Genpact LTD Q2 FY2020 Earnings Call

Good day, ladies and gentlemen. Welcome to the 2020 Second Quarter Genpact Limited Earnings Conference Call. My name is Victor, and I’ll 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 the conference call. As a reminder, this call is being recorded for replay purposes. The replay of the call will be archived and made 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.

Thank you, Victor, and good afternoon, everybody, and welcome to Genpact’s second quarter earnings call to discuss our results for the quarter ended June 30, 2020. We hope you had a chance to review our earnings release, which was posted to the IR section of our website, genpact.com. Speakers on today’s call are Tiger Tyagarajan, our President and CEO; and Ed Fitzpatrick, our Chief Financial Officer. Today’s agenda will be as follows. Tiger will provide an overview of our results and update you on our strategic initiatives. Ed will then walk you through our financial performance for the quarter, as well as provide our new outlook for 2020. Tiger will then come back for some closing comments, and then we will take your questions. 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 that we believe provide additional information to enhance the understanding of the way management views the operating performance of our business. You can find a reconciliation of those measures to GAAP in today’s earnings release posted to the IR section of our website. And with that, let me turn the call over to Tiger.

Thank you, Roger. Good afternoon, everyone, and thank you for joining us today for our 2020 second quarter earnings call. Our second quarter results were much stronger than expected in light of the unprecedented environment the world is facing. Our performance was driven by incredibly strong execution by our teams on many fronts as well as the resilience of our business model and the strategic choices we’ve made over many years. The four biggest drivers of these results are: first, reaching over 99% work enablement for our global delivery teams across both intelligent operations and transformation services. Second, continuing to win new client relationships in both intelligent operations and transformation services through global lockdowns. Third, rapidly bringing new solutions to market, leveraging both existing and new capabilities as we help our clients pivot their business models through accelerated digital transformation. And fourth, swiftly and decisively optimizing our operating and SG&A cost base while continuing to invest in new areas relevant for our clients and the world of the future. The amazing dedication of our more than 96,000 person global team, as we transitioned to remote virtual work and the continued high quality delivery of services to our clients makes me very proud and has strengthened our trusted advisor position with boards and C-suites. Specifically during the second quarter, total revenue was $900 million, up 3% on a constant currency basis. Global Client revenue grew 4% on a constant currency basis. We also delivered adjusted operating income margin of 16.2%, up 80 basis points year-over-year, and adjusted diluted earnings per share of $0.52, up 6% year-over-year. The first half of this year has more than adequately demonstrated the strength and resilience of our strategic choices and industry verticals and the predominantly non-discretionary nature of the solutions and services we provide for our clients. Our exposure to the hardest hit industries is limited. Additionally, a substantial portion of our business is annuity based, even in our transformation services business. Our client-facing relationship teams and our transformation services teams, working in a completely virtual environment, have been able to bring to market several digital and cloud-enabled solutions that we have been deploying over the last couple of years. This has led to continued new deal inflows, a buildup of our pipeline to an all-time high, and new logo wins. The consumer goods, retail, insurance, and high-tech verticals led the way to double-digit growth. Anticipated pressure in our banking and capital markets vertical eased as we secured additional client approvals through the quarter to enable work-from-home for processes managing highly sensitive customer information. Transformation services that includes consulting, digital, analytics, and the right point experience business grew in the mid-teens, demonstrating the increased importance of digital transformation to our clients in these times. We also provided solutions to our clients for cash and working capital optimization, supply chain redesign, reducing payment fraud in banking, and implementing cloud-based automation and insurance underwriting among many others, all in our rapid, agile fashion. Transformation Services now accounts for approximately 30% of our global clients' revenue. At the same time, our CEO and C-suite discussions have increased almost five times, allowing us to understand their strategic competitors in these times and create new sole source opportunities, both with existing relationships and new logos. The highly collaborative way we transitioned to work-from-home and the continuous delivery of our service level metrics, productivity, and continuous innovation have given us a stronger seat at the table in many clients' existing relationships. We see five big trends that are here to stay for our clients across industries. First, a significant shift from offline to online. Second, virtualization of all technology services and solution delivery. Third, an accelerated consumption of cloud-based services and solutions. Fourth, an exponential growth in real-time predictive analytics. And fifth, all of the above with the human-centered design of process and collaboration experience. These trends play well to our focus over the last few years on partnering with clients on their digital transformation journeys. These transformations have seen a dramatic compression from what typically used to be a five-year horizon to 18-month horizons. A key area of increased investment is our cloud service offerings. We believe successful digital transformation, leveraging cloud-based solutions requires three competencies that we're investing in: deep domain knowledge to drive the functional design and configuration of new business architecture; transformation services that help discover, plan, change, manage, and programmatically drive cloud projects across all four assets in our company: people, processes, data, and technology; and finally, the ability to bring together the building blocks of services on a cloud backbone in an agile way. We are partnering with top cloud providers to bring these cloud-based solutions in all our high-priority areas, such as finance and accounting, supply chain management, banking operations, and insurance operations, to name a few. For example, for a large industrial client, we are reimagining their cash collections process to reduce errors in payments and improve regulatory compliance by replatforming their collections application to Amazon Web Services in order to drive improved cash flows. A second area of heightened focus and investment is digital commerce, where we are working with clients in both B2B and B2C markets. As the world shifts from offline to online, our clients need to reimagine their business models by redesigning their core operating processes, as well as front-end design and experience. In the world of digital commerce, a seamless flow of data, payments, and products are vital to deliver great customer experiences. We are uniquely positioned to help them connect that reimagined front end with a redesigned supply chain management, auto management, and end-to-end finance processes. This gives us a differentiated advantage to help clients succeed in their pivot to online. For example, for a leading CPG company that is dramatically scaling its digital commerce business, we are redesigning its entire middle and back office stack and processes and connecting it to new front-end platforms. We are leveraging AI and predictive insights to reimagine supply chain operations, trade promotions, and cash collections to reduce leakage and improve user experience. All of this has led to an expanding pipeline, including many large deals. The pace of progress through various stages of the pipeline for many of these large deals has become slow, but overall aging remains in line with historical trends, and we are seeing increased deal activity and inflows. We signed several new deals in the second quarter and are gaining share with both new and existing clients. We expanded our longstanding partnership with Walgreens Boots Alliance, which selected us as a long-term partner to help improve its finance capabilities, costs, and controls. Leveraging our deep domain process expertise in retail and healthcare, as well as AI, automation, and analytics solutions powered by Genpact Cora, our digital business platform, we will work together to standardize finance processes, foster smarter access to data, and unlock savings to drive innovation through Walgreens Boots Alliance and help drive improved business outcomes. We were also selected by a global bank to deliver marketing operations and campaign management utilizing our data and analytics capabilities. Additionally, we are supporting a large scale-up in collections across multiple geographies for that bank. We now have with this bank, a deep and diverse relationship with solutions spanning customer service, collections, core operations, credit and risk, data quality and governance lending on marketing operations. We believe speed and agility are key drivers of success that enabled us to quickly respond to changes in the marketplace and bring innovative solutions to our clients. This allowed our teams to successfully transition through a primarily work-from-home model, update our Smart Enterprise Process (SEP) frameworks with new protocols to run services virtually, and provide clients with detailed playbooks on how to adjust their processes for the work-from-home environment. We have also rolled out several new solutions over the last few months, contextualized to our chosen industries and focused on specific outcomes for our clients. Let me share a few examples. For many of our clients, our forecasting as a service solution with AI and machine learning leverages non-traditional client data and other external datasets to forecast key business metrics such as revenue, cash, and inventory in a world where traditional forecasting methods based solely on historical trends are no longer reliable. For a large industrial manufacturing company, we are using an AI and machine learning-aided buying process and a cloud-based automated solution for procurement to improve user experience, increase visibility, and drive spend reduction. For clients across multiple industries, we are leveraging AI and machine learning to detect duplicate and fraudulent claims in areas with high volumes and limited visibility. The strength of these solutions fueled our mid-teens growth in transformation services even in these times. These highly focused engagements often set the stage for future long-term annuity engagements. We believe in this virtualized world, a work-from-anywhere model that offers the flexible mix of home and office delivery will become the norm. All service delivery models will include onshore, nearshore, offshore, and work-from-home based on client processes, regulatory constraints, and employee preferences. This provides unconstrained access to talent pools across the globe, enhances business resilience and continuity, and can improve both employee and customer experience. We're already piloting a permanent work-from-home model in select geographies with plans to potentially leverage this globally. Throughout the last several months, our proprietary platform, TalentMatch, has allowed us to identify talent available for redeployment from one part of our business to another, as the needs of our clients change. Combined with our reskilling platform, Genome, this bolstered our ability to scale the work-from-anywhere model and improve our employee utilization globally. We have also adjusted our cost base for the lower growth expectations for this year by taking actions to further improve our utilization levels and optimize our real estate footprint, providing us with the flexibility to balance our short-term needs with the ability to invest in long-term growth opportunities. The timing of a large-scale return to the office remains unknown, given the various epidemic stages of COVID-19 across the geographies we operate in. With the health, safety, and overall welfare of our global workforce as a top priority, we are prepared to continue to deliver services for our clients and innovate for them in a predominantly work-from-home model. Any return to the office will be implemented in a slow and deliberate manner, with social distancing, temperature screening, and other protocols in place. The essential nature of the product we deliver for our clients plays a key role in global commerce and positions us well to handle the high levels of uncertainty in the macro environment. Clients want a strategic partner with a broad global delivery footprint to diversify their operations and help them undertake an accelerated digital transformation journey that allows their business model to adjust to the new normal. What the last seven months have shown us is that our deep domain depth and process expertise, as well as our investments in digital transformation services, help us maintain a strong competitive advantage. All of this would not be possible without the disciplined efforts of our leadership teams, who constantly move with speed and agility, pivot to the new, and drive our values and culture deep into the organization. With that, let me turn the call over to Ed.

Thank you, Tiger, and good afternoon, everyone. Today I will review our second quarter results as well as provide our current full-year financial outlook for 2020. Beginning with our second quarter results. Total revenue for the second quarter was $900 million, up 2% year-over-year or 3% on a constant currency basis, led by better than expected performance in both our global client and GE businesses. Global client revenue, which represented 87% of total revenue increased 3% year-over-year or 4% on a constant currency basis ahead of our expectations. Performance was driven by improved revenue coverage related to our transition to our remote working model and stronger than anticipated client demand for transformation services. As Tiger mentioned earlier, overall revenue coverage improved as we received additional approvals in our banking and capital markets business to work-from-home and we were able to allow certain employees around the globe to return to the office using a disciplined and measured approach. During the quarter, we continued to expand the size of our global client relationships. For the 12-month period ended June 30, 2020, we grew the number of global client relationships with annual revenues over 5 million from 121 to 132. This included clients with more than $50 million in annual revenue growing from 8 to 11. GE revenue declined 2% year-over-year. Adjusted operating income margin was 16.2%, compared to 15.4% during the same period last year, largely driven by better than expected revenue growth coupled with the accelerated cost containment initiatives we drove during the quarter. The cost containment initiatives included lower discretionary spending, targeted reductions of transformation services headcount, which improved utilization levels. We did SG&A headcount and related spending, which is now more aligned with our new revenue level expectations. Lower travel and favorable foreign exchange also contributed to the improved adjusted operating income margins year-over-year. As Tiger referenced in his prepared remarks, with the uncertainty of the impact of COVID-19 during the quarter, we took actions to reduce our run rate cost base. During the second quarter, we recorded a $22 million restructuring charge, representing $11 million of severance costs related to workforce reductions to manage utilization and streamline corporate expenses, as well as an $11 million charge included in other operating expenses related to certain leased properties we no longer plan to occupy. We expect savings from the severance actions to cover the severance cost within the third quarter. These restructuring charges are excluded from our second quarter adjusted operating income. Also included in other operating expenses is an $8 million impairment of certain digital assets that we no longer plan to leverage. As we continue to reallocate our resources to focus on the most relevant and impactful digital solutions for our clients. These costs are included in our adjusted operating income. Gross margin for the second quarter was 34%; excluding the relevant restructuring costs I mentioned a moment ago, gross margin for the quarter would have been slightly above the 34.5% level reported during the first quarter of 2020. The 34% includes the approximately 100 basis point impact with certain clients not permitting work-from-home during the quarter. As such, we expect gross margins to improve as we progress throughout the balance of 2020. As a percentage of revenue, SG&A expenses declined 160 basis points year-on-year, driven by COVID-related cost containment initiatives and lower travel costs that we discussed earlier. SG&A excluding the restructuring charges we discussed earlier declined by 220 basis points. Adjusted EPS was $0.52, up 6% year-over-year compared to $0.49 in 2019. This $0.03 increase was primarily driven by higher operating income of $0.04, partially offset by higher interest expense of $0.01. Our effective tax rate during the quarter was 21.5%, compared to 22.4% last year, largely driven by a change in jurisdictional mix of income. Turning to our balance sheet and cash flows. During the quarter, we returned $19 million of capital to shareholders related to our quarterly dividend of $0.10 per share, which is up 15% compared to last year. While we have approximately $229 million of authorized capacity available under our current share purchase program, we are proceeding conservatively on our share purchases until we have better visibility on the impact of COVID-19. Cash and cash equivalents totaled $867 million compared to $379 million at the end of the second quarter of 2019, and included $330 million related to the drawdown of our bank facility we made early in the second quarter. Our net debt to EBITDA ratio for the last four rolling quarters improved to 1.63x compared to 1.85x at the end of the first quarter. Our day sales outstanding during the quarter improved sequentially to 87 days compared to 89 days during the first quarter. Given the current environment, we will continue to closely monitor the aging of our accounts receivable, which has remained relatively stable through the end of July. During the second quarter, we generated $192 million of cash from operations compared to $126 million during the same period last year. The increase is driven by higher operating income and relatively lower working capital investment compared with last year. Given our strength in liquidity and the recent improvement to debt market conditions, we will likely look to reduce a portion of the balance outstanding on our revolving credit facility during the third quarter. Capital expenditures, as a percentage of revenue was 1.8% in the second quarter, that is one percentage point lower sequentially due to tighter spending controls related to the uncertain environment. With that said, we continue to make investments to support our COVID-19 work-from-home capabilities, including information technology and related information security, and we'll continue those efforts in the coming months. We continue to expect capital expenditures for the full year to be between 2.5% and 3%. As you can see from our results, we've significantly bolstered the strength of our balance sheet. There was no change in our capital allocation priorities. We will continue to invest first in driving organic growth. We also have a solid M&A pipeline and we'll be vigilant in continuing to search for companies that can strengthen our capabilities in our chosen service areas. Let me now turn to our full-year outlook as well as an early framework to help you think about revenue growth in 2021. We expect total full-year 2020 revenue to grow approximately 3.5% to 5% on a constant currency basis. The low end of our range essentially assumes flat sequential revenue for the third and fourth quarters relative to the second quarter level as we continue to believe the second quarter should represent the lowest revenue quarter for the year. The high end of our range assumes single-digit sequential increases in both the third and fourth quarters. For Global Clients, we now expect revenue growth to be in the range of 5% to 6.5% on a constant currency basis. We expect GE revenue to decline 6% to 8% for the year. While we typically do not share bookings guidance, I want to provide some commentary on our current expectations for bookings for the full year 2020 and our early thoughts on how that may translate to top-line growth for 2021. Given the elongated client decision-making cycle that Tiger referred to earlier, bookings for the year are not surprisingly on a pace to be at a lower level in 2020 compared to last year. Given this, we believe the recovery to our top-line growth rate will extend throughout 2021. With that said, given the low penetration rates and growing size of our market, as well as our record pipeline levels we are seeing, we fully expect Global Client revenue growth to return to low double-digit to low teen growth rates as we work our way through this elongation of the current booking cycle. With respect to 2020 margins, we are now expecting to drive adjusted operating margin of approximately 15.5% for the full year. Our intention is to begin dialing back up our R&D and sales and marketing spending for the balance of the year as we get better visibility into sequential revenue growth. Of course, all of this will depend on the progression of COVID-19, but for now we have assumed a relatively stable environment based on the current status. Given this outlook, we are estimating adjusted earnings per share for the full year 2020 to be between $2.03 to $2.07. With that, let me turn the call back over to Tiger.

Thank you, Ed. We are in an industry that continues to be underpenetrated. The need for our clients to drive change with speed has become greater than ever. We are often the advisor and catalyst for transformation journeys with our clients and can bring them the capabilities needed to lead them through these changes. The strategic choices we have made in the industry verticals and service lines we focus on have served us well. Our investments in digital, analytics, and consulting, including the recent acquisition of Rightpoint, allow us to lead our clients through digital transformation journeys at a time when digital is front and center. Our strong execution has reinforced our credibility as a trusted advisor to our clients. The flexibility and agility with which we've addressed our cost base allows us to double down on our investments in cloud and digital commerce, which are increasingly more critical for our clients. We continue to strategically recruit talent to support these areas. The strength of our balance sheet and cash flow allows us to continue to pursue strategic acquisitions to bolster these and other capabilities. If there's one thing the world has shown us, it's that ecosystems win. Along with our clients, we realize that deep and varied partnerships provide speed and expertise in this fast-paced ever-changing environment, and we are constantly deepening our ecosystem of partners. Some of our key relationships include hyperscale cloud providers like Amazon Web Services, Google Cloud Platforms, and Microsoft Azure, specific cloud-based solution providers like Anaplan, BlackLine, HighRadius, and Kinaxis, as well as strategic go-to-market partners like Deloitte, a partnership that we just announced this week. The strength of our inflows and pipeline shows that our strategy and execution is working. We believe several of our recent wins across our chosen verticals demonstrate our reputation as a transformation thought leader. Our belief in our long-term top-line growth trajectory and margin profile remains unchanged. Our long cycle business is complemented by short cycle transformation service engagements, allowing us to help our clients transform their businesses with speed throughout the business cycle. The last several months have reinforced the resilience of this model. One of the things that makes me proud is the way our teams have continued to give back to the communities in which we operate. From running call centers for various state governments in India to support COVID-19 patients, to manage COVID-19 testing data for local governments, to serving meals to underprivileged communities, our teams continue to go above and beyond. We've also opened up parts of our internal reskilling platform, Genome, to the public to allow people to acquire the right skills for the future. We've always believed that a strong culture of diversity and inclusion provides a competitive differentiator to cultivate the best ideas to develop cutting-edge solutions. Over the past 10 plus years, we've made great progress in gender equity, starting with our board representation, my leadership team, and permeating globally throughout the organization. We are sharpening our focus on our racial equity program. We know that there's a lot of work to be done, but we are committed to being part of driving this long-overdue change in the world. I would like to take this opportunity to thank our recently retired Chairman of the Board of Directors, Bob Scott. Over the years, we have all greatly benefited from Bob's leadership, intellect, and wisdom. We wish him all the very best. Our longstanding board member Jim Madden has now taken the helm, and I look forward to partnering closely with him in his new role, building on the great counsel he has provided us over the years. In closing, I want to once again recognize the amazing work and dedication of our 96,000 plus global team, who have come together to support our clients, communities, and colleagues during these difficult times. They have faced the challenge over the last several months head-on, driving productivity and innovation for our clients and embodying our values and culture every day to rally around a shared purpose to support the global economy. With that, let me turn the call back to Roger.

Great. Thank you, Tiger. We would like now to open the call for your questions. Victor, can you please give the instructions.

And our first question will come from Ashwin Shirvaikar at Citi. You may begin.

Thank you. Hi, Tiger. Hi, Ed. Good to hear from both of you.

Thank you, Ashwin.

Hey, pretty good solid quarter compared to definitely compared to expectations. So congratulations on that.

Thank you.

And that's kind of where my first question is, is if you could break out the delta, because you guys spoke almost halfway through the quarter and such a major positive surprise is generally speaking unusual for a company such as Genpact, which has high visibility into outcomes. So if we can break out the impact of incremental work-from-home, the separate impact of what seemed like better transformation services and other factors that would help.

Yes, Ashwin. Thank you for the good question. Our business has always had high visibility, and we stopped providing guidance at the end of the first quarter due to significant changes in the environment. We wanted to take a moment to assess how those changes would impact us. We received work-from-home approvals from our banking clients faster than we anticipated, which allowed us to achieve over 99% of our revenue coverage from this. This was a major factor in exceeding our expectations. Additionally, our transformation services, which include new solutions we brought to market that combine capabilities we've developed over five years, gained significant traction in areas like cash management, working capital fraud, supply chain, and analytics. Lastly, our ability to maintain productivity and innovation while transitioning to work-from-home has pleased our clients, and we have strengthened our relationships with C-suite executives, leading to new transformation service opportunities that have added to our pipeline. Overall, the results were better than we initially anticipated, especially considering the low visibility we had at that time.

I understand. Could you quantify the impact of each of these key elements? Additionally, I'm curious about whether your momentum is carrying through into conversations in July and beyond. It seems that the outlook you've provided for Q3 and Q4, particularly at the lower end, appears somewhat conservative. Any comments on that would be appreciated.

I can provide a bit more detail on each of those items. The first point that Tiger mentioned about improved coverage for work-from-home was likely the biggest contributor, closely followed by transformation services. It wasn't just one factor; there were several contributors. Those two were the most significant, along with slight improvement in intelligent operations as well. Tiger discussed execution, so all of these played a role. The largest impact we noted regarding work-from-home capabilities was approximately $30 million, and we probably reduced that by about half to give you some perspective on transformation services, followed by intelligent operations. This provides some numbers based on what we mentioned in our last quarter and how we performed. Now, regarding your second question, could you please remind me what that was again?

Yes. That it seems as though you're bringing considerable momentum into Q3. So at the lower end of your suggested outlook, Q3, Q4 being sequential seems quite conservative. And what do you think of that statement first, and how would you respond, I guess?

I'll start. Tiger, feel free to add in. This is the environment we're facing right now. Even though we’re providing guidance for the full year, there’s still a lot of uncertainty. Every day brings news about another state where cases are rising. Given this uncertainty, it’s wise to be cautious and wait to see how things develop before we feel comfortable pushing forward. I believe maintaining a flat outlook for the next couple of quarters is sensible. However, we also expect to see steady improvement in Q3 and Q4. That seems like a reasonable perspective. Tiger, do you have anything to add? The good news is, as Tiger pointed out, the inflows are strong, and our pipeline is expanding. While we didn’t close the deals, until there is more certainty in the environment, I think our guidance remains suitable. Tiger?

Yes, there’s nothing more to interpret beyond acknowledging the current environment. The visibility and uncertainty can alter information that remains unknown to us today. Thus, in this situation, it is wise to take a cautious approach at the lower end. Clearly, if conditions stay the same, we expect to exceed the lower end, which is why Ed referenced this year’s quarter two revenue being at the low end. From this point, revenue should increase, but we believe the current environment necessitates a conservative and prudent stance.

That’s perfectly understandable because there's a lot of good news here. Thank you.

Yes.

Thank you, Ashwin.

Ashwin, mathematically as well, you also gave a little color on Global Clients and GE. We do expect based upon productivity and other factors to be lower in the second half of the year. So that's another driver of the overall number, just for your model.

Thank you. Our next question will come from the line of Tien Tsin Huang from JPMorgan. You may begin.

Hi. Thanks. My cell service is excellent. I have two questions to ask together, if that's okay. First, the quarter's results were impressive, by the way.

Thank you.

The sales cycles appear to be a bit longer, as you mentioned. I'm interested in how much of this is related to targeting larger enterprises and possibly clients that are new to outsourcing. Additionally, regarding the margin, I understood your outlook on R&D. I want to confirm whether this is a lever you can adjust, as you explained to Ashwin. If the situation becomes more challenging, can we assume that reducing spending in this area to maintain margin is an option? I'm trying to clarify how revenue expectations evolve and what you aim to achieve with margins in both favorable and unfavorable scenarios.

Yes, I understand your questions, Tien. Let me start with the first one. It's somewhat of a mixed situation. When we discuss cycle times, there are a number of large deals that are inherently complicated and involve significant digital front-end centers throughout their transformation processes. This applies across various industries and services, from supply chain and insurance to banking and finance. These deals typically take longer to complete. The length of the cycle isn't primarily about attracting new clients; many new clients are now motivated to pursue these transformation journeys because they can look to others who have successfully navigated similar processes. Therefore, that's not the core issue. The main challenge is the time it takes to integrate everything. Additionally, factors like remote work and virtual meetings contribute to this extended timeline. There was also a period of approximately 90 to 120 days where the priority was shifting to work-from-home setups, which affected service delivery. The reason I refer to it as a mixed situation is that we are also witnessing unprecedented speed in certain instances. These instances typically involve smaller yet significant deals, particularly in the realm of transformation services and analytics. We've experienced strong performance in analytics during the second quarter, building on a solid first quarter. That reflects more rapid decision-making and agility from our clients. Regarding your second question, Tien, our performance in the second quarter illustrates our capabilities. The team effectively adjusted our cost structure for what we anticipate will be the new normal this year, demonstrating that we can adapt as needed. As we consider reinvesting in our new offerings, especially in cloud and digital commerce, it's essential to ensure that margins align with revenue and top-line performance, which we see as a given.

Thank you. Our next question will come from the line of Keith Bachman from BMO. You may begin.

Hi, Tiger and Ed. I wanted to follow up on that last point and take it from perhaps the other side of the lens. Could you talk, Tiger, a little bit about how you see pipeline and signings growing, and any specifics on characterization about how quickly they're growing now on a year-over-year basis? And the reason I wanted to ask the question is you did take some headcount cuts during the quarter to reflect, as you described, the new normal, but do you have concerns about as you flex up that you'll have the ability to meet those needs? And then I have a follow-up for Ed specifically if I could.

Yes, Keith. I'll get straight to that part of the question that you have. We don't have concerns about flexing. As we see more bookings, volumes, deals, and ramp-ups come through, we absolutely have no concerns on that. But kind of ramp up, you're talking about if that were to happen, and it's a market where they surprise us with even more than we had expected. It would still put demands on us, lesser than the demand when we’ve had high growth rates just last year, for example. And we've ramped up in sales, digital, analytics, consulting, and domain across the globe. So we have no concerns on that. Part of the actions that we took were based on utilization across a range of our transformation services group, as well as intelligent operations and our SG&A functions. Those actions were based on utilization in order to provide us the opportunity to actually go and hire fresh talent in the areas that we wanted to continue to hire and add new capabilities. So not concerned at all about both the ability to actually ramp up as we see more of that volume come through, as well as I don't think we've lost and let go of people that we didn't want to let go. In fact, I think we've created a pretty significant excitement in the company over the last five months. The way we've navigated this, the way the team has come together to serve the client, the response from the client, and then what it's done to our pipeline and our inflows and our client conversations.

Okay. And just, Tiger, to flush that out, though, could you talk about, is the pipeline or signings growing low single digits, mid single digits? Are you in the double digits? And I just wanted to follow up from my question because it relates to Ed. Ed, you did talk about you aspire to get back to, for global clients in particular, the low teens, I think, was the context. And you talked about '21. Was the comment there that you think you'll get back there into '21? I wasn't sure what the conclusion was for any kind of time horizon based on the pipeline and signings that you see now.

Yes, Keith, sort of our business is a long cycle business by definition. Therefore, if we have a couple of quarters of delayed bookings because signings are not happening because people are basically hunkering down to deliver work-from-home, which is exactly what happened through the whole of Q2 and the latter part, the last 15 days of Q1. In some parts of our client base and geographies, this continues to be the case. One would expect that to translate to lower bookings in 2020 than last year, which is what Ed called out. That then translates to a tempered revenue growth next year versus just bouncing back. In our business, you wouldn't bounce back. What would start bouncing back if everything else remains stable is bookings would start coming back, but then that translates to revenue subsequently. The way I'd describe it is that we would expect to get back to normalized Global Client growth rate as we traverse through 2021. So the way I would translate that is by the time we get to the end of 2021, our Global Client growth rate should come back to normalized growth rates.

Makes perfect sense. Many thanks for the response.

Thank you, Keith.

Thanks, Keith.

Our next question comes from Bryan Bergin from Cowen. You may begin.

Hi guys. Good afternoon.

Hey, Bryan.

Can you remind us what the typical timeframe is for bookings to convert to revenue? I'm interested in whether the pace of that conversion has been extended or if it primarily relates to the injection and signing rates. Additionally, as you observe an increase in the pipeline, are you seeing new types of deals that you can highlight?

Yes, so the conversion of bookings to revenue obviously has so many factors associated with it, whatever I'm going to tell you is going to be a normalized averaged-out kind of trajectory. But you can expect a typical sales cycle for a large deal to be of the order of magnitude of nine months, then you sign the deal. Then you ramp, and that ramp could be nine, twelve, or eighteen months. By the time you get to what one would call steady state revenue off that booking, you could be in your eighteen months after getting that deal signed. That's a classic global large deal environment that you're in. Now, there are lots of differences that happen if you do a rebadged deal where you carve out an operation and take it over; that could be lumpy. Leaving those aside, that's the way it normally works.

So more impact on the bookings timing as opposed to post-book, as Tiger said that's kind of what we typically expect. There's no normal. If there was a range on average, there's no normal depending on the size of the deal, the type of deal, etc., but what's taking longer now of getting the deals through and to execution. And that's why we think bookings will be impacted in comparison to last year. That was the common question I think.

On your question on the type of deal that we are seeing, I wouldn't say that type is different from a service perspective, because we already focused on a specific set of industry verticals and a specific set of services with very deep capabilities. What I would say is different is the importance of in that journey, the importance of digital, which one would argue over the last three or four years has gone up significantly and has gone up many notches just in the last four months. The importance of integrating and making those services capable of dealing with online versus just offline, depending on the industry. If it's a consumer goods company, if it's a retail, if it's a life sciences company, if it's a manufacturing company that is pivoting from distribution to online distribution in a B2B world, and let's assume 3% of their revenue used to be B2B, and now they’re thinking about 25% of that being B2B. That’s a very different environment for their supply chain for their order management for their finance for their accounts receivable and cash collections, and that changes the nature of the deal, the complexity of the deal, and the evaluation that deal goes through.

Okay. That's helpful. And then just on transformation services, are you expecting to maintain the level of growth you saw in 2Q within that kind of second-half outlook that you have?

I think so, broadly at a high level the answer is yes. Because we have seen a demand for the type of services and the type of change that is being looked for with rapid payback, it's pretty strong. Think about it. A lot of our clients in almost every industry are looking at two things that are interconnected. One, they're looking at sometimes a smaller top line, a lower growth. In that environment, they have to find a way to run the company more efficiently and save cost. We are a big player in that journey and, in doing so, actually bringing all technologies in order to run it in a new modern way. At the same time, they actually want to undertake a broader digital transformation journey to leverage the cloud, to leverage virtualization; they're going to use real time analytics and to be able to pivot to online. All of that in the context of bringing better experience when everyone is virtual requires dollars. So you undertake a cost journey in order to undertake a digital transformation journey to pivot to a new business model. We play in both cases. That allows us to therefore sometimes enter with one and pivot to the other.

Okay. So that would infer you're not seeing anything that was pulled forward in transformation services or anything kind of one-time surge related in that?

No, not at all. Not at the moment.

Hi, thanks for taking my questions this evening. In your prepared remarks, you talked about banking and capital markets, some of the pressure there alleviating. So looking here in Q3, has that business stabilized? And then can you also provide a little bit more color on your consumer retail and healthcare business as well? Thank you.

Yes. The reference to banking and capital markets was primarily with reference to transition to work-from-home where all of the industry verticals that we serve. No surprise that a number of clients in the banking vertical took time to give us the approval given some of the sensitive data that we manage and the regulatory environment to allow us to move that particular portion of the work to a work-from-home environment and set it up in a manner where all of us were comfortable. By the time we got to the end of the second quarter, it allowed the whole company to achieve that 99% rate. Therefore, that positions us well for stability in the Q3 and Q4 environment. What I would say we are seeing in banking and capital markets, is a continued push for movement to the cloud, a continued push for the ability to drive costs out in an environment where clearly the banks are challenged with return on equity as a big requirement looking into the future. At the same time, it throws up opportunities, for example, for collections in the consumer banking world, and we talked about that with one of the clients that I've referred to. So we expect the banking and capital markets verticals to continue to be lower growth than some of the other verticals. You referred to the consumer goods, retail, life sciences vertical; we see that to be a high growth vertical as we continue to finish the balance of the year. A number of those clients are pivoting to online very aggressively. A number of them are pivoting to finding a way to deal with a very volatile demand and supply environment. Our capabilities in supply chain and finance have been really, really welcomed by clients at this point in time. Then our traction that they're getting in analytics in supply chain and finance and accounts receivable as they pivot to real-time analytics to deal with their environment. When we talk about all the changes happening in life sciences and healthcare, I think it positions us really well for continuing to be very strong in that vertical.

Thank you. And our next question comes from the line of Robbie Bamberger from Baird. You may begin.

Yes. Thanks. Great job this quarter.

Thanks, Robbie.

Thanks, Robbie.

Yes. So last quarter you noted 85% of your portfolio is essentially recurring and not really exposed to the hardest hit areas of COVID. And I guess, based on the positive results over the past few months, have you seen this figure increase, I guess, as a percentage of revenue?

Robbie, you're a bit hard to hear. But if I understood your question correctly, I believe you were referring to what we mentioned last quarter, that about 15% of our revenue comes from industry verticals that have been negatively impacted by COVID-19. We still maintain that view. These sectors are well-known to us, including travel, hospitality, aviation, energy, and parts of automotive. Together, they account for approximately 15% of our total revenue at the highest level.

Yes, that remains relatively constant because the Rightpoint business impacted relatively in line with the rest of the business. So that 2.5% still a good number.

Okay, perfect. And then I guess one more. Is the mix of existing client revenue versus new client revenue in terms of growth pretty normal, or does this environment, I guess, change that dynamic at all?

From a revenue perspective, it's pretty normal because it takes time for our revenue mix to change given the long cycle nature of the business. However, I think I would say we probably have in every one of our verticals quite a few new clients and new logos that have entered in. It'd be interesting as they travel through the pipeline and ultimately take their decisions, those would be additions to our portfolio, which is very exciting. Typically, when we establish a relationship with a large global enterprise in any of these verticals, that ends up being a multiyear journey as we grow that relationship over time. So revenue mix hasn't changed. I would say our inflows and pipeline does have some very interesting new logos.

I've looked at this since I joined. I've been saying two-thirds from existing logos, one-third from new. I don't know that it's changed, but when I look next, I'll come back and advise. But I think it's pretty consistent.

Perfect. Thank you.

Thank you.

Thank you. And I'm not showing any further questions at this time. I'll turn the call back over to Roger for any closing remarks.

Thank you, Victor, and thanks everybody for joining. We look forward to speaking to you again next quarter.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.