Concentrix Corporation

Good day, everyone, and thank you for standing by. Welcome to the Concentrix Fiscal First Quarter 2024 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 participate, you will need to press star 1-1 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand it over to the Vice President of Investor Relations, Sarah Buda. Please proceed.

Thank you, Operator, and good evening, everyone. Welcome to the Concentrix second quarter fiscal 2024 earnings call. This call is a 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 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 expectations, 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 and our other public filings with the SEC. Also, during the call, we will provide and discuss non-GAAP financial measures, including adjusted free cash flow, non-GAAP operating income, non-GAAP operating margin, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, non-GAAP EPS, and constant currency revenue growth. A reconciliation of these non-GAAP measures is available in the news release and on the company's investor relations website under financials. With me on the call today are Chris Caldwell, our president and CEO, 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 to your questions. With now, I'll turn the call over to our CEO, Chris Caldwell.

Thank you very much, Sarah. Hello, everyone, and thank you for joining us today for our second quarter 2024 earnings call. First, let me start off by thanking our clients and game changers for their contributions for being included in the Fortune 500 list for the first time this year. We started with an idea that companies wanted to deliver a better brand experience for their customers. We believe that by thinking about the customer experience holistically across both back office and front office work, while investing in technology for frictionless engagement, we could create a market opportunity for ourselves. Over 20 years, we have grown that idea to a global player in over 70 countries delivering solutions that continue to push the industry forward. I couldn't be prouder of the team or more thankful for the trust of our clients. Now, turning to the second quarter performance. We increased revenue 47% as reported and grew 4% on a pro forma constant currency basis in the quarter exceeding our prior guidance. We reported non-GAAP operating income of $321 million, an increase of 46% year-on-year and in line with our guidance. We delivered adjusted EBITDA of $380 million, an increase of 47% year-on-year. On a pro forma basis, we grew non-GAAP operating income 4% and adjusted EBITDA 2% year-on-year. We generated more than $200 million in adjusted pre-cash flow this quarter while returning more than $60 million of value to shareholders through dividends and share repurchases. We remain on track to generate $700 million of adjusted pre-cash flow for the full year after integration expenses and on track to complete $120 million of share repurchases for the fiscal year, of which we have done over $60 million through the end of Q2. Our positive momentum continued in the second quarter, giving us confidence to raise our revenue growth guidance for the full year. Our revenue guidance does not anticipate any changes in the macroeconomic environment, but it does reflect ongoing client demand for our solutions and the stability of our clients' volumes. We see the same momentum in Catalyst as its growth continues to be appreciated, which we expect to continue for all of 2024. From a vertical perspective, we are seeing particular strength in retail, travel and e-commerce and banking and financial services that is expected to continue for the rest of 2024. As we mentioned in our first quarter call, we are increasing our investment in our technology while also investing to transition more business from competitors. In the second quarter, we accelerated these investments while still expecting to increase our non-GAAP operating income by 40 basis points for the entire year on a full-forum basis. Specifically, we have increased our development spend to approximately 1% of revenue through the second quarter, an increase of approximately 50 basis points from the start of Q1. This increased investment relates to our development of technology platforms for both client and internal use, as well as an increasing number of pilots that we have underway with clients using generative AI. We see this investment remaining at this level for a few quarters prior to falling more in line with historically what we have spent, while revenue from these investments starts to become more meaningful. We also expect to incur approximately $20 million to $25 million of new term incremental expense as we take on some large, multi-year programs where we are taking share from competitors as clients consolidate capacity with us. These investments, again, are temporary, and revenue follows these subsequent quarters. We see both of these as near-term and positive investments that will set us up for long-term growth and value creation. Now, let's talk about some of our recent wins and the trends we're seeing in the business. As a reminder, our growth strategy is to drive incremental value to clients through a broad set of technologies and services at global scale. Our strategy is working and we're starting to see this reflected in our growth rate and our pipeline building across both existing and new clients. Some examples of wins in the quarter include a major global retail e-commerce line where we combine the power of NAI's contact and translation tools with our CX expertise in global footprint to design and implement a new customer solution experience for them across their media operations. This allowed our clients to move volume from competitors to us, resulting in a 20% increase in our revenue and a mid-single digit increase in our margin for this specific program, while reducing the cost for the client by double digits. Our use of GenAI expertise was a win-win for us and our clients. We also won a new large global media client this quarter. We will support the launch of one of their new high-profile channels in EMEA and consolidate their customer experience operations in Japan and Korea. We will also design and build a generative AI knowledge management solution for their enterprise. They wanted a partner that could provide a complete solution delivered globally and consistently and securely, which we are able to do. Other wins in the quarter include a global travel client that has a web health relationship in Europe. This quarter, we started to expand our revenues as a combined organization by leveraging our AI footprint and our AI-based training tools to improve effectiveness and efficiency for our game changers. This resulted in coming from competitors to us, as well as a pretty potential new revenue streams as they contemplate rolling out our AI solution across their enterprise. Finally, we sold Catalyst services into a former Web Health client in Europe to provide specialized digital engineering resources to build, enhance, and maintain the client's digital infrastructure and CCaaS platform to support their primary channel for new business. This strengthens our existing relationship with the client. These wins underscore the breadth and complexity of solutions that we are delivering for our clients. They also reflect how our business continues to change. At our investor day two years ago, we talked about 13% of our business being commoditized, low complexity transactions. Last year, we updated investors that we were down to 10%, and now we have reduced that to 7%, meaning 98% of our transactions are meeting to high complexity now in our business. These wins also demonstrate two important factors in our ability to gain market and wallet share. Clients are seeking a broader set of integrated solutions from fewer partners and are looking to us to boost our mobile scale, technology, and integrated consulting implementation and support offerings. And secondly, automation and generative AI is continuing to be an area of competitive advantage for us. As we have said before, we believe generative AI presents a tremendous upside opportunity for concentric and our clients. We have an increasing number of pilots and solutions going into production with clients now. While the level of generative adoption readiness varies greatly by protocol and client, there are a few common themes with these pilots and productions. First, the vast majority of pilots in the process are looking at using AI to augment a human advisor to make the advisor more effective at representing our client's brand and enhancing the brand experience for the customers. Second, many of these pilots are using generative AI to upgrade or replace existing knowledge platforms, chatbots, automation systems, and IDR systems. This brings me to the upside opportunities we see as we combine our own AI tools with those of our partners to bring new value to our clients. Many of our technology platforms continue to gain traction in the market. We are building on this momentum and will be introducing a variety of new products over the coming quarters. This quarter, we filed a patent for Giles, which stands for Generative Intelligence for Limitless Engineers. A platform we developed to automate coding and testing using GenAI that is helping us to build new platforms faster. From our internal usage, we are seeing up to a 40% productivity boost to experienced coders on transactional tasks.

We believe our investments in both generative AI pilots and technology products will help us expand the share of wallet and share of market long-term at superior margins.

Finally, let me touch on the web health integration. As you can see from these wins we've mentioned, we're starting to see revenue synergies sooner than we expected. This is a testament to the successful integration of our go-to-market and delivery organizations, which we initiated on day one and are largely behind us. the integration is on track as is a realization of planned cost synergies in summary our growth strategy is working we are differentiating concentric from the market and delivering incremental value to clients to a broad set of technologies and services at global scale and our recent wins offer evidence that ai is an upside opportunity for incentives with that i'd like to thank our game changers and our clients for the relationships over the last quarter fantastic call over to andre andre over to you

Thank you, Chris, and hello, everyone. I'll begin with a look at our financial results and then discuss our outlook for the rest of the year. The second quarter marked another solid quarter for the company. We exceeded our targets for revenue, delivered profits within our guidance range, and drove strong free cash flow. We delivered second quarter revenue of $2.4 billion on a pro forma constant currency basis. As if the web help combination was completed at the beginning of 2023, we grew revenue by 4%. For the first half of the year, our constant currency pro forma growth was 3.4%, so our overall revenue trends remain positive. As you can see from our guidance, we expect this stability to continue in the second half of the year. Looking at our revenue growth by vertical, on a pro forma basis, revenue from retail, travel, and e-commerce clients grew 10% year over year. Revenue from banking, financial services, and insurance clients grew 6%. and our other vertical grew 3%. Our technology and consumer electronics clients grew over 3% on a pro forma basis. While this vertical is still lagging some other sectors due to the macro environment, we were happy to see some positive momentum from consumer electronics clients as we gained share with key clients. We continue to see strength in enterprise tech. Revenue from our telco and media clients decreased 3% on a pro forma basis. primarily due to lower volumes from a few North American communications clients, as discussed in prior quarters. Turning to profitability, our non-GAAP operating income was $321 million in the quarter, an increase of $101 million compared with the second quarter of 2023. Our non-GAAP operating margin was 13.5%, down about 20 basis points from last year due to the inclusion of WebHelp, which historically operated at slightly lower non-GAAP OI margin. Adjusted EBITDA was $380 million, up $121 million year-over-year, and our adjusted EBITDA margin was 15.9%, roughly flat year-on-year. On a pro forma basis, our second quarter profitability metrics continued their solid improvement. Non-GAAP operating income increased $12 million with a 30 basis point margin improvement compared with last year. Adjusted EBITDA was up $8 million, and our adjusted EBITDA margin was flat compared with the last year. Non-GAAP net income was $183 million in the quarter, an increase of approximately $46 million compared to the second quarter of last year. Non-GAAP EPS was $2.69 per share, an increase of $0.06 per share year on year. GAAP net income was $67 million for the quarter. GAAP results for the second quarter of 2024 included $116 million in amortization of intangibles, $31 million in expenses related to the webhub combination and integration, $22 million in share-based compensation expense, $2.5 million in step-up depreciation, a $7 million reduction in acquisition contingent consideration, $14 million in net foreign currency gains, and $4 million in imputed interest related to the seller's note issued in connection with the combination. Our adjusted free cash flow for the quarter was strong at $202 million and we remain on track for our full year adjusted free cash flow outlook of $700 million net of integration expenses. As we stated in our last call, the adjusted free cash flow metric is calculated as free cash flow excluding the impact of the factoring program we assumed and have continued to operate since the WebHelp combination. During the second quarter, the amount of factored accounts receivable decreased by $24 million, with the outstanding factored balance standing at about $162 million at the end of the quarter. In the second quarter, we made payments related to earnouts of past WebHelp acquisitions of approximately $28 million, of which approximately $5 million resulted in a reduction of adjusted free cash flow. Turning to the balance sheet, at the end of the second quarter, cash and cash equivalents were $207 million, and total debt was $4.9 billion. Net debt was $4.7 billion at the end of the second quarter, and we repaid $150 million of the principal amount of our term loan in the quarter. We reduced our net debt to 2.97 times pro forma adjusted EBITDA at quarter end. a sequential decrease from 3.04 times in the prior quarter. We expect to continue to reduce our net debt and net leverage to the end of 2024. We remain committed to our plan of reducing net leverage to close to two times adjusted EBITDA within two years of the close of the WebHelp combination while supporting our dividend and buying back stock. During the second quarter, we repurchased approximately 660,000 shares of our stock for approximately $40 million and an average price of approximately $61 per share. And we paid $20 million through our quarterly dividend. As a reminder, on our first quarter earnings call in March, we committed to $100 million in share repurchases over the remaining three quarters of 2024. So we have about $60 million more to go on that commitment. At quarter end, the remaining authorization on our share repurchase plan was approximately $227 million. Our liquidity remains strong at approximately $1.5 billion, including our over $1 billion line of credit, which is undrawn. We remain committed to investment-grade principles, and we are steadfast in our capital allocation priorities. We expect to continue to drive organic growth, realize integration synergies related to the web help combination, and repay debt, while continuing a disciplined program of returning capital to our shareholders through our dividend and discipline share repurchases. Now, I'll turn my attention to the business outlook for the third quarter and full year 2024. For the third quarter, we expect revenue of $2.35 billion to $2.4 billion based on current exchange rates. This reflects approximately 1.5% to 3.5% pro forma constant currency growth. net of an approximately 205 basis point exchange rate headwind. Proforma revenue for the third quarter of 2023 would have been $2.367 billion, assuming the web help combination occurred at the beginning of fiscal 2023. We expect non-GAAP operating income to be in the range of $330 million to $350 million in the third quarter. At the midpoint of our guidance, this equates to a non-GAAP operating income margin of approximately 14.3%. Importantly, this is an increase of 20 basis points over the prior year quarter on both a reported and pro forma basis. On a pro forma basis, non-GAAP operating income was $334 million in the third quarter of 2023. We expect non-GAAP EPS of $2 and 76 cents per share to $3.04 per share for the third quarter. This assumes interest expense of $75 to $76 million, excluding $4 million of imputed interest on the seller's note. It assumes a non-GAAP effective tax rate in a range of 25 to 26%.

We anticipate a weighted average diluted share for the third quarter.

We estimate that about 4% of net income will be attributable to participating securities and about 96% of total net income will be attributable to common shares for the third quarter. Turning now to the full year 2024 guidance, based on our strong start and continued confidence in our strategy and execution, we are increasing our full year 2024 revenue guidance while reiterating our free cash flow guidance. Specifically, our guidance for the full year is as follows. We expect 2024 revenue to be in a range of $9.58 billion to $9.675 billion, reflecting approximately 2.5% to 3.5% pro forma constant currency growth. This is net of an approximately 150 basis point exchange rate headwind. This is an increase to our prior guidance of 1% to 3% year-on-year growth on a pro forma constant currency basis. We continue to expect first year net synergies of $75 million. The current run rate is approximately $80 million on an annualized basis. We do anticipate that some of these synergy savings will be offset by continued ramp up costs and accelerated investment in technology. As a result of the investments Chris referred to earlier, we are reducing our non-GAAP operating income expectation for the year. We now anticipate non-GAAP operating income in the range of $1.35 to $1.40 billion for the year, which represents a 14.3% margin at the midpoint. Importantly, this is an increase of 10 basis points over the prior year and 40 basis points over the prior year on a pro forma basis. We expect non-GAAP EPS of $11.40 per share to $12.07 per share. This assumes full-year interest expense of $300 to $304 million, excluding $16 million of imputed interest on the seller's note. We expect an effective tax rate of approximately 25% to 25.5%. and a weighted average diluted share count of approximately 65.1 million shares for the full year. In terms of cash flow, we are reiterating our outlook for $700 million in free cash flow in 2024, even after funding integration costs. This assumes no change in the amount of factored accounts receivable from the beginning of the year. Our strong free cash flow will position us to further reduce our net leverage to approximately 2.6 times adjusted EBITDA by year end while repurchasing approximately $120 million of shares as we have committed. Our business outlook and cash flow expectations do not include any future acquisitions or impacts from future foreign currency fluctuations. In conclusion, we are pleased with our performance in the second quarter and our outlook for the year. We are exceeding our revenue growth expectations with solid execution across key verticals. We're optimistic about our second half and are seeing solid demand for our unique technology and services offerings. We're increasing our competitive position with a broader set of technology and service offerings. With this backdrop, we are increasing our revenue guidance for the year, and we are reiterating our expectations for free cash flow. We will continue to return value to shareholders with our ongoing share repurchase program and dividend while reducing leverage. With that, Carmen, please open the line for questions.

Thank you so much. And before opening the lines, as a reminder, please press star then 11 to get in the queue and wait for your name to be announced. To remove yourself, press star 11 again.

One moment for our first question, please.

And it comes from the line of Joseph Vaffey with Canaccord Genuity. Please proceed.

Hey guys, good afternoon. Great to see the fine tune up on the guide and welcome Sarah to the team. I thought maybe we would just start with kind of parsing out, you know, kind of, it looks like you're taking the bull by the horns a little bit on the macro or on the AI front that is. And, you know, it's turning a little bit more into an opportunity than, you know, maybe people have thought previously. And then, you know, we could compare and contrast that to what you're seeing on the macro and how both of those kind of have kind of funneled into the new guidance for the year. And then I'll have a quick follow-up.

It's Chris. So, first of all, you're absolutely right. We are using your term, taking bull by the horns, from a generative AI perspective. We're seeing very good traction in pilots and getting some things into production into our client base. And we're also seeing the ability where we think that there's misses in the market from a technology solutions perspective on platforms, that we have a lot of this base built out for ourselves already, but now we need to work on getting it to commercial standards and from a multi-tenant perspective and ease of use perspective. in large-scale rollouts. And so we don't want to miss that opportunity and are taking advantage and leaning into it. I think secondly, we also are seeing good traction in taking share as well as winning net new clients with even the AI products that we have right now, as we talked about in a couple of our wins. So we see that as being very, very positive, and we built that into sort of our guide of seeing our revenue increase, while also seeing some costs associated with doing these pilots and building out the infrastructure that we want that we think will put us in a very, very nice position for further growth. In terms of the macro, we're not seeing really any change. We're not seeing it improving. We're not seeing it declining. We're seeing, and that's sort of a global comment, we're seeing things fairly stable and steady. And clearly any kind of positive changes coming from that, we expect to benefit from it based on the share that we have within our client base.

Great. That's great color. And then thanks for that, Chris. And then maybe on, you know, one for Andre, I know that, you know, as we exit this year, some of the web health, you know, merger related costs are going to abate and then more cost synergies are going to kick in combined with continued debt pay down, maybe offset a little bit more now at this point by investment in the business. And I know you're not providing guidance for next year, but, you know, it would be great to get an updated framework on, you know, I think you've reiterated your $700 million in free cash flow guidance this year. But to kind of provide a little bit of framework for next year would also be helpful. Thanks a lot.

Happy to do that, Joe, and good to talk to you. Yeah, so there certainly are reasons for us to be optimistic that the $700 million in pre-cash flow that we generate this year can go up in 2025. I want to stop short of guiding for 2025. But the two major drivers there will be synergies. We expect to, in year one, post-close of the combination, recognize $75 million in net synergies. We're already above that run rate. as we look at the synergies that we are realizing right now in the business. We expect that will go up to at least $105 million in net synergies in the second year post-close of the combination. And then you're right, the integration expenses will drop pretty meaningfully from 2024 to 2025. I would see a drop in the range, could approach $50 million or more, frankly, of cash integration expenses dropping off. So both of those things would give us some confidence that we could see cash flow go up. Obviously we're also going to be paying down debt. So some opportunity with that and perhaps if we get there some interest rate reductions to see interest costs also come down from a cash basis and be a bit of a help to us in 2025.

Great. Thanks a lot, guys. Nice to see the guide up.

Thanks, Cheryl.

Thank you. One moment for our next question.

Operator, do we have a next question?

Okay, I think the question was going to be from Rupalu.

Hi, thanks for taking my questions and congrats on inclusion in the Fortune 500 list. Andre, can you help me understand all of the moving pieces to the guidance? Looks like fiscal 2Q revenues beat the midpoint of guidance by $32 million and EPS beat by $0.07. But you're guiding fiscal 3Q down sequentially and lower than street estimates. And if I look at fiscal year revenue guidance increase, that looks like it's about 23 million at the midpoint and then operating margin is down 50 bits to 14.3% and EPS is 36 cents lower. So given all of these different data points, I mean, my questions to you would be on the revenue side, was there any pull-in of revenue from 2Q to 3Q? Why would there be a sequential decline in 3Q? And does that imply a somewhat steeper ramp between 3Q and 4Q to get to the full year?

No. So, Rupal, as we've kind of commented about our revenue guide throughout this year, we want to be prudent in how we guide revenue. And so we think that we have done that with what we've provided here. So having grown at 4% here in Q2, you're right, we are guiding to growth of 1.5% to 3.5% over the balance of the year, roughly. Certainly, that's what we're guiding to in Q3. Again, we're just there. We're being prudent. We are not seeing anything in our clients' volumes. We are not seeing anything in our pipeline that suggests that revenue should decline. From a revenue perspective, just being prudent with the guide and and frankly quite confident and focused on coming in, as we did this most recent quarter, at least in the upper half of what we've guided to, which would put you very, very close to a continuation of the growth rate that we saw here in the first half.

And then on operating margins, the 50 basis points lower, 14.3 versus 14.8 for the full year, I think you talked about some investments you're making. Can you elaborate more on what are the investments that you're making and when do you expect to see revenue benefit from those investments?

Yeah, so Kristen and Script alluded to two major areas where we're investing. So we're investing heavily in technology and our platforms, embedding Gen AI into them both for internal use, for client pilots, and for the development of some commercial products. We don't think that – and that is certainly weighing on our margins, but we think that's a good investment for the long term. As you see in many of the wins that Chris talked about, technology is at the forefront of what's driving our competitive advantage and driving those wins across the finish line for us. And we also don't think that level of heightened investment is a forever thing. We think it is temporary here through the balance of the year and could even begin to taper soon. as we exit the year. The other major area that we're investing in is transitioning new business to us. That can come in many, many different flavors. It can become transitioning work from a competitor where we incur upfront technology costs. It could be upfront training costs. It could be all of those types of things. But we're happy to do that because, again, We do that in advance. The revenue shows up a few quarters out, and the margins on those deals are quite attractive to us. So that's how you think about it. You're right. At the midpoint of our guide, we've come down a bit. It's because of these investments. We think it's the right thing to do to grow the business and drive value for the long term.

Okay, and maybe I'll try and sneak one more in. Sorry if I missed this. Did you talk about the growth rate for the new economy clients and for the Catalyst business in fiscal 2Q? And how are sales cycles trending for different size of deals? Thank you.

Yeah, so Catalyst continues to – we're very, very proud of how Catalyst is doing. It's growing quite nicely, grew sequentially from Q1 to Q2, and is meaningfully accretive to the overall growth rate. for the business in Q2, and we see that continuing over the back half of the year. New economy clients continue to represent about 25% of revenue at Rooploo, and as I commented at your technology conference earlier this month, they are growing faster than the rest of the business, faster than the enterprise clients, although not nearly as fast as they were, call it, two years ago. They've become very focused on ROI, on rightshoring the work, on embedding technology to become more efficient, and all the things, frankly, that the enterprise clients are interested in, too.

Okay. Thank you for all the details.

Sure.

Thanks, Rupal.

Our next question comes from Divya Goyal with Scotiabank.

Good evening, everyone. So I had a question on web health. Andre, I think you mentioned that there are certain earn-out payments that you have to make related to the web health acquisitions that were made prior to you guys acquiring web health. If you could provide some more color on that, and is that going to be an additional benefit Is that an additional impact on your guidance as well for the year on the bottom line?

No. So yes, the payments that we made, and they were about $28 million in Q2, relate to past acquisitions by WebHelp. So these were things that we're committed to prior to us becoming involved with WebHelp and then closing on the transaction in 2023. They do not impact our bottom line, as they effectively have been accrued for some period of time. So no impact there. They do obviously use cash, although most of that payment does not impact our free cash flow. As I alluded to, maybe $5 million impacted free cash flow. We don't expect any further earnouts in 2022. related to those acquisitions. I don't believe there are any in 2025. And then a fairly similar amount of earnouts would be expected in 2026. These were all kind of part and parcel with the financial model that we put together as we looked at the transaction and closed the transaction. They're playing out exactly as we expect them to.

That's perfect. And just another question related to web health. So you did talk about some of the, I think Chris mentioned some of the cross-sell synergies of Catalyst into web health. If either you or Chris could provide a little bit more color into how exactly is that trending and what is the broad attraction that you are seeing or Catalyst into some of these new web health clients that you've recently acquired?

Yeah, for sure, it is, Chris. So, first off, we expected, obviously, revenue synergies, but we didn't necessarily account for them in the first year. They tend to take a while to gain traction and go, and we're kind of well ahead of where we expected to be at this point in time. Both, by the way, taking concentric clients across to sort of the web help footprint and vice versa, as we talked about on the prepared remarks. From a technology perspective, where we're gaining share really across our whole client base, forget about whether it's a webhawk client originally or a consumption client originally, is integrating our technical services. And the vast majority come from our catalyst group. Some of that comes from our existing client success organization already. But ultimately, it's that value proposition of putting everything together that clients are most interested in. that has really helped us accelerate our growth rate and start to build a stronger pipeline that we're seeing right now.

That's helpful. And is it fair to assume that your Catalyst business would be, to your point, consulting related? So would it be a higher margin business? Or what is the big difference between what you're doing with Catalyst versus your standard business?

So either Catalyst... Yeah, good question. So in our catalyst business, we have our consulting business, we have our analytics business, we have our digital engineering business, our CCaaS business, our cloud migration business. And so there's a lot within our catalyst business. And the margin profile, some is, as you can imagine, higher than our core business. Some is actually lower than our core business because we're doing a lot of these pilots and we're doing a lot of the build out of these tools within our catalyst business, which which is not necessarily creative to our overall margin. But what we see long-term, as we talked about when we started investing in that business, is the ability to increase our margins, much like we do in our core business, to be more creative than our core business as we go forward. But that's a longer-term comment.

That's all for me. Thank you so much.

Thank you.

Thank you.

One moment for our next question, please.

All right, and it comes from the line of Vincent Collegio with Barrington Research. Please proceed.

Yeah, Chris, I'd like to sort of think a little bit more about your market share gains. Are they coming at the expense of medium-sized and smaller players as well as some of your larger competitors?

Actually, they're coming from both. We've won business from smaller players who weren't able to deliver on a corporate and didn't necessarily have the investment security that they needed. And we've won some good-sized business. One of the deals that we talked about was from a larger competitor, primarily because we could bring everything together and have the technology solution versus just sort of the operations part of it. And so we see that continuing based on how clients are thinking about their businesses and returning their services right now.

So if we isolate your larger competitors, do you think you have a more complete portfolio today of what folks are looking for? Or am I overgeneralizing?

No, absolutely. We think we have a very, very complete portfolio across both the consulting and both the design, the build, and the run aspects of delivering services and solutions to clients. We're looking for someone who can bring this expertise, and by the way, do it securely, to their enterprise and kind of reimagine what they're delivering from a customer experience perspective. And that's really where we're gaining a share because the conversations are very different than probably what we had two or three years ago.

And with seeing the WebHub revenue synergies a bit earlier than expected, how are you feeling about seeing a meaningful contribution from revenue synergies in 2025?

I don't want to guide for 25, but I think directionally from my comments and from Andre's comments, you can see that we're pretty bullish and confident. And, you know, as we expected doing the transaction, this is what we want. And we're executing along that plan.

Okay. And then as the AI automation evolves here, I know we're still very early days. Are you seeing any change in the competitive landscape in your technology business?

I think in the big transformational deals that we're working on and seeing, we call that Q1, Q2, we have a different set of competitors. They're much larger, much bigger global integration, development capabilities, technology companies. And we think we compete very, very well with that because we have the domain expertise to run what our clients are looking for because we run their businesses as it stands right now. So that's definitely changed from a competitive standpoint. We've also seen smaller VC-backed companies talking about AI who kind of are talking about new bells and whistles. But again, they don't really necessarily understand what the clients are after and what the intimate knowledge of the domain expertise is. And so therefore, you know, we have a very good competitive advantage against them as we're building out the technology that's very suited for the client base because we know it, we know the domain expertise. So we are migrating to different competitors, but we think we're very, very well positioned for sort of this new competitive landscape.

Thank you, Chris. Thank you, Vincent.

Thank you. And with that, ladies and gentlemen, I will conclude the Q&A session and conference for today. Thank you all for participating, and you may now disconnect. you you

Thank you. Thank you. Thank you.

Good day, everyone, and thank you for standing by. Welcome to the Concentrix Fiscal First Quarter 2024 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 participate, you will need to press star 1-1 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand it over to the Vice President of Investor Relations, Sarah Buda. Please proceed.

Thank you, Operator, and good evening, everyone. Welcome to the Concentrix second quarter fiscal 2024 earnings call. This call is a 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 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 expectations, 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 and our other public filings with the SEC. Also, during the call, we will provide and discuss non-GAAP financial measures, including adjusted free cash flow, non-GAAP operating income, non-GAAP operating margin, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, non-GAAP EPS, and constant currency revenue growth. A reconciliation of these non-GAAP measures is available in the news release and on the company's investor relations website under financials. With me on the call today are Chris Caldwell, our president and CEO, 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 to your questions. With now, I'll turn the call over to our CEO, Chris Caldwell.

Thank you very much, Sarah. Hello, everyone, and thank you for joining us today for our second quarter 2024 earnings call. First, let me start off by thanking our clients and game changers for their contributions for being included in the Fortune 500 list for the first time this year. We started with an idea that companies wanted to deliver a better brand experience for their customers. We believe that by thinking about the customer experience holistically across both back office and front office work, while investing in technology for frictionless engagement, we could create a market opportunity for ourselves. Over 20 years, we have grown that idea to a global player in over 70 countries delivering solutions that continue to push the industry forward. I couldn't be prouder of the team or more thankful for the trust of our clients. Now, turning to the second quarter performance. We increased revenue 47% as reported and grew 4% on a pro forma constant currency basis in the quarter exceeding our prior guidance. We reported non-GAAP operating income of $321 million, an increase of 46% year-on-year and in line with our guidance. We delivered adjusted EBITDA of $380 million, an increase of 47% year-on-year. On a pro forma basis, we grew non-GAAP operating income 4% and adjusted EBITDA 2% year-on-year. We generated more than $200 million in adjusted pre-cash flow this quarter while returning more than $60 million of value to shareholders through dividends and share repurchases. We remain on track to generate $700 million of adjusted pre-cash flow for the full year after integration expenses and on track to complete $120 million of share repurchases for the fiscal year, of which we have done over $60 million through the end of Q2. Our positive momentum continued in the second quarter, giving us confidence to raise our revenue growth guidance for the full year. Our revenue guidance does not anticipate any changes in the macroeconomic environment, but it does reflect ongoing client demand for our solutions and the stability of our client's volumes. We see the same momentum in Catalyst as its growth continues to be appreciated, which we expect to continue for all of 2024. From a vertical perspective, we're seeing particular threats in retail, travel, and e-commerce, and banking and financial services that is expected to continue for the rest of 2024. As we mentioned in our first quarter call, we are increasing our investment in our technology while also investing to transition more business from competitors. In the second quarter, we accelerated these investments while still expecting to increase our non-GAAP operating income by 40 basis points for the entire year on a pro-forma basis. Specifically, we have increased our development spend to approximately 1% of revenue through the second quarter, an increase of approximately 50 basis points from the start of Q1. This increased investment relates to our development of technology platforms for both client and internal use, as well as an increasing number of pilots that we have underway with clients using generative AI. We see this investment remaining at this level for a few quarters prior to falling more in line with historically what we have spent, while revenue from these investments starts to become more meaningful. We also expect to incur approximately $20 million to $25 million of new term incremental expense as we take on some large, multi-year programs where we are taking share from competitors as clients consolidate capacity with us. These investments, again, are temporary, and revenue follows in subsequent quarters. We see both of these as near-term and positive investments that will set us up for long-term growth and value creation. Now, let's talk about some of our recent wins and the trends we're seeing in the business. As a reminder, our growth strategy is to drive incremental value to clients through a broad set of technologies and services at global scale. Our strategy is working and we're starting to see this reflected in our growth rate and our pipeline building across both existing and new clients. Some examples of wins in the quarter include a major global retail e-commerce line where we combine the power of our GenAI contacts and translation tools with our CX expertise in global footprint to design and implement a new customer solution experience for them across their media operations. This allowed our clients to move volume from competitors to us, resulting in a 20% increase in our revenue and a mid-single digit increase in our margin for this specific program, while reducing the cost for the client by double digits. Our use of GenAI expertise was a win-win for us and our clients. We also won a new large global media client this quarter. We will support the launch of one of their new high-profile channels in EMEA and consolidate their customer experience operations in Japan and Korea. We will also design and build a generative AI knowledge management solution for their enterprise. They wanted a partner that could provide a complete solution delivered globally and consistently and securely, which we are able to do. Other wins in the quarter include a global travel client that has a well-held relationship in Europe. This quarter, we started to expand our revenues as a combined organization by leveraging our AI footprint and our AI-based training tools to improve effectiveness and efficiency for our game changers. This resulted in work coming from competitors to us, as well as the print potential new revenue streams as they contemplate rolling out our AI solution across their enterprise. Finally, we sold Catalyst services into a former Web Health client in Europe to provide specialized digital engineering resources to build, enhance, and maintain the client's digital infrastructure and CCaaS platform to support their primary channel for new business. This strengthens our existing relationship with the client. These wins underscore the breadth and complexity of solutions that we are delivering for our clients. They also reflect how our business continues to change. At our investor day two years ago, we talked about 13% of our business being commoditized, low complexity transactions. Last year, we updated investors that we were down to 10%, and now we have reduced that to 7%, meaning 98% of our transactions are meeting to high complexity now in our business. These wins also demonstrate two important factors in our ability to gain market and wallet share. Clients are seeking a broader set of integrated solutions from fewer partners and are hoping to boost our mobile scale, technology, and integrated consulting implementation and support offerings. And secondly, automation and generative AI is continuing to be an area of competitive advantage for us. As we have said before, we believe generative AI presents a tremendous upside opportunity for Consentrix and our clients. We have an increasing number of pilots and solutions going into production with clients now. While the level of generative adoption readiness varies greatly by protocol and client, there are a few common themes with these pilots in production. First, the vast majority of pilots in the process are looking at using AI to augment a human advisor to make the advisor more effective at representing our client's brand and enhancing the brand experience for the customers. Second, many of these pilots are using generative AI to upgrade or replace existing knowledge platforms, chatbots, automation systems, and IDR systems. This brings me to the upside opportunities we see as we combine our own AI tools with those of our partners to bring new value to our clients. Many of our technology platforms continue to gain traction in the market. We're building on this momentum and we'll be introducing a variety of new products over the coming quarters. This quarter, we filed a patent for Giles which stands for Generative Intelligence for Limitless Engineers, a platform we developed to automate coding and testing using GenAI that is helping us to build new platforms faster. From our internal usage, we are seeing up to a 40% productivity boost to experienced coders on transactional tasks.

We believe our investments in both generative AI pilots and technology products will help us expand the share of wallet and share of market long-term at superior margins.

Finally, let me touch on the web health integration. As you can see from these wins we've mentioned, we're starting to see revenue synergies sooner than we expected. This is a testament to the successful integration of our go-to-market and delivery organizations, which we initiated on day one and are largely behind us. The integration is on track, as is a realization of planned cost synergies. In summary, our growth strategy is working. We are differentiating concentrics from the market and delivering incremental value to clients for a broad set of technologies and services at global scale. And our recent wins offer evidence that AI is an upside opportunity for concentrics. With that, I'd like to thank our game changers and our clients for the relationships over the last quarter and pass the call over to Andre. Andre, over to you.

Thank you, Chris. And hello, everyone. I'll begin with a look at our financial results and then discuss our outlook for the rest of the year. The second quarter marked another solid quarter for the company. We exceeded our targets for revenue, delivered profits within our guidance range, and drove strong free cash flow. We delivered second quarter revenue of $2.4 billion on a pro forma constant currency basis, as if the web help combination was completed at the beginning of 2023, we grew revenue by 4%. For the first half of the year, our constant currency pro forma growth was 3.4%, so our overall revenue trends remain positive. As you can see from our guidance, we expect this stability to continue in the second half of the year. Looking at our revenue growth by vertical, on a pro forma basis, revenue from retail, travel, and e-commerce clients grew 10% year over year. Revenue from banking, financial services, and insurance clients grew 6%. and our other vertical grew 3%. Our technology and consumer electronics clients grew over 3% on a pro forma basis. While this vertical is still lagging some other sectors due to the macro environment, we were happy to see some positive momentum from consumer electronics clients as we gained share with key clients. We continue to see strength in enterprise tech. Revenue from our telco and media clients decreased 3% on a pro forma basis. primarily due to lower volumes from a few North American communications clients, as discussed in prior quarters. Turning to profitability, our non-GAAP operating income was $321 million in the quarter, an increase of $101 million compared with the second quarter of 2023. Our non-GAAP operating margin was 13.5%, down about 20 basis points from last year due to the inclusion of WebHelp, which historically operated at slightly lower non-GAAP OI margin. Adjusted EBITDA was $380 million, up $121 million year-over-year, and our adjusted EBITDA margin was 15.9%, roughly flat year-on-year. On a pro forma basis, our second quarter profitability metrics continued their solid improvement. Non-GAAP operating income increased $12 million, with a 30 basis point margin improvement compared with last year. Adjusted EBITDA was up $8 million, and our adjusted EBITDA margin was flat compared with the last year. Non-GAAP net income was $183 million in the quarter, an increase of approximately $46 million compared to the second quarter of last year. Non-GAAP EPS was $2.69 per share, an increase of $0.06 per share year on year. GAAP net income was $67 million for the quarter. Gap results for the second quarter of 2024 included $116 million in amortization of intangibles, $31 million in expenses related to the webhub combination and integration, $22 million in share-based compensation expense, $2.5 million in step-up depreciation, a $7 million reduction in acquisition contingent consideration, $14 million in net foreign currency gains, and $4 million in imputed interest related to the seller's note issued in connection with the combination. Our adjusted free cash flow for the quarter was strong at $202 million and we remain on track for our full year adjusted free cash flow outlook of $700 million net of integration expenses. As we stated in our last call, the adjusted free cash flow metric is calculated as free cash flow excluding the impact of the factoring program we assumed and have continued to operate since the WebHelp combination. During the second quarter, the amount of factored accounts receivable decreased by $24 million, with the outstanding factored balance standing at about $162 million at the end of the quarter. In the second quarter, we made payments related to earnouts of past WebHelp acquisitions of approximately $28 million, of which approximately $5 million resulted in a reduction of adjusted free cash flow. Turning to the balance sheet, at the end of the second quarter, cash and cash equivalents were $207 million, and total debt was $4.9 billion. Net debt was $4.7 billion at the end of the second quarter, and we repaid $150 million of the principal amount of our term loan in the quarter. We reduced our net debt to 2.97 times pro forma adjusted EBITDA at quarter end. a sequential decrease from 3.04 times in the prior quarter. We expect to continue to reduce our net debt and net leverage to the end of 2024. We remain committed to our plan of reducing net leverage to close to two times adjusted EBITDA within two years of the close of the WebHelp combination while supporting our dividend and buying back stock. During the second quarter, we repurchased approximately 660,000 shares of our stock for approximately $40 million and an average price of approximately $61 per share. And we paid $20 million through our quarterly dividend. As a reminder, on our first quarter earnings call in March, we committed to $100 million in share repurchases over the remaining three quarters of 2024. So we have about $60 million more to go on that commitment. At quarter end, the remaining authorization on our share repurchase plan was approximately $227 million. Our liquidity remains strong at approximately $1.5 billion, including our over $1 billion line of credit, which is undrawn. We remain committed to investment-grade principles, and we are steadfast in our capital allocation priorities. We expect to continue to drive organic growth, realize integration synergies related to the web help combination, and repay debt, while continuing a disciplined program of returning capital to our shareholders through our dividend and discipline share repurchases. Now, I'll turn my attention to the business outlook for the third quarter and full year 2024. For the third quarter, we expect revenue of $2.35 billion to $2.4 billion based on current exchange rates. This reflects approximately 1.5% to 3.5% pro forma constant currency growth. net of an approximately 205 basis point exchange rate headwind. Proforma revenue for the third quarter of 2023 would have been $2.367 billion, assuming the web help combination occurred at the beginning of fiscal 2023. We expect non-GAAP operating income to be in the range of $330 million to $350 million in the third quarter. At the midpoint of our guidance, this equates to a non-GAAP operating income margin of approximately 14.3%. Importantly, this is an increase of 20 basis points over the prior year quarter on both a reported and pro forma basis. On a pro forma basis, non-GAAP operating income was $334 million in the third quarter of 2023. We expect non-GAAP EPS of $2 and 76 cents per share to $3.04 per share for the third quarter. This assumes interest expense of $75 to $76 million, excluding $4 million of imputed interest on the seller's note. It assumes a non-GAAP effective tax rate in a range of 25 to 26%.

We anticipate a weighted average diluted share for the third quarter.

We estimate that about 4% of net income will be attributable to participating securities and about 96% of total net income will be attributable to common shares for the third quarter. Turning now to the full year 2024 guidance, based on our strong start and continued confidence in our strategy and execution, we are increasing our full year 2024 revenue guidance while reiterating our free cash flow guidance. Specifically, our guidance for the full year is as follows. We expect 2024 revenue to be in a range of $9.58 billion to $9.675 billion, reflecting approximately 2.5% to 3.5% pro forma constant currency growth. This is net of an approximately 150 basis point exchange rate headwind. This is an increase to our prior guidance of 1% to 3% year-on-year growth on a pro forma constant currency basis. We continue to expect first year net synergies of $75 million. The current run rate is approximately $80 million on an annualized basis. We do anticipate that some of these synergy savings will be offset by continued ramp up costs and accelerated investment in technology. As a result of the investments Chris referred to earlier, we are reducing our non-GAAP operating income expectation for the year. We now anticipate non-GAAP operating income in the range of $1.35 to $1.40 billion for the year, which represents a 14.3% margin at the midpoint. Importantly, this is an increase of 10 basis points over the prior year and 40 basis points over the prior year on a pro forma basis. We expect non-GAAP EPS of $11.40 per share to $12.07 per share. This assumes full-year interest expense of $300 to $304 million, excluding $16 million of imputed interest on the seller's note. We expect an effective tax rate of approximately 25% to 25.5%. and a weighted average diluted share count of approximately 65.1 million shares for the full year. In terms of cash flow, we are reiterating our outlook for $700 million in free cash flow in 2024, even after funding integration costs. This assumes no change in the amount of factored accounts receivable from the beginning of the year. Our strong free cash flow will position us to further reduce our net leverage to approximately 2.6 times adjusted EBITDA by year end while repurchasing approximately $120 million of shares as we have committed. Our business outlook and cash flow expectations do not include any future acquisitions or impacts from future foreign currency fluctuations. In conclusion, we are pleased with our performance in the second quarter and our outlook for the year. We are exceeding our revenue growth expectations with solid execution across key verticals. We're optimistic about our second half and are seeing solid demand for our unique technology and services offerings. We're increasing our competitive position with a broader set of technology and service offerings. With this backdrop, we are increasing our revenue guidance for the year, and we are reiterating our expectations for free cash flow. We will continue to return value to shareholders with our ongoing share repurchase program and dividend while reducing leverage. With that, Carmen, please open the line for questions.

Thank you so much. And before opening the lines, as a reminder, please press star then 11 to get in the queue and wait for your name to be announced. To remove yourself, press star 11 again.

One moment for our first question, please.

And it comes from the line of Joseph Vaffey with Canaccord Genuity. Please proceed.

Hey guys, good afternoon. Great to see the fine tune up on the guide and welcome Sarah to the team. I thought maybe we would just start with kind of parsing out, you know, kind of, it looks like you're taking the bull by the horns a little bit on the macro or on the AI front that is. And, you know, it's turning a little bit more into an opportunity than, you know, maybe people have thought previously. And then, you know, we could compare and contrast that to what you're seeing on the macro and how both of those kind of have kind of funneled into the new guidance for the year. And then I'll have a quick follow-up.

It's Chris. So, first of all, you're absolutely right. We are using your term, taking bull by the horns, from a generative AI perspective. We're seeing very good traction in pilots and getting some things into production into our client base. And we're also seeing the ability where we think that there's misses in the market from a technology solutions perspective on platforms, that we have a lot of this base built out for ourselves already, but now we need to work on getting it to commercial standards and from a multi-tenant perspective and ease of use perspective, in large-scale rollouts. And so we don't want to miss that opportunity and are taking advantage and leaning into it. I think secondly, we also are seeing good traction in taking share as well as winning net new clients with even the AI products that we have right now, as we talked about in a couple of our wins. So we see that as being very, very positive, and we built that into sort of our guide of seeing our revenue increase, while also seeing some costs associated with doing these pilots and building out the infrastructure that we want that we think will put us in a very, very nice position for further growth. in terms of the macro we're not seeing really any change we're not seeing uh it improving we're not seeing it declining uh we're seeing and that's sort of a global comment we're seeing things fairly stable and steady uh and um and clearly any kind of positive changes uh coming for that uh we expect the benefit from it based on the share that we have within our client base

Great. That's great color. And then thanks for that, Chris. And then maybe on, you know, one for Andre, I know that, you know, as we exit this year, some of the web health, you know, merger related costs are going to abate and then more cost synergies are going to kick in combined with continued debt pay down, maybe offset a little bit more now at this point by investment in the business. And I know you're not providing guidance for next year, but, you know, it would be great to get an updated framework on, you know, I think you've reiterated your $700 million in free cash flow guidance this year. But to kind of provide a little bit of framework for next year would also be helpful. Thanks a lot.

Happy to do that, Joe, and good to talk to you. Yeah, so there certainly are reasons for us to be optimistic that the $700 million in pre-cash flow that we generate this year can go up in 2025. I want to stop short of guiding for 2025. But the two major drivers there will be synergies. We expect to, in year one, post-close of the combination, recognize $75 million in net synergies. We're already above that run rate. as we look at the synergies that we are realizing right now in the business. We expect that will go up to at least $105 million in net synergies in the second year post-close of the combination. And then you're right, the integration expenses will drop pretty meaningfully from 2024 to 2025. I would see a drop in the range. It could approach $50 million or more, frankly, of cash integration expenses dropping off so both of those things would give us some confidence that we could see cash flow go up obviously we're also going to be paying down debt so some opportunity with that and perhaps if we get there some interest rate reductions to see interest costs also come down from a cash basis and be a bit of a help to us in in 2025.

Great. Thanks a lot, guys. Nice to see the guide up.

Thanks, Cheryl. Thank you. One moment for our next question.

Operator, do we have a next question?

Okay, I think the question was going to be from Ruplu.

Hi, thanks for taking my questions and congrats on inclusion in the Fortune 500 list. Andre, can you help me understand all of the moving pieces to the guidance? Looks like fiscal 2Q revenues beat the midpoint of guidance by $32 million and EPS beat by $0.07. But you're guiding fiscal 3Q down sequentially and lower than street estimates. And if I look at fiscal year revenue guidance increase, that looks like it's about 23 million at the midpoint, and then operating margin is down 50 bits to 14.3%, and EPS is 36 cents lower. So given all of these different data points, I mean, my questions to you would be on the revenue side, was there any pull-in of revenue from 2Q to 3Q Why would there be a sequential decline in 3Q? And does that imply a somewhat steeper ramp between 3Q and 4Q to get to the full year?

No, so, Rupalu, as we kind of commented about our revenue guide throughout this year, we want to be prudent in how we guide revenue. And so we think that we have done that with what we've provided here. So having grown at 4% here in Q2, You're right. We are guiding to growth of 1.5% to 3.5% over the balance of the year, roughly. Certainly, that's what we're guiding to in Q3. Again, we're just there. We're being prudent. We are not seeing anything in our clients' volumes. We are not seeing anything in our pipeline that suggests that revenue should decline. And so, from a revenue perspective, just being prudent with the guide and frankly quite confident and focused on coming in, as we did this most recent quarter, at least in the upper half of what we've guided to, which would put you very, very close to a continuation of the growth rate that we saw here in the first half.

And then on operating margins, the 50 basis points lower, 14.3 versus 14.8 for the full year, I think you talked about some investments you're making. Can you elaborate more on what are the investments that you're making and when do you expect to see revenue benefit from those investments?

Yeah, so Chris in his script alluded to two major areas where we're investing. So we're investing heavily in technology and our platforms, embedding Gen AI into them both for internal use, for client pilots, and for the development of some commercial products. We don't think that – and that is certainly weighing on our margins, but we think that's a good investment for the long term. As you see in many of the wins that Chris talked about, technology is at the forefront of what's driving our competitive advantage and driving those wins across the finish line for us. And we also don't think that level of heightened investment is a forever thing. We think it is temporary here through the balance of the year and could even begin to taper later. as we exit the year. The other major area that we're investing in is transitioning new business to us. That can come in many, many different flavors. It can become transitioning work from a competitor where we incur upfront technology costs. It could be upfront training costs. It could be all of those types of things. But we're happy to do that because, again, we do that in advance. The revenue shows up a few quarters out, and the margins on those deals are quite attractive to us. So that's how you think about it. You're right. At the midpoint of our guide, we've come down a bit. It's because of these investments. We think it's the right thing to do to grow the business and drive value for the long term.

Okay, and maybe I'll try and sneak one more in. Sorry if I missed this. Did you talk about the growth rate for the new economy clients and for the Catalyst business in fiscal 2Q? And how are sales cycles trending for different size of deals? Thank you.

Yes. So Catalyst continues to – we're very, very proud of how Catalyst is doing. It's growing quite nicely, grew sequentially from Q1 to Q2, and is meaningfully accretive to the overall growth rate. for the business in Q2, and we see that continuing over the back half of the year. New economy clients continue to represent about 25% of revenue at Rooploo, and as I commented at your technology conference earlier this month, they are growing faster than the rest of the business, faster than the enterprise clients, although not nearly as fast as they were, call it, two years ago. They've become very focused on ROI, on rightshoring the work, on embedding technology to become more efficient, and all the things, frankly, that the enterprise clients are interested in, too.

Okay. Thank you for all the details.

Sure. Thanks, Rupal.

Our next question comes from Divya Goyal with Scotiabank.

Good evening, everyone. So, I had a question on web help. Andre, I think you mentioned that there are certain earn-out payments that you have to make related to the web help acquisitions that were made prior to you guys acquiring web help. If you could provide some more color on that, and is that going to be an additional Is that an additional impact on your guidance as well for the year on the bottom line?

No. So yes, the payments that we made, and they were about $28 million in Q2, relate to past acquisitions by WebHelp. So these were things that we're committed to prior to us becoming involved with WebHelp and then closing on the transaction in 2023. They do not impact our bottom line, as they effectively have been accrued for some period of time. So no impact there. They do obviously use cash, although most of that payment does not impact our free cash flows. I alluded to maybe $5 million impacted free cash flow. We don't expect any further earnouts in 2022. related to those acquisitions. I don't believe there are any in 2025. And then a fairly similar amount of earnouts would be expected in 2026. These were all kind of part and parcel with the financial model that we put together as we looked at the transaction and closed the transaction. They're playing out exactly as we expect them to.

That's perfect. And just another question related to web health. So you did talk about some of the, I think Chris mentioned some of the cross-sell synergies of Catalyst into web health. If either you or Chris could provide a little bit more color into how exactly is that trending and what is the broad attraction that you are seeing or Catalyst into some of these new web health clients that you've recently acquired?

Yeah, for sure it is, Chris. So, first off, we expected, obviously, revenue synergies, but we didn't necessarily account for them in the first year. They tend to take a while to gain traction and go, and we're kind of well ahead of where we expected to be at this point in time. Both, by the way, taking concentric clients across to sort of the web help footprint and vice versa, as we talked about on the prepared remarks. From a technology perspective, where we're gaining share really across our whole client base, forget about whether it's a webhub client originally or a consumption client originally, is integrating our technical services. And the vast majority come from our catalyst group. Some of that comes from our existing client success organization already. But ultimately, it's that value proposition of putting everything together that clients are most interested in. that has really helped us accelerate our growth rate and start to build a stronger pipeline that we're seeing right now.

That's helpful. And is it fair to assume that your Catalyst business would be, to your point, consulting related? So would it be a higher margin business? Or what is the big difference between what you're doing with Catalyst versus your standard business? So either Catalyst...

Yeah, good question. So in our Catalyst business, we have our consulting business, we have our analytics business, we have our digital engineering business, our CCaaS business, our cloud migration business. And so there's a lot within our Catalyst business. And the margin profile, some is, as you can imagine, higher than our core business. Some is actually lower than our core business because we're doing a lot of these pilots and we're doing a lot of the build out of these tools within our Catalyst business, which which is not necessarily treated to our overall margin. But what we see long-term, as we talked about when we started investing in that business, is the ability to increase our margins, much like we do in our core business, to being more creative than our core business as we go forward. But that's a longer-term comment.

That's all for me. Thank you so much.

Thank you.

Thank you.

One moment for our next question, please.

All right, and it comes from the line of Vincent Collegio with Barrington Research. Please proceed.

Yeah, Chris, I'd like to sort of think a little bit more about your market share gains. Are they coming at the expense of medium-sized and smaller players as well as some of your larger competitors?

Actually, they're coming from both. We've won business from smaller players who weren't able to deliver on a corporate grant and didn't necessarily have the investment and security that they needed. And we've won some good-sized business One of the deals that we talked about was from a larger competitor, primarily because we could bring everything together and have a technology solution versus just sort of the operations part of it. And so we see that continuing based on how clients are thinking about their businesses and returning their services right now.

So if we isolate your larger competitors, do you think you have a more complete portfolio today of what folks are looking for? Or am I overgeneralizing?

No, absolutely. We think we have a very, very complete portfolio across both the consulting and both the design, the build, and the run aspects of delivering services and solutions to clients. Clients are looking for someone who can bring this expertise, and by the way, do it securely, to their enterprise and kind of reimagine what they're delivering from a customer experience perspective. And that's really where we're gaining a share because the conversations are very different than probably what we had two or three years ago.

And with seeing the WebHub revenue synergies a bit earlier than expected, how are you feeling about seeing a meaningful contribution from revenue synergies in 2025?

I don't want to guide for 25, but I think directionally from my comments and from Andre's comments, you can see that we're pretty bullish and confident. And, you know, as we expected doing the transaction, this is what we want. And we're executing along that plan.

Okay. And then as the AI automation evolves here, I know we're still very early days. Are you seeing any change in the competitive landscape in your technology business?

I think in the big transformational deals that we're working on and seeing, we call that Q1, Q2, we have a different set of competitors. They're much larger, much bigger global integration, development capabilities, technology companies. And we think we compete very, very well with that because we have the domain expertise to run what our clients are looking for because we run their businesses as it stands right now. So that's definitely changed from a competitive standpoint. We've also seen smaller VC-backed companies talking about AI who are talking about new bells and whistles. But again, they don't really necessarily understand what the clients are after and what the intimate knowledge of the domain expertise is. And so therefore, we have a very good competitive advantage against them as we're building out the technology that's very suited for the client base because we know it, we know the domain expertise. So we are migrating to different competitors, but we think we're very, very well positioned for sort of this new competitive landscape.

Thank you, Chris. Thank you, Vincent.

Thank you. And with that, ladies and gentlemen, I will conclude the Q&A session and conference for today. Thank you all for participating, and you may now disconnect.