簡柏特 (G) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 FY14 Genpact earnings call. My name is Joyce, and I will be your operator for today.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Bharani Bobba, Head of Investor Relations. Please proceed.

Thank you, Joyce. Welcome to Genpact's earnings call to discuss our results for the fourth quarter and full year ended December 31, 2014. We hope you've had a chance to review our earnings release, which you will also find in the IR section of our website, Genpact.com. With me in New York today are Tiger Tyagarajan, our President and Chief Executive Officer; and Ed Fitzpatrick, our Chief Financial Officer.

Our agenda today is as follows: Tiger will provide an overview of our results and address the progress in executing our more focused strategy; followed by Ed, who will discuss our financial performance in greater detail. Tiger will provide closing comments, and then we'll all be available to 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 our call today we will refer to certain non-GAAP financial measures, which we believe provide additional information for investors and better reflect the way Management views the operating performance of the business. You can find a reconciliation of those measures to GAAP in our earnings release in the IR section of our website.

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

Thank you, Bharani. Good afternoon, everyone, and thank you for joining us today.

We are very pleased with Genpact's fourth-quarter and full-year results for 2014. We delivered on our stated financial expectations, made significant progress on the execution of our growth strategy, and made all our planned investments. Our 2014 total revenue has increased 7% to $2.28 billion. Global client revenues grew 10% for the full year, at the high end of our expectations. G revenues declined approximately 2%, less than we expected at the beginning of the year. Adjusted operating margins were in line with our expectations at 15.1%. In the fourth quarter, total revenue has increased 8% year over year and 2% sequentially. Our global client revenues grew 11% year over year.

We continued the momentum we have had in our big deal wins since the beginning of the year, signing two more large transformational deals.

2014 was a pivotal year for Genpact. It is clear that the industry is evolving. Companies, particularly in our targeted verticals, are looking for partners to bring an innovative approach to their operating models and deliver significant transformation. In this environment, we are working with our clients to identify new sources of value to create productivity and efficiency gains beyond cost savings. The solutions we are developing are, and building for our clients, increasingly bundled advanced new technologies such as social, mobile, analytics, and cloud.

What clients are really looking for in these new technologies are: 1, depth of understanding of the best design; 2, a deep appreciation of the context; 3, knowledge and experience of domain and process; and 4, ability to leverage the data that flows through those processes in order to make more intelligent business decisions. We are uniquely qualified to partner with our clients on these transformational journeys given our strong industry and domain expertise.

As the world goes through a secular shift of integrating new technology and finding new ways to use data and insights as a competitive advantage, we see these trends presenting a highly attractive opportunity set for Genpact. We recognized this two years ago as we started our strategic journey and therefore decided to focus specific capability and domain investments to build solutions that help our clients take advantage of these secular trends. Our goal is to capture a bigger set of opportunities in our large and still highly underpenetrated growth markets. By focusing our efforts we are finding more opportunities to pursue and enhance our credibility and differentiation in those pursuits.

This is driving increased investment both in capabilities and in client-facing teams, where we continue to add highly talented and experienced professionals. We have made disciplined investments in our targeted verticals, service lines, and geographies that have positioned us well to capture new growth opportunities, as our clients and the industries in which they operate continue to be transformed and reinvented.

As we reflect on 2014, we are very pleased with our progress. We have met or exceeded our objectives of realigning our resources and developing new solutions for our targeted verticals, services and geographies; making significant client-facing investments, both in terms of numbers and experience of the team; and adding depth to our domain and subject-matter expertise that drives differentiation. Our efforts led to solid financial results for the fourth-quarter and full-year 2014, a significant increase in bookings and the signing of six large transformational deals.

Let me highlight some of our specific accomplishments during 2014.

First, we continued to build on the momentum we created at the beginning of the year and are making further progress in converting our big deal pipeline into revenue. We signed six large transformational engagements in 2014, including two this past quarter. The two deals this past quarter were unique, innovative, and replicable. In the CPG space we had another big win to add to the one we had in Quarter 1. Genpact was selected to help Mondelez International implement a global business services organization over the next few years. This is a strategic and transformational engagement in financial accounting for our Company. Our second big win this past quarter is in the banking vertical, where we are taking over the wealth management technology platform and associated services capabilities from a leading global bank. This service line is exciting as it allows us to create a strong end-to-end new technology-enabled service offering in a very fast-growing market. This was one of our identified focused service lines, and now we have the ability to replicate this offering with new and existing clients.

Second, we continue to add domain and subject matter experts and depth to our client-facing teams. For the full year 2014, we spent 6.6% of our revenues in sales and marketing compared to 4.7% last year. We also added two new business leaders in our healthcare and analytics businesses. These leaders have added significant domain expertise and experience to the Management team.

Third, our domain experts and client-facing and operating teams are building industry-leading solutions that integrate new technology and data insights to solve for critical client and industry needs.

Fourth, we are actively working with our clients to deploy our systems of engagement technology. Our systems of engagement build on our foundation of deep domain understanding and process expertise, with advanced technologies, such as enterprise-ready clouds, mobility, big data analytics, and visualization, to provide differentiated client insights and business impact.

Fifth, we accelerated the integration of rapid robotic automation solutions with our SEP framework to drive increased efficiency and effectiveness and operational intelligence for our clients. These solutions are a key differentiator for us in expanding within existing clients and winning new client engagements.

Sixth, we are adding significantly to our domain expertise through highly focused acquisitions and joint ventures. Our Know Your Customer solution with Markit in the capital market space has gained significant momentum. We continue to sign up additional buy-side firms and banks. The integration of our acquisition in the life sciences regulatory space is on plan and the combined teams are creating bigger solutions for clients. This acquisition is a great example of our more focused strategy in action, as we made a significant investment in the vertical where we already have a market leadership position.

Seventh, we continue to use strategic partnerships and alliances to enhance our capabilities. In the fourth quarter we announced a collaboration with Lombard Risk Management to provide a new solution to help financial services firms optimize their collateral management operations. The collaboration between Genpact and Lombard Risk addresses major pain points in the industry and significantly improves margin and collateral management efficiencies with an end-to-end solution.

Other key highlights for the fourth quarter demonstrate our solid progress. Growth was broad-based and five of our target verticals continued to lead global client revenue growth in the fourth quarter, namely CPG, life sciences, insurance, manufacturing and services, and capital markets, which all grew in double digits year over year. From a service-line perspective, Finance & Accounting, core industry vertical operations, and consulting led growth. GE revenue declined 5%, with growth in IT outsourcing and projects offset by declines in other parts of the business.

As promised at our 2014 Investor Day, we have provided our annual bookings number in our earnings release. Our bookings number is comprised of two components. First, the total value of new contracts signed with clients during a given calendar year. Second, the incremental new value beyond the original scope of renewed contracts. Regular renewals of contracts, which we consider business as usual, are not counted as new bookings.

Before we talk about our specific booking numbers and how we will provide updates to the market, I do want to emphasize that bookings can vary significantly on a quarterly or even on an annual basis. As we have always discussed, since becoming a public company our business is best viewed through our multi-year lens as that better aligns with the nature of our long-term client relationships. This is particularly true as it relates to bookings, which tend to be more lumpy and volatile in any given quarter, and creates lumpiness year on year as well.

Furthermore, conversion from bookings to revenue can also vary significantly depending on the nature of the services, size of the contract, ramp period and deal structure. Because of this inherent volatility we plan to disclose our booking metric on an annual basis, although we believe bookings are best judged over multi-year periods similar to the rest of our business.

In 2014, we achieved $2.16 billion in bookings, up approximately 50% over 2013. The composition of 2014 bookings was broad-based across our chosen vertical markets: banking and financial services, insurance, CPG and retail, life sciences, manufacturing and services, and capital markets. 2014 was a significant step up in bookings over 2013 due to, firstly, realignment of our strategic focus to key target verticals, services, and geographies. This focus led to an increase in sales force productivity. Second, 2013 bookings was broadly flat in comparison to 2012. Third, our focus on large annuity opportunities led to six new large deal wins over the course of 2014. While we are pleased with our 2014 booking achievements, we do not expect this level of growth every year. Over a longer time horizon, we expect growth in bookings would be a leading indicator of revenue growth.

Our pipeline continues to be healthy across our key target verticals, services, and geographies. We have bolstered our capabilities with increased investments in advanced technologies and automation as well as consulting, particularly in the area of financial accounting and in the risk and regulatory arena in financial services. Strong traction in our consulting business, which includes reengineering services, has led to earlier and richer design discussions with clients and is reflected in our pipeline and bookings. Our win rates have improved, although decision cycle times continue to be longer for larger deals.

Finally, we continue to generate large amounts of cash that provides us flexibility to make investments for growth both organic and through acquisitions in sharply defined areas of our strategic focus. We are continuously evaluating the best use of our cash to provide superior returns to our shareholders.

With that, I'll now turn the call over to Ed.

Thank you, Tiger. Good afternoon, everyone. Today I will review our fourth-quarter performance and full-year results, followed by a summary of key highlights on the balance sheet and cash flows, and finally our outlook for 2015.

We closed the fourth quarter of 2014 with revenues of $602 million, an increase of 8% year over year, or 9% on a constant-currency basis. Excluding Pharmalink, which we acquired in May 2014, revenue growth was 6%, or 7% on a constant-currency basis.

Fourth-quarter revenues from global clients increased 11% year over year, or approximately 13% on a constant-currency basis. Excluding Pharmalink, revenue growth was 9%, or approximately 10% on a constant-currency basis. Within global clients, business process outsourcing revenues increased 16%. Our global client IT services revenues declined 3%. GE revenues declined 5%, in line with our expectations.

In this quarter, our overall business process outsourcing revenues increased 11%. Our overall IT services revenues declined 2%.

Adjusted income from operations totaled $82 million compared to $86 million in the prior year. This represents a margin of 13.6% compared to 15.3% in the fourth quarter of 2013. This reduction was driven by our planned investments in sales and marketing.

In fact, gross margins grew to 40.3% from 38.1% last year due to operating efficiencies and favorable foreign exchange. As a result of the increased revenue and gross margin levels, total gross profits grew to $242 million from $213 million in the fourth quarter of 2013.

SG&A expenses totaled $167 million compared to $136 million in the fourth quarter of last year. Our sales and marketing expense as a percentage of revenues this quarter was approximately 7.6%, up from 5.4% in the same quarter last year, driven by the ramp in client-facing teams. The ramp in subject matter experts also contributed to the increase.

Net income was $45.8 million compared to $48.8 million in the fourth quarter of 2013. Our adjusted EPS for the fourth quarter of 2014 was $0.26 per share, up from $0.25 per share in the fourth quarter of 2013.

I will now turn to our full-year financial results.

On a full-year basis, our 2014 revenues were $2.28 billion, an increase of 7% year over year, or 8% on a constant-currency basis. Excluding Pharmalink, revenue growth was 6%, or 7% on a constant-currency basis.

Revenues from global clients increased 10% year over year, or approximately 11% on a constant-currency basis. Excluding Pharmalink, revenue growth was 8%, or approximately 9% on a constant-currency basis. Within global clients, business process outsourcing revenues increased 12%. Our global client IT services revenues increased 3%. GE revenues declined 2%

Our overall business process outsourcing revenues increased 8%. Our overall IT services revenues increased 4%.

We continued to expand relationships for global clients in 2014 across a range of our industry verticals. In the 12 months ended December 31, 2014, we grew the number of client relationships with annual revenues of $5 million to 89 from 78. This includes relationships with more than $15 million in annual revenue increasing to 32 from 26, client relationships with more than $25 million in annual revenue increasing to 16 from 13, and client relationships with more than $50 million in annual revenue increasing to 4 from 3.

Adjusted income from operations totaled $344 million compared to $353 million in the prior year. This represents a margin of 15.1% versus 16.5% in 2014, in line with our expectations articulated in our last call.

Our gross profit for the year totaled $901 million, representing a gross margin of 39.5% up from 38.1% last year. This margin growth was driven by incremental revenue as well as operating efficiencies and favorable foreign exchange.

SG&A expenses totaled $586 million compared to $485 million in 2013. Our sales and marketing expense as a percentage of revenue for 2014 was approximately 6.6%, up from 4.7% last year. Including capabilities, our incremental investments totaled 2.7% of full year 2014 revenues or approximately $63 million. As we have mentioned previously, these investments have been ramping in 2014 and will have a full-year impact in 2015.

Net income for the full year was $192 million or $0.85 per diluted share compared to $229.7 million or $0.97 per diluted share in 2013. The year-over-year decline of $0.12 in earnings per share was primarily driven by unfavorable year-over-year foreign exchange re-measurement of $0.11, as well as lower operating income due to increased selling and marketing expenses of $0.03, higher financing costs of $0.02, partially offset by share buyback impact net of dilution of $0.04.

Total shares outstanding were reduced by approximately 5% from the beginning of 2014, driven primarily by shares repurchased in the second quarter. The average cost of the shares purchased was $17.50.

Our adjusted EPS for 2014 was $1.03 per share compared to $1.13 per share in 2013. The decline in adjusted EPS was broadly due to the reasons previously stated.

Our tax expense for the full year was $57.4 million, down from $71.1 million in 2013, representing an effective tax rate of 23%, largely in line with 23.6% in 2013.

I'll now turn to our balance sheet.

Our cash and liquid assets totaled approximately $462 million, up from $424 million at the end of the third quarter of 2014. This was after repayment of $31.7 million of short-term debt. With undrawn debt capacity of $113 million and existing cash as stated earlier, we continue to have liquidity flexibility to pursue growth opportunities. Our net debt to EBITDA in the last four rolling quarters was approximately 0.9.

Our days sales outstanding improved to 79 days, a reduction of 2 days over the fourth quarter of last year and 3 days sequentially, mainly due to improved billing-to-collection process and execution.

Turning to operating cash flows, we generated $272 million of cash from operations in 2014 compared to $312 million last year. This is better than our earlier outlook, mainly due to the improvement in DSOs. The year-over-year decline was primarily driven by foreign exchange re-measurement, up-front investments required for large deals, as well as lower operating income.

Capital expenditures as a percentage of revenue were approximately 2.9% in 2014. This was mostly invested to support incremental client operations.

Finally, our outlook for 2015. We expect total revenues to be between $2.46 billion and $2.5 billion, which assumes an adverse foreign exchange impact of approximately $35 million or 150 basis points at today's exchange rates. We expect global client growth to be in the range of 11% to 13%, or approximately 12% to 14% on a constant-currency basis. Excluding Pharmalink, we expect global client revenue growth to be in the range of 9% to 11%, or approximately 11% to 13% on a constant-currency basis. We expect GE revenue to be down 2% to 4%, or approximately 1% to 3% on a constant-currency basis.

With continued investments in sales and marketing and capabilities, we expect our adjusted operating margin to be approximately 15%. We would expect our operating margins to ramp during the year as our selling and marketing investments are absorbed by higher revenues as we progress throughout 2015.

In 2015, we expect our effective tax rate to be approximately 23% to 24%, similar to 2014. We expect our cash flow from operations to grow approximately 2% to 5% in 2015. Capital expenditures as a percentage of revenues are expected to be approximately 3%.

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

Thank you, Ed.

In summary, we believe we have the right strategy with the right areas of focus to increase our market share and drive growth in our underpenetrated markets.

The four pillars of our strategy are as follows: 1, concentrate our investments to ensure market leadership in select key industry verticals, focused service lines, and targeted geographic markets; 2, expand our team of subject matter experts and lead solution architects who bring extensive knowledge and deep domain expertise to clients; 3, further integrate our core operations, new technology, and analytics offerings to differentiate our solutions; and finally, deepen our client relationships.

Our performance and progress in 2014 clearly demonstrates that we are executing very well against our strategy. With the acceleration in growth in the second half of the year, I am pleased with the momentum in our business as we enter the new fiscal year. We are providing relevant and highly differentiated services that are clearly resonating with the needs of our clients.

We also look forward to see you all and plan to give a more detailed update on the progress of our strategy execution journey at our Investor Day on February 27 in New York.

I'll now hand the call back to Bharani.

Thank you, Tiger. We would like to open it up for Q&A. Operator, can you please provide the instructions?

(Operator Instructions)

The first question comes from the line of Bryan Keane of Deutsche Bank.

Hi, guys. Thanks for the new disclosure. Obviously, there's going to be some questions about the bookings number. When I look at it, it looks super strong, up 50%. You guys talked about it not exactly translating to revenue. Can you just help us think about how it will translate to revenue? Because I noticed organic growth ticked down 1 point in the fourth quarter from the third quarter, and then the revenue growth rate looks about the same or similar growth rates as the fourth quarter yet the bookings number looked so strong.

Bryan, let me start off by saying that the translation of bookings to our revenue in the year following bookings is a very complex equation, because bookings is total contract value. As you know, 75% of our business is annuity long term contracts. All those contracts have a ramp. Then, we have consulting reengineering IT and analytics. Some of that are projects and they are start and stop, and they are shorter term and shorter cycle deals. So, when you put all of that together and then you put together the fact that total bookings numbers in 2014 follows a year in 2013 where bookings were flat compared to 2012.

And the reason for that, I think we articulated over many earnings calls, where we said that our pipeline is now getting populated by larger deals that we are bringing in, more and more, as we cross them with our clients, and those take longer to close. They started closing in 2014, so you can almost count part of the 50% as a catch up, part of the 50% as following two years of flat bookings to each other. Of course, there was productivity that regard to the sales team because we realigned them to the areas of focus, and I wouldn't read more than all of that.

We are very, very pleased with the booking momentum. I said that on the call. We'd like to continue the journey. 50% growth would not be expected going forward. Medium to long term, the modeling that we would expect, unless many of these variables change, is booking will be a nice good leading indicator for medium-term revenue growth. We would not like to look at bookings as a single annual number.

Bryan, just to add to that. What I would say is coming into the year, you heard Tiger and me talking about having visibility to about the sales, about 75% of sales based upon what we have in orders in house starting the year. We feel pretty -- the level for this year is consistent with what we have seen historically.

That's helpful. Just on operating margins, look like we're thinking about flat year over year. When do we start to see some margin leverage? Is that a few years down the line or does that start in 2016? Maybe you can quantify the amount of investments maybe in this year as opposed to 2014? Thanks.

We're not going to give numbers, but directionally, Tiger and I both talked about, we definitely should start to see leverage in 2016 as the full force of the investments that we made in 2014 really out in 2015. Then, we return to more normalized levels in 2016. Tiger can add, but all I would say is, you should expect to see leverage, particularly in G&A. The sales force will ramp a bit as we go forward. Sales and marketing investment this year, for 2015, is going to be consistent with what we spent in 2014, so that's not really ramping. It's relatively flat on a percentage level, but dollar-wise it's going up with the revenue growth.

Bryan, the only other statement I'd add to what Ed said is, while we will definitely start seeing leverage in the business on margins going into 2016, we will have to constantly evaluate the fact that we still have an underpenetrated market that is undergoing significant transformation. And, if investments continue to pay off, then we will have to evaluate the tradeoff between how much of that margin do we actually allow to go through versus actually reinvesting some of that in the business. Overall, we expect some leverage to come through in 2016.

The other piece I'd highlight is on the gross margin side, we saw nice uptick this year because a lot of productivity. We also signed a lot of big deals this year. As you've also heard us talk about, big deals initially start out at lower gross margins, and that's no exception. 2015 will start off with a bigger mix of them than we had in 2014, so gross margins you'd expect to see a bit lower in 2015 as we come out of the gate.

Okay, great. Thanks for the help. We'll see you guys at the analyst day.

Thanks, Bryan.

The next question comes from the line of Ashwin Shirvaikar of Citibank.

Thanks. Hey, Tiger. Hi, Ed. Good results here.

Thanks, Ashwin. Hi.

I was wondering within the year, for the quarter, and I know you guys tend not to get into specific quarterly type guidance, but can you help us with the cadence of how revenues might flow through and how margins might go up and down with regards to specific investment timing and things like that?

I think I've talked about the margin profile because we had visibility to this. Last quarter I talked about the margins will be somewhat of the inverse of this year. In other words, 2014 we started out higher and went lower as the selling and marketing ramped. Next year, selling and marketing will start higher. As our sales increase, the selling and marketing costs will not be increasing like they did last year, so our margin should increase for sure second half of the year versus first half and likely as we go throughout each quarter. I'd say the ramp will be below the 15%, first half of the year will be above the second half of the year roughly.

On the year-over-year growth by quarter, I won't guide you too specifically because we can have movement between the quarters other than to say they all should be roughly aligned with the overall growth that we told you. I think the range is 8% to 9.5%, the $2.46 billion to $2.5 billion, so use that. As you think about modeling, remember that the Pharmalink acquisition came in the second half of the year, so growth might look a little better, total Company wise, first half of the year, as a result of that.

Ashwin, the final statement I'll add to that is on revenues, except for what an acquisition does, I would think about the revenue profile and the distribution of revenue, quarter by quarter, to be broadly similar to the way its been in our business, actually, for many years now. It hasn't changed that much. You would find as you would expect in our business quarter one always starts lower than the earlier quarter. That's happened in our business every year. I think happened, now, nine years or eight years in succession.

Okay. One question I had was on the GE contract. Now you've got -- the guidance is what it is and GE as a company does tend to ask for a lot of productivity to flow down to them. In terms of how you think of that relationship, are there parts of what you have historically done at GE that you're now beginning to de-emphasize or are parts becoming far more competitive than they used to? In other words, this is a big chunk, how long should we continue to look for a modestly down type of a trend?

Ashwin, it's a great question. I start by saying that our relationship with GE and the characterization of our relationship with GE and the work we do with GE hasn't changed in its color and character over many years. What I mean by that is the IT businesses have always been competitive. On the business process and analytics side of the house, our mandate has always been to drive value, to drive productivity, to bring in new technology and new ways of doing things. We've done that systematically over many years and we continue to do that.

What that does mean is the work we do with GE constantly changes and constantly evolves. We've said this again many times. GE continues to always be at the forefront of innovation, so we often try new things with GE, because GE tries new things. Then, we expand it to many other clients.

If you look at our portfolio of the work we do with GE, a lot of it is new stuff. Risk and regulatory is a great example in the financial services space, and you know how much of that is needed across the banking world these days.

To some extent, and again we've said this before, our business with GE and GE Capital is a function, also, of the way GE and GE Capital performs in terms of their balance sheet size, where they are taking the GE Capital balance sheet, acquisitions that they do and the speed at which they integrate them, the growth that they experience, et cetera. I think we are, as always, very well aligned, and as always, continue to find ways to drive productivity for them.

Okay, that's good to hear. I look forward to seeing you in a few weeks here.

Thanks, Ashwin.

The next question comes from the line of Tien-tsin Huang.

Hey, good afternoon, thank you. Just to dig into the bookings a little bit more. I'm glad it just -- it sounds like it's just new work is what you're describing. As we're trying to think about this formulaically, how does revenue retention look on as-basis? I heard the 75% comment, but if we just look at revenue retention, what does that typically look like?

It's a good question, Tien-tsin, and thanks for joining the call. It is only new work. That's the first statement. To some extent, therefore, it's a pure definition of bookings. Renewals accounted, only to the extent that there is new scope added in that renewal. A lot of our BPM contracts tend to go through renewal cycles, and as long as we continue to deliver value they get renewed.

That renewal rate in the industry -- it is not just about us, in the industry has historically been 90% plus for many years now. There will always be some pockets where it's different, but broadly 90% plus is an expectation that a lot of us would have. Then you have the IT and projects and consulting side of the house where you have start and stop. Once it stops, you've got to go back and re-win another set of businesses. That's the 75% that Ed referred to. You start the year with 75% visibility. You then have to win more business to reach the 100% mark.

Right, okay. I guess if we mix all of that together and we think about -- the only other piece that's missing maybe is duration. I don't expect you to give a precise answer here, but as we look at bookings, is there a rule of thumb around duration or even as we look year by year maybe book to bill, is there -- I know it's going to be lumpy, but is there a metric we should be looking for to better define it?

No, but the right way to think about it, Tien-tsin, so if you look at two broadsides of our house. On the BPM side, those are annuity contracts. You know that they typically tend to be five years, a few of them beyond five years, sometimes a few of them under five years, three years. Then, on the IT end and consulting side of the house, those tend to be anywhere from three months, six months, nine months, a year et cetera. If you look at our business, those are the two things that get mixed together and determine the overall relationship of total contract value to annual revenue.

Given the large deals that we won in 2014, and a lot of them were BPM annuity deals, the mix of the business shifted a little bit to more BPM annuity contracts. That obviously helps the overall annuity side of the house for us, which we like. Of course, it had a lot of bundling of technology and analytics. More and more we are doing that. I would say that's an important mix to keep watching. Depending on a year-to-year basis, as that mix changes, booking number will change, which is why it's important not to look at booking numbers on an annual basis.

If the average tenure stays the same, our guidance going forward on a longer-term basis, we would expect the bookings number and the growth there should correlate pretty closely to the revenue growth.

Makes sense. Just two quick clarifications and then I'll jump off. I promise. Revenue per employee, the trend there, given what your talking about with Automation, how should that evolve? Then just definition of large deal, can you remind us what that is? Thank you, that's all I have.

Great, Tien-tsin, the evolution of revenue per employee has to be only in one direction. It has to go up, for a variety of reasons, automation robotics, higher value-added work, more complex work, work that is more distributed across the globe, you name it. All of those drive revenue per employee up over many years, and I think it will continue in that direction. The second one which was around -- what was the second part of the question?

Definition of large deals, thank you.

Oh, large deals. For us, a large deal is $50 million TCV plus.

The next question comes from the line of Joseph Foresi of Janney Montgomery Scott.

Hi. I was wondering with the fluctuation in the business and the bookings, how do you think about industry growth rates, at this point, and where you fit at a particular spectrum?

Great question, Joe. I would say if we look at our business, and I'm calling that out as distinct from some of our competitors who may have a much larger IT business. For our kind of a business, I would say 2015 numbers, and the plans that we have, take us to, clearly, at the global, the planned growth rate level, above industry growth rates. If you look at 2014, obviously, we were below industry growth rates. That was the trajectory that we had expected. That was the trajectory that our investment plan had laid out, so that's the way I would think about our business.

Okay. We've fallen into, I think, a trap, maybe three years ago, where there's a very large amount of large deals that were out there in the pipeline that you were trying to convert. Is this large-deal cycle obviously different from that? It sounds like it is. If so, how? Have you approached large deals in any different manner to try to get the revenues across the goal line?

About two years back, we started to talk about large deals entering the pipeline. I don't know if you're referring to that. Basically, over 6 to 8 quarters, we had said that those large deals were making slow progress because they are complex and take a long time to decide. That characterization of large deals hasn't changed. What has changed is that, now, there is a steady flow of those large deals because they now populate all stages of our pipeline, so I don't think there's a difference between the characterization of large deals, those deals versus now. We just have more large deals that we go to our clients and create.

There are many more sole sourced. They are more complex. They often start with design and consulting rather than just plain vanilla outsourcing. They often have much more new technology and analytical and insight components built into it. Now, we have, in our client-facing teams, in our domain expert teams, as well as in the solutions that we have started building for the specific industry verticals we are focused on, I think the ability to create those deals better and then win a fair share of them, which we are. Those win rates, as I described, had gone up and had gone up in 2014, and we expect those to continue.

Okay, last question for me. We saw the bookings. They look, obviously, impressive, but you're cautioning us not to maybe think of it as or put any kind of conversion rate on it. Is there anything you're doing internally to measure either the sales force or change in their composition to try to get those revenues in the door at a quicker pace? I'm just trying to not get ahead of myself given where the bookings numbers are looking.

Joe, as you can imagine, a typical sales person's role in our business would be to generate new bookings. That is the single most important metric for a number of the sales people, for a number of the business leaders, and that is logical in our business. Obviously, some of them who manage client relationships would also have metrics that are managing those relationships, making sure that promises are kept, delivery in partnership with the operating team is great, net promoter score, which is so important for us, is high. So bookings is an important metric, and making sure that those continue to move forward as we go through 2015 is important.

Thank you.

The next question comes from the line of Anil Doradla with William Blair.

Hi guys, this is Matt Farrell on for Anil. First, congratulations on the quarter.

Thank you, Matt.

My first question is about large deals, and are those large deals that you signed in 2014, are they ramping as you expected? Then, can you update us on the pricing trends that you're seeing in these large deals? Are you having to give up on pricing to keep the bookings number going up? Thank you.

It's a great question, Matt. One, all the large deals that we have signed are progressing well. Some of them, as you can imagine -- two of them got signed in the last quarter, so it's very early days. A couple of them got signed into the third quarter, so only a quarter plus since we signed, but they are progressing on plan. They are complex. They are global. They are multi tower, and they require a lot of change management in partnership with a number of our clients. So far, progressing well across the board.

And on the margin front, are we seeing any margin pressure?

Interestingly, and we've, I think, talked about this in a couple of earlier calls as well. Large deals, the clients needs in large deals are actually different. What they are really looking for is value. They are really looking for big, bottom-line impact, risk mitigation, change management, take me to best-in-class, allow me to become a disrupter in my market space, in my competitive landscape, because I want to leverage disruptive technologies, disruptive designs of processes, disruptive robotics et cetera. In that landscape, price is not, often, the number one reason why any client chooses any partner.

The other context that I'll give is that these large deals, therefore, have large global competitors who participate in them. Not everyone has all the capabilities lined up to participate in them. As a result, pricing is competitive, but it is not irrational. There is no reason to believe that large deals means lower price and lower margin.

I think what I'd add there, Matt, is on these large deals you saw some of the impact of them in the year. Initially they start out because of the up-front cost a little bit lower margin than we ramp. Also, there are some up-front cash related investments that we make that affect the cash flow in 2014, as you heard me talk about, so just two added points there.

Okay, thanks for that. Then, are there any updates on the capital allocation strategy? I know you guys touched on it earlier, but anymore specifics that you guys could dive into? Thanks.

We definitely plan to come back to you with more details at the February 27 meeting here in New York, so stay tuned for that. As we've said before, our priority really is driving profitable growth. As we look at that, capital expenditures to support the growth, and then from there, attractive M&A in our targeted verticals, tuck-in in nature, right economics to them. Then from there, the return of capital is the piece that we'll come back to you with on the 27th of February.

The next question comes from the line of George Tong with Piper Jaffrey.

Hi. Thanks for taking my questions. Tiger, can you give us a sense for how much growth you're seeing in the pipeline? If you look at growth in new bookings on an annualized basis instead of total contract value basis, how much growth you're seeing there?

Again, the mathematics there would involve not just the conversion of total contract value, value driven contract value, but it also involves change in mix of long-term contract deals versus shorter term technology or consulting type deals. I think the math is very complicated just to do a simple conversion. We are seeing continued momentum of new deal flow into our pipeline, both in terms of regular deal flow as well as in terms of new deals that are getting created in order for our clients to be able to drive new value.

Some of that, as I said, clearly is a reflection of the alignment of our resources to chosen areas. Obviously, when you do that you can go deeper. You can go with more domain. Addition of new people into the team who have deeper experience and bringing that to the table, and new solutions that we are going in with. When you think about the combination of those, we like the addition of new deals to our pipeline. We like the -- there is no change in the velocity of those deals, large deals take longer, regular deals take a certain time. Then our win rates in 2014 were up.

Very helpful. With regard to the two large deals that you signed this quarter, can you give us a sense for when you expect these to be ramped and if there will be significant start-up costs?

They will take time to ramp as one would expect large deals to take. Typically, one would expect in our business, for those types of deals, anywhere from a 12 to 24 month ramp depending on which part of the world and how many countries are involved et cetera. I would have that expectation of both these deals. That's the way you should think about it. Then in terms of up front --

Not a significant impact, no.

Not materially significant, there wasn't anything up front.

Got it. Last for me. Could you provide us with a progress report on your, the incremental sales and marketing investments you're making? The comment on sales force productivity trends and how these are measured?

Our total investments for the year, in terms of total cost as a percent of revenue, was [6.6%] (corrected by company after the call). That was broadly in line with what we had said we would like to reach. We, obviously, did those investments in a combination of specific industry verticals, the services against those verticals and in the geographic markets that we have chosen.

We feel very good about the way those people have undertaken the journey of getting integrated. Given the fact that ramp happened through 2014, there's obviously a whole set of people who joined in Q3 and Q4, they are still going through the process of getting immersed and working with clients and creating new conversations. Those are progressing well.

We track productivity by individual. We track productivity by cohort. We track productivity by vintage of having spent time in the Company. We track productivity by hunters versus people who mine. Overall, sales productivity is up. There are segments, obviously, that do better than the others. We do our typical root-cause analysis and then we intervene and run new training programs, add new skills and tools. I think all of that going very well.

Thanks very much.

The next question comes from the line of Keith Bachman with Bank of Montreal.

Hi guys, thank you. Your ITO business was down in Q4 after a couple quarters of growth. What's causing that? More specifically, implicit within your 2015 guidance, what should we be assuming for BPO versus ITO?

I'd start by saying that quarter by quarter in our business is not something that we focus too much energies around. Fourth quarter, typically tends to have IT budgets winding down. Those IT budgets in our business would broadly be three buckets. There's the IT business that we do with GE. There's the capital markets IT business, and then there is a business that we have with global clients that cut across the range of our verticals. Typically, quarter four tends to be ones where some of those projects end. I wouldn't read too much into just the quarter four numbers.

More and more we really are looking at our business as industry verticals where our objective is to serve clients in those industry verticals and add competitive advantage to them. When we do that, it's never ever in the context of BPO versus IT versus something else. It's always in the context of solutions that solve big problems that they are facing, Know Your Customer in capital markets, regulatory affairs in a pharma vertical, managing claims better in a property and casualty insurance company. I think, really, the industry that we are in is moving more and more towards consolidated solutions rather than the segregation of BPO and IT.

Okay, well that raises other questions about whether the categorization between BPO and ITO is appropriate going forward, but perhaps we'll leave that for your analyst day.

And, Keith, you are right. We will tee that up at the analyst day not about ourselves but about the whole industry. Because the whole industry is categorized that way, so obviously, also we report the same way.

Well let's transition, I want to go back to bookings for a second. The growth was impressive. If we go to a normal industry, or not normal, but traditional industry characterization, the book to bill was below 1. You're not including renewals that don't have variance on size. If we did include renewals where there wasn't an increase in scope, I would assume the book to bill would be greater than 1. But, just trying to tease that out a little bit?

Don't know, Keith. The simple answer to you would be, it ought to be. It will be, because obviously, we do a lot of renewals every year. If there's no change in scope, we don't count it. So you're right, but I don't have the number. We don't expect to add that to our booking number.

Given the high renewal rate, the focus, as you would imagine, is going to be on growth and that's why we talk about bookings.

So, then rather than focus on the book to bill, we'll focus on the growth of that bookings number relative to the expected growth on revenues then. That's the translation?

That's right. Then, we'll try to triangulate for you on if there's disconnects to what we're coming out with, but for sure, we're using that bookings number and the visibility to give you the guidance for the coming year.

Okay. Just last one I'll sneak in on seasonality. Currently Street consensus estimates have EPS increasing in the March quarter, at least the information we have versus December quarter. I wonder if you'd care to make any comments on whether that is appropriate?

No, we wouldn't comment to that other than what you heard me talk about before as far as in general year-over-year growth and the profitability, the inverse of what you saw in 2014, you'll see in 2015. We're going to start out low, below the 15% that we guided to Q1 and then ramp from there.

That's it for me, thank you.

Thanks, Keith.

The next question comes from the line of Dave Koning with Baird.

Hey, guys, nice job.

Thank you.

I just wanted to talk just briefly about a comment you made about bookings and how it was a great year, but then there's the ramp time to have that all flow into revenue as you just ramp the contracts. Does that mean that this year, while good like you said, it won't have major acceleration, but then should we really expect a lot of that bookings to really hit in year two and three? So do we get back to that 10% to 13% growth you used to routinely do? Is it that 2016/2017 timeframe that we can expect that?

Dave, the expectation that we had as we started our investment journey, if you remember, was to start the investments in 2014, focus the business on the chosen areas, build the capabilities, add the teams and bring new business in. That will allow us to start accelerating growth into 2015 and then further on into 2016, with the medium-term objective of getting global client growth rate closer to mid teens. That was the vision that we had laid out, so you're absolutely right. As long as we continue to drive the momentum that we now have in the business, we are on that path.

Okay, great. Then, as we look longer term on margins, I think you've said in the past 15.5% to 16.5. Did I remember that right? Are we on that pathway that really the leverage comes in 2016 to get towards that level again?

All I would say Dave is that I think there will be leverage in 2016. The extent of that leverage is just too early to quantify specifically. We'll obviously, as we get towards the end of the year and beginning of next year, we'll obviously have much better visibility ourselves. Also, a clear view on what are we going to direct towards investments and what is going to be the margin line? We'll talk about it at that time.

Great, thank you.

Thanks, Dave.

The next question comes from the line of Edward Caso with Wells Fargo.

Hi, thanks. Congrats on doing what you said you would do.

Thanks, Ed.

Just one more on the bookings here. If you took the six deals out of this year and you took how you define large deals out of last year, what would that percentage be? I'm trying to figure out is, how dominating are these six transactions to the number? How sensitive will you be to large deals in the next year number?

Ed, I'm not going to be able to give you that number, but let me tell you -- and this is, again, something we've said in many calls before. As any business, and as our business continues to become bigger, the law of large numbers starts playing out obviously, so we will need large deals in order to continue to drive growth. That's the nature of any business and that's the nature of our business, so that's the way I would answer the question.

The last one, a technical one for Ed. The other line above operating income, I think it's something to do with shared services, was particularly favorable this quarter. Can you put some color on that?

I'm not sure which line it is. We'll have to get back to you on that, Ed. I'm not sure which line you're referring to.

Okay, thanks.

Thanks, Ed.

The next question comes from the line of SK Prasad Borra with Goldman Sachs.

Thanks for taking my questions. A couple, if I may. First on bookings, I'm sorry to labor the point. Is it -- just from a very simplistic point of view, the 50% growth in bookings you mentioned, should we see that as providing some visibility into 25% of the revenues which are non recurring? The second question is, you mentioned the win rates have been up. Can you name any competitors whom you're winning these deals against? Is there particular parts of your portfolio where you seem to be doing well compared to others?

I'll answer the second question, Prasad. I haven't fully understood the first question, so I'll come back to you.

Second question, our competitive set is pretty much the way we've seen it over the last two or three years. It's a set of global competitors. It's a set of large technology players. A lot of them are focused on specific verticals, specific services where they have strength. We see the competitive set in each of those deals depends on what type of deal it is and which industrial vertical it belongs to, and the names are all the usual names.

Having said that, the one other point I would make is repeat the point that in a number of these situations, given the fact that we were working with the client in order to create a new solution and a new way of thinking, it's often sole sourced.

Okay, that's clear. Probably on the question around bookings. I guess I'm connecting back to one of the statements you made, which is close to 75% of your revenues is more or less recurring long-term contracts. The definition around new bookings, which you mentioned, is more about new business you're getting are change of scope. I'm saying the 50% growth in bookings you're referring to, should that be a better indicator for that 25% of the revenues, which are more or less non recurring?

No, I think you're mixing up two different concepts, Prasad. The way I would think about the 75% visibility is that for the balance, 25%, we don't have bookings. Our objective, like every year, would be to get bookings this year in order to fill that for this year. That's a typical visibility we enter every year with.

Okay. That's clear, thank you.

Ed, to get back to your question on the other income expense. I'll look at the P&L, but I know there's pluses and minuses in that every quarter. I don't remember anything unusual this quarter that was out of the ordinary. I know there was a gain we had on some land, but there's some pluses and minuses in there but nothing material to speak to.

The next question comes from the line of Jason Kupferberg with Jefferies.

Thanks, guys. Just wanted to start with a question on your thought process around horizontal BPO relative to vertical BPO right now? I know, historically, the focus has probably been a bit more horizontal, but clearly you're building a lot of domain expertise in your chosen verticals. So, just thoughts over time what sort of mix shift might we see in your revenue between those two, or just where you see the markets demand patterns evolving relative to the two?

Jason, interestingly in our business, and I'm going back to five plus years back. We've always had almost half our business as industry vertical focused, industry vertical processes, given our heritage of coming out of GE Capital and GE. As a result, only half our business, one would have characterized as horizontal financial accounting that cuts across verticals, technology that cuts across verticals et cetera and a bunch of other things that we did. Whether it was insurance claims processing, mortgage back office, credit card back office, building pricing models for commercial lending and so on and so forth, all of those are very industry specific focus.

We've always had that 50/50 mix. As we've gone through the last couple years, I think that mix is broadly the same. We're continuing to build deep domain in our chosen verticals in that half of the business, and in the other half of the business we're building capabilities and domain around the horizontals. What is interesting is that when we build capabilities that are deep in our horizontal, like financial accounting, it actually becomes deep in financial accounting for the pharma industry. Deep in financial accounting for the insurance industry, because that's when you get really deep.

Okay, that makes sense. For the outlook on bookings for 2015, I think it sounds like what we're saying is a quote/unquote normal year, bookings growth would approximate revenue growth. Obviously in 2015, you've got a very difficult year-over-year comparison. Just to have people's expectations calibrated properly, is it fair to assume that bookings growth will be less than revenue growth in 2015? I realize you probably can't put a firm number on it, but just directionally?

No, we are not putting a firm number on bookings for 2015. There is no outlook for bookings for 2015, Jason. I just want to clarify that.

I want to reclarify that bookings for a specific year, starting January 1 to December 31, is a very difficult specific number to put because you could have overflow. You could have all kinds of things. Directionally, over many years, let's say two years, you should find that bookings growth should start mirroring and start actually be a leading indicator of revenue growth. So, we don't have an outlook for 2015 bookings.

Last question, if we think about the sales and marketing investments for 2015, I know you said it should be similar as a percent of revenue as 2014. The composition of those investments, any notable changes we should be thinking about?

No. For the first statement I would make is that since we are going to keep the overall percentage of revenue constant, the extent of incremental spend in investments is far more muted in 2015 as new spend versus what we did in 2014. What is happening in 2015 is actually a flow through and a full-year impact of 2014 that will be felt in 2015. That's a bigger impact. I think we've got a set of investments in 2014 that will flow through into 2015. We'll do a little bit more, but substantially muted as compared to 2014.

Okay, understood. Thank you.

Thanks, Jason.

There are no further questions in the queue. I will now like to turn the call back over to Bharani Bobba.

Thank you, everyone, for joining us on the call today. Again, we look forward to seeing everyone at our February 27 Analyst and Investor Day. Thanks, Bye.

Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect, have a great day.