Concentrix Corporation

good day and thank you for standing by welcome to the concentric's fiscal fourth quarter 2022 financial results conference call at this time all participants are in a listen early 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 1 1 on your telephone you will then hear an automated message advising your hand is raised please be advised that today's conference is being recorded I would now like to hand the comments over to your speaker today, David Stein, Head of Investor Relations. Please go ahead.

Thank you, Leigh Ann, and good evening. Welcome to the Concentrix fourth quarter fiscal 2022 earnings call. This call is the property of Concentrix and may not be recorded or rebroadcast without the written 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 today'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 evening, everyone, and welcome to our fourth quarter and fiscal year 2022 earnings call. I would like to start with a quick review of 2022. We made progress across several fronts that we believe continue to position us as a leader in the customer experience industry. For the full year, revenue increased over 13% on an as-reported basis. On an organic cost and currency basis, revenue was up over 8%. On a non-GAAP basis, our operating income increased more than 20% and our operating margin was up 90 basis points to a record 14%. Free cash flow was up 26%. In addition to this profitable growth, our operational performance continued to be strong in 2022, once more delivering the highest customer satisfaction and innovation scores since we started our surveys over a decade ago. Our investments in new technologies and innovative services have also allowed us to capitalize on new opportunities with clients as their priorities have shifted going into 2023 from helping to support their growth to reducing their operational costs. As a reminder, earlier in the year, we introduced our new Concentrix Catalyst Group, successfully integrating the PK acquisition to allow us to deliver deeper CX technology solutions at scale. In July, we augmented our B2B revenue generation capabilities and footprint with a service source acquisition. Throughout the year, we have rolled out multiple technology platforms for our operations that have helped increase our profitability and security such as RecruitCX, ConnectCX, and CXQI. We have also increased our operational footprint with new countries and additional locations in Europe, Latin America, and Asia. In 2023, we have additional footprint investments in the works as well as continued focus on building platforms that will help us be more efficient and deliver a compelling offering for our clients. We believe all of this is helping continue to build our pipeline of opportunities around more complex work and higher value services. Turning to the fourth quarter, I'm pleased to report that despite the challenges of a tough macroeconomic environment in the back half of the year, we delivered strong revenue growth, profit improvement, and cash flow generation. Our revenue of $1.64 billion represented an increase of 12% compared with last year on a reported basis. Revenue increased approximately 6% on an organic constant currency basis. Non-GAAP operating income of $248 million was up 22% and adjusted EBITDA increased 20% to $285 million. Free cash flow increased 32% to $193 million compared with last year. We did experience volume softness primarily in late October and November with clients in the consumer electronics and retail e-commerce areas. Clients in these areas as a whole were flat to down year over year without their traditional seasonal uptick in volumes related to consumer spending they expected. While the base business remained solid, volumes were below what these clients had forecasted for their Double 11 shopping event, Thanksgiving, and Christmas pre-sales. Although we adjusted quickly, our fourth quarter profits were impacted by initial staffing levels to meet clients' forecasted demand. The rest of the portfolio performed very well with several of our key verticals posting double-digit revenue gains that Andre will go through. our Catalyst business continued to build a strong pipeline of new opportunities of integrated solutions with our CX Operations clients, as well as expansion work within our existing Catalyst clients. Within our Catalyst business, we did experience a few ramps progressing slower in the quarter than we expected, primarily based around clients' ability to coordinate change in their ecosystems. This is typical with larger projects, and we expect to be on pace within our second quarter. From a sales perspective, we signed business with two dozen new logos in the quarter. Our wins provide a full spectrum of services to clients across our vertical service. Two interesting examples include providing business to consumer sales and integrated sale propensity analytics to improve conversion rates for a large European service provider, which was delivered by our new business to business sales team, and in our catalyst business, providing advisory services for cloud-based data management, quality assessment, and assurance to reduce costs on an operational process for a new economy company. In addition to these wins, our pipeline of single systems integrator and solution operator opportunities, which combine the capabilities of our concentric catalyst, core CX operations, and our B2B team, increased during the quarter. We believe this expanding pipeline shows that our investments to align our capabilities and services to designing, building, and running the future of CX is resonating well with existing and new prospective clients. We use these capabilities to broaden and deepen our relationships by optimizing business processes, consolidating volume, and reducing our clients' costs. Going into the new year, demand from enterprise and new economy prospective clients remain strong. Existing clients are recalibrating volume expectations and we're seeing positive discussions that we'll expect will lead to the consolidation of client volumes with us. As a result, we expect choppiness in the first two quarters of the year as these discussions are finalized. We expect year-over-year growth to accelerate in the second half of the year as a result of large deals we have already signed, underlying base business, and consolidation of volumes from smaller suppliers. we do not expect and are not factoring in large seasonal volume at the end of 2023. As a reminder, historically, we have done well in both good and more challenging economic times by helping our clients meet their goals. In times like these, our clients need to continue to drive revenue, do more with less through automation, and retain customers by ensuring the best possible experience. We are having the right conversations about all these areas with our clients. From an operational perspective going into 2023, challenges staffing new technical problems have eased and the labor market has become stable and more predictable in most regions. The pricing environment for solutions also remains stable. In summary, 2022 was a successful year where we took significant steps to build our offering both organically and inorganically focused on transforming everything CX for our clients and their customers. We're optimistic about what we can deliver in 2023. We have confidence in our strategy to grow faster than the market with margin expansion, relentlessly innovating with new solutions, and expanding into emerging markets, building strategic key relationships, and selectively pursuing strategic acquisitions to drive superior returns for our shareholders. Finally, I'd 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, and our investors for their confidence and concentric. With that, I'll turn the call over to Andre. Andre?

Thank you, Chris, and hello, everyone. I'll begin with a look at our financial results for the fourth quarter and then discuss our business outlook for fiscal year 2023. We delivered solid revenue growth, impressive margin improvement, and strong cash generation in the fourth quarter, despite some impact from lower client volumes and slower project ramps than we expected going into the quarter. Revenue in the fourth quarter was $1.64 billion, as reported, up 11.9%. The improvement in reported revenue includes a 5.1% negative impact from foreign currency fluctuations and an 11.2% impact from acquisitions. Organic constant currency growth was 5.8%. In terms of client verticals, on a percentage basis, revenue increases with healthcare clients led the way in the quarter, growing approximately 23%. Revenue grew 13% in the technology and consumer electronics vertical, with technology clients driving the growth. Our retail, travel, and e-commerce clients grew by 12%, with travel clients driving the growth. Revenue from banking, financial services, and insurance clients grew by 10% in the quarter. Communications and media client revenue grew 9%, with all that growth driven by the contribution of the Catalyst acquisition. Revenue from our other vertical grew 5%, with growth from acquisitions more than offsetting an organic decline in that vertical. Organic growth in the quarter was driven primarily by increases with clients in the technology, travel, banking, healthcare, and automotive industries. New economy clients generated growth of 13% year over year and represented 22% of fourth quarter revenue. We generated modest growth across our enterprise clients on organic constant currency basis. While we grew with 14 of our 20 largest enterprise clients, softer volumes with a handful of consumer electronics and communications clients were a headwind for this grouping of clients in the quarter. Turning to profitability, non-GAAP operating income was $248 million in the fourth quarter, compared with $203 million last year. Our non-GAAP operating margin was 15.1%. up an impressive 120 basis points from 13.9% in the fourth quarter last year. Adjusted EBITDA was $285 million, compared with $238 million in the fourth quarter of last year. Our adjusted EBITDA margin was 17.4%, up 120 basis points from 16.2% in the fourth quarter last year. This impressive margin progress reflects profit flow-through on revenue growth from existing and new clients. contributions from catalysts in our B2B revenue generation business, productivity improvements, and increased pricing, partially offset by investment in new program ramps and wage inflation. Non-GAAP net income in the fourth quarter was $157 million compared with $158 million last year. Non-GAAP EPS was $3.01 per share compared with $2.99 per share last year. GAAP results for the fourth quarter of 2022 included $42 million of amortization of intangibles, $19 million of expense related to acquisition integration, and $10 million of share-based compensation expense. Our non-GAAP tax rate was 32.5% in the fourth quarter. This was higher than expected due to the change in geographic mix of our income, which increased our exposure to US BEAT and GILTI taxes for the full year. Our nine gap tax rate for the full year was 27.3%. Turning to cash flow, our fourth quarter cash generation from operations totaled $236 million, and capital expenditures were $43 million. This resulted in free cash flow of $193 million in the quarter. Fourth quarter free cash flow included approximately $19 million of integration costs, primarily related to the service source acquisition. We are on track to deliver are year one cost and revenue synergy targets for this acquisition. For the full year, free cash flow came in as expected at slightly over $460 million. We continue to expect free cash flow to approximate 85% of non-GAAP net income over time and for capital expenditures to approximate 2.5% of revenue. Turning to the balance sheet, at the end of the fourth quarter, cash and cash equivalents were $145 million. Debt outstanding, was $2.224 billion and net debt was $2.079 billion. We achieved the commitment we made at the time of the PK acquisition of reducing our net leverage to under two times pro forma adjusted EBITDA by year end. We did this despite an active capital program, an active program for capital return and the service source acquisition. Speaking of capital deployment, we maintained our balanced approach in the quarter including capital return, investing in the business, and debt repayment. During the quarter, we repaid a quarterly dividend of 27.5 cents per share. We also repurchased 106,000 shares of our stock for approximately $13 million. Repurchases in the fourth quarter were made in the average price of approximately $120 per share. For the full year, we paid $53 million in dividends and used $121 million on share repurchases. As of today, we have $354 million remaining on our share repurchase authorization. Our near-term priorities for free cash flow are our dividend and debt reduction, with modest anti-dilutive and opportunistic share repurchase activity as well. At year-end, our liquidity remains strong at nearly $1.3 billion. including our $1 billion line of credit, cash on hand, and the additional capacity on our AR securitization. Our strong balance sheet and cash flow generation provide significant flexibility for the future. Now I'll turn to our business outlook for the first quarter and full fiscal year 2023. As Chris mentioned, the current macroeconomic environment presents both challenges and opportunities for us. While growth is slowing in some verticals and we're experiencing delays with some project ramps, we also see opportunities to gain share with our client base through the consolidation of volumes from smaller providers. We also see opportunity for new outsourcing volumes as our clients seek to make more of their cost structure variable and drive efficiencies using our design, build, and run approach. On balance, we now expect to see constant currency revenue growth in the first half of 2023 in the low to mid single digits. with stronger growth in the second half of the year. We're also taking steps internally and making investments to drive further efficiency and reduce costs, as well as grow faster in emerging markets, Latin America, and Europe across our entire set of capabilities. For the first quarter, we expect organic constant currency revenue growth to be in the range of 2% to 4%. Based on current exchange rates, we also expect a 2.4 point year-over-year headwind in the first quarter. We expect the timing of our 2022 acquisitions to contribute approximately $80 million of incremental year-over-year revenue growth in the first quarter. Based on these assumptions, we expect reported first quarter revenue to be in the range of $1.61 billion to $1.64 billion. Our profitability expectations for the first quarter include non-GAAP operating income in a range of $210 million to $220 million. This equates to a non-GAAP operating margin of 13.2% at the midpoint of the range, an increase of 10 basis points over the first quarter last year. We expect interest expense in the first quarter to be approximately $35 million, with an effective tax rate of 26% and a weighted average diluted share count at approximately 52 million shares. As is typical in our business, we expect first quarter free cash flow to be approximately breakeven. Moving now to our outlook for the entire year, we expect 2023 constant currency organic revenue growth to be in a range of 4% to 6%. Based on current exchange rates, we expect almost no FX impact on our reported revenues for the full year 23. We expect the timing of our 2022 acquisitions to contribute approximately $160 million of incremental year over year revenue growth for the full year. This equates to reported full year revenue in a range of $6.715 billion to $6.865 billion. These expectations include a continuation of the general economic softness we have seen in recent quarters throughout the year. including muted seasonal volumes in the fourth quarter of 2023, consistent with 2022. Based on our discussions with clients regarding their recalibrated volume expectations for 2023, we expect to grow faster in the second half of 2023 than in the first half. Despite the challenging macro environment, several factors give us confidence in our forecast for the year, including increasing contributions the two large deals discussed on our last earnings call, a growing pipeline with discussions with clients to consolidate more volumes from smaller providers, and passing the anniversaries of the offshore movement and downturn in volumes last year from our cryptocurrency clients, which occurred in the second quarter of 2022. Our full-year profitability expectations include non-GAAP operating income in a range of $950 to $990 million. This equates to a non-GAAP operating margin of 14.3% at the midpoint of the range. We expect full-year interest expense to be approximately $140 million, an effective tax rate of approximately 26%, and a weighted average deleted share count of approximately 52 million shares. We expect another strong free cash flow generation year, with free cash flow growing by over 10% to over $500 million in 2023. This would position us to further reduce our net leverage to under 1.6 times adjusted EBITDA by year end if we assume no further acquisitions or share repurchases. Our business outlook does not include acquisition-related impacts or transaction integration costs associated with any future acquisitions. Also not included in the guidance are impacts from future foreign currency fluctuations or future share repurchases. As I close, I want to say that we had a successful year with strong revenue growth, margin expansion, and free cash flow generation. We believe our unique customer experience offerings will keep our business resilient through business cycles. Our vision for the future of the business presented at our investor day last January is unchanged, despite the near-term challenges in the economy. This includes faster-than-market growth through 2025 with meaningful margin expansion, strong free cash flow generation, and the ability to be a leading consolidator in the space, leveraging our strong balance sheet. With that now, Leanne, please open the line for questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment please.

Our first question comes from the line of Vince Colicchio of Barrington Research.

The line is now open.

Yeah, good afternoon, Chris. Can you talk a little bit more about how the demand patterns are changing for more labor-intensive work? Are you seeing demand for a bigger offshore piece? And are you seeing some existing engagements shift more towards catalyst-type work, for example?

Hey, Vince. So first on the labor part, we are seeing, as we kind of talked about in Q3, a continuation of when, People are looking to outsource. For the vast majority, they're looking at outsourcing offshore versus nearshore or onshore to begin with. And that's primarily driven by sort of the cost environment that people are looking for a larger reduction in their run costs. And so we are seeing that, but we're not seeing sort of a difficulty to supply to those demands or changes in sort of the pricing environments relatively stable for sort of the higher value work that we do. You are correct. We've made a concerted effort over the last year to really focus on more in-depth and integrated complex offerings with our catalyst business. Obviously, you know, it takes some time to ramp those up, and we had some constraints on the technical talents at the beginning of the year in 2022. As we mentioned, those constraints were cleaned up and cleared up. And so we are seeing a much bigger pipeline of those more integrated offerings going into 2023, which we're excited about.

It sounds like a good amount of the consolidation-related revenue you expect in the second half will be signed in the first half. I'm curious in terms of confidence level with signing that business. Are you dealing largely with existing clients, and to what extent are these clients that have consolidated business with you in the past?

So you are correct. The vast majority are existing clients that we're having the conversations with. A big chunk we have consolidated volume with in the past through COVID, as well as from other areas where they might have seen different changes in their growth pattern, and we were the predominant provider in those areas. And so we have a high level of confidence with what we think we can sign from a consolidation perspective in the first couple of quarters.

And then, Andre, if I look at the midpoint of your adjusted operating margin expectation for fiscal 23, It looks like a slight increase. I'm just wondering if you could review the puts and takes to that.

Sure, Vince. Happy to. Yeah, you're right. At the midpoint, it's 14.3%, which is up 30 basis points versus what we delivered in the past year. You know, we think the drivers of our margin growth remain what they have been, which is, you know, certainly more complex, higher value offerings. more technology in our offerings, using technology, including some of the platforms that Chris alluded to in his prepared remarks, to make ourselves more efficient and leverage on our G&A as we grow. I think the somewhat more modest margin progression this year versus last year and a couple of prior years would largely reflect that the growth rate is down a bit. And so at less leverage on G&A, more investment, frankly, up front in some of the program ramps, including those large programs that we talked about on the third quarter earnings call. And let's see, you know, I think we've talked about the pricing environment and our ability to pass through cost increases being a major contributor to our progress in the margin in 2022. I think we'll keep pace with cost increases and pricing, but probably not be playing the game of frankly catch up that we were playing in parts of 2022, catching up from some wage actions that frankly started in mid 2021 for us. So those are kind of the puts and takes as I think about the margin progression. We're very, very proud of the margin progress that we've made really since If you go back to when concentric acquired convergence moving from where it was at roughly 10% non-GAAP OI to being at 14% this most recent year, we still think all those factors I talked about before give us the confidence that we can drive to 14.3% at the midpoint of our guide this year and keep going.

Thanks for answering my questions. I'll go in the queue.

Great. Thank you, Vince.

One moment for our next question.

Our next question comes from the line of , the Bank of America. Your line is now open.

Hi. Thank you for taking my questions. Chris, I mean, my first question relates to your revenue guidance for the full year as well as for the first quarter. looks like you know fiscal 1q revenues will be down seasonally and you're guiding for low single-digit organic growth in constant currency the full year you're guiding mid single digits so that implies you know healthy growth in the back half I know you've said that you know you're getting some consolidation volumes consolidated from other providers and and you have these two large deals but You know, if I look at your business, about 50% of your business is tied to end markets like tech, consumer electronics, retail, travel, and e-commerce, which are exposed to consumer spending and macro, you know, slowdown. So what happens if there's a recession? What have you factored in, in terms of a recession, either in the first half or second half? And is there a way for you to quantify, like off the mid single digit, you know, organic growth you're expecting for the full year, how much do you think is coming from the large deals versus the consolidated volumes you're getting? I'm just trying to understand the risk associated with, you know, a macro slowdown in the second half and what you're factoring in for that. Thank you.

Thanks, Rupaloo. So, let me kind of break apart the question from this perspective. When we look at our 2023 plan and what we're seeing as our growth drivers, you know, clearly our clients have kind of recalibrated their volume based on what we experienced during the fourth quarter and what they experienced during the fourth quarter. And how we've looked at that is basically continued in those specific areas that you mentioned about consumer electronics and retail. through sort of 2023, regardless of additional changes in the macroeconomic, because we muted it down fairly significantly. We then layered on where we have discussions already going ahead and where we think will be successful from a consolidation perspective and how those get layered in. They're not instantaneous over, you know, a 30-day period. They kind of get phased in over a quarter, quarter and a half, two quarters. Hence, we kind of talk about the first two quarters being choppy. The third thing that we layer on is net new wins. And the net new wins, as we talked about in Q4, we want a significant number of new logos. Those are at muted volumes. Those are at the new volumes that we're seeing that are coming through. And so they continue to progress and will add on to our growth. The next layer is the elements and verticals that we continue to do well in that are not so bound by macroeconomic locations. You saw the healthcare vertical grow, BFSI grow. Some of the work that we're doing in those tends to be more resilient to sort of shaky economic times that we're seeing. The next layer down from that is we have some regions that are somewhat isolated from what we're seeing around the globe and spending a lot of time working with them to see what growth opportunities we have in those. And so those have performed sort of on forecast, if not a little bit better. And so they're laying on. Then we get into the bigger deals that we've already signed that come through and we've seen progress as we expect. One deal is ramping a little slower primarily because the client, it's a big change for them. And so they're kind of taking a little longer to kind of make some coordinated changes in their ecosystem, but we've already started and we'll get back to pace in Q2. And then we're also seeing sort of net new pipeline of opportunities that we're talking about with both our catalyst and CX operations that are clearly tied to sort of what we're seeing in the economy where clients are asking us, prospective clients are asking us to sort of transform what they need to drive costs out of the business. And we look at what our win rates are against those deals and the sort of the push that those clients and prospective clients are making in order to get them in place. They'll feel confidence around what we think we can close over the next quarter or two, which will impact our revenue through the back half of the year. And so we've spent a significant amount of time kind of putting all these layers of building blocks into our plan of what we expect to deliver, not only in the first two quarters, but also in the back half of the year as we look at the business and the regions that we operate in. We also mentioned in the prepared remarks we have and are making additional footprint investments. We're seeing some good traction in those which expose us to some higher growth areas where we think we're under invested in. We primarily talked about LATAM and Europe in the past, as well as offshore delivery centers for our catalyst business that allow us to be at a higher margin profile for that type of work and have more scale for that type of work. So we think we're building the right building blocks, Rupalu. We think we're being conservative on what we see As we mentioned, we're not factoring in any large seasonal business within 2023. We're really just keeping it baseline business for that. So if anything bounces back at the back half of the year, that's fantastic, but we're not counting on it. Hopefully that provides some color around what we're thinking about.

Okay, thank you for all the details there. I appreciate that. For my follow-up, if I can ask about the growth rate for the new economy clients. you know, three quarters ago, they were growing at 47%. I think you mentioned 13%. What are you seeing with respect to those type of clients? I mean, are they, you know, are they more hesitant to spend? When do you think, you know, what do you think is a steady state growth rate for the new economy clients? And I was wondering if you can, if you've mentioned, and maybe I missed this, what was the revenue total contribution from from the new economy clients in fiscal 22 and what, in general, what growth rate should we expect from those clients going forward?

Yeah, so I'll let Andre answer the total dollar figure for 2022. But just prior to that, you know, Rupali, the new economy companies, as we've talked about a few times, kind of replicate a lot of our verticals that we deal with. So we do have new economy companies within e-commerce. They tend to be feeling the same pain as traditional e-commerce players and some retailers where there's been less sort of disposable consumption within those areas. We've also seen, as we've mentioned in sort of Q3 and Q4, where the new economy companies where they were focused at really growth and customer acquisition at any cost at sort of the beginning of 2022 to where they are rightfully so being prudent about their investments and the services we're offering them tend to be more traditional services around sort of cost optimization, process consulting, and then really focused around where they think that they can drive higher returns for their shareholders versus just growth at any cost. We do expect that the new economy companies will grow at an elevated rate versus enterprise clients. It's just the nature of the beast that they're building their market where enterprise clients are optimizing their market. But, you know, we're still expecting and we still continue to win net new deals in the new economy space that we think that will have the higher elevated growth rate. And I'll pass it to Andre on terms of the total contribution in 2020.

So, Rupali, the total contribution in fiscal 22 from new economy clients, about $1.45 billion overall. So right in that 22% to 23% of revenue that it's been tracking at, frankly, each quarter here this year.

Okay. Thanks for that, Andre. I appreciate it. If I can ask you one more question on capital allocation priorities. I think you mentioned dividend and debt reduction followed by modest share buybacks. Can you remind us what the target is for leverage and your debt? What leverage ratio are you comfortable with? What is the target? And then I'd like to hear your thoughts on M&A. Is the long-term target still to get to the $10 billion in revenues by fiscal 25? And I think that entailed $1.5 billion of M&A. In this environment in fiscal 23, your thoughts on inorganic growth?

Yeah, so I'll start with kind of the middle of your question. So the $10 billion is still absolutely our target for 2025 for this business, and we're confident we can get there. You're right, it requires some amount of M&A in that $1.5 billion range, and we still think that that is a good use of capital in this business. We think that the industry will continue to consolidate clients want to have deeper relationships with less partners, and therefore, you know, having that scale is important in terms of the capabilities, et cetera. Obviously, you know, what we'll look for there, first of all, first and foremost, the deals need to be accretive to our EPS. They have to hit our targets from a return on capital perspective. And then, you know, we're not just looking for scale for scale's sake. We're looking for domain expertise for groups of clients that we think that we can grow more quickly, and for technology capabilities. Those things really all remain unchanged. From a leverage perspective, we've said for M&A, we are comfortable taking our leverage up as high as three and a half times, maybe even higher, and feel that with the strong free cash flow generation of this business, as well as the acquiree, we would be in a position to delever very, very quickly and get to, you know, get very quickly under three times and keep pushing down towards, you know, the low twos from a net leverage perspective. Right now, given the current interest rate environment, as we think about the strong free cash flow we're going to generate in 2023, you know, obviously we're still looking for a creative M&A. That's a priority. Supporting our dividend is certainly a priority. And then from a share buyback perspective, you know, I think you'll see us be modestly active there. We do want to offset dilution from share issuances, so that will be a part of the program. And then, you know, some amount of opportunistic share repurchase perhaps after that. But right now in the current interest rate environment, you know, de-levering, creating more fresh powder for a creative M&A, would be a higher priority for us than, you know, what I would call kind of large-scale share repurchase.

Okay. Thank you for all the details. If I can just sneak one more in. Chris, can you talk about the sales cycle? You know, is it lengthening, shortening? Is it, you know, as you would have expected in this environment? And if you can make any comments on attrition rates, both in the catalyst business as well as in the base business. Thank you.

No problem, Rupalu. So just in terms of the sales cycle, what I will tell you is that discussions that clients pre a deal starting to form are taking a little longer, right? So clients are kind of going through this debate internally about do they outsource more? Do they consolidate more? How is that going to look and what's their strategy based on what they're seeing from a volume expectation perspective? the decision is made to say, yes, we're going to do this, then frankly the sales cycle has not changed. It's actually maintained sort of the speed that it's coming through. On complex deals, which we're doing more of in obviously the catalyst business, it tends to be a longer sales cycle. We haven't seen that necessarily extend any further. It's just a longer sales cycle because of more kind of moving parts and more integration into their IT systems and infrastructure that we have to deal with. From an attrition perspective, our catalyst attrition, frankly, is down fairly significantly. You've seen a number of companies kind of looking at resizing their technical talent opportunities, so that has really somewhat cooled the market and driven a lot of stability within it. In the general attrition perspective in our operations business, It's still lower than pre-COVID and starting to trend down a little bit more. It had trended up a little bit through the course of 2022 as the job markets had kind of heated up in a lot of different regions that we operate in. We're now seeing it sort of trending down a little bit, but still not back to where it was pre-COVID levels. And so we're comfortable with what we're seeing, hence our comment and prepared remarks about sort of a more stable labor environment and more predictable labor environment.

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

One moment for our next question.

Our next question comes from the line of Joseph Buffy of Canaccord Genuity. The line is now open.

Hello, gentlemen. Good afternoon. Thanks for taking my questions here. I just thought perhaps we'd focus a little on the catalyst line of business a bit more. I know you signed a large, very large deal there last quarter. We're getting an update on progress there. I know you've cited it as a growth driver, but just a little more incremental color on progress on that and then a quick follow-up.

Yeah, for sure. Thanks very much for the question. So we have started the project. We started it a little sort of mid-December-ish, early December-ish when we kicked off and started putting, I'll call it, feet on the ground. That is one of the projects that's ramping slower than expected, primarily because of the change. There's a number of things that the client is coordinating within their ecosystem with vendors that are leaving, us that are taking over some of that work, and projects that they've got on play that are being – kind of reorganized in terms of what we're taking on and doing. Based on what we're seeing, we're expecting that we'll be back on pace with our expectations in Q2. But we're pretty happy with it going so far, clients happy with what they're seeing, and looking forward to kind of getting into more of the meatier stuff. As we mentioned originally when we announced the deal, it will start to contribute more meaningful to our revenue in Q3, Q4, and that's still... still, frankly, the plan and what we're seeing.

Got it. Thanks for that. And then maybe if there's any differences in the current demand environment for the kind of more complex IT solutions work right now versus some of the CX work, be interested to compare and contrast demand drivers given the macro right now. Thanks a lot.

Yeah, for sure. Good question. So we are seeing a change in some of the demand from what I'll call it discretionary IT projects. Think of it as sort of, you know, rewrites of workflow or other things that might be more customer experience facing versus cost takeout automation. We are seeing a higher demand request for, you know, more consulting and journey mapping around how we can take costs out. And then if it drives a different customer experience, then delivery on that. And so that has changed a little bit in terms of what we're seeing within our Catalyst business. From the larger infrastructure projects that we are dealing with, frankly, they're tied to fairly significant ROIs for the client. And so there's been really no impact in those. They've continued to come along. We continue to bid and win new projects within that space. And so that seems relatively stable. Anything pure, I'll call them vanity projects for the lack of a better term, those generally dropped out of the funnel in sort of the Q3 timeframe.

Great. Thanks very much, guys. Much appreciated.

No problem.

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