Concentrix Corporation

Thank you for standing by, and welcome to Concentric's third quarter fiscal year 2024 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. To remove yourself from the queue, you may press star 1-1 again. I would now like to hand the call over to Sarah Buda, Investor Relations. Please go ahead.

Great. Thank you, operator, and good evening. Welcome to the Concentrix Third Quarter Fiscal 2024 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 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 in our other public filings with the SEC. Also during the call, we will 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 up the call for your questions. Now I'll turn the call over to Chris.

Thank you, Sarah. Hello, everyone, and thank you for joining us today for our third quarter 2024 earnings call. Today, I'm going to walk you through our current demand environment, the opportunities we are seeing in our business, and most importantly, the positive changes we are making to harness these opportunities to drive long-term value creation. Let's start with what we see in front of us today and how our market has changed over this last quarter. Our business, like all businesses, is going through a significant transformation. We see this across our clients and across sectors. Clients are under pressure to show both innovation and cost control. Every client we speak with has brought forward AI on their agenda as a way to optimize processes, show their boards relevance, and reduce costs. In some cases, the environment is used as a reason clients are pushing their partners and vendors on different economic outcomes. What we've seen in the past few months is an acceleration in the pace of change driving more technology adoption, movement in delivery location, and asks for investment by clients for their transformations that are now taking priority. Transitions that might have taken several quarters are now taking place in a significant shorter timeframe. So, what does this mean for us? First, it validates that we have the right strategy and the right model to capitalize on this moment. Because of the investments we've made in our own technology and that of our technology partners, our global scale and domain expertise, clients are looking to us to lead them through their AI journey to drive innovation, reduce costs, and embrace new economic models. Second, it means we need to focus on winning the right business, and in some case, walking away from transactional price-led commodity business where there is no desire or ability from the client to automate. As we've said, this now represents less than 7% of our business, a marked decline from the 13% only two years ago. With the pace of generative AI, we expect this portion of the business to decline even further and faster. Essentially, we are proactively disrupting our own business with confidence. In doing so, we see many small bumpiness in the short term, but we believe that we are building the right business for the long term. Let me give you some examples of how this is playing out currently. We are winning new logos from competitors. An example in Q3 is a win with an airline who has been with their existing partner for decades before awarding us the entire business. Our technology leadership is allowing us to drive automation to improve performance and reduce costs for the client while enhancing the customer experience. This win leverages the power of concentrics with our catalyst capabilities, our generative AI solutions to support the client across 15 lines of business and 10 languages. We are driving change in our existing business. One of the many examples in Q3 is from a large infrastructure company that we have serviced for five years. This quarter, we deployed an AI bot that in the first month handled 40% of all transactions completely autonomously with a high customer satisfaction rate. For us, this resulted in an immediate 12% reduction in revenue in the near term and some margin pressure as we made upfront investments in technology for a longer-term contract with the client. By automating the simple transactions and delighting the client with the innovation, the client is already having us focus on more complex work which will lead to increased revenue and margins when fully ramped middle of next year. More importantly, it is leading to new opportunities for us to deploy technology into their enterprise. We are also expanding relationship with larger transformational opportunities. In the third quarter, with an existing client, we want a large transformational program that we have been working on for close to a year that is all incremental business to us. This is with a large financial organization where we will take over the complete servicing of a specific segment of customers. This includes the back office, technology, and servicing of all the customers. This win encompasses third-party technology partners, our own GenAI tools, Catalyst services, and our client success organization. The initial five-year contract is valued at over $150 million in revenues. This is a remarkable win and marks one of our first large-scale transformational wins with our new model. Strategically, it was significant as well as no traditional competitors were engaged in this pursuit as they didn't have a complete solution. We're also winning the majority of client consolidation opportunities. Of the 22 client consolidation opportunities we saw in Q3, we were winners in 80% of them. With global scale, differentiated technology, and domain expertise, we are well positioned to win. In fact, in Q3, we saw our highest quarterly contract revenue bookings since our combination one year ago today. We are also partnering with leading complementary technology partners. We are continuing to increase our capabilities across multiple key technology partner solutions. For example, last week at Salesforce Dreamforce event, We participated with a large presence and gained significant interest in our technology solutions that complement Salesforce, as well as our ability to customize and configure Salesforce. Although these examples span many different sectors and have varying deliverables, they are good examples of the current operating environment. Clients' requests for transformation investments are increasing in exchange for longer contracts. There are periods of revenue decline on a client by client basis when we deploy some of our new technology, but we have demonstrated our ability to win more business over time from these clients as we help them automate transactions. We are winning higher complexity deals and walking away from commodity business if there is no desire to automate. Clients are using this moment to consolidate providers. and technology from our partners and our own IP is helping us embed ourselves within our clients' environments. This deep integration creates higher value, stickier revenue long-term. We see this in our cross-sell and up-sell ratios that show an increase when we have our solutions embedded. As we have seen increased demand for generative AI automation, we quickly mobilized to both increase our capabilities and make our tools commercially available. As we discussed during our last investor call, our investment in the development of our tools increased to a run rate of approximately $100 million on an annual basis. This is proving to be the right strategy and brings me to today's announcement of our launch of IX Hello. This is our first product in our new intelligent experience technology suite aimed at helping organizations harness the power of generative AI across their operations. With our launch of IX Hello, we are giving customers an LLM agnostic generative AI productivity tool that automates and accelerates common internal tasks. IX Hello integrates across internal applications to boost productivity, visibility, and quality of work with an on-brand, compliant, and secure environment. The genesis of our product strategy is very straightforward. Clients saw what we were doing internally, and they realized it was what they wanted. a proven, trusted GenAI productivity tool that integrates knowledge across their front office and back office platforms, is flexible and LOM agnostic that operates in a highly secure, trusted environment. Our increase in investment has not only allowed us to make necessary changes to commercialize IP, but also enhance our practices around our technology partners' products. As always, our clients are at the center of the decision on what to deploy in their environments. We now have close to 1,000 clients who are using generative AI solutions we have implemented at scale every day. In short, as we saw in our Q3 results and our Q4 outlook, the operating environment is very dynamic right now. Q3 came in largely as we expected. Revenue was above the midpoint of our guidance at 2.6 pro forma constant currency growth in the quarter. NGOI was within our guidance range, but at the low end as we incurred more costs than we anticipated to shift a large number of programs offshore sooner than expected and to absorb some upfront technology investment in order to secure longer-term deals as discussed. Looking at Q4, we have lowered our expectations, which Andre will give more details on. In order to continue investment levels, we are actively reallocating capital towards our technology and transformation work to ensure that we are winning the right long-term business. We are acutely focused on ensuring we are moving with velocity and proactively transforming our business to gain share and position us for long-term value creation. Our teams are aligned and we are excited about the future ahead. I'd like to thank our dedicated game changers for their hard work and commitment to excellence and our clients for their trust and their business. Now, I'll turn the call over to Andre.

Well, thank you, Chris, and hello, everyone. I'll begin with a look at our financial results and then discuss our outlook for the fourth quarter. We delivered third quarter revenue of $2.4 billion, reflecting 2.6% in pro forma constant currency growth, calculated as if the web help combination was completed at the beginning of 2023. Looking at our revenue growth by vertical, on a pro forma constant currency basis, revenue from retail, travel, and e-commerce clients grew 8% year over year. a continuation of the solid growth we've been driving in this vertical through a combination of share gains and new client wins. Revenue from banking, financial services, and insurance clients grew 5%, which is relatively consistent with prior quarters this year. Our recent wins in this sector indicate further opportunities for growth. Our other vertical grew 6%, an acceleration from the first half of the year, driven primarily by automotive clients where we're bringing unique technology solutions to help them drive their businesses. Our technology consumer electronics clients grew 1% on a pro forma basis, reflecting a balance of the positive effects of share gains against lower volumes in consumer tech. Consistent with the first half of 2024, revenue from communications and media clients decreased 3%. This vertical is an area of high price sensitivity for lower complexity work. And revenue from healthcare clients decreased by 4% as we have shifted the delivery for a few large healthcare clients offshore during the quarter. Overall, healthcare remains a solid vertical for us, and there are portions that remain onshore due to compliance and customer preference. But this short shift from those clients is having a near-term impact. Turning to profitability, our non-GAAP operating income was $331 million in the quarter, an increase of $100 million compared with the third quarter of 2023. Our non-GAAP operating margin was 13.9%, down about 20 basis points from last year. Our non-GAAP operating margin grew about 40 basis points sequentially from the second quarter. Adjusted EBITDA was $388 million, up $119 million year-over-year, and our adjusted EBITDA margin was 16.3%, down about 20 basis points year-on-year, but a sequential increase of 40 basis points from last quarter. On a pro forma basis, non-GAAP operating income was essentially flat year-on-year, with a 20 basis point margin decrease compared with last year. Non-GAAP net income was $192 million in the quarter, an increase of approximately $49 million compared with the third quarter of last year. Non-GAAP EPS was $2.87 per share, an increase of 11 cents per share year on year. GAAP net income was $17 million for the quarter. GAAP results for the third quarter of 2024 included $117 million in amortization of intangibles, $36 million in expenses related to the web help combination and integration. $23 million in share-based compensation expense. $2 million in step-up depreciation. An $11 million increase in acquisition contingent consideration. $33 million in net foreign currency losses. $4 million in imputed interest related to the seller's note issued in connection with the combination. and a $5 million one-time tax expense associated with legal entity restructuring. Our adjusted free cash flow for the quarter was $135 million, net of $63 million in capital expenditures. As we stated in the last call, the adjusted free cash flow metric is calculated as free cash flow excluding the impact of changes in the factoring program that we assumed and have continued to operate since the WebHelp combination. Adjusted free cash flow was below expectations for the quarter as a result of client collection delays in the month of August, principally in Europe, that have been caught up in September, and accelerated spending on integration costs. Turning to the balance sheet, at the end of the third quarter, cash and cash equivalents were $246 million, and total debt was $4.91 billion as we repaid $100 million of the principal amount of our term loan in the quarter. Net debt was $4.67 billion at the end of the third quarter. Our net debt was 2.95 times pro forma adjusted EBITDA at quarter end, consistent with the prior quarter. We expect to continue to reduce our net debt and net leverage through 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 also supporting our dividend and repurchasing shares. During the third quarter, we repurchased approximately 600,000 shares of our stock for approximately $39 million, an average price of approximately $65 per share. We paid $20 million through our quarterly dividend. We now expect fourth quarter share repurchases to exceed $30 million, bringing expected full-year repurchases to over $130 million, which is above our previous commitment. and today we were pleased to announce the 10% increase to our quarterly dividend. At quarter end, the remaining authorization on our share repurchase plan was approximately $188 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 our capital allocation priorities remain unchanged. We expect to continue to drive organic growth, realize integration synergies related to the combination, repay debt, while continuing a disciplined program of returning capital to our shareholders through our dividend and discipline share repurchases. Now, I'll turn to the business outlook for the fourth quarter. As Chris mentioned, we are operating in a very dynamic environment and we're investing to grow over the long term. From a revenue perspective, while we came in above the midpoint of our guidance in the third quarter, we now expect a slower growth rate in the fourth quarter than we'd expected previously. This reflects three factors in the following order in terms of significance. Lower volume forecast from some clients in the third quarter as a result of lower underlying transaction volumes and automation, a larger shift of revenue to lower cost delivery geographies than expected, and the loss of some commoditized projects that we have chosen to walk away from over price. With the reduction in our revenue outlook for the fourth quarter, accelerated investments in transformation of our business, and some short-term costs associated with moving programs offshore, we are reducing our previous margin expectations for the fourth quarter. Included in our profitability expectations for the fourth quarter is continued progress on cost synergies. Our year one synergies will meet our target of $75 million, Our current annual run rate for Synergies is approximately $95 million. Many of these Synergy savings are being invested back in the business to support transformation activities. We've accelerated our integration spending as we now believe we can achieve our year three target of $120 million in Synergy savings in 2025. Looking at cash flow, while we expect a significant sequential increase in quarterly adjusted free cash flow in Q4, The reduced profit expectations and higher 2024 integration costs will result in a reduction in our adjusted pre-cash flow expectations for the full year. With this context, our expectations for the fourth quarter are as follows. We expect fourth quarter revenue of $2.42 billion to $2.47 billion based on current exchange rates. This equates to pro forma constant currency change ranging from a decrease of 0.5% to growth of 1.5% in the quarter. Our expectations include a 60 basis point tailwind from foreign currency fluctuations. On a pro forma basis, revenue was $2.417 billion in the fourth quarter of 2023. We expect fourth quarter non-GAAP operating income in a range of $335 million to $355 million. At the midpoint of our guidance, this equates to a non-GAAP operating margin of approximately 14.1%. Pro forma non-GAAP operating income for the fourth quarter of 2023 was $365 million. We expect non-GAAP EPS of $2.90 per share to $3.16 per share for the fourth quarter. This assumes interest expense of $74 million, excluding $4 million of imputed interest on the seller's note. It assumes a non-GAAP effective tax rate in a range of 24% to 25%. We anticipate a weighted average dilute share count of approximately 64.5 million shares for the fourth quarter. We estimate that about 3.7% of net income will be attributable to participating securities and about 96.3% of total net income will be attributable to common shares for the fourth quarter. Our expectations for the fourth quarter would lead to the following results for the full year 2024. Full year 2024 revenue in a range of $9.591 billion to $9.641 billion, reflecting pro forma constant currency growth of approximately 2.2% to 2.7%. This is net of an approximately 110 basis point exchange rate headwind. At the midpoint of our expectation, for the full year our growth is 2.5 percent constant currency pro forma which was the low end of the full year range we gave last quarter on a pro forma basis 2023 revenue was 9.486 billion dollars full year 2024 non-gap operating income will be in a range of 1.306 billion to 1.326 billion dollars at the midpoint of our guidance this equates to a non-gap operating margin of approximately 13.7%. Pro forma non-GAAP operating income for 2023 was $1.316 billion. Four-year non-GAAP EPS will be in a range of $11.05 per share to $11.31 per share, reflecting four-year interest expense of approximately $307 million, excluding $17 million of imputed interest on the seller's note, and a non-GAAP tax rate for the full year of 24.4% to 24.7%. Reflected in our full year non-GAAP EPS expectation is a weighted average diluted share count of approximately 65.1 million shares for the full year and about 3.6% of net income being attributable to participating securities with about 96.4% of total net income being attributable to common shares for the full year. We expect adjusted free cash flow of $625 million to $650 million for 2024 after funding accelerated integration costs. And we expect to reduce our net leverage to approximately 2.8 times adjusted EBITDA by year end, while repurchasing over $130 million of shares during the year and supporting our dividend. Our business outlook and cash flow expectations do not include any future acquisitions or impacts from future foreign currency fluctuations. Looking ahead, while we are not providing guidance for 2025, we do see several factors that point to revenue and cash flow growth next year. We have won several new large-scale programs that will ramp throughout the year. Our integration with WebHelp is entering its final phase, and although we are reinvesting synergy savings into our technology and other initiatives, we do expect materially lower integration costs next year. Finally, we believe that the investments in our new product introductions will begin to pay off. We look forward to giving you more details on our outlook for 2025 on our next earnings call. In conclusion, we met our revenue and profitability expectations for the third quarter. We are investing in and transforming the business by securing large transformational new wins, decreasing our exposure to lower margin price sensitive business, and investing in technology platforms and partnerships to increase our competitive position and drive future growth opportunities. And finally, we will continue to return value to shareholders for their ongoing share repurchase program and our dividend while reducing our leverage. With that now, Lateef, please open the line for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. To remove yourself from the queue, you may press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Joseph Voffey of Canaccord.

Hey, guys. Good afternoon. Thanks for taking my call here. Congrats on actually having a really good bookings quarter with all that other information. So that's great to see. Just kind of wondering, you know, some of the puts and takes here on the top line to begin with. I know you're kind of walking away from some of the more commodity business while at the same time you're winning new business that may not have ramped. I'm just kind of wondering how you see that plus and that minus on the revenue line kind of taking place here over the next few quarters, if you see it as kind of revenue neutral or not, and then a follow-up. Thanks.

Yeah, for sure, Joe. It's Chris. So just when we look at the midpoint of our previous Q4 guide, we really see kind of three buckets as Andre talked about from a materiality perspective. The first one was starting in sort of later July and earlier August, we started to see some clients decommit for some volume primarily because they weren't seeing the sell-through that they were expecting going into the fourth quarter. and also automation that we were putting in. When you lump those two together with the vast majority being sort of volume declines from client pull-through sales, it was about a 1% headwind, give or take. If you look at offshoring accounts that were primarily going to offshore in Q1 to Q2, because frankly, Clients don't want to have too much movement in the fourth quarter if they can help it just because it's normally a big quarter. That was a little over half a basis point of headwind that was going, which we had anticipated but had been anticipated in sort of Q1, Q2, not in sort of Q3, Q4. And then the last sort of little less than half a basis point was when we talked about the consolidated wins where we're winning about 80%. The ones we didn't win are those kind of ones that are incredibly price sensitive. We didn't chase the price. And that is about a little less than half a basis point of headwind that we saw going into Q4.

Got it. That's helpful. And then, you know, as we look at some of these kind of newer wins that you won here in the quarter and what you're seeing, you know, How are you seeing ramps on those businesses relative to maybe historically or if AI makes some of these ramps a little longer or a little shorter?

Yeah, for sure, Joe. So if you look at the airline, we will start – we're already in the planning phase and kind of incurring costs. But when it starts to connect to revenue, we'll be late – sort of late Q4, early Q1, where it will start to come in with a little bit of revenue, and it will be kind of fully ramped by sort of end of Q2, Q3. When you look at the large transformational project that we're very, very excited to have won, we are now spending time on the planning and moving and kind of infrastructure build-out that we have to do, which we're incurring costs, we won't see revenue until the end of Q2 with it sort of fully ramped until the end of Q4 of 2025. So it kind of gives you a feel where things of traditional business haven't really changed too much, but the biggest transformational wins certainly will take longer and incur some expense to happen to make that kick in.

Got it. And then maybe I'm just going to sneak one more in for Andre on the accelerated merger-related costs here in 2025. You know, there are kind of a few moving parts here. Can you just kind of walk us through some of the thinking here on accelerating those investments now and, you know, what were the positives that outweighed the acceleration relative to the thought process there? Thanks.

Yeah, so we're very excited about the fact that we could bring some of the synergies forward into 2025. And obviously that comes with incurring some costs, heightened integration costs here in 2024. But we feel really good about the fact that we feel that we can hit $120 million in synergies in 2025, hitting that ultimate synergy number a year ahead of schedule. Why are we doing it? We're doing it so we can reallocate a lot of those resources, that cash or that investment, towards the transformation activities that Chris has been speaking about, a combination of technology investment as well as some of the upfront investment in transformational program ramps.

Great. Thanks very much, Andre.

Sure.

Thank you. Our next question. comes from the line of Divya Goyal of Scotiabank.

Hello, everyone. Andre, if you could provide a little bit more color, and maybe this is to do with the acquisition-related expenses, but I noticed that your other expenses picked up pretty materially this quarter. Could you help us understand what exactly would that relate to?

Yes. Are you talking about below-the-line items?

Yes.

Yeah, that is principally a net of two things. So we have $33 million in foreign currency losses that are largely related to intercompany translation related to liabilities or assets that are denominated in non-USD. So as the USD is weakened versus currencies, particularly the peso, where there's a lot of intercompany balances that kind of drives that kind of non-cash expense to that line and we back that out of our non-GAAP net income and our non-GAAP EPS metric just like and then that is offset partially by the by the change in the contingent consideration in the quarter as well so that those are the two major items that frankly we're We can't control in any real way. We will see fluctuations there effectively, however, the non-cash items.

That's helpful. Also, could Chris or yourself provide a little bit more color in terms of catalyst business and how is that trending given the interest rates coming down in U.S.? ?

So the interest rates have not had, frankly, any impact as we would have liked to have seen in it. But the Catalyst business we're really, really happy with. What we're finding is that this is really the enablement partner for our technology providers. So whether we're deploying sort of new cloud solutions or I mentioned Dreamforce, but whether it be Microsoft Copilot or some of the other LLM tools, that's really flowing through our Catalyst team. And our Catalyst team is also providing a lot of the consultation and around the transformational deals that we're doing. And so we found it to be a real asset and one that we want to continue to drive. But we have not seen sort of a step-up change in the large pure IT digital transformation projects that we've talked about in the past because of interest rates coming down.

Right. Okay. No, that's helpful. One thing that I wanted a little bit more clarification on was – the offshoring element that you mentioned. So revenue seems to have trended okay here, but expenses picked up partly because of obviously pulling forward the acquisition-related expenses. But you mentioned there was increased offshoring as well. Increased offshoring would, in my understanding, impact the revenues and benefit the margins. So just trying to understand those dynamics here.

Yeah, Divya, you're totally correct. The issue is that this offshoring, frankly, we're caught with dual cost because our clients have asked us to move it up. And frankly, we're doing the right things by the clients by moving it up. And so you do get some margin compression when you have that dual cost structure in there. The other component of the SG&A that I want to be very clear to call out is as we talked about some of the transformational deals like the large infrastructure company or even the large transformational opportunity, we are funding that infrastructure build-out and that technology infrastructure build-out ahead. We are expensing those. We are not capitalizing those. So they're flowing through our SG&A. But in turn, we're getting longer-term contracts with the clients that will see margin expansion as we continue to deploy those and ramp those up fully. And so those two things are somewhat muting what you would typically see traditionally where we offshore and we see that revenue dip, but then you see the incremental margin increase within a quarter.

Okay, that's helpful. Thanks, Chris. Thanks, Andre.

Thank you.

Thank you. Our next question comes from the line of Vincent Colicchio of Barrington Research.

Yes, good afternoon, guys. Andre, the TCE, as they say, segment was up, I think, 1% in the quarter, and you have some volume pressures, I think you mentioned there. Is that something we should be concerned about going forward?

That sector has been muted for us for a while. We have two things going on there, which is we're doing well with our clients and we're gaining share, but what we see is just in the underlying volumes, particularly around consumer technology and consumer electronics, we're just seeing very, very muted volumes there. We're gaining share, but we're not in the process of gaining share, gaining much in the way of revenue. The great news is as we gain share, as hopefully over time the macro improves and people stop sweating their tech and go through refresh cycles, we should see transaction volumes pick up there, hopefully, and then we'll be well positioned to return to faster growth there, as we've seen in the past. Just right now, doing great from a share game perspective, but the underlying volumes just aren't there.

And Chris, you had mentioned a lot of success closing on consolidation opportunities. I was wondering if you can give some color on if there's significant legs on this and just kind of what the dynamic is here.

Yeah, so Vince, what we're seeing is that where clients are either not seeing the growth in their business as they expected and they're trying to manage costs, it makes sense to deal with less partners. And if they're looking for sort of a full solution with technology or we're the largest incumbent partner that's performing, the best performing partner, then we have a very, very, very high probability of consolidating that volume from other partners into us. And so we do think it has legs. We have talked about it for a while. we're seeing it happen a little faster than we expected. And we are seeing it in pretty much all the verticals for the most part. And as Andre pointed out, where we're not chasing kind of volume that no one wants to automate, it's highly price sensitive, that tends to be where we're being consolidated out because we didn't have the highest exposure in that within every single client anyhow. But we're just not chasing that work because, honestly, we believe that at some point it needs to get automated, and with the tools that are available now, it should be automated sooner than later anyhow. So it's not what we consider a long-term loss.

You talked about rapid change in your industry and rapid movement towards automation. I think historically you should talk about trying to automate things 10% to 20% or maybe the number is wrong of your portfolio. Is there a new number you may want to put out there in terms of how much you seek to automate each year?

Not really, Vince, because what we're seeing is that a lot of this automation we had planned going into end of 2024 and 2025 But what we've seen is a very fast demand of accelerating it because people want to see in-year savings and they want to kind of get into 2025 at a new cost structure. And so we're not seeing automation coming out of the blue of, hey, we've never, ever thought about this. We're seeing, hey, we were planning on doing this a quarter, two quarters, three quarters from now. We need to do it now. And then we're also seeing not only with our new tools but some of our partners' tools, things that were a little harder to automate we actually can bring in ourselves to automate a little further. But we're not seeing sort of a dramatic change in what can be automated for the most part. It's really the timing. The other thing that we talk about from a dynamic industry perspective is really, we always talk about things moving offshore, right? That's clearly one of the value propositions this industry has. Again, what's somewhat unique is historically, if you go back and look at Q4, Most people are locked and loaded with their capacity plans and do not want to move anything in Q4 because they want to have sort of a bumper back half of the year. And this is one of the first times that we've seen clients saying, yeah, we know we talked about this in Q1, Q2. We need to do it now. How can you help us so that we can see the savings by the end of 2024 and start 2025 in a new cost structure? And so that is changing some of the dynamics as well that we historically have not seen.

Thank you.

Thank you. Our next question comes from the line of Ali Davies of Redburn Atlantic.

Hi, guys. Evening. A couple for me. I guess you gave the kind of infrastructure example where you said you now handle 40% of transactions autonomously, and that was kind of a 12% reduction in revenues. Is that included in the sort of 7% of business that you see as transactional, or is that sort of separate to that?

Actually, that's a great question. That was actually outside of the 7% of revenue. While we were able to kind of automate the transaction, it was quite complicated, and we had to wait for the right bot technology to be able to actually make it automatable as fast as we were able to do it. So that's not considered in sort of that 7%. on that specific client.

Following on from that, there's obviously much more than 7% that can't be automated now. Are you able to give us an indication of how much of revenue that would be?

No, because we don't. We also see it a little differently. The complexity and the infrastructure cost to put in on some of these larger, more complex automations is a little different than the domain knowledge that goes into how you need to manage these types of transactions. is very different than sort of that 7% of revenue, which tends to be very short speed to proficiency, very easy to move, like literally can move it in kind of weeks, and very, very, very different. And so when we're automating things that, for instance, in that infrastructure company, we've been working for them for five years. We understood their internal system very, very deeply. We had domain subject experts around because they're a regulated business. around how we need to deliver for it and what needed to happen around for it, and to train people in that high level of proficiency. So those do take a while, and we started working on that transformation project almost six or seven months ago when we originally started it, and then the economics changed, quite frankly, transparently in Q3, where the client asked us to pick up those costs to extend for a longer-term contract, which we were happy to do.

Okay, great. And then maybe just one more. On the sort of the IX Hello tool that you've sort of released today, can you kind of talk about the pricing dynamics there and, you know, I guess why it won't kind of, you know, cannibalize your ability to win, you know, volumes that will now be offshored, outsourced?

Well, actually, we're quite comfortable with the cannibalizing the right type of business because it drives better embeddedness of our services into our clients. And as they consume more technology, that's fantastic for us because obviously the margin profile is more accretive. Right now, and in the beta phase of what we've been doing up until when we launched, a lot of this has been included in our pricing and has been bundled in services. What we're seeing is that clients are wanting to buy this and deploy this on their own enterprise or within other competitors' operations, which we're happy for them to do. And it's a per seat price. with volume discounts based on how many seats that are done.

Okay, great. Thanks very much, Chris.

No problem.

Thank you. Once again, to ask a question, please press star 1-1 on your telephone. Again, star 1-1 on your telephone to ask a question. Our next question comes from the line of Ruplu Bhattacharya of Bank of America. Your line is open.

All right. Thanks for taking my questions. Can you walk us through your thought process in making these Gen AI related investments? I think you mentioned 100 million per year. How do you decide how much to invest and what ROI are you looking for when you invest in products such as this or investments to strengthen your capitalist business to better cater to Gen AI? So can you just talk about like what returns are you looking for and how do you know when

when enough when you've invested enough well how do you measure success yeah for sure very good question so just for clarity we're at a run rate of a hundred million annually right now but what we said in our last conference call and we're very still clear about is that if we don't see commercial success the way we want to see commercial success we're certainly going to pare that down that's not our plan and we can see sort of a clear path to how we want to get there but that's not a run rate of investment we are committing to indefinitely by any stretch of the imagination. What we classify as success is that by the end of 2025, that we are getting an ROI on our spend, and that spend, as I might mention, might fluctuate depending on the return metrics of it, that the margin profile of that business is accretive to our overall business. and that hopefully our goal is that the growth rate is accretive to our overall growth rate of our business. That's what our goal is for those products of why we want to do it. What's key to understand is that we've seen a clear hole in the marketplace around some of the things that we're doing that others are not. We have a deep understanding based on decades of experiences of how to manage these interactions and how to optimize these conversations and optimize businesses as a whole with that deep domain expertise, that when our solution goes in, it's highly, highly customized. And a lot of our clients have disparate tech stacks. So they need something that's flexible from an LLM perspective. They need something that's flexible from a tech stack perspective, and we fit in that. Where we have clients who have sort of homogeneous technology environments or environments where they've got a clear direction of tech partners they want to use, We're very, very happy to deploy our partners' technology into those spaces if it fits. And so it's really quite complementary around how we see it. And we're doing it to differentiate ourselves in the marketplace because, as I mentioned in the large transformational deal, there was no other – we knew who the competitors were. There was no other traditional competitor in that space. They weren't even invited to the RFP. because they did not have a complete solution, and they did not have the technical strength to pull off what the client was after.

Okay. Just keeping on the investment theme, I think the press release said that the company plans to release additional technology products in the IX suite. How should we think about the impact of that on margins over the next few quarters? And is that the only investment that would impact margins, or are you hiring more people in Catalyst

and and uh you know trying to build up that business as well so how should we think about the impact of investments on on operating margins for sure so so root blue like at a hundred billion dollar run rate i i have to i am we definitely are producing more products than one uh so we have a number of others that are already being built and well down the path and are actually doing previews with with clients as we speak and so There will be some rapid succession of what we're looking at. And we've got sort of a very clear roadmap of what our deliverables are over the next number of months to make that happen. That is already baked into the forecast from an OPEX perspective, as we mentioned, in that $100 million run rate. We are also, as Andre pointed out, accelerating some of the synergy costs and reinvesting and reallocating some of that capital because we do need to hire some skill sets that we don't have in our business right now around some of the GenAI tools from our partners, some automation tools that we have within our client set. And so that, our goal is to do without increasing our operating expense and manage within the lines that we are doing right now. The only thing that is fluctuating our SG&A line that we can see within Q4, and I don't want to guide for 2025, so let's just talk about Q4, is really around these transformational programs where we are getting a number of requests from clients who say, we need help to transform. You've got the capabilities to do it. If we give you a longer-term contract, would you take some of the burden of these costs up front? Because we don't have the budget to do it. And as long as the economic model works out, we're more than happy to do that for our clients.

Okay. Maybe, can I ask about, you talked about programs shifting offshore. So obviously that impacts you initially in terms of revenue because you're shifting the program. But if it's to a lower cross geography, I mean, it should help in margins. So can you talk about what is that time delta between when you actually move a program to when you can actually start seeing any margin benefit? And within that, the question, if you can also weave in any thoughts on the overall pricing environment as well. Is it more competitive, less competitive?

Yeah, so on the offshore movement, you're right. Once we get those programs fully ramped offshore and we get past the period where we have duplicate costs where we can rationalize with some of the costs that we're supporting those programs onshore, we will get to a better margin spot on those programs. That generally takes about two to three quarters to do that, and that's what you see kind of impacting our Q4 outlook and should give us some confidence that we'll see improvement as we go through the back part of 2025. From a pricing environment perspective, I'll let Chris comment as well, but what we're seeing is certainly In the more commoditized work, we're seeing very, very heightened price sensitivity there, and we're choosing not to chase that work on price. We're also seeing pricing take the form of these different constructs where clients are asking us to take on more of the upfront investment in transformation, whether that be technology, building out capacity, or even doing some of the training related to those programs. All of that now, the new commercial contract seems to be moving a bit more of that upfront cost onto the provider. But we're happy to do that if it allows us to win the work. And as long as we can build that upfront cost into the margin of the program, that means we should see improving margins on that program over time.

Okay. I'm going to try and, Andre, sneak one more question in. And this has been asked in various different ways, but I'm going to ask it in another way. You know, you've talked about thousands of customers now using Gen AI. On the last call, I think, you know, you had said that you had hundreds of proof of concepts that were going on. So are those proof of concepts now done? And do you think that the customer base that you have is now prone or is now more receptive to using Gen AI? And if that is the case, do you think that You know, as these models are getting more advanced, we just had a press release from T-Mobile and OpenAI where their new model is smarter. It can have sentiment detection. Do you think that given this environment that you still think that the lower transactional work will go away and that you'll gain more work in the concentric business, more in the consulting type of space? Do you see that happening or do you think as models get smarter and more capable that the disruption can be more? So has your thought process on that changed as you've talked to more customers and as you're seeing these new models come up?

Eric Lewis, Chris. So a couple of things in that because it's a good question. The first thing, just for clarity, when we talk about close to 1,000 customers, that's close to half our client base is using generative AI that we have installed. And some of that is our partner's technology that we've installed and configure and manage. Some of that is obviously our intellectual property that we've installed and managed. And that is using it at scale, day to day, using operations. This is not proof of concept stuff. This is real industrial enterprise use of the AI technology. And for clarity, when you look at what clients are using that for, it is very different. There's some clients who are using a full stack. where we're doing automated bot, where we're using our generative AI QA system, where we're using our generative AI coaching system, where we're using our generative AI task system, all sorts of things like that. When it's not customer-facing, clients tend to be very receptive to using it, and those proof of concepts, frankly, go very quickly into production. When it is anything to do with an external brand engagement, we continue to see, despite all the press releases and everyone talking about, we continue to see a reluctance to interface with high-value interactions with customers where the AI is doing everything. What we see, and still to this day, and still conversations, is that it's normally a human-to-last connect, but that human is AI-powered to get better answers, better help, service in a more intimate personalized way and deliver what what they need to do and so we still see that playing out to to this case obviously with the models getting more advanced that will somewhat change but as we've seen and shown as we've kind of automated and put the technology in we've won net new business that historically hasn't hasn't hasn't been there in terms of proof of concepts We still have hundreds of proof of concepts, but very transparently, some we roll out and the client goes, okay, we've done the economic model on this. It's going to cost too much to do the queries to an LLM versus how we can do it other ways. We're going to kill it. Others are like, yes, this is perfect. Let's get it into production as quickly as possible. And so, you know, this quarter we added, I think, 20, I think 25 new applications I think it's 25 new at-scale implementations of our GenAI technology into our client base from POCs. And so we are converting them, but we are always having these new POCs coming into the ecosystem.

Okay. Thank you for all the detail.

You go ahead. Sorry, Rupal, just not to go on because I'm sure you're bored of this, but the reality is that LLMs and generative AI, everyone assumes it's one solution fits all. And what we're finding more and more is our clients are putting in different types of solutions for different types of functions and features and departments that best fit their cost model and the type of activity they want to automate and the type of service that they want to get. And so we do have clients who have multiple generative AI solutions in their environment. And we expect that to continue. We don't expect there to be sort of one product that does everything for everyone across the entire enterprise.

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

Thank you. And ladies and gentlemen, that does conclude today's conference call. Thank you for participating. You may now disconnect.