Genpact Limited Q4 2007 Earnings Call Transcript

| About: Genpact Limited (G)

Genpact (NYSE:G)

Q4 2007 Earnings Call

March 20, 2008 8:00 am ET

Executives

Roanak Desai - Head of Corporate Development and Investor Relations

Pramod Bhasin - President and Chief Executive Officer

Vivek Gour - Chief Financial Officer

Analysts

Bryan Keane – Credit Suisse

Jason Kupferberg – UBS

Rod Burgess – Bernstein

Tim Fox – Deutsche Bank

Vincent Nguyen – Goldman Sachs

Julie Santoriello – Morgan Stanley

Ashwin Shirvaikar – Citigroup

David Cohen – JP Morgan

Karl Keirstead – Kaufman Brothers

Operator

Good day ladies and gentlemen and welcome to the Genpact Earnings Call for Fourth Quarter and Full Year 2007 Results. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call Mr. Roanak Desai.

Roanak Desai

Depending on where you are good morning, afternoon and evening to you all. Welcome to Genpact’s Earnings Call discussing our results for the fourth quarter and full year ending December 31, 2007. As the operator just mentioned I am Roanak Desai, Head of Corporate Development and Investor Relations. With me is Pramod Bhasin our President and Chief Executive Officer and Vivek Gour our Chief Financial Officer.

We hope you’ve had an opportunity to review the press release that we issued. We have inadvertently omitted tables on EPS as well as some of our non-GAAP measures on the original press release. A revised press release will be issued shortly. Please allow me to outline the agenda for today’s call. Pramod will begin with an overview of our results for 2007 and provide guidance for 2008. Vivek will take you through our financial performance including the income statement and balance sheet. We will then close the presentation and take questions.

Please note that some of the matters we will discuss in today’s call are forward looking and keep in mind these forward looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include but are not limited to general economic conditions and those factors set forth in today’s press release and discussed under the risk factors section of our amended registration statement on Form S1 and our SEC filings.

Genpact assumes no obligation to update the information presented on this conference call. During our call today, which will last about an hour we will refer to certain non-GAAP financial measures which we believe provide useful information for investors. You can find reconciliation of these measures to GAAP as well as related information in our press release on the Investor Relations section of our website at www.Genpact.com. Our updated press release should hit in about an hour or so.

With that let me turn over the call to Mr. Pramod Bhasin, Genpact’s President and CEO.

Pramod Bhasin

Today I’m going to share with you some top line comments on our results for the year, a few general comments on the direction of the industry and then comment to our outlook for 2008. Our fourth quarter results caped off an outstanding year for Genpact in which we made company history with the public offering of our common shares and listing on the New York Stock Exchange. We are very proud of this major accomplishment and I want to thank all of those who made this milestone possible, our clients through their support, employees through their hard work and dedication.

We exceeded our financial targets for the year. Revenues for 2007 were $823 million which represented 24% increase over 2006. Revenue for employee increased to $28,200 from $26,400 in 2006 reflecting the higher value work we are doing for clients as well as our contractual rights to partially offset inflation through price increases. Our adjusted income from operations was $132 million. This represented 16% adjusted operating income margin an increase of 50 basis points from 15.5% in 2006.

Significantly we accomplished this while continuing to invest for growth and incurring additional expenses as a public company. Our revenue growth with existing clients provided a scale of us to enhance management of our operating costs but optimizing utilization of our investment in infrastructure, IT and telecom, controlling wage inflation, moving geography, increasing supervising span, all to drive efficiency and productivity.

Organic revenues grew 28% from a year ago and accounted for 95% of total 2007 revenues. More than 90% of this growth came from existing clients. This is a clear testament to our ability to build long term relationships with our clients and broaden our offerings with new services and solutions as well as across multiple geographies and business units. This allows us to drive profit and technology improvements that drive meaningful impact to our clients.

We are able to take investments we made in reengineering capabilities assisted by lean, to drive what we call end to end business impact helping our clients increase their revenues, cash flows and margins. Our strategy of growing with existing clients will play to our benefit in the current environment. The validity of our strategy as well as the quality of our existing relationships will with respect to companies such as GE, GFK, Genworth, Mass Mutual, Nissan, Penske, Wachovia and Westpac just to name a few.

The strength of our relationship with clients and the caliber of these clients provide a strong foundation for growth. Our global clients revenues had a strong growth rate of 91% and increased in total by $182 million in 2007. As of December 31 we had 18 client relationships that generated $5 million or more in annual revenue of which three generated $25 million or more in annual revenue. We believe that a number of these clients as well as several of our new clients can each grow to $25 million or more in annual revenues over the long term.

We saw healthy growth from GE with revenues growing by 11% which exceeded our target. This is prior to adjustments made for dispositions of businesses by GE. We continue to believe that long term growth with GE is sustainable in the mid single digits annually. It is important to know that we manage our businesses with the expectation that GE growth will be unevenly distributed across borders. While we have many thousands of employees working with GE businesses it still represents a small percentage of GE’s 320,000 employees around the world.

This is a rare opportunity for us to broaden the services we provide GE businesses and to continue to penetrate them. In addition GE internal M&A efforts afford that we have an opportunity to help integration efforts and to penetrate newly acquired businesses. GE is very supportive of our growth with global clients and continues to serve as a strong reference. Several major winds in the year demonstrate our success with many clients in diverse industries and geographies for a wide range of our services and solutions.

Some of the industries of our new clients are hospitality, vehicle rental, insurance, diversified banking and financial services, pharmaceuticals, plastics and chemicals, retail grocery, global logistics, audio/video communication, industrial automation, real estate and information technology. As we have shown with our global client base we believe we have the potential to develop new clients into important relationships and grow with them as we demonstrate our value proposition.

Approximately 44% of our 2007 revenues came from banking, financial services and insurance clients and approximately one quarter of these revenues came from insurance clients with the remainder distributed among consumer, commercial and investment bank and asset management clients. About 22% of our 2007 revenues came from manufacturing clients which include aircraft, infrastructure, automotive, healthcare and pharmaceuticals. Our remaining revenue for 2007 came from clients providing healthcare, transportation and logistics, media entertainment and hospitality services.

Our revenues are spread over a number of geographies globally. In 2007 24% of our revenues were generated from outside operations an increase from 22% in 2006. Of note, European delivery operations accounted for 9% of our revenues doubling from 2006 primarily driven by our acquisition of ICE early last year. Our operation in the Americas and Asia/Pacific maintain their share at 10% and 6% of revenues respectively.

Global delivery is a cornerstone to our offering to our clients roughly 60% of our top 18 customers have delivery from multiple geographies. We have a broad set of service solutions that we bring to our clients. Business process services continues to be the primary driver of growth accounting for 76% of our revenues in 2007 with a balance of 24% from IT outsourcing engagements. While we don’t manage our business by service offerings we see strong growth in our finance and accounting operation in 2007 which translated into roughly 40% of our business profit of services revenue.

Supply chain and procurement services together with analytic combine to contribute 13% of revenue. On the IT side the share between our IT services and software offerings is approximately even. In 2007 our reengineering services engaged with a number of clients on high impact projects. Utilizing our deep pool of talent approximately 500 employees with Six Sigma Black Belt training 7,800 employees with green belt training and 9,000 employees trained in liens as of December 31.

We are taking advanced capabilities directly to our clients. Many of our Black Belt are now deploying outside to our clients spinning on higher margin projects that can drive real impact for our clients businesses. Some recent success of using this approach include, for instance, for an Australia bank we decreased the time to open new customer accounts from 22 days to one day and to resolve customer issues from 28 days to two days.

For a global oil and gas one we reduced monthly gas flow variance between business units by 90% delivering an annual impact of $4 million. For one of the largest banks we redesigned the wire process transfer process to reduce cycle time by up to 90% and errors by more than 50% delivering benefit greater than $10 million. For a leading investment bank we designed a process to track and recover expenses for clients leading to benefits upwards of $10 million.

Let me turn to attrition next. We measure attrition from day one about six months Black force One training that way employees become sellable. Our attrition rate for the year was 30% a decrease from 32% in 2006. This was a testament to our excellent processes as well as ongoing training and career development opportunities. Every year we have driven attrition down by one to two percent and we expect to continue our industry leadership and remain well below industry rates of 50% to 60%. Our attrition would be 22% if measured for six months as many in our industry do.

We also continue to lead the industry with annual inflation rate in the 8% to 10% range which is in line with was we saw in 2006. Our operations in tier two and tier three cities allow us to tap into new pools of talent. We provide outstanding career and training opportunities and remain an employer of choice in the industry. In addition, over 60% of our 2,000 hires came from direct can, employee referrals and our 20 store fronts across India each accounting for roughly half of that 60%. Most of our client contracts also provide some offset for wage inflation.

Now I would like to talk about our outlook for 2008. The current environment will have an impact on many companies. We believe companies who generally have three potential reactions. One some companies would have headline approach and move tall. Two others will have large strategic issues that management has to focus on. Finally, three most companies that are more nimble and seek to emerge stronger from turbulent economic times will want to establish new or accelerate their existing relationship to providers like us in order to benefit from productivity and process reengineering to meet their internal goals and targets.

Given the caliber of our clients our strategy of working with selected key companies, the depth and breadth of our service offerings we will aggressively help our clients to achieve their business and productivity goals through innovation, Six Sigma, lean and reengineering. Our focus on operating excellence in driving end results that are aligned with our clients goal to increasing revenues and cash flows will allow us to grow with them.

Medium and long term growth of our industry will be driven in part by the changing demographics and developed work. Once, baby boomers are beginning to retire in developed markets. Countries like China and India continue to mature and their relatively young population continues to grow at a rapid pace. The need for companies in the developed world to access the growing talent in countries like India and China will help drive growth in our industry.

Fundamentally the bulk of the services we provide and the work we do falls into what we call “Keep The Lights On” work. Roughly 80% to 85% of our business relates to essential services and solutions that clients need to remain competitive in their markets. Key areas include finance and accounting, IT help desk, remote infrastructure monitoring, supply chain, procurement services, collections, analytics as related to process improvement as well as ongoing ERP implementation.

In addition, most of our relationships involve multi-year long term contracts in which we are helping clients operate more efficiently. While our pipeline remains robust we continue to watch the environment closely. We are working with clients to focus on opportunities with faster payback and consequently are higher return on investment and identify entry points that clearly minimize risks. Currently the bulk of our demand for our services continues to come from clients in the US and the UK.

We are also seeing increasing growth from clients in Europe and Australia as well as emerging opportunities in Japan aligned us to continue to diversify our client base. In February we held Focus our annual management team meeting with 450 leaders from our business and 18 attendees from our clients. As well as our second semi-annual client round table. We discussed the changes our clients are seeing as well as their candid thoughts on their relationship with us.

Using the candid feedback we continue to evaluate and adjust and improve our service offerings to align with market demand and fulfilling the evolving needs of our clients. Our clients look to us as their merchant captive partner to supply innovative solutions to help them operate more efficiently and deliver meaningful business impact on the ultimate goals and targets. In 2008 we are pushing a number of initiatives to move from FTE based model to value based pricing and are packing some of our key things to end to end solutions for important client issues.

Capitalizing on our expertise in F&A and supply chain, procurement services we are driving and end to end solution called Cash is King, that helps companies maximize their cash flow and minimize their working capital needs. We analyze and help drive solutions over the lifecycle of a companies cash movements from procurement to payables to inventory to receivables. The goal is to provide cash payback and to ensure that we get compensated on the actual impact we drive. This is one example of a number of solutions that we are currently developing.

For 2008 we are also considering entering the domestic India market and China market. There are a number of Indian and Chinese domestic multi-national companies that can benefit from the values we bring to driving profit excellence. These companies have huge domestic markets and are becoming global players, organically and through acquisitions in their own rights. The value proposition for these customers obviously can not made otherwise but rather the end to end business impact we can deliver.

In addition, in our China delivery venture we will continue our focus on increasing our presence with Japanese customers and to engage clients globally to provide delivery in areas such as IT. With that I’d like to discuss our guidance for 2008. We submit that our revenues will grow organically by 25% to 27% from $823 million. Roughly 80% to 85% of that growth is expected to come from our existing customers. Adjusted operating income margin is expected to improve slightly by 10 to 30 basis points to 16.1% to 16.3%.

Longer term over the next three to five years we are still comfortable with a 25% to 27% growth rate and adjusted operating margins that improve by 1% to 2% from where we were in 2006. I’d like to now turn over the call to Vivek to discuss the financials.

Vivek Gour

I want to apologize for the delayed release of our 2007 results. This was driven, in large part by complexities surrounding taxes that I will discuss in a bit. We ended the year with $823 million in revenue representing a 34% growth from 2006. Our organic growth rate for 2007 was 28%. Revenues for the fourth quarter of 2007 were $232 million. Before we discuss gross profit and SG&A I’d like to discuss our foreign exchange heading strategy which allows us to mitigate the impact on costs of revenues and SG&A for movement in foreign exchange rates.

As a multi-national organization our revenues are largely in US Dollars while our costs are in a variety of currencies around the world. This impact inception we have been perceiving hedges on a rolling basis to limit our exposure to foreign exchange fluctuations. We are hedged out for most of estimated costs for 2008 and 2009. We are also executing on our hedging strategy for 2010 and 2011. In addition, many of our contracts do have some form of foreign exchange impact sharing to extent that our hedges don’t protect us against such movement.

From an accounting standpoint the cost of revenue line and the SG&A line are booked in the P&L at the current foreign exchange rates of that month. These costs on the P&L will move with the FX movement. The hedge gains and losses offset changes in our cost of revenue line and in our SG&A line due to these foreign exchange movements. This ensures that our income from operations is essentially neutral with foreign exchange fluctuations.

Most importantly our hedges give us time to adjust our operations for longer term shifts in foreign exchange rates whereas otherwise we would be forced to confront every fluctuation and shift if and when it happens.

Moving back to the income statement our gross profit for 2007 was $307 million representing a 37.3% margin which is a decrease from 41.1% gross profit margin in 2006 due to movement in foreign exchange. Adjusted for the benefits of our hedging strategy our gross profit margin for 2007 has improved slightly from 2006. Continuing down the income statement SG&A expenses for 2007 were $231 million representing 28.1% of revenue and an increase of 45% from $169 million in 2006.

SG&A increased for a number of reasons. First and foremost SG&A expenses increased due to FX movement as the costs of book at the current rate. In addition, our cost of stock options increased to $13 million in 2007 up from $5 million in 2006. We also have provided $1.5 million for potential loan put back in our mortgage business. Lastly, we have incurred additional professional fees and other expenses related to potential acquisitions as well as fees related to being a public company.

Adjusted for the above as well as the benefits of our hedging strategy our SG&A expenses as a percentage of revenues for 2007 have improved when compared to 2006. Our adjusted income from operations grew to $132 million in 2007 an increase of 38% over 2006. Our adjusted operating income margin for 2007 was 16.0% which is a 50 basis point increase from the 15.5% in 2006. Our margin improvement is the result of the many ways we can adjust how we go to market and provide services and solutions to clients, drive greater efficiency and Pramod mentioned earlier.

It also reflects our contractual rights in many cases to improve pricing with clients partially to offset inflation. In addition, as our operations have grown we have increased functional and support techcom slower that overall revenue growth for the company. We do not manage our business on a quarterly basis given the long term nature of our contracts and relationships. Transition of client profits often moves up or down from one quarter to the next depending on the needs of each client.

In addition, our business does incur an element of seasonality which coincides with the annual operating cycle of our clients. As projects are completed in the fourth quarter and transition begins in the first quarter revenues in the first quarter of the following year can be flat or even decline sequentially. Revenue then increases in sequential quarters as the year progresses. In addition, the quarters in the first half of the year have lower margins than the quarters in the second half of the year.

Our tax expense for 2007 was $17 million. Our taxes and therefore our net income of $56 million reflect the impact of increased taxes resulting from the partial expiration of [inaudible] in India starting March 31, 2007. During the fourth quarter we obtained a favorable tax ruling from the Hungarian government that allowed us to reverse in Dollars $110 million tax provision which had previously booked through the first three quarters of 2007.

During the third quarter 2007 earnings call we indicated that as a result of internal restructuring and subsequent change in the tax basis of one of our legal entities we may be required to recalculate certain existing deferred tax assessment liabilities at US Federal Tax rate. At that time we estimated that this would produce a one time non-cash charge for deferred tax liability of approximately $22 to $29 million. This was due principally to unrealized gains on Dollar hedges.

The recalculated process involves a detailed and complex analysis of the tax implications of the restructuring and we have determined that the deferred tax liability is much less than estimated earlier. The calculation of certain deferred tax arising out of the restructuring resulted in a credit to the income statement for the fourth quarter of 2007 and the net effect of these calculations has resulted in a one time non-cash benefit of $1.3 million.

Our capital expenditures for 2007 were $63 million or 7.6% of our 2007 revenue. This represents an ongoing maintenance expense as well as the aggressive investments we are asking in the special economic gloom we are developing Gurgaon, Hyderabad, Bulandshahr and Jaipur in India. In addition we have added new sights in Manila in the Philippines and Bucharest in Romania and Changchun in China. To support our growth we expect to continue to invest roughly 10% of our revenues per year in capital expenditure.

Moving on to the balance sheet we have no soft borrowing as we used a portion of our IT overseas in the third quarter to pay down our revolving bank debt. In addition, long term debt has decreased by $19 million due to regularly scheduled payments. We have cash and cash equivalent and short term deposits of $314 million as we have retained the balance of the receipts from our IPO. In addition to that we have adequate leverage and lines of credit available for general corporate services as well as for potential acquisition.

Our accounts receivable has increased keeping in line with our revenue growth. Our day sales outstanding is currently at 75 days up from 71 days in December 2006 but improved significantly from the 82 days in the third quarter of 2007. Day sales outstanding for the year have increased as a result of the global client comprising an increasing percentage of our overall revenue. Our global clients typically have longer contract periods then our contract with GE.

Our cash flow from operations for 2007 was $150 million compared to $37 million 2006. The increased cash generated reflects increased tax profits as well as stable working capital needs. To reiterate we exceeded our expectations for 2007 and fully expect to meet our financial goals for 2008. With this I’ll turn it over to Roanak.

Roanak Desai

With that I’d like to open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Bryan Keane with Credit Suisse.

Bryan Keane – Credit Suisse

I wanted to make sure I was clear about the general impact of the economy. Can you talk about any cancellations push outs of work and changes in BPO volumes that you have seen that impact revenues going forward as well.

Pramod Bhasin

As we said, we think companies will have free deferring reactions depending on what is the state of their own health. Either they can stall or their internal restructuring are occupying them so much. Many companies will actually accelerate. We’ve seen all elements of that so yes we’ve seen some people push back by a quarter or two, make particularly on healthy active projects. In some cases the discussion has been stronger about how do we accelerate and how do we do more. We are seeing both elements at this time.

Bryan Keane – Credit Suisse

Is there typically a lot of volatility in BPO volumes during a given quarter between a client or can you see the trend coming and you have other clients ramping up makes a difference? How is the visibility on that?

Pramod Bhasin

Generally we can see, we have very good visibility, but one of the reasons we don’t try to manage our business on a quarterly basis is its quite often you will have push backs and transitions for one reason or the other which take a transition from one quarter to the other. Sometimes it may be a system issues sometimes it may be a timing issues in terms of HR practices and of course sometimes now it may be a case of we can’t make this investment right now.

We generally have pretty good visibility. I think there is greater choppiness at this point in time perhaps than we have seen to a minor degree I would say, it’s not huge but to a minor degree. Importantly it’s working both ways.

Bryan Keane – Credit Suisse

I know we talked about 18 client relationships accounting for $5 million or more. How many new strategic clients were signed in 2007 and what does that bring the total to?

Pramod Bhasin

If you looked at 2007 clients would not have reached the $5 million stage. If you looked at some of the examples, if you look at the types of companies we have signed in the year I would tell you probably signed 20 companies which could become significant customers over the medium to long term.

Bryan Keane – Credit Suisse

What’s the total number if you added 20, what was it before at the end of ’06?

Pramod Bhasin

We probably added the earlier 18 and then the 18 we talked about and add to that the potential of these 20 not all of them will get there of course but if you added that to the 18 then that’s what I would suggest the number could be at this point in time.

Operator

Our next question comes from the line of Jason Kupferberg with UBS.

Jason Kupferberg – UBS

I want to start talking a little bit about visibility for this year. You touched on it a little bit in the prior question. As you shape the guidance for 2008 and came up ultimately with the 25% to 27% organic growth forecast, to what extent did you add any additional discounting to the existing pipeline or the existing backlog recognizing that decision making might be a little spotty this year or there might be a higher probability of some surprises in this kind of environment versus what you might have seen in the past. Was there any additional degree of conservatism baked into the numbers that you ultimately ended up giving us this morning?

Pramod Bhasin

I would not say that we’ve added additional conservatism. Mainly because our visibility into the pipeline is very strong we typically would have visibility into 80% to 85% of our pipeline at any time. A couple of reasons I would add because I think your question is a very important one to address and the point you are making is a very bold one that we must address. One is, a lot of the activities that need to go into place to make those transitions happen is something we can track very early one. They have to start happening three to six months before the actual transition happens.

Two is, because of our diversified portfolio and the growth coming from a wide variety of products and wide range of geographies again we feel pretty good about our forecast of revenue. Finally I would say it is a time when obviously there could be more volatility in the market but against that we have factored in our view that along with that volatility will also come opportunity. That’s how we positioned our revenue growth forecast.

Jason Kupferberg – UBS

I know there was some reference earlier to an increased focus on some offerings that provide clients with a quicker payback. When I hear that, that sounds like it might suggest some smaller contract sizes. Maybe if you could talk bigger picture is there any change in average deal sizes in part because clients are changing their buying habits a little bit in looking for quick hit kinds of initiatives to generate quick ROI?

Pramod Bhasin

Our pipeline is very robust as we said but we clearly see that the deal sizes are smaller at this point in time. That’s really because clients are saying we want to focus on those projects that give us maximum payback. There is definitely that kind. We feel pretty strongly that we have all the products we can produce that, we can structure them appropriately and take them to our customers. That change is happening and clients are far more laser sharp at looking at their paybacks than they were certainly a year ago.

Having said all that the pipeline is robust and so the projects that we are talking about like when we talk about “Cash is King” the bulk of that is going to go to our existing customers. When we have customers and we know are saying we need to preserve cash and maximize cash flow those are the guys we can take this to, to drive even greater volume than we originally may have had, or may in part get from them this year.

Jason Kupferberg – UBS

Last quick one on margin, 10 to 30 basis points of expansion you guys are looking for in ’08. Can you talk about the individual factors that are contributing to that, whether it’s more contract ramping, SG&A leverage, pricing, what have you and any particular factors you might highlight that could potentially generate upside to that 10 to 30 basis points if things break your way?

Pramod Bhasin

Three factors I would point out. One is maturing of customers in the early stage of ramping up a customer, we said in the past is not a time when we make money. As the customers mature and as we can see 18 customers over $5 million based on getting into profitable territory that helped. We have pricing terms in our long term contracts which allow us to partially offset wage inflation and cost inflation.

The third one is productivity and efficiency, as we gain scale we are able to drive to improve telecom costs to go down further, we manage our cost based error and our infrastructure costs are improving by moving to tier two cities. It’s a combination of those three things which we feel we have a good visibility and have good control over.

Operator

Our next question comes from the line of Rod Burgess with Bernstein.

Rod Burgess – Bernstein

I wanted to inquire a little bit more about the pipeline. My specific question is has the value of the deals in your pipeline increased in the last six months and to the extent that it has is that increase a function of the slower economy driving deals into the pipeline? Or is it a function of your added aggression in chasing deals with your sales force?

Pramod Bhasin

I would term it as the individual deal size has gone down but there’s a larger volume of deals in the pipeline. This pipeline has been accumulating for a while and I would not say that’s because we have been overly aggressive. I think it has been driven by more customers jumping on to this and saying we want to do this as well. We started bringing out our new product baskets our new way of tackling this with partial paybacks etcetera in the last few months. Therefore, I think the pipeline growth has really come from clients looking at this as a way to achieve efficiency they need.

Rod Burgess – Bernstein

When you look at the smaller deal sizes offset by a higher volume of deals is the value of the deals in your pipeline up in the last six months? Can you measure that?

Pramod Bhasin

Yes we can, it is up but equally given our overall growth it should be up. I can say that, right? It better be up in some respects. Yes, it’s up in overall number of clients we are talking to and number of deals in the pipeline.

Rod Burgess – Bernstein

Let me take this a step further. You are maintaining your longer term growth target. When you look at your growth outlook over the next year, what I wanted to do is get some ideas on what are the swing factors in your growth over the next year. I know you have very good visibility but let me ask it this way. If you come in at the very high end of your internal target range for growth what will enable you to do that of at the end of the year you are able to achieve that goal?

On the other hand things don’t go as well as planned and the growth is less than what you are hopping for, what is most likely to contribute to that weakness, is it the economy or is it something else that you would be most worried about? I’m trying to get a feel for the swing factor in your growth outlook.

Pramod Bhasin

I appreciate that. Complex question so let me address it as I have a feel for the market. The profit of our growth is going to be because our strong client relationship. It makes a huge difference at this point in time. If you are performing well for customers they are likely to push forward you way and say accelerate transition, accelerate payback, and move faster. I think reengineering will help us a lot because we are getting kudos from every customer with our reengineering capabilities because as you saw from some of the examples we quoted the impact we can have is very significant based on a few reengineering projects.

We are certainly looking at gain shares in reengineering to contribute and help drive revenue and profitability and it’s our whole focus on driving income and business impact. I focused very clearly on helping companies achieve cash flow on margin improvement or revenue improvement whatever it may be. On the down side if we worry about, we may have to wait for second half of this year to see how real this is if it is real at all is really seeing projects move out by a quarter. People are saying I don’t have the money to invest.

The up front investment they need to make is, if nothing else things like stay on the top for transition costs etcetera. We don’t have the money to invest and therefore we go to push it out. I think that’s the key factor and if they push it out I suspect it will be pushed out by a couple of quarters or something like that. We’ve seen both sides of it, as I said earlier. Gross impact will be on the down side.

Rod Burgess – Bernstein

It sounds like the key is to convince clients to be able to swallow the up front transition expenses and somewhat of the distraction that occurs as the transition goes on. If you can convince clients to swallow that during this environment then your growth is going to be very much on track.

Pramod Bhasin

Yes and I think we’ve come up with some structural solutions also to help them mitigate first year costs that work for us and can work for them and allow them to defray them significantly from an accounting perspective. We are going to work all the pieces at this time. I think on one side we are concerned and watch the economy closely. On the other side we think about it as an opportunity. This is when they need us most.

Operator

Our next question comes from the line of Tim Fox with Deutsche Bank.

Tim Fox – Deutsche Bank

My first question is around the 24% of revenue that came from your IT services and software offerings. I’m wondering if you could dig in a little bit around the software side of the business, I believe its half of the 24%. What’s the nature of that work and are you any more exposed in this environment to those type of shorter term projects than on the BPO side?

Pramod Bhasin

Half of those revenues are IT services, help desk type work which is keyboard type work and half is software work. Clearly the software work will have more push and pull related to it than perhaps finance and accounting that we may be doing for a bank or financial business or something. That’s the area we will watch out for. The bulk of our software work is the RP implementation, that’s what we do FAP and Oracle, etcetera. A lot of it is project based on the software side and therefore the pulls and pushes in that business are likely to be greater than they are on the BPO side. We’ll have to watch out for that to see how it plays out.

Tim Fox – Deutsche Bank

My second question was around the pricing and the competitive environment. You mentioned that you have some flexibility in pricing in your contracts, in the longer term contracts. I was wondering if you could comment at this point have you seen any pricing pressure from the competitive environment given the slight softening in the demand side.

Pramod Bhasin

We see it, if I may use the word, patchy. There are a few competitors who are very aggressive on price. We know who they are, we can name them and we know when we are up against them and it may turn into a price game. I think that happens, certainly we are seeing that in Europe, for instance. I do think that we can and should expect to see margin and pricing pressure from our customers this year given that they may be hurting a lot.

We have good contracts with our existing customers and the bulk of our growth comes from that so we feel somewhat protected but on new deals and with existing customers as they hurt I think we will see expectations of margins and driving greater productivity. To offset that though we have contracts which allow us price increases and offset to inflation as well as our reengineering effort deliver the productivity customers need.

Typically we often use that to satisfy a customers needs for higher productivity given the pain they may be facing. As we go forward on new accounts we are going to wait and watch but it’s very clearly split by who we compete with on any given deal. Our strategy of growing with existing customers and building strong relationships mitigates that because the bulk of that growth is never competed.

Operator

Our next question comes from the line of Julio Quinteros with Goldman Sachs.

Vincent Nguyen – Goldman Sachs

This is Vincent Nguyen sitting in for Julio. Related to the pricing question, you mentioned that you are beginning to push to transition your pricing model from more of a FT model to a value based pricing model. How much can you quantify or provide more color about how much your current business is FT based versus value based and over a longer term what’s the shift that you are going to be expecting for the next couple of years?

Pramod Bhasin

Today the bulk of our business I would tell you is FT based, 80% and the rest may be project based or outcome based. We are going to start down this path now, the reasons are twofold. It allows us to more clearly align with the customer’s goal, they want output and they want to pay for a given output. Therefore it forces us to think about life that way as well. At the same time it allows us to get the benefits of productivity that we can drive internally.

We are going to start down this path, I don’t think it will get to anything more than 5% of our business if that to the output based because it will take time, you need predictability, you need to manage the risks, customers need to agree. We would like to be able to increase that to medium to long term at some point it should be 50% of our business should be driven based on output pricing so that we get the benefit of the gain share, of the reengineering work we do and the productivity work we do.

Vincent Nguyen – Goldman Sachs

My second question is related to your seasonality comments that the first quarter is usually the weakest quarter and in terms of margin the first half is usually lower than the second half. Taking account of everything that you are seeing right now, whether it’s pricing, higher volume or client hesitation in terms of project referrals. Are we going to see the seasonality side of the business more pronounced this year relative to historical levels?

Pramod Bhasin

We don’t think so. We think you’ll see the same seasonality. I think our first quarter is always lower because of projects rounding off at the end of the year. Each year that’s what happens and we’ve seen it and it’s driven by the business planning cycle of our customers and it’s driven by their transitions beginning to take off. We don’t think we will see greater seasonality than we have in the past.

Vincent Nguyen – Goldman Sachs

My final question, a housekeeping question, what’s your tax rate for 2008?

Vivek Gour

Our tax should be in the rage of about 20% effective operating tax rate.

Operator

Our next question comes from the line of Julie Santoriello with Morgan Stanley.

Julie Santoriello – Morgan Stanley

Could you talk a little bit about more of your assumptions for 2008 particularly on the areas of wage inflation, pricing and head count growth, what’s built into your guidance?

Pramod Bhasin

Wage inflation is roughly where we were this year between 8% and 10%. Pricing is basically only that pricing that is either contractually there or at similar levels. We would have increased gain sharing in reengineering revenues both in our profitability as well as in our revenue line because we are building that up as we go forward. Head count therefore will grow slightly lower than the revenue target as we seek to improve revenue for employee each year as we have done this year.

Julie Santoriello – Morgan Stanley

Genpact clearly has been a leader in moving into tier two and tier three cities to recruit employees and we’ve been increasingly hearing over the last few quarters your competitors planning to do the same. Are you seeing any impact from that as yet? Are you starting to see more competition for labor in these tier two and tier three cities?

Pramod Bhasin

We see it Julie by geography almost. Broadly I would say no, we are not seeing greater competition because we are also doing a number of things to expand the pool we can hire from including, for instance, thinking about how we can provide extra training for them to help them pass our filters where as we may have rejected them earlier. The crunch you see is by city so hire F&A may be tough because of that point in time two or three other captors have come in one other third party person has come in and therefore by particular geography will get tough.

We are not seeing it broadly, I think typically its not because competition is there its because we’ve been able to broaden the basket of people we can hire from and it’s obvious there are more than enough people in this country as well as in China.

Julie Santoriello – Morgan Stanley

Last question is on the acquisition pipeline how that is shaping up especially as we are hearing of more captive is potentially looking to be sold. Can you share with us how you are seeing the acquisition pipeline and perhaps any timing might we see a large acquisition this year?

Pramod Bhasin

I don’t know at this stage of the offer or I can’t say too much on that. We clearly have an active pipeline that we are looking at all the time. It looks interesting particularly given valuation where those are. We remain very interested in captive but I don’t think we can come to you at this time and say anything is in the offering or anything is going to happen in the near future or make any comments to that extent. The pipeline looks reasonably good, we have to see how the year progresses and what happens on valuation. Right now there is a bunch of stuff that looks pretty attractive.

Operator

Our next question comes from the line of Ashwin Shirvaikar with Citigroup.

Ashwin Shirvaikar – Citigroup

The question I had is a follow up to a previous comment you had about structure solutions you are putting in place to help plant transition. Could you elaborate on that?

Pramod Bhasin

For instance, I’ll give you an example, from an accounting perspective we book transition revenue that we get in the first year over a three year period. What we are trying to work out with the customer is to say how can they book the transition costs conversely on their side also over a three year period. As of right now many of them have to take it in year one which is what create a pre-tax cost benefit analysis for them as far as accounting is concerned.

How we found a way to do that which does not imply undue risk for us which the accountants have blessed. That’s the kind of thing that we will continue to do is find ways to help our customer at times like this without taking on additional risk because we are booking these as revenues over three years.

Ashwin Shirvaikar – Citigroup

You are talking about accrual accounting no so much cash accounting?

Pramod Bhasin

On the accounting earlier transition costs were you had to take it immediately if you were the customer.

Ashwin Shirvaikar – Citigroup

It seems like it does not impact cash flow.

Pramod Bhasin

It won’t impact us. Hopefully it will help the customer and hopefully it’s not taking undue risk here.

Ashwin Shirvaikar – Citigroup

Can you maintain or even possibly improve on the 22% attrition rate that you have?

Pramod Bhasin

I actually think so. Nobody in my office agrees with that by the way but I actually think so. Frankly we are really attacking this hard, we are attacking rights now attrition at the AVP and manager level or the supervisory line to figure out how do we bring that down. If we can bring that down we’ll bring associate attrition level down. We’ll keep hammering away at it and you can only do it bit by bit. Can I improve it hugely?

No, absolutely not. Could we take it down another percentage point, two percentage points? We would love to, its not what’s in our plan, it’s not what we are banking on but I think it is a possibility we can do it and we would love to be able to try and do it.

Ashwin Shirvaikar – Citigroup

Are there any particular views you can share for the Philippines as you are ramping that up?

Pramod Bhasin

Very happy with it I was there a few weeks ago performance is very, very good. Quality is very good, level of people is very good, very delighted with the results.

Ashwin Shirvaikar – Citigroup

Do you have more clients than just the current clients in the Philippines?

Pramod Bhasin

We have two plans right now but we now have to look for what else can we do out there. There is room to do finance and accounting. We also probably have to move to another town other than Manila so we are looking at that. We have had this discussion with customers so no real order. We are having some very interesting discussions which I’m confident will lead to business there.

Ashwin Shirvaikar – Citigroup

A couple of housekeeping questions, one is can you share what the GE productivity give back is going from 2007 to 2008?

Pramod Bhasin

We do it business and the range will be quite large from zero up to, in some cases 8% or more. These are the same rates that we have lived with for now 10 years. There isn’t one finite number that we aim for because the contract, productivity as well as price increase or inflation etcetera it’s got all those elements in there together. It’s no different than it has been for years and it’s worked very well for us. We also get gain sharing from them when we deliver productivity over and above these numbers. Net net I would say, if it isn’t one number there but I think it varies by business and in some cases it’s a plus and in some cases it’s a minus.

Ashwin Shirvaikar – Citigroup

No real change. Was that a B classification GE versus non-GE revenues during the quarter?

Pramod Bhasin

Yes, certainly we’ve shown it but Vivek can talk to it further.

Vivek Gour

You want the quarterly number?

Ashwin Shirvaikar – Citigroup

Yes.

Vivek Gour

The quarterly number, the revenue for Q4 organic was $218 million not including the acquisition of which GE was $113 million and global clients were $104 million. In addition to that the acquisition income revenue all of it of course global clients which was $14 million.

Ashwin Shirvaikar – Citigroup

You didn’t move anything from GE bucket to the non-GE there wasn’t that transition?

Vivek Gour

There were two dispositions but I think they happened, did they happen in the fourth quarter.

Pramod Bhasin

They happened in the second and third quarter.

Vivek Gour

They were G Plastics, G Advanced Materials, VIP Modular and that was roughly $22 million of GE revenue which went out of the GE bucket but if you were to include them in the GE bucket GE would be 11%. If you were to exclude them GE will be closer to 6%.

Operator

Our next question comes from the line of Tien-Tsin Huang with JP Morgan.

David Cohen – JP Morgan

Hi this is David Cohen for Tien-Tsin. Would you talk a little bit more about the pipeline in terms of a new clients as opposed to what you are selling into your client base, how you are seeing the demand there specifically with the new clients and what kinds of services they are talking to you about?

Pramod Bhasin

For new clients the pipeline looks pretty robust, the deal sizes are smaller but the number of clients are larger. We typically continue to see demand in F&A, shares services type of work. We are seeing great traction in many other areas. We are seeing great traction in supply chain, we’ve seen great traction in financial services, we are seeing good traction in insurance. Pretty much the same that we have seen in the past. We haven’t seen a huge change in how the pipeline has worked in the past.

David Cohen – JP Morgan

How many new clients are you expecting to bring on in ’08?

Pramod Bhasin

We don’t measure it that way. We go perhaps 20 new customers this year all of them won’t be big clients necessarily or big volume ones. Many of them could be. I would expect we will head to similar numbers where we can bank on these customers big companies that we can bank on with whom many of them would go to perhaps in time over $25 million in revenue.

David Cohen – JP Morgan

Some housekeeping items, in terms of the guidance for the non-GAAP operating margin what are you assuming for the adjustments for 2008?

Vivek Gour

The adjustments will be our fair market value formation accounting adjustment which in 2008 is approximately $36 million. There is a small amount of about $2 million depreciation related adjustments which also relate to our formation accounting. Those will be the two big items.

David Cohen – JP Morgan

What do you expect for basic and diluted share count for 2008?

Vivek Gour

For 2008 diluted share count you should take an average of $220 million.

David Cohen – JP Morgan

What was the share count in the fourth quarter? I assume that will be in the press release.

Vivek Gour

That will be in the press release. The fourth quarter ended at $218.4 million. The average for the year was $205 million.

David Cohen – JP Morgan

What was the EPS in the fourth quarter? I realize it will probably be in the press release.

Vivek Gour

The EPS in the fourth quarter we will give it to you in the press release. Our GAAP EPS for the year is $0.12 per share but we will also be showing you a walk to the pro-forma EPS which is net income of the year divided by the average outstanding which is $0.27 per share then we also show you the walk to the adjusted net income EPS which will be $0.51 per share.

David Cohen – JP Morgan

Is it $0.27 was adjusted for the full year?

Vivek Gour

Yes, $0.37 is offset adjusting back the fact that for the first half of the year we had a small amount of equity in a large capital base which had a preference in time dividend which rely etcetera.

David Cohen – JP Morgan

The fourth quarter adjusted EPS was what?

Vivek Gour

I don’t have the EPS for the fourth quarter I was giving you the numbers for the full year.

Pramod Bhasin

We’d be very happy to address your questions offline and we’ll get this press announcement out hopefully right away.

Operator

Our next question comes from the line of Karl Keirstead with Kaufman Brothers.

Karl Keirstead – Kaufman Brothers

I’ve got a question about the GE revenues in the fourth quarter. You just mentioned they were $113 million. By my calculations sequentially down about 8% a little bit more than I think you were guiding to a few months ago. Two question, why the variance and then secondly you mentioned on your prepared comments that the GE revenue stream in ’08 would experience an uneven distribution by quarter. Can you give us some specific color on how you see the GE revenue stream in the March and June quarters in light of the sequential decline in the December quarter?

Vivek Gour

In the December quarter the GE revenue went down in our GAAP numbers mainly because of the dispositions which took place towards the end of the third quarter. We also have GE projects coming to an end typically in October/November which are related to top line analytics, etcetera. You are right, our third quarter revenue for GE was $123 million it went down to $113 which is an 8% drop but if you were to look for the full year and add back the divestitures our revenue from GE actually went up from $453 million in ’06 to $503 million in ’07 which was a $50 million increase. This is substantial given our penetration in GE.

Pramod Bhasin

Typically to answer your second question in terms of March and June, its these contract were gained in the fourth quarter, new transitions start up in the first quarter and that’s why we get seasonality in our revenues and we expect to see the same thing this year. Overall we are very pleased with the growth we have seen with GE this year in 2007 which has been higher than planned.

Karl Keirstead – Kaufman Brothers

Just to be clear, you are suggesting that there might be another sequential decline in the GE revenue stream in the March quarter?

Pramod Bhasin

No, we’re not. The sequential decline is really dispositions. The bulk of that is disposition which have been reclassified.

Karl Keirstead – Kaufman Brothers

You mentioned on your last call that the portion of the old mortgage loan portfolio subject to the put back provisions was $25 million at the end of the third quarter and then that would drop to about $3 million at the end of the December quarter. Can you confirm that it in fact dropped to that level or if not where it might be today?

Vivek Gour

It did drop to $3 million in the end of the fourth quarter and as of today it has dropped to nil.

Operator

We have no other questions at this time.

Pramod Bhasin

Thank you very much; I appreciated your time and attention. As I said, we will be getting a press release out with EPS numbers very shortly. We appreciate your time and we appreciate your attention. If you have more questions of course we’d be happy to have Roanak and others take these offline. Thank you for your time.

Operator

This concludes the presentation you may now disconnect and have a great day.

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