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Genpact Limited (NYSE:G)

Q1 2012 Earnings Call

May 02, 2012 8:00 am ET

Executives

Shishir Verma - Vice President, Investor Relations

NV “Tiger” Tyagarajan - President & Chief Executive Officer

Mohit Bhatia - Chief Financial Officer

Analysts

Jeff S. Rossetti – Janney Montgomery Scott LLC

Tien-tsin Huang – JPMorgan Securities LLC

Bhavan Suri – William Blair & Co. LLC

Edward Caso – Wells Fargo Securities LLC

Ashwin Shirvaikar – Citigroup Global Markets (United States)

Kunal Tayal – Bank of America Merrill Lynch

Manish Hemrajani – Oppenheimer Securities

Bryan C. Keane – Deutsche Bank Securities, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Genpact Ltd. earnings conference call. 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. Welcome, everyone, to Genpact’s earnings call to discuss our results for the first quarter ended March 31, 2012. With me I have Tiger Tyagarajan, our President and Chief Executive Officer, and Mohit Bhatia, our Chief Financial Officer. Our agenda for today is as follows. Tiger will begin with an overview of our results in relation to our long-term strategy with the perspective on the current environment. Followed by Mohit, who 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 these 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 fact sheet on the front page of the IR section of our website for further details on our quarter results.

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

NV “Tiger” Tyagarajan

Thanks, Shishir. Good morning, good afternoon, and good evening, everyone, and thank you for joining us on our call today. Genpact had a great first quarter with more than 30% growth in both revenues and adjusted operating income.

The market environment overall is stable with increasing interest in long-term transformative business process management engagements. We are seeing continued strong demand for our Smart Decision Services offering and accelerating demand for IT services.

We established 25 new client relationships this quarter, up from 16 in quarter one of 2011. These results were in line with our expectations and a great start to the year. We have evolved our growth strategy over time, and I want to talk about our results in the context of the key elements of this strategy.

With consistent implementation and investment, we are winning client engagements and creating a clearly differentiated business model that will help drive sustainable growth beyond 2012. The five key elements of this growth strategy are, first, guide global enterprises to best-in-class through our proprietary Smart Enterprise Process framework that delivers improved outcome for them.

Second, investors and those started at vertical industry and horizontal domain expertise. Third, combined data analytics and process expertise to create meaningful insights. Fourth, expand geographically in terms of both market and delivery capability. And finally, add new capabilities through acquisitions. I will now discuss these elements and give examples of how they work for us this quarter. First, guiding the enterprise to best-in-class through our proprietary SEP framework.

Our clients get focused on adjusting their business and operations to the new normal, they tell us that they’re looking for partners who can help them with a number of challenges, including migrating their businesses to a more valuable cost structure, seeking innovative solutions to help them balance the challenges of lower growth in developed economies and capturing higher growth in emerging markets, and driving a comprehensive agenda of transformation to achieve all of this.

In each of these cases, the key differentiator is delivering better outcomes and effectiveness not just in the services we manage for the client, but across the clients entire delivery footprint. All this leads to deeper client relationships over time and a much bigger impact for them.

As an example, in the first quarter, we established a new client relationship with a large global pharma major, based on our demonstrated expertise and differentiated approach in improving effectiveness and delivering outcomes. We use SEP to build a roadmap to take them on a journey to best-in-class, including assessing the health of their finance and procurement processes globally, and building an operating platform to support future rapid growth.

Based on our extensive knowledge of the pharma industry and process expertise, during the assessment phase we were able to significantly expand the engagement into running the full range of finance and procurement processes.

The second key element of our growth strategy is to invest in and build targeted vertical industry and domain expertise. Clients value insights and experience in their specific industries and their competitive environment and intimate knowledge of their business models and deep domain expertise in the context of their industries. For example, in finance and accounting, our risk management. We have identified key growth verticals CPG, retail, pharma, healthcare, manufacturing, capital markets, insurance, banking and financial services.

Within this vertical industry structure, we are investing and expanding our front-end business development and relationship management teams with experienced professionals who have deep domain expertise in our targeted verticals to improve client intimacy and increase mining and cross-sell opportunities. While it is still early days in this investment phase, we are already beginning to see the impact.

As an example this quarter, we established a new client relationship based on our focus on healthcare and domain expertise and revenue cycle management. The goal is to help the client drive efficiency and effectiveness through reduced leakage in their reimbursement operations, which is integral to their revenue model.

We won the engagement because of our end-to-end view of their entire reimbursement process and our suite of customizable and integrated applications within the technology framework that is fully in compliance with new regulatory requirements of HIPAA 5010 and ICD-10. We will provide the solution as a business process as a service, which will avoid the large capital expenditure required to implement a totally new ERP system for reimbursement.

Third, another vital element of our growth strategy is to combine data analytics and process expertise to create meaningful insights for our clients. Technology advances and proliferation including social media and cloud computing have enabled our clients to easily collect, store and access large volumes of data about their customers, end-users, operations, competitors, and suppliers.

This explosion in so called big data has produced greater demand for insights. Smart Decision Services combined insights drawn from data with our in-depth understanding of business processes and outcomes in areas such as sales and marketing effectiveness, risk management, and reporting, and supply chain effectiveness.

The intelligence we provide is exactly what clients are looking for today as they face an environment where they must drive top line growth and profitability without adding costs.

Another example, for a large telecom services provider, we want a contract to increase the capacity and customer satisfaction of their front-end sales and customer service organizations without adding head count. Leveraging our Smart Decision Services capabilities, we implemented sophisticated analytics to identify underline drivers of inbound call volume.

Based on this we reconfigured their operations and IVR technology using visualization methods to optimize call routing and implemented technology solutions, which utilize alternate channels of customer communications, such as web and SMS. We also redesigned their reporting processes and dashboards to provide more accurate and timely insight into their operations. While engagement has already led to a 6% increase in capacity and has headed towards a 20% plus increase in the next 12 to 18 months.

Fourth, the fourth element of our growth strategy is to expand geographically in both our markets and delivery capabilities. We continue to invest in adding new markets for growth, such as Latin America, the Middle East, and South Africa. We are also adding to our delivery and domain-led, capabilities across geographies.

For example, as clients look for a mix of onshore and offshore services, we are investing in domain-led onshore delivery centers to build expertise, in specific industries and add complex high-end works that requires client collaboration. We recently opened a new delivery center in Richardson, Texas, where Genpact will provide technology services, business analytics, and mortgage underwritings, for a growing number of US-based clients, thereby establishing a new hub for these high-end capabilities.

The fifth key element of our growth strategy is to add capabilities through acquisitions. We will continue to expand our targeted vertical industry, domain, and geographic capabilities through acquisitions that meet our disciplined criteria for strategic, operating, cultural, and financial fit.

We are excited about the acquisition of Accounting Plaza in Europe, which closed on April 25. This business provides a huge runway for growth by adding retail industry focus capabilities in finance and accounting, IT and HR along with a $40 billion a year global retailer to our client base. The global retail industry is just beginning to undergo business transformation. And these capabilities combined with our current portfolio of services will help drive our growth with other clients in Europe and globally.

The acquisition also benefits our geographic expansion strategy by adding Dutch language capabilities. Other recent examples of adding capabilities through acquisitions include enhancing Genpact mortgage domain expertise with a technology platform that has improved processing efficiency and created a mortgage business process as a service offering.

Another example is adding the new cloud-based order-to-cash platform, which has been leveraged for SaaS and DaaS solutions and lastly expanding on analytics business into social media monitoring and measurement.

Our results in the first quarter demonstrated these key five elements of our growth strategy are resonating with the marketplace. We believe that these are extremely well aligned with the needs of enterprises today.

The market environment for our business appears to be broadly stable. While the overall global GDP growth forecast have been lowered, our clients continue to see a slow recovery path in the U.S. continuing strength in emerging market and country specific challenges in Europe.

In capital markets, we are seeing a clear reining in of discretionary spends. While these trends continue to give us some reason for caution, we are leading corporations in a range of industries across the globe to embark on driving transformative agendas, which will allow their organizations to build flexibility and adapt to the environment.

This means selecting partners who demonstrate thought leadership and execution around transformation, deep understanding of their specific industry, Anu can provide insights and technology to make better decisions, while creating and taking them on a journey to best-in-class, all of this in the context of broad global delivery capabilities.

With this as a backdrop, our pipeline remains healthy as we are beginning to see some earlier results from the investments we have been making in the front-end. Client decision cycle times remained stable and deal sizes have been steady.

From an industrial perspective, demand is broad based from CPG, life sciences, healthcare, banking and financial services, where we are beginning to see some new infusion from U.S. retail banking clients.

In capital markets, we are seeing clients focus less on discretionary projects, but engaging in discussions around long-term partnerships that will help them permanently reduce their cost structure as that industry goes to a secular change. We see demand from all geographies including the U.S. and across all major service lines, particularly Finance and Accounting, Core Banking and Insurance Operations, Smart Decision Services and IT.

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

Mohit Bhatia

Thank you, Tiger, and good morning, everyone. Today, I will review our first quarter performance, followed by a summary of key highlights on the balance sheet and statements of cash flow.

We closed the first quarter of 2012 with net revenues of $435.5 million, an increase of 31.7% year-over-year and 13.4% excluding Headstrong, which we acquired in May of 2011. Business process management revenue increased 15% driven by a strong global client BPM growth of 20% within which Smart Decision Services grew 61%.

In addition, our IT business continues to gain momentum, growing 18% this quarter, excluding Headstrong and a 148% on a reported basis. Within this category, our global clients IT business grew 33% and the GIT business grew 6%.

Global clients continued to be our growth engine. Global clients revenue increased 46.6% in the first quarter or 18.9% excluding Headstrong and represented 73% of Genpact’s total revenue.

Growth was driven by strong demand for nearly all major service lines and industries including SDS, banking and insurance operations, IT and finance and accounting and all industry verticals. We also saw double digit growth across all major geographies including the U.S. with particularly strong growth in Asia-Pacific and Europe.

Revenue from GE in the first quarter totaled $116 million, up 3% year-over-year driven by growth from smart decision services and IT. In the first quarter, revenue from GE represented 27% of our overall revenues. Our expectation for the full year is that GE will continue to grow in flat to low single digits.

You would have notice a slight change in how our financial statements are presented, where revenue from GE are no longer shown to be from a related party. This is simply due to U.S. GAAP Accounting Standards on stock ownership and how revenue is characterized. Our relationship with the Headstrong and is reflected in our results.

Our annualized revenue per employee for the first quarter of 2012 was US$32,200 up from US$30,700 in 2011, reflecting our growing onshore presence and higher value offerings in smart decision services and IT.

Adjusted income from operations totaled $70.8 million in the first quarter of 2012, an increase of $19.5 million, or 38% from the prior year quarter. This represents the margin of 16.3%, up from 15.5% in the first quarter of 2011 with the margin improvement driven by higher revenues and by gross profit.

Our gross profit for the first quarter totaled $170 million, representing a margin of 39%, up from 35.1% last year, due to better supervision spend, higher margin contribution from a Smart Decision Services, and from favorable foreign exchange, which more than offset the impact of wage inflation and the impact of new contract ramps. We do not expect favorable foreign exchange to continue at these levels and intend to setup investments in resources and capabilities through the year to drive future growth.

SG&A expenses totaled a $105 million in the first quarter of 2012, representing 24.1% of revenues, compared to $67.4 million, or 20.4% in the first quarter of 2011. This increase was driven by investments in front-end sales and relationship management, higher stock comp expenses, marketing and branding, new product development and other investments in resources and capabilities for growth partly offset by savings in support functions.

Our sales and marketing expenditure as a percentage of revenue was approximately 5% in the first quarter, up from 4% in the same quarter last year, as we continue to ramp up investments in our front-end teams.

Our tax expense for the first quarter was $16.4 million, up from $13.1 million in 2011, representing an effective tax rate of 29.8%, compared to 26.6% in 2011.

As mentioned in our previous calls, the year-over-year increase in the tax rate was primarily due to the complete sunset of the STPI tax holiday in India, the higher tax rate for Headstrong and certain other repeated items. In 2012, we continued to expect our effective tax rate to be in the range of 27% to 29% that I had indicated on our previous call.

Net income was $38.5 million or $0.17 per diluted share in the first quarter of 2012 up from $36.1 million or $0.16 per diluted share in the first quarter of 2011. The increase in net income was primarily due to higher operating income that was offset by an anticipated loss on foreign exchange re-measurement below the income from operations line, higher stock comp expenses, our net interest expense, these amortization expenses and higher taxes.

In the first quarter of 2012, we recorded a $3.7 million in foreign exchange re-measurement loss compared to a $1.6 million gain in the first quarter of last year, primarily driven by the appreciation of the Indian rupee versus the U.S. dollar from the end of last year to quarter one of 2012. Normalizing for this would have added another $.016 to our EPS this quarter.

We also recorded net interest expense of $400,000 in the first quarter of 2012 compared to a $2.9 million of interest income in the first quarter of 2011, primarily reflecting the long-term debt taken on in May 2011. We do expect net interest expense to increase though the remainder of 2012, reflecting the movement of funds out of high interest jurisdictions to the United States and the full year impact of interest expense from more acquisition financing.

As of March 31, 2012, Genpact had approximately 56,500 employees worldwide, up from approximately 45,500 at the end of the first quarter of 2011. Our attrition rate was at 23% in the first quarter, down from 29% in the first quarter of 2011.

Genpact has had some of the lowest attrition rates in the industry for sometime, and our people investments through 2012 will continue to drive employee engagement and retention.

I will now turn to our balance sheet. At the end of the first quarter of 2012, our cash and liquid assets totaled approximately $412 million, up from $408 million at the end of last year. This balance is after utilizing $32 million for capital expenditures and also factoring an increase of approximately $21 million for translation of local currency balances and receivables into U.S. dollars.

Our days sales outstanding stood at 92 days, compared to 84 days in the same quarter last year, and 82days in the fourth quarter of 2011. During the quarter and as part of an exercise to gain a six-year contract renewal, one of our clients agreed to a substantial upfront payment for certain investments that we made, including upgrading facilities, infrastructure and technology used to service that client processes.

The increase in DSOs for the quarter primarily reflects that receivable. We have since received this payment, which will be reflected in our second quarter cash flow results. We expect our DSOs to normalize in the second quarter and we expect to close the year at levels similar to 2011.

Cash from operations in the first quarter of 2012 was $5 million, compared to $21 million in the prior year first quarter. The lower level in this first quarter resulted from investments and working capital due to higher revenues and receivables, employee bonuses, security deposits for our new sites and cash taxes.

As we discussed in our fourth quarter conference call, after adjusting for certain 2011 one-timers and the other specific events that totaled $50 million to $58 million in 2012 we continue to expect our cash flow to grow in line with revenue.

Our capital expenditure as a percentage of revenue have accelerated in 2012 as planned and represented 3.8% of revenue in the first quarter of 2012. This was mostly invested in creating additional capacity for growth in our [SEC] locations in Gurgaon, India and also in the Philippines and Europe. We continue to expect to close the year with CapEx representing approximately 4% to 5% of revenue.

With that and in conclusion, we had another great quarter in terms of growth and profitability and I’d like to hand back to Tiger for his closing comments.

NV “Tiger” Tyagarajan

Thank you, Mohit. In closing our first quarter results were a great start to the year. As we look ahead, clients continue to face some volatility and uncertainty, which will require them to begin their transformational journeys. We are well positioned to meet this demand especially through continued implementation of our growth strategies and our targeted investments.

Turning to our guidance, we continue to expect Genpact full-year revenues of $1.84 billion to $1.88 billion before the addition of at least $24 million from the Accounting Plaza acquisition. As a result, our current outlook for the year is revenues of $1.86 billion to $1.90 billion and adjusted operating income margin of 16% to 16.5%.

Lastly, we were considering an Investor and Analyst Day towards the end of this month, but due to key client commitments during that timeframe, we are now expecting to have our Investor and Analyst Day in the fall.

We will provide more details as we get closer. Thank you.

Mohit Bhatia

Thank you, Tiger.

NV “Tiger” Tyagarajan

Thank you.

Mohit Bhatia

Erica, could you please open the floor for questions?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Joe Foresi with Janney Montgomery Scott. Please proceed.

Jeff S. Rossetti – Janney Montgomery Scott LLC

Well, this is Jeff Rossetti in calling on behalf of Joe, thanks for taking my question. I was just wondering Mohit, would it be possible to find out exactly what was the organic growth for BPO, excluding EmPower and also the growth rate for Smart Decision Services excluding EmPower?

Mohit Bhatia

So, the EmPower acquisition was actually very, very small. In our own measurements, we don’t even measure that separately. Our organic growth for the first quarter was 13.4%. I suspect if I would remove EmPower, it would be like 13.3%, it was very marginal and non-material to our numbers.

Jeff S. Rossetti – Janney Montgomery Scott LLC

Okay. And could you maybe also talk about the how Headstrong is progressing with (inaudible) and others. Tiger had mentioned the challenging market in the investment banking just try see how that business is performing?

Mohit Bhatia

Sure. The first quarter results of Headstrong are very satisfactory, given the fact that one of their clients had filed for bankruptcy towards the end of last year. The fact that Headstrong in first quarter came in flat, compared to last year despite losing the clients is something that is very satisfactory.

I think like Tiger, a little bit of fact the uncertainty remains in capital markets, there is pressure on discretionary spends from a lot of the investment banks. While that is the risk, the opportunity really is that these financial institutions and banks are also looking for partners who can help them try and variabilize their cost base and to help them with more transformative end-to-end improvements that would make them more effective.

NV “Tiger” Tyagarajan

A couple of other points that I would add to what Mohit said clearly discretionary spend is coming under scrutiny, at the same time, the intensity of dialogue around larger transformative engagements has gone up. And with our process expertise and our reengineering capacities, I think, we are very well positioned to have those dialogues. We continue to win a large number of analytics and smart decision services, cross-sell engagements.

And the last point I would make is, the addition of that leadership team to the company has really helped us drive technology, our technology business, our IT business in a forward direction, and which is why we’re beginning to see growth in that business after many years of not more than probably single-digit growth.

Jeff S. Rossetti – Janney Montgomery Scott LLC

Okay. Thank you. And I can just squeeze one more last question. Mohit I know you mentioned about the receivable, could you maybe give a little bit more color about how the payments might can progress with that particular client. I know you’ve mentioned there was an upfront investment made? Thank you.

Mohit Bhatia

Sure, so like I said as part of the commercial terms with a large client, they agreed to pay us a pretty substantial upfront payment, which will be used amongst other things to improve, and upgrade and refresh the infrastructure and technology used to serve the clients processes. That clearly changed the DSOs, because it came in as a receivable for the cash given only a few days later in the second quarter and that impacted our DSOs by over seven days.

If I were to exclude this one client, which cause a swing in the DSOs, the rest of the companies DSOs [was in] only by about a day or about 1.4 days. I think, if we look at the business as usual of increasing DSOs of just 1 to 1.5 days, it is really a quarter one thing, it’s about timing, there are lots of new contracts that came in the fourth quarter of last year and if normal while we iron out the billing complexities, et cetera for these new logos.

A lot of these are timing issues, we should get normalize in the second quarter, which is why we are confident as a company that our DSO should be back in control at the same levels of 2011 over the balance part of the year. Just for ample clarity, the one big receivable for this client that I alluded to has already been received in cash, so it will reflect in our quarter two, AR getting normalize, as well as our cash flow is being up.

Jeff S. Rossetti – Janney Montgomery Scott LLC

Thanks. Nice quarter.

NV “Tiger” Tyagarajan

Thank you.

Operator

Our next question comes from the line of Tien-tsin Huang with JPMorgan. Please proceed.

Tien-tsin Huang – JPMorgan Securities LLC

Hi, thanks so much, good results. Just wanted to ask on the margin side, it sounds like it implies down to flat margins after a good start to the year. So how the year progress, is it really more just ramping up some costs as new clients come in, just wanted to get a little bit more color there?

NV “Tiger” Tyagarajan

Let me just take that and then I’m going to ask Mohit to jump in. We actually have not been able to drive as much investment as we thought we would in the first quarter

Tien-tsin Huang – JPMorgan Securities LLC

Right.

NV “Tiger” Tyagarajan

As we’ve been saying a lot of the investments are in the front-end, these are domain expertise, people being brought in, it takes time to ramp these people up. And to some extent the margin that we delivered in the first quarter is a reflection of that. As we go through the year, we expect those investments to be done and that’s one of the reasons why we would expect our margins probably to look flat as we go through the year. Mohit?

Mohit Bhatia

No, absolutely, Tiger, I completely agree. Just peeling the onion a bit on that between gross margin and SG&A. Gross margin at 39% is very high. I think you should see it come down a bit over the next few quarters, maybe by 100 basis points approximately, but we’ll keep updating you.

On the contrary, SG&A which is 24% of revenue should improve over the next three quarters again by 50 to 100 basis points, but those are some of the trending that we can all hope for as we walk down the rest of the year.

Tien-tsin Huang – JPMorgan Securities LLC

Okay, that’s good to know. Just quickly on the capital markets, thanks for the color on that as well. I was curious, maybe your peers have talked about a lot more weaknesses, it sounds like you’re seeing something little bit different, a little bit better. I’m curious what’s perhaps driving the delta there, Tiger?

NV “Tiger” Tyagarajan

I can answer only for ourselves, I suppose. It’s probably a reflection of the type of services that we offer. Clearly, most of what we offer, not all of it, most of it is non-discretionary. Most of what we offer is annuity streams and is sticky. I mean, it’s classic business process management and even a substantial portion of Smart Decision Services. I think that have to be done. So I suspect, part of it is a discretionary component, which is why, in capital markets where clearly the businesses are finding a new way of dealing with the world. Some of those discretionary spends are coming under pressure. I suppose it’s that, all I can say is that, given the way the world is looking and most corporations saying, this is the way it’s going to be for quite some time to come. They are very actively in dialog, saying, we need to run our businesses differently. So it seems to be great conversations that we are having.

Tien-tsin Huang – JPMorgan Securities LLC

Okay, good. Last one for me and I’ll jump off just on Japan, has that stabilized at this point, I know it’s a little bit weak last quarter? Thank you.

NV “Tiger” Tyagarajan

Yes, it’s stable. It is stable. Interestingly, lots of new conversations, but as you know probably Japan, decision cycle times are much, much longer than anywhere else in the world, but to specifically answer your question, stable.

Tien-tsin Huang – JPMorgan Securities LLC

Thank you.

Operator

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

Bhavan Suri – William Blair & Co. LLC

Good morning, can you hear me?

Mohit Bhatia

Yes, Bhavan.

Bhavan Suri – William Blair & Co. LLC

Great. Hey, Tiger. So, just a follow-up on that question, you mentioned sort of new infusions in core banking. Could you provide just a little color of what sort of things are they looking at or is this just an expansion of things like mortgage processing type work?

NV “Tiger” Tyagarajan

No, it’s in fact you hit one of the nails on the head. Mortgage clearly, I mean it’s pretty obvious that mortgage, given interest rate environment in the U.S. is seeing a surge in volumes. We have a very nice mortgage origination business and that got beefed up with the technology acquisitions that we did that allows clients to drive real efficiency on the front-end of the business and we all know how inefficient that front-end is. And we are seeing very great traction there. We are also beginning to see traction in classic retail banking operations after a pretty significant period of (inaudible) and I suspect that’s got to do with capacity that’s got rationalized, the reality of the new world and now saying, now we need to take a relook at costs having done all possible restructuring. And lastly, all the regulatory work that needs to get done, I mean the amount of new regulations and the work that needs to get done, just means a lot of more work that has to be done with no new revenue. Therefore the most effective, efficient way of doing it in a very scalable variable manner is a combination of factors that are driving that.

Bhavan Suri – William Blair & Co. LLC

It is interesting Tiger because the other offshore players talk about regulatory work being pushed out, and I am not seeing that happen and sort of you guys see, the IT growth was quite reasonable. It was actually good and part of that is certainly the investments you have made on the IT side, but in that retail banking space you talk about regulatory work. Is there anything? If you first, look at your IT business versus say any of your offshore IT services peers, what would differentiate the fact why would someone like a retail bank pick you versus them? Kind of why you are seeing something different, I guess, is what I am getting to.

NV "Tiger" Tyagarajan

So the regulatory work that I was talking about was not technology driven. Outside of capital markets, I’ll talk about capital markets separately, but in capital markets it’s different, but outside of capital markets in the retail banking, the regulatory work is not technology driven. It’s more analytics driven, it’s more data cleansing and then driving, reporting and analytics.

And our history and legacy of having come out with our background in financial services, the 14 plus years of having done analytical and reporting work, I suspect (inaudible) good step. Having said all that, I think part of the statement that people are making is true, which is the amount of regulatory work that needs to get done is still a lot more than what people are looking at today, and I think that’s a function of a lot of regulations still have to be defined. The last point I would make is if you look at a number of regulations and what they are trying to achieve, they are trying to achieve operating control and who better position to drive better operating control in those environments than someone without operating background, because it’s not about technology…

Bhavan Suri – William Blair & Co. LLC

Right.

NV “Tiger” Tyagarajan

It’s about operating background and analytics background.

Bhavan Suri – William Blair & Co. LLC

And then one last one for me. Obviously, SDS at 60%, you’ve seen that business grow from 40% to 50% to 60% while the size of that business continues to grow. I guess just if you could give us some sense of why it’s accelerating and then the sustainability of that sort of high growth rate?

NV “Tiger” Tyagarajan

Well, that mean I’ll answer the last part first. I mean you can’t sustain 60% growth rate forever. That’s a natural law of averages. So let’s get off that part. What’s sustaining it is the demand for two things, lot of data and the combination of risk and regulations, in some environment the combination of I need to find a way to drive growth in a very low growth world or I need to enter a new market in an emerging economy, because that’s the only way I’ll get growth.

And to do that, I need to understand the market, understand the segments, do analytics or if you take the life sciences industry, I need to find a way to drive rationalization in my large sales force. I need to drive rationalization in my trade promotions in the CPG world. And let’s face it, in developed economies there aren’t any new customers to get. I mean, I’m just making a broad statement.

Bhavan Suri – William Blair & Co. LLC

Right.

NV “Tiger” Tyagarajan

It’s actually about customer retention and it’s about cross-sell and it’s about up-sell. How do you do that without doing analytics and data mining? And then the other side of the house is reengineering and redesigning processes to get more effective and better outcomes, because I think the realization is pretty clear, as people start looking at our Smart Enterprise Process framework, they realize that efficiency only gives them so much benefit and they’re looking for bigger benefit and those outcome benefits come when they start engaging us on Smart Enterprise Processes.

Bhavan Suri – William Blair & Co. LLC

Great, thanks.

NV “Tiger” Tyagarajan

But saving 60% is obviously not going to be the way we would plan it.

Bhavan Suri – William Blair & Co. LLC

That’s helpful, thanks Tiger.

NV “Tiger” Tyagarajan

Thanks.

Operator

Our next question comes from the line of Edward Caso with Wells Fargo. Please proceed.

Edward Caso – Wells Fargo Securities LLC

Hi, can you hear me, okay?

NV “Tiger” Tyagarajan

Yes, Ed hi.

Edward Caso – Wells Fargo Securities LLC

Great, good evening. Can you talk a little bit about the demands from clients on you’re helping fund their decision? I mean with money being tight on their side, are they putting more pressure on you to arrange the contracts in a way that you sort of fund some of their upfront costs?

NV “Tiger” Tyagarajan

So, Ed, no, the answer to that specific question is no, nothing different than what it used to be. In fact, if we go back to 2009, 2010, probably the pressure was higher for obvious reasons. I think people have, I don’t think the people have a problem with cash flow these days. It’s more about productivity and it’s more about driving better outcomes. What we are finding is more opportunities to take over centers, to take over operations and two drivers of that.

One, on the demand side, I think as a realization that actually someone like us and other people like us can drive real impact when we start penetrating a center and driving improvements and better outcomes, applying all our tools and methodologies and so on. On our side, there are clear areas where when we takeover a center, we get new capabilities, new domain in either an industry vertical or a domain in a geography that we could leverage off from any other clients. I mean, that’s the background to the Accounting Plaza deal. So is that upfront application of some cost? The answer is, yes. But I would say that’s more driven by the demand supply equation than cash flow. I don’t think cash flow is driving any extra on that.

Edward Caso – Wells Fargo Securities LLC

My second question is, we believe the market is moving more vertical and you touched on that a little bit as well and obviously Accounting Plaza gives you sort of vertical F&A capabilities. Is there a pricing pressure increasing if all you have to offer now is sort of generic F&A work and are you seeing some of that in your book of business?

NV “Tiger” Tyagarajan

No, Ed, and so let me explain this whole verticalization that people talk a lot about. 50% of our business and 50% of the work we do, actually more of than 50% of the work we do is very specific to specific verticals already. And if that’s being the way it has been forever. So when you do mortgage process, then it’s only for the mortgage business. When we do distribution of parts and managing inventory for a large equipment manufacturer, that’s it, I mean that’s only specific to that industry.

So we’ve always been that way. When we look at finance and accounting, 80% of it is similar across industries. If you want to drive even more incremental value, particularly when it comes to driving outcomes better, then the last 20% which is very industry specific does make a difference. And then when you want to drive cross-sell, when you want to get into a client intimacy, where you are really part of the strategic direction the client is taking, for example, the restructuring their sales force, which for some industries is the largest part of their cost base, or changing the way they run trade promotions, which could be the largest part of their cost base or how do you manage claims. So it’s more driven by as you get deeper with clients one of the best opportunities to grow that relationship is to get deeper in that vertical in terms of expertise and that’s the direction I suspect a lot of people are taking. We have always been that way in terms of the services we deliver. We just reorganized ourselves in the last year to make that happen even better.

Edward Caso - Wells Fargo Securities LLC

Thank you.

Operator

Our next question comes from the line of Ashwin Shirvaikar with Citi. Please proceed. Ashwin your line is open, you may proceed.

Ashwin Shirvaikar – Citigroup Global Markets (United States)

Hi, guys can you hear me now?

NV “Tiger” Tyagarajan

Yes Ashwin, yeah hi.

Ashwin Shirvaikar – Citigroup Global Markets (United States)

Yeah, hi. So, a good quarter, I wouldn’t ask you about you guys crossed the employee milestone recently and as you get larger on the employee front and more global. Can you talk about how your recruiting practices change and particularly in places like the U.S. and as you grow in Asian business, can you talk about the implications to be a financials of growing in those regions?

NV “Tiger” Tyagarajan

Ashwin, yes, our employee base is now 56,000, so it’s much bigger than it used to be. Just obviously in the context of some of our bigger competitors, still very small. The interesting thing is it’s distributed across many countries and it’s distributed in some of the larger countries such as India or China, just to pick two examples across many centers. We do pride ourselves on picking centers of the future in advance, we tend to do that before others, we tend to tie up universities, even in the case of the U.S. where we just picked Richardson in Texas.

Why did we pick that place? After intense study we realized that there are a couple of markets where the ability to get a broad spectrum of talent that we wanted and we wanted financial services, analytics, technology-type talent from a broad range of industries with a large population in the context of the U.S. that we could tap into and an environment that is very good to work with, and then we apply, interestingly, the practices that we apply on hiring, on working with universities, on reskilling employees before they even come in or prospective employees before they come in, injecting new content into universities are interesting that you can apply the same principles, the same practices in India, in China, in the Middle East, in Eastern Europe, and now in the U.S.

The content will be different because you are skilling people for different things, but it’s the same and that’s fascinating because our ability to then apply it with very fast time to market is one of the reasons why we think we can set up centers in anywhere from 60 to 90 days and get it going.

Ashwin Shirvaikar - Citigroup Global Markets (United States)

Well, I guess I was asking more about, for example, Richardson, Texas, I mean it’s Dallas basically and then you said that you bought Accounting Plaza, which is in Netherlands. So, these are high cost of labor locations, yes, the labors is plentiful. But I was asking more from a, is there an impact to the pace at which your cost grow relative to your revenues? In other words is there a margin impact down the road as you grow these locations?

NV “Tiger” Tyagarajan

So, great question, Ashwin. But if you look at the distribution of Accounting Plaza, yes they have a nice center in the Netherlands, but they have even bigger center in Poland and then the Czech Republic.

Ashwin Shirvaikar – Citigroup Global Markets (United States)

Okay.

NV “Tiger” Tyagarajan

So, from a global delivery footprint actually they are very nicely located. We like the Netherlands footprint, because we didn’t have it. All we need is a footprint because then we can serve one more language that is top to serve for almost anywhere else in the world. If you look at the distribution of our workforce, it is still predominantly distributed in the emerging market economies.

When we deliver services from Denville or from Wilkes-Barre, Pennsylvania which are obviously developed economies and now from Richardson, Texas. The type of work the people do there and the way those contracts are structured, which often is outcome based is such that with the right tools and the right methodologies and things like Smart Decisions service and Smart Enterprise Process, our objective is to drive the same margin profile

Ashwin Shirvaikar – Citigroup Global Markets (United States)

Okay. And on growth, my last question, I guess is as you signed many of these contacts and you’ve clearly have a lot traction on Smart Decision Services and SEP and so on. Your organic growth 13% in change, when do you think it sustainably goes towards the upper teens? How long does it take?

NV “Tiger” Tyagarajan

That’s a good question. When we add sales people Ashwin in our business and these are experienced people from the industries often that they are meant to serve. They take time to get integrated and then of course, our cycle times on sales as you can imagine and as you know, even in Smart Decision Services, let alone BPM, which is the bigger part of our business is very long in often 9 to 12 months. And then that cycle then gets on to getting into transitions, which then get you revenue later. So there is a real lag before the investments in sales then leads to revenue. I think we’re beginning to see the signs of that in our pipeline. Obviously, we need to see that converts to revenue. I would say, it would take probably the end of this year before that starts really moving into the revenue.

Ashwin Shirvaikar – Citigroup Global Markets (United States)

Okay. So next year you might look at upper teens, mid to upper teens type of…

NV “Tiger” Tyagarajan

Well, I didn’t say that Ashwin. All I said was that the investment in sales will have an impact on revenue and the expectation is that by the time you get to the end of this year, investments that we made 18 months before the end of this year would start showing an impact on revenue. I haven’t done the mathematics as to whether it will lead us to the upper teens.

Ashwin Shirvaikar – Citigroup Global Markets (United States)

Got it. Okay, thank you, guys.

NV “Tiger” Tyagarajan

Yeah, Ashwin.

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. Firstly, continuing on the capital market side of the business, Tiger, if you could give us some sense, if capital markets indeed didn’t measure up to your expectations for Q1 and then whether for the full year as a whole whether there are any changes in terms of expectations from this part of the business?

NV “Tiger” Tyagarajan

So, Kunal, when we made our operating plan for the year 2012, as well as when we gave our guidance last quarter for 2012, the unraveling of some of the things in capital markets had already happened, whether it was the bankruptcy situation in the U.S. or of the company that went bankrupt and so on. So, the plan that we built was built on that basis. So did business then delivered the expectations that were post that, the answer is yes. Had all of that not happened, our expectations would have been different, but post that our expectations were met.

Kunal Tayal – Bank of America Merrill Lynch

Got it, that is helpful. Secondly, if you could talk about the outlook for your top five clients. This quarter they’ve done particularly well, so if you expect your top five clients to continue growing ahead of the company for rest of the year?

NV "Tiger" Tyagarajan

I think we’ll have get into account by account analysis and discussion. It’s also a function of how would the size of the company versus the size of our penetration and therefore the growth you can expect. Broadly I can tell you that when we work with our client, the range of services that we have allows us to penetrate that client in many directions over many years. As we’ve built more services and as we have expanded more end-to-end our opportunity to drive better outcomes for our clients, to drive more value to our clients allows us to continue to drive new growth with a lot of those relationships. So I would characterize a lot of the accounts, not just the top five as relationships that one could grow over many years. And they grow in stages as they go through transitions.

Kunal Tayal – Bank of America Merrill Lynch

Right, and lastly, just in terms of the expectation from GE, that would still be flat on a YoY basis, full year basis?

NV "Tiger" Tyagarajan

That’s right, Kunal. That’s the way we would continue to think about it. We’re highly penetrated. We have very deep penetration with almost every business that we have. We would track to GEs on growth to some extent and GE Capital on growth and therefore at the moment we would work with our close to flat for the year.

Kunal Tayal – Bank of America Merrill Lynch

Sure, thank you.

NV "Tiger" Tyagarajan

Thank you.

Operator

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

Manish Hemrajani – Oppenheimer Securities

Hi, good quarter, guys. Thanks for taking my call.

NV “Tiger” Tyagarajan

Hi, Manish.

Manish Hemrajani – Oppenheimer Securities

GE revenues were up about 3% this quarter, higher than what most folks had expected. If you look at GE’s results as well, they reported strong results in 1Q, industrial growth of 11% and 14% order growth. Are you seeing some of that growth that GE is reflecting the work that you do for them? And then how do you see GE contribution playing out for the rest of the year?

NV “Tiger” Tyagarajan

So, I’ll have Mohit talk to contribution by the time we get to the end of the year. But in terms of GE growth, if you look at GE’s businesses, you would broadly think about it as of GE Industrial business and GE Capital. We are clearly seeing growth towards the GE Industrial businesses where we are seeing growth in Smart Decision Services with GE Industrial businesses, we are seeing growth with IT.

Remember that the growth that GE gets sometimes is orders and then equipment delivery and real work starts when that equipment needs to be furbished. So there is a longer tail that GE has and similarly our work also has a longer tail where our work picks up when the service revenue I suspect picks up. On the GE Capital side, it’s all a function of GE Capital’s trajectory to whatever they have told in terms of managing their balance sheet and so on. So overall, we’re seeing growth in different parts of the businesses, the way those businesses grow and acquired, when businesses acquire new companies within that portfolio that allows us to get in and do more work as they integrate those businesses.

Mohit Bhatia

And just for some color, the 3% growth that you saw with GE, largely came from both IT and from the Smart Decision services. So, just like other global customers, there continues to be a demand even from many of the GE businesses for services like analytics and reengineering that we have to offer as part of SDS, and the IT business is growing nice. So, the IT business for GE grew almost 6% contributing to that overall 3% growth of GE as an account with us.

Manish Hemrajani – Oppenheimer Securities

Got it, and then probably you commented on this before, attritional levels of 0.2% are the lowest we’ve seen in the last three years. Anymore color on that, is that sustainable and how should we view that going forward?

NV “Tiger” Tyagarajan

Sustainable, well, our objective is to try and sustain it, to clearly try and sustain it, Manish. But the reality is we all know that the world, when I say world, not just the developed economy, the emerging economies have slowed down a little bit on growth. And a lot of the people who tried from our businesses don’t necessarily go to our competitors, they actually end up in industry and a lot of the industries have had a little bit of a hiccup which is beginning to start getting reflected in India or China’s GPD growth base. I think that would have an impact. Over time it did have an impact in 2009 when attrition did come down, we seen that now.

But as far as we are concerned, as we always think about these as long-term employee propositions and our long-term employee proposition remains unchanged, which is to build careers, allow people to come in and build careers. We like people who stay for a long time, because that allows them to build expertise. It adds value to our clients and obviously, then it adds value to the company. So, we don’t think about these in the context of what’s happening in the environment today versus tomorrow. We tend to drive employee practices in a very consistent way over a much longer timeframe.

Manish Hemrajani – Oppenheimer Securities

Got it, that’s all I had. Thank you

NV “Tiger” Tyagarajan

Thank you.

Operator

And our next question comes from the line of Brian Keane with Deutsche Bank. Please proceed.

Bryan C. Keane – Deutsche Bank Securities, Inc.

Hi, guys. I just want to ask about the acceleration of organic growth. I think it was a 11.5% last quarter, 13.4% this quarter. Obviously, lots of competitors were seeing a deceleration in our year-over-year organic growth rate. So I’m just hoping you could pinpoint the reason you guys think that you saw that acceleration in the first quarter?

NV “Tiger” Tyagarajan

So, Bryan first of all, I would say and we’ve said this many, many times over many years. We are a little careful about looking at just a quarter. We are a long cycle business, I mean for various reasons that I have already described. The only way we really think about the business in terms of all its metrics is at least a year. So, with that as the background, we had a good quarter with GE. We had a good quarter with IT, where we’ve done something that actually is having an impact. I don’t think it’s the market.

At the end of the day, in IT we are small in the context of the total market and then the context of our competitors. So some of the things that we did over the last 18 to 24 months in IT and it’s been a series of actions and then the final action being where some of the leaders who came in from the Headstrong business with much deeper technology expertise. And then Smart Decision Services, where I think the services that we offer match the needs of the market almost to the tee, albeit data and analytics, and reengineering and these services have been built over 15 years. We didn’t this yesterday.

So I think that match is just superb for today’s market. Having said all that, it’s only one quarter and we think about our business in the context of at least a year.

Bryan C. Keane – Deutsche Bank Securities, Inc.

So I guess that gets to my second question, I guess you’re just being conservative because the guidance I think for organic was 10 to 12.5 and you are obviously ahead of that in the first quarter. Unless you guys see something that would cause the deceleration that you know about in your organic growth going forward.

NV “Tiger” Tyagarajan

No, it’s not a question of whether we see something that is going to cause deceleration. I think it’s very, simply put, the uncertainty in the world that we all live in. Just wake up in the morning and read the newspaper then there is something that you didn’t expect. So I think it’s just being prudent and therefore saying, it’s just one quarter and then we have the whole year to go.

Bryan C. Keane – Deutsche Bank Securities, Inc.

Okay. Last question from me, just how does the pipeline look for large deals for BPO in particular and can we see some decisions on that over the next three to six months?

NV “Tiger” Tyagarajan

Bryan the pipeline looks actually pretty similar to the way it looked over the last 12 months. That’s why we called it steady in many contexts. Cycle times are steady. Deal size distribution is steady. We’re not seeing much variation. In terms of the proportion of large deals, we have seen kind of the proportion that used to be there. We are not seeing any delayed decisions, neither are we seeing any accelerated decision. I think it’s reasonably steady. What we are seeing is as we’ve seen actually over the last couple of years very laser-sharp focus on what do we need to do to drive that transformation and how do we get fast payback.

And sometimes, therefore, the engagement starts with some of the things that I think we are almost hugely differentiated on which is tell me how to run my business differently using things like Smart Enterprise Processes, redesign my operations and then start taking it. So I think it’s all of the different evolution but overall the pipeline looks very similar.

Bryan C. Keane – Deutsche Bank Securities, Inc.

Okay thanks for the color and congrats on the quarter.

NV “Tiger” Tyagarajan

Thanks, Bryan. Thank you.

Mohit Bhatia

Thank you.

Operator

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

Shishir Verma

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