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

Ashwin Shirvaikar - Citigroup Global Markets, Inc. Joseph Foresi - Cantor Fitzgerald Securities Maggie Nolan - William Blair & Co. LLC Puneet Jain - JPMorgan Securities LLC Edward S. Caso - Wells Fargo Securities LLC Steven Schneiderman - BMO Capital Markets (United States) Frank C. Atkins - SunTrust Robinson Humphrey, Inc.

Ashish Sabadra - Deutsche Bank Securities, Inc. Bryan C. Bergin - Cowen & Co. LLC Eric Ciura - Robert W. Baird & Co., Inc..

Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 Genpact Limited Earnings Conference Call. My name is Michelle, 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 will expect the call to conclude in an hour. As a reminder, this call is being recorded for replay purposes. A replay of the call will be archived and available on the IR section of Genpact's website. I would now like to turn the call over to Roger Sachs, Head of Investor Relations at Genpact. Please proceed, sir..

Tiger will provide a high level overview of our results, and update you on some of our strategic initiatives. Ed will then discuss our financial performance for the quarter in greater detail and provide an update on our financial outlook for the year. Tiger will then come back for some closing comments and then we will take your questions.

As Michelle said, we expect the call to last about an hour. Please note, the year-over-year growth rates discussed today include the impact of the reclassifications of the divested GE Capital businesses to Global Client revenue as if these transactions occurred on January 1, 2016.

This was done to provide a consistent view of the underlying growth trends of our business. The actual results without these adjustments are included in the earnings release. 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..

banking, CPG, manufacturing, insurance, life sciences and high-tech. This led to a strong 15% constant-currency growth in Global Client BPO revenues.

While we saw a solid growth across most of our service lines, including financial accounting and core industry vertical operations, our transformation services revenue growing at more than 20% led the way.

The challenging business conditions that impacted the investment banking industry over the past several quarters are beginning to show signs of stabilizing. This helped reverse recent declines in our Global Client ITO business that grew 2% on a constant-currency basis during the second quarter.

We also saw transformation services pick up real momentum in the capital markets vertical, driven by risk services, digital robotic automation implementations and artificial intelligence, or AI product engagements. GE revenues declined 26% as we felt the peak impact from the phase-out of work related to GE Capital divestitures.

Additionally, we saw accelerated levels of productivity driven by GE's continued efforts to consolidate some of their core industrial operations as well as our joint effort to embed digital into many of their processes.

Our GE business provides us one of the most fertile sandboxes to test breakthrough digital and analytics innovations, leveraging GE's Predix platform, AI and blockchain based solutions.

We expect performance of our GE business to improve in the second half due to the ramp up in ITO engagement we won in the second quarter that was part of GE's vendor consolidation initiative. We also recently signed another long-term contract with a buyer of our divested GE Capital business.

To-date, we have signed contracts with nine buyers and see opportunities to expand these relationships as we move forward. Our BPO pipeline continues to improve across most of our targeted verticals, service lines and geographies with continued strong traction from transformation services.

We're also seeing momentum pick up on big deals and are pleased with our win rates. We live in a volatile world where there is heightened sensitivity to global political climate and potential changes to trade policies, tax laws and Visa regulations.

However, during the last few months, we believe the mindset of corporate leaders has shifted from a wait-and-see approach to becoming more comfortable and proactive, while operating in the current uncertain environment.

This means management teams are now embracing change and transformation and leveraging digital technologies, data analytics and design consulting, along with global delivery to drive growth and competitiveness. All of this is with an intense focus on customer experience leading to better operating performance.

As a result, we are seeing deal cycle times begin to stabilize, improving from the more challenging conditions we witnessed late last year.

Our focus on Lean Digital encompassing the intersection of deep domain knowledge and digital technologies, along with our understanding of how to leverage data for real time analytics continues to differentiate us in the market. Therefore, more and more clients are viewing Genpact as a trusted partner helping them transform and create value.

We bring to the table a sharp understanding of their business context and data that is immersed in their domain. As we discussed during our March Investor Day at our Palo Alto Innovation Center, over the last three years, we've invested in transformation services and the development and execution of our Lean Digital approach.

This has led to a dramatic increase in the number of CXO level conversations that are centered around business challenges they are addressing well beyond cost savings. As you recall, we first made the decision back in late 2013 to focus on what we now call intelligent operations where digital plus advanced analytics are embedded in our services.

We are really starting to see the benefits of these investments materialize. Our other engine of growth where we capture new value being unlocked through bundling of digital, analytics and consulting is our digital-led solutions.

A number of our clients across key industry verticals have engaged with us in the digital-led transformation of their businesses that leverages digital technologies such as robotic process automation, dynamic workflow and mobility to transform the way they run their businesses and use data analytics.

More importantly, at its cutting edge, transformation starts with reimagining the work that gets done using design thinking and implementing AI-based products and solutions that truly disrupt industries. These two chosen paths to market, intelligent operations and digital-led solutions are both underpinned by our deep expertise in specific domains.

We believe Genpact is in a highly differentiated position to achieve our growth target through long-term client engagements, leveraging this powerful interplay of intelligent operations and digital-led transformation.

As a result of our many clients CXO conversations, it is clear that the more we grow intelligent operations, the more the client believes we have our rights to compete and win in digital-led transformation.

Conversely, the more we win and grow with the client on digital-led transformation, the more opportunities will open up to win long-term intelligent operations engagements, forming a synergistic and virtuous cycle of growth. Let me share a few specific examples.

First, a leading large equipment manufacturing company has been leveraging our intelligent operations globally in finance and accounting as well as procurement.

Given our demonstrated success implementing and running these operations with digital and analytics embedded in them, the client has now chosen us as their digital transformation partner on a much wider scale.

We will be designing and running additional center of excellence using technology such as robotic process automation, across multiple business groups and functions, including finance, supply chain and logistics. This was a broader company-wide engagement that should also ultimately lead to leveraging AI-based products and solutions.

Next, we are working with a global bank to design their contact center of the future for retail cardholders to dramatically improve their customer's experience.

The bank is currently testing our NeuralIntelligence (10:25) product to assist its customer service agents to better understand customer inquiries and deliver best responses to solve issues faster and more accurately.

The product, which was built on the Genpact Cora platform, not only increases customer satisfaction, driving more card usage, but also reduces cost through faster agent training, lesser need for supervision and automation of repetitive tasks. The next evolution of this product is expected to leverage AI to make it even more predictive and intuitive.

One of the most significant milestones in the quarter was our launch of Genpact Cora, a comprehensive automation to AI platform leveragable to accelerate digital transformation journeys.

Genpact Cora is a modular interconnected mesh of flexible digital technologies that hones in on specific operational business challenges and tackles them end to end, helping companies reimagine the way business outcomes get delivered.

We believe Genpact Cora is the first platform to fully integrate automation, analytics and AI engines, all in a single unified platform embedded with and drawing insights from our domain expertise that we have built from running thousands of intelligent operations and processes for Global 1,000 companies.

The Genpact Cora platform is the foundation for Genpact products and consulting services already in the market with more than 1 million users processing over 1.1 billion transactions annually. We believe Genpact Cora is unique in the industry for three specific reasons.

First, its modular design and architecture allows clients to future proof investments in digital as their needs change and as better digital technologies emerge. Second, its open architecture and mature application programming interface allows for best-of-breed capabilities for the highest impact and easy connectivity to systems of records.

And third, most importantly, it has a built-in command and control hub to provide a much-needed governance layer to mitigate risks that can accompany automated solutions. We have been separately deploying various modules that make up Genpact Cora over the last two-plus years.

This includes integrating mobility through our Endeavour acquisition, dynamic workflow through the acquisition of PNMsoft and more recently, AI and natural language processing implementations through our acquisition of RAGE Frameworks.

Our new platform is already delivering incredible value to a number of our clients across various industry verticals.

Individually, each of these acquisitions provide compelling solutions, but now part of a combined solutions set coupled with Genpact domain and process expertise, we believe we have powerful and synergistic offerings to take our clients operations to the next level.

For example, our Pharmacovigilance AI product that we are co-innovating with a global pharma major is expected to redefine the way drug safety gets managed.

Using Genpact Cora's AI analytics, predictive modeling and other technologies, this exciting product completely reimagines the way pharma companies monitor, detect, assess, report and prevent adverse events from various medications.

Through our RAGE acquisition, we added LiveWealth, a product that serves our wealth management business that is now incorporated into Genpact Cora. LiveWealth allows the global financial services institution to extract and gather insights from many disparate data sources both structured and unstructured.

It eliminates billing and asset reporting errors for the client resulting in customer response cycle times going from 45 days to on demand. These products are all replicable and scalable across our clients and are enriched with our domain knowledge and granular understanding of the variables and the data, and all their interrelationships.

Therefore the more these products are deployed across clients, the more knowledge and intelligence they acquire, thereby adding value to every client, the classic network effect. Commercial models in every one of these AI-based products are transaction or outcome-based or as a service annuity license-based.

We are very excited that our positioning as a digital transformation partner is being recognized by leading industry analysts and research firms. Noted analyst firm HfS Research, recently ranked Genpact as a top three provider of AI-powered solutions propelled by the Genpact Cora platform and our RAGE acquisition.

Additionally, the Everest Group recently stated that the introduction of Genpact Cora is timely for an industry seeking digital transformation as clients want to buy business outcomes, not just tools and products.

M&A remains a priority for us, and this morning, we announced the acquisition of OnSource, a digital company focused on disrupting the claims inspection process in the insurance industry.

The company's Inspection-as-a-Service solution uses self-service smartphone apps and drones to obtain videos and images that are used to assess damages, generate estimates and payout claims. This is creating significant value for clients.

As an example, Safe Auto Insurance is using the OnSource solution to improve its productivity, lower cycle times and provide overall better quality and service levels. OnSource increases our presence in Boston, which is becoming a digital center of gravity for us, along with our Palo Alto Innovation Hub. Switching to our ITO business.

Over the past few months, we have taken several actions to realign our ITO portfolio into specific areas connected to our deep domain expertise to drive growth.

First, we reprioritized our investments into sharply defined high growth opportunities, such as business intelligence that combines ITO and analytics and data engineering where clients face significant challenges to make sense of unstructured as well as structured external and internal data in order to derive critical real-time actionable insights that solve problems.

Second, we are doubling down in areas of deep domain and complementary BPO and analytic strength such as risk, commercial leasing and lending and wealth management.

And finally, we have de-prioritized certain ITO services that no longer fit with our strategy or negatively impact profitability such as fast commoditizing pieces of legacy ITO work where our domain depth is limited.

In addition to more sharply focus of our IT investments, we've divested our ownership position in the kyc.com utility in the capital markets vertical. However, given our domain and process expertise in the customer on-boarding process, we entered into a long-term agreement to remain the backend service provider for that business.

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

Thank you, Tiger. Good afternoon, everyone. Today, I'll provide you with more detail on our second quarter results, followed by key balance sheet and cash flow highlights. I'll also provide an update to our full year financial outlook for 2017.

In the second quarter, we generated total revenues of $671 million, an increase of 6% year-over-year or 7% on a constant-currency basis. Revenue growth, excluding the recent acquisition was approximately 6% on a constant-currency basis.

Revenues from Global Clients, which represent 91% of our total revenue increased 11% year-over-year or 13% on a constant-currency basis. Within Global Clients, our BPO revenues grew 13% year-over-year or 15% on a constant-currency basis, while Global Client IT service revenues increased 2%.

Global Client growth was led by our transformation services, growing year-over-year by more than 20%, representing approximately 20% of total Global Client revenue. GE revenues, which now represent less than 10% of total revenue declined 26%, higher than our initial expectations.

We now expect GE full year revenues to be down 16% to 20% versus our prior outlook of 13% to 15%. Overall business process outsourcing revenues, which represent 83% of our total revenues, increased 9% year-over-year, while total IT services revenue declined 5%.

Adjusted income from operations for the quarter was $111 million, up 17% year-over-year with a corresponding margin of 16.5% compared to 14.9% during the second quarter of 2016.

Along with strong top line growth during the second quarter we received an approximately 150 basis point benefit from an India-based subsidy, which we had incorporated in our full year guidance. On a normalized basis, adjusted operating margin during the quarter would have been approximately 15%.

At 38.1%, our gross margin was in line with the level reported during the first quarter and down from the 39.1% reported during the second quarter last year. The year-over-year decline reflects the short-term impact of slightly lower margins related to recent acquisitions, a change in revenue mix and the impact from the GE-related IT revenue decline.

We continue to expect our gross margin to improve through the balance of the year with increased productivity on higher revenues and a more favorable mix. SG&A expenses totaled $168 million, compared to $165 million in the second quarter of last year.

Our sales and marketing expense, as a percentage of revenue, was approximately 6.5% compared to 7.1% in the same quarter last year, driven by operating leverage.

We expect sales and marketing to be a higher percentage of revenue during the second half of the year due to initiatives around the launch of Genpact Cora and other marketing related spending. Total G&A expense as a percentage of revenue this quarter declined 40 basis points year-over-year due to improved productivity in operating leverage.

Adjusted EPS for the second quarter was $0.43 compared to $0.36 last year.

The $0.07 year-over-year increase is primarily driven by higher operating income and share repurchase activity of $0.06 and $0.04, respectively, partially offset by $0.02 from higher interest expense due to higher debt levels related to our recent M&A activity and a $0.01 impact from lower year-over-year balance sheet foreign currency measurement gains.

During the quarter, we returned $12 million to shareholders in the form of our second regular quarterly dividend of $0.06 per share that equates to a current annual yield of approximately 1%. Our effective tax rate for the second quarter was 18.3% compared to 18.5% in the second quarter of last year.

Our tax during the first two quarters of 2017 benefited from non-recurring discrete items. For the full year, our outlook is now expected to be approximately 20% versus our prior range of 20% to 21%. Now let me turn to our balance sheet and cash flows.

Cash and cash equivalents totaled $441 million compared to $388 million at the end of the first quarter of 2017. With undrawn debt capacity of $144 million and existing cash balances, we continue to have ample flexibility to pursue growth opportunities and execute on our capital allocation strategy.

As we discussed with you during our first quarter earnings call, largely as a result of our recent M&A activity, our rolling net debt-to-EBITDA ratio increased during the quarter, and as of June 30, 2017, was approximately 1.9 times. Our days sales outstanding were 85 days, in line with last year.

We expect DSO to improve as we progress throughout the year. We generated $84 million of cash from operations in the second quarter of 2017, compared to $96 million during the same period last year, largely in line with our expectations.

Capital expenditures as a percentage of revenue were 3.4% in the second quarter of 2017 compared to 3.8% during the second quarter of 2016. We continue to expect CapEx as a percentage of revenue to be approximately 3% to 3.5% on a full year basis. Now let me turn to our full year outlook for 2017.

With only five months remaining in the year, we have greater visibility into the full year outlook and now expect total revenue to be between $2.66 billion and $2.71 billion, up from our prior range of $2.63 billion to $2.7 billion.

Due to the recent appreciation, primarily in the euro and British pound, we now expect the full year adverse foreign exchange top line impact of approximately $24 million, down from the $33 million we had assumed as of the end of the first quarter.

Additionally, we now expect Global Client growth to improve to 7% to 10% on a constant-currency basis, up versus our prior outlook of 6% to 9%, with Global Client BPO growth now expected to improve to approximately 12% on a constant-currency basis, up from our prior outlook of 11%.

Our adjusted operating margin income expectation remains at approximately 15.7%. As I mentioned earlier, we expect our effective tax rate to be approximately 20% higher than 2016's rate of 18.7% that benefited from larger non-recurring discrete tax items during the fourth quarter of 2016.

Finally, we continue to expect full year adjusted earnings per share to be between $1.53 and $1.57. This includes a $0.01 negative balance sheet FX charge on the 2017 year-to-date basis. There is no change in our assumptions for the overall weighted average shares outstanding for the year.

With that, let me turn the call back over to Tiger for his closing comments..

Thank you, Ed. Today is the 10-year anniversary of the Genpact's IPO on the New York Stock Exchange. As I look back and reflect on our journey so far, I'm amazed how this company continues to redefine the industry.

Our culture of rapidly embracing change, driving innovation and agility permeates throughout our organization and has solidified our reputation for excellence as we serve our clients' needs.

We have evolved from a traditional outsourcing firm to a trusted business partner, helping our clients drive best-in-class operations using our patented Smart Enterprise Processes, our Lean Digital framework, and now Genpact Cora and related transformation services.

I wanted to take a moment to thank our global workforce for the dedication, passion and innovation, they bring to every client engagement. It's because of our people that we have been as successful as we have been.

And I wanted to thank our fantastic clients who are our true partners and with whom we now co-innovate all the time to help them navigate this rapidly changing world.

Our talent, coupled with our cutting-edge solutions positions us extremely well to profitably grow our business and drive client and shareholder value in what continues to be a very attractive underpenetrated market. With that, I'll now turn the call back to Roger..

Thank you, Tiger. We'd now like to open the call to your questions. Michelle, can you please give the instructions..

Our first question comes from the line of Ashwin Shirvaikar with Citi. Your line is open. Please go ahead..

Thank you. And good quarter guys..

Thanks Ashwin..

My question is with regards to, as you look at your pipeline and the new revenues that come in, what percent of it is newer stuff, digital AI and can you discuss the forward-looking sort of margin and cash flow implications of doing more of that work? Yes, let me just start with that..

Yes. So if I were to parse the question and the answer into two parts, Ashwin, in terms of new wins, digital analytics, transformations and new stuff, there are two ways we get that. One is when it gets embedded in the number of the deals in managed services, BPO, analytics, et cetera that we do, as part of what we are calling intelligent operations.

For example, it would be one of the large deals that we signed this quarter where it's finance and accounting global for a large equipment – global large equipment manufacturing company.

Apart from the fact that it's all the traditional stuff that you would expect in a financial accounting operations and moving that to global delivery centers, it includes robotic automation, right out of the gate, it includes the implementation of workflow solution on the cloud, and it includes at phase two, the implementation of a couple of AI-based products around, for example, financial reporting.

That is digital analytics and transformation, but embedded within a larger deal. And I would actually say about 80% to 90% of our deals today have a number of those components embedded.

And then we look at digital-led solutions, an example of that would be for a large reinsurance company where we're going in and implementing dynamic workflow on the cloud for a range of their operations that they run to make their operations really different from the way it runs today, taking out cost, improving cycle times, et cetera.

That's about, as I say, today, 20% of our business, growing at 20%-plus. So if you dial the clock into the next couple of years, that could easily become more than a-third of our business.

And the final point, I would make, which answers your question on margin is, obviously, all of the transformation services and the digital and analytics solutions have a better margin profile.

And as we do more of those and the proportion of that grows in the company that is one of the ways in which you actually get to a higher-margin profile in the company. Having said that, there are other forces that actually do have margin pressure, be it the IT business and some of the old IT work, or the onshore offshore mix, et cetera.

So as we go forward, some of that will play itself out..

Yeah. I think as we said before, the bias is that, hey we liked the revenue, if that becomes a bigger percentage of our business, that's great, is a positive bias there.

And then on the first part too, Tiger, I think when Tiger talked about that digital as a component of our business last year, it was a much – I don't remember the exact number, but it was a lower number, so that percentage is improving year-over-year..

Right, right. And the reason I was asking the question is, one of the more frequent questions we get from investors is with regards to – and obviously, as you do more RPA and more automation, you can drive a lot of productivity for the client.

How much of that incremental benefit, economic benefit can you capture as opposed to going to the client? So that's kind of where I was heading..

Yeah, yeah. Yeah.

No, that's – and the good news – I mean, the starting good news is, we have such an underpenetrated market, Ashwin, that the more we do that, then the more we get the broader digital-led solutions engagements that we talked about, which includes embedding LiveWealth as a product, LiveSpread as a product, the Pharmacovigilance Artificial Intelligence product.

And those are classic transaction-based, outcome-based, licensed fee-based, with services wrapped around it, engagements, very different commercial models. And that's the direction that I think a number of our services will ultimately head in..

Yeah. A quick question, just on numbers. You mentioned parsing out ITO and potentially getting out of parts of it.

Was there a financial impact of that that you can walk through?.

So Ashwin I want to clarify, I don't think we said we are getting out of parts of it, we have de-prioritized focus and investments in specific parts of our ITO business and reprioritized and doubled and tripled down in other parts of our ITO business and we called out the big vector there would be how deeply connected is it to our domain expertise, be it risk or commercial lending or wealth management et cetera, that I said.

So it's not really getting out. So therefore, to that extent, there is no financial impact of what I just described, it's actually reallocating resources and focusing our resources where we think is the best bang for the buck..

Understood. Thank you for that clarification..

Thanks, Ashwin..

Thank you. And our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Your line is open. Please go ahead..

Hi.

My first question is, how do you feel about IT services at this point, has it bottomed? And how sustainable is that rebound in capital markets?.

Joe, a little bit, the answer would be based on what's the trajectory investment banks are going to take in their industry. One would argue that that industry will continue to undergo structural change. As that structural change continues, I think we will be a partner in that structural change in its ups and downs.

So I think part of the answer is it's difficult to predict how the industry goes.

I think from our perspective, I think we have clearly refined our focus in that vertical like in the other parts of our ITO business, so we feel more comfortable with the stability that I think that vertical and the broader IT business has achieved, is the way I would answer that question..

Got it. And so how sustainable is this pickup in demand that you saw? I mean it seems like Washington continues to have some challenges and then the macro data it's stable, but it hasn't really upticked. So I'm just wondering, it seems like you saw a little bit of uptick in demand, wondering how sustainable you think that is..

Joe, I don't think we're seeing an uptick in demand driven by macroeconomic uptick. It's more around a number of our client leadership teams, as I said, moving from how do we respond to some of the changes in the macro, including taxes and Visas and changed political environment, two, this is the way we're going to respond.

And that includes, I'm going to leverage more digital technologies to transform.

I'm going to continue my journey around changing the way we run the business, so there's a little bit more confidence that we're finding in the leadership teams that we deal with to actually be more decisive in their journey forward as compared to let's say, towards the end of last year..

Got it. Okay. And then how should we think about revenues and margins in the second half of the year? What does the cadence look like in the next two quarters? And how does it look from an organic versus inorganic growth rate? Thanks..

Yes, Joe, so we gave the full year outlook for revenues. The only color I'd give you to quarterize is the year-over-year comparison is a little bit tougher in Q4 than in Q3. So slightly better growth of the remaining six months in Q3, a little lesser in Q4 is the guidance I'd give you.

And then the second part of your question related to operating margin. So operating margins should appreciate as we go throughout the balance of the year, a bit in Q3 and in Q4 as we get levered. So that one I wouldn't use your revenue model to assume how much the leverage happens. But full year at 15.7%, I'd expect the uptick to be reasonably smooth..

Thank you..

Thanks, Joe..

Thank you. And our next question comes from Anil Doradla with William Blair. Your line is open. Please go ahead..

Hi. This is Maggie Nolan in for Anil Doradla. My first question was about the acquisition that you all announced today. It seems like that complements some of the acquisitions that you've done in the past.

Do you think that's a reflection of maybe a strategic move towards managing client processes from end-to-end, and does that go hand-in-hand with your strategy to do more digital work? Can you comment on that a little bit?.

So Maggie, you just took the words out of my mouth. That's the answer.

The acquisition that we did of BrightClaim, the insurance claim in the P&C space and the folks who manage that with operations in Atlanta and Austin, Texas, was one that we did at the beginning of the year or in the middle of the year, and then this is a OnSource digital technology company that actually does similar processing, but using digital tools.

The combination is what is going to be value for clients, along with the fact that we have a very mature and robust insurance business in that same vertical. Both those acquisitions as you can imagine were very specifically targeted as part of our strategy and M&A exercise.

And I think we feel very pleased about the fact that they both straddle the same space, they come together really well and the opportunity is really to change the way client run, for example, claims in the property and casualty space..

Okay, great. And then more on the topic of the insurance space. It seems like there has been a lot of activity from the BPO players in that space and there's lots of opportunity. Can you talk about the competitive dynamics there, and how you guys are able to differentiate, perhaps also in the context of these acquisitions? Thanks..

So Maggie, we've always been very competitive in the insurance vertical and that goes back to our history of having insurance as one of our deep domains, almost going back to the beginning of the company when we were part of GE Capital and GE. And we've continued to sharpen that domain expertise over the years.

And we've included in that over the last three or four years much deeper digital capabilities around insurance. And as I said, the acquisition that we did BrightClaim further reinforced our domain capability in that space.

That competitive landscape has been pretty consistent for quite a few years now with people who have domain depth as the only players who actually are successful in that space.

More and more, the view we've always had is that the competitive landscape is going to be based on domain expertise that then is able to leverage technology such as AI, because our view is that AI comes to life and really adds value and disruptive value only when it really is seeped in domain and is able to leverage domain and the context as well as has access to data in that domain..

Thank you..

Thanks, Maggie..

And Joe, back to the question, there was a piece of your question that I didn't answer, you talked about organic versus inorganic growth. So we did talk about for the quarter, about 1% of that growth was based on inorganic, and I'd say roughly the similar amount for the full year, 1% or maybe just slightly more than a 1%.

So that will be flowing through with the top line revenue growth..

Thank you. And our next question comes from the line of Puneet Jain with JPMorgan. Your line is open. Please go ahead..

Hi. Good quarter, guys..

Thank you, Puneet..

Sir, growth rates improved by a lot in the quarter, top line growth rate improved a lot. But it doesn't look like all the benefits are flowing through in full year results.

So beyond the tougher comps that you'll experience in 4Q and more generally in second half, are there any headwinds that you expect maybe at GE or otherwise that could hurt growth rates?.

So just answering the GE portion first, we have in our outlook said that our expectation for GE now is 16% to 20% decline and that's different, and a higher decline than the expectation we had as we started the year. So part of it is answered there.

And then some of the performance in quarter two, about half of it was an acceleration of the integration of the acquisitions that we had done versus what our expectations were.

And the balances is flowing through and makes the quarter three, quarter four, a more steady quarter three, quarter four versus a ramped quarter three, quarter four, that on the face of it was going to be a tougher ramp. And that led us to change our guidance at the bottom end and at the top end..

Got it..

Yeah. We like a linear nature of the balance of the year, which is better I'd say. And then you also asked the question about why isn't that flowing through at the bottom line to EPS, as we look at the analysis, the organic growth that Tiger talked about, we saw a bit of that in Q2.

We're going to see a bit more of it for the second half of the year as well, part of the reason why we rose the guidance was that organic growth.

That flows through about an incremental $0.01 in terms of EPS for the full year, that's partially offset – or offset by the $0.01 of FX that you heard us talk for foreign currency related translation losses, as well as the inorganic – the M&A revenue coming through at a 15.7 points of operating margin roughly being offset by the interest cost.

So in the net, the acquisitions are just under $0.01 dilutive in the first year as you might expect as we're in the ramping phase of those acquisitions. So that's why the net of the growth that you're seeing isn't flowing through the EPS because of those three items..

Got it.

And Tiger, if you can also comment on how you are going to integrate Cora in your delivery? How those contracts are going to be structured? And how does your visibility compare on those contracts with rest of your business?.

So Puneet, the way to think about Cora is that it is a platform that actually has modular integration of various digital technologies. And while the overall vision is for a client to buy into the overall full vision, not everyone needs to jump on to the full platform with its entire vision on day one.

In fact what we're seeing is that a lot of clients prefer to start with for example, robotic process automation and then move on to using AI to drive pretty disruptive change in the way, for example, they run their commercial lending business or their wealth management business.

The advantage of Cora is that once you jump onto the platform with only one module, you can actually bring in the other modules over time. You can connect the other modules to each other because they're open architecture with APIs. The APIs can connect to the ERP layer.

And as technologies evolve, you can actually change those modules without much investment and get the new module in.

And finally, as we've said, the most important thing that we think is needed in the journey around robots and robotics and AI is to have a governance layer that actually manages all of this, manages the change, manages compliance, manages conformance, and when something is not working to actually dive in and fix it immediately.

So that's what Cora does. A lot of the contracts would be dependent on, whether it's robotics, whether it's AI, whether it's a connected piece. A lot of them will turn out to be outcome-based, will turn out to be transaction-based, will turn out to be license-fee based..

Got it. Thank you..

Thanks, Puneet..

Thank you. And our next question comes from the line of Edward Caso with Wells Fargo. Your line is open. Please go ahead..

Hi. Thank you. Good evening..

Hi..

First question.

Just want to make sure that the OnSource acquisition just announced, is that most of the increase in the revenue guide for this year other than the FX adjustment?.

No. Ed, that's minimal, almost nothing..

Almost nothing..

...contribute to it. It's what Tiger said, it's organic growth picking up nicely along with a little bit better as well on the inorganic side from the existing acquisitions due to the speed of the integration, and then partially offset by some of the GE decline that you heard us talk about. So it's a nice combination actually..

Yes, unlike BrightClaim which was a more operating business acquisition in the insurance space, OnSource is a digital technology and is not a material revenue contributor, it's a very strong capability that we're bringing in, which when combined with the capability we have at BrightClaim and our insurance vertical is where value will get created..

Great.

The moving away or the selling of the KYC business, I remember that being trumpeted as a great example of your desire to get into building BPaaS's, is this a signal here that you're moving back to being more responsive to client requests as opposed to building BPaaS solutions and then hoping clients come to it?.

I think, Ed, it's a reflection of three things. One, I think it's a reflection of the world we are in which is to experiment and constantly reevaluate whether that structure is the right structure to deliver the best value to our clients.

The second, it's a reflection of – in the case of kyc.com, the conclusion that we came to with our joint venture partner was that it is at this point of evolution when actually the BPaaS had been fully built out and was actually, pretty successful in delivering the value that it was meant to deliver, the ongoing build and the implementation in that particular BPaaS space was better managed by our JV partner, while the long-term contract on managing the services behind it for the same services should be managed by us, which is why we entered into a client on-boarding, managing the KYC services behind that platform for that same service.

So I think it's very specific to kyc.com and I think we need to be agile in this world to experiment and then change constantly as that world evolves. And the contra example to that is in the pharmacovigilance space we believe that given our domain expertise in the pharma space and what we build, we think that's going to play out differently..

Ed, can you talk a little bit about the $12 million again, in the June quarter? I see that it's about 16% of operating income and the way I understood your math here, it's actually included in the $0.43.

So what is it and sort of why is it – it looks like it's a nonrecurring thing, so why is it in the sort of recurring number?.

Yes. So it's an India-based subsidy. What I had said was operating margins would have been on a normalized basis about 15%, which is what we would have expected on a normalized basis without this kind of improving on the trend from Q1 to Q2 and throughout the balance of the year.

We consider it to be a recurring item because we know for this year, for 2015 to 2016, this is what this relates to, the 2016, 2017 year is also in process and this thing will need to be renewed every year, but we do think it's a recurring in nature item. We actually planned for it.

It's in our operating plan obviously within our guidance as you heard me talk about it. So it's related to the specific services that we provide in the jurisdictions that we provided. And again, as I said, we expect it to recur.

So it's a – this subsidy is consistent with the other subsidies that we received and we've classified them always in other income and expense, and that's where it is. And it's always been included in – that type of item is always been included in our operating margins..

Terrific. Thank you..

Thanks, Ed..

Thanks, Ed..

Thank you. And our next question comes from the line of Keith Bachman with Bank of Montreal. Your line is open. Please go ahead..

Hi, guys. Steve Schneiderman pinch hitting here for Keith tonight. Wanted to talk about ITO real quick. I understand that from prior question that we're not changing around the margin profile because you're shifting investments from the underperforming areas to the areas where you're doubling down.

But doesn't that over time create a little bit of a margin benefit from shifting from the lower margin areas to the better margin areas where you're focusing, and hopefully, growing that business better?.

Yes, we've gotten that question before. We certainly think there's a bias, which is good. We like towards higher margins, but again, this is an uncertain world. So we like that that bias is shifting as more and more goes to transformation services with higher margins as you might expect, that's a good thing.

But we'll give you an update on our outlook and operating margins year-to-year, but hopefully over the long-term, that does play out, and that's definitely where our head is in terms of view, but we'll guide to year-to-year on what we think operating margins do.

Anything more, Tiger to add?.

No, specifically, on the ITO side, very similar. Longer term, that's the direction it will go, but we haven't found that out yet. But, clearly, that is exactly the way it will move..

Okay, great. Thanks for clarifying that one.

On free cash flow, can you talk about some of the puts and takes for the quarter given that the operating performance was solid, DSOs flat year-over-year, why didn't we see a little bit of a better bounce there?.

I think you can look quarter-to-quarter, and you can also look year-to-date, year-to-date we are ahead of where we were last year. As you know, quarter-to-quarter those things can move with balance sheet movements, tax payments, accruals and the like, so it's on a year-to-date basis very much aligned with where we expected.

And as I said in the quarter it was largely aligned, it's probably a little bit lower, but we were a little better in Q1. So on the DSO side, I would say, it's very much along the trajectory that we had expected for the full year, no change in our expectation of year-over-year growth..

And the full year guide is intact for 4% growth?.

Yes, yes, as I said, full year, no change..

Okay. And last one for me, on the margins. Given that you had the 150 bps benefit on the quarter, even if we ex that out, if you get to 15.7% for the year, it seems like you'll get a little bit of a benefit from a ramp from Q3 and Q4, although less than honestly that we were expecting, and as you guys displayed in 2016.

Is there anything that's changing for the margin profile for the rest of the year? Or does this just happen to be when you are able to receive the subsidy coming in?.

Yeah. So the subsidy was factored into the full year on more of a smooth basis, right.

So if you divide that by four you can kind of say, hey this is how you would have expected to be on an annual basis, but just the way it happens, we had to record it in the quarter that it was approved and received, so that's just lumpy, but we – again as I said we factored that in.

In our plan, we actually factored in on a more smooth basis quarterly, but it hit this quarter.

In terms of – so if you include that in the full year grade Q3 and Q4 should not have that type of item in it because it's all in Q2, but for the balance of the year you should see the normal increase in our operating margins as we leverage the top line growth through to the bottom line.

And I think, as I said that should be a reasonably smooth uptick Q3 to Q4 such that for the full year we get to that 15.7% outlook..

Okay. Great. Thanks, guys..

Thank you..

Thank you..

Thank you. And our next question comes from the line of Frank Atkins with SunTrust. Your line is open. Please go ahead..

Thanks for taking my questions.

I wanted to see if I could get an update on revenue by geography and any changes or trends as you look at North America versus Europe versus UK?.

So nothing to call out that's different. We have always focused on North America that includes the U.S. and Canada, UK and Western Europe, Continental Europe, Japan and Australia as our core markets and core Global Clients in those markets, et cetera.

And as we look at those markets across various verticals of ours, there's nothing that is specific that I would call out as different. We've always had a very strong position in the U.S. obviously. We see Canada, particularly in the banking space continue to move forward.

We've always had very strong presence in the banking and insurance space in Australia. Japan has always been the way it is, which is you got to be there long-term, we've always been committed to Japan in the long-term. And as we continue to be committed there, we see progress there.

And then Europe, both UK and Continental Europe continue to make progress. So nothing special to call out..

Yes. I mean high-level, U.S. about 70%; Europe, about 20%; Asia-Pac, about 10%, roughly, no real change there..

Okay, fantastic.

And then also if I could get an update on wage trends, the hiring environment and the attrition number for the quarter?.

Wage trends are broadly stable. Obviously it's different across different economies that we operate in, ranging from the U.S. to Europe, which are all significant geographies for us from an operating perspective, with broadly about 5,000 people each. And then onto China, Philippines and India, nothing that's unique.

Obviously, we are broadly in a stable inflationary environment, there's obviously a war for talent when it gets to specific talent around digital and analytics and consulting and deep domain and that's been the case for some time now.

I think being an Employer of Choice and a place where people can really do cutting-edge work that actually gets implemented and executed and drives value for clients is we believe more important than just wages. And we see that play out, and we've seen that play out year-on-year for many years now. On attrition it's stable again across the globe..

It's a little higher, but in the relative range and most of that is managed turnover..

Okay, great. Thank you very much..

Thank you..

Thanks, Frank..

Thank you. And our next question comes from the line of Bryan Keane with Deutsche Bank. Your line is open. Please go ahead..

Hi. This is Ashish Sabadra on behalf of Bryan Keane. Congrats on the good quarter..

Thank you, Ashish..

Yeah, Tiger, my question for you was, you talked about a pickup in momentum on big deals. I was wondering if you can talk about if there are certain verticals or geographies that you're seeing more of those bigger deals coming in..

Actually, Ashish I was just thinking as you were asking it's all the verticals that I called out as verticals that have had a very uniform performance, which has led to our 15% constant-currency Global Client BPO growth. I talked about one of the big deals that we closed, which was in the large equipment manufacturing space.

Another one that we closed in the quarter was in the banking space, specifically a large financial institution where it's going to be in the mortgage processing and the mortgage underwriting space. We see similar activity in insurance, in CPG, in life sciences and in high tech.

So interestingly enough, across the range of verticals that we cover and a large range of those verticals we see both activity and closure..

That's great, that's great. Just maybe a quick follow up was, healthcare was one of those vertical other than capital markets, which was weak in prior quarters. It looks life sciences overall is doing well.

But I was just wondering if you could provide any more color, have you seen a turnaround there and what's driving that?.

So for us, life sciences is a separate vertical from healthcare. They are two separate verticals. Life sciences has always been doing well. In fact, the pharmacovigilance example that I just gave where we are applying artificial intelligence is in the life sciences vertical.

Healthcare is not one of the verticals, which has grown as much as the other verticals I called out. So that's a separate vertical and that's a smaller vertical, and a much smaller verticals than the life sciences vertical..

It's the smallest vertical we have..

It's the smallest vertical we have..

Yeah..

Any particular color on the like plans for turnaround there or it's just a small vertical, and you just plan to deemphasize that maybe?.

Yeah. I don't think it's material enough to spend too much time on it, Ashish, so nothing to write home about. I think there are clear connections between some of the life sciences work and healthcare work, but nothing specific to call out there..

That's helpful. Thanks again and good work..

Thank you. Thanks, Ashish..

Thank you. And our next question comes from the line of Bryan Bergin with Cowen. Your line is open. Please go ahead..

Hi, guys. Thank you.

On the IT services business, can you give us a sense of how much of that you plan to be doubling down on versus how much you're deemphasizing?.

I would say, if you leave the capital markets business as a separate vertical, of the balance, I would say, 60%-40%. 60% double down on, and 40% probably focused less on, and reallocate resources, which is actually something that we've done, so it's not something that is in the plans, it's been done. So it's more a 60%-40% kind of a split..

Okay. Thanks.

And then can you just talk about the changes in the competitive environment as you're growing the transformational services? And are you seeing a visible change in your win rates, or you think this is more (57:46) at this point that you need to have?.

So transformation services is very critical for two reasons. Reason number one is that we actually have a right to partner with our clients, given our depth of domain and process understanding to help our clients navigate through digital transformation.

Our clients when they engage with us, believing that they choose us for that reason and we win for that reason. The second – and therefore it's important for us to bring that to the table for our clients if you really want to be a trusted partner on their digital transformation journey. So it's very, very important.

The second is when we do that, there's no question that while it leverages all our domain and process understanding, our ability subsequently to win and partner with them on intelligent operations, managed services in the long run increases, pick a number, 2 times and 3 times, because you are in there and actually have designed the roadmap and actually started implementing some of the digital technologies and tools, et cetera.

So I would say as I described the interplay between intelligent operations and digital-led solutions and the synergistic relationship between the two is what is most exciting, and it's brought together by our depth of domain in the places that we play in..

Okay. Thanks.

And just one follow-up on the transformational services, how is your onshore mix changed as you're growing that business and just talk about your hiring efforts in the U.S?.

So clearly, transformation services is a significantly higher proportion onshore because these are projects, these are engagements where you're actually with the client in their operations and helping them drive the change and implementation, you are doing assessments, you are doing workshops, and so on.

To that extent, clearly, the mix, particularly when it comes to consulting and digital has changed. When it comes to analytics it's also changed, but remember analytics also has a significant delivery component attached to it when you create centers of excellence that actually then run the analytics longer term.

Our effort to build those teams out, not today, but over the last four years, I would call out, has been highly successful. We will continue to march down that path, bringing in data scientists, bringing in digital experts and then bringing in these not just into the company directly, but also through acquisitions.

So whether it is a leadership team that came with the Endeavour acquisition, the PNMsoft acquisition, the RAGE Frameworks acquisition, now the OnSource acquisition, all of them are people who actually become part of our leadership team around digital consulting, analytics consulting and leading that charge into the marketplace..

Thank you..

Thank you..

Thank you. And our last question comes from the line of Eric Ciura with Baird. Your line is open. Please go ahead..

Hey, guys. Nice job this quarter..

Thank you, Eric..

Yeah. My first question is, just looking at revenue growth sequentially in Global Clients, historically, the last five years it's been very consistent about a $15 million to $20 million sequentially in Q2 each year, this year was up nearly $50 million.

So, I guess, one, why was growth sequentially so good this year? And then, just in the back half, why are you expecting to return about a more normalized pace of sequential growth?.

So I would start by saying what we've always said, which is a quarter in our business is tough to look at as a independent quarter. We are a long cycle business. We are a long cycle business that actually – it's easier and better to talk about the year because these are long cycle contracts, take one year to negotiate and then bring home.

So when we look at quarter two, we won a set of deals that closed in the quarter. That actually started getting executed in the quarter. Half of that was obviously because of the acquisitions that we did and the integration of those acquisitions were faster than we had originally planned.

So I wouldn't necessarily assume that a quarter like that is therefore, means that it's the way it's going to play out every quarter. Because it's more around the full year, which is why Ed talked about, when you look at the year, it actually makes the growth in Q3 and Q4, much more steady and straightforward..

Okay. Thank you. And then secondly, just looking at margins next year.

Now that you're divesting the KYC business, which has been about a 30 basis points to 40 basis points plus headwind to margin, and you also may be kind of lapping some added investments in the acquisitions and I know you had a headwind to margins this year from GE being down so much.

Is there any reason to think why next year margin expansion can't be greater than the 20 basis points you're guiding to this year?.

I think we'll speak to next year's margins when we get there. But just like every year, you're going to have your pluses and minuses, we'll get to that. We didn't speak a lot about foreign currencies, foreign currencies like the rupee has appreciated significantly.

That could be, like you said, offset by some of the things you had talked about, but there are a lot of gives and takes. We'll come back to you on the Q4 earnings call in February and give you an update on our view for 2018..

Great. Thanks, guys..

Thanks, Eric..

Thank you. And I would now like to turn the conference back over to Roger Sachs for any closing remarks..

Thanks, Michelle, and thanks, everybody, for joining us today. Look forward to speaking to you next quarter..

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