Q4 2016 Real-Time Call Brief

Highlights

We are pleased with our full year 2016 results, as we delivered strong Global Client BPO growth of 13% on a constant currency basis, expanded our adjusted operating margin and significantly grew our adjusted earnings per share.

Our Digital transformational services uniquely position us to drive value for clients. These consulting, digital and analytic services now account for approximately 20% of our Global Client revenues and collectively grew more than 20% in 2016.

Specifically, during 2016, total revenues increased 6% on a constant currency basis.

Global Client revenues increased 9% on a constant currency basis.

Global Client BPO revenues was up 13% on a constant currency basis.

Adjusted operating income margin grew 20 basis points to 15.5%.

Adjusted EPS was $1.46, up 16%.

Bookings for the full year increased to approximately $2.65 billion, up 3% from $2.59 billion recorded in 2015.

As a result of G&A leverage and disciplined cost management, we delivered our adjusted operating income margin goal of 15.5%, and grew EPS by 16%.

Our overall Global Client revenue was up 9% year-over-year on a constant currency basis.

During the year, as companies continued to adopt new business models, they dramatically reduced spending on deploying maintaining and running legacy IT infrastructure. This trend coupled with cutbacks and discretionary technology projects led to our Global Client ITO revenues declining 6% in 2016.

Our GE revenue declined 7% year-over-year better than the initial expectation we outlined at the beginning of last year.

We build our critical mass within our digital organization with almost 1,000 team members, more than doubling the number from the end of 2015. We acquired two digital companies to expand our capabilities and dynamic work-flow and mobility that we're incorporating into our solutions.

During the 2016, we achieved total bookings of approximately $2.65 billion, up 3% year-over-year or approximately 5% up on a constant currency basis from $2.59 billion in 2015.

Global Client BPO bookings saw solid growth, including three large deal wins in the fourth quarter.

As we announced this morning, we are increasing the size of our share repurchase programs by $500 million, bringing the total size of the program to approximately $1.3 billion.

Given the confidence and the stability of our cash flows, we announced our quarterly cash dividend of $0.06 per share starting in the first quarter.

We generated total revenues of $682 million, an increase of 5% year-over-year or 7% on a constant currency basis.

Revenues from Global Clients, which represent 85% of our total revenue increased 9% year-over-year or 11% on a constant currency basis.

Within Global Clients business process outsourcing revenues grew 12% year-over-year or 14% on a constant currency basis.

Our Global Client IT services revenues declined 3%.

GE revenues, which represent 15% of total revenue decreased 10%.

During the quarter, overall business process outsourcing revenues, which represent 80% of our total revenues increased 8% year-over-year, while total IT services revenue declined 4%.

Adjusted income from operations for the quarter was $114 million, up 19% year-over-year, with the corresponding margin of 16.7%, up from 14.8% during the same period last year.

A 190 basis points year-over-year improvement was primarily due to improved productivity, G&A leverage and favorable impact of foreign currency.

Gross margins grew 140 basis points year-over-year to 40.5%, primarily driven by productivity improvements.

SG&A expenses totaled $171 million compared to $165 million in the fourth quarter of last year.

Our sales and marketing expenses as a percentage of revenue this quarter was 6.9% flat year-over-year.

Total G&A expenses as a percentage of sales declined by 50 basis points year-over-year due to leverage and the higher revenue base.

Adjusted EPS for the quarter was up 24% year-over-year to $0.43 per share compared to $0.34 per share last year.

Our fourth quarter EPS included $0.02 benefit from non-recurring discrete tax items that lowered our effective tax rate during the quarter.

Excluding this impact, our fourth quarter EPS would have improved by $0.07, driven by higher operating income of $0.07.

The impact from repurchases of $0.02 partially offset by balance sheet related FX loss and higher net interest expense, representing approximately $0.01 each.

Our full year 2016 results. Revenues were $2.57 billion, an increase 4% year-over-year including the adverse effect from FX of approximately $45 million, driven by the declines in the Euro, British pound and Australian dollar.

On a constant currency basis, total revenues were up 6% year-over-year.

Business process outsourcing, which represents approximately 81% of total revenue for the full year of 2016 increased 7% year-over-year.

IT Services revenues declined 5% year-over-year.

Revenue from Global Clients, which represented approximately 83% of total revenue for the full year 2016, increased 7% year-over-year or approximately 9% on a constant currency basis.

Within Global Clients, our core BPO revenue increased 11% year-over-year or approximately 13% on a constant currency basis, while IT Services revenue declined 6%.

GE revenues declined 7%.

For the 12-months period ended December 31, 2016, we grew the number of Global Client relationships with annual revenues over the $5 million to 109 from 103.

We also grew the number of Global Clients with more than $50 million in annual revenue from 4 to 6 during the year.

Adjusted income from operations totaled $397 million, up 5% year-over-year with a corresponding margin of 15.5%, up from 15.3% in 2015.

The 20 basis points operating margin increase was primarily driven by productivity, G&A leverage and total spend management that we drove due to the lower than expected revenue ramp.

Our full year gross margin for the year was a 39.5% compared to 39.3% in 2015 due primarily to operating leverage.

Sales and marketing expenses as a percentage of revenue was 7% in line with level we reported during 2015.

Total G&A expense increased by 60 basis points year-over-year, largely driven by our continued investments in R&D related spending on domain expertise, digital and analytics capabilities.

Adjusted EPS was up 16% year-over-year to $1.46 per share compared to $1.26 in 2015.

This $0.20 increase was primarily driven by higher operating income of $0.07, net share repurchase activity of $0.06, lower net interest expense of $0.05, due to one-time cost during 2015 associated with our debt refinancing and lower tax expense of $0.03, partially offset by the impact of balance sheet related FX losses of $0.01.

Again a lower tax expense for the year was driven large part for the non-recurring discrete tax adjustments we reported in the fourth quarter of approximately $0.02 per share.

For the full year 2016, we repurchased approximately 14 million shares, totaling $345 million, at a weighted average price of $24.76 per share, including 4.3 million shares repurchased during the fourth quarter, totaling $103 million for an average price of $23.73 per share.

Since launching our program in the first quarter of 2015, we repurchased approximately 24 million shares at a weighted average price of $24.03 per share, for total repurchases to-date of $572 million.

Our effective tax rate for the year was 18.7%, down from 20.5% last year.

Our cash and liquid assets totaled $423 million, compared to $419 million at the end of the third quarter of 2016.

With undrawn debt capacity of $189 million and existing cash balances, we continue to have ample flexibility to pursue growth opportunities that execute on our capital allocation strategy.

Our net debt-to-EBITDA ratio for the last four rolling quarters was 1.1.

We generated $346 million of cash from operations in 2016, up $327 million last year primarily due to increased operating earnings and improved DSO, offset by higher net cash outflows related to large contract activity that fluctuates from year-to-year.

Capital expenditures as a percentage of revenue were 3.3% in 2016, up slightly from prior year due to capital expenditures directly related to customer operations and related platforms.

Our days sales outstanding were 81 days, which was in line with our expected improvement from second and third quarter levels.

Outlook for 2017; we expect total revenues to be between $2.61 billion and $2.68 billion, which assumes an adverse foreign exchange impact of approximately $33 million or 130 basis points at today's exchange rates.

For Global Clients, we expect revenue growth to be in the range of 4% to 7% or approximately 5% to 8% on a constant currency basis.

Within Global Clients, we expect Global Client BPO to grow at approximately 10% on a constant currency basis and Global Clients ITO revenues to decline approximately 5% to 7%, due primarily to the full year impact of the accelerated second half decline in 2016.

GE's divestiture of much of its GE Capital business will continue to impact our GE revenue in 2017. As a result, we expect GE to be down 13% to 15%.

With continuing G&A operating leverage offsetting the investments in digital capabilities, analytics and domain expertise, we expect adjusted operating margin to improve to approximately 15.7% in 2017.

Our 2017 effective tax rate is expected to be approximately 20% to 21%, largely aligned a normalized tax rate in 2016.

Given the outlook I just provided, we expect adjusted earnings per share to be between $1.53 and $1.57.

This includes the impact of higher interest rates and interest expense of approximately $0.04 and $0.05 from expected share repurchases during 2017, which are assumed at similar levels to what we repurchased in 2016.

Cash flow from operations is expected to grow approximately 4% in 2017.

Capital expenditures as a percentage of revenues are expected to approximately 3% to 3.5%.

We continue to expect free cash flow to net income ratio to be approximately 1:1 on average over time.

Lastly, dividend payments are expected to approximately $48 million during the year or roughly a 1% yield based on yesterday's closing price.