IBEX Limited

welcome to the ibex third quarter full year 2024 earnings conference call at this time all participants are in the listen only mode after the speaker's presentation there will be a question and answer session to ask a question during the session you will need to press star 1 1 on your telephone you will then hear an automated message advising your hand is raised to withdraw your question please press star 11 again. Please be advised that today's conference is being recorded. To note, there is an accompanying earnings deck presentation available on the IBEX Investor Relations website at investors.ibex.co. I will now turn this conference over to Mr. Michael Darwall, Investor Relations of IBEX.

Good afternoon, and thank you for joining us today. Before we begin, I want to remind you that matters discussed on today's call may include forward-looking statements related to our operating performance, financial goals, and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward-looking statements reflect our opinion as of the date of this call, and we undertake no obligation to revise this information as a result of new developments which may occur. Forward-looking statements are subject to various risks, uncertainties, and other factors that could cause our actual results to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on September 13, 2023. As a reminder, as of July 1, 2023, we became a domestic filer, and as such, are reporting on a US GAAP basis rather than from the previous IFRS standard. With that, I will now turn the call over to IBEX CEO, Bob Deckinson.

Thank you, Mike. Good afternoon, everyone, and thank you all for joining us today as we share our third quarter fiscal 2024 results. For my remarks today, I will briefly review our results for the quarter. which included the strongest adjusted EBITDA margin and EPS quarter in our history. And then I will go into detail and share our strategy to be at the leading edge of the transformation from traditional live agents to a business that also offers AI virtual agents and automated interactions. Our third quarter fiscal 2024 was one of the strongest on record. The operational and strategic initiatives we have delivered upon over the last several quarters resulted in adjusted EBITDA of 19.2 million, delivering record 15.1% adjusted EBITDA margin and 70 cents adjusted EPS. Revenues for the quarter were slightly down to 126.8 million versus prior year, primarily due to the completion of a short-term project we serviced last year. These results are an output of the structural business we have built. We continue to grow our highest margin services and geographies. Our digital-first and integrated omni-channel business grew to 78% of our revenues from 73% prior year. And our higher margin offshore and nearshore regions grew to 76% of our revenue from 72% prior year. Our higher revenue, lower margin U.S. region contracted to 24% of revenue from 28% prior year. We expect these trends to continue as we land and expand with great new clients. I'm again excited to report we had three new client wins in the quarter, totaling 15 for the first three quarters of 2024, as compared to eight in the same period in FY23. Our pipeline is loaded with great blue chip clients that continue to look to better alternatives to their long-tenured relationships with our multibillion-dollar competitors. I am also encouraged by the velocity of our pipeline. The signature win for the quarter was with a leading member-focused health and fitness company where we initially began discussions in November of 2023, launched training by the first week of January and reach scale by the end of March. We continue to be confident in our ability to compete and win. Our balance sheet remains a position of strength with approximately $50 million in net cash while generating nearly $10 million in free cash flow in the quarter. We were able to leverage this strong position to buy back more than $8 million in shares demonstrating our board of directors' confidence in our business and in our management team. Let me now segue to our AI strategy. The intersection of generative AI and CX continues to create a lot of excitement, potential disruption, and headlines for the BPO industry. One of the most important questions is if generative AI will significantly impact live agent client volumes and potentially provide headwinds in the industry. At IBEX, we see these potential shifts as opportunity. Let me explain. When I arrived here at IBEX nine years ago, there were two distinct trends occurring in the industry. The first being the evolution of CX as a competitive weapon for leading clients, while the second was the acceleration of digital first support. We set a strategy to transform our business and capitalize on these trends. This is what we called BPO 2.0. This is the exciting business we have built. Fast and flexible, digital first, tech-led, leveraging deep analytics and insights, grounded in amazing, long-tenured clients with trusted relationships. Built around branding and culture, we have been and continue to be extremely successful in this transformation. Now, the convergence of AI and CX creates another opportunity for IBEX, and one that is on a level playing field. we now see the opportunity to transform our business from providing customer support by live contact center agents to one where we will also provide AI virtual agents to resolve certain customer contacts, which in turn will provide significant cost savings for our clients while creating additional revenue and margin opportunities for IBEX. Our goal is to be on the leading end of this transformation. And I am confident in our ability to be successful because many of the key differentiators in our current business position us well for this pivot. We believe one of the critical success factors will be the ability to marry generative AI technologies with customer journeys to create great customer experiences. The combination of being a tech-led BPO coupled with our deep analytics capabilities creates a compelling competitive advantage. We will not be the developer of the technology, but rather a builder of the solution. The technology will be provided through strategic partnerships we have built with several best of breed technology companies. But the overall solution is being developed by IBEX and leverages our knowledge of the customer journey. This is an example of how our speed and nimbleness allow us to get ahead of our competitors. We believe our size is an advantage as well. While the largest BPOs work through the complexities of massive merger integrations with hundreds of thousands of additional seats to protect, our size creates opportunities. Simply put, Our new call automation solution, IBEX Automate, will likely reduce the number of calls we handle by live agents as well as for our competitors who service the same client. However, by implementing this AI solution across the entire enterprise, we expect to cover a greater percentage of the client's needs compared to what our live agents currently handle. As a result, This will more than compensate for the decrease in live agent volume. Additionally, we have developed a disruptive solution we call IBEX Translate that uses generative AI to translate conversations into various languages that are difficult to support. This solution targets costly, old-world language translation service companies that result in poor customer experiences. IBEX Translate is gaining tremendous amount of interest and will be 100% accretive to our business. IBEX is well positioned as a first mover where we are front and center with our clients developing customer facing AI solutions. In fact, our early success taking this to market has already yielded more than 35 pipeline opportunities. with many in the late stages and one recently closed. We continually get feedback from our clients that we are further along than our competitors in developing these types of solutions. Being first to market also strengthens our relationships as a trusted partner. The traction we have And our speed to aggressively market these services provides exciting near and midterm opportunities for growth for IBEX in this next generation of customer experience outsourcing. We believe our balance sheet is a competitive advantage as well. While the majority of our competitors are challenged with highly leveraged balance sheets as a result of large acquisitions of more seats, We have been very patient in our M&A strategy. Now, with our clear strategy of transforming our business into a provider of customer experiences, whether live agent, AI virtual agent, or hybrid, we are able to look to the future and identify companies that can help accelerate this strategy, as well as opportunities to invest in our key tech partner ecosystem to create more points of differentiation. In summary, we are very excited and confident in our ability to be a leader in the future models of the BPO industry. We are well on our way to successfully transforming our business. Now, before I turn the call over to Taylor, I would like to take a moment to recognize and thank our CIO, Jim Ferrado, who recently announced his retirement at the end of the fiscal year in June. Jim's contributions to IBEX cannot be measured simply by traditional IT metrics. Since joining the company in 2015, Jim has had an immeasurable impact on the business. His leadership has been instrumental in the company's success from building our award-winning WaveX BPO 2.0 technology platform to enabling our agents to be resilient during COVID as we had to transition thousands of agents to work at home overnight, to keeping our systems safe and secure. Jim has also been key in the development of IBEX's groundbreaking generative AI-powered Wave IEX customer experience solution suite. His pragmatic approach and leadership resulted in a world-class IT infrastructure and organization that has consistently delivered the best CX solutions for some of the world's greatest companies being recognized globally again and again for excellence. We thank Jim for his near decade of service at IBEX and more than 35 years in the IT and BPO spaces and the legacy he leaves at the company. I will now turn the call over to Taylor to go through our financials. Taylor?

Thank you, Bob, and good afternoon, everyone. Thank you for joining the call today. My discussions of our third quarter and fiscal year 2024 financial results references to revenue, net income, and net cash generated from operations are on a U.S. GAAP basis. While adjusted net income, adjusted earnings per share, adjusted EBITDA, and free cash flow are on a non-GAAP basis. Reconciliations of our U.S. GAAP to non-GAAP measures are included in the tables attached to our earnings press release. Our third quarter results are among the strongest in our history. Our record adjusted EBITDA and EPS results were achieved despite the expected 3.6% decline in revenue from the prior year. which resulted in revenue of $126.8 million versus $131.6 million. On a year-over-year basis, revenue was impacted by the completion of project-related revenue received in the prior year, representing two points of the decline, and a changing business environment for several of our fintech and telecommunication clients. Revenue was also impacted by the shift from lower-margin onshore to higher-margin offshore geography. The strength of our 15 new client wins across all our key verticals partially offset these headwinds. Revenue mix continued to grow in our higher margin digital and omnichannel services and offshore geographies. Digital and omnichannel delivery now represents 78% of our total revenue versus 73% in the third quarter a year ago, while our offshore and nearshore revenues now comprise 76% of total revenue versus 72% in the prior year quarter. Our lower margin onshore regions decreased to 24% of total revenue versus 28% in the prior year quarter. We expect that these mixed shift trends will continue to have a positive impact on our long-term margins. Gap net income was $10.3 million, down from $11.3 million in the prior year quarter. The change was primarily the result of a $1.3 million impairment recorded in connection with a strategic decision to exit two of our delivery locations. as well as a $1.5 million severance expense as we focus investment on AI technology, HCM, and ERP infrastructure, as well as our sales and marketing organizations. These investments are important pieces of our strategy to drive and support growth in our business. Our tax rate for the quarter was 11% compared to 14% last year. The changes in effective tax rates between these periods was primarily attributable to changes in revenue mix across our taxable jurisdictions and discrete items. We expect the tax rate to return to near 20% in the fourth quarter. Fully diluted EPS was 57 cents compared to 59 cents the prior year quarter. On a non-GAAP basis, adjusted net income increased to 12.6 million from 11.7 million in the prior year quarter. Non-GAAP fully diluted adjusted earnings per share increased to 70 cents from 61 cents in the prior year quarter. Adjusted EBITDA increased to 19.2 million, or 15.1% of revenue, an all-time high from 18.8 million, or 14.3% of revenue, for the same period last year. The change in adjusted EBITDA margin was primarily driven by our higher gross margin and lower FD&A expenses, excluding the impairment and severance expense from our cost optimization efforts undertaken during the quarter. For the third quarter of fiscal year 2024, our top five, top 10, and top 25 client concentrations remained largely unchanged compared to the prior year at 37%, 54%, and 78%, respectively, of overall revenue, representative of a well-diversified client portfolio. Pushing to our verticals, retail and e-commerce increased to 24.9% of third quarter revenue, versus 22% in the prior year quarter. Health tech increased to 14.6% of third quarter revenue versus 13.8% in the prior year quarter. And travel, transportation, and logistics increased to 13.1% of third quarter revenue versus 10.7% in the prior year quarter. Conversely, our exposure to the telecommunications vertical decreased to 14% of quarterly revenue versus 16.2% in the prior year quarter. Additionally, FinTech decreased to 13.7% of revenue for the quarter versus 18.5% in the prior year quarter, impacted by the changing landscape for some client payment support models and geographic shifts from onshore to offshore delivery. Net cash generated from operating activities was a solid 11.4 million for the quarter, compared to 13.6 million in the prior year quarter. Net cash generated from operating activities was 18.5 million compared to 24.4 million for the nine months ended March 31st, 2024 and 2023 respectively. Our DSOs were 74 days consistent with 73 at the end of the second quarter and in line with industry average. Several larger client payments were received the first week of April due to the quarter end again falling on a weekend and impacted DSOs at the end of the third quarter. Capital expenditures were 1.7 million or 1.3% of revenue in the third quarter of fiscal year 2024 versus 3.7 million or 2.8% of revenue in the prior year quarter as we continue to utilize our available capacity from build outs completed in previous years. Free cash flow is a strong 9.7 million in the current quarter, consistent with 9.8 million in the prior year quarter. Free cash flow increased to 11.8 million from 9.2 million for the nine months ended March 31st, 2024, and 2023, respectively. We ended the third quarter with 50.7 million in cash, down from 57.4 million as of June 2023, driven by share repurchases during the current year. Net cash was 49.3 million, down from 56.4 million as of June 2023. We continued with our share repurchase program announced on September 18, 2023, authorizing us to repurchase up to $30 million worth of shares through March 18, 2024. During the third quarter, we repurchased 500,000 shares for $8.1 million. The nine months ended March 31, 2024, we have repurchased 1.1 million shares, or roughly 6% of our outstanding shares, for $18.6 million. Our board has recently authorized a new share repurchase plan for $30 million over the next year. Our record adjusted EBITDA margin and adjusted EPS was a result of margin improvements across all our regions and the continued growth of our high margin services and geographies. We accomplished these results while continuing to invest in advanced AI capabilities to accelerate future revenue growth. In addition, we had another strong quarter of generating free cash flows. We remain confident in our strategy-driven growth in our higher-margin offshore regions, accelerated by new client wins, and to realize cost savings through optimizing our site footprints that will continue to drive high-performing adjusted EBITDA margins in the years ahead. As a result of our efforts, we anticipate delivering full-year results near the midpoint of our adjusted EBITDA margin guidance, while revenue will be near the lower end of the guidance provided last quarter. We are also improving our previous capital expenditure guidance as we continue to carefully manage our capacity utilization. We remain excited about our business and believe our recent client wins strength for our pipeline and strategic investments will position as well as we head into fiscal year 2025. With that, Bob and I will now take questions. Operator, please open the line.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to stand out. To withdraw your question, please press star 1 1. Please stand by while we compile the Q&A roster. Our question is from the line of Dave Coney with Bayer. The line is open.

Yeah. Hey, guys. Congrats on great profitability.

Great. Thanks, Dave. Yeah, we're really proud of the milestone of punching north of 15%.

Yeah, no, it's great. And maybe if we... Just start, though, on sales activity. You called out in the queue. I know you called out on the call today, too, but you called on the queue specifically that Q3 kind of marked an unthawing of some sales decisions and how Q1 and Q2 were still a little tougher for sales. So things are clearly getting better. What's kind of the timeline between when those get better and then when that kind of goes into revenue? And then kind of also, are these bigger than average or kind of normal size wins?

Yeah, Dave, thanks for that question. And yeah, so, you know, we started seeing at the beginning of our fiscal year that pace, velocity, and size of deals starting to pick up. Okay, so, you know, that would have been, you know, kind of around the July timeframe. Now, The prior two quarters, things were running a little bit slow. So we started getting those and they continued to accelerate into Q3 and some strength into now what I feel like is Q4. So we're excited about that, not only the size and the velocity. Now, what we also like is the quality of these new logos and potential new logos. they're blue chips leading brands that are out there that are really looking, you know, in my mind, looking to challengers to the incumbents. And that plays really well to us. And, you know, and, and the challenge to me sits in two buckets. One is, can you go deliver as a strong differentiated traditional BPO, you know, that, that leverages technology, et cetera. But the other piece of that decision-making is, can you, drive AI into your business to help them solve, you know, solve interactions. And candidly, you know, and why I've leaned into the discussion on AI, Dave, on my remarks is most of what we're seeing is the industry is talking about AI kind of internally. And we are out in front of how AI can impact the customer experience. And so we think those two things work really well for us. And that's what the clients are looking. So the size of the opportunities, I think, are great. The brands are, you know, kind of what we've historically done, which are just, you know, the who's who, the, you know, who everybody wants to do business with. And I love the ability for us to compete and to win.

Gotcha. Thanks for that. And then maybe just one follow up. The the EBITDA margin was really good, obviously. But what was particularly interesting, even with revenue down a little bit, the margin, the gross margin was super, super strong. It was one of the best I think we've ever seen. How are you able to do that? Like, is it a mix, like a geographic mix, or what's happening on the gross margin?

Dave, so let me take the first cut at this, and then, you know, Taylor, if you want to, you know, add some more color onto this. But look, we... The business that we've built is one that is structurally solid, that as we grow, we think we grow in our high-margin services and geographies. Now, right now, we have a few headwinds, but those headwinds are kind of localized to our lower-margin U.S. region. And that region, I think I shared, was down about 4% from prior years. But we are growing and, you know, landing and expanding with those clients into our, you know, Philippine region, you know, and our nearshore regions. And so that overall structure of our business to me is, you know, you put those together and I think our ceiling continues to rise. And so you might have a quarter here that, you know, bounces, you know, that bounces off or so, but our overall ceiling continues to rise as all of those, you know, as all of those vectors connect and align. And that's what happened in Q3. And, you know, as I look out over the, you know, as I look out over the next several quarters, I feel like, you know, gross margin should, we should be able to, you know, really have a, you know, solid, you know, solid performance around gross margin as a result of, you know, as a result of that structure. Now, Taylor, you might want to give, you know, maybe a little bit more color into, you know, into, you know, kind of some of those details, you know, the regional, you know, the regional gross margins, et cetera.

No, absolutely. And we've had an impressive track record of improving gross margins. If you look at like six of the past seven quarters, we've improved gross margins on a year over year basis. And really the, It's a combination, as Bob mentioned, you know, we're going into higher margin services and higher margin geographies, which has helped driving the improvement in our gross margins. And then, you know, recently we've also had a couple regional specific initiatives where we thought we could drive improvement in gross margins and have seen good traction with those initiatives. So it's really a combination of profit improvement initiatives as well as higher margin services.

Got you. No, thanks, guys.

Yeah, thanks, Dave. Appreciate it.

Thank you. This concludes the question and answer session. I would now like to turn it back to Bob Deccan for closing remarks.

Operator, thank you. So, real quickly, Very proud of the team and the results that we posted this quarter. As said, those milestones were quite an achievement from this team. I'm also very excited about the trajectory of our business and really the opportunities that AI presents us and where we believe we are going to be on the leading edge of this transformation. With that, thank you all for joining and look forward to chatting with you next quarter. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.