Genpact LTD Q1 FY2024 Earnings Call

Good day, ladies and gentlemen. And welcome to the 2024 First Quarter 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. 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 Krista Bessinger, Head of Investor Relations at Genpact. Please proceed.

Thank you, Michelle. Hi, everyone, and welcome to Genpact's Q1 2024 earnings conference call. We hope you’ve had a chance to read our earnings press release posted on the Investor relation section of our website, genpact.com. Today we have with us BK Kalra, President and CEO; and Mike Weiner, Chief Financial Officer. BK will start with a high-level overview of our quarter, then Mike will cover our financial performance in greater detail before we take your questions. Please also note that during this call, we will make forward-looking statements, including statements about our business outlook, strategies, and long-term goals. These comments are based on our plans, predictions and expectations as of today, which may change over time. Our actual results could differ materially due to a number of important risks and uncertainties, including the risk factors in our 10-K and our 10-Q filings with the SEC. Also during this call, we will discuss certain non-GAAP financial measures. We have reconciled those to the most directly comparable GAAP financial measures in our earnings press release. These non-GAAP measures are not intended to be a substitute for our GAAP results. And finally, this call in its entirety is being webcast from our Investor Relations website. An audio replay and transcript will be available on our website in a few hours. And with that, let me turn the call over to BK.

Thank you, Krista. Hello, everyone, and thank you for joining us today. I'll start with a brief overview of Q1 performance, our updated outlook and then hand the call over to Mike to take you through our financial performance in more detail. Q1 was a solid start to the year with total revenues of $1.13 billion, up 4% year-over-year. This was above the high end of our guidance range driven by early signs of improving execution and better-than-expected performance across both digital operations and Data-Tech-AI. Gross margin of 35% also exceeded expectations reflecting operational efficiencies and better-than-expected revenue performance. Adjusted operating income margin was 16.1% in line with guidance reflecting investments in our top priorities. In Q1, as most of you know, we established our 3+1 Execution Framework and it is driving promising early results. '3+1' consists of three client-facing initiatives: partnerships, Data-Tech-AI, and simplification, and one internal-facing initiative, Client Zero. This is about establishing Genpact as our own best credential for AI-led transformation. Let me walk you through each one of them. First, on partnerships. In the first quarter we significantly strengthened our partnership team and achieved Tier 1 partnership status, the highest level with AWS, Salesforce, and Adobe. We have also joined forces with Microsoft. By combining Genpact's leadership in finance and accounting with Azure OpenAI technology, we are transforming finance organizations to best-in-class leveraging data and AI solutions. Second, on Data-Tech-AI, we are aggressively driving go-to-market engagement across data engineering, analytics, and AI with a specific focus on generative AI. This drove a significant increase in client conversations in Q1 and contributed to better-than-expected Data-Tech-AI revenue. We are working with clients to integrate generative AI into their core business processes. Generative AI is also serving as a driver of foundational work, as we help enterprises build a broader data and system architecture that is a prerequisite to succeed in the AI world. Genpact plays a critical role. We've bridged the gap between off-the-shelf solutions delivered by platform providers, bringing domain understanding at a key stroke level. This helps clients install an AI-first end-to-end business process, with underlying data and systems in their production environment. Clients choose us for five key reasons: one, deep domain expertise; two, end-to-end capabilities from strategy and design all the way to delivery and transformation; three, strong partner ecosystem; four, client centricity; and five, full-stack data technology and AI stack including our prebuilt accelerator, the Cora platform. Let me give you a few examples. Novva Data Center, a provider of state-of-the-art data centers, is using our AI solution to improve the functionality, integration, and operational efficiency of the Boston Dynamics Spot robots, using natural language processing hardware integration with OpenAI interfaces. These robots have been given features such as AI-powered anomaly detection, facial recognition, license plate monitoring, and the ability to have human-like interaction. These features will allow their robots to further enhance security capabilities and monitor critical infrastructure. Or in the case of Volkswagen Financial Services, we have integrated generative AI into the production system. This enables agents to manage servicing requests with significant efficiency. The generative AI translation skills are already launched across three countries in Europe and rapidly expanding. This solution has significantly enhanced agents' ability to manage account changes, loan disbursements, and address customer complaints, while delivering a more personalized experience and improved customer satisfaction. We are also building responsible AI centers of excellence for clients, and this is a significant focus for us. I'll give you a couple of examples. The finance organization of a major IT company wanted to automate a range of operational finance activities. We run a portion of their finance and accounting and other operational processes. Taking a page from our own best practices, we established a responsible AI center of excellence for them, bringing functional domain depth, supplementing it with data engineering capabilities and enabling AI deployment. It is helping them put various use cases in production at speed. We also established an AI center of excellence for a major life insurance company. For this client, we are building a platform that uses advanced AI techniques that stitches together historical information, product specifications, and future projections to enable a range of decisions. The first use case will drive the end-to-end automation of pricing and renewal decisions using AI, with humans in the loop. These are just a few examples. While it is still very early days, we are seeing increased momentum in generative AI-related revenues and bookings and believe we are in a strong position to partner with enterprises to drive competitive advantage moving forward. Third, on simplification as part of 3+1. We simplified our sales and go-to-market leadership structure in Q1, moving from a highly matrix organization to 12 units that mirror our client organization. This is strengthening execution and accountability with standardized scorecards, internal management reporting, sales and post-sales activity, all supported by a new governance structure that tracks key performance indicators at the unit level. We are now in the process of simplifying a number of additional key elements that will allow us to scale more efficiently. And finally, the plus one in our '3+1 Execution Framework,' is Client Zero. This is the work we are doing to establish Genpact as our own best credential for AI-led transformation. We have identified and are moving forward with more than 15 internal use cases across IT, finance, HR, legal, sales, and marketing to drive growth, improve client and employee satisfaction, reduce costs, and improve cash flow, all by leveraging the same AI tools we use on behalf of our clients. It's early days here as well, but we are excited by the progress we are making. Now turning to our guidance. Mike will go through the details but I wanted to cover a few important points upfront. As I mentioned earlier, we are seeing early signs of improving execution with expected results for quarter one. As a result, we are increasing our full-year revenue guidance by 50 basis points to 2.5% to 3.5% growth on an as-reported basis, up from 2% to 3% previously. Our outlook does not assume any improvement in the macro buying environment. We are simply flowing through the revenue upside from Q1 of approximately $20 million at the midpoint of the range through the full year. We are also increasing our gross margin outlook for the full year by 30 basis points to 35.3%, up from 35% previously, reflecting outperformance in Q1. Our AOI margin outlook remains unchanged at 17% for the full year as we continue to invest in our top priorities, partnerships, and generative AI to drive accelerating long-term growth. In closing, Q1 was a solid start to the year, with revenue and gross margin above the high end of our guidance range reflecting early signs of improving execution. We are excited by the progress we are making and believe our 3+1 Execution Framework will be a crucial ingredient in putting us on a path to reach our full potential. With that, let me turn the call over to Mike.

Thank you, BK. Good afternoon, everyone. Today I'll review our first quarter results and then provide you with thoughts on our second quarter and full year 2024 outlook. Beginning with our first quarter results, while we continue to experience pressure in our discretionary short-cycle work, demand for our long-term annuity-based services continues to be strong. Specifically, our pipeline achieved record levels fueled by strong inflows. We booked three large deals in the quarter. While this was lower than the number in the first quarter of last year, our overall total bookings level was near the level we booked in the same period last year. We also booked 30 new logos in the quarter with an average TCV of approximately $4.5 million compared to 17 new logos with an average TCV of approximately $5.6 million last year. Sole-sourced deals represented approximately 40% of bookings, and win rates remain elevated at 62%. Total revenue of $1.13 billion was up 4% year-over-year both on an as-reported and constant currency basis. This performance was above our expectation reflecting early signs of improved execution and better-than-expected performance across digital operations, Data-Tech, and AI across all segments. As noted in our press release, we made an enhancement to our Data-Tech and AI and digital operations revenue breakout for accuracy to more accurately reflect revenue from certain solutions. We have also provided historical comparison results in our press release and in our financial fact sheet which were posted prior to the call. The results I will provide for Data-Tech and AI and digital operations below will leverage the prior methodology so that you can accurately compare the results to the guide we provided on our year-end call. Data-Tech and AI revenue, which represents 44% of total revenue, increased 3% year-over-year on an as-reported and constant currency basis. Performance was largely driven by service lines in finance and accounting, supply chain, and risk. Digital operations revenue, which represents 56% of total revenue, increased 4% year-over-year on an as-reported and 5% on a constant currency basis primarily reflecting deal ramps related to last year's large booking wins. Outcome and consumption-based models expanded to approximately 19% of first quarter revenue compared to 13% of total revenue in the first quarter last year. Revenue from priority accounts grew 4% year-over-year and remained at 63% of global revenue with 43% of first quarter bookings from priority accounts. From a segment perspective, financial services increased 3% year-over-year primarily driven by the ramp of large deals and growth in financial crimes, partially offset by continued pressure around client discretionary tax spend. Consumer and healthcare increased 5% year-over-year due to large deal ramps and growth in supply chain engagements. High-tech and manufacturing increased 4% year-over-year primarily driven by a ramp of new logos in both digital operations and Data-Tech and AI, moderately offset by the partial descoping of a high-tech priority client noted last year. Adjusted operating income margin was 16.1%, down 30 basis points year-over-year primarily due to increased investments to support growth. Gross margin for the first quarter was 35%, up 100 basis points year-over-year primarily driven by less upfront large deal investment and lower severance costs. As a reminder, severance costs were elevated last year from workforce reductions in our short-cycled advisory work. SG&A as a percentage of revenue increased 90 basis points year-over-year to 20.8%. The year-over-year increase was largely due to higher investments to support growth that I mentioned earlier. Note, we also had lower stock comp expense which does not impact our adjusted operating income margin. Our effective tax rate was 25.2% compared to 23.4% during the same period last year primarily driven by lower tax deductions related to stock-based compensation and the implementation of Pillar 2 global minimum tax rates. GAAP net income was $117 million, up 10% year-over-year. GAAP diluted EPS equivalent of $0.64, up 12% year-over-year. Adjusted diluted EPS of $0.73 was up 7% year-over-year and outpaced revenue growth for the quarter. The increase was primarily driven by the impact of a lower outstanding share count of $0.02, higher adjusted operating income of $0.01, an FX remeasurement gain compared to the same period last year of $0.01, and lower taxes of $0.01. Compared to the first quarter of 2023, we grew the number of relationships with annual revenue greater than $5 million from $175 million to $187 million. Additionally, clients with annual revenue greater than $25 million expanded from 36 to 40, and clients with approximately $100 million of revenue remained at 5. Turning to cash flow and balance sheet. During the quarter, we utilized $26 million of cash from operations compared to utilizing $34 million during the same period last year. Days sales outstanding expanded to 91 days from 83 days in 2023 due to collection delays and higher payment terms in new accounts. The overall credit quality of our portfolio continues to be very strong. Cash and cash equivalents totaled $478 million compared to $584 million at the end of the fourth quarter of 2023, reflecting the return of $57 million to shareholders at an annual incentive compensation payout that occurred in the first quarter. At the end of the quarter, our net debt-to-EBITDA ratio for the prior four quarters was 1.1 times in line with our preferred one to two times range. With undrawn debt capacity and our existing cash balances, we have ample flexibility to pursue growth opportunities and execute on our capital allocation strategy. During the quarter, we repurchased approximately 865,000 shares at a total cost of $30 million and at a weighted average share price of $34.67 per share. Capital expenditures as a percentage of revenue equated to approximately 1.8% in line with our expectations. We remain committed to returning capital to shareholders through a regular cadence of buybacks and quarterly dividends. We continue to plan to pay out approximately 50% of our operating cash flow to shareholders during the year, including a minimum of 30% of our cash flow from operations for share repurchases. Before I provide an update on our outlook, here are some quick stats on attrition. Our attrition rate for the quarter was 23%, in line with fourth-quarter levels and the low end of our historic range. Adjusted for involuntary attrition and employees with less than three months of service, our attrition was 17% during the quarter. Finally, let me update you on our full year 2024 outlook and our second quarter guidance. Genpact's outlook for full year 2024 is as follows: total revenue in the range of $4.59 billion to $4.63 billion, represents year-over-year growth of approximately 2.5% to 3.5% as reported, up from prior guidance of 2% to 3%. This includes digital operations revenue growth of approximately 3.6% year-over-year and Data Tech and AI revenue growth of approximately 2.3% year-over-year at the midpoint of the range, compared to the previous midpoint of 3.1% and 1.7% respectively on an updated classification basis. Full year gross margin of approximately 35%, full year adjusted income from operations margin of approximately 17%, and full year adjusted EPS in the range of $3.01 to $3.04. This represents a year-over-year growth of 1% to 2% and includes higher adjusted operating income of $0.09, positive impact related to lower share count of $0.06, partially offset by the impact of higher expected tax rate of $0.04, higher interest expense of $0.04, and the negative year-over-year FX impact of $0.02 due to the $4 million remeasurement gain recorded last year. As we've communicated in the past, to the extent we deliver revenue upside over the course of the year, our plan will be to reinvest a portion of that upside back in the business to drive future revenue growth. Our 2024 effective tax rate continues to be expected at 24.5% compared to 23.4% reported for full year 2023. The increase reflects the implementation of new Pillar Two global minimum tax rates, as well as lower year-over-year tax benefits related to stock-based compensation. We continue to expect cash flow from operations to be approximately $500 million. Capital expenditures as a percentage of revenue continue to be expected to be approximately 1.5% to 2% in 2024, which includes investments related to internal system upgrades. Our outlook for the second quarter 2024 is as follows: total revenue in the range of $1.143 billion to $1.148 billion, representing a year-over-year growth of approximately 3.4% to 3.8% as reported. This includes digital operations revenue growth of approximately 5.4% year-over-year and Data-Tech-AI revenue growth of 1.6% year-over-year at the midpoint of our guidance. Gross margin is expected to be approximately 34.8%, down 20 basis points sequentially due to the alignment of our annual compensation refresh of employees in Q2. Adjusted operating income margin is expected to be 16.5%. With that let me turn the call back over to Krista.

Great. Thank you, Mike. We would now like to open the call for questions. Michelle, could you please give the instructions?

And our first question comes from Puneet Jain with JPMorgan. Your line is open.

Hi. This is Selina on for Puneet. Congratulations on the results. Of course, it's still early, but now that you guys are kind of seeing some of the benefits of your new strategies such as the three-plus-one payoff on the P&L, is it pretty soon to start thinking about longer-term revenue targets? I think we're currently modeling you guys at high single digits, but I know the previous target was closer to low double. So just would appreciate any color here.

Yes. So it's Mike. I'll kick this off and then I'll turn it over to BK. Right now, we're really focused on our execution in 2024. So at this point, I think we're comfortable with the ranges we provided for this year. And as we get additional clarity as we move forward in the year, we'll provide additional color on a go-forward basis.

Yes. And if I may add, we don't see any change in the macro environment. And in our model, the macro environment is more baked than where it was at the back half of last year. But we are enthused with our early execution and we'll continue to update as we go along.

Great. Thank you.

Hi. This is Brad Clark on for Keith Bachman. Thanks for taking my question. I wanted to hone in on the comment on generative AI for your clients. I think you said, better-than-expected revenues and bookings in the quarter. Is there any other color that you can provide to help shape perhaps the size or depth of the business and where you're seeing early traction with clients?

So, Brad, I'll say three comments. One, obviously, these are early days, not just for us but for our clients overall in the industry, but in the early days, we see a lot of interest from clients relative to many of the technology waves that we saw in the past. Point number two, I think we are seeing, therefore, enhanced conversations, and a number of those conversations convert into booking and revenue, and a number of those conversations don't convert. They just stay as an excitement and possibilities that we can harness and that we need to kind of handhold our clients as we go along. And the last point, I think what we have seen in booking and revenues is still a very, very small portion. So we have set up our systems to see that on a consistent basis and as it solidifies, as it progresses at some point in time, we will share more light on that.

Yes, BK, let me just elaborate on some of those comments, right? While we're not providing any quantitative benefit to the question, I think it's very interesting. Today, we sit between the client and the hyperscale large enterprise technology companies. And the vast majority of all of our client conversations are how can we help in the middle of those two things. And we think that's going to be a real driver for us for future growth.

Great. Thank you.

Hi. Thank you. Can you dissect for me in a little bit more detail where the outperformance came from in Q1? Is there anything about that that's one time or non-recurring or timing considerations that we should keep in mind as we think about how Q2 might shape up in comparison to Q1?

No, I think it's from that perspective. It's Mike answering the question. Hey, Maggie, how are you? So in the first quarter, right, if you think about our business, our two revenue disaggregation units, our digital operations revenue, right, it was with better expected execution, particularly regarding the deal ramps of the large deals that we implemented in the third and fourth quarter of last year. We continue to execute really well in that. As far as our data tech and AI business versus our expectations, project work, particularly in finance and accounting supply chain, really drove a lot of that outperformance.

And if I can add, Mike, look, where it is all coming from in early days is all about the 3+1 framework, Maggie. So take an example of partnerships. In partnerships, as one of the key attributes in 3+1, we invested in really strong talent, including a leader and a team in there, and started engaging with technology partners. And what we see in more detail, the inflows are roughly 2.5 to 3 times relative to the corresponding period last year. Or if I go into, like Mike was saying, in data tech AI, how our employees are embracing this pivot, there are more and more conversations happening with the clients on data and AI. And some of it you've already seen are results in data tech AI. So, clearly, the investments that we are making, the pivot that we are embracing, is showing some early results as well as the cadence of governance and execution that we have put in place.

Thank you. That's great to hear. When you think about all these changes that you are making within the organization, now that some of that is underway, particularly on the sales team, can you talk a little bit about the reception of those changes? Has there been any change in voluntary attrition within the group? Thanks for taking my question.

Yeah. Thanks Maggie. And what I can tell you is that overall, there is a level of excitement in the team, excitement because everybody is clamoring to deliver better results point number one. And they see their efforts pay off, though I think we all are aware that they are a little bit more coming in from easier comps, I would say that. Two, I think with the routines and rituals, and there are a few routines and rituals that are getting etched for now and in the future. Those routines and rituals are yielding results, and a number of our colleagues are seeing the results of their hard work pay off. So I would say there's a lot of excitement that I can feel in a palpable manner. We also hired north of 50 leaders at a senior level in the last 90 days or in the first quarter and more focus on Data, Technology, AI, also in partnerships. And all of that support is enabling our existing staff to progress further with clients.

Thank you.

Hi. Thanks for taking my question. It was nice to see the solid execution and the return to sequential growth that's implied in the 2Q outlook you have here. I was wondering if you could comment on the visibility that you have into this 2Q outcome in the remainder of the year. Are you expecting sequential growth through the remainder of the year past 2Q? And what kind of assumptions have you made around things like discretionary spending which I know some of us kind of more of an impact on Data-Tech-AI?

Yeah. So this is Mike. Let me kind of kick that off, and I'll turn it over to BK. We're not really looking to provide additional color on how we're seeing it out greater than this year in 2024. But what I'll talk about is really our second half in terms of what our guidance is really based on particularly with regard to revenue, which I think you're alluding to. It's a prudent guide to be completely frank with you, right? We have not anticipated any real change in the macro environment, particularly from the second half of 2023 and through first quarter 2024, right? We have the large deals that we did flowing through. And yes, arguably off of a poorer comp. But that's really what's reflected in our second half revenue round.

Yeah. And I think the only add that I have, Ryan, is for the second quarter guide. Clearly, sitting on May 9th, we have better visibility to what will happen in the next 55 days. And on the second half, Mike just responded to that question.

Got it. And then just quickly on productivity commitments from clients. Can you provide some more color on activity you're seeing there? Like has the macro or increased interest in AI led to clients asking for higher levels of productivity than in the past in your core services?

So there is a lot of interest from clients on AI, but there has not been any increase in productivity expectations that we see in all of our client conversations and renewals in new signings. And reality is, Ryan, that we always baked in a lot of productivity based on AI tools. Now yes, they may be new. What we see is an interest from clients to learn more about how that certainly has changed but not the quantitative side of those.

We've also seen, we talked about in our prepared remarks, a nice amount of growth in alternative commercial models, right, moving away from FTE-related pricing, which all supports the implementation of a lot of this new technology.

Got it. Thank you.

Hey, guys. Good afternoon. Thank you. I wanted to ask a follow-up question on the go-to-market changes that Maggie asked. Specifically, are the changes to your sales and go-to-market organizations fully implemented as you exited the first quarter? Or do you have incremental changes that you're now pursuing in Q2 and as you go through the balance of this year?

Thanks, Bryan. We have made several changes and will continue to adapt as the year progresses, especially with the 3+1 strategy taking hold and our ongoing engagement with clients to understand their needs better. This is a continuous evolution rather than something new. We implemented a significant number of changes recently. For example, in our simplification efforts, we transitioned from a matrix organization to 12 dedicated units that directly serve our clients, which has significantly empowered decision-making within these units. These changes were made in Q1, but as we move forward, we expect to make further improvements and bring in new talent that will advance our efforts in data, technology, and AI.

And thus far, the execution has been wonderful. We had a nice growth in terms of our inflows and our bookings but more to come.

Okay. Very good on that. And then just pivoting to gross margin here. So just first a clarification on the 1Q. I thought I heard you say you had less large deal upfront investments. So if I'm right on that, what does that do to? And then can you just talk about the drivers as you go through the balance of this year, the cadence of gross margin? I understand you took the outlook for gross margin up a bit here for the year. But the 2Q downtick, I think, first before you build in a second half recovery. So just help us with the moving parts as you go through the year for gross margin.

Sure. So our gross margin, I believe in the first quarter was up about 100 basis points, right? And I think what you're referring to is prior year comps with lower severance and less large deal investments than we had in the prior year, as well as lower stock expense that really drove that increase. And as far as we have increased our gross margin as we continue to move through the year, we're flowing through the revenue that we had in terms of better-than-expected revenue in the first quarter and we have enhanced operating leverage which we're flowing through in terms of the gross margin for the remaining part of the year in our guide.

All right. Thank you.

Congrats on this solid execution there. I guess, my question, BK, 62% win rates that seems elevated. I mean, what would you point to as the drivers? Is it the pitch or go-to-market strategy that's pushing up the win rates?

Sure. Thanks, Bryan. If you look at last year, our win rates were around 60%. I completely agree that those are quite high. There are two main factors driving this. First, we are handling many small and medium-sized deals, where we often win them without competition, which boosts our win rates. Second, for many clients we've onboarded, we are securing follow-on larger deals, some of which are also won without competition. Our win rate improves here because these clients are already familiar with our capabilities and performance in their account. Overall, our win rates are indeed very high, and while I prefer having a larger pipeline—which we currently have at a record level—it would also be beneficial to further increase the pipeline, even if it results in a few fewer wins, that doesn't concern me too much.

Got it. For my follow-up, you increased gross margin but not operating margin or adjusted operating margin. What is the reason for that? The margin guidance of 16.5% in the second quarter is a bit lower than what we had in our model. I'm considering the factors involved in that as well. Thanks.

Yes. Let me first address your initial question about our gross margin, which is up, while we are maintaining our adjusted operating income relatively constant from our original guidance. In our prepared remarks, if we continue to achieve better revenue performance, we will focus on increasing our investments, specifically our time investments in the business. So, considering the model moving forward, that's essentially driving this. The improved revenue we experienced in the first quarter will contribute to the operating leverage for future growth. As we are the first client for the company, we are also working on enhancing our own efficiencies. With all three of these positive factors, we plan to reinvest back into the business, concentrating on driving AI investments.

And then just the second quarter in particular?

I'm sorry. It's relatively the same thing for the second quarter. In terms of your question about why it's 16.5%, I can't really comment on your model, but if you look at our seasonal pattern, it's pretty much in line.

Got it. Thanks for the color.

Thanks. Congrats on strong execution. I have a couple first. As the model continues to shift towards outcome-based pricing or what you call, I guess, non-FTE-based pricing. How should we think about the back changing in terms of profitability, headcount, et cetera? And then, the follow-up is more about discretionary work. Which part of the revenue today is considered discretionary of Genpact? Thanks a lot.

So let me kick it off and then I'll hand it over to BK, right. So what we have seen thus far in terms of our alternative commercial or not FTE-related pricing, we've actually seen the contrary in terms of the average margin on that work that we do is higher than the average of the company as a whole, right? Yes, and we continue to believe that there will be an enhanced decoupling between revenue and FTE-related costs.

Yes, exactly to the point that you're making, Mike. We are increasingly seeing that decoupling and we are pushing the decoupling of FTE to revenue. And I would again say we are in the early stages of that and we are putting certain architecture infrastructure in place to over a period of time build more momentum there. And clearly, more of our investments are also going, Moshe, in building IP and building repeatable assets that we can deploy over and above say software of our partners. And we are again at early stages of that as more and more data and IP takes hold, more disassociation of revenue with FTE will happen and that's where our endeavor is. Oh, could you clarify what portion of our business is related to discretionary? I'm just trying to understand better since your voice is a bit unclear. So we have in Data-Tech-AI, Moshe, what we have is also a lot of consulting and portions of projects that we do. Over 70% of our revenue is annuity-based, and so bulk of our digital ops and a large portion and a significant portion even in Data-Tech-AI is long-term for us. They are long-term contracts. But as we think of the end-to-end capabilities, one of the reasons why clients buy from us is strategy, design to run and transform; that strategy and design portion of it has componentry which is tied to discretionary. And owing to better execution, our pipeline is looking better, but we don't see it is because budgets have been released. It is more because we are becoming more agile in the marketplace if that answers the question.

Thank you. Just a follow-up on the non-FTE revenues and the mix shift over the past year. How should we think about that on a go-forward basis? Because the shift is pretty significant in the past year. So were there a few projects a few clients that drove that? And is this something that's going to be maybe lumpy going forward? Or where do you kind of see the end game for this?

So I'll take that and then Mike feel free to add. Look, Surinder, our endeavor is to push that agenda more whether it be in large deals, and we have succeeded in a few large deals or in renewals or in smaller and medium-sized deals. And even if the entire large deal or a medium-sized deal is not on non-FTE, I think there are portions of it that we are inserting is point number one. Point number two I already spoke about IP and data, and these are early days. So clearly, where is the end game? It is too early to tell. What we are exceptionally clear about is that we want to break this association of FTE with revenues and have revenue grow disproportionately relative to the FTE headcount. And I think we are putting architecture and infrastructure elements around that and we'll continue to report progress. Mike?

Yes. I'm just going to build on that. So historically, over the last two years, I would say we disproportionately saw on renewals our ability to get these models implemented. But I think one of the interesting things regarding our generative AI conversations we're having with clients initially, they're much more receptible to moving to those models than they were historically. So the generative AI narrative is acting as a catalyst for those discussions, as well as just our pivot to have more IP-related assets that have to drive that decoupling.

That's helpful. And then when I think about just guidance in general, I look back to last year. And obviously, the environment has been challenging. It's been hard to predict client behavior. Fast forward to this year, you guys are out executing the guide. How should I think about the overall quality of the guide? Or any methodology changes that you guys have made? Is it just you guys are being maybe a bit more conservative this year? Any color there would be helpful or how you've been adapting to maybe the lower levels of visibility in this environment?

Yeah. So nothing has changed from what we told you about a quarter or so ago regarding other methodology on a go-forward basis. Obviously, we get smarter every quarter that we go. Listen, I will say it's prudent from that perspective. And that prudency really relates to our assessment that the macro environment particularly that affects some of our more discretionary shorter duration work has not improved in our models from the second half of last year through the first quarter of this year. To the extent that changes? Yeah, potentially we could see additional benefits to it. But for now, I think the prudent way to move forward is using the information that we have to the best of our ability and making a conservative view from that perspective. Keep in mind, as BK alluded to, over 70% of our business is somewhat annuitized and we have very good visibility at any given point on how that's going to perform for the remaining piece of the year on a rolling 12-month basis. So it really comes down to that 25% roughly cohort of our business that is short-term discretionary in nature. And again, what we're doing is tying that to our assertion of where the macro business environment is going to be for that period of time; as it changes, we'll update our guidance accordingly.

Thank you.

Hi, everyone. Nice job on the quarter. Thank you for taking my questions. Can you touch on how the demand environment for new business progressed throughout the quarter, both for the shorter duration discretionary deals and the larger ones as well? It seems like the outperformance in the quarter was more Genpact specific execution versus the macroeconomic environment. Thank you.

So Sean, what I would say, yes, I think the execution and early signs are good. However, I'll also say that our pipeline is at a record level across all the segments, across Data-Tech-AI and across Digital Ops. And now we can also attribute a lot of that to our increased agility again, acting more proactively with our partnership and with technology partners. We are getting more and more advice from our technology partner as well. As I speak to clients or even partners, what Mike also cited earlier, that with an understanding of hands on the keyboard and the assets and strategy and design and how we run and transform, we are able to capture the knowledge at a very key stroke level, which a lot of technology partners coming top down are not able to. And that is the true execution that is needed by clients. And therefore, there's a reaffirmation and we are seeing as we engage more actively with clients, to reflect that in our pipeline. Now, I would again continue to maintain that there are many ways in which we see where the macro environment is, where the budgets are. Have we seen any significant or any meaningful improvements there? The answer is no. It continues to be as it was in the second half of last year. So that is what is sitting in our prudent guide. Well, thank you so much, Michelle. And what I would say is, Q1 was a solid start to the year with revenue and gross margin above the high end of our guidance range, early signs of improving execution, and we are excited with the progress we are making with our 3+1 Execution Framework. And yes, we are pleased with the beat and flow, I would say, with this prudent guide. I do want to take this opportunity to thank all of our employees for embracing the pivot, all of our clients for choosing to impact, and all the shareholders for ongoing support. And I do want to thank you all, and we'll come back to you next quarter.

Thank you for your participation. This does conclude the program. You may now disconnect. Good day.