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spk05: Good day and thank you for standing by. Welcome to the Concentrix's first fiscal second quarter 2021 financial results conference call. At this time, participants are on a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I will now hand the conference over to your speaker today. David Stein, Vice President, Investor Relations. Please go ahead.
spk02: Thank you and good morning. Welcome to the Concentrix second quarter fiscal 2021 earnings call. This call is the property of Concentrix and may not be recorded or rebroadcast without the permission of Concentrix. 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.
spk01: Thank you very much, David. Good morning, everyone, and welcome to our second quarter earnings call for fiscal 2021. During the second quarter, we continued to see our value proposition resonate in the market, coupled with strong momentum in our sales and solid execution in our operations, driving our performance to exceed pre-COVID levels. We had record revenue of $1.37 billion in the second quarter, representing organic revenue growth of 29% compared with last year. On a constant currency basis, revenue increased by 24%. Our second quarter non-GAAP operating income improved to $172 million, up 155%, and adjusted EBITDA increased 113% to $208 million compared with last year. In the second quarter, while the U.S. and some parts of Europe started to open up, we saw continued effects of the COVID pandemic in certain regions, particularly Asia, where we invested in support and resources for our staff to care for themselves and their families. We focused on humanitarian efforts for all of our staff and their families as they experienced thousands of additional cases across India, Philippines, Vietnam, and Malaysia. Our hearts and thoughts go out to all those affected. With the uptick in cases and lockdowns, over 70% of our staff worked at home in the quarter. Our work-at-home performance remains in line with our pre-COVID levels when staff were based in our facilities. Happily, in recent weeks, we have seen a return to relatively stability as COVID cases have started to decrease. Our results in the second quarter included a net COVID impact on profit of $10 million, and we expect a similar impact in the third quarter. Our second quarter was also very strong for bookings, nearly surpassing our record third quarter of 2020 for renewals, expansion, and new logo wins. Our travel vertical is also now starting to show signs of recovery, and our communications sector has started to reach a point of stability which we expected. Andre will provide more details on the accelerated growth in each of our verticals. To focus on our significant new business wins with iconic and disruptive brands for a moment, we signed more than two dozen new clients, including more than a dozen new disruptor brands. Our revenue from disruptor clients is now at a run rate to exceed $1 billion of total annual revenue. We were also happy to see new client signings growth across our geographical footprint versus being concentrated in one region. Driving our business growth is our combination of deep domain expertise, digitally enabled global delivery, and the ability to invest in secure technical infrastructure that is highly adaptable and scalable to support our clients' needs. Our unique value proposition intentionally automates lower complexity transactions on behalf of our clients, which leads to stickier, more profitable relationships and more opportunities for growth with existing and new programs. Our solutions help transform client businesses through increased efficiency and by delivering greater customer experiences. For example, for a large retail and e-commerce company this quarter, we recently transformed their existing contact model reducing the human assist portion by a factor of three. Then, through digital self-service and chatbots, we improved the client's net promoter score by two and a half times. Our clients value our technology-infused solutions and rated us with high performance scores for innovation in our second quarter. Additional example of our wins in the second quarter include volume acceleration with one of the world's largest social media firms providing sales and content moderation services. Further penetration within two larger financial institutions to provide remediation services, anti-money laundering services, and know your customer services. Sales of these VOC essential platforms, additional implementations of Amazon Connect, and significant growth with existing disruptor clients in fintech, travel, and e-commerce industries, among others. We also see a significant opportunity to deploy more complex digital engagements as clients are seeing superior levels of customer experience as an imperative coming out of COVID. Going into the second half of the year, we are encouraged by the strength and breadth of our pipeline that continue to grow both from a size perspective and frequency of multiple offering engagements. Among these strong growth opportunities, some business challenges do come to manage. Areas we are fanatical about include the ongoing impact of COVID and ensuring we're taking care of our team members around the world. We are also focused on continuing to upskill and invest in our staff as the work we are delivering is more complex than ever before. This quarter, we are also taking a meaningful step forward by increasing our wages across North America, sorry, United States for starting positions to ensure we can meet the demand of our growth and be more socially responsible to the communities we operate in. As a global company, whose roots run through six continents and grow deeper every day, we have a long-standing commitment to our people and the communities we live and work in. As part of that commitment, we are very happy to have released our first environmental, social, and governance report with our earnings this quarter. The report provides more details on our efforts in corporate social responsibility, the investments we are making, and our progress in having a measurable and meaningful impact to our staff and their communities. While we expect this report to evolve as we move forward, one thing that will not change is our commitment to doing the right thing for all of our stakeholders, our staff, our clients, our shareholders, and the communities we work in. I would encourage you to visit the investor relations section of our website and download a copy. 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 return for our shareholders. Based upon strong results here today, we are confident in exceeding the goals we discussed on our last earnings call of constant currency revenue growth above 10% for fiscal 2021 and margins meaningfully above pre-COVID levels. We are confident we will achieve our stated goal of growing faster than the market with progression in our profit margins. 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'll now turn the call over to Andres. Thank you, Chris.
spk07: It's good to be with you today. I'll begin with a review of our financial results for the second quarter and then discuss our business outlook for the third quarter. As anticipated in our guidance last quarter, our revenue and profit growth accelerated in the second quarter, and I'm pleased that we delivered results at the higher end of our guidance range. Revenue was $1.37 billion. On a constant currency basis, revenue increased organically by over 24% compared with last year. Reported revenues include a foreign currency benefit of $45 million. As Chris mentioned, our strong growth reflects increased demand across a broad set of existing and new clients in all of our verticals. We also saw growth in every region in which we operate in the quarter. The magnitude of the increase reflects the extreme COVID impacts in the second quarter of last year. Still, even normalizing for COVID impacts, we believe we grew slightly faster in the second quarter than we did in the first quarter of 2021. Our top performing vertical in terms of year-over-year revenue growth was retail, travel, and e-commerce, which grew 38% due to strong e-commerce volumes and increases with travel and tourism clients as the domestic travel market began to pick up. Our banking, financial services, and insurance and healthcare verticals each grew approximately 36%. Revenue from technology and consumer electronics clients grew by approximately 27%. I'm pleased to report that we were able to achieve the relative stability we expected in the communications and media vertical, as revenues in this vertical grew slightly on a sequential basis. On a combined basis, we also grew with clients in our other verticals by 15%. Contributing to the growth across our strategic verticals were our over 115 global disruptor clients, which represented about 19% of our second quarter total revenue, approximately $260 million in quarterly revenue, and grew by 47% year over year. Turning to profitability, our non-GAAP operating income was $172 million, and our non-GAAP operating margin was 12.6% in the quarter. Second quarter adjusted EBITDA was $208 million, and our adjusted EBITDA margin was 15.2%. Our profitability reflects flow-through from strong revenue growth, which more than offset the impact of COVID expenses. On a net basis, COVID expenses approximated a $10 million reduction in profit in the second quarter. In terms of net income in the second quarter, Non-GAAP net income was $125 million and adjusted EPS was $2.37. GAAP results for the second quarter included $35 million of amortization of intangibles and $9 million of share-based compensation expense. GAAP diluted EPS was $1.50 per share. Our effective GAAP tax rate of 34% in the second quarter includes a $9 million charge related to the tax impact from the movement of our non-core insurance solutions business to assets held for sale as part of our efforts to fine-tune our business portfolio. For clarity, the CIS business provides administrative services to life insurance clients and is unrelated to the CX services we provide to the insurance industry. Our non-GAAP tax rate was 26%. Moving to cash flow, cash flow from operations in the second quarter totaled approximately $203 million, and capital expenditures in the quarter were $29 million. Accordingly, we generated free cash flow of $174 million in the quarter. We continue to expect capital expenditures for the full year to be in a range of 3.5 to 4% of revenue. Turning now to the balance sheet, At the end of the second quarter, cash and cash equivalents was $131 million, and total interest-bearing debt was $959 million. During the quarter, we paid down $150 million on our term loan, reducing our outstanding principal balance on that loan to $700 million. Net debt was $828 million at quarter end. At the end of the second quarter, gross leverage approximated 1.2 times trailing four quarters adjusted EBITDA. And liquidity remains strong with over $819 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. We remain comfortable with up to three times gross leverage, which provides ample capacity for future disciplined M&A. Now I'll turn to our expectations for the third quarter. Given the record demand for CX solutions, we expect third quarter revenue to be in a range of $1.35 billion to $1.40 billion. This translates to 6% constant currency revenue growth at the midpoint of the range, including an approximately two-point positive impact of foreign exchange rates compared with the third quarter of last year. We expect third quarter non-GAAP operating income of $160 million to $174 million, reflecting flow-through from strong revenue growth balanced with investments in program ramps and increases in wages for our staff across the globe. These staff wage increases include a meaningful investment to increase the minimum wage the company will pay to our staff in the U.S. We expect interest expense to be approximately $6 million in the third 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 third quarter excludes approximately $34 million related to the amortization of intangibles, and $10 million of share-based compensation expense. Based on our strong year-to-date performance, our guidance for the third quarter, and strong new business signs, we are confident that we will meaningfully exceed the revenue goal of $5.3 billion, or double-digit revenue growth, that we discussed in our last earnings call. Similarly, we are confident that we will exceed our profitability goal of margins above pre-COVID levels that we discussed on our last earnings call. again by a meaningful amount. Can you expect that foreign exchange rates will have about a two-point positive impact on full-year 2021 revenue compared with 2020? In closing, we are very encouraged by the results of the second quarter. We are confident in our expectations for the third quarter and beyond. Finally, we are a well-positioned global leader in a large, fragmented, and growing market. executing a plan to grow organically faster than that 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, Victor, please open the line for questions.
spk05: Of course. As a reminder, to ask a question, you will need to press star 1 on your telephone number. And to withdraw your question, just press the pound key. Once again, that's star one for questions. One moment for questions. Our first question will come from Rupalu Bhattacharya from Bank of America. You may begin.
spk03: Hi, thank you for taking my questions and congrats on the strong quarter. Chris, you've talked several times about disruptor clients being a focus for the company. Can you maybe just talk about how that relationship progresses with these disruptor clients? Is it all inflationary in the sense that is revenue in year two more than year one and year three more than year two? And on average, how many years does it take for a disruptor client to become mature and then possibly start asking for discounts?
spk01: Hi, Rupalu, and I appreciate the congratulations. From a disruptor perspective, it really comes into – couple of categories. I mean, we look at disruptors in terms of are they going to be a leader in their space? Are they doing something that's truly disruptive? Frankly, where's their focus on the end markets? And as you would expect, there are some disruptors who will start small with us, very, very small, and will grow extremely rapidly and get to a level of maturity within sort of 24 or 36 months. There's others that will grow to a moderate level and sort of be consumed by somebody else in the space or consumed by sort of an existing enterprise client. And then there's some that will not make all their series raises and will be relatively small and might disappear. Generally, what we find from a maturity curve perspective, it's somewhere between that, I'll call it 48 months and maybe seven years that they start to kind of look at how they do procurement differently than what they've historically done in the past. What we offer to them though is sort of a significant amount of agility, significant amount of ability to scale, the global diversity, significant amount of insight into sort of regulatory issues in some places, security issues in some places, and then access to technology that, from a capital base, they might not be able to invest in as they start out, but certainly is high value to them as they continue to grow. So lots of different offerings we offer into that disruptor space.
spk03: Great. Thanks for all the details on that. For my next question, Chris, can you talk about what impact you think competitors like going private and being purchased by the Cytel group will have on the industry? And as part of that, can you talk about the pricing environment and your focus on outcomes-based pricing? How is that trending?
spk01: Yeah, for sure. So, I mean, certainly first I'd like to wish Chuck Sykes congratulations. He's been a great competitor and certainly a legend in the industry and a fantastic operator. From our perspective, we historically have not really competed with that company outside of in some technology spaces. But, you know, the pricing environment historically remains stable, whether it's private or public competitors. I mean, the market is generally the market, and what clients are starting to change their attention to is really, to your second point, outcomes-based pricing or outcomes-based performance incentives. And that's really where I think we shine, because we like those contracts. They tend to give us much more leverage. We're able to invest more in those contracts and get better benefit from them. And so we see that as something that will continue to progress in this environment and then takes out sort of a simple price-to-price comparison in the marketplace.
spk03: Got it. And for my last one, if I can ask one to Andre. Andre, your revenue guide at the midpoint for fiscal 3Q is mostly flat sequentially, but operating margin guide looks like down 40% sequentially to 12.1%. Can you maybe just talk about the puts and takes impacting operating margin, and then how do those factors trend going forward beyond 3Q?
spk07: Happy to, and good to speak with you, Rupalu. So, you know, the real trend there, you're right, and the midpoint relatively flattish from a revenue perspective and down just a tick sequentially from a margin perspective. In the third quarter, we invest pretty heavily in ramps into the fourth quarter. And so that is certainly the largest of the puts and takes as we think about rolling forward from Q2 to Q3. On top of that, as Chris and I both mentioned, we are doing some things globally with staff wages across the country. across the globe with a real focus also on the entry-level wages for our U.S. staff. And so that will have an impact as well. But, again, so that's kind of how we get to that guidance. We think it's balanced guidance, and we're very confident we'll achieve it.
spk03: Okay. Thanks again for all the details. Congrats on the strong execution and results. Thanks. Thank you. Thank you.
spk05: Our next question comes from Shannon Cross from Cross Research. You may begin.
spk06: Thank you very much. I was wondering, can you talk a bit about how the conversations with customers have changed in sort of the hopefully we're in the post-COVID world or, you know, what some of the customers have learned about what they want to do internally versus outsource? I'm just curious, you know, what kind of new opportunities, you know, might be there following what we've all gone through during the last year. And then I have a follow-up question. Thank you.
spk01: For sure, Shannon. So a couple of kind of high-level trends. First of all, we see as a whole clients looking for more touchless ways of engaging with clients in sort of a physical environment, and certainly that's been driven by e-commerce and been driven by more sort of services and products delivered to their homes. It's been driven by more sort of digital engagements where you don't actually have to talk to somebody or chat with somebody. And so we're seeing those are really the focus around conversations. It's how to reduce customer effort, how to reduce contact points, and how to make the experience sort of delightful in a very simplistic way. And so that's also changed some of what their priorities have been around saying when we outsource something, Instead of outsourcing one component of that in order to get full leverage, in order to take out more costs and drive a better experience, they're actually looking at outsourcing more end-to-end of the process so that, for instance, we can take over that and then not only put in our own technology, put on our own staff around it, design our own digital experience for it, and deliver it to the clients. That has opened up, and we've made comments about this in sort of Q3 and Q4 scripts and even Q1, is that we're seeing our clients who we've had longstanding relationships with give us more stuff that historically has not been outsourced. And so we see that as a very positive trend.
spk06: Great. Thank you. And then I'm curious, you know, is there a potential for more asset sales when you look at, you know, the various companies and capabilities that you have? And on the flip side of that, you know, how are you thinking about M&A these days?
spk01: So, Shan, just on the asset sales, you're talking about our divestiture of the CIS business?
spk06: Yeah, yeah, exactly.
spk01: Yeah, no, I mean, we're very happy with the portfolio of services that we have and, frankly, have been investing more and more. CIS was a bit of a unique instance where we took it as far as we could, and then it wasn't tying into the rest of our core focus around customer experience, and so wanted to make sure that that team were able to continue to grow. And so that worked out very, very well for all parties involved. I think from our perspective, when we look to the M&A environment, you know, we've talked about this, valuations are on the higher side right at the moment. We're very focused on making sure that we're disciplined in the type of transaction that we would do to drive the right shareholder returns. And we're also very focused in, you know, getting capabilities and technology that will increase our overall ability to deliver better experiences for our clients. We're not after bulk for bulk or size for size. because we've already attained that, and now it's all about really driving superior value to our clients.
spk06: Okay. And maybe a clarification just on wages. Is this going to hit from an expense perspective, you know, all in the current quarter, or will it be something that sort of rolls through the model over the next few quarters? Thank you.
spk01: It's really in the guidance, Shannon, and starts to – I don't want to use the word impact, but the investment starts this quarter and the start of this quarter – and we'll continue to be in our guidance going forward. But it effectively is an increase for what we're doing within the wage category.
spk06: Elizabeth Mertinko- Okay, thank you.
spk05: Michael Heaney- Thank you. Male Speaker 1 Once again, that's all for questions. Our next question comes from Vincent Colicchio from Barrington Research. You may begin.
spk04: Vincent Colicchio Yeah, Chris, great quarter. Curious, the communications and media segment had a nice quarter. Should we expect that to be stable going forward, or maybe see some growth sequentially? And then a similar question on the travel market.
spk01: So, Vince, from the telecommunication standpoint, we're pretty happy with where it is, and we've kind of mentioned that we're seeing stability here. So you'll see some growth. You'll see some, frankly, ebbs and flows, but really what we're looking at is a percentage of business, and we don't see a material change from where that is, even though the rest of the business is growing. So that would indicate there's some underlying uptick, but really we look at it as a percentage of business more so than anything else and are very happy with where it is, and we're happy with the clients that we're doing and the services we're delivering and the profitability that it's returning to us. In terms of the travel vertical and clients, you know, pre-COVID, it was one of our fastest-growing verticals, both in the disruptor category as well as in sort of the established travel company category and hospitality category. What we're seeing is very encouraging, much sooner than we expected with signs of life in the domestic travel markets, both in Europe and in North America. So that we definitely want to grow. We definitely want to see continued increases, and it will somewhat be – reliant on how people feeling about travel and how sustainable travel is, and then certainly how business travel kicks in. So a couple of components to that, but absolutely, we expect to see that vertical grow over time.
spk04: And I think you mentioned the pandemic impacting, you know, some of your foreign locations. I apologize if I missed it, but Has there been delivery disruption in any of those markets incrementally from last quarter?
spk01: No. The team is just an amazing, amazing team in the countries and, frankly, have just done a remarkable job. We increased our work-at-home presence as we kind of called out almost 10%. In the region, we increased it significantly more, but globally it moved our whole numbers up about 10% to about 70% work-at-home. and the performance has been in line, if not a little bit better, than in facilities in some of those regions. So I'm extremely happy with how delivery has been able to execute and how we've been able to support the clients.
spk04: And, Andre, was there anything unusual in other income this quarter?
spk07: Not really. So what primarily shows up there, Vince, is foreign currency translation gains, We do some hedging there to try to minimize the volatility there. What you see coming through as a gain there is some of the forward points that we do get on the hedges that we put in place. And so as I would think about that line on a go-forward basis, I would think about it being relatively neutral and flat.
spk04: Okay. Thanks for answering my questions.
spk07: Sure. Thank you very much.
spk05: Thank you. Once again, let's start one for questions. And I'm showing no further questions at this time. I'd like to turn the call over to Chris for any closing remarks.
spk01: Thank you very much. We very much appreciate your interest in Concentrix today. We are pleased with our performance here today and are confident in the strength of our business model and track record of being a consolidator in the space. We really continue to see ourselves performing better than the market growth rate with margin expansion. As a market leader in CX Solutions, we are passionately focused on continuing strong execution in our operations to drive continued growth in our valuation. Thank you again, and have a great day.
spk05: This concludes today's conference call. Thank you for participating.
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