1、North America Equity Research28 January 2019Equity Ratings and Price TargetsMkt CapRatingPrice TargetCompanyTicker($mn)Price($)CurPrevCurEnd DatePrevEnd DateConduentCNDT US2,696.4012.84OWn/c16.00Dec-19n/cn/cExlService Holdings Inc.EXLS US2,005.4556.96Nn/c63.00Dec-19n/cn/cGenpactG US5,671.8129.37Nn/c
2、32.00Dec-19n/cn/cGlobantGLOB US2,504.0168.04OWn/c73.00Dec-1964.00n/cVirtusa Corp.VRTU US1,643.9948.60OWn/c59.00Dec-19n/cn/cSource:Company data,Bloomberg,J.P.Morgan estimates.n/c=no change.All prices as of 25 Jan 19.IT and BPO ServicesSMid Cap C4Q Preview-Expect Healthy Results Overall;Positive on VR
3、TU and G Payments,Processors&IT ServicesPuneet JainAC(1-212)622-J.P.Morgan Securities LLCTien-tsin Huang,CFA(1-212)622-6632tien-J.P.Morgan Securities LLCPankti Gandhi(91-22)6157 J.P.Morgan India Private LimitedSee page 25 for analyst certification and important disclosures,including non-US analyst d
4、isclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in mak
5、ing their investment decision.Various SMid cap IT services/BPO stocks in our coverage offer mixed risk/reward going into C4Q results.While the near-term IT services demand environment appears a little uncertain,we expect relatively healthy and inline growth rates at VRTU and GLOB.We continue to pref
6、er VRTU over GLOB going into results,as we expect both firms to grow earnings at a 20%+rate this year(CY19),which should help VRTU close the valuation gap to GLOB(16x vs.30 x on CY19 ests.).We like CNDT as well,but believe the stock requires patience as management needs to rebuild its track record o
7、f meeting expectations.Finally,among our Neutral-rated stocks,we prefer G over EXLS given the valuation discount between the two firms(G trades at 14x vs.EXLS at 18x CY19 ests),and potential for higher revenue growth at G this year.Tricky demand environment.We expect potential for near-term weakness
8、 in IT services spending,driven by macro uncertainty(Brexit,economic slowdown,USgovt.shutdown)which appears to be continuing into this year.Peer C4Q18 results have been mixed with large cap India IT services firms and IBM reporting healthy growth rates,while ACNs F1Q(Nov ending)results and bookings
9、werent as strong as they usually are.Within our SMid cap coverage,GLOB and VRTU have high exposure to digital but the potential slowdown in discretionary spending could still hurt near-term growth rates at the two firms(although a mild slowdown may not be incremental to current estimates).BPO growth
10、 rates arent as tied to discretionary spending,and should prove to be relatively defensive we actually expect BPO firms to benefit from the recent contract activity(specifically G).Potential impact of the US government shutdown.Our SMid cap coverage doesnt have much direct exposure to the US govt.sh
11、utdown.While offshore firms do limited public sector work,much of CNDTs public sector exposure is with state and local govt.However,the potential for a prolonged(or another)shutdown could hurt CNDTs federally-sponsored programs such as SNAP and Govt.healthcare.Thoughts on CY19 BPO guidance we expect
12、 growth improvement,driven by solid recent bookings and absence of last years headwinds at various firms.Specifically,CNDT should guide for low single-digit growth,primarily driven by M&A,while offshore BPO firms should grow in high single-to-low double digits.G should experience significant growth
13、acceleration driven by the recent contract wins,while WNSs FY20 guidance(to be issued in April with F4Q results)should also point to low double-digit growth.We generally expect higher earnings growth than revenue growth,as CNDT,EXLS,and G are expected to improve margins.We expect all three firms to
14、issue earnings growth guidance in double digits,although CNDTs FCF guidance could come in below Street expectations due to high capex.2North America Equity Research28 January 2019Puneet Jain(1-212)622- Thoughts on CY19 SMid cap ITS guidance-we expect slower but still healthy top line growth.We expec
15、t GLOB to guide for solid 20%revenue growth(all organic),which would be consistent with its long-term growth but slightly below its low 20s organic growth in CY18.Similarly,VRTU should grow FY20 revenue in low double-digits(guidance to be issued in May,along w/F4Q results),better than many peers,but
16、 below its FY19 growth rates.We expect GLOBs op.margins to deteriorate modestly y/y on incremental Argentina based taxes(JPMe 200bps in SG&A),while VRTU should continue to expand margins(helped by restructuring benefits)to get 20%+earnings growth at both firms.Where our views differ from the Street.
17、Our CY19 revenue estimate for CNDT is well below the Street(JPMe$4.56B vs.$4.72B),as we expect flattish organic growth next year.We expect the company to guide for 2-3%revenue growth this year,much of which could potentially stem from new acquisitions(which arent part of our ests).We also expect low
18、er FCF(JPMe$200M vs.cons.$275M).Our C4Q revenue estimate for G is also below the Street as we keep our estimates in the lower half of the guided range(recent deals should help but the bar is too high,in our view).We also expect higher margin and earnings estimates at VRTU in FY20,stemming from restr
19、ucturing benefits.Stock views going into results.Going into C4Q results,we continue to recommend VRTU as our top pick,which should remain on-track for solid 20%+earnings growth next year and inline results should be good enough to drive multiple expansion from current levels(18x NTM earnings).We exp
20、ect solid top line results at GLOB,but a 30 x+multiple and all-time high stock could limit upside potential going into the results although we maintain our OW rating on GLOB for its attractive long-term growth potential.Similarly,we think Gs multiple has upside potential if revenue guidance produces
21、 upside relative to expectations.We expect encouraging guidance at CNDT but believe the company needs to re-establish a track record of meeting expectations.3North America Equity Research28 January 2019Puneet Jain(1-212)622-Earnings Expectations&Summary TablesTable 1:C4Q Earnings Calendar Scheduled
22、DateDescriptionConference Call Details20-Feb-19Conduent C4Q18 resultsTBD28-Feb-19EXLS C4Q18 resultsReport before market open.Conference Call at 8:00AM ET.Dial in Details:+1(877)303-6384;international dial-in+1(224)357-2191.7-Feb-19Genpact C4Q18 resultsReport after market close.Conference Call at 4:3
23、0PM ET.Dial in Details:+1(877)654-0173;international dial-in+1(281)973-6289.Conference ID:645800914-Feb-19Globant C4Q18 resultsReport after market close.Conference Call at 4:30PM ET.Dial in Details:+1(888)346-2877;international dial-in+1(412)902-4257.Webcast:http:/ F3Q19 resultsTBDSource:Company rep
24、orts,Bloomberg.The highlighted ones are tentative dates as per Bloomberg.Table 2:C4Q Earnings Expectations:JPM vs.Consensus RevenueAdj.OPMAdj.EPSNew JPM vs.Cons.%chgOld JPMNew JPMCons.Old JPMNew JPMCons.Old JPMNew JPMCons.SalesOPM(bps)Adj.EPSCNDT$1263$1263$12598.1%8.1%8.3%$0.25$0.26$0.260%(20)-2%EXL
25、S$234$235$23315.1%15.1%14.7%$0.73$0.73$0.731%46 0%G$800$800$81317.1%17.1%17.0%$0.49$0.49$0.48-2%4 1%GLOB$140$140$14016.8%16.8%15.2%$0.50$0.50$0.470%160 7%VRTU$312$312$3139.7%9.7%10.3%$0.56$0.56$0.590%(63)-5%Source:J.P.Morgan estimates and Bloomberg consensus.Table 2:CY18/FY19 and CY19/FY20 Earnings
26、Expectations:JPM vs.Consensus FY1EFY2EJPMeConsensus%chgJPMeConsensus%chgSalesEPSSalesEPSSalesEPSSalesEPSSalesEPSSalesEPSCNDT$5,374$1.065,370$1.050%1%$4,559$1.124,692$1.11-3%1%EXLS$883$2.75882$2.750%0%$999$2.99998$3.020%-1%G$2,965$1.772,979$1.760%1%$3,286$1.943,285$1.980%-2%GLOB$523$1.74521$1.710%2%$
27、621$2.11627$2.06-1%2%VRTU$1,247$2.261,251$2.260%0%$1,388$2.831,403$2.81-1%1%Source:J.P.Morgan estimates and Bloomberg consensus.*FY+1 estimate for WNS and VRTU.4North America Equity Research28 January 2019Puneet Jain(1-212)622-Company-Specific ExpectationsCNDT(Overweight)We expect CY19 guidance to b
28、e inline with prior targets,but it wont be a layup Our 4Q revenue estimate of$1,263M(vs.cons.of$1,259M)represents-4%CC organic decline,hurt by sales execution issues and continued(although waning)adverse impact of strategic actions.We also expect nearly a point of adverse revenue impact from potenti
29、al client penalties(we estimate$10-15M impact)related to the ITO subcontractor issue the company had highlighted on its 3Q call.We also estimate 4Q EBITDA of$153M(vs.cons.of$159M)representing a 12.1%margin about in-line with 3Q levels.While the company typically experiences seasonally higher margins
30、 in 4Q(on sequential basis),our estimate represents about 100bps in headwinds from penalties and lower revenue,and 40bps in impact from higher stranded expenses(full quarter impact of HR services and incremental impact of Govt.services divestitures).We expect CNDT to guide for CY19 revenue growth in
31、 low single digits,excluding the adverse impact of divestitures but including acquired revenue.The company had previously suggested 2-3%revenue growth next year,which we believe it should maintain but expect much of this growth to stem from acquisitions.CNDT has closed the Health Solutions deal whic
32、h should contribute 50bps+to growth this year.We expect the company to continue pursuing more deals this year.Our CY19 revenue estimate of$4,559M is well below consensus of$4,716M,and represents flat revenue growth on an organic basis(compares with-4%in CY18).We expect growth trends to be back-end l
33、oaded,with potential for positive revenue growth by the year-end.We would expect improvement in sales productivity,and would look for improvement in new signing trends as an early indicator of revenue growth turning positive.We dont expect a meaningful impact from the US government shutdown on CNDTs
34、 revenue given much of the companys public sector exposure is with state and local governments.However,the potential for a prolonged(or another)shutdown could have an impact on various federally sponsored programs such as SNAP(Supplemental Nutritional Assistance Program)and federally-funded U.S.gove
35、rnment healthcare programs.As of now,we dont expect an adverse impact from the shutdown on the companys CY19 guidance.We also expect the company to maintain its core EBITDA growth guidance of 8-12%for CY19,which would imply$630-655M in CY19 EBITDA.Our math assumes CY18 core EBITDA(without divestitur
36、es and corresponding stranded expenses)of$608M and$25M in adverse impact from stranded expenses.We estimate CY19 EBITDA of$637M,representing 9%y/y growth on a like-to-like basis.We believe the incremental contribution from unannounced acquisitions which isnt included in our estimates could push this
37、 years EBITDA higher throughout the year.We also estimate CY19 FCF of 200M(vs.cons.of$275M),stemming from continued high capex related to insourcing of ITO business.Our estimate represents 32%of EBITDA,better than last years but still below the companys long term targets(specifically after restructu
38、ring payments will be closer to normalized levels).We also believe the company could be exploring a potential capital return(repurchase),which should be highly accretive at current stock price levels.5North America Equity Research28 January 2019Puneet Jain(1-212)622-EXLS(Neutral)High single digit gr
39、owth sustainable over next couple yearsOur 4Q revenue estimate of$234.5M(vs.cons.of$234M)represents 7%CC organic growth,driven by strong growth in analytics(JPMe 15%in organic CC)and steady growth in Operations Management(JPMe 5%in CC).Our 4Q adjusted EPS estimate of$0.73(in-line with consensus)bake
40、s in 180bps y/y margin expansion partially offset by below the line headwinds to yield 4%y/y growth.Our 4Q margin estimate represents easier comps despite YTD headwinds.Our FY18 revenue of$883M compares w/consensus$882M and guidance of$877-885M,while our EPS estimate of$2.75 is at the mid-point of t
41、he companys guidance of$2.72-2.78(in-line with consensus).We expect EXLS to issue FY19 revenue guidance of 7-10%(in CC organic growth).This compares w/9%organic growth implied in ours and consensus FY19 estimate(cons.estimate of$998M compares w/JPMe$999M).We expect FY19 growth to benefit from robust
42、 contract activity recently(35 client wins until 3Q18 YTD)and continued solid growth in the Analytics business(we estimate 15%organic).We expect slightly stronger growth in 2H,on easier comps as well as potential synergies from the SCIO acquisition.We also expect FY19 non GAAP EPS guidance to be in-
43、line with our/cons.estimate of$2.99/3.01.Our estimate bakes in 60bps y/y margin expansion stemming from lower Health Integrated headwinds(60-70bps in FY19 vs.150bps in FY18)along with continued benefit from cost initiatives.Our margin estimate points to only 60bps in expansion as we expect the compa
44、ny to keep the powder dry for expansion beyond this year.We also expect lower balance sheet translation gains,but modestly higher taxes should drive high single digit earnings growth.Our FY19 estimates move from$996M/$2.98 to$999M/$2.99.We expect management focus on the successful integration of the
45、 SCIO deal over the near term,making acquisitions less likely over the next one or two quarters.Beyond 2019,we continue to expect high single digit revenue coupled with steady margin expansion to yield double-digit earnings CAGR.Our FY20 estimates move from$1,090M/$3.34 to$1,091M/$3.34.G(Neutral)Str
46、ong exit rate in 2018 should set the bar for solid revenue acceleration in 2019Our 4Q revenue/adj.EPS estimate of$800M/$0.49(vs.cons.of$814M/$0.48 and implied guidance of$785-845)implies solid 10%organic growth in CC,driven by 10%growth in Global Clients and 6%growth in GE(including$8M in contributi
47、on from the new deal).Our estimate also reflects the benefit from the recently signed large transformational deals(e.g.Walmart).We also expect 50bps margin expansion sequentially(and 140bps y/y),driven by higher revenue growth(better utilization trends in transformation services)and easing headwinds
48、(related to tail accounts and development cost related to its wealth management platform).We expect G to issue CY19 CC revenue growth guidance in the low double digits(we expect 10-13%),including strong low double-digit growth in Global Clients(in CC),driven by solid build-up of transformational dea
49、ls in its backlog(including WMT,McKesson etc.).We expect organic growth in Global Clients to accelerate from 8%in CY18 to 8.5%,while GE should also benefit from the recently won contract to grow 30%+(including$90M or 3,500bps in incremental contribution 6North America Equity Research28 January 2019P
50、uneet Jain(1-212)622-from the new contract).Our FY19 revenue estimate of$3,286M is inline with the consensus estimate of$3,284M,and represents 11%in CC organic growth.We also expect the company to issue earnings growth guidance in high single digits,which combined with 1%in dividend yield,results in
