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Genpact (G) Beats on Q3 Earnings as Revenues Increase

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Genpact Limited G reported strong third-quarter 2016 results. Non-GAAP earnings (including share based compensation) increased 9.1% year over year to 36 cents, which beat the Zacks Consensus Estimate by 3 cents.

Revenues increased 5% from the year-ago quarter to $617.8 million. Global clients (84% of total revenue) revenues surged 8% (10% at constant currency) to almost $543 million, while revenues from general Electric GE fell by the same magnitude to roughly $106 million (16% of total revenue).

Overall, total BPO revenues (81% of total revenues) advanced 9% year over year to $526 million. Global client BPO revenues jumped almost 13% (15% at constant currency). Consulting, digital and analytic services grew more than 20% during the quarter and represented about 20% of revenues.

However, global client ITO revenues slumped 9% in the reported quarter primarily due to lower technology spending in the investment banking and healthcare markets.

GENPACT LTD Price, Consensus and EPS Surprise

GENPACT LTD Price, Consensus and EPS Surprise | GENPACT LTD Quote

For the 12-month period ending Sep 30, 2016, number of clients with annual revenues over $5 million increased to 107 from 103. This includes 33 clients with more than $50 million in annual revenue, down from 34 clients. Clients with more than $25 million in annual revenue remained constant at 16. Genpact now has six clients, including GE, with more than $50 million of annual revenue, which is up from four.

Operating Details

Gross margin expanded 30 basis points (bps) from the year-ago quarter to 39.5% on the back of improved productivity.

Selling, general & administrative (SG&A) expense increased 80 bps on a year-over-year basis to 24.2% in the reported quarter.

Non-GAAP operating margin (including stock based compensation) expanded 60 bps from the year-ago quarter to 14.7% driven by higher gross margin base.

Balance Sheet & Share Repurchase

As of Sep 30, 2016, cash and cash equivalents were $468 million compared with $407 million as of Jun 30.

During the quarter, Genpact authorized a $250 million increase to its share repurchase program, bringing the total authorization to $750 million. In the third quarter, the company repurchased approximately 6 million shares for $156 million.

Guidance

For full-year 2016, revenues are now anticipated in the range of $2.57–$2.58 billion. The net foreign exchange adverse impact is now approximately $43 million, up from the company’s previous outlook of $41 million.

Genpact anticipates strong Global Client BPO growth in the fourth quarter. However, contraction in discretionary technology spending will continue to impact the IT service revenues.

Global Client revenues for 2016 are now expected to grow at approximately 9% to 10% due to the decline in IT spending. Regarding GE, the company now anticipates revenues to decline approximately 6%.

Non-GAAP operating income margin are expected to be 15.5%. Earnings are anticipated to be in the range of $1.42–$1.43 per share.

Cash flow from operations is expected to increase almost 6% from 2015. Capital expenditure is anticipated to nearly 3% of total revenue.

Zacks Rank & Key Picks

Genpact has a Zacks Rank #2 (Buy). Acacia Research ACTG and ManpowerGroup Inc. (MAN - Free Report) sporting a Zacks Rank #1 (Strong Buy) are two better-ranked stocks in the broader business services sector. You can see the complete list of today’s Zacks #1 Rank stocks here.

Acacia’s and ManpowerGroup’s earnings are anticipated to grow 20% and 10.1%, respectively, over the long term. Genpact is estimated to grow at 13%.

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