins of 16% to 16.5%, which includes the contribution from the Headstrong acquisition for eight months. Based on our results in the first half, we expect to come in at the higher end of these ranges.

With that said, [Erica], please open the floor up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Tien-Tsin Huang with JPMorgan. Please proceed.

Tien-Tsin Huang – JPMorgan

Hi. Great. Thanks. Great quarter here everyone. I wanted to, I guess, just ask on the revenue upside. Tiger, where would you -- what would you characterize the biggest upside relative to your expectations in terms of what you saw in the quarter?

Tiger Tyagarajan

Tien-Tsin, as I said, we clearly saw upside in our core finance and accounting particularly in Europe, Asia-Pacific. I’d call out Australia and Japan our insurance operations and of course, a broad range of Smart Decision Services reengineering both on the cost side, as well as the growth side for our customer and analytical services. Now that also offset, as I said, some of the softness we saw both in Japan, as you would expect, as well as retail, consumer lending in the U.S.

Tien-Tsin Huang – JPMorgan

Got it. Thanks for that. I guess also early on the call, you mentioned that Headstrong would be I think margin neutral. Yeah, just looking at some of the past, I thought it might be a little bit dilutive there. Can you maybe help reconcile that or did I hear that incorrectly?

Tiger Tyagarajan

I’m going to have Mohit to answer that.

Mohit Bhatia

Yeah. For this quarter, Headstrong has been margin neutral as far as adjusted operating income margin is concerned, but Headstrong has been dilutive to net income and EPS by $0.01 and that is also primarily because in this quarter we took a lot of deal expenses.

Tien-Tsin Huang – JPMorgan

Okay.

Mohit Bhatia

We do expect Headstrong to be marginally GAAP EPS accretive for the full year.

Tien-Tsin Huang – JPMorgan

Good. Yeah. So there is no change there. Okay, I guess the last one from me, just there has been some announcements around late off in the financial services sector obviously a lot of concern, sounds like it’s not showing up here, but I’m curious with your Headstrong shown exposure to the capital markets side, have you seen any change or you watching things little more closely there given what’s been happening on the ground in the last few weeks?

Tiger Tyagarajan

Tien-Tsin, nothing -- we haven’t seen anything yet but as you rightly said the world is a different place these days. So we watch exactly the kind of events you’re talking about. These are very, very recent and in fact more recent than this call could have captured. So you’re absolutely right, we’re watching all events of this nature.

Tien-Tsin Huang – JPMorgan

Okay. Very good. Excellent. Thanks a lot. I appreciate it.

Tiger Tyagarajan

Thanks, Tien-Tsin.

Operator

Our next question comes from the line of Rahul Bhangare with William Blair & Company. Please proceed.

Rahul Bhangare – William Blair & Company

Hi. Thanks for taking my questions. Can you talk about the ramp up projects that were either pushed out last year, delayed and what other contributing this year?

Tiger Tyagarajan

Yeah. Rahul, I think we talked about this at the Investor Day as well. Most of the ramps that were pushed out last year have started getting executed now, not a single one of them got canceled. There were a few that got more elongated as these clients continue to break them up into what they now think are more logical phases, where they get pay back and then they are reinvested back. Other than that not a single one have got canceled as you’ve said and everyone of them is getting executed.

Rahul Bhangare – William Blair & Company

Okay. And Business Process is a service, can you talk about maybe how many customers you have there and how Genpact positioned itself in the market?

Tiger Tyagarajan

Rahul, very early days for Business Process as a service, we have two or three customers where we provide Business Process as a service at the enterprise services level and that would be for example finance and accounting, HR operations. These are obviously companies where either they’re divisions of large corporations but in different markets that are starting up and therefore it’s easy for them to not get involved in legacy.

One of the biggest challenges in Business Process as a service that you have to give up what you have is legacy, so if you don’t have legacy, it’s great. Emerging markets therefore are great opportunities for us to do this.

The other area where we’re finding early traction in Business Process as a service is specific point solutions that are offered on the cloud. One of the great ones that we’re now beginning to see traction in is the small acquisition that we did called Akritiv that allows on the cloud collections and receivable management for business to business enterprises with strong reporting in MIS capabilities, but still very early days from our prospective offering large Business Process as a service.

Rahul Bhangare – William Blair & Company

Great. Thank you.

Tiger Tyagarajan

Okay.

Operator

Our next question comes from the line of Dave Koning with Baird. Please proceed.

Dave Koning – Baird

Yeah. Hey guys. Good job.

Tiger Tyagarajan

Thank you.

Dave Koning – Baird

Yeah. First I just wanted to better understand, I think Headstrong just backing into the numbers had to be around $44 million of revs in Q2, is that about right?

Mohit Bhatia

Yeah. That’s about right. In fact, they were closer to $45 million.

Tiger Tyagarajan

Yeah.

Dave Koning – Baird

Okay. Great. And then is there anything seasonal about Headstrong, meaning, if it contributed to do about two months this quarter, would that mean you just add another $20 million or something like that, so next quarter you’d think in the ballpark of $65 million just on a full quarter basis?

Tiger Tyagarajan

Yeah. I think one of the most important things, Dave, is to understand Headstrong’s Japan business. Now if you look at the way to think about this business in a normal year is that they do have like most businesses of this nature a ramp as you go through the yard.

However, the fact is that Japan will take time to recover. We don’t know when Japan will recover and therefore we have to be prudent as we think about the balance of the year and the revenues from Headstrong, as well as from of our clients in Genpact as it relates to Japan.

Dave Koning – Baird

Okay. And part of the reason, I’m asking couple of these questions is because it looks like through the remainder of the year, maybe there is some conservatism, but it looks like you’re kind of guiding towards a little bit of core organic deceleration from the 15% in Q2. I just want to better understand that. I mean, are you just trying to take a reasonably cautious approach or is there anything in there really other than that?

Tiger Tyagarajan

Yeah. So let me start by saying that, first of all, as Mohit said in his articulation of revenue. There is a 2% benefit that we’ve got through foreign exchange and obviously, as we think about the second half, we wouldn’t plan for that.

And then, of course, there are clearly some known risks, I talked about Japan and retail consumer lending in the U.S. We actually don’t think it’s going to come back this year.

And then, of course, I think you talked about prudence, the current environment I think dictates that we just remind prudent.

Dave Koning – Baird

Yeah. Okay. And then, that make sense. My last question then just, in Q2 you had other income of $3 million, which was the same as Q1 despite having all the debt command for the Headstrong acquisition. I’m wondering maybe why you didn’t start going into an expanse mode there and maybe if we should start to expect that in Q3 given all the debt?

Mohit Bhatia

Yeah. This is Mohit. I’ll take that. See it is largely because of interest income and let me explain that. I mentioned in the last quarter call too that our interest income varies with the geographic distribution of our cash. For example, we are on much higher interest rate in India as compared to the U.S.

And in quarter two of last year, the average balances in India were very low as compared to large balances that we had in India this time, in this quarter. Even within India, there has been substantive movement in interest rates over the last 12 months by well over 200 basis points. So all this put together give us a good upside on interest income in quarter two, which more than offset almost $1.6 million of interest expenses that I had to pay because of our acquisition financing.

Interest was the main reason, they were some one times as I guess you should know we received some subsidy from China State government, which is not -- which is pass through, it’s also an expense and an income but it does show up in the other income line and that’s why you’re seeing the other income line inflated a little more than it should be. But this China subsidy will appear every quarter at least for the balance part of this year. Does that help?

Dave Koning – Baird

That does, I mean should we just expect that they continue to be a positive income number the rest of the year, overall?

Mohit Bhatia

Well, to the extent of this $0.8, $0.9 million of China subsidy, yeah, to the extent of higher interest income as I said it’s a function of how long the cash stays in India and how long the cash stays is also an element of potential opportunities, acquisitions, et cetera, which we don’t know. But also you recall and assuming that none of these events happen then as of now, you should at least see it in quarter three because I do plan to remit some of the India funds to the U.S. in the fourth quarter.

Mohit Bhatia

Great. Thank you. That definitely helps.

Operator

Our next question comes from the line of Joe Foresi with Janney Montgomery Scott. Please proceed.

Jeff Rossetti – Janney Montgomery Scott

Hi. This is Jeff Rossetti in for Joe. Nice quarter. I just wanted to see if may be you could, if there is any way to possibly quantify some of the cross-selling market potential that you see with Headstrong?

Tiger Tyagarajan

Joe, the early cross-sell opportunities are all around, primarily reengineering and analytics, shorter cycle, faster decisioning, risk and those we are seeing immediately, they typically tend to be like many of our early engagements in those $0.5 million at any given point in time and then, those could be scaled up.

I think the bigger opportunity that we’re beginning to build up in our pipeline, as I said is BPM, Business Process Management, typical finance and accounting procurement, as well as broad back office operations for capital markets -- large capital markets businesses. Those take time to decide. We also, obviously will go through a cycle of decision making that at some point in time in some cases will get competitive given the nature and the size of these organizations.

We think that by the time we get to next year and we start talking about 2012, we had said that in the medium-term Headstrong would be a 20% growth business in that term and we expect that to happen driven by these cross-sell opportunities. And of course, there are cross-sell opportunities in the reverse direction of taking IT from Headstrong into specific Genpact clients.

Jeff Rossetti – Janney Montgomery Scott

Okay. Thank you. And I believe Mohit you mentioned that the SG&A might be coming up in the back half of the year. Just wanted to see, how you see that trending may be heading into 2012? Thanks?

Mohit Bhatia

Sure. The investments that we are talking about in the second half that would obviously increase the SG&A as a percentage of revenue are already as per plan and are baked into the 16% to 16.5% range that we are talking about, so they are planned. So, at least at the adjusted operating income margin level, you should not see any exposure.

The investments will be largely on front-end on sales sources, on account management resources that we be hiring to manage some of our new relationships, as well as in some of the new geographies like Tiger mentioned, Brazil and other areas of Latin America and China that we want to expand in.

In 2012, it’s too early to say. We haven’t done a detailed operating plan exercise for 2012. But likely mentioned to you in the Investor Day, our intent as a leadership team is definitely to invest back into the business even in the medium to long term.

Tiger Tyagarajan

Yeah. And Joe, to really hold in that medium-term and this is more about the medium term than just about 2012 to hold on margins flat and all opportunities to continue to drive productivity and cost, which we will do. Our clear objective would be to reinvest it back in the same elements and in other elements that will continue to drive growth in this business.

Jeff Rossetti – Janney Montgomery Scott

Thank you.

Mohit Bhatia

Thanks, Joe.

Operator

Our next question comes from the line of Vincent Lin with Goldman Sachs. Please proceed.

Vincent Lin – Goldman Sachs

Great. Thanks. I want to talk about [GEE] revenues during the quarter looks like it’s accelerated versus the first quarter quite a bit. I was just wondering your expectations on GE for the balance of the year, should we be expecting GE to be in line with your previous expectation, meaning a low single digit growth for 2011? Thanks.

Tiger Tyagarajan

Yeah. Vincent, if you look back on GE over the whole of 2010, what happened in 2010 was re-acceleration from almost no growth in the second half of last year. So, what we are finding in the first half of this year is really growth in comparison to that first half of 2010.

In the second quarter, we also get the benefit as we always do almost every year of the IT business with GE coming back versus the first quarter. As we get into the second half of the year, that growth will then have to be against second half of last year, we don’t expect this kind of growth to continue. So, our original thinking that GE would be close to flat or very low-single digit should continue as it is.

Vincent Lin – Goldman Sachs

Got it. And then, maybe just to follow-up on Tien-Tsin question on the banking and financial services sector, earlier, you talked about at the Investor Day that you are seeing some slowdown in terms of volumes in mortgage and also in the credit space, just wondering the expectations for the volumes how the equation for the balance of the year, how should we think about that?

Tiger Tyagarajan

So Vincent, I think we don’t -- we continue to see that softness and let me state very clearly what we are -- where we are seeing this. We have seen this in origination on consumer loans so that would be mortgages. We have also seen it in origination on credit cards and that kind of auto finance and auto leases.

And then we’ve seen it in again delinquencies and therefore collections. Given some of the credit quality of new customers coming in as well as the fact that they actually roll over faster and pay back faster, we don’t expect that to change materially during the course of this year. So, we think softness obviously not only in revenue, but we are also seeing softness in our pipeline in those specific segments in the U.S.

Vincent Lin – Goldman Sachs

All right. Thanks.

Operator

Our next question comes from the line of Arvind Ramnani with UBS. Please proceed. Arvind, your line is open, you may proceed?

Arvind Ramnani – UBS

Hi, sorry, it was in mute. You’ll have communicated that Genpact typically does not see significant outperformance -- so can you maybe characterize the outperformance, was there one-time payment that boosted revenues or was there some unrecognized revenues that got recognized or did you see that kind of specific transaction volume despite that particular set of clients?

Mohit Bhatia

Not really Arvind, like Tiger mentioned earlier, the growth was real. other than the 2% benefit we got from foreign exchange, with good rates, the dollar weakening against the Euro, Yen and Australian dollar other than that, the growth came from global client BPM, from Smart Decision Services, from quite frankly renewed interest we are seeing in reengineering, enterprise risk and some of our analytics businesses.

Tiger Tyagarajan

So -- so Arvind, just to further reinforce, FX is the only thing and Mohit called that out, that we would count as, we don’t know how the second half is going to be. Everything else is all our regular businesses and as I said, we have some really good strengths in various parts of our businesses – that, we should see those continue.

The reality of course is, as I’ve said couple of times, that there are segments in our business that are soft, but they are getting mitigated by the other parts of our business.

Arvind Ramnani – UBS

Great. How are some of the gross selling opportunities progressing? Are there specific clients that are interested in expanding the services? And also, how are you equipping the sales team or the operational team to offer this wider set of offerings?

Tiger Tyagarajan

Arvind, your question is with reference to Headstrong and Genpact right?

Arvind Ramnani – UBS

That’s right.

Tiger Tyagarajan

Yeah. So we’ve gone through a series of first, awareness, training and deep dives, particularly on Headstrong’s client management, account management and sales team understanding our business process management, analytics, reengineering and risk services, so that they can actually go and articulate that to their relevant client relationships they have. Those conversations, every time we’ve started having them have gone exceedingly well.

That’s why we’ve seen five of those convert into complete deal signings that we are now beginning to execute on. We also have specific leaders who have moved into the capital markets business to actually own each of these service lines for capital markets and build them out, obviously, drawing on resources that we have in other parts of our financial services and other verticals.

Arvind Ramnani – UBS

Excellent. Thank you.

Tiger Tyagarajan

Thank you.

Operator

Our next question comes from the line of Manish Hemrajani with Oppenheimer. Please proceed.

Manish Hemrajani – Oppenheimer

Hi, good morning. Good quarter guys.

Tiger Tyagarajan

Thanks Manish.

Manish Hemrajani – Oppenheimer

If you look at your, outperformance in the second quarter and look at where your guidance is coming, given where Headstrong contribution is, are you seeing something out there in terms of demand slowdown in DCM and IT services, which is making you take this slightly conservative stand on this guidance?

Tiger Tyagarajan

No, Manish. No. As I said, I think the first step to think about is kind of think about backing off 2% of that growth in the first half and saying that who knows that repeats itself and why should we plan for that repeat, FX.

Then saying, that there is still Japan, which got mitigated this half and there is the retail consumer banking and credit products that we talked about in the U.S. which also got mitigated this half.

We don’t see anything to believe that, that won’t happen in the second half, but we don’t know. We do know that the world is uncertain.

There are enough things we’ve seen in the first half of pop up and I don’t want to go through all of those because they are all macroeconomic that we don’t know how our clients are going to get impacted. It just says that it is the right time to be prudent, so other than that nothing else.

Manish Hemrajani – Oppenheimer

Can you remind us what was Japan’s contribution to Headstrong last year?

Mohit Bhatia

(Inaudible) 14%.

Tiger Tyagarajan

Japan’s contribution to Headstrong was about 12% – 13% to 14% -- of Headstrong’s revenue.

Manish Hemrajani – Oppenheimer

Got it. Got it. Just one more housekeeping question as we move into next year, given that your tax rate is at 26% to 28% for this year and as more of the SEZs come into play later this year and early next year, how should we look at tax rate for 2012?

Mohit Bhatia

So, first of all, like I mentioned to -- in another question, we haven’t done our 2012 detail planning yet and they have lots of puts and takes and we’ll get there. But at a high level, in ‘012 the rates could marginally go up before they start coming down in the outer years. Our STPI tax holidays finished in March 31st this year, next year we should see the full-year impact.

Headstrong is increasing our average ETR and we will get a full year impact of Headstrong next year. Both these events should have an upward pressure on the tax rates and they’ll be partially offset by our newer businesses moving to the SEZs, but like I said, we shall have to work that math.

Manish Hemrajani – Oppenheimer

Okay. Got it. Thank you, guys. That’s all from me.

Tiger Tyagarajan

Thank you.

Operator

Our next question comes from the line of Kunal Tayal with Bank of America-Merrill Lynch. Please proceed.

Kunal Tayal – Bank of America-Merrill Lynch

Hi, thanks. Just to better understand the increased demand on the F&A side, are there any trends as to whether this demand is more from the first-time adopters of outsourcing or is it just the existing clients who are now spending, update a piece of their budget on -- if any activities?

Tiger Tyagarajan

So Kunal, actually I would say there are three -- there are three types of clients that you can think about -- both those that you talked about in the third category. One is -- clients are just expanding their scope. More and more clients continue to expand scope, if they have done transactional work, they go into more decision-making finance and accounting.

A lot of the clients also when they enter and typically these are clients entering for the first time into outsourcing and that’s the second category, actually don’t tend to do a complete all encompassing end-to-end complete global all of finance and accounting.

They do tend to break it up, which is why sometimes deal sizes are little smaller than they used to be in the past. But there is the third category which is becoming an important category and I suspect as we go forward will become more important. Contracts that were signed in 2004, 2005, 2006 coming up for renewals and we are beginning to see those as well.

Kunal Tayal – Bank of America-Merrill Lynch

Sure, got it. That’s helpful. And are there any other specific trends in the way your pipeline may have grown over the past one or two quarters on the hunting side versus the mining side, has the hunting side of the pipeline may be growing slower than the mining side because of, maybe, the macro?

Tiger Tyagarajan

So Kunal the way -- so I will answer the question in two ways. One, if you think about the range of services we offer today, they have a number of products and services particularly when it comes to things like Smart Decision Services, analytics reengineering, risk, technology particularly with something like Headstrong where the decision making cycle time is fast, the payback is actually fast and therefore our ability to hunt and get a new clientele is actually much quicker than earlier.

Clients desire to get that payback and start driving not just costs takeout but also growth, it’s actually more than before. However, when we do get those clients in a hunting deal, they tend to be small in size to begin with.

After that we mine that client. So to that extend if you see the mathematics, it will look as though we have more mining and less hunting. To some extent it’s driven by that. There is no question that when it comes to large financial services, retail banking deals, large collection deals, large mortgage origination deals those have slowed down.

I mean there is softness in our pipeline, as I said, on those types of large back-office deals in retail banking as well as obviously, in the finance and accounting space I did say that clients tend to break up a large potential transaction into smaller pieces.

Kunal Tayal – Bank of America-Merrill Lynch

Right. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Matt McCormack with BGB Securities. Please proceed.

Matthew McCormack – BGB Securities

Yeah. Hi, just a kind of follow- up on all the questions on the cross-sell opportunity. You did mention that the real opportunities in BPM, however, that’s longer sales cycle in a competitive process. So, I guess and I would also assume, your contact that the client is going to be different and whoever Headstrong selling IT into. So, I guess, could you just talk about what’s the true advantage did that acquisition bring to the table in terms of those long sales cycle BPM deals?

Tiger Tyagarajan

Matt, when we did the acquisition we knew that BPM deals have a certain cycle time. We didn’t expect to be any faster than it is right now. We knew that -- as it is given. We also knew that we will enter these clients on the analytics and reengineering and both services very quickly. In fact, we believe we have entered them faster than we expected.

The decision-makers interestingly in capital markets have a much closer connection between technology and process than in most other industries because these are not enterprise technology people, these are people who are technology people who are very focused on that trading platform or that FX platform or that brokerage platform, wealth management platform. And therefore the acquisition, one of the big drivers of the acquisition was our ability to use that technology and domain expertise to walk into the operating leader’s office and have that conversation.

Often, it’s the same operating leader who also gets involved in the technology decision that Headstrong has been doing.

Matthew McCormack – BGB Securities

Okay. Now that’s helpful. In terms of the attrition, the comment was made that 29% rate is expected to stay stable. I guess could you just provide a little information regarding why you are confident that it won’t increase?

Tiger Tyagarajan

Just one other, I just got one other point, Matt, on your earlier question. The reality is and we said this when we did the acquisition, we hadn’t seen capital markets BPM deals not just we hadn’t seen them actually having been done as many as compared to many other industries and we certainly had been invited.

We’re now in the dialog, in conversations. In many instances right now, the only people in conversations for a number of these BPM opportunities in capital markets. So clearly, that was the rationale and continues to be the rationale of having acquired Headstrong.

Attritions, if you look at the attrition for last year, as we drove more aggressively through performance management in the third and particularly in the fourth quarter of last year, we did have a spike in our attrition.

We said at the beginning of the year that we will bring back a lot of the training. In fact, we’ve doubled training as we started the year and go through the year for a lot of our employees, including education at work and a lot of other programs and career pathing and that started bringing the attrition down Q1 versus Q4 of last year and now it’s stable.

We think that will continue as we go through this year and we expect that to be the way it will play out. Our training budgets for this year are double than they were last year.

Matthew McCormack – BGB Securities

Okay. Thank you so much.

Tiger Tyagarajan

Thank you.

Operator

We have no further audio questions at this time. I will now turn the call back to Shishir Verma for any closing remarks.

Shishir Verma

Thank you, everyone, for joining us on the call today. If you have any questions, please do not hesitate to reach out to me. Thank you, everyone.

Tiger Tyagarajan

Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. Everyone may now disconnect and have a great day.

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