Why Is Genpact (G) Up 0.8% Since Last Earnings Report?

A month has gone by since the last earnings report for Genpact (G). Shares have added about 0.8% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Genpact due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Genpact Q2 Earnings Beat Estimates, '18 Revenue View Up

Genpact reported mixed second-quarter 2018 results, wherein earnings surpassed the Zacks Consensus Estimate but revenues missed the same.

Adjusted earnings of 41 cents per share beat the consensus mark by a penny but fell short of the year-ago figure by 2 cents due to a higher tax rate in the quarter. Notably, Genpact witnessed an effective tax rate of 20.9% in the quarter, higher than 18.3% in the year-ago quarter.

Revenues of $728.6 million missed the consensus mark by $5.9 million. However, the top line was up 9% year over year on a reported basis and 8% on a constant currency basis, driven by the positive impact of recent acquisitions.

Genpact is benefiting from its expanding Global Client and GE pipelines. Signing of major deals reflect the company’s popularity as a preferred digital transformation partner among its new and existing clients. The company’s continuous organic and inorganic investments to enhance its service lines look impressive. Backed by these efforts, Genpact is optimistic about long-term profitable growth in attractive and underpenetrated markets.

In the reported quarter, Genpact announced two buyouts. Acquisition of Commonwealth Informatics is expected to boost Genpact’s pharmacovigilance suite by integrating Commonwealth’s signal detection capabilities into Genpact’s AI-based pharmacovigilance solution to handle adverse situations in the pharma industry. Considering the complexities associated with patient safety, extensive manual work, higher expenses and other related issues, pharmacovigilance seems to be the perfect solution for AI and machine-learning based automation. To this end, the company has also developed the Genpact Cora PharmacoVigilance AI solution.

The buyout of Barkawi Management Consultants should boost Genpact’s supply chain service line and generate value for its client base. Barkawi's consulting capabilities in demand, supply, logistics and distribution planning in the United States and Europe will boost its growth opportunities. This deal is expected to close in the third quarter of 2018.

Revenues in Detail

Total BPO revenues (83% of total revenues) increased 9% year over year to $606 million. Total IT services revenues (17% of total revenues) were up 7% year over year to $123 million.

Global Client (91% of total revenue) revenues climbed 9% year over year on a reported basis and 8% on a constant currency basis to $663 million. The growth was driven by strength across industry verticals like high-tech, banking and financial services and manufacturing.Transformation services revenues for global clients grew at a low double-digit rate.

At the end of the second quarter, the company had nine clients with annual revenues of more than $50 million, a significant increase in many years. Notably, the company witnessed its first global client relationship exceed the $100 million mark in the quarter.

Under Global Client, Global Client BPO revenues of $569 million were up 11% year over year on a reported basis and 10% on a constant currency basis. Global Client IT revenues were however down 2% year over year to $94 million.

General Electric (GE) revenues of $65 million increased 4% year over year due to the positive impact of a large IT services contract, which gained precedence during the second half of 2017. It accounted for 9% of total revenues.

GE BPO revenues declined 18% year over year to $37 million. GE IT revenues of $28 million increased 58% from the year-ago quarter.

Operating Results

Adjusted income from operations was $109.6 million, down 1% year over year. Adjusted operating income margin declined 150 bps year over year to 15%.

Selling, general & administrative (SG&A) expenses totaled $176.2 million, up 5% year over year. As a percentage of revenues, SG&A expenses were 24.2% compared with 25% in the year-ago quarter.

Balance Sheet and Cash Flow

Genpact exited the second quarter with cash and cash equivalents of $333.9 million compared with $424.2 million in the prior quarter. Long-term debt was $987.3 million compared with $996.9 million at the end of prior quarter.

The company generated $77 million of cash from operating activities in the quarter. Capital expenditures, as a percentage of revenues, came in at 3.9%.

Dividend & Share Repurchase

In the quarter, Genpact returned $48 million to its shareholders, which includes $14 million of dividend payments (quarterly dividend of 7.5 cents per share) and $34 million through repurchase of approximately 1.1 million shares at an average price of $31.05 per share.

In the first half of 2018, the company repurchased approximately 4.3 million shares at an average price of $31.34 per share. Since the initiation of the company’s share repurchase program in 2015, it has repurchased shares worth $922 million at an average price of $25.74.

2018 Guidance

Genpact raised its full year 2018 revenue view. The company now expects revenues in the range of $2.95-$3.01 billion compared with the previously guided range of $2.93-$3.00 billion. This indicates year-over-year growth of almost 8-10%, up from the previously projected range of 7-9.5%.

Global Client revenues are expected to register 9.5-11.5% growth, up from the previously guided growth range of 9-11%.

The full-year guidance for GE’s revenues, adjusted earnings, adjusted operating margin, effective tax rate and cash flow from operationshas been reaffirmed. GE revenues are expected to decline 8-10% in 2018.

Adjusted earnings are expected in the range of $1.72-$1.76 per share. Adjusted operating margin is estimated to be around 15.8%. Cash from operations is expected to register 8-9% growth in 2018.

Effective tax rate is anticipated to be at the lower end of the 21-22% range. Capital expenditure for the full year is expected to be approximately 3% of revenues.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Genpact has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Genpact has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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