Genpact Limited (NYSE:G) Q1 2024 Earnings Call Transcript

Genpact Limited (NYSE:G) Q1 2024 Earnings Call Transcript May 9, 2024

Genpact Limited misses on earnings expectations. Reported EPS is $0.643 EPS, expectations were $0.69. Genpact Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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.

Krista Bessinger: 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.

BK Kalra: 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 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 open AI 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 specific focus on gen 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 gen AI into their core business processes. gen 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 center 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 case of Volkswagen Financial Services, we have integrated gen AI into the production system. This enables agents to manage servicing requests with significant efficiency. The gen AI translation skills are already launched across three countries in Europe and rapidly expanding. This solution has significantly enhanced agent’s ability to manage account changes, loan disbursements, addressing customer complaints, while delivering 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 debt, 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 of the examples. While it is still very early days, we are seeing increased momentum in gen 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 highly matrix organization to 12 units, which mirrors 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 indicator 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 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 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 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 GenAI 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 team ingredient in putting us on path to reach our full potential. With that let me turn the call over to Mike.

Mike Weiner: 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 and all segments. As noted in our press release, we made an enhancement to our Data Tech and AI and digital operations revenue breakout for more accurate to more a 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 we’ll 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 Health care 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 up 7% year-over-year and outpaced revenue growth for the quarter.

The increase was primarily driven by the impact of lower outstanding share count of $0.02, higher adjusted operating income of $0.01, and 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 700 — excuse me $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 2 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 for 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 as reported 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’re able to deliver revenue upside over the course of the year, our buys 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 in the expected of 24.5% compared to 23.4% reported for full year 2023. The increase reflects the implementation of new Pillar two global mineral and 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 continues 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 Marinas reported. Gross margin is expected to be approximately 34.8%, down 20 basis points sequentially and the alignment of our — due to the alignment of our annual compensation refresh of employees in 2Q. Adjusted operating income margin is expected to be 16.5%. With that let me turn the call back over to Krista.

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

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Q&A Session

Operator: [Operator Instructions] And our first question comes from Puneet Jain with JPMorgan. Your line is open.

Unidentified Analyst: Hi. This is Selina [ph] 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 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.

Mike Weiner: Yes. So it’s Michael. 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 now, 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.

BK Kalra: Yes. And if I may add, we don’t see any change in the macro environment. And in our model, 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.

Unidentified Analyst: Great. Thank you.

Operator: Thank you. Our next question comes from Bradley Clark with BMO. Your line is open.

Bradley Clark: Hi. This is Brad Clark on for Keith Bachman. Thanks for taking my question. I wanted to hone in on the comment on GenAI 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?

BK Kalra: So, Brad, I’ll say three comments. One, obviously, these are early days, not just for us, for our clients or 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 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.

Mike Weiner: 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 hyperscaling 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.

Bradley Clark: Great. Thank you.

Operator: Thank you. Our next question comes from Maggie Nolan with William Blair. Your line is open.

Maggie Nolan : 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?

Mike Weiner: 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.

BK Kalra: And if I can add, Mike, look, where it is all coming from in early days is all about C+1 [ph] framework, Maggie. So take an example of partnerships. In partnerships, as one of the key attributes in C+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 3x relative to the corresponding period last year. relative to the corresponding period last year. Or if I go into, like Mike was saying, in data tech AI, how our employees are also 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.

Maggie Nolan : 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 reception of those changes culture? Have there been any changes in voluntary attrition within the group? Thanks for taking my question.

BK Kalra: 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 see — I would say that a lot of — 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 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.

Maggie Nolan: Thank you.

Operator: Thank you. Our next question comes from Ryan Potter with Citigroup. Your line is open.

Ryan Potter: 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?

Mike Weiner: 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 really 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.

BK Kalra: 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.

Ryan Potter: Got it. And then just quickly on productivity commitments from clients. Can you provide some more color I guess on activity 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?

BK Kalra: 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 our — 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 an interest from clients to learn more about the how that certainly has changed but not the quantitative side of those.

Mike Weiner – CFO: 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.

Ryan Potter: Got it. Thank you.

Operator: Thank you. Our next question comes from Bryan Bergin with TD Cowen. Your line is open.

Bryan Bergin: 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. Are those fully implemented as you exited the first quarter? Or do you have incremental kind of changes that you’re now pursuing in 2Q and as you go through the balance of this year?

BK Kalra: Thanks Bryan. So look I think we have made a number of changes and we’ll continue to evolve. As we progress through the year as we as 3+1 takes hold as well as a client as we continue to engage with clients and learn more on their needs. So it’s a continuous evolution and there’s nothing new. I think what we did was a surge of changes that we have driven. More fundamentally, and as an example in simplification we moved from a matrix organization to finite 12 units that truly face the clients and brought in a lot of decision-making to those 12 units. And those changes happened in Q1. But there are — as we continue to progress I think we will continue to improve it on the edges as well as bringing in new talent that pushes the agenda of data and technology and AI further.

Mike Weiner: 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.

Bryan Bergin: 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 too? 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.

Mike Weiner: 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.

Bryan Bergin: All right. Thank you.

Operator: Our next question comes from Bryan Keane with Deutsche Bank. Your line is open.

Bryan Keane: Congrats on this solid execution there. I guess, my question BK 62% win rates that seems elevated. I mean what would you point to p-p is it the pitch or go-to-market strategy that’s pushing up the win rates?

BK Kalra: Yeah. If you — thanks Bryan. If you look at even last year where we ended our win rates were in the range of 60%. And I completely agree with you that they are really high win rates. And what is driven by is two factors. One there is a lot of small deals and medium-sized deals where we do a lot of sole source. And that is helping us improve our win rates. And two, even they areas we have onboarded many clients, there are follow-on larger deals that we are doing and some of these follow-on deals that we do, they happen to be sole source and therefore, our win rate improved, because we have already seen the CI ratio they have already seen the performance that we drive in the account. Having said that, I would say that yes, they are very high win rates.

And I’d rather have a bigger pipe and we have a record level of pipeline as I speak today. But it won’t hurt to increase the pipeline further and that’s where our effort is and even if some of the wins goes down, I’ll be less bothered by that.

Bryan Keane: Got it. And then my follow-up is, just looking — you increased gross margin but not operating margin or adjusted operating margin. Maybe what is the cause of that? In second quarter, the margin guide of 16.5% is a little lower than we had in our model. So, just thinking about the puts and takes there as well? Thanks.

Mike Weiner: Yes. Let me first address your first question really with regard to — yes, I think what you’re asking is our growth margin up and we’re holding our AOI relatively constant from our initial guide, right? So in our prepared remarks, to the extent we continue to execute on better revenue performance, what we’re going to do is essentially focus that on increasing our investments, our time investments in our business. So if you kind of think about the model on a go-forward basis, that’s really driving this. Better revenue that we flowed through in the first quarter. We’ll have the operating leverage on growth that we have on a go-forward basis. And as clients zero for the company, we continue to execute on our own efficiencies. What we’re going to do with all three of those positive is we’re going to deploy those back in the business and focus really on derive AI investments.

Bryan Keane: And then just a second quarter in particular?

Mike Weiner: I’m sorry. It’s relatively the same thing for the second quarter. In terms of — I think your question is, why it’s 16.5%, right? I think it’s really — I can’t really comment on your model, but it really results in if you look at our seasonal pattern, it’s pretty much in line.

Bryan Keane: Got it. Thanks for the color.

Mike Weiner: Thank you, Bryan.

Operator: Thank you. Our next question comes from Moshe Katri with Wedbush. Your line is open.

Moshe Katri: 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 Gen 5? Thanks a lot.

Mike Weiner: 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.