Concentrix Corporation

Good day, ladies and gentlemen, and welcome to Concentric's fiscal third quarter 2021 financial results conference call. At this time, all participant lines are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will be given at that time. If you would like to ask a question, press star then 1 on your touchtone telephone. As a reminder, today's call is being recorded. If you require any further assistance, please press star then 0. I would now like to turn the call over to your host today, David Stein, Vice President, Investor Relations. Please go ahead.

Thank you, Sarah, and good morning. Welcome to the Concentrix third 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 adjusted 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 third quarter earnings call for fiscal 2021. I will be covering our announcement about our new dividend and share repurchase program later in my comments, but first wanted to start off with our strong operating results. We delivered outstanding organic growth and profit progression in the third quarter. What pleases me most is the broad range where the growth is coming from and also the sustainability of the work that we are winning. As a reminder, less than 1% of our revenue comes from COVID-specific programs. In the third quarter, we recorded revenue of $1.4 billion, representing reported revenue growth of 20% compared with last year. On an adjusted constant currency basis, revenue increased 19%. Our third quarter non-GAAP operating income improved to $182 million, up 49% compared with last year. Adjusted EBITDA increased 40% to $215 million, and non-GAAP earnings per share increased 63% to $2.49. We delivered these strong results while continuing to invest in our staff, our client relationships, and our technology platforms. Digging into our operating results in more detail, in the third quarter, we saw revenue growth across all verticals, particularly in technology, retail, banking, and healthcare. Revenue from our travel and transportation clients One of our fastest growing sub verticals before COVID for the first time exceeded pre-pandemic levels in the third quarter with particular strength in Europe and Asia. This is encouraging as we look to regain the business we lost from the pandemic. Additionally, during the quarter, we drove broad-based growth across all geographies. While we are encouraged by these growth trends, nevertheless, COVID continued to impact our team and operations during the quarter. We experienced virus surges primarily in Asia and continue to invest in the physical and mental health of our staff, including providing vaccine support in many of the regions we operate in. Our work-at-home staff stayed level at 70%. Even as we experienced COVID-related impacts in the third quarter, we remain strong overall performance, demonstrating the resilience of our operating model. Our results include a net COVID impact on profit of approximately $6 million. In addition to the strong revenue and profit performance in the third quarter, we continue to see very strong new business signings. This included all-time high new logo acquisitions. Once again, we signed more than two dozen new clients in the quarter, including over a dozen new Disruptor brands. Our revenue from Disruptor clients is now on a run rate approaching $1.1 billion of total annual revenue. Part of our success in winning new business is due to our digital transformation capabilities and discipline processes. Our end-to-end solutions help transform client businesses through increased efficiency and by delivering greater customer experiences for their customers. Many of our large enterprise clients and disruptor clients are benefiting from our digitally enabled solutions. For example, we recently helped a large technology company transform its customer journey, remodeled how they delivered their services, reduce traditional interactions, and move more into self-service using technology we implemented. This increased their customer satisfaction by over 50%, resulting in a significant increase in sales through their channel while reducing their costs by about 30%. Another example of how we're delivering differentiated services for our clients is a high-growth fintech company that was having difficulty meeting demand with their internal resources and a few partners that were unable to scale. we were able to consolidate much of the volume, help optimize their customer journey map, drove efficiencies and effective results across their credit card, loan, and retail banking business, delivered cost savings of 35%, and within 24 months have reached their larger partner status. Our clients view our combination of deep domain expertise, digital-enabled global delivery, and the ability to invest in a secure, adaptable, and scalable technological infrastructure technology infrastructure as key differentiators. We are proud to have received all-time high scores for innovation from our clients during the third quarter. We will be stepping up our investment in our technology platforms to continue this momentum as we see long-term benefits of this strategy. We see a significant opportunity to deploy more complex digital engagements as clients seek superior levels of customer experience. Our sales pipeline continued to grow across all regions and verticals during the quarter, and we expect the fourth quarter to be another strong quarter of new business signings. This gives us confidence in our ability to drive incremental growth in future quarters. We now expect above-market adjusted cost and currency revenue growth of approximately 17% for the full year with meaningful profit margin expansion well above pre-COVID levels. Looking forward, we are bullish on CX market fundamentals, client demand for innovative digital and technology solutions, and our ability to execute for opportunities for value creation. Our continued strong financial position provides flexibility for us to invest in the business and enhance shareholder value across multiple areas. Based on our current financial strength and our confidence in the future, today we announced a quarterly dividend and share repurchase program as part of our capital deployment plan to increase shareholder value. We are pleased to initiate a quarterly dividend of 25 cents per share in the fourth quarter. We are also pleased that our board has authorized a $500 million stock repurchase program. We are still committed to continuing to look for creative M&A targets, and even with our announcement today, we have an ability to invest significantly in the right acquisitions. In summary, we expect to achieve faster-than-market growth with margin expansion. As a market leader, we are passionately focused on continuing to drive superior execution and enhance shareholder value. I would like to thank our exceptional staff for their commitment to execution, our clients for their trust, and our board of directors for their support and mentorship, and our investors for their confidence in Concentrix. Before I turn a call over to Andre, I want to let you know we are planning to hold an investor day in January 2022 to review our progress since our spinoff last year and the incredible opportunity and our superior ability to lead in the CX industry. So look for a save-the-date communication later this quarter. Now I will turn the call over to Andre. Andre?

Thank you, Chris. It's good to be with you today. I'll begin with a review of our financial results for the third quarter and then discuss our business outlook for the fourth quarter. We delivered strong revenue growth with margin expansion in the quarter. Our revenue of $1.4 billion came in at the high end of our guidance for the quarter. Reported revenue included a foreign currency benefit of $23 million. As discussed in our earnings call last quarter, we divested non-CX elements of our insurance business as well as a small mobile networks business during the quarter. To help evaluate our constant currency revenue growth without the impact of these divestitures, we've introduced a new metric, adjusted constant currency revenue growth, which removes the impact of both foreign currency translation and the divested businesses. On this adjusted constant currency basis, revenue increased 19% in the third quarter. The strong growth reflects increased demand across a broad set of existing and new clients in all verticals and in every region. Our top performing vertical in terms of year-over-year revenue growth was banking, financial services, and insurance, which grew 27% due to strong increases with multiple banking and fintech clients. Revenue from retail, travel, and e-commerce clients grew 26%. Technology and consumer electronics and healthcare verticals each grew by approximately 24%. Communications and media client revenue grew 7% against the prior year quarter, while growing slightly sequentially. On a combined basis, we grew with clients in our other verticals by 11%. Contributing to the growth across our strategic verticals were our more than 115 global disruptor clients. These clients represented about 21% of our revenue in the quarter or approximately $293 million and grew by 54% year on year. Turning to profitability, non-GAAP operating income exceeded our guidance for the third quarter. Our non-GAAP operating income was $182 million and our non-GAAP operating margin was 13.0% in the quarter. Third quarter adjusted EBITDA was $215 million, and our adjusted EBITDA margin was 15.4%. The strong profitability reflects flow through from strong revenue growth, which more than offset the continued impact of COVID on the business. In terms of net income, in the third quarter non-GAAP net income was $132 million, and adjusted EPS was $2.49, up 63% from the prior year. GAAP results for the third quarter included $34 million of amortization of intangibles, $9 million of share-based compensation expense, and a pre-tax gain of $13 million related to the divestitures I mentioned earlier. GAAP diluted EPS was $2.08. Our effective GAAP tax rate was 28% in the third quarter. Moving to cash flow, cash flow from operations in the third quarter totaled approximately $93 million, and capital expenditures in the quarter were $42 million. Capital spending was approximately 3% of revenue, and we continued to invest in support of growth, particularly in support of work from home and digital offerings and security. Accordingly, we generated free cash flow of $51 million in the quarter. We continue to expect capital expenditures for the full year to be in the range of 3.5% to 4% of revenue. Also in the quarter, we received proceeds of $74 million from the divestitures. Turning now to the balance sheet, at the end of the third quarter, cash and cash equivalents totaled $154 million. Total interest-bearing debt was $866 million net of issuance costs. This debt consisted of $700 million on our term loan and $169 million borrowed against our accounts receivable securitization. During the quarter, we paid down $94 million of borrowings using divestiture proceeds and free cash flow. Net debt was $712 million at quarter end. We ended our third quarter with gross leverage of approximately 1.0 times our trailing four quarters adjusted EBITDA and 0.8 times on a net leverage basis. Our liquidity remains strong with over $935 million of cash, undrawn lines of credit and capacity on our accounts receivable securitization. Our current liquidity gives us significant financial flexibility. As Chris mentioned, our strong results, financial position, and free cash flow generation create options for us to invest in the business and enhance shareholder value. Our priority for capital deployment remains growing the existing business through funding organic and strategic growth opportunities. We have the financial flexibility to do this while providing disciplined returns of cash to shareholders. 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 fourth quarter. Given the continued strong demand for CX Solutions, we expect fourth quarter revenue to be in the range of $1.44 billion to $1.48 billion. This translates to a range of 11 to 14% in adjusted constant currency revenue growth. The adjusted constant currency growth includes an approximate negative $9 million combined year-over-year impact from the divested businesses and currency translation. We expect fourth quarter non-GAAP operating income of $195 million to $205 million, reflecting flow-through from strong seasonal revenue growth. For the fourth quarter, We expect interest expense to be approximately $5 million and we expect 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 fourth quarter excludes approximately $34 million related to the amortization of intangibles and $11 million of share-based compensation expense. Our guidance for the fourth quarter implies full year 2021 revenue of just under $5.6 billion or approximately 17% revenue growth on an adjusted constant currency basis. We expect the combined impact of divested businesses and foreign exchange rates will be just above a one point positive impact on the full year 2021 reported revenue compared with 2020. Our guidance also implies that our full year 2021 non-GAAP operating income margin will be approximately 13.0%. In closing, we are very encouraged by our results and the progress we are making across the business. We are confident in our expectations for the fourth quarter and beyond. We are a global leader in a large fragmented and growing market, executing a plan to grow organically faster than that market. As a proven industry consolidator with a strong balance sheet, we are well positioned to deliver sustained growth, margin progression, free cash flow, and enhanced shareholder returns. At this time, Sarah, please open the line for questions.

Thank you. To ask a question, you will need to press star then 1 on your telephone. To withdraw your question, please press the pound key. Again, that is star then 1 if you would like to ask a question. first question comes from the line of Ruplu Bhattacharya with Bank of America. Your line is now open.

Thank you for taking my questions. Congrats on the quarter and congrats on the capital return plan with the dividend. Maybe for my first question, I'd like to ask Chris, maybe on pricing, can you give us an idea of what percent of your contracts are based on FTE or full-time employee-based pricing and versus other pricing mechanisms such as output-based pricing or gain, you know, like transaction pricing or gain sharing. And the reason I ask this is as you see your mix shifting away from voice to more non-voice services, as you provide more value, do you think that, you know, that mix of pricing mechanism towards more performance-based pricing can happen, and do you see that mix shifting? Okay.

So, Rupal, I would answer it in two parts. I think right now what we've said is we still have more than 50% of our revenue in a component tied to a unit of measure. It might be person, transaction, other type of metric that we use that is sort of directly related to cost. And then our gain share or, you know, effectively gain share model continues to grow. So the deals that we're winning now, more and more of that percentage is becoming, you know, a gain share model, which we like, we enjoy. We think it's what will help drive our margins going forward and aligns our market. lines us with our clients, but we still have a lot of older business that we continue to work through that is based on a unit of measurement.

Got it. Thanks for that. Can I ask you about labor, you know, labor costs as well as the competition for labor? Again, as you makeshift more towards higher value services, are you seeing more competition for skilled labor? And just how is that trending in the face of COVID and the current environment?

Yeah, I think actually, look, markets are always competitive and we go after staff who are our top tier staff. want to make sure that we create the right environment and culture to hire them and retain them and have them grow their careers with us. So we have not had a challenge to this point, but we're always very focused on making sure that we do have the right environment and we are competitive in the marketplace and we are creating an environment that people want to join and continue to grow their careers with us.

Got it. I have a couple of quick ones for Andre if I can sneak them in. Andre, could you remind us of what the typical seasonal or seasonality is going from 3Q to 4Q. I mean, 4Q is typically a strong quarter for you guys. I think you're guiding 4.5% sequentially, and you're guiding about the street, so that's great. But it just seems a little conservative, just given past historical performance, or maybe that's being impacted by the divestiture. So can you just remind us on what typical seasonality is and how the guide compares to that?

Yeah, I think typical seasonality is just as you've suggested, Ruflu, which is the fourth quarter seasonality. is a strong quarter from a seasonal perspective. And you see that in our guide. Admittedly, we are not guiding to as much sequential growth as we had last year. Q3 was still a little bit impacted last year by COVID, certainly as we entered that quarter. And so that probably contributed a little bit to the sequential ramp that you saw last year. And also, if you think about some of the verticals where we're seeing growth, particularly around consumer electronics and tech, but also in banking, financial services, and insurance, those have a little bit less of a seasonal component to them than some of the other verticals that we're in. And so that might be muting things just a little bit. But again, we have signaled all along that we expected strong sequential growth from Q3 to Q4, and I think our guide reflects that.

Right. Okay. Thanks for the details on that. Then the very last question for me is on the capital return plan, can you help us think about the buyback? You know, you put a new authorization in, but how should we think about the cadence of the buyback? And just also in terms of you mentioned M&A a couple of times. I mean, what is the focus in terms of like what size of an acquisition or what parameters do you keep in mind when you look at acquisitions? Thanks again.

Sure, so I'll be happy to do that, and Chris can back clean up on anything I miss. You know, I would say as it relates to the pace, and I certainly don't want to predict how fast we will enter the market under the share repurchase plan, but I think if you look at what we're doing with both the dividend and the share repurchase, you're going to see us start fairly modestly in terms of capital return. That said, we do believe our shares are undervalued. But we also believe that, you know, investing in organic and accretive M&A is the best way, the best use of capital to drive shareholder value. So, again, the repurchase is part of kind of a balanced capital allocation plan that includes, you know, accretive M&A on a disciplined basis along with the dividend. You know, if you look at the size of the authorization, you know, it's pretty much in, you know, in line with, if you look at our peer groups, the size of of their most recent authorizations as a percent of outstanding. And I would imagine our pace will be similarly in line with that. So certainly, as you put the $500 million in place, that is out there to be used over a fairly long period. And so I think that probably gives you some color on that. As for the M&A, we're very, very focused on that. And as Chris has mentioned, we have ample capacity to do M&A of various sizes, frankly. And so we're going to be disciplined in what we do. So we could certainly have the firepower to do large acquisitions, but also we're focused on tuck-ins that increase the value of the platform. I'll let Chris add anything he would like to add to that.

I'd agree, Andre. To us, it's about the financial returns and the strategic significance to the M&A, and if it matches those two, that's more important to us than, frankly, the size when we look at just straight dollar value.

Got it. Thanks for all the details, and congrats again on the quarter. Thank you. Thanks very much.

Thank you. Our next question comes from the line of Shannon Cross with Cross Research. Your line is now open.

Hi, this is Matthew Morano on for Shannon Cross. I just got a couple here. Can you walk us through the puts and takes on operating margin this quarter? You performed pretty well out of guidance. Is there anything specific to call out there? Maybe like quantify the impact from the wage increases during the quarter and how we should model that going forward? And then I have to follow up. Thanks.

Yeah, so if you think about our performance, we came in roughly $7 to $8 million above the high end of our guidance range, and we were at the high end for revenue. So you would probably think that maybe we should have come in there. What we saw in the quarter and what drove the overperformance versus our guide was we really did have strong performance on the ramps that offset some of the expected investment We did see a good response, early response to the US wage adjustments that we made, improving hiring and attrition and also partnering with our clients to ensure that we have the skilled staff to deliver the exceptional customer experience that we do. And on balance, we saw a little bit less net COVID spend. And I would say those three things kind of were each kind of equally weighted towards that kind of $8 million, $7 to $8 million of overperformance of the high end of our guide.

Great, that's helpful. Thank you. Just one more. You've had some pretty broad-based demand across the board for the last few quarters. Just trying to get a sense looking into fiscal 22. You know, I know these growth rates, these growth rate levels are probably not as sustainable given the tougher comps, but do you see any verticals that are going to start slowing down or vice versa that you see maybe ramping up going into 22. And then just one more that I'm going to squeeze in here. Anything to call out specific from a geographic perspective on this quarter? Thank you.

Yeah, Matthew, I'd look at it. First, let me ask you, answer the second question first. From a geographic perspective, we were actually happy because we saw strong demand and growth, frankly, in all our geographies, which is, You know, nice. And this is a couple of quarters that we've actually seen that. Now, each geography has a little bit of a different mix about what's going faster than others. And we called out, for instance, travel and transportation in Asia and Europe as one of those. But overall, really, really happy. I will tell you, we see still strong demand sort of across all of our key verticals going into next year. We see it in consumer electronics. We see it in technology. We see it in fintechs in the banking area, certainly in health care. And, you know, as we called out, we're seeing travel and transportation starting to come back in certain markets. So as hopefully, you know, COVID gets more under control, you know, We hope to benefit from that vertical going back to where it was from a number of clients' perspective. It's certainly now back to where it was from a dollar perspective, but we see a lot more opportunities coming into the future with that vertical as an instance of one that will continue to grow well.

Thank you so much.

Thank you. Our last question comes from the line of Vincent Colicchio with Barrington Research. Your line is now open.

Yeah, Chris, it was nice to see telecom grow again sequentially. Should we expect continued growth there going forward?

Yeah, Vince, as we've talked about, there's some telecom business we actually very much like, and it's based around sort of the consumption of services that we offer and some of the technology we offer. And as we mentioned, we've kind of gotten to the bottom of where we want to bring the telecom portfolio, and then it will start to grow based on what it is with some of the new services we do. So I would consider that it would continue to grow, but obviously we're growing the overall business faster. and bigger, and so it will probably stay roughly around the percentage of business that we are seeing it at now.

And on the acquisition side, are you finding – I know you guys are, you know, careful in terms of – and diligent in terms of, you know, what you pay for deals – Are you finding, for the most part, opportunities being too expensive right now?

I think we've said, you know, we're seeing sort of unrealistic expectations from some of the people looking to sell their businesses in the marketplace, both driven by sort of the very robust public markets and private equity that likes us based. That being said, there are other opportunities that make sense. And what we're most focused on, as I go back to, does it have a strong strategic fit to us? Will it drive the right financial returns as the business runs without doing any unnatural acts? And is it something that will drive better shareholder value over the longer term? And so provided it matches up to that, we will continue. execute and sort of complete a transaction in those parameters.

And are you seeing any movement on pricing in any of your geographies, given the tightness of the labor market?

No, pricing is pretty steady. And sort of going back to an earlier question in the Q&A, we tend to be focused more on doing gain share and, you know, aligning our economics to our clients' economics, which change it, you know, the pricing becomes much more complex around those types of things. And so, therefore, it really hasn't necessarily changed. Things are always competitive in this marketplace, but generally steady from a pricing perspective.

Okay. Most of my other questions were answered. Thank you.

Great. Thank you very much, Vince.

Thanks.

Thank you. There are no further questions. I will now turn the call back to Chris Caldwell for closing remarks.

Thank you very much, everybody, for joining us today. We always very much appreciate your interest in Concentrix. We're extremely pleased with our strong execution and are confident in the strength of our business model and track record for being a consolidator in the CX industry. Again, please look for the Save the Date for our Investor Relations Day coming up in January 2022. And I look forward to seeing you next quarter. Thanks very much, everybody. I appreciate it.

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

Thank you. Thank you. you Thank you. Thank you. Thank you. you you

Good day, ladies and gentlemen, and welcome to Concentric's fiscal third quarter 2021 financial results conference call. At this time, all participant lines are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will be given at that time. If you would like to ask a question, press star then 1 on your touchtone telephone. As a reminder, today's call is being recorded. If you require any further assistance, please press star then 0. I would now like to turn the call over to your host today, David Stein, Vice President, Investor Relations. Please go ahead.

Thank you, Sarah, and good morning. Welcome to the Concentrix third 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 adjusted 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 third quarter earnings call for fiscal 2021. I will be covering our announcement about our new dividend and share repurchase program later in my comments, but first wanted to start off with our strong operating results. We delivered outstanding organic growth and profit progression in the third quarter. What pleases me most is the broad range where the growth is coming from and also the sustainability of the work that we are winning. As a reminder, less than 1% of our revenue comes from COVID-specific programs. In the third quarter, we recorded revenue of $1.4 billion, representing reported revenue growth of 20% compared with last year. On an adjusted constant currency basis, revenue increased 19%. Our third quarter non-GAAP operating income improved to $182 million, up 49% compared with last year. Adjusted EBITDA increased 40% to $215 million, and non-GAAP earnings per share increased 63% to $2.49. We delivered these strong results while continuing to invest in our staff, our client relationships, and our technology platforms. Digging into our operating results in more detail, in the third quarter, we saw revenue growth across all verticals, particularly in technology, retail, banking, and healthcare. Revenue from our travel and transportation clients one of our fastest growing sub-verticals before COVID for the first time exceeded pre-pandemic levels in the third quarter with particular strength in Europe and Asia. This is encouraging as we look to regain the business we lost from the pandemic. Additionally, during the quarter, we drove broad-based growth across all geographies. While we are encouraged by these growth trends, nevertheless, COVID continued to impact our team and operations during the quarter. We experienced virus surges primarily in Asia and continue to invest in the physical and mental health of our staff, including providing vaccine support in many of the regions we operate in. Our work-at-home staff stayed level at 70%. Even as we experienced COVID-related impacts in the third quarter, we remain strong overall performance, demonstrating the resilience of our operating model. Our results include a net COVID impact on profit of approximately $6 million. In addition to the strong revenue and profit performance in the third quarter, we continue to see very strong new business signings. This included all-time high new logo acquisitions. Once again, we signed more than two dozen new clients in the quarter, including over a dozen new Disruptor brands. Our revenue from Disruptor clients is now on a run rate approaching $1.1 billion of total annual revenue. Part of our success in winning new business is due to our digital transformation capabilities and discipline processes. Our end-to-end solutions help transform client businesses through increased efficiency and by delivering greater customer experiences for their customers. Many of our large enterprise clients and disruptor clients are benefiting from our digitally enabled solutions. For example, we recently helped a large technology company transform its customer journey by We modeled how they delivered their services, reduced traditional interactions, and moved more into self-service using technology we implemented. This increased their customer satisfaction by over 50%, resulting in a significant increase in sales through their channel while reducing their costs by about 30%. Another example of how we're delivering differentiated services for our clients is a high-growth fintech company that was having difficulty meeting demand with their internal resources and a few partners that were unable to scale. We were able to consolidate much of the volume, help optimize their customer journey map, drove efficiencies and effective results across their credit card, loan, and retail banking business, delivered cost savings of 35%, and within 24 months have reached their larger partner status. Our clients view our combination of deep domain expertise, digital-enabled global delivery, and the ability to invest in a secure, adaptable, and scalable technology infrastructure as key differentiators. We are proud to have received all-time high scores for innovation from our clients during the third quarter. We will be stepping up our investment in our technology platforms to continue this momentum as we see long-term benefits of this strategy. we see a significant opportunity to deploy more complex digital engagements as clients seek superior levels of customer experience. Our sales pipeline continues to grow across all regions and verticals during the quarter, and we expect the fourth quarter to be another strong quarter of new business signings. This gives us confidence in our ability to drive incremental growth in future quarters. We now expect above-market adjusted constant currency revenue growth of approximately 17% for the full year with meaningful profit margin expansion well above pre-COVID levels. Looking forward, we are bullish on CX market fundamentals, client demand for innovative digital and technology solutions, and our ability to execute for opportunities for value creation. Our continued strong financial position provides flexibility for us to invest in the business and enhance shareholder value across multiple areas. Based on our current financial strength and our confidence in the future, today we announced a quarterly dividend and share repurchase program as part of our capital deployment plan to increase shareholder value. We are pleased to initiate a quarterly dividend of $0.25 per share in the fourth quarter. We are also pleased that our board has authorized a $500 million stock repurchase program. We are still committed to continuing to look for creative M&A targets, and even with our announcement today, we have an ability to invest significantly in the right acquisitions. In summary, we expect to achieve faster-than-market growth with margin expansion. As a market leader, we are passionately focused on continuing to drive superior execution and enhance shareholder value. I would like to thank our exceptional staff for their commitment to execution, our clients for their trust, and our board of directors for their support and mentorship, and our investors for their confidence and concentrics. Before I turn a call over to Andre, I want to let you know we are planning to hold an investor day in January 2022 to review our progress since our spinoff last year and the incredible opportunity and our superior ability to lead in the CX industry. So look for a save-the-date communication later this quarter. Now I will turn the call over to Andre. Andre?

Thank you, Chris. It's good to be with you today. I'll begin with a review of our financial results for the third quarter and then discuss our business outlook for the fourth quarter. We delivered strong revenue growth with margin expansion in the quarter. Our revenue of $1.4 billion came in at the high end of our guidance for the quarter. Reported revenue included a foreign currency benefit of $23 million. As discussed on our earnings call last quarter, we divested non-CX elements of our insurance business as well as a small mobile networks business during the quarter. To help evaluate our constant currency revenue growth without the impact of these divestitures, we've introduced a new metric, adjusted constant currency revenue growth, which removes the impact of both foreign currency translation and the divested businesses. On this adjusted constant currency basis, revenue increased 19% in the third quarter. The strong growth reflects increased demand across a broad set of existing and new clients in all verticals and in every region. Our top performing vertical in terms of year-over-year revenue growth was banking, financial services, and insurance, which grew 27% due to strong increases with multiple banking and fintech clients. Revenue from retail, travel, and e-commerce clients grew 26%. Technology and consumer electronics and healthcare verticals each grew by approximately 24%. Communications and media client revenue grew 7% against the prior year quarter, while growing slightly sequentially. On a combined basis, we grew with clients in our other verticals by 11%. Contributing to the growth across our strategic verticals were our more than 115 global disruptor clients. These clients represented about 21% of our revenue in the quarter or approximately $293 million and grew by 54% year on year. Turning to profitability, non-GAAP operating income exceeded our guidance for the third quarter. Our non-GAAP operating income was $182 million and our non-GAAP operating margin was 13.0% in the quarter. Third quarter adjusted EBITDA was $215 million, and our adjusted EBITDA margin was 15.4%. The strong profitability reflects flow-through from strong revenue growth, which more than offset the continued impact of COVID on the business. In terms of net income, in the third quarter, non-GAAP net income was $132 million, and adjusted EPS was $2.49, up 63% from the prior year. GAAP results for the third quarter included $34 million of amortization of intangibles, $9 million of share-based compensation expense, and a pre-tax gain of $13 million related to the divestitures I mentioned earlier. GAAP diluted EPS was $2.08. Our effective GAAP tax rate was 28% in the third quarter. Moving to cash flow, cash flow from operations in the third quarter totaled approximately $93 million, and capital expenditures in the quarter were $42 million. Capital spending was approximately 3% of revenue, and we continued to invest in support of growth, particularly in support of work from home and digital offerings and security. Accordingly, we generated free cash flow of $51 million in the quarter. We continue to expect capital expenditures for the full year to be in the range of 3.5% to 4% of revenue. Also in the quarter, we received proceeds of $74 million from the divestitures. Turning now to the balance sheet, at the end of the third quarter, cash and cash equivalents totaled $154 million. Total interest-bearing debt was $866 million net of issuance costs. This debt consisted of $700 million on our term loan and $169 million borrowed against our accounts receivable securitization. During the quarter, we paid down $94 million of borrowings using divestiture proceeds and free cash flow. Net debt was $712 million a quarter end. We ended our third quarter with gross leverage of approximately 1.0 times our trailing four quarters adjusted EBITDA and 0.8 times on a net leverage basis. Our liquidity remains strong with over $935 million of cash undrawn lines of credit and capacity on our accounts receivable securitization. Our current liquidity gives us significant financial flexibility. As Chris mentioned, our strong results, financial position, and free cash flow generation create options for us to invest in the business and enhance shareholder value. Our priority for capital deployment remains growing the existing business through funding organic and strategic growth opportunities. We have the financial flexibility to do this while providing disciplined returns of cash to shareholders. 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 fourth quarter. Given the continued strong demand for CX Solutions, we expect fourth quarter revenue to be in the range of $1.44 billion to $1.48 billion. This translates to a range of 11 to 14% in adjusted constant currency revenue growth. The adjusted constant currency growth includes an approximate negative $9 million combined year-over-year impact from the divested businesses and currency translation. We expect fourth quarter non-GAAP operating income of $195 million to $205 million, reflecting flow-through from strong seasonal revenue growth. For the fourth quarter, We expect interest expense to be approximately $5 million and we expect 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 fourth quarter excludes approximately $34 million related to the amortization of intangibles and $11 million of share-based compensation expense. Our guidance for the fourth quarter implies full year 2021 revenue of just under $5.6 billion or approximately 17% revenue growth on an adjusted constant currency basis. We expect the combined impact of divested businesses and foreign exchange rates will be just above a one point positive impact on the full year 2021 reported revenue compared with 2020. Our guidance also implies that our full year 2021 non-GAAP operating income margin will be approximately 13.0%. In closing, we are very encouraged by our results and the progress we are making across the business. We are confident in our expectations for the fourth quarter and beyond. We are a global leader in a large fragmented and growing market, executing a plan to grow organically faster than that market. As a proven industry consolidator with a strong balance sheet, we are well positioned to deliver sustained growth, margin progression, free cash flow, and enhanced shareholder returns. At this time, Sarah, please open the line for questions.

Thank you. To ask a question, you will need to press star then 1 on your telephone. To withdraw your question, please press the pound key. Again, that is star then 1 if you would like to ask a question. Our first question comes from the line of Ruplu Bhattacharya with Bank of America. Your line is now open.

Ruplu Bhattacharya Hi. Thank you for taking my questions. Congrats on the quarter and congrats on the capital return plan with the dividend. Maybe for my first question, I'd like to ask Chris, maybe on pricing, can you give us an idea of what percent of your contracts are based on FTE or full-time employee-based pricing? versus other pricing mechanisms such as output-based pricing or gain, you know, like transaction pricing or gain sharing. And the reason I ask this is as you see your mix shifting away from voice to more non-voice services, as you provide more value, do you think that, you know, that mix of pricing mechanism towards more performance-based pricing can happen, and do you see that mix shifting? Okay.

So, Ripto, I would answer it in two parts. I think right now what we've said is we still have more than 50% of our revenue in a component tied to a unit of measure. It might be person, transaction, other type of metric that we use that is sort of directly related to cost. And then our gain share or, you know, effectively gain share model continues to grow. So the deals that we're winning now, more and more of that percentage is becoming, you know, a gain share model, which we like, we enjoy. We think it's what help will drive our margins going forward and aligns our market. lines us with our clients, but we still have a lot of older business that we continue to work through that is based on a unit of measurement.

Got it. Thanks for that. Can I ask you about labor, you know, labor costs as well as the competition for labor? Again, as you makeshift more towards higher value services, are you seeing more competition for skilled labor? And just how is that trending in the face of COVID and the current environment?

Yeah, I think actually, look, markets are always competitive and we go after staff who are our top tier staff and want to make sure that we create the right environment and culture to hire them and retain them and have them grow their careers with us. So we have not had a challenge to this point, but we're always very focused on making sure that we do have the right environment and we are competitive in the marketplace and we are creating an environment that people want to join and continue to grow their careers with us.

Got it. I have a couple of quick ones for Andre if I can sneak them in. Andre, could you remind us of what the typical seasonal or seasonality is going from 3Q to 4Q. I mean, 4Q is typically a strong quarter for you guys. I think you're guiding 4.5% sequentially, and you're guiding about the street, so that's great. But it just seems a little conservative, just given past historical performance, or maybe that's being impacted by the divestiture. So can you just remind us on what typical seasonality is and how the guide compares to that?

Yeah, I think typical seasonality is just as you've suggested, Ruflu, which is the fourth quarter seasonality. is a strong quarter from a seasonal perspective. And you see that in our guide. Admittedly, we are not guiding to as much sequential growth as we had last year. Q3 was still a little bit impacted last year by COVID, certainly as we entered that quarter. And so that probably contributed a little bit to the sequential ramp that you saw last year. And also, if you think about some of the verticals where we're seeing growth, particularly around consumer electronics and tech, but also in banking, financial services, and insurance, those have a little bit less of a seasonal component to them than some of the other verticals that we're in. And so that might be muting things just a little bit. But again, we have signaled all along that we expected strong sequential growth from Q3 to Q4, and I think our guide reflects that.

Right. Okay. Thanks for the details on that. Then the very last question for me is on the capital return plan, can you help us think about the buyback? You know, you put a new authorization in, but how should we think about the cadence of the buyback? And just also in terms of you mentioned M&A a couple of times. I mean, what is the focus in terms of, like, what size of an acquisition or what parameters do you keep in mind when you look at acquisitions? Thanks again.

Sure, so I'll be happy to do that, and Chris can back clean up on anything I miss. You know, I would say as it relates to the pace, and I certainly don't want to predict how fast we will enter the market under the share repurchase plan, but I think if you look at what we're doing with both the dividend and the share repurchase, you're going to see us start fairly modestly in terms of capital return. That said, we do believe our shares are undervalued. But we also believe that, you know, investing in organic and accretive M&A is the best way, the best use of capital to drive shareholder value. So, again, the repurchase is part of kind of a balanced capital allocation plan that includes, you know, accretive M&A on a disciplined basis along with the dividend. You know, if you look at the size of the authorization, you know, it's pretty much in, you know, in line with, if you look at our peer groups, the size of of their most recent authorizations as a percent of outstanding. And I would imagine our pace will be similarly in line with that. So certainly, as you put the $500 million in place, that is out there to be used over, you know, a fairly long period. And so I think that probably gives you some color on that. As for the M&A, we're very, very focused on that. And as Chris has mentioned, we have ample capacity to do M&A of various sizes, frankly. And so we're going to be disciplined in what we do. So we could certainly have the firepower to do large acquisitions, but also we're focused on tuck-ins that increase the value of the platform. I'll let Chris add anything he would like to add to that.

I'd agree, Andre. To us, it's about the financial returns and the strategic significance to the M&A, and if it matches those two, that's more important to us than, frankly, the size when we look at just straight dollar value.

Got it. Thanks for all the details, and congrats again on the quarter. Thank you. Thanks very much.

Thank you. Our next question comes from the line of Shannon Cross with Cross Research. Your line is now open.

Hi, this is Matthew Morano on for Shannon Cross. I just got a couple here. Can you walk us through the puts and takes on operating margin this quarter? You performed pretty well out of guidance. Is there anything specific to call out there? Maybe like quantify the impact from the wage increases during the quarter and how we should model that going forward? And then I have to follow up. Thanks.

Yeah, so if you think about our performance, we came in roughly $7 to $8 million above the high end of our guidance range, and we were at the high end for revenue. So you would probably think that maybe we should have come in there. What we saw in the quarter and what drove the overperformance versus our guide was we really did have strong performance on the ramps that offset some of the expected investment We did see a good response, early response, to the U.S. wage adjustments that we made, improving hiring and attrition, and also partnering with our clients to ensure that we have the skilled staff to deliver the exceptional customer experience that we do. And on balance, we saw a little bit less net COVID spend. And I would say those three things kind of were each kind of equally weighted towards that kind of $7 to $8 million of overperformance of the high end of our guide.

Great, that's helpful. Thank you. Just one more. You've had some pretty broad-based demand across the board for the last few quarters. Just trying to get a sense looking into fiscal 22. I know these growth rates, these growth rate levels are probably not as sustainable given the tougher comps, but do you see any verticals that are going to start slowing down or vice versa that you see maybe wrapping up going into 22. And then just one more that I'm going to squeeze in here. Anything to call out specific from a geographic perspective this quarter? Thank you.

Matthew, let me answer the second question first. From a geographic perspective, we were actually happy because we saw strong demand and growth, frankly, in all our geographies, which is nice. And this is a couple of quarters that we've actually seen that. Now, each geography has a little bit of a different mix about what's growing faster than others. And we called out, for instance, travel and transportation in Asia and Europe as one of those. But overall... um, really, really, uh, happy. I will tell you, we see still strong demand sort of across all of our key verticals, um, going into next year. We, we see it in consumer electronics, we see it in technology, we see it in FinTech, in the banking area, uh, certainly in healthcare. Um, and, uh, you know, we, as we called out, we're seeing travel and transportation starting to, to come back in certain markets. So as, uh, hopefully, you know, COVID gets more under control, um, We hope to benefit from that vertical going back to where it was from a number of clients' perspective. It's certainly now back to where it was from a dollar perspective, but we see a lot more opportunities coming into the future with that vertical as an instance of one that will continue to grow well.

Thank you so much.

Thank you. Our last question comes from the line of Vincent Colicchio with Barrington Research. Your line is now open.

Yeah, Chris, it was nice to see telecom grow again sequentially. Should we expect continued growth there going forward?

Yeah, Vince, as we've talked about, there's some telecom business we actually very much like, and it's based around sort of the consumption of services that we offer and some of the technology we offer. And as we mentioned, we've kind of gotten to the bottom of where we want to bring the telecom portfolio, and then it will start to grow based on what it is with some of the new services we do. So I would consider that it would continue to grow, but obviously we're growing the overall business faster. uh, and bigger. And so it will probably stay roughly around the percentage of business that we are, um, where we're, we're seeing it at now.

And, uh, on the acquisition side, um, are you finding, um, I know you guys are, uh, you know, uh, uh, careful in terms of, uh, uh, deal and diligent in terms of, you know, what you pay for deals. Um, Are you finding, for the most part, opportunities being too expensive right now?

I think we've said we're seeing sort of unrealistic expectations from some of the people looking to sell their businesses in the marketplace, both driven by sort of the very robust public markets and private equity that likes us based. That being said, there are other opportunities that make sense. And what we're most focused on, as I go back to, does it have a strong strategic fit to us? Will it drive the right financial returns as the business runs without doing any unnatural acts? And is it something that will drive better shareholder value over the longer term? And so provided it matches up to that, we will continue. and sort of complete a transaction in those parameters.

And are you seeing any movement on pricing in any of your geographies, given the tightness of the labor market?

No, pricing is pretty steady. And sort of going back to an earlier question in the Q&A, we tend to be focused more on doing gain share and, you know, aligning our economics to our clients' economics, which change it, you know, the pricing becomes much more complex around those types of things. And so, therefore, it really hasn't necessarily changed. Things are always competitive in this marketplace, but generally steady from a pricing perspective.

Okay. Most of my other questions were answered. Thank you.

Great. Thank you very much, Vince.

Thanks.

Thank you. There are no further questions. I will now turn the call back to Chris Caldwell for closing remarks.

Thank you very much, everybody, for joining us today. We always very much appreciate your interest in Concentrix. We're extremely pleased with our strong execution and are confident in the strength of our business model and track record for being a consolidator in the CX industry. Again, please look for the Save the Date for our Investor Relations Day coming up in January 2022. And I look forward to seeing you next quarter. Thanks very much, everybody. Appreciate it.

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