Concentrix Corporation

Ladies and gentlemen, thank you for standing by and welcome to Concentrix Fiscal First Quarter 2021 Financial Results Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker for today, David Stein, Vice President of Investor Relations. Sir, you may begin.

Thank you, Tawanda, and good morning. Welcome to the Concentrix first quarter fiscal 2021 earnings call. This call contains forward-looking statements that address our expected future performance and that by their nature address matters that are uncertain. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements as a result of new information or future events or developments. Please refer to yesterday's earnings release and our most recent filings with the SEC for additional information regarding uncertainties that could affect our future financial results. This includes the risk factors provided in our annual report on Form 10-K. Also during the call, we will discuss non-GAAP financial measures, including free cash flow, non-GAAP operating income, adjusted EBITDA, and adjusted EPS, as well as constant currency revenue growth. A reconciliation of these non-GAAP measures is available in the news release and on the Concentrix Investor Relations website under Financials. With me on the call today are Chris Caldwell, our President and Chief Executive Officer, and Andre Valentine, our Chief Financial Officer. Chris will provide a summary of our operating performance and growth strategy, and Andre will cover our financial results and business outlook. Then we'll open the call for your questions. Now I'll turn the call over to Chris.

Thank you very much, David. Good morning, everyone, and welcome to our first quarter earnings call for fiscal 2021. Our results exceeded our expectations and clearly were well above the guidance that we provided at the start of the quarter. While Andre will provide more color, let me just say we are very pleased with the strong execution that drove this performance. I am most pleased that our performance continues to be fueled by existing customers rewarding us with more share of their business and wins from clients that are looking for long-term relationships that we have been quickly able to turn into revenue. While we are seeing a robust market overall, the significant upward trend demonstrates that we are successfully executing on our plan for above-market growth and margin expansion. Our first quarter revenue of $1.35 billion represents an increase of 14% compared with last year. On a constant currency basis, revenue increased by 12%, which more than offset a 1.5% total company revenue headwind from our travel clients, as well as our continued portfolio rebalancing to reduce our telecom exposure. Our first quarter non-GAAP operating income of $177 million was up 22%, an adjusted EBITDA increase 21% to $213 million compared with last year. These results also included an additional net expense of $10 million of COVID-related costs in the quarter. We saw revenue overperformance across a broad range of our portfolio, including technology and consumer electronics, retail, e-commerce, and healthcare. As mentioned, this growth more than offset the impact of COVID-related muted volumes in the travel industry and and our nearly complete portfolio rebalancing efforts for a healthier, more balanced business. During the first quarter, we signed nearly two dozen new clients, including more than a half dozen new disruptive brands. As a reminder, our disruptive clientele represents over $800 million of annualized revenue and has been growing above 25% in recent quarters. We continue to be encouraged by the strength of our pipeline across verticals, geographies, and solutions. Recent examples of our wins include signing a long-term contract for complex licensing work and analytic support with a large insurance company that historically has never outsourced, helping a global tech company increase its cloud-based sales, serving disruptors at the forefront of the fintech industry to launch new products and manage fraud, and providing patient health plan administration and device monitoring support for a large healthcare provider. We have also deployed tens of thousands of live instances of our secure CX platform to authenticate and secure a remote workforce. This quarter, we also launched VOC Essentials, our entry-level voice of the customer satisfaction platform that allows our clients to have actionable insights from customer interactions, regardless of how or where they engage our clients. This complements our existing enterprise voice of the customer platform. From a market standpoint, our wins continue to expand our geographically diverse client base. We continue to see strong demand for our technology solutions individually and as an integrated solution with our CX services. And through the quarter, we made investments in additional experience sales, solutions, and technical staff to enhance our technology and digital offerings. Based on our strong performance to date and looking forward with the increased demand across the geographies and verticals we service, We now expect to achieve constant currency revenue growth of above 10% for fiscal 2021 with margins above pre-COVID levels. In summary, we are deepening our client relationships, relentlessly innovating with new digital solutions and expanding into emerging markets while we selectively pursue strategic acquisitions to drive superior returns for our shareholders. As always, we remain committed to working towards a greater good in all that we do, doing right by and for our people, our clients, their customers, and our communities. This includes fostering an inclusive culture where our staff is supported and empowered to care for others, our planet, in the ways most meaningful for them. Finally, I would like to thank our exceptional staff for their commitment to execution, our clients for their trust, and our talented board of directors for their support and mentorship. I will now turn over the call for Andre.

Thank you, Chris. It's good to be with you today. I'll begin with a review of our financial results for the first quarter and then discuss our business outlook for the second quarter. Our revenue and profit growth accelerated in the first quarter. Revenue in the first quarter was $1.35 billion. On a constant currency basis, revenue increased nearly 12% compared with last year. Reported revenues include a foreign currency benefit of $26 million. Our strong growth reflects increases with a broad set of clients across our strategic verticals. We also saw growth in every region in which we operate in the quarter. Our top performing vertical was healthcare, growing 29% due to strong seasonal volumes from open enrollment. Our technology and consumer electronics vertical grew approximately 27%. Revenue from clients in the retail, travel, and e-commerce vertical grew by approximately 20%, as growth with several retail and e-commerce clients more than offset the expected lower volumes from travel and tourism clients. Revenue from banking, financial services, insurance, and other clients grew in the high single digits, including growth across several personal banking and fintech platform providers. Revenue from communications and media clients decreased 6% in the first quarter as we near the end of our portfolio rebalancing efforts. We believe the significantly less pronounced impact of 1% on our overall growth rate signals the last quarter this year in which we will experience such an impact from this vertical. Contributing to the growth across our strategic verticals were our over 100 global disruptor clients. which represented about 18% of our first quarter total revenue and grew by 28% year-over-year. Turning to profitability, profit improved significantly in the first quarter. On a year-over-year basis, non-GAAP operating income was $177 million compared with $145 million last year. Our non-GAAP operating margin was 13.1%, up 90 basis points compared with the first quarter last year. First quarter adjusted EBITDA was $213 million, compared with $177 million last year. And our adjusted EBITDA margin was 15.7%, up 90 basis points compared with last year. Our profitability reflects flow through from strong revenue growth, which more than offset the impact of COVID expenses. On a net basis, COVID-19 expenses approximated $10 million in the first quarter. In terms of net income, in the first quarter, non-GAAP net income was $120 million compared with $95 million last year. Adjusted EPS was $2.29 compared with $1.85 last year. GAAP results for the first quarter included $35 million of amortization of intangibles and $7 million of share-based compensation expense. GAAP diluted EPS was $1.69 compared to $1.01 last year. Our effective GAAP tax rate of 28% in the first quarter was slightly lower than expected. Our higher taxable income resulted in less exposure to certain U.S.-based erosion taxes. Moving to cash flow, cash flow from operations in the first quarter totaled approximately $36 million. Higher than planned revenue in the quarter resulted in higher accounts receivable balances at quarter end. Additionally, in our business, year-end payroll and incentive payouts can cause first quarter cash flows to be lower than other quarters. While this negatively impacted cash flow in the quarter, we continue to expect free cash flow for the year to approximate non-GAAP net income. Capital expenditures in the quarter totaled $42 million. We continue to expect capital expenditures for the full year to be in a range of 3.5% to 4% of revenue. Turning to the balance sheet, at the end of the quarter, cash and cash equivalents was $118 million, and total interest-bearing debt was $1,113 million. During the quarter, we paid down $50 million on our term loan, reducing the outstanding principal balance to $850 million. Net debt was $996 million at quarter end. At the end of the first quarter, gross leverage was approximately 1.65 times adjusted EBITDA, and liquidity remained strong with approximately $800 million of cash, undrawn lines of credit, and capacity on our AR securitization. Our current liquidity gives us significant financial flexibility. Our priorities for capital deployment remain growing the existing business through funding organic and strategic growth opportunities. Now, I'll discuss our expectations for the second quarter. Given the accelerated momentum we are seeing in the business, we expect second quarter revenue to be in a range of $1.33 billion to $1.38 billion, including an approximately 4% positive impact of foreign exchange rates compared with the second quarter of 2020. We expect second quarter non-GAAP operating income of $160 million to $174 million. We expect interest expense to be approximately $8 million in the second quarter, an effective tax rate of 27% to 28%, and a weighted average diluted share count of approximately 52 million shares. Our non-GAAP operating income guidance for the second quarter excludes approximately $35 million related to amortization of intangibles and $11 million of share-based compensation expense. Because of our strong Q1 and our momentum going into Q2, we now expect full year revenue to be at or above $5.3 billion, including an approximately 2% positive impact of foreign exchange rates compared with 2020. This equates to an expectation of constant currency revenue growth above 10%. Our full year constant currency revenue growth above 10% is a significant increase from the range that we discussed during our spin, where we suggested that it would be in a 3% to 5% growth range. We do not plan on updating our yearly guidance in subsequent quarters. Our expectations for the business do not include any future acquisition-related or disposition impacts or transaction or integration costs. Also not included in our expectations are future foreign currency fluctuation impacts. In closing, We are very encouraged by our first quarter results. We are confident in our expectations for the second quarter and beyond. We are a well-positioned global leader in a large, fragmented, and growing market, executing a plan to grow organically faster than the market. As a proven, successful consolidator in our market with a strong balance sheet, we are well-positioned to deliver sustained growth, margin progression, and strong free cash flow. At this time, Tawanda, Please open the line for questions.

Thank you. Ladies and gentlemen, as a reminder to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Shannon Cross of Cross Research. Your line is open.

Thank you very much, and good morning. I'm wondering about the revenue and maybe some of the components. You know, what are you seeing within travel? I know I was in an airport the other day, and it's actually, they're coming back to life. And then I'm also curious about your thoughts on longevity of the strength in health care. And then I have a couple of follow-ups. Thank you.

Hey, Shannon, this is Chris. So from a travel industry perspective, what we've kind of communicated before and still see is that the domestic travel market is picking up, and we're seeing that in each of the individual regions that we operate in. But the international travel market, and specifically the business travel market, is still effectively nonexistent. Unfortunately, we had a lot of revenue in our business that was on the business side and on the international side with less on the domestic side. So we are starting to see that pick up on the domestic side and focusing more sales efforts in that. But we expect that there will still be a headwind for a foreseeable future in the overall travel clientele that we deal with. On the healthcare side, clearly what we've seen is a strong, growing, robust market. We have been – had our revenue growth by net new wins, not only by services in that market, by net new clients coming in that we've won. And so we see that there's a good longevity, albeit more seasonality with the open enrollment that we're going through that we have one new business in.

Okay. And then I'm curious, maybe a bigger picture question, with regard to how customers are viewing BPO and outsourcing and coming out of COVID, or hopefully we're coming out of COVID. So just in terms of maybe more of a willingness to rely on others, thoughts on onshoring, offshoring, just wondering how the pandemic may have changed some of the customers' mindset around this, and then if it poses an opportunity as maybe you'll start to see, you know, incremental RFPs come up.

So, Shannon, what we've seen is basically customers that were outsourcing already pre-pandemic and through the pandemic are starting to make choices with partners that were there during the hardest time of the pandemic and giving more business, which we have been very successful in because we did a good job supporting our clients through the pandemic, to give more because of the trusted relationship that's happened through some pretty adverse times. What we're also seeing is that new customers are coming to the market who are trying to do everything that outsourcing provides, which is make your cost model more variable, align sort of your outcomes-based pricing to what you need to accomplish from a business perspective, and also where they've had internal challenges, either staffing or supporting their own businesses, to be able to rely on someone who can provide the scale to help them out. And I don't think that's necessarily going to change. What I think we're seeing is that there's a net new amount of business that is now being outsourced that will continue to remain outsourced past the pandemic.

Okay, great. And then my last question is just on gross margin. How should we think about gross margin opportunity, you know, if you can think about how revenue may make shift over the coming year? And then I would assume, you know, some of the incremental COVID costs may – ameliorate. And then that completes my questions. Thank you.

Yes, Shannon, this is Andre. Good to speak to you. Certainly, our gross margin is down versus prior year, and that is largely because that is where the bulk of the net COVID costs show up. So I think, you know, we think those costs, frankly, are with us for a while. You know, we continue to see across the globe, you know, localized and somewhat regionalized, you know, flare-ups that will cause those costs to stay with us for a bit longer. Certainly over time, though, we think there is room to move gross margins, you know, back, you know, towards the directions they were in prior to the pandemic. That'll be a function of the COVID costs going away. And that'll be a function of, you know, growing more in our strategic verticals, adding more technology to our solutions. and moving up margins in that fashion.

Great. Thank you so much.

Thank you.

Thank you. Our next question comes from the line of Ruplu Bhattakara with Bank of America. Your line is open.

Hi. Thanks for taking my questions and congrats on the quarter. For the first one, Chris, I wanted to ask you, two of the strategic growth drivers you've talked in the past are investing in emerging markets and developing new digital solutions. So maybe can you talk a little bit about the progress you've made so far in those two areas? And specifically, you know, with respect to emerging markets, customers there tend to typically be more cost-conscious and maybe more demanding in terms of services required. So maybe can you talk about some of the competitive advantages that Concentrix has that can enable you to serve those customers in emerging markets more profitably

more profitably than maybe some of your other competitors can sure you know you hit the nail on the head that emerging markets tend to you can rely on labor arbitrage there has to be some technology element there has to be you know a higher level of efficiency that you can deliver for those clients I think that helps us in our overall global enterprise but specifically in those emerging markets we've been able to drive more technology we're able to pilot things faster because there's a desire to be more efficient, and they are more generally cost-conscious within those markets. And so I think that's led us to be very successful not only against our competition in those markets, but also take some of those solutions and bring them to more established markets as we continue to grow, because we've got proof points of where it's worked in highly, highly competitive markets. I think to your second question around digital offerings, clearly we've done more announcements in the last little while. Obviously, our Secure CX announcement that we did, that we've now got tens of thousands of endpoints in place doing secure remote work and are continuing to grow that. We talked about our VOC Essentials product that we launched, which adds to a successful VOC practice, and it's a more entry-level product that we can sell not only as a standalone product but also integrated into our CX solutions. We've talked about deploying more telephony solutions, natural voice IVR, as well as cloud-based telephony platforms. So there's a whole host of things going on on top of our just regular digital products that we're driving. And clearly our goal is not only to get clients to use this technology, whether it's with us from a CX Solutions perspective or maybe directly, but also as part of our CX solutions that we go to market with. And we're seeing good traction in both of those areas.

Okay, thanks for those details. For the second question, I'd like to ask just a clarification around the full-year revenue guidance. I think, if I heard correctly, Andre said the $5.3 billion for the full year. Last quarter, Chris, I think you talked about fiscal 3Q, fiscal 4Q, being sequentially improving in terms of revenues from the second quarter. Is that still the case? Because if I take the midpoint of your fiscal 2Q guidance, $1.36 billion, and then even with this modest growth in 3Q, 4Q, it seems that you can be higher than $5.3 billion. So maybe I misread that. So if you can just clarify what you're seeing here. What are your thoughts for the second half and what the full year guidance is? Thank you.

Yeah, a little clarity from me, Rupaloo. So what we've guided to is that we felt a need, having spoken at the time of the spinoff and talking about the growth for this year being in that market range of 3% to 5%. We felt a need, given the strong performance here in Q1 and the momentum into Q2, to address the fact that that was no longer our expectation. And in fact, we now expect to grow much faster than that. And so what we've said is that we'll grow, you know, above 10%. You know, whether, you know, how exactly that plays through the back half of the year, whether the strong, strong demand environment that we see right now continues is something that we'll address as we go forward. But we're really just dealing with that data point that we had put out there and indicating that that is no longer relevant, and we think that instead we'll grow above 10%. And all I did with the $5.3 billion is kind of do the math for you. Take that 10% and apply it to last year's revenues and add the currency impact on top of that.

Got it. Thanks for the clarification. And, yes, certainly 10% growth is actually strong growth. So, I mean, thanks for the details on that. Maybe just for my last question, Chris, I wanted to ask you, I mean, not recently, but maybe, you know, last quarter we were hearing things about some discussion about the Biden administration planning a surtax on nearshore and offshore call center operations. So call centers operating outside the U.S. who are servicing U.S. clients. may face a surtax. Any thoughts on that? Have you heard anything? And your thoughts, if such a surtax is imposed, I mean, how would that impact the business and just your overall thoughts on that going forward? Thank you.

Yeah, Rupalu, I think in every administration for the last four or five, that has been sort of a common discussion in the first few days or first few months, and so far nothing has yet to pass. Not to say that it won't or it can't. I think, clearly, from our perspective, what we do is we work with our clients to make sure that we have a delivery solution for them, regardless of whether it's onshore, nearshore, or offshore. And I think, you know, whatever surcharge would possibly come through just suddenly changes the economics of that, and we will adjust accordingly. I don't see it as being a massive impact to the business because the work still needs to be done. and it still needs to be done at the most cost-effective manner that's possible. And if that changes the dynamic of it, then we would certainly adjust to support it.

Got it. No, that makes sense. And any tax would impact other competitors as well. So congrats again on the strong results in the quarter as well as the strong guide. So congrats on the strong execution. Thank you. Thank you very much.

Thank you. Our next question comes from the line of Dave Culling with Baird. Your line is open.

Yeah. Hey, guys. Thanks. Great job.

Thank you.

Yeah, and I guess I was wondering, the pace of growth kind of going through the year, it looks like Q1, you know, was the 12% constant currency, give or take, I believe. Q2, it looks like midpoint, maybe 23% constant currency or somewhere around there, and then the rest of the year, low single digits. I guess, am I right about that pacing, and maybe is there one or two things specifically driving maybe a client or a vertical or something driving kind of early year that maybe falls off, like, you know, kind of one-time revenue, or is there something that's kind of creating that pacing?

David, it's Andre. No, there really isn't. In fact, one of the things we feel very good about is, you know, kind of the sustainable nature of the work that we are signing up to do with our clients. So there is not much revenue. probably a little bit less than 1% that would be kind of what I would call COVID-related revenue that might go away because it involved in track and trace and vaccine, et cetera. I think my answer here is kind of more to the point of what I just said to Ruplu. You know, we're really not providing, we're just providing an update to our expectations that, you know, the 3% to 5% range that we talked about at the spinoff is probably no longer Obviously, we have a very easy comparison in Q2, so it's going to be in the range of revenue growth that you've indicated. And then it's just a factor of where the demand environment, if this very, very strong demand environment stays in place, then you'll see that in our second half performance.

Gotcha. And I guess my follow-up is just, it was pretty broad-based. I think health, tech consumer, retail, travel, all of those were growing over 20%, a 20% to 30% band. Is that the expectation, that verticals are going to continue to be broad-based? And as you look to the guidance the rest of the year, is there going to be some switching? Are you kind of assuming, well, healthcare will decelerate, but maybe other parts will accelerate? Or is it pretty much kind of the ones that are driving it now will keep driving it?

Well, I think we feel really good about the broad-based across the verticals, across the geos, and also, frankly, within the verticals. I mean, as you look through, as I look through, for instance, the drivers of our strength in retail and e-commerce, it is just, you know, it's a number of names all growing at nice levels. I think you could see, you know, some seasonal flavor to growth as we go forward. Perhaps You know, healthcare at 29% with a strong open enrollment, that might not be where that operates at on a go-forward basis. And then you'll see normal seasonal patterns as you look out again towards Q4 in retail and e-commerce and perhaps in a return to higher growth within healthcare.

Yeah, gotcha. Well, great. Great job.

Thank you.

Thank you. I'm sure no further questions in the queue. I would now like to turn the call back over to Mr. Stein for closing them off.

Thank you all very much for joining the call today, and that will end the call. Have a good day.

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