Concentrix Corporation

Good day and thank you for standing by. Welcome to Concentrix's fiscal second quarter 2023 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'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Stein, Vice President of Investor Relations.

Thank you, and good evening. Welcome to the Concentrix second quarter fiscal 2023 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'll 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 evening, everyone, and welcome to our second quarter earnings call for fiscal 2023. During the quarter, we received many investor questions about the impacts of the ongoing macroeconomic environment. the status of our transformative combination with WebHelp, and the emergence of generative AI technology. I will provide a brief update on each of those topics today. I would also encourage those listening to download our updated ESG report from our website that we just released. Now, let's begin with our Q2 results. While we were disappointed in not being within our guidance, I am pleased that as a team, we did grow and drive margin expansion and strong cash flow in the quarter, despite the fact that certain clients saw volumes that were well below their expectations entering the quarter. Reported revenue in the second quarter was $1.6 billion, up 3%. On an organic constant currency basis, revenue grew by 1.6%. our second quarter non-GAAP operating income improved to $221 million, growing 3.6%. Adjusted EBITDA increased 3.5% to $259 million compared with last year, and both our non-GAAP OI and adjusted EBITDA margins were up 10 basis points over last year. This reflects our ability to manage our cost structure dynamically when volumes from clients are lower than their expectations. Non-GAAP EPS was $2.69 per share compared with $2.93 per share last year, largely reflecting the expected impact of higher interest rates. While we continued to see volume softness, we also experienced relative strength across certain strategic verticals, particularly with clients in the healthcare, travel, insurance, and certain parts of our technology portfolio. The volume softness that we have seen in recent quarters in the retail, e-commerce, consumer electronics and telecom industries continued and in some cases intensified with certain clients despite us maintaining or growing share within those clients. From a catalyst perspective, our large project that we have talked about on past calls will have no further ramp this year reflecting conversations within the last few weeks driven by budget pressures at the client. we are adjusting our outlook and cost structure accordingly. Regarding client-driven provider consolidation opportunities within our existing base, we continue to see clients wanting to work with fewer partners who can support end-to-end processes. This trend favors partners like Concentrix who have the breadth of capabilities to serve clients in the strategic partner role. Currently, clients are faced with a dilemma regarding whether to cut costs by consolidating partners or holding excess capacity. These decisions are occurring more slowly than we originally expected. Additionally, while we are gaining share by winning provider consolidation opportunities, the volumes we are consolidating with clients are starting at a reduced level. We see these factors as temporary and if the softness persists, we expect clients will speed up their plans for consolidation, which we believe benefit us. From a sales perspective, we signed business with two dozen new logos in the quarter. The pipeline of new business has remained solid, although clients are focused on optimizing their cost structure rather than expansion, and we are seeing smaller deals and slower approval processes once we have been chosen as the partner. From a Catalyst perspective, we are very happy with new wins coming in that combine our CX operations and digital IT service offerings. Again, these wins tend to be smaller as large transformational projects are taking much longer to transact. We also view this as temporary and believe digital transformation remains essential to clients in the long term. A few examples of our Q2 wins that demonstrate our broad set of capabilities include for a very large global generative AI provider, we were awarded and are now providing generative AI moderation services. We were selected due to our experience in critical trust and safety content support, as well as our footprint in innovative ways we came up with to train the models. For a large consumer electronics brand in Asia Pacific, we proposed a transformational omni-channel CX delivery model to drive improved customer experience while lowering the cost to serve in high-cost markets. We designed and built the solution with AI-enabled translation services which are providing an accelerated, more profitable path to growth for our clients. We were selected because of our domain knowledge, the ability to integrate complex technology, and our understanding of the local markets they were looking to grow in. For a major airline operating in EMEA, we were selected to become the primary provider to drive improved experiences and drive better support across all key languages. incorporating new digital and AI-powered capabilities and replacing other providers unable to provide a full solution. We were selected because of our multilingual footprint, ability to integrate technology, and the ability to lower the number of partners the airline had to deal with to get a full solution. For a large consumer communications brand in EMEA, we want a significant new agreement to deliver reimagined service models for improved customer acquisition and retention using sophisticated analytics and AI-enabled technologies. We were selected because of our understanding of the market, our robust sales capabilities, and our ability to automate manual work they were currently challenged with. In Catalyst, we identified opportunities to improve a large transportation company's software implementation speed and support costs. Our proactive approach helped us secure the consulting engagement as the exclusive provider. The client embraced our recommendations, leading to a shift in their product strategy and further engagement around their product development. We were selected because of demonstrated expertise in software development, implementation practices, and managed services of software environments while having a focus on the customer experience of the user during transition of software. In all of these examples, the clients' needs aligned to our sell-as-one approach while demonstrating the effectiveness of our design-build-run go-to-market strategy. We have remained disciplined in our approach to pricing the current market and on selling profitable, sustainable programs for the future that build on our unique capabilities. From an operating perspective, we continue to achieve strong customer satisfaction and innovation scores, which we believe will again help us to be a continued partner of choice. Moving to our proposed transformative combination with WebHelp, we recently filed our proxy statement that provides more insight into the transaction and have made great progress on integration planning since announcing the combination. Their share purchase agreement has now been signed. We have started to receive approvals from various regulatory agencies and have made strong progress towards completing the financing. As we discussed on our last call, WebHelp will diversify our revenue, client base, vertical focus, and global footprint. WebHelp will also add capabilities and deep domain expertise to our European, African, and Latin American market presence. The potential combination has been very well received by clients of both companies, and we believe there is a strong potential for growth in selling WebHelp's capabilities into our client base, as well as selling our capabilities to the more than 1,000 additional WebHelp clients, as we have successfully done in past combinations. WebHelp also brings recognized and exceptionally technology-enabled solutions, including the anti-money laundering, know your customer, and payment processing services, and telehealth, which we believe we can expand into many Concentrix clients and regions. The combination is expected to be accretive from the outset. We project mid to high single digit earnings per share accretion in the first year, followed by double digit accretion in the second year. Additionally, we feel very confident about achieving cost synergies of $120 million by the third year, through various measures such as IT systems harmonization and real estate footprint rationalization as two examples. WebHelp's performance in the first quarter surpassed expectations with low double-digit constant currency like-for-like growth. This was above WebHelp's planned growth for the quarter. We continue to expect that WebHelp will exceed 8% like-for-like revenue growth for the full year 2023 and will deliver approximately $500 million in 2023 adjusted EBITDA, consistent with our expectations when we announced the transaction back in March. Three months since signing the combination, we believe the rationale for the WebHelp transaction has only been strengthened, and we look forward to realizing the benefits of the transaction for our clients, staff, and shareholders. We continue to expect the combination to be completed by the end of this year. I would like to spend a few minutes discussing our perspective on generative AI. As background, we have been using various forms of AI for over two years. As a technology-enabled industry leader, we already deploy AI tools across 60% of our business and are on track to have this close to 80% by year end. Many of these tools help drive productivity and proficiency of our advisors, while some have completely automated work with machine learning chatbots and natural language processing IVRs. We have talked about a number of these use cases on prior earnings calls. Our depth of experience comes from trialing a myriad of AI tools in our business over the years and identifying tools that are scalable and secure for deployment. This gives us a rich understanding of the opportunities and challenges of sustainable deploying the technology in our client's environment and workflow. Our depth of experience with established forms of AI as well as our current client discussions have helped inform our point of view regarding generative AI in the current market. We see generative AI as a continued evolution and enhancing solutions we can deliver to our clients. Our conversations about generative AI are centered around security, data management, and how to fit the technology into the advisor and customer workflows we help our clients design, build, and run. While harnessing this exciting advancement has the potential to drive substantial value for us and our clients, we believe there is some resistance to large-scale deployment due to concerns about the ownership of data, the security of proprietary information, and customer exposure to AI hallucinations or brand damaging engagement. While we will help our clients navigate these concerns, we continue to believe that the near-term focus for using this new technology will be on driving the productivity and proficiency of advisors before opportunities to fully automate work start to gain traction. We have many use cases in place that are proving out our thesis that generative AI will create new revenue opportunities and greater margin expansion opportunities for us while saving our clients' costs. Our processes and philosophies have proven successful with past technological advancements, and we believe generative AI will be the same. In addition to the multiple examples of new business wins in the quarter that we called out earlier, most of which use machine learning AI in the solution, Our generative AI proof of concepts also span multiple industries and clients. A few examples of our use cases that are currently being done. We are working on leveraging proprietary large language models to ensure accuracy and compliance in regulated industries. We have seen benefits of being able to review materials far faster than we can with current tools for compliance. We have a pilot currently where we are using generative AI to condense training materials and provide gen AI videos of courseware at a fraction of the cost that we can do currently. This already is being tested in production and we expect to ramp this up to thousands of staff over the coming months. We're working with a large airline taking notes from interactions with customers and condensing it down for training and coaching that provides insights into how an advisor is working. Our proof of concept is currently saving about 45 minutes to 60 minutes a day for our coaches on preparing materials for their sessions with the advisors. We expect it to be rolled out across the entire program and other accounts starting in our fourth quarter. Lastly, using GenAI, we have been able to greatly speed up a client's ability to scan through the knowledge bases and provide summary information back to an advisor to help them with their conversation with customers. This use case went into production last week on a program, and we're seeing the desired results of faster time to serve with greater ability to solve the customer problems faster. In all of these, we're working with our clients to evaluate the cost structure of generative AI and determine if machine learning or other types of automation are more cost effective. Gen AI does have a cost factor to it, and we expect that it will cause some clients to continue to look at other methods of automation or offshoring first as generative AI costs inevitably will come down. Our investment in developing our catalyst business has significantly expanded our capabilities in being able to design, build, and run generative AI solutions at scale with thousands of staff able to deliver strategy, design, and technically integrate the solutions when the need occurs. We view this as a unique capability that differentiates us significantly from our traditional CX peers. We believe that the role of concentrics will remain crucial even as clients have the option to purchase large language models directly. Generative AI is not a plug and play technology in the enterprise environment and services are required to ensure a consistent and positive outcome when a company's brand reputation is on the line. The implementation and last mile tasks such as model tuning, feedback gathering, training, exception handling are requiring human involvement and deep domain expertise. As a result, we believe that Concentrix will play an indispensable role in assisting clients with these critical elements, allowing us to add higher value services that don't exist today so our clients can fully utilize the benefits of this technology. We have the experience, the expertise, and the vision to leverage this technology to drive significant value for our clients and our business. Now, with all automation, we expect some revenue impact over time, but we believe it will be offset by new work and increased margin potential. We expect a modest acceleration of the volume of transactions we already automate each year, and the economics for us and our clients will depend on where those transactions are currently serviced from. We are committed to delivering outstanding outcomes and maintaining our leadership position in the AI and automation space. In summary, the SPICE... Despite facing macroeconomic challenges that have impacted volumes for some clients, we achieved revenue growth and margin expansion this quarter. We are successfully planning for the combination with WebHelp and investing in harnessing the power of generative AI while continuing to drive strong, positive cash flows. We are focused on aligning with the changing demands of our clients to enhance our long-term partnership for concentric and the market that we serve. Finally, I want to take a moment to express my appreciation to our dedicated award-winning staff. Their hard work, resilience, and unwavering commitment to excellence are the driving force behind our success. Also, I'd like to thank our clients for their trust and our talented board of directors for their support. With that, I'll turn the call over to Andre.