Genpact Ltd

NYSE:G

Earnings Call Analysis

Expecting Growth Amidst Uncertainty

The company has been proactive, with Digital Operations ramping up cautiously yet effectively, laying a stable foundation for the coming year. While the Digital-Tech and AI business is utilizing budgeted resources, specifically in data engineering, to bolster its progress, overall growth is expected to be between the provided full year 2023 guidance and lower than initial double-digit projections. Confidence remains strong in Digital Operations, despite the challenging business climate. Further clarity and details are anticipated in early February.

Moderation in Revenue Growth and a Revised 2023 Outlook

The company has observed increased pressure in short-cycle advisory and other project work, which has led to total revenue falling short of expectations. Despite this, bookings are anticipated to remain robust with a projected growth of at least 25% in 2023. Total revenue reached $1.14 billion, a modest 2% increase year-over-year, while adjusted operating income margin improved slightly by 0.1% to 17.2%. Adjusted diluted earnings per share saw a marginal rise of 1%. However, due to the challenging market conditions, the full-year 2023 revenue growth expectation has been lowered to approximately 2.5%, compared to the previously anticipated growth of 5.5% to 6.5%.

Targeting Accelerated Growth Despite Near-term Uncertainty

A record-level pipeline has been achieved, attributed to robust deal inflows and the integration of generative AI capabilities, particularly within Data-Tech-AI services. The growing role of AI is evidenced by the successful implementation in various clients' operations—achieving cost reductions and efficiency gains—and is believed to be a catalyst for future expansion of non-traditional pricing models. Thirty-two new logos were added this quarter, reflecting a well-distributed growth across all verticals and geographies. Despite the reset expectations for 2023, the company is positioned for stronger growth in 2024, although the current visibility does not support forecasting a return to double-digit growth yet.

The CEO Succession Plan and Strong Foundation for the Future

The current CEO has laid out a plan to transition leadership after over a decade at the helm. The incoming CEO has long been a part of the company, and there is confidence that the built foundation will lead to continued robustness of the business model despite temporary macroeconomic headwinds.

Financial Performance in Detail and 2023 Revenue Projections

Adjusted operating income margin, partly thanks to operational efficiencies and higher gross margins, increased both year-over-year and sequentially. The company faced a decline in cash from operations compared to the previous year, attributed to a rise in days sales outstanding (DSO). Looking towards the end of the year, the company now expects revenue for full-year 2023 to be approximately $4.45 billion, which aligns with its adjusted actions and market forecast.

Leveraging Non-FTE Pricing Models and Strategic Insights

The company is driving growth through non-FTE (full-time equivalent) pricing models, which currently represent 16% of revenue. This is anticipated to grow over the long term, supported by a high-quality pipeline and strategic initiatives in various verticals, including financial services and supply chain management. These strategies are expected to decouple revenue growth from employee growth, marking a significant shift towards a more scalable and flexible business model.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, ladies and gentlemen. Welcome to the 2023 Third Quarter Genpact Limited Earnings Conference Call. My name is Didi, and I will be your conference moderator for today.

[Operator Instructions]

As a reminder, this call is being recorded for replay purposes. The replay of the call will be archived and made available on the IR section of Genpact's website. I would now like to turn the call over to Roger Sachs, Head of Investor Relations at Genpact. Please proceed.

[Roger Sachs, executive]

Thank you, Didi. Good afternoon, everybody, and welcome to our third quarter earnings call to discuss results for the period ended September 30, 2023.

We hope you had a chance to review our earnings release, which was posted to the IR section of our website, genpact.com. Speakers on today's call are Tiger Tyagarajan, our President and CEO; Mike Weiner, our Chief Financial Officer; and BK Kalra, our next CEO. Today's agenda will be as follows: Tiger will provide an overview of our results and update you on our strategic initiatives, BK will follow with a few brief introductory comments, and then Mike will walk you through our financial performance for the quarter as well as to update you on our full year 2023 outlook. Mike and Tiger will then take your questions. We expect the call to last about now.

Some of the matters we will discuss in today's call are forward looking and involve a number of risks, uncertainties and and other factors that could cause actual results to differ materially from those in such forward-looking statements. Such risks and uncertainties are set forth in our press release.

In addition, during today's call, we will refer to certain non-GAAP financial measures that we believe provide additional information to enhance the understanding ability management fees, the operating performance of our business. You can find a reconciliation of these measures to GAAP in today's earnings release posted to the IR section of our website. And with that, let me turn the call over to Tiger.

[N. V. Tyagarajan, executive]

Thank you, Roger. Good afternoon, everyone, and thank you for joining us today for our third quarter 2023 earnings call. I know you've all seen the exciting news that BK Kalra has been appointed as Genpact's next CEO as I've announced my retirement in February of 2024. I will share more about this announcement, and BK will share a few words. But first, let's review the quarter.

At a high level, we saw increasing pressure in short cycle advisory and other project work in quarter 3 as clients remain sharply focused on large farm special deals that prioritize cost reductions. This resulted in total revenue being below our expectations. However, bookings remained strong and are on pace to grow at least 25% in 2023. In addition, we continue to make significant progress in the use and deployment of Gen AI as we move into light production environments with early demonstrated results. This is leading to many new inflows as clients prepare to embed large language models into their operations.

Turning to our performance in more detail. We delivered on a constant currency basis. Total revenue of $1.14 billion, up 2% year-over-year. Data-Tech-AI services revenue of $500 million down 2% year-over-year and digital operation services revenue of $636 million, up 6% year-over-year. We also delivered adjusted operating income margin of 17.2%, up 10 basis points year-over-year and adjusted diluted earnings per share of $0.76, up 1% year-over-year. Our third quarter revenue grew less than expected, we saw ongoing pressure in short-cycle projects at advisory work, driven by 3 things: one, fewer small deals converted; two, longer decision cycle times for those small deals; and three, lower demand for smaller tech deals in our financial services and consumer health care articles. These challenges were predominantly feed in our data TI services where we design and build solutions to transform our clients' businesses.

However, our recent large deal wins are ramping up on schedule, this help drive solid performance in our digital operation services where we digitally transform and run our clients' operations. Given our year-to-date performance, lower than normal visibility into client discretionary spending and no expectation of seeing the typical seasonal year-end lift from budget flush spending, we are resetting our full year 2023 revenue outlook. We now expect full year top line growth of approximately 2.5% year-over-year on a constant currency basis compared to our prior expectation of 5.5% to 6.5% growth. Mike will provide greater details on this updated outlook.

Despite the challenging macro environment, demand for our long-term annuity-based services remains very healthy. Fueled by continued robust inflows, our high-quality pipeline once again reached a record level. We believe our deep domain process and data expertise, combined with our experience building, developing and refining our AI capabilities over the last 7 years gives us a unique competitive advantage in these times with the rise of Gen AI. This has led to many new deal inflows year-to-date embedded with Gen AI. We signed 2 new large deals during the quarter following the 11 we signed in the first half beyond Win rates in the period were approximately 55% above historical levels and roughly half of our wins continue to be sole-sourced.

We also added 32 new logos during the quarter, a bounce back from the first half of the deal. We anticipated growth in bookings for the year and ongoing expansion of our pipeline, we continue to believe that we are well positioned for accelerating growth in 2024 compared to our adjusted outlook for 2023. However, given limited visibility into our short cycle revenue, we currently do not have the same level of confidence in forecasting a return to double-digit growth in 2024, as we did in our prior quarter update. We will provide a more detailed 2024 outlook during our year-end earnings call in early February.

Turning to our 5 key strategic initiatives. We continue to make progress in all of them in quarter 3. First, Revenue from our prior year accounts grew 6% year-over-year during the quarter and expanded to approximately 64% of our total revenue. Our investments in these clients are paying off as approximately 70% of our year-to-date bookings were from our priority accounts. We continue to expect this portfolio to grow faster than the company average over the long term. Second, we continue to deepen our partnerships with cloud technology players as we co-innovate and create joint IP solutions. Three examples. First, we expanded our partnership with AWS integrating their better of Gen AI capabilities with our proprietary cloud-based financial ground solution. This solution has been deployed into production at key financial institutions to drive precision and efficiency in detecting, investigating and preventing financial growth. We grew our team and certifications in Gen AI, machine learning and data engineering for Google Cloud and new SaaS solutions listed on the Global Cloud platform marketplace.

And finally, as an elite partner of ServiceNow, we are enhancing our cloud-based joint solutions and automate procurement and sourcing, supply chain and insurance processes, just to name a few. Through initiative, we are continuing to invest in new operating centers in Tier 3 cities in India, where we expanded our talent base and footprint. These new hubs not only offer us cost benefits, but also access to diverse talent pools with lower attrition. Fourth, we continue to drive outcome and transaction-based commercial models, which represented 16% of our revenue in the third quarter.

And finally, our recent investments in large [indiscernible] teams continue to generate great results, both in bookings and pipeline. As expected, our attrition level for the third quarter was 25%, consistent with the first half of the year and significantly lower than the 36% during the same period last year. Adjusting for involuntary attrition and employees with less than 3 months of service, our attrition rate was even lower at 21%.

Let me now update you on the rapid progress we're making with Gen AI. I'm more confident than ever that this is a huge opportunity for us. We have 3 focus areas: first, we are using gen AI to disrupt less penetrated areas for us and are wide open for new service models. For example, customer care, FP&A, sales and commercial operations; second, we are prioritizing services where we are a recognized leader. For example, financial accounting, financial crimes and risk services and supply chain, where gen AI acts as a catalyst to drive a step function improvement in outcomes; and third, we are implementing gen AI internally's across our own HR, training, knowledge management and software development functions, helping to drive speed, margin improvement and employee and user experience. We currently have more than 90 specific gen AI solutions that are undergoing rigorous testing either with clients or our recurrent teams. We have begun to shift our focus from building proof of concept and pilots to implementing solutions in live products and environments with about 10 either deployed or on the verge going live. To date, we've had nearly 2,000 client conversations helping to generate gen AI road maps with specific use cases and related execution parts.

While I already shared the financial crimes solution deployed on Amazon Bedrock earlier in the call, let me now share 2 more examples that are on a rapid paths to production.

For our global entertainment company, we've integrated AI into mining and sentiment analysis of their customer chat data. This has led to a 40% reduction in resources for handling that feedback as well as a significant increase in first-time resolution by providing ideal responses to service agents to solve customers' issues. For a leading financial institution, we integrated gen AI, predictive AI and machine learning models into their loan review process, resulting in a 3x increase in volume processed. This transformation is enhancing client satisfaction and driving business growth. While we are still in the early days, gen AI embedded solutions enable clients to quickly achieve outcomes.

As a result, we believe -- it will help accelerate the trend towards greater use of alternate commercial pricing models, ultimately leading to a greater decoupling of revenue growth from employee growth over the long term. Our ability to upskill our employees at scale, combined with our deep domain expertise, represents a competitive advantage for us as we help clients unlock the benefits of gen AI. We now have more than 90,000 team members enrolled in our AI trading programs with almost 47,000 having completed various levels of certifications. We have also created an internal AI playground where our employees can experiment with multiple large language models to help drive gen AI adoption.

Currently, more than 60,000 employees are using this platform. Our progress was recently recognized by the leading industry analyst firm HFS where we earned the highest ranking in their inaugural generate enterprise services horizon report.

Now let me come back to the CEO succession plan we announced today. We have been an incredible journey for me leading Genpact over the last 12-plus years. The world around us has changed dramatically in that time and Genpact has successfully transformed along with it. I have tremendous personal and professional respect for BK. He has been a true partner for me for years and helped shape and execute the various pivots of the company. He knows our business, our clients and our teams better than anyone and embody the very best of who we are at Genpact. His holistic and hands-on approach to strategic and operational leadership will be a guiding force as he becomes our next CEO.

Equally importantly, we have built a great leadership team over the years that will make the whole transition seamless. As for me, I plan to stay actively involved as a member of the Board and will, of course, work very closely with BK to ensure a smooth and successful transition. With that, I'd like to turn it over to BK for a few additional remarks.

[Balkrishan Kalra, executive]

Thank you, Tiger. I consider it an honor to be selected as Genpact's next CEO. And on behalf of the entire Genpact team, I want to express our immense gratitude for your leadership. As many of you know, I have been with Genpact since our early days. I look forward to leading this talented team and building on the strong foundation that Tiger has established. I'm excited to step into the CEO role early next year.

Over the next several months, I'll be reviewing every aspect of the business and spending time listening to our clients, employees, partners and investors. The focus for us right now is navigating the current macro environment. I am confident the headwinds are temporary, and our business model remains robust. We expect to see our top line improve in 2024. We participate in underpenetrated and high-growth market. And with unparalleled dedication of our global team, we are extremely well positioned to drive sustainable long-term growth for all our key stakeholders.

With that, let me turn the call over to Mike to go over the quarter in more detail.

[Michael Weiner, executive]

Thank you, BK, and good afternoon, everyone. Today, I'll review our third quarter results and provide you with our latest thinking regarding our full year 2023 outlook. Total revenue of $1.136 billion was up 2% year-over-year both as reported and on a constant currency basis. Data-Tech-AI services revenue, which represents 44% of total revenue, declined 2% both on as reported and a constant currency basis. This performance was below our expectations, largely due to incremental pressure related to short-cycle discretionary tech spending that escalated during September for Gold left Financial Services and consumer and health care verticals. Digital operations services revenue, which represents 56% of total revenue, increased 6% year-over-year, both on an as-reported basis and a constant currency basis, reflecting on-time deal ramps related to recent large booking wins.

From a vertical perspective, financial services increased 6% year-over-year, largely due to large deal ramps partly offset by clients' lower-than-expected discretionary tax spending. Consumer and Health Care declined 2% year-over-year, largely due to pressure on short-cycle growth-oriented digital marketing projects and discretionary tech spending as well as the impact from the recent divestiture of a business we had previously classified as held for sale last year. Hitech and manufacturing increased 4% year-over-year, primarily driven by ramp-ups related to recent news and low global wins, partly offset by the impact of reduction of scope of a priority Hi-Tech client mentioned earlier in the year. Despite our disappointing third quarter top line performance during the 12-month period ending September 30, 2023, we grew the number of client relationships with annual revenue greater than $5 million from 158 to 182.

Additionally, clients with annual revenue greater than $25 million expanded from 34 to 38 and clients more than $100 million increase from 3 to 5. Adjusted operating income margin was 17.2%, up 10 basis points year-over-year and 40 basis points sequentially, largely due to higher gross margins and general operational efficiencies.

As a reminder, our performance in the third quarter last year included the positive impact from the business designated as held for sale last year that has been divested. Gross margins in the third quarter expanded 10 basis points year-over-year, primarily reflecting cost management actions implemented earlier in the year.

Sequentially, gross margins improved 20 basis points, largely driven by better utilization and greater mix of digital operations revenue, offset by the impact of ramping up of recent large deal wins. SG&A as a percentage of revenue improved 60 basis points both year-over-year and sequentially, reaching approximately 20%. Year-over-year improvement was largely due to the absence of expenses related to nonstrategic business that was divested, offsetting the higher investment in sales and marketing and research and development in the third quarter of 2023. Sequential improvement from second quarter was primarily due to operating leverage.

Our effective tax rate was 24.1% compared to 20.8% last year largely due to changes in our jurisdictional mix of income and a recent increase in U.K. statutory income tax rates. Adjusted EPS was $0.76, up 1% year-over-year from $0.75 during the third quarter of last year. The increase was primarily driven by higher adjusted operating income of $0.02, the positive impact from lower outstanding share count of 110%, partly offset by a $0.02 impact from year-over-year increase in our effective tax rate.

Turning to cash flow and balance sheet. During the quarter, we generated $162 million of cash from operations compared to $226 million during the same period last year. The decline was driven by a sequential increase in our DSOs in the third quarter related to delayed collections on certain accounts where cash was received in early October. On a year-over-year basis, DSOs expanded by 3 days to 84 days. We now expect the end of the year to be at a similar level. Our net debt-to-EBITDA ratio for the last 4 rolling quarters was 1.1x. Capital expenditures as a percentage of revenue equated to approximately 1.3%.

Now let me provide you with our latest thinking regarding our full year outlook. As Tiger discussed earlier, we saw clients become more cautious on discretionary project spending during the third quarter. This translated into lower levels of short-cycle project revenue than we anticipated. At the same time, we remain focused on prioritizing large transformational deals driven by cost savings and efficiency gains. This dynamic resulted in less near-term revenue as bookings remain skewed towards large deals where revenue is recognized over a multiyear period. As a result, we now expect revenue for full year 2023 to be approximately $4.45 billion, representing a year-over-year growth of 2.5% on a constant currency basis. We now anticipate our full year adjusted operating income margin to expand by 50 basis points year-over-year to 17%. This is up from our prior outlook of 16.8%. The increase is primarily driven by the greater mix of digital operations revenue in our revised top line outlook as well as lower investment in Data-Tech-AI services revenue growth for the remainder of the year.

We expect our recent large deal bookings to contribute a higher revenue in the fourth quarter compared to the third quarter. Given that many of these deals have initial onshore delivery, we continue to expect full year 2023 gross margin to be relatively flat to slightly down compared to last year.

Taking into account our year-to-date tax expense, we now expect full year 2023 effective tax rate to be at the lower end of our 24% to 25% range. Given the updated outlook, we now expect adjusted earnings per share for the full year 2023 to be approximately $2.89, representing year-over-year growth of 6%. Due to the anticipated DSOs and lower expected adjusted operating income, we now expect to generate full year cash flow from operations of approximately $475 million compared to our prior outlook of approximately $500 million. We now expect capital expenditures as a percentage of total revenue to be at the low end of our 1.5% to 2% range full year. As Tiger discussed, given our limited visibility in short-cycle revenue, we do not have the same level of confidence in calling for a double-digit growth in 2024, as we did when we spoke to last quarter.

That said, we continue to believe we're well positioned for accelerating growth in 2024. Over the next several weeks, we'll be finalizing our forecast and provide you with specific 2024 guidance during our year-end earnings call in early February.

With that said, let me turn the call back to Roger.

[Roger Sachs, executive]

Thank you, Mike. We'd now like to open up our call for your questions. Didi, please provide the instructions.

[Operator]

[Operator Instructions]

And our first question comes from Tien-Tsin Huang of JPMorgan.

[Tien-Tsin Huang, analyst]

Tiger, it's been an amazing run. So it's hard to hear that the end of an era here come February, but congrats on that news. And of course, congrats to BK. I do maybe -- yes. Well, I'm sure we'll get a chance to get speak again. I guess, this quarter as well. But let's just get into the business for a second here. Just thinking about the comments are on short cycle as well as large deals. It's been a pretty common theme, Tiger, that we've been hearing throughout the -- this reserve season. So maybe can you talk a little bit about ACV versus TCV. I've been trying to understand that dynamic better for a lot of the companies. I'd love to hear your thoughts on that because it sounds like the backlog is strong, but the short cycle work isn't filling out. So that must be having an impact on the level of bookings that convert this year or in year. So anything to walk us through that dynamic?

[N. V. Tyagarajan, executive]

So TT, first of all, thank you. And your question nailed the answer itself. It's exactly the dynamic that we are seeing very strong long-cycle annuity deals with multi-year TCV. Typically, as you know, in our business, that range is in the order of magnitude which is slightly above 3-year terms on the average actually closer to 4 years. And then on the short cycle, you put out 3 months, 6 months, 9 months, 1 year, et cetera. And those short-term projects are the ones that have been challenged. And we've heard that across the industry. In fact, we were both dynamics across the industry. What then happens is we see the 25% at least bookings growth that we talked about, which sets the stage nicely particularly for digital operations, but also for -- half of our Data-Tech-AI because half of our Data-Tech-AI is long cycle in nature, except it really nicely for the long haul. The short term, bookings that don't get done immediately translates to impact on revenue not coming through for the year. And that's the dynamic we're seeing. Mike, do you want to add anything?

[Michael Weiner, executive]

Yes. What I'd add to that is that if you actually play out what you just said, Tiger, with regard to 25% projected year-over-year bookings growth and how it manifests itself in the financials for the third quarter and how we're thinking about the fourth quarter as well. Our digital operations business grew 6%, and we're expecting it to continue to grow, which the vast majority of the large deals were reflected in there as well as, as you said earlier, about half of the Data-Tech and AI business is there. So it is a tale of 2 cities as you kicked off the discussion with incredibly strong transformational large deal wins that make up the vast majority of the pipeline with some shorter near-term non-annuity Data-Tech and AI pressure that we're seeing in the third and projected into the fourth quarter.

[Tien-Tsin Huang, analyst]

Great. So just my quick follow-up. And if we're -- so no budget flush assuming this year makes sense. I heard the comments around '24 and the acceleration in '25. But what are you looking for? Is there anything that you can do to maybe catalyze the short-cycle work short of pricing? I mean I imagine changing over the calendar year sometimes helps. But at this stage, it's probably too early to call. Is there anything that can be done on your side to maybe catalyze that?

[Michael Weiner, executive]

Yes. And the way we're kind of thinking about it without getting any specific numbers today with regard to 2024 and how we're thinking about entering the year. There's a key -- there's a number of key variables we think about in our business. Obviously, the basis of it with the digital operations business growing strong will act as a fundamental base for us with these large deal signings we had both the including the 2 we had this particular quarter. But really, the variability it really comes from our Data-Tech-AI business that we talked about earlier. A few just points the pipeline of Data-Tech-AI remains incredibly strong and grubbed. So that means there's huge demand there. The large deals that I mentioned earlier, also having Data-Tech-AI component into it will continue to ramp up through next year. But specifically, what could we do and what are we seeing right now. So there's a huge opportunity associated with generative Specifically, while we didn't see the budget flushing that we traditionally see in the third and particularly into the fourth quarter, we are not hearing any degradation in terms of generative AI budgets going into next year.

So when you think about it, those dollars are what we're going to go after with our huge focus in investment on data engineering solutions, I think that's going to be a nice tailwind for us as we go help us through, particularly in the Data-Tech-AI to help drive our growth next year above the level that we had this year, certainly.

[N. V. Tyagarajan, executive]

And just to add finally to what Mike said in terms of some of the specific actions we've already taken. We now have a gen AI of offerings on the back of the 9 projects and pilots that I talked about, of which 10 are into getting closer and closer to production mode and 2 are in full production. The moment the board progresses, the more we get into replication mode. And as you can imagine, gen AI is the conversation that if you can replicate and start rolling out those solutions, it gets lapped up pretty quickly. So we expect that to be a tailwind. Second, generative AI itself, begs the question for our clients actually whether they have all the data lined up, and that's why Mike's comment on data engineering is a big one. We expect data engineering to be one of the tailwinds in our Data-Tech-AI as we compete this year and enter this year. And those specific actions we are doing in terms of resource allocation into the specific mine centers industry verticals and geographies where we see the most uplift.

[Operator]

Our next question comes from David Koning of Baird. David, please rejoin. Our next question comes from Maggie Nolan of William Blair.

[Margaret Nolan, analyst]

I was hoping you could comment a little bit. It's great to have you regularly provide kind of that percentage that you've been giving. Can you give a little bit of color on the traction of that non-FTE work within your high priority accounts and how widespread that is being adopted within those particular accounts.

[N. V. Tyagarajan, executive]

So Maggie, it's a great question. At the total revenue level, our non-FTE commercial models, the penetration of 16%, as you heard in my remarks. And as you remember, we have said that over the long term, 2026 horizon, we'd like to get that to at least 20%. And last quarter, I reiterated that there is a very high tolerability that we'll get there faster because our bookings seems to be tracking in terms of its penetration of alternate commercial models higher than that 16%, which is great, and therefore, we keep accreting. Within priority accounts, that penetration of non-FTE pricing models is higher than the company average.

The exact number, I wouldn't be able to give right away, but it's tracking higher than the company average and the reason is very simple, often in the smaller relationships, you don't have enough of a combined scale to be able to drive the kind of non-FTE pricing and value-based pricing that you can when you do financial accounting, with order management, with supply chain. And when you put all that together, our ability to drive real value is tremendous, and we participate in that value creation.

[Margaret Nolan, analyst]

And then on the margins, do you anticipate that this current dynamic with the short cycle work versus the longer-term kind of cost optimization projects is going to have an impact on where gross margin or operating margin can come in over the next couple of quarters?

[Michael Weiner, executive]

Well, it's there's 2 separate dynamics that are going on associated with our gross margin. As you know, when we have these large deal ramp-ups, particularly when we take onshore delivery and move it to offshore tends to have a dilutive effect on the business in the near term and gets accretive from a gross margin perspective.

With the countervailing view on that as well is that our data tech and AI gross margins when we have slower revenue growth, disproportionately benefit us on a gross margin basis. So with that said, and our projections going into next year with the recovery in Data-Tech-AI, I think they'd be relatively flat on a go-forward basis with those 2 counter things going in different directions.

[Margaret Nolan, analyst]

Congrats, Tiger and BK on your announcement.

[Operator]

Our next question comes from Ashwin Shirvaikar of Citi.

[Ashwin Shirvaikar, analyst]

Guys. Tiger, congratulations on the long run. And it's been a pleasure working with you. And BK, congratulations, very well deserved and look forward to working with you. I guess the question I have is as you look at Data-Tech-AI and digital ops, right, the digital ops business should still, I would imagine, even without sort of a budget flush and without things like that, should still be sequentially growing most quarters, right? And so that would imply kind of Data-Tech-AI can shrink to the, I don't know, 475, 485 kind of range for December. So when I kind of think of the carryforward from that, I just want to try to get better color on the less, they are not quite double-digit kind of comment. Is that more of a mid-single-digit type of comment better or worse? What kind of visibility do you have by line? Any thoughts there?

[Michael Weiner, executive]

So let me kick off. There's 2 things to really unpack there. So your sequential observation, third quarter into fourth quarter regarding digital operations is 100% correct, both on a notional dollar basis. on a year-over-year percentage basis, also off of the tough fourth quarter comp from that perspective. So correct, by definition, our Data-Tech-AI business as we going into the fourth quarter. okay? So with that said and the full ramp up that -- I'm going to build on some of the other comments we said earlier, with the full ramp-up of the digital operations business that we have on the large deals we've gone through the year, that will provide a nice space for next year, right?

Now if you then think about our digital -- our Data-Tech-AI business, with some of the drivers that we're talking about, particularly that regarding generative AI, right? and being able to utilize some of those budgeted numbers that are out there, particularly again with the data engineering solutions that we're offering. We think that's going to help propel our Data-Tech-AI business. So at the end of the day, logic would dictate that next year will be somewhere between our full year 2023 guidance, but a little less than our initial double-digit view that we had the -- so we'll have to ultimately see where it goes. We'll provide additional information about that in early February. But the obvious other thing that we have to think about, the variable out there that's creating a little less visibility than normal is the macroeconomic environment? Does it remain stable? Does it improve? Does it deteriorate, right?

[N. V. Tyagarajan, executive]

So one of the things that I would add, Ashwin, the one of the things that I would add to what Mike said, Ashwin, on digital operations is that going into the third quarter -- actually, probably even going -- finishing off the second quarter onto the third quarter, the big discussion that we all had was confidence in the ramp of the wins that we've had as we go through quarter 3 and quarter 4. And one of the most pleasing aspects of our business is that ramp has exactly delivered what we had expected on digital operations. So even in this environment, we are really confident, not just with your comment that it's a natural thing to come through. But even the risk associated with those types of ramps hasn't paid at all so it's actually really, really solid.

[Ashwin Shirvaikar, analyst]

Right. And that's sort of where I was going to go next with regards to the expectations that you had. You're -- just to confirm, you're not necessarily seeing delays with regards to sort of rebadging type deals. What types of deals and decision-making are you seeing delays with? I mean, I know the broad classification is short-cycle discretionary, but if you can be more granular with regards to what you're seeing by vertical, by geography? Any details there would be there for.

[N. V. Tyagarajan, executive]

Yes, I'll take the easy ones because I guess the whole industry would be seeing this and you would agree with that because you probably see more of it as you talk to the peer group. Technology project work where teams are allocated, let's say, to financial services firms, banks and as those projects get completed, the question of once the next project comes up, and if the leaders and the firm decide that actually, we don't want to spend any more money on the next set of projects. So instead of spending x billion dollars, we'll spend x divided by 2. That means that those projects -- new products don't come in to utilize the same set of people who build the expertise to build the domain, et cetera.

It's a really tough decision for advance to take because the moment that happens, we move those teams into great projects with other people. Those people don't sit idle. But everyone in banking, a number of people in retail, consumer goods and in manufacturing are clearly taking those decisions have been taking those decisions. That's one example. Another would be in the front end improvement of marketing experience improvement of digital marketing. Some of those are coming under radar and under the lens of, is this really needed and is the payback immediate? Those are the 2 questions that get asked, particularly as we get to the end of the year, budget flushing not available, et cetera.

So those are 2 examples. I'll give you examples where we're not seeing that at all. Supply chain, a great example where we are not seeing any degradation. I need to improve my supply chain. I need to get a diversification of my supply chain driven by all macro factors. Another 1 would be get my data ready for gen AI. 2 examples where we are not seeing any degradation.

[Michael Weiner, executive]

Just quickly to add to that, too, Tiger, that our pipeline associated with that type of work has not reduced, it's actually increased. The quality of the pipeline increases, so that's going to be, again, a nice driver for us as we go into 2024. We work hard on converting that pipeline into revenue.

[Operator]

Our next question comes from Bryan Bergin of TD Cowen.

[Bryan Bergin, analyst]

Thank you, Tiger. Good work with congratulations on retirement. BK, congrats on the promotion here. My first one is a clarification. So I just want to be crystal clear. The digital ops, it sounds like there's really nothing changed. You feel good about the ramp. So as you were thinking about what you would grow in '24. Just to be clear, is there any change on how you were feeling about the business? Fully understand that the DTA business has flattened out here, but just on the digital ops to start.

[Michael Weiner, executive]

No. What we said in the first and second quarter and our last has played out exactly I would -- Ashwin asked a moment ago, has already degradation in terms of digital operations projected ramp worked out quite well. And that's really, as I talked about earlier, we'll continue to provide the base for fourth quarter and into next year. We've seen no degradation.

[Bryan Bergin, analyst]

Okay. Very good. And then just on the margin expenses. So you're obviously able to offset, I guess, the mix aspect of this, but as you're kind of leaning into reduced costs, can you just talk about how you're balancing efficiency here versus the need for growth investments?

[Michael Weiner, executive]

Yes. We're not -- it's very simply. We're not pulling away from growth investments. In my prepared comments, I tried to articulate, we're not pulling away from sales and marketing investments or R&D. There's natural efficiencies in our business, particularly in the down cycle, particularly Data-Tech-AI and on that small cohort of work that we do. But we're not pulling from those investments for the future.

[Operator]

[Operator Instructions]

Our next question comes from Mayank Tandon of Needham & Company.

[Sam Salvas, analyst]

Great. This is Sam on for Mike today. Just a quick one from me. The 32 new logos this quarter was good to see. Could you guys talk about which verticals had the strongest new logo additions this quarter?

[N. V. Tyagarajan, executive]

Actually, Mike, is actually nicely distributed across all our verticals. And we are very pleased with what I called in my prepared reports a bounce back because if you remember the first half of the year, it had come down versus the prior 3 or 4 quarters. And the reason for that 1 was reduction in some of the smaller, faster-growing technology companies that we saw withdraw for all good reasons that we all know in the first half.

Got replaced by other larger clients across all verticals and interestingly, across geos as well, whether it's Europe, Asia or North America.

[Operator]

I'm showing no further questions at this time. I would now like to turn it back to Roger Sachs for closing remarks.

[Roger Sachs, executive]

Thanks, everybody for joining us today, and we look forward to speaking to you again in early February.

[Operator]

This concludes today's conference call. Thank you for participating, and you may now disconnect.