Concentrix Corporation

Good day and welcome to Consensrix Fiscal Second Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your touchtone telephone. If anyone should require assistance during the conference, please press star then 0 to reach an operator. As a reminder, this call is being recorded. I would now like to turn the call over to David Stein, VP Investor Relations. You may begin.

Thank you, Michelle, and good morning. Welcome to the Concentrix Second Quarter Fiscal 2022 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, David. Good morning, everyone, and welcome to our second quarter earnings call for fiscal 2022. As you can see from our results we announced, our second quarter had strong revenue growth and even stronger margin expansion. This last quarter we have fielded many questions from investors around how our business model fares during uncertain times and we believe our results show the services we offer to our clients are in demand. Our growth strategy is succeeding despite the ever-changing macroeconomic environment which gives us the confidence that we can rapidly adjust to changes that are and that our underlying business is strong and growing. We are not seeing signs of a slowdown in our pipeline or new business signings, although the placement of work to lower cost locations and more drive to digital solutions continues to increase, which we see as a positive to the business. Reported revenue in the second quarter was $1.57 billion, up 14.5%, including a higher than anticipated foreign exchange headwind. On a constant currency basis, revenue increased 17.2%. Our second quarter non-GAAP operating income improved to $213 million, growing 24%. Adjusted EBITDA increased 20% to $250 million compared with last year. Non-GAAP earnings per share increased 24% to $2.93 per share compared with $2.37 per share last year. Once again, we saw growth across all our verticals. The market continues to have stable pricing, with price increases being accepted by clients for the most part to offset any labor increases. Some clients did decide to move volume offshore to better manage their cost structure, while the vast majority of our client base is happy delivering from their current geography. As part of driving better business outcomes for our clients, we won digital transformation and CX solution businesses across over two dozen new logos, many now engaged across both our operations and catalyst offerings. Demand remains strong and our solid pipeline gives us the confidence to expect strong signings for the rest of the year. As we've spoken with investors over the last couple of months, we've also seen a lot of interest in understanding more about our new economy clients. There have been questions about size and strength of these clients to weather changes in the economy. We believe our new economy client base is strong, vibrant, and will generally succeed in down cycles. They continue to make substantial contributions this quarter to grow, increasing 42% year over year to $363 million in the quarter. As a reminder, we have over 125 new economy clients spread across our set of verticals and end markets that we service. As we stated at the time of our analyst day back in January, The majority of these are not small companies and have large potential. In the second quarter, we grew revenue on a year-over-year basis with over 80% of these clients, which represents 90% of our new economy client revenue. These clients look to us to be able to help them as they scale globally, as their businesses become more complex, and as they deal with many of the challenges that we help our enterprise clients navigate. Turning to Concentrix Catalysts, We're making strong progress and seeing good sales motion to cross-sell our full range of CX capabilities. Our teams have met with a select set of our clients to explain the opportunities to more fully address key CX needs and have gained significant interest to explore these additional solutions. At the end of Q2, we had a pipeline of close to $100 million of opportunities with combined capabilities beyond what we would have been able to participate in previously. These opportunities are in addition to our growing traditional concentric catalyst pipeline. For example, a software company needed help in many areas of their CX organization, so they partnered with us to leverage a variety of our capabilities. We are helping them build out a scalable support function, transition to a new CRM system, designing and building user bots, growing their revenue, and understanding their customer journey, all while lowering their total delivery costs. Having developed a customer journey-driven approach to optimize a holistic customer experience, our combined concentrics and catalyst teams have been instrumental in deepening the relationships and adding significant value in ways that we would not have been able to support before. Our challenge in catalyst at the moment is hiring. We simply cannot hire enough technical staff to meet the strong demand and are expanding our development locations, taking advantage of our global footprint to keep up. The demand for our operations and catalyst business continue to confirm our clients want to deal with fewer partners who have deeper domain expertise and broader service capabilities on a global scale. Increasingly, as a single source integrator and operator, we selectively pursue strategic clients to deliver end-to-end CX solutions. This quarter, we were also pleased to announce the acquisition of ServiceSource in May. ServiceSource adds deep domain expertise in sales generation and expands our business-to-business sales capabilities. We have an active pipeline with significant demand from our clients for this capability. We also gain an attractive client portfolio of technology and new economy brands whom we can help scale and cross-sell other CX services. We expect the transaction to close in the second half of fiscal year and be accretive to both growth and profitability after synergies in the first 12 months. In terms of capital deployment, in the second quarter we paid $13 million in dividends and repurchased $58 million of our stock at an average price of about $158 per share. We also continue to focus on completing complementary and financially compelling acquisitions as we have mentioned with our service source acquisition. From an operating perspective, we continue to achieve strong customer satisfaction, innovation, and client value attainment scores. In our second quarter, demand for CX Solutions was particularly strong in travel, technology, banking financial services and insurance, automotive, and healthcare. Reflecting the current macro environment, some of our clients are experiencing volume volatility, particularly in e-commerce and crypto industries, while supply chain is primarily impacting clients that manufacture out of China. We are also happy to have released our updated 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 our communities. I can't thank the Concentrix team enough for the commitment to making the world a better place. With a few of our 2025 goals close to completion well ahead of schedule, we have now started to update other goals. I encourage you to visit the Investor Relations section of our website and download a copy. Turning to the balance of the year, despite foreign currency impact and a shift of some programs to lower cost delivery, our broad-based strength across the business, strong win-win with clients, and a robust pipeline across our strategic verticals keeps us confident that we will continue to grow faster than the market while expanding our margins. In summary, we're focused on transforming everything CX for our clients and their customers. We are deepening our client relationships and relentlessly innovating with new solutions and expanding into emerging markets while we selectively pursue strategic acquisitions to drive superior returns for our shareholders. 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 membership. And with that, mentorship. And with that, I will turn it over to Andre.

Well, thank you, Chris, and hello, everyone. I'll begin with a look at our financial results for the second quarter and then discuss our business outlook for the third quarter and full year 2022. We delivered strong revenue growth, margin improvement, and cash generation in the second quarter. Revenue in the second quarter was $1.57 billion, up 14.5% on an as-reported basis. The improvement in reported revenue includes a nearly three-point negative impact from foreign currency fluctuations. This FX impact is almost a full point more than we expected entering the quarter, reflecting the weakening of the euro, the British pound, Japanese yen, and Australian dollar during the quarter. As a reminder, approximately one-third of our revenue is denominated in currencies other than the U.S. dollar. And as these currencies have weakened against the U.S. dollar since early in our second quarter, it has had a meaningful impact on our reported revenue and revenue outlook for the rest of the year. Revenue increased 10% compared to last year on an adjusted constant currency basis pro forma for the impact of businesses acquired and divested since the start of the prior year's second quarter. Revenue increased across all of our verticals in the second quarter. On a percentage growth basis, revenue from healthcare clients led the way, growing by approximately 28%. Revenue grew 27% in the retail, travel, and e-commerce vertical. Our technology and consumer electronics and banking, financial services, and insurance verticals both grew by 12%. Revenue from communications and media clients grew 7% in the quarter, with almost all of that growth driven by the inclusion of revenue from our acquisition of PK in December of 2021. Clients in the other vertical industries grew 6% in the second quarter. Each of our four strategic verticals grew by double digits organically on a constant currency basis in the quarter. Our new economy clients generated strong growth of 42% year-over-year and represented 23% of second quarter revenue. Virtually all the growth in revenue from our new economy clients was organic, led by clients in technology and consumer electronics, retail, travel, and e-commerce, and banking, financial services, and insurance verticals. As Chris mentioned, we were able to deliver this strong growth despite headwinds in foreign exchange and shifts in service delivery to lower-cost geographies. Turning to profitability, non-GAAP operating income was $213 million in the second quarter, compared with $172 million last year. Our non-GAAP operating margin was 13.6%, up 100 basis points from 12.6% in the second quarter of last year. Adjusted EBITDA was $250 million compared with $208 million in the second quarter of last year. Our adjusted EBITDA margin was 15.9%, up 70 basis points from 15.2% in the second quarter of last year. Profitability in the second quarter reflects flow-through from revenue growth with existing and new clients, contributions from PK, productivity improvements, and increased pricing, partially offset by investment in new program ramps and wage inflation. Non-GAAP net income in the second quarter was $155 million, compared with $125 million last year. Earnings per share were $2.93 on a non-GAAP basis, compared with $2.37 last year. GAAP results for the second quarter of 2022 included $41 million of amortization of intangibles, $13 million of share-based compensation expense, and $2 million of expense related to the acquisition and integration of PK. Our gap tax rate was 23% in the second quarter, and our non-gap tax rate was 24%. Our tax rates in the second quarter were below expectations, primarily due to the geographic mix of our income. Turning to cash flow, second quarter cash flow from operations totaled $165 million, and capital expenditures were $26 million. This resulted in free cash flow of $142 million in the quarter. We expect capital expenditures for the full year to be a bit below our initial expectation of approximately 3% of revenue, and we expect free cash flow for the full year to approximate 85% of non-GAAP net income. Moving to the balance sheet, at the end of the second quarter, cash and cash equivalents were $163 million, and net debt outstanding was $2.3 billion. Net debt was $2.1 billion at the end of the second quarter. During the quarter, we paid a quarterly dividend of 25 cents per share, and our board has declared another quarterly dividend of 25 cents per share to be paid during the third quarter. We also repurchased 367,000 shares of our stock for approximately $58 million. As of the end of the second quarter, we had $417 million remaining on our authorization. In addition to our dividend and debt reduction plan, we believe that our shares are undervalued and that continued modest share repurchase at this valuation is warranted and will be modestly accretive to EPS. At the end of the second quarter, gross leverage was approximately 2.3 times adjusted EBITDA and net leverage was approximately 2.0 times on a trailing four quarters pro forma basis. We continue to believe that we can reduce our net leverage to under two times pro forma adjusted EBITDA by the end of the year, barring any additional M&A beyond service source. Our liquidity remains strong at approximately $1.3 billion, including $1 billion of undrawn line of credit, cash on hand, and the additional capacity on our AR securitization, which provides significant financial flexibility for the future. Now I'll discuss our business outlook for the third quarter and full year 2022. For the third quarter, We expect revenue to be in a range of $1.575 billion to $1.605 billion. This includes a three-point negative impact of foreign exchange rates compared with 2021 and roughly a one-point headwind on a sequential quarter basis. This equates to 7% to 9% revenue growth on an adjusted constant currency basis pro forma for the impact of businesses acquired and divested since the start of the prior year third quarter. Our profitability expectations for the third quarter include non-GAAP operating income in the range of $220 million to $235 million. At the midpoint, this equates to a 130 basis point increase in non-GAAP OI margin year over year. We expect interest expense in the third quarter to be approximately $19 to $20 million with an effective tax rate of approximately 24% to 25% and a weighted average share count of approximately 52 million shares. Turning now to our outlook for the entire year, based upon our strong performance year to date, while also adjusting for an additional negative foreign exchange impact on reported revenue of about 1%, we now expect 2022 revenue to be in a tightened range of $6.365 billion to $6.415 billion. Included in our expectations is a three-point negative impact of foreign exchange rates compared with 2021. This equates to 9% to 10% revenue growth on an adjusted constant currency basis pro forma for the businesses we have acquired and divested as if those transactions had occurred at the start of fiscal year 2021. Our full year profitability expectations include non-GAAP operating income in a range of $890 to $915 million. At the midpoint, this equates to a 100 basis point increase in non-GAAP OI margin year over year. We expect full year interest expense to be approximately 65 to $66 million with an effective tax rate of approximately 24 to 25% and a weighted average share count of approximately 52 million shares. Our business outlook does not include the anticipated acquisition of service source or any other future acquisition related impacts or transaction and integration costs. As a reminder, once the service source transaction closes, We expect contributions of $230 million in revenue and $38 million in EBITDA with synergies in the first 12 months. Also not included in the guidance are impacts from future foreign currency fluctuations. In closing, we had another strong quarter of performance. Our vision for the future of our business presented during our investor day back in January remains unchanged. We're executing against our growth strategy to achieve the long-term targets we laid out earlier in the year, including near double-digit, faster-than-market growth through 2025 with meaningful margin expansion, strong free cash flow generation, and the ability to use our strong balance sheet to be a leading consolidator in space. With that, Michelle, please open the line for questions.

As a reminder, to ask a question, please press star then 1. If your question has been answered and you'd like to remove yourself from the queue, press the pound key. Our first question comes from Rupal Bhattacharya with Bank of America. Your line is open.

Hi, good morning. Thank you for taking my questions. Chris, looks like you're taking down fiscal 22 revenue guide by 1% on a constant currency basis. So it looks like it's more than FX that's impacting your top line I think you said some customers are moving to lower-cost geographies. I just wanted to clarify, are they still your customers, and what is the impact of that on revenue? And besides that, are you seeing any weakness anywhere in demand? And also on revenues, if I look at your fiscal 3Q and the full-year guide, that implies a 7% sequential revenue growth between 3Q and 4Q to get to the midpoint of your revenue guide. So just... wanted to get your confidence on that because if I look last year, it was about 5% sequential growth. And if we go back to pre-COVID in 2019, I think Concentrix did 4% sequential growth. So just the confidence that you can have 6% to 7% sequential growth in the fourth quarter.

Yeah, a lot to unpack there. So let me try and tackle all the questions in part. The first one in regards to the 1% guide change for the fiscal year. You are correct. It's primarily driven by some clients who we had expected to work with the clients to kind of move them back offshore because a lot of them had come on shore during COVID or we had won them. and had originally put them onshore to offshore over the course of sort of the next 12 months. And based on them wanting to kind of get some cost savings sooner, faster, we moved on that in the second quarter and moved that That's about a $50 million impact for the rest of the year, give or take. But for now, client base is sort of set where they're delivering from and pretty happy with that. They are our clients, they continue to be our clients, and they actually were very happy that we were able to move as fast as they wanted to move in order to get them the cost savings. So from that perspective, we're pretty happy with what we're seeing. In terms of pipeline confidence, I think through the prepared remarks, I hope you felt a lot of confidence in the pipeline. Our pipeline continues to grow. We're winning the deals that we want to win. We're seeing good cross synergies with our catalyst business at a pipeline of just in that alone, 100 million of net new sort of opportunities that have come into our pipeline. And I think that's reflective of our guidance and confidence that from Q3 to Q4, we can see the increase at that 7% range to get to our midpoint of our guide.

Yeah, Rupal, I would also just remind that that 5% last year, and this is kind of a detailed thing, had about a one-point impact from a combination of businesses that we divested midway through the third quarter, and FX. So an adjusted basis for that was closer to 6%. And so I think with contributions from Catalyst, as well as the strong signings we saw in Q2, strong pipeline, that's what gives us the confidence in the guide.

Okay, thanks for the details there. Maybe, Andre, I'm going to ask you a similar question on operating margins. It looks like the guide for fiscal 22 op margin is 14.1% at the midpoint. and the guide for 3Q is 14.3%. So this means that, you know, mathematically, the fiscal 4Q up margin has to be around 15.4%, which is a significant sequential increase. So the same question, what's giving you confidence that you can see that kind of margin, sequential margin improvement from 3Q to 4Q?

Yes, so you're right. We see at the midpoint roughly 100 basis point improvement in non-GAAP OI margin from Q3 to Q4. That's not such a pronounced difference from the 90 basis point improvement we saw last year, so not so dissimilar. This is where some of the impact of the shore mix that Chris has alluded to regarding revenues actually is a positive for us. Obviously, moving to offshore and nearshore geographies where margins are higher allows us to drive that higher margin. Also, just again, we think we'll see continued contributions from PK and improvements in that margin and some benefits from the current FX environment as well. So, all of those things have us fairly confident that we can drive that level of margin increase. It's not so different than what we saw last year. It is a little bit more, and we think we've got a juice in the business to deliver it.

Okay, thanks for the details there. I've got a couple more questions, if I can sneak them in. Chris, FITEL recently announced its intention to acquire Majorelle. How does this impact the competitive landscape for you in Europe and in voice-based customer services?

So it doesn't really impact us. We don't really run into them too much in our European footprint. We've been happy with sort of the differentiated offering that we've been delivering. And so whenever there's some consolidation like that, you know, clearly we see that as what we've been talking about, just more consolidation industry, and will, I believe, provide us more opportunities to grow.

Okay. Maybe for the last one, Chris, can I ask you on pricing trends and attrition rates? In pricing, you had talked about the move to more outcomes-based pricing. Is that taking hold? Are you able to pass on labor cost increases to customers? And maybe on attrition, have you seen an uptick in attrition rates? How are those trending?

So a couple things. Back in our prepared remarks, I talk about the fact that, for the most part, pricing increasing is going through and clients are accepting that pricing increase. primarily because they look at the value we deliver for them as a business. And where they're not able to afford to, we then look at offering them alternative to go offshore, which obviously some clients took in the last quarter, and we were able to move them relatively quickly to offshore. So we think we're well covered and executing well from that perspective. From an attrition perspective, I think we continue to be best in class, and we haven't necessarily seen any material uptick or downtick. and we're still performing generally better than pre-COVID levels, so I'm pretty comfortable with where we're seeing our supply of labor, and that's a global comment. From a catalyst perspective, I did call out the fact that we are focused on hiring. We have a lot more work, and that is muting our growth on our catalyst segment, and we believe that we will be able to be in a better position as we open up more development centers globally to support the pipeline of work that we have in the Catalyst business.

Okay. Thank you for all the details. Appreciate it.

Thank you.

Again, if you'd like to ask a question, please press star then 1. Our next question comes from Vincent Colicchio with Barrington Research. Your line is open.

Yeah, Chris, your commentary on the catalyst pipeline sounds fairly healthy. Curious if that was in line with your plan. Also curious if you're on track to grow catalysts 20% as previously communicated, or if the hiring challenges you just cited are impairing that.

Yeah, so our Catalyst execution is a little ahead of plan. As we mentioned, we closed some deals, albeit very, very, very small in Q1, which we didn't expect to close, honestly, anything. And our pipeline is much healthier on the combined opportunities than we expected at this point. We expected actually to be a couple quarters out with that type of level of pipeline in this business. You've got to remember, when we bought Catalyst, it was slightly over $400 million. So if you think about building a pipeline of 25% of revenue within Catalyst, sort of a very short time. I think that speaks to sort of the value proposition we're delivering for the clients and where they see dealing with us as being very, very valuable. From a growth perspective, that is our goal. I will say that the hiring is muting that a little bit and has muted it in our second quarter, although we do expect to as we bring on the development centers to speed up that revenue growth. And I think 20% is a very reasonable long-term revenue target for us in that business.

And Andre or Chris, has supply chain had less of an impact on volume this quarter than the prior quarter?

It's actually pretty much in line to the same. We continue to see our manufacturers or our clients who manufacture in China having challenges getting product out in a consistent and – you know, high-volume nature. And so that has impacted volume with a number of our clients, but it's consistent with what we saw within sort of the Q1 period of time. It hasn't necessarily opened up any better.

And a big-picture question. Chris, in the last quarter, you talked about, you know, an expansion in terms of what clients are willing to outsource post, you know, pandemic. If I could use that word, hopefully it's not too optimistic. You know, does that mentality continue in the market?

I think it does, Vince. And, you know, I'll tell you in that 100 million, approximately 100 million of opportunities within the combined catalyst operations pipeline, The vast majority of those are opportunities that historically would not have been outsourced. They would have been done in-house. And so we're now able to talk about things that historically we haven't been able to. We've got a very, very deep technical bench strength within Catalyst that we can build very bestow applications. And then with our operations and domain expertise, kind of operationalize it and run it. And this is a sort of new market that we're eating into, which is pretty exciting to us.

And, you know, generally hearing in your industry and across other industries that, you know, private market multiples are still fairly rich relative to the downdraft we've seen in public markets. Is that what you're seeing?

Historically, private multiples do take a number of months to kind of fall in line with their public peers. We are starting to see those private multiples starting to come down, not in a meaningful way, but they are starting to come down. But I will tell you, less things are transacting on the private market. So it would be indicative of that people are waiting for multiples to come in line to what would be accretive to sort of public company multiples. Okay. Thanks for answering my questions. Perfect. Thank you.

There are no further questions. I'd like to turn the call back over to Chris Caldwell for closing remarks.

Great. 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 in the quarter and are confident in our ability to continue to lead in the dynamic digital CX marketplace. I'd also encourage you to all download our ESG report and look forward to talking to you next quarter. Thank you very much, everybody.

This concludes the program. You may now disconnect. Everyone, have a great day.