Roger Sachs - Genpact Ltd. N. V. Tyagarajan - Genpact Ltd. Edward J. Fitzpatrick - Genpact Ltd..

Ashwin Shirvaikar - Citigroup Global Markets, Inc. (Broker) Joseph Foresi - Cantor Fitzgerald Securities George K. F. Tong - Piper Jaffray & Co. Anil Kumar Doradla - William Blair & Co. LLC Edward S. Caso - Wells Fargo Securities LLC Steven Schneiderman - BMO Capital Markets (United States) Puneet Jain - JPMorgan Securities LLC Frank C.

Atkins - SunTrust Robinson Humphrey, Inc. Bryan C. Bergin - Cowen & Co. LLC Bryan C. Keane - Deutsche Bank Securities, Inc..

Good day, ladies and gentlemen, and welcome to the Third Quarter 2016 Genpact Limited Earnings Conference Call. My name is Chanel and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

We expect the call to conclude in an hour. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Roger Sachs, Head of Investor Relations at Genpact. Please proceed, sir..

Thank you, Chanel. Good afternoon, everybody, and welcome to Genpact's third quarter earnings call to discuss our results for the quarter ended September 30, 2016. We hope you had a chance to review our earnings release, which was posted to the IR section of our website genpact.com.

With me in New York today are Tiger Tyagarajan, our President and Chief Executive Officer, and Ed Fitzpatrick, our Chief Financial Officer. Our agenda today will be as follows. Tiger will provide a high level overview of our results as well as update you on some of our strategic initiatives.

Ed will then discuss our financial performance in greater detail and provide an updated full year outlook. Tiger will then come back with some closing comments and then we will take your questions. And as Chanel just said, we expect the call to last about an hour. Some of the matters we will discuss in today's call 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 are set forth in our press release.

In addition, during 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 in our earnings release in the IR section of our website.

And with that, let me turn the call over to Tiger..

to continue to add domain acumen and capabilities in our targeted verticals and services where we see attractive growth opportunities. We believe organic investments and strategic partnerships, along with targeted acquisitions, provide the most effective way to accelerate the rollout of digitally enabled disruptive solutions to our clients.

We have a robust pipeline of opportunities in a number of our key areas as potential acquisition targets, and our strong balance sheet provides the flexibility to pursue the right deals. With that, let me turn the call over to Ed for a more detailed review of the second quarter results..

Thank you, Tiger, and good afternoon, everyone. Today, I'll provide you with more detail on our third quarter operating results, as well as key balance sheet and cash flow highlights. During the quarter, we generated total revenues of $649 million, an increase of 5% year-over-year, or 7% on a constant currency basis.

Revenues from Global Clients, which represent 84% of total revenue, increased 8% year-over-year, or 10% on a constant currency basis. Within Global Client, business process outsourcing revenues grew 13% year-over-year, or 15% on a constant currency basis, and were up sequentially from 10% in the second quarter.

Our Global Client IT services revenues declined 9%. GE revenues, which represented 16% of total revenue, decreased 8%. During the quarter, overall business process outsourcing revenues, which represent 81% of total revenues, increased 9% year-over-year, while total IT services revenue declined 8%.

For the 12-month period ending September 30, 2016, we grew the number of Global Client relationships with annual revenues over $5 million to 107 from 103.

This includes client relationships with more than $50 million in annual revenue decreasing to 33 from 34, and client relationships with more than $25 million in annual revenue remaining constant at 16. We now have six relationships, including GE, with more than $50 million in annual revenue, up from four.

Adjusted income from operations for the quarter was $104 million, up 7% year-over-year, with a corresponding margin of 16.1%, up from 15.7% during the same period last year, and 14.9% from the second quarter. The 40-basis point improvement year-over-year was primarily due to improved productivity and foreign currency gains.

The 110-basis point sequential margin improvement was largely driven by productivity and leverage from G&A expenses. Gross margins grew to 39.5% from 39.2% last year, primarily driven by productivity and favorable foreign currency. SG&A expenses totaled $157 million, compared to $145 million in the third quarter of last year.

Our sales and marketing expense as a percentage of revenue this quarter was approximately 6.6%, flat year-over-year. Total G&A expense as a percentage of sales increased as expected by approximately 80 basis points year-over-year, largely driven by continued investments in domain expertise, as well as digital analytics capabilities.

Sequentially, we drove significant operating margin improvements due to ramping revenues and leverage from SG&A costs. Adjusted operating earnings for the current quarter includes a $5 million charge related to a mortgage platform asset. This charge was offset by a $5 million gain on the sale of our Atyati business.

Adjusted EPS for the third quarter was $0.37 per share, compared to $0.35 per share last year. The $0.02 year-over-year increase was primarily driven by higher operating income of $0.03 and the impact from a lower share count of $0.01, partially offset by a $0.02 impact of balance sheet-related FX gains last year.

During the quarter, our board of directors authorized a $250 million increase to our share repurchase program, bringing the total authorization since we launched the plan in February 2015 to $750 million. In the third quarter, we repurchased approximately 6 million shares at a weighted average price of $24.78 for total purchase of $156 million.

Since launching our program – the buyback program in the first quarter of 2015, we've repurchased approximately 19 million shares at a weighted average price of $24.10 for total repurchases to-date of $469 million.

Our effective tax rate during the third quarter was 20%, down from 21.1% in the third quarter of last year, reflecting changes in our jurisdictional mix of income and favorable resolution of certain tax matters from prior years.

Turning to our balance sheet, our cash and liquid assets totaled $419 million, down from $468 million at the end of the third quarter of 2016. With undrawn debt capacity of approximately $235 million and existing cash balances, we continue to have ample flexibility to pursue growth opportunities.

Our net debt to EBITDA ratio for the last four rolling quarters was approximately 1. We generated $144 million of cash from operations in the third quarter of 2016 compared to $139 million during the same period last year. Our days sales outstanding remained in line with the level we saw during the second quarter, at 85 days.

We expect the DSO metric to improve in the fourth quarter more in line with historical levels. Capital expenditures as a percentage of revenue were 3% in the third quarter. This included the continued development of certain Lean Digital assets, as well as adding capacity for growth. Finally, let me update you on our outlook for 2016.

As Tiger mentioned earlier in the call, clients across multiple verticals are taking a very cautious approach to discretionary technology spending. This is causing a smaller than typical year-end seasonal lift to short cycle IT-related work, impacting both our Global Client and GE business.

While IT is currently feeling some pressure, Global Client BPO growth expanded from 10% in the second quarter to 15% in the third quarter and we expect strong growth to continue in the fourth quarter. Given the lower IT spending ramp, we now expect full year 2016 revenue to be in the range of $2.57 billion to $2.58 billion.

The net foreign exchange adverse impact is now approximately $43 million, up from our prior outlook of $41 million. Global Client revenues for 2016 are now expected to grow at approximately 9% to 10% due to the decline in IT spending with continued strength in our Global Client BPO business.

Regarding GE, we now expect full year 2016 revenues to decline approximately 6% due to contracted IT-related spend. We continue to expect our adjusted operating margin to be approximately 15.5% and our full year effective tax rate to be in the range of 20% to 21%.

Given the lower revenue outlook, we're now expecting cash flows to grow at the low-end of our prior guidance range at approximately 6%. While we're changing our top line outlook, through disciplined cost management, we expect to maintain our adjusted operating margin percentage.

When combined with the benefits from our share repurchase program, we are increasing our full year earnings per share expectation to be between $1.42 and $1.43.

This assumes weighted average shares outstanding of approximately 211 million for the year and includes 6.3 million shares repurchased during the third quarter, as well as a positive impact of approximately $3 million related to pre-tax foreign exchange gain on balance sheet-related items on a year-to-date basis.

With that, I'll hand it over to Tiger for his closing comments..

Thank you, Ed. In summary, as I said, there are three big trends sweeping our clients. First, they're all grappling with a slow growth world and digital disruption. Second, digital is a clear boardroom agenda item. And third, decision-making on business and digital transformation has expanded to include the full CXO suite.

Our investment in digital, analytics and domain capabilities, as well as senior client-facing leaders positions us well to take advantage of these trends. As a result, our number of CXO-level transformation conversations have significantly increased.

We also believe that our continued strong Global Client BPO growth demonstrates that our Lean Digital approach is resonating in the market. Over the past year, we have expanded the number of relationships with annual revenue greater than $50 million to six clients up from four.

As we continue to become more of a strategic partner with our clients and transform their operations, we believe it will be possible to grow some of these relationships to over $100 million annually as we go into the future. With that, I'll turn the call back over to Roger..

Thank you, Tiger. We would now like to open our call for your questions. Operator, can you please provide the instructions..

And our first question comes from the line of Ashwin Shirvaikar of Citi. Your line is now open..

Thanks. So, I guess, my first question is, Tiger, with regards to the three trends that you said. It would actually indicate that certain parts of your IT business maybe higher-end parts, should actually be doing quite well because the need for advice, which, by the way, I agree with is there.

So is this – you kind of have two separate things continuing to happen. Your BPO business is picking up, you're talking positively about Lean Digital, but on the other side, IT continues to do not do well. Is this – you talked about it in the past.

Is this about IT positioning, what's the unique change in that business to get the whole thing moving in the right direction?.

No. So, Ashwin, I think it is actually the right question to grapple with and ask. And one response would be that the portion of the IT business, which is deeply connected to understanding industry domain, and I will give you one example.

Anything that is related to technology platforms, ERP platforms in the commercial leasing and lending environment is an area that we are very deep in our domain expertise. We see great traction. And that traction is not just IT, but it's IT converting to digital, converting to services, BPaaS model, analytics wrapped around it, et cetera.

So that is the portion of the IT business that's growing even within the overall IT business declining.

As it relates to digital, in the entire Lean Digital journey, it is actually embedding digital technologies in the broader services that we offer and it therefore actually becomes part of, one, either a transformational consulting engagement and then, subsequently, in managed services, those digital assets actually get embedded into a number of our BPO services.

And actually for us, we don't segregate those out and call them out as separate digital technologies. Over time, I agree with you.

One of the things that we will evaluate is are there digital services that we are best positioned to, particularly, if it connects deeply to domain, that we should actually double down on and that's one of the things that we will, probably by the time we get to our Investor Day in the first quarter, we should talk more about that..

Okay. And just thinking a little bit from a modeling perspective, when I consider Global Client BPO growth, including, I guess, ex-GE revenues, which I think is the way – is the right way to look at it, considering how much of GE revenue is going to convert over to Global Client.

What's that growth rate from a exiting the year standpoint and would that be a good proxy then to start thinking about BPO growth for next year?.

Yeah. So, I had mentioned Global Client BPO growth was about 15% in the quarter. And in the prepared remarks, said that we expect that strong growth rate to continue. For the full year, the number was in the teens. I think it was around 13%, I think, on a year-to-date basis roughly.

And I think based upon where we are on a year-to-date basis, we won't guide to next year, but kind of we are expecting that low-teen type of growth as we go forward. So, we'll guide you when we come to the Q4 call, but right now, based upon what we see and what we've done year-to-date, we expect that trend to continue..

Yeah. So the only addition I would add to that is we haven't done the modeling to be fair, Ashwin, on the GE business – the GE Capital business that then gets converted by the time we get to next year into Global Client and what that does to the overall number.

But leaving that aside, I think Ed's articulation of 13% constant currency growth for this year, driven by 15% constant currency growth in third quarter, we expect that trajectory to kind of continue into fourth quarter. That sets us up for next year, our view, and it's too early I think to guide, but sets us up nicely for next year.

We haven't factored the GE Capital conversion in..

Can you separately comment on what is going on with the GE contracts that you're signing? Are they coming through with additional scope?.

No, the contracts won't, Ashwin, to be fair, come through with additional scope on day one. The most important thing in these contracts is continuation of service. The good news is, these are very critical services, so the service has to continue, which is why we were always confident that we would sign these new contracts.

And obviously, it takes time for a brand new MSA to be negotiated with a number of these big buyers, big banks, big institutions, and that journey continues. And once the contract is signed, then the new buyer gets under the tent and starts discussing with us what else can we do. And you know our cycle. Ours is a long cycle business.

These are clients actually who, potentially, we have not worked with before. They have not worked with anyone before. That actually sets a nice stage for growth, but it takes time..

Got it. Thank you, guys..

Thanks, Ashwin..

Thank you. And our next question comes from the line of Joseph Foresi of Cantor Fitzgerald. Your line is now open..

Hi.

I was wondering can you cut out for us the piece of the IT services business that's now considered discretionary and what's your expectation for that discretionary piece going forward?.

So, Joe – Joe, hi. We don't have a specific detail cutout of discretionary IT spend, we don't. Suffice to say that it is a material number.

Particularly, if you define discretionary as projects that have a start and stop that depending on macro trends or industry trends or company trends, the company could decide to move that spend to a later date, to come back to it later, to actually stop a project, all of which happens as you know in that discretionary world.

So, don't have a specific number. It is a material enough number for us to get impacted whenever there is a discretionary squeeze..

Okay. So let me just ask it in a different way. Do we think that part of the discretionary spending piece of the puzzle has bottomed at this point and have you made any changes there from a head perspective? I'm just trying to get an understanding what we should be expecting from that business going forward..

So the second part of is an easy answer, Joe. In our industry, head count adjustments, when you have revenue that doesn't come through, et cetera, is actually pretty easy, because our global delivery footprint with the kind of attrition rates that run in the industry makes it very easy for us. So that's an easy answer.

So head count adjustments are already done and we don't worry that much of about it. Has the decline in the IT business bottomed out? I would say we've taken into account three things. We've taken into account that what is sitting in our pipeline, which is actually reasonably healthy.

Even in on our IT business, decisions are not being taken and they are getting extended out. And we've taken into account the fact that we don't know when those decisions are coming back.

Second, we've taken into account the fact that some of the work that we were doing, and this includes both GE and Global Clients, is discretionary in nature, those projects have been cut and they've been stopped.

And the third is no new additions of material context is getting added to the pipeline, particularly, as it pertains to discretionary kind of spend both in GE as well as in Global Clients. When is that all going to come back? I think is the question that you're asking; if it will come back and will it further get reduced.

I don't think we can definitively say anything. There's so much dependent on some of the things happening around us in the world. There is one secular trend that is there that is no surprise. There is a piece of spend that is constantly being reduced from what one would call the traditional IT bucket, and is being moved to the digital bucket.

And even in this discretionary attack and cutback on spend, the digital discretionary spend is not being attacked as aggressively. People want to preserve that..

Joe, all I would add is, you would expect with – the fact that the decline in IT that we're talking about here is across multiple verticals, you would've expected the pipeline to be a different story. You heard Tiger say the pipeline actually has stayed relatively stable and even has grown in certain circumstances.

So, to us, it feels like it's more of a macro-based item. And we'll see. IT is a short cycle business, it can go up and it can go down. So, right now, not a lot of visibility in terms of the timing of the turn. But the work is still there in terms of the pipeline now. It's a question of when do they pull the trigger. So....

Got it. Okay.

And how does the BPO backlog look heading into 2017? Have win rates and wallet share gone up in BPO since you started using the digital assets? Could that be an accelerant to that growth rate?.

So, first of all, Joe, we've always had very high win rates, so that was – it hasn't gone up. It stayed around the high win rates that we've always had, and we've kept it that and we're very, very proud of those win rates. As we look at our 2017, it's too early to comment.

I think the commentary that both Ed and I had around our expectation for Q4 in Global Client BPO, and the way we think about go-forward and the pull-through of that into 2017 is the way right now I would think about it.

Global Client BPO continues to do really well and has got a lot of initial engagement attached to it, which are transformative, consulting, Lean Digital, analytics engagements. And often, those subsequently historically has shown convert into managed services for us, so, so far so good on all of those fronts..

Okay. And then last one for me. Any color you can give us on the long-term contribution from GE? I know you're picking up business and losing business there, and it seems to be bouncing around a little bit, but any long-term thoughts would be great. Thanks..

I think just the math on GE Capital businesses sold, which, once it transfers to the new buyer, we will start counting it as outside of GE starting next year. That itself will take the number to the 14% odd mark from a revenue concentration for us.

And as we dial that forward into the balance of 2017, I would expect that number to further come down, because even in its best days, one wouldn't expect GE growth rates to match Global Client growth rates..

Got it. Thank you..

I think as we look at GE next year, we also talked about the work that will wind down that hasn't wound down in the speed that we thought this year. So, GE kind of a similar type of, hey, we're going to expect that to be down again next year. Don't know yet to be extent it's going to be, we'll guide you again. But that trend will continue and....

Because we'll also have the full year impact, Joe, of ramp down this year, particularly in the second half, that we expected and has happened, as well as IT business crunch that has happened, unless it comes back, the full year impact of that to be felt through in GE next year.

So, all of that means, basically, the concentration of GE in our overall portfolio will continue to come down..

Okay. Thank you..

Thanks, Joe..

Thank you. And our next question comes from the line of George Tong of Piper Jaffray. Your line is now open..

Hi. Thanks. Good afternoon. You're maintaining your 15.5% full year operating margin guidance, which, based on the year-to-date performance, implies a pretty sharp step-up in margins in 4Q; by my calculations, about 200 basis points of year-on-year margin expansion.

Can you discuss what you expect to be different in 4Q versus 3Q that will help you achieve that level of margin expansion?.

I think you'll see more of the same that you saw from Q2 to Q3 in terms of leverage. We had a pretty good leverage point from Q2 to Q3, with managed spending levels, and you will see some increase in SG&A, but we will leverage that. Gross margins will be reasonably steady. The improvement really will come through the leverage of SG&A spend..

And George, just to add to what Ed said. If you historically go back to our margins, this typical trajectory is a trajectory that often, our business has exhibited. And that's because Q4 tends to be the best quarter from a revenue perspective, notwithstanding the fact that, in any case, ours is a secular growth business.

And Q1 tends to be a wind-down, particularly of short cycle projects, et cetera, and we therefore get a significant lift in margins in Q4. So....

But to be fair, over the last couple of years, we've been ramping up our selling and marketing and R&D spend, so you wouldn't have seen that trend, but as is typical in most companies, your ramp in the fourth quarter revenue, you don't typically see a ramp in SG&A spend to that order of magnitude.

So typical leverage should happen, and that's what we're expecting to happen in the fourth quarter..

And to round that up finally, to Ed's point, I think our ramp – step-up ramp on both capability investments and front-end investments and sales, we undertook that over the last couple of years. We don't expect that step-up ramp to happen as we go through Q4, so now we're going to get leverage..

Got it. Very helpful.

And then, switching to global IT trends, how much of the global IT revenue declines in the quarter is related to investment banking? How much is related to healthcare? And going forward, are there other verticals you'd call out that could also represent a large drag on IT spending?.

So, actually, George, if you remember last quarter, we called out investment banking and healthcare. And we, at that time, had said that we don't expect that to come back during the year, and it is not coming back during the year.

So actually, a lot of the call-out now is not incremental investment banking and healthcare, it's much more – basically all the other verticals; banking, insurance, manufacturing, and CPG, life sciences, and GE, so it's not just Global Clients. So it's reasonably all pervasive, at least for the industry verticals that we straddle.

And we've taken all of that into account, and it's a combination of pipeline not converting, new pipeline not getting added, and existing work being stopped in – wherever it can be stopped..

Got it.

And then lastly, could you maybe elaborate on some of the trends you're seeing in Global Client BPO, in terms of pipeline growth and retention rates?.

Retention rates is easy, George, as high as it's always been. As long as we deliver great services, as well as new thought leadership such as, for example, the global life sciences contract we talked about, where this is the second renewal. So it's a pretty old contract, second renewal.

And we've converted the entire contract into a significant outcome-based contract driven by the leadership team at the client, as well as us, coming together and actually making it a completely outcome-based contract.

And as long as we continue to do that and bring that kind of value to our client, we see retention rates being extremely high in this business, barring significant M&A activity that could change provider, et cetera, et cetera. To your earlier question – earlier part of the question on....

What was the first part? Bookings?.

Pipeline. Pipeline..

Yeah. So, our pipeline continues to be robust in the Global Client BPO space. As you can imagine, given the revenue growth rates around transformational-type engagements, those types of engagements in our pipeline are bigger than they used to be.

A lot of our Global Client BPO engagements now have a significant transformational component that is often attached to it, and often at the front-end of it. So, sometimes that Global Client BPO conversion takes a little longer to fully convert into revenue, because you often have an initial transformation engagement that is part of it.

Sometimes, it is only the transformation engagement that then, subsequently, you have to go and win again the managed services engagement, if there is one. All of which is the nature of the industry these days.

And I think those who are able to bring that value proposition together upfront, in client conversations, in the C-suite, in chosen industries with domain, digital, and analytics together, are the ones who have a seat at the table and who have a chance of winning.

And we're seeing that play out very nicely, ever since we started focusing our energies around specific industry verticals and building our capabilities, both at the front-end and on the capability side..

Right. If I can sneak just one quick related question – related to the pipeline, last quarter, I think you said in the pipeline, about 60% of contracts had some sort of a digital component.

Can you talk about whether that 60% has gone up over the past quarter, and where it is currently?.

Yeah, it's about the same. It's about the same, George, and we wouldn't expect that to significantly ramp in one quarter, given the long cycle nature of the decision making in our businesses. But there are segments of that where it's ramped up even more, and which you would expect.

So, in finance and accounting as an example, it's actually now reaching almost 100% mark, where almost every single opportunity in our pipeline in finance and accounting has significant transformation and digital components.

There are Lean Digital components that are part of the deal, and part of the way that deal gets done, and part of the differentiation that we bring to the table. So we would expect that to climb up over time. Broadly, I would say that that 60% mark is still a good reflection of where it is today..

Very helpful. Thank you..

Thanks, George..

Thanks, George..

Thank you. And our next question comes from Anil Doradla of William Blair. Your line is now open..

Hey, guys. Thanks for taking my question..

Hi, Anil..

So, Tiger, yeah, it's almost like a tale of two trends, right? There is a BPO trend there and there is an ITO trend, and they're just moving in more or less opposite directions. So, if I'm a skeptic and I look at your ITO and say that, okay, you're a BPO company, you're doing absolutely fantastic. Organic growth is one of the best in the industry.

The market size is great and all that stuff. So, let's put that aside. But when I look at your ITO and I see that you're competing with the big boys. The big boys are under increased pressure. They're getting more desperate. Pricing is more under pressure. And more importantly, the financial industry has never been big proponents and never embraced BPO.

So given that, as a skeptic, if one were to be a skeptical, given these trends are not going to change, what we are witnessing in the ITO, why should I believe that we're going to see a reversal of trend, say, in 2017 when there is a more case to be made of a structural headwind?.

So I think, Anil, you captured it right. So, I couldn't have described our business better than you just did.

Therefore, as we think about the balance of the year as well as next year, we will have to carefully assess the strength of our Global Client BPO business and how do we continue to drive that strength, both in the industry and our position in the industry.

And as we continue to do that, particularly, the parts of our IT business and I would call out some parts which are actually very closely aligned to our domain expertise, et cetera, leaving that aside, there are parts of our ITO business, which will continue to undertake the trend that you just described with the intensity of the competition, the intensity of the pricing pressure, all in a shrinking overall pie environment.

Now, that could change if that pie changes, but to an earlier question, but we don't know that. But the good news is that our business is a materially and predominantly Global Client BPO and it's only getting bigger..

Wonderful. So, we're both on agreement on that. That's good. Now, Ed, you talked about some of your spending priorities.

Given what we're going to see over the next, potentially, three, four quarters, can you share with us what you're doing from a spending point of view on the ITO side? What kind of spending disciplines you're introducing? How you're reigning the cost? And more importantly, can you share some insights into the margin structure on the ITO side when you compare it with the BPO? Thanks a lot, guys..

I'll speak to the last one first. I think the ITO margins are different depending upon the projects that we have. So, as Tiger talked, the more closer they are aligned with the domain expertise, the higher the margin, the more complex growth, the higher the margin.

Overall, ITO margins are probably slightly below what we see in the BPO and other service lines that we have, but there are cases where we do have nice margins there as well as I mentioned. So, I'd say on that side, margins, that's where they are.

In terms of spend, we look at our business both at a vertical level and at a service line level and are intensely focused on ensuring that we plan both top line and bottom line across those service lines and verticals and we're working through squeezing spend everywhere we can, and IT is probably being squeezed the most in terms of discretionary spend to ensure that we are as profitable as we can be without doing something foolish.

So, I'd say we're squeezing everything, travel, head count, productivity, bench levels, all that is being looked at with a very close eye and we'll continue to do that as we proceed..

And Anil, our history of driving productivity in our business is a long history. So the fact that as the business changed its revenue outlook for the year, those cost measures in that particular line of service line and business is automatic and is par for the course. So, I wouldn't say there is anything unique that we are going to do next year.

We're already doing it and that's the reason why you also see our margin holding up to the 15.5%..

Great. Thanks a lot, guys..

Thanks, Anil..

Thank you. And our next question comes from the line of Edward Caso of Wells Fargo. Your line is now open..

I was tempted to ask on IT, but I'll behave myself..

Thank you, Ed..

Yeah. Could you talk a little bit about the Philippines? We have a interesting new President there, who's made interesting comments and there has been a lot of global change.

Can you frame how big your operations are relative to the total delivery network? Any moves you're taking? Any questions you're getting from your clients about any potential risk? Thanks..

So, obviously, we are watching the situation, Ed, to your point, very closely. Our country manager for Philippines is actually the President of the BPO and IT services organization. Consider it as the equivalent of Nasscom in Philippines, Dan Reyes, and has been our country manager for now many, many years.

So, he is well connected to the industry and is extremely well connected to the ministries that look after exports, commerce, technology, and so on. And our view is that the government understands the importance of maintaining strong trade flows between the Philippines and the U.S.

And the clarification that we have from the official body is that the government has clarified that their position has nothing to do with trade flows, has nothing to do with relationships around business and trade between the Philippines and the U.S.

Having said that, to your question, I think it's about 7-odd percent of our six – between 5% and 7% of our revenue. So, it's not immaterial, but it's only about 5%, 7%. It's a very nice part of our business. It has very meaningful relationships with a number of our clients.

The good news, Ed, is a lot of the work that we do there is call center type customer-facing work. Very often, it's a global footprint with many delivery locations that we offer that client as well as many delivery locations that often the client has.

So, therefore, classic business continuity planning, disaster recovery planning that allows work to move from one place to another that we would execute on, that we have executed in the past whenever natural disasters have struck, unfortunately, the Manila and Philippines area that we have successfully executed for ourselves and for our clients.

I think we would execute those. We kind of discussed those with our clients. And our clients are in constant conversation with us. A number of them have their own captive operations there. So, I think it's obviously an important question. It's something to watch. It's something to keep ready as alternative options, et cetera.

Just to be clear, we have clients right now who are talking to us about ramping up in Philippines just as we talk. So, that's the current situation. And we are in constant communication with the clients as well on that exact situation..

Can you talk a little bit about your platforms. I haven't heard much about that today. You used to talk a lot about KYC or Know Your Customer; maybe an update where that is.

So, how many platforms do you have, how many are actually being used at this point? And within the earlier comments about spend in investment, how much effort are you still putting into the whole platform effort? Thanks..

So, obviously, platforms continue to be a focus area for our investments, our spends, and then are taking it out to market. The whole foray around digital is actually bringing in a bunch of these digital technologies and tools around a specific domain area and building a platform that actually allows us to change the way the services get rendered.

One of the platforms that is the most pervasive for us is the finance and accounting platform, which started off with audit of cash (50:24), and has now progressed to being able to do source to pay, reconciliations, et cetera, all on the same platform.

And that obviously is integral to every one of our finance and accounting deals, which is why the penetration of digital and finance and accounting is so high, almost hitting 100% now. So, that's a very critical platform.

We don't talk about it because it's almost become par for the course for us and its part of the way we differentiate ourselves in the marketplace around finance and accounting.

We have a significant platform around wealth management that we carved out from one of the big banks, and it's the OpenWealth platform that has a significant presence in wealth management as a platform both for the U.S. and the UK as a market. That's doing well. We have the KYC platform, which continues to make progress in terms of signing up banks.

It has still taken time to ramp up volumes and, therefore, see the benefit of that ramp-up as a utility. We continue to hope to see that going into the future, but as you know, utilities take time to ramp-up, and we're still in the stage of actually bringing clients in, in order to get them to the table to actually put volumes into that platform.

And then, the mortgage platform is the other platform that we built out, where as we took a charge right now in order to make sure that our balance sheet doesn't carry that..

That's right. That was the mortgage platform that came to us by an acquisition. We continue to do the build out.

Had a list of customers lined up, they haven't come to fruition as yet, that product is still commercially viable, but given the near-term outlook, we took a write-down during the quarter to write that down to zero although, the mortgage business is still very much – very attractive to us and we do very well.

And in fact, we're driving growth in the mortgage business. So, happy with that. Happy with that. And then on the just overall macro CapEx related to digital, as you know, we progressed from 2%, 2.5% of revenue to closer to 3%, the big part of that incremental spend that we're making on CapEx is in a digital space on a lot of these asset build outs..

Yeah. And the last one I would point out is, once again, the commercial lending example on receivables financing that that I described. Clearly, that is a new build out for a specific client and provides the opportunity to be leveraged now as we take it to other clients who have a similar kind of business.

So I think, as we look at the various spaces where we have deep domain depth, understanding which of those present themselves as an opportunity to co-innovate with a client and build these out in a very fast cycle sprint, because that's the nature of the current technology build outs.

Some of them, by the way, will work, some of them may not work, and then a fast failure is a good thing to do in this environment in the digital world, and then moving onto other opportunities..

Thank you..

Thanks, Ed..

Thanks, Ed..

Thank you. And our next question comes from the line of Keith Bachman of Bank of Montreal. Your line is now open..

Hi, this is Steve Schneiderman pinch hitting for Keith tonight. Thanks for taking my call. Wanted to just start off talking about capital allocation. Tiger, you mentioned about focus on M&A, something that's been a topic over the last couple of Analyst Days.

Given it's been such a focus, how are you seeing your progress made to-date? I understand you have the pipeline that you're looking forward to, but in terms of your execution, are you at where you want to be or do you think you need to step that one up a little bit in order to accelerate growth into next year?.

So, Steve, I think our pipeline is in the areas that we like, both in terms of vertical capabilities, post the choice of verticals that we made and the capabilities that we'd like to bring in, as well as digital and analytics type capabilities that we'd like to use acquisitions to add to our capabilities. I would say the pipeline is strong.

Having said that, very clearly, the combination of making sure that it fits our culture, making sure that actually the financial profile makes sense, while obviously the pipeline has the strategic intent already as one of the reasons why it's sitting there in the pipeline, I wouldn't necessarily assume that a large pipeline means a certain number is going to close.

We don't drive our acquisition journey with a goal that says, we must acquire X amount of revenue or we must spend X amount of our cash generation capabilities on acquisitions. We feel good about the fact that the pipeline is the kind of the thing that we'd like to look at.

We continue to make progress on those dialogs, and sometimes we reach a conclusion that it's not something that we like to acquire and we do that actually quite often..

Partnerships?.

And therefore, it is part of a three-pronged strategy of organic investments, partnerships and alliances, both with large technology providers as well as with startups.....

Point solution sales..

...for point solutions and building out of platforms, and acquisitions. So, it's a three-pronged strategy to actually go down that path..

So just on the dollars, orders of magnitude, we doubled the M&A, but it's still not to the level that we would want to get after. But, with that said, we did see an attractive avenue by the share purchase to get after that in terms of returning capital to shareholders.

So, you saw that in the year-to-date and the increase in the authorization from the board..

Yeah. Fair enough. Moving onto a different topic in terms of how you look at FX for the quarter, you mentioned that there was a little bit of help on the margins.

Can you quantify how much that was?.

We've not typically talked about that. What we've said is – what we typically do when we signup a contract, let's say, a five-year contract, we typically hedge that contract for the duration of the contract period.

So, (56:49), this is normal course of business, where if we take the risk on the FX, we'll hedge that wherever the hedge needs to take place depending upon the delivery and the revenue country, we'll hedge that. So, that's really just par for the course..

Okay.

Nothing out of the ordinary?.

No, not at all. And on revenues we've just said, hey, we were about 41% (57:10) at the beginning of the year. I think we've got a little bit, a little bit better at the end of the second quarter and now back that to a little bit worse. It's about $2.5 million worst than we ever at the beginning of the year on revenue impact..

Okay. Okay and I have one more on cash flow.

I believe you said last quarter that if we're still at sales 85 days, might be a an issue for meeting the cash flow target for the year and it looks like we're still at 85 days, and I understand we're pointing towards the lower-end of the operating cash flow guidance, but are there any other puts and takes besides DSOs that we should be putting into the consideration for meeting your free cash flow target?.

Yeah. There are puts and takes. I think I feel good about our ability to reduce it. We did, as you heard me talked about before, we did – we have been in the process of implementing Oracle 12, and we've done probably about 75% of it through the end of last year. We're taking our short cycle business through that journey now.

That probably had a couple day impact in this quarter, which I expect to be remediated in the fourth quarter, so I do expect us to see better days when we said kind of back to historical or Q4 level somewhere in the lower 80 days range by the end of the year..

Sounds good. Thanks very much, gentlemen..

Thanks, Steve..

Thanks, Steve..

Thank you. And our next question comes from the line of Puneet Jain of JPMorgan. Your line is now open..

Hey. Thanks for taking my question. For your $25 million plus customers have continued continue to decline sequentially over the last few quarters.

Is that also related to IT services weakness somehow or is something else going on there?.

No, it is. It is, actually – obviously, when you look quarter by quarter, you see some of that moving. Most of it is related to IT, but as you can see at the same time, some of those same relationships have gone into the $50 million bracket and we can see a line of sight to some of them going on to the $100 million bracket at some point in time.

So, I think what you're seeing here, Puneet, is part of our strategy that we launched in 2014, actually, fully playing out.

Now, it's taken a couple of years plus, almost three years, to fully play out, which is add to the front-end, add senior leaders, get to the table at the C-suite to have strategic conversations, have a bunch of capabilities around domain, digital, analytics, and then the pivot around Lean Digital, to participate in the conversation that has now become an important conversation at the C-suite and, therefore, drive not just initial deals and relationship, but ongoing additional deals and relationship that then takes that relationship to a much bigger number.

So, you will see a divergence where some of our smaller clients, as you've seen in our portfolio, actually go away; some of the others, driven by IT businesses' decline, actually become smaller, if the material portion of the relationship was IT, but a number of others actually grow substantially in the nature of that relationship.

And the bigger they become, they obviously become much more strategic in the nature of those conversations..

Got it. And actually, a great segue to my next question. So, obviously, it's been three years since you tried to reposition great returns in BPO, but overall growth hurt by IT services.

So can you talk about need to offer IT services in capital market? Does that business, like the tech capabilities there, like does that help in developing platforms or offering core BPO? Why do you need to offer IT services to capital market customers?.

So I think, Puneet, it's a very strategic question, which is, if you are in the capital markets vertical, clearly, it's important to be in technology, because that's very important for the capital market and investment banking vertical.

So I think the only way that your question can be reframed is, should you guys be in the investment banking, capital markets vertical? Now, that's a difficult (61:28) question..

Correct..

And I think there's always a time and an opportunity to go back and evaluate the verticals one is part of, the services one is offering, what new services to add, how to pivot further, double down, reduce, and all of that is part of our typical strategic look at our business that, I would argue, in our kind of a business, one should look at every couple of years, and I think we should be doing that soon..

Got it. Thank you..

Thank you. And our next question comes from the lien of Frank Atkins of SunTrust. Your line is now open..

Thanks for taking my questions.

I wanted to ask real quickly any changes on pricing, either on the BPO or ITO side?.

Nothing material to talk about on the BPO side, pretty stable. Obviously, as we do more Lean Digital transformation type engagements, those type of engagements typically do tend to have better pricing, et cetera.

But otherwise, broadly, that landscape, as long as one can find a way to make sure that one is driving disruptive value for your clients, is actually pretty stable. IT, we actually talked about it, it's a competitive – it's more competitive, it's more intense.

Pricing is one of the levers that is being used in that competitive landscape, more probably today than it used to be. So that's an intense competitive landscape on pricing..

Okay, and great.

(62:58) Could give us a quick update on where you're seeing in terms of sales capacity and productivity since you made some investments in that area few years ago?.

So we ramped up our sales overall numbers, levels, quality, and capacity over the last three years. We believe we've – those step-up ramps are behind us a little bit. We don't need to do any step-up ramps. But as the business grows, we will continue to grow our sales teams, and that continues to be on track.

As new accounts get added, as accounts mature and become larger and, therefore, require a more strategic client partner to own that relationship, all of those we continue to do. And therefore, we continue to hire great sales people into the team.

Obviously, performance management is a big part of any sales organization, and we are a performance culture, so we continue to do that.

Driving best practices across different sales teams, the ability to use tools and leverage those tools to drive productivity is, again, part of the way we drive productivity in our sales organization, and that continues to make good progress and good trend, barring, obviously, portions of our business where, for a variety of reasons, we've already covered.

For example, in the IT business, sales productivity would naturally be lower, and then that therefore calls for action around, what do you do with that IT team, how do you realign it, et cetera?.

And last one for me.

Could you just give us a quick update on where the Predix opportunity sits right now?.

We are one of the chosen strategic partners for the Internet of Things journey for GE and Predix is the platform, GE's platform, for that journey. So we are one of the chosen platforms. We work on three fronts. We continue to develop our people in order to be able to take some of the work we do for GE and move that onto the Predix platform.

The second is, we're working on new solutions for the GE businesses that allows that work to then move onto the Predix platform. So we have a bunch of development folks around Predix that become part of that journey. And we have actually a pretty significant development team around Predix.

And the third is, which is probably the most interesting one for everyone, is actually take those capabilities to other industrial clients, other hi-tech clients who are also on Internet of Things journey, and offer to them the opportunity to actually jump onto the platform, the opportunity to provide a bunch of services and analytics on Predix-type platforms with our services.

So our ability to actually do system integration work, development work, and actually analytical services using Predix as a platform, all of that is what makes us a strategic partner for GE in that journey, and we feel very good about being part of that journey..

All right, great. Thank you very much..

Thank you..

Thank you. And our next question comes from line of Bryan Bergin of Cowen. Your line is now open..

Hi. Thank you.

Can you talk about transaction and outcome-based pricing trends? How those contract discussions with clients are going and just a sense of scale relative to your business?.

Bryan, it's still not as scaled up as one would like it to be. We obviously tee up that conversation straight out of the gate in any new relationship, as well as when we get to contract renewal, when we get to reshaping our relationship, the life sciences example being a great example of that.

The reality is that a number of our clients are on their own journey of transformation. And it must fit in with their journey. Some services offer themselves up for outcome-based pricing more easily than others. Sourcing and procurement is a great example. Receivables management is another great example. Some others don't.

If you're closing the books for a client, it doesn't offer itself up for outcome-based pricing that easily. So, I think it's a little bit of learning as we go along; the industry is learning, our clients are learning, we are learning. We think it will keep growing.

And as we look into the future, I think, a larger proportion of our business will be outcome-based pricing of various forms. It could be fixed price for a certain period of time. It could be outcome-based with gain share. It could be transaction-based pricing. It could be all of the above..

Okay.

Just on Brexit, anything to call out there? Any notable changes in client behavior or decision making?.

Nothing. Nothing other than, obviously, it is one more uncertainty to add to the mix. If the client has a significant UK presence, particularly if that UK presence serves the rest of Europe, an example would be investment banks, in global investment banks with UK footprints.

So, obviously, at the margin, it does impact our kind of a business, but it's only in the margin. It obviously slows down some decision making. But, again, I would say, for us, it's only in the margin. It does create one more level of uncertainty that pushes out some decision making, again, only in the margin for us..

All right. Thank you..

Thanks, Bryan..

Thank you. And our next question comes from the line of Bryan Keane of Deutsche Bank. Your line is now open..

Hi, guys. Just a couple of clarifications.

I guess how widespread was the cut in projects in the IT cancellations? Was that new this quarter and was that all the way through the industry or is that only a couple clients specific?.

No, it's not a couple of client specific, Bryan, which is why I think we called it out as reasonably industry-wide. If you understand our business in IT, it is not a couple of clients making up a large portion of our business. It's actually reasonably fragmented other than GE. So, we clearly saw GE discretionary spends being cut.

And almost at the same time, we saw banking clients, we saw insurance clients, which we had started seeing a little bit, but we saw pretty clear insurance clients cut, and we saw CPG clients and we saw manufacturing clients.

So, for us, it was an industry-wide phenomena cutting across a range of clients, mostly revolving around is it important for us to run this project now? Is it important for us to kick this off now? I know we've talked to you and, therefore, it sitting in your pipeline, why don't we wait? We'll come back to it later.

And a lot of those are ones that they can push out. And there's no need for a number of them to do anything in the third and fourth quarter, and we saw that ripple through a number of the industries that we serve other than healthcare and investment banks where we saw that much earlier..

And where there cancelations as well or they just decided, forget it, it's not the pipeline at all.

We're just not going to do this anymore?.

Yeah, absolutely. And when we talk about cancelation, it's cancelation of work that we are doing at the moment. That has happened in a number of our client situations, and that's the nature of some of this work. It is possible to cut back and cut down on..

Okay. Okay. And then, when I compare your guy's growth rate in IT versus the industry, you guys are a little bit below kind of where the industry is tracking.

Is that just – are you guys loosing share or is that just because of the verticals you guys are in?.

No, I would say we would be losing share, it is....

Capital markets....

It is no surprise that that is true. Given the size and scale of that business versus our competitors, and given our focus on domain-led – industry domain-led IT that is connected to the depth of domain that we have in certain specific industry verticals, clearly, those portions of the business, we would not be winning as much as we can..

Okay.

So, I guess the question then is if we're going to keep the IT service business, how are we going to fix it? What's the plan to change the trajectory that it's on?.

It's a question that, Bryan, I talked about earlier to an earlier question. I think we'll continue to drive focus on those parts of the IT business that we think have a better traction for growth for us and we actually have seen that over the last couple of years. We continue to see that.

And those are the ones that are deeply connected to our Lean Digital journey, that are deeply connected to the specific services that we have expertise on, that we have differentiation on, where the choice of the IT partner is driven by the understanding of the domain and that's the one who wins. And we know those spaces.

We have made those choices and that – as we continue to focus on those, we'll continue to see that growing, we'll continue to see the other parts of the business not growing as much and, over time, as we've seen in the GE Global Client equation, that's what we'll see in the IT business as well..

Okay. That's helpful.

And is there a way to split your business in IT between those two sides?.

Not at the moment. But as we further refine it, Bryan, we will come back to that..

Okay, all right. Thanks so much..

Thanks, Bryan..

Thank you. And I'm showing no further questions at this time. I would now like to turn the call over to management for any closing remarks..

Thanks, everybody, for joining us today, and we look forward to speaking to you again early next year. Thanks..

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day..