Concentrix Corporation (NASDAQ:CNXC) Q4 2023 Earnings Call Transcript

Concentrix Corporation (NASDAQ:CNXC) Q4 2023 Earnings Call Transcript January 24, 2024

Concentrix Corporation beats earnings expectations. Reported EPS is $3.36, expectations were $3.09. CNXC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Concentrix Fiscal Fourth Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker for today, David Stein. Please go ahead.

David Stein: Thank you, Lisa, and good evening. Welcome to the Concentrix Fourth Quarter Fiscal 2023 Earnings Call. This call is the property of Concentrix and may not be recorded or rebroadcast without the written permission of Concentrix. This call contains forward-looking statements that address our expected future performance and that, by their nature, address matters that are uncertain. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do 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 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 Investor Relations website under Financials. With me on the call today are Chris Caldwell, our President and Chief Executive Officer, and Andre Valentine, our Chief Financial Officer. Chris will provide a summary of our operating performance and growth strategy, and Andre will cover our financial results and business outlook.

Then we’ll open the call for your questions. Now I’ll turn the call over to Chris.

Chris Caldwell: Thank you very much, David. Hello, everyone, and thank you for joining us today for our fourth quarter and fiscal year 2023 earnings call. It was an incredibly exciting year in which we believe we made the right investments and focused on strengthening our fundamentals. We are excited about the opportunities that are in front of us now with a larger footprint, expanded marquee client base, and more geo-diversified business with the ability to deliver advanced technical solutions at scale. Our 2023 revenue increased 12.5% on an as-reported basis, including approximately 9% from Webhelp. We are excited about the cross-selling traction that already started in the fourth quarter that while small had clients from either side of the combination generating revenue that neither company would have been able to participate in prior to coming together.

On a non-GAAP basis, our operating income increased 14.2%, and our adjusted EBITDA margin was up 30 basis points to 16.6%. We were very pleased with our free cash flow increasing 8% for the year. Throughout 2023, we also made great progress in evolving our solution offerings by developing multiple new intellectual property initiatives for both internal and external consumption, that will allow us to be more integrated into client environments while also reducing our operating costs. A few examples of these initiatives include our internally developed Connect CX product, allowing our game changers to be more productive by automating paths to built-in AI and is now deployed on more than 220,000 desktops, hitting our goal, we mentioned in Q3 of deploying to approximately 80% of our legacy operations.

We continue to expand the deployment of Connect CX across our new footprint and intend to upgrade the platform to GenAI in the next two quarters. Our training CX suite has gone through a massive upgrade this year being rebuilt on GenAI and training over 100,000 game changers in 2023. It is creating more intuitive and interactive engagement and accelerating their speech proficiency, a tool that has gained interest from clients to use in-house based on our results. Our Smart Suite, which we just started to roll out is almost up to 35,000 desktops. Through real-time assisted self-coaching and faster access to personalized haulage management, the set of technologies has delivered double-digit improvement in key metrics like AHT and NPS, all built on GenAI.

These internal tools are in addition to the external cloud and software partners we have used to deliver services to our clients. All these examples continue to demonstrate our focus on being a complete solutions company for our clients with a tech-first mindset, which we believe differentiates us greatly from our peer CX competitors and allows us to deliver higher value services. In 2023, our innovation and complete automation of transactions for partial processes hit an all-time high, which drives higher value to our clients and more efficiencies for us. Turning to the fourth quarter. Our team continued to deliver excellent service for our clients while making considerable progress with the initial integration of the Webhelp business, which I’ll talk about in a bit.

We met several financial and operating milestones in the fourth quarter, which Andre will review in more detail, but at a high level, revenue increased 36% as reported and grew over 3% on a pro forma constant currency basis in the quarter. We also delivered record fourth quarter non-GAAP operating income and adjusted EBITDA up 37% and 40%, respectively. These improvements are as a result of solid growth in Europe, Asia and Latin America with increased movement to offshore and nearshore operations as well as continued delivery efficiencies, some delivered from the tools that I highlighted earlier. I’m also pleased that we continue to grow in each of our key verticals as well as in our catalyst, B2B and specialized healthcare areas. We have invested in a new strategic and consultative set of seller capabilities that will allow us to deliver our [sell as one] (ph) initiative, which focuses on selling complete end-to-end transformational solutions in larger enterprise deals.

With a sales pipeline that currently stands at over $0.25 billion of annual contract value, created all within Q4. Clients continue to appreciate both our advanced services and technologies and our extensive global reach. Our wins this quarter included a broad range of clients across verticals and delivery regions, providing a full spectrum of services. A few examples of those wins. An international money transfer company experiencing exponential growth saw a partner for high-risk compliance operations. We are now providing anti-money laundering and fraud prevention services for this client. The solution includes a European center of excellence with skilled experts and FinTech leadership. The second phase of this project will launch later this quarter, leveraging capabilities of the combined business, including advanced technology from catalyst and our Know Your Customer platform that came from Webhelp.

Our premier health — mental health clinic faced the challenge of establishing consistent practices for customer access. We are providing a comprehensive solution involving a modern curriculum, cloud contact center services, our AnyPaaS solution, CRM integration and Generative AI-driven functionality. Our solution is streamlining processes, increasing efficiency in scheduling and referrals and empowering the team to significantly enhance the overall customer experience in mental health. Another healthcare management company sought best-in-class capabilities and transformative solutions to navigate the complex system for assisting members with provider selection and insurance inquiries. Within 30 days, we started to integrate the technology stack, perform the CX assessment and quality assurance review.

This is helping to revolutionize and evaluate overall member experiences for the client. Finally, an automotive manufacturer faced challenges managing multiple vendors. Our catalyst team leveraged our intelligence operational capabilities for compliance and best practices and developed strategic IT services that implemented dashboard reporting and robotic analysis solutions. The solution marked a significant step forward towards achieving higher efficiency and innovative automation within their business. Based on the reception from clients and our pipeline of opportunities that combine with capabilities of Concentrix Catalyst and our core CX operations, it is evident that our strategy is working. Our clients view the combination of deep domain expertise, digitally enabled global delivery and our ability to invest and secure adaptable, scalable technology as key differentiators.

Our unique approach to intentionally infuse digital technologies and analytics continues to drive sales wins. Turning to our Webhelp transaction. This marks a significant milestone in the evolution of our company. It is the beginning of a new chapter, creating a global market leader with a world-class platform for value creation. We now offer one of the most robust, well-balanced global footprint in the industry. The combination of the two companies broaden our technology and AI solutions in multiple high-value verticals, strengthening our end-to-end value proposition and adding significant new consulting, technology and operating capabilities in Europe, Latin America and Africa. The integration of the two companies is progressing smoothly and is contributing as anticipated.

Throughout the quarter, we achieved significant integration milestones. Examples include the start of successful migration of over 30,000 new staff to our HR systems and starting the sales management practice and establishing the global leadership structure. We are thrilled with the talented staff and the strength of our combined execution. As I mentioned, we are already converting a growing pipeline for wins that neither company could have won without the other, and we are on track to deliver the cost synergies we discussed when we announced the combination. Turning to fiscal 2024. In the first quarter, we expect to make progress towards achieving our synergy targets for the combination as integration activities move forward. We expect to continue to convert and ramp synergy pipeline wins as well.

For the full year, we expect revenue growth, profit improvement, strong cash generation and debt reduction. We also see 2024 being the year that GenAI will start to positively influence our revenue and margins in the later part of the year and into early 2025. While the specific timing of these advancements with AI and client adoption are still not entirely clear, we are now confident in our ability to offer competitive solutions and see benefits from the technology. While our clients are taking time on their AI adoption, we are seeing tangible benefits with our own use cases, and we’ll continue to invest — these investments to make us more efficient and offer a higher level of service to our clients ahead of returns for the next few quarters.

We see immense potential in the emerging technologies that can intelligently act on customer intent to improve the customer experience and are building out new capabilities and services to take advantage of the market as it develops. Based on our conversations with clients and the proof of concept we’re currently working on, we continue to believe that GenAI will enhance the customer experience with human involvement versus completely automating work. Our current GenAI pipeline includes over 140 client engagements. While the majority of these projects revolve around proof of concepts, a few projects have transitioned to the run or managed services phase. The use cases that are gaining traction relate mostly to our technology, allowing our game changers to be more productive and more personalized engagement specific to the end customers.

A few relate to completely automated services replacing low-value work while we generate more managed services type of revenue for supporting the technology and the environment. In summary, we have made great strides executing our strategy in 2023, making investments in acquired and organic growth and a differentiated growth model that I believe will allow us to outperform in the market. We believe that 2024 will require continued investment to ensure we are ahead of the market for further GenAI deployments at scale. Finally, I want to acknowledge the collective strength of the team we’ve built and thank them all for their adaptability and commitment to execution in the evolving industry. Their dedication and hard work has positioned us as a formidable force in the market.

I also want to thank our clients for their trust, our talented Board of Directors for their support and mentorship and our investors for the confidence in Concentrix. We look forward to an exciting year ahead and the continued success of our company. Now, I will turn the call over to Andre. Andre?

Andre Valentine: Thank you, Chris, and hello, everyone. I’ll begin with a look at our financial results for the fourth quarter and then discuss our business outlook for fiscal year 2024. I’m pleased to report that our revenue and profitability metrics not only met but exceeded our Q4 guidance. Free cash flow also remained strong, allowing for substantial debt reduction in the fourth quarter. Fourth quarter revenue was $2.23 billion, which included $574 million added by the Webhelp business for the last two months of the quarter. We will not be separately reporting Webhelp performance going forward as we are now managing the business on an integrated basis. On a pro forma basis, as if the Webhelp combination was completed at the beginning of the fourth quarter, revenue for the quarter was $2.42 billion, resulting in pro forma constant currency growth of approximately 3.5%.

As anticipated, the contribution from the legacy business came in at the low end of our prior full year guide and the Webhelp business contributed faster growth. Revenue increases with clients in our four strategic verticals more than offset some volume softness with a few clients. On a pro forma basis, revenue from retail, travel and e-commerce clients grew 12% in the quarter. Pro forma revenue from banking, financial services and insurance clients grew 6%. Healthcare client revenue grew 5% on a pro forma basis. Revenue from technology and consumer electronics clients grew by 1% on a pro forma basis as growth with several clients was offset by continued softer volumes with a large consumer electronics client. Continuing trends from earlier in the year, pro forma revenue from communications and media clients decreased by 3% and revenue from clients in our other vertical decreased 6%.

While we grew on a pro forma basis with 14 of our 20 largest clients, softer volumes with a handful of consumer electronics, retail, e-commerce and communications clients remained a headwind. Turning to profitability. Non-GAAP operating income was $341 million in the fourth quarter, up $93 million compared with last year. Our non-GAAP operating margin was 15.3%, up 20 basis points from the fourth quarter last year. Adjusted EBITDA was $398 million, up $113 million compared with last year. Our adjusted EBITDA margin was 17.8%, up 40 basis points from last year. This margin progress reflects profit flow-through on revenue growth efficiency gains across our operations and early attainment of synergies from the Webhelp combination. On a pro forma basis, as if the Webhelp transaction had closed at the beginning of the prior year’s fourth quarter, profitability metrics would have been as follows: non-GAAP operating income of $365 million, up $22 million compared with last year.

Non-GAAP operating margin of 15.1%, up 50 basis points from the prior year. Adjusted EBITDA of $429 million, up $28 million. And adjusted EBITDA margin of 17.8%, up 70 basis points from last year. The large swing in our reported other expense line in the quarter was mostly due to items associated with the Webhelp combination. These included a $16 million increase in the fair value of contingent share consideration related to the combination and $13 million in net foreign currency losses. We believe that these items do not reflect the underlying health of our operations and future changes in the fair value of contingent share consideration and foreign currency movements are not predictable. Accordingly, we have adjusted our non-GAAP net income and non-GAAP EPS metrics to exclude these items.

Going forward, our reporting of non-GAAP net income and non-GAAP EPS exclude the change in fair value of contingent share consideration related to Webhelp combination and net foreign currency gains and losses. We believe that this change removes confusion in the reported non-GAAP net income and EPS results and more closely aligns our reporting with investors’ expectations. This measure is also on a consistent basis with how we provided non-GAAP EPS guidance for the fourth quarter. The presentation for all prior periods has been updated to reflect this change. Non-GAAP net income was $213 million in the quarter compared with $146 million last year. Non-GAAP EPS was $3.36 per share compared with $2.80 per share last year. GAAP results for the fourth quarter of 2023 included $40 million in expenses related to the combination and integration, $97 million in amortization of intangibles, $24 million in share-based compensation expense, a $16 million change in the fair value of contingent share consideration, $13 million in net foreign currency losses and $3 million in imputed interest related to the seller’s note issued in connection with the combination.

Turning to cash flow. Cash generation from operations in the fourth quarter totaled $229 million and capital expenditures were $65 million. This resulted in free cash flow of $164 million, including $40 million of transaction and integration costs related to the combination. This is within our guidance range for the quarter, which excluded the transaction and integration costs. For the full year 2023, we achieved our expectation of more than $500 million in free cash flow, excluding transaction and integration costs associated with Webhelp. Moving forward, we expect capital expenditures to be approximately 2.5% of revenue. Our GAAP and non-GAAP tax rates were 10% and 21%, respectively in the fourth quarter. This was lower than expected due to onetime items that changed the geographic mix of our income, reducing our exposure to certain minimum taxes and allowing us to use more net operating loss carry for us than we anticipated.

Our non-GAAP tax rate for the full year was 24%. Turning to the balance sheet. At the end of the fourth quarter, cash and cash equivalents were $295 million, and total debt was of $4.94 billion. Net debt was $4.65 billion at the end of the fourth quarter. The gross debt balance included $2.15 billion of senior unsecured notes $1.9 billion outstanding on our term loan, the $762 million seller’s note and $129 million of borrowings under our AR securitization facility and as reported net of debt issuance costs and discounts. Our gross debt of $4.94 billion at the end of the year represents a reduction of nearly $300 million since the close of the combination as we use free cash flow and a reduction of cash on the balance sheet to pay down debt.

By year-end, we had reduced net debt by approximately $150 million after the combination closed. We reduced net leverage, which stood at 3.2 times pro forma adjusted EBITDA at combination close to 3.0 times by year-end. We did this in addition to continuing an active program for capital return. Our strong free cash flow generation and adjusted EBITDA growth gives us a clear path to reduce leverage further and we’re committed to our plan to reduce net leverage to close to 2 times adjusted EBITDA within two years of the close of the combination. Regarding our capital allocation priorities, our focus remains on organic growth, the continued integration of Webhelp, realizing planned synergies and repaying debt. Consistent with our commitment to investment-grade principles, we will prioritize paying down debt and reducing our net leverage while continuing our dividend and disciplined share repurchases.

During the fourth quarter, we paid $21 million through our annual — quarterly dividend, I should say, of $0.3025 per share. We also repurchased 286,000 shares of our stock for approximately $23 million at an average price of approximately $79 per share. For the full year, we paid $64 million in dividends and made $81 million in share repurchases. At year-end, the remaining authorization on our share repurchase plan was approximately $290 million. We’ve continued to repurchase shares in the first quarter of 2024 with repurchases totaling approximately $11 million quarter-to-date. At year-end, our liquidity remained strong at $1.71 billion, including our $1.04 billion line of credit, which is undrawn, cash on hand, and the additional capacity of $371 million on our AR securitization.

Our strong balance sheet and cash flow generation provides significant flexibility for the future. Now I’ll turn my attention to the business outlook for the first quarter and full year 2024. To help with year-over-year comparisons on a go-forward basis, we have published quarterly pro forma revenue figures to help model future year-over-year performance. These figures demonstrate how the combined business would have performed if the transaction had closed at the beginning of 2023. The pro forma data is available in our historical metrics file, which can be accessed on our Investor Relations website. For the first quarter, we expect revenue to be in the range of $2.36 billion to $2.406 billion based on current exchange rates. This reflects approximately 1% to 3% pro forma constant currency growth and approximately 1.1% exchange rate headwind.

Pro forma revenue was $2.36 billion in the first quarter of 2023. In terms of profitability, in the first quarter, we expect non-GAAP operating income in the range of $315 million to $325 million. At the midpoint of our guidance, this equates to non-GAAP operating income margin of approximately 13.4%, an increase of 10 basis points over the prior year and 40 basis points on a pro forma basis. On a pro forma basis, non-GAAP operating income was $307 million in the first quarter of 2023. Our non-GAAP EPS expectations for the first quarter are in a range of $2.51 per share to $2.65 per share. The calculation of this metric is consistent with the approach that I described earlier. As is typical in our business, we expect first quarter free cash flow to be approximately breakeven and for free cash flow to ramp up meaningfully in the second quarter.

We expect interest expense in the first quarter to be approximately $79 million, excluding $4 million of imputed interest on the seller’s note. We expect an effective tax rate of approximately 26% to 27%. We expect a weighted average diluted share count of approximately 65.8 million shares. Consistent with prior periods, our non-GAAP diluted EPS calculation follows the two class method, allocating earnings between common stock and participating securities. For the first 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. Moving to our outlook for the entire year, we expect 2024 revenue to be in the range of $9.51 billion to $9.70 billion for the full year.

This reflects approximately 1% to 3% pro forma constant currency growth and our revenue expectations net of a 70 basis point exchange rate headwind. Pro forma revenue was $9.49 billion for the full year 2023. Our full year profitability expectations include non-GAAP operating income in a range of $1.39 billion to $1.45 billion. At the midpoint of the range, this equates to a non-GAAP operating margin of 14.8%, an increase of 60 basis points over the prior year and 90 basis points on a pro forma basis. Our guidance for the full year reflects our confidence in achieving our year one synergy target of $75 million. For context, our current achieved net synergy run rate is approximately $55 million on an annualized basis. Pro forma non-GAAP operating income was $1.32 billion for the full year 2023.

Our non-GAAP EPS expectations for the full year are in the range of $11.69 per share to $12.50 per share. We expect full year interest expense to be approximately $295 million, excluding $16 million of imputed interest on the seller’s note. An effective tax rate of approximately 26% to 27% and a weighted average diluted share count of approximately 65.6 million shares. In calculating non-GAAP diluted EPS attributable to common shares for the full year, we expect approximately 96% of total net income will be attributable to common shares. In terms of cash flow, we expect another strong year with free cash flow growing by approximately 40% to over $700 million in 2024, inclusive of acquisition and integration costs. This has positioned us to further reduce our net leverage to approximately 2.5 times adjusted EBITDA by year-end, assuming no further acquisitions.

We remain committed to reducing our net leverage to close to 2 times adjusted EBITDA within two years after the close of the combination. Our business outlook does not include any future acquisitions or impacts from future foreign currency fluctuations. In closing, we had a very successful year with strong revenue growth, margin expansion and free cash flow generation. We’re excited about the combination with Webhelp, which has joined two leading CX providers into global platform for growth and value creation. We believe our range and global reach of high-value services and digital capabilities creates a unique customer engagement offering that will keep our business resilient through business cycles. We look forward to another year of growth and value creation.

With that, operator, please open the line for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. The first question that we have for today is from Joseph Vafi of Canaccord. Your line is open.

Joseph Vafi: Hey guys, good afternoon. Nice to see strong results here for the end of the year. Just wanted to maybe drill down a little bit on your guidance philosophy here for the coming fiscal year. And any assumptions you have on changes in the macro relative to where you are on that revenue guide? And then I’ll have a quick follow-up.

Chris Caldwell: Sure, Joe, it’s Chris. I’ll pass to Andre if he’s got a follow-up comments. The way we look at 2024 evolving is similar to 2023. We don’t expect there to be a sort of seasonal peak in Q4. We expect retail and e-commerce continuing to be somewhat muted, primarily driven by the macroeconomic conditions. Similar with consumer electronics, we’re seeing that as relatively muted. And so we see it as being that consistency through the course of the year. We do see us being able to deploy more of our Generative AI solutions internally through the course of the year that will add to some better productivity gains. But as we’ve called out, kind of investing that into, frankly, winning the business, doing more transformation, and building out more tools because we do think that this year, we’ll start to see a bit more of an inflection point near the end of the year for client solutions.

That will mute a bit of growth, but that’s more of the back half of the year is the way we are looking at it.

Joseph Vafi: Got it. And then — and maybe you could compare and contrast maybe the cadence of momentum between kind of core Concentrix and then Webhelp. I know they’re kind of integrating so it may be harder to do at this point, but how — is there a way to kind of give us a little more color into those two sides of the business? Thanks.

Chris Caldwell: Yeah. Joe, it’s pretty integrated even now as we speak and we talked about [indiscernible] deals. What I’ll tell you is that the Webhelp business has brought us more kind of nearshore and offshore capabilities for our Europe business. And so clearly, our goal over the next year is to drive more business into higher profit nearshore and offshore regions than sort of Continental Europe for some of the business that we’re doing. The Webhelp business also brings us more e-commerce clients that are — and travel clients within the market, and that’s a global comment, clients in Latin America and Europe in those categories. And frankly, that has been a fairly successful high-growth area for us and so that’s like to be.

And then lastly, in some of the newer capabilities that we’re bringing on board, like the AML and KYC activity that we called out as some of the wins that we’ve got — we expect to see some good wins from that. But the general like-for-like core business is very, very, very similar. It really brings us the additional footprint and in additional market clients that we were after.

Andre Valentine: Yeah, I think it’s fair, Joe, to say that when we acquired Webhelp, it was growing faster than Concentrix, I think in our guidance, that continues and it certainly helped by the fact that unlike the Concentrix business, Webhelp did not have much of a presence in North America where we do see some pressure given higher costs and clients’ desire to drive costs down through automating transactions or looking for nearshore or offshore alternatives to onshore North American services.

Joseph Vafi: Got it. Great. Thanks guys for that color.

Andre Valentine: Thank you.

Operator: Thank you. One moment for our next question. And our next question will be coming from Vincent Colicchio of Barrington Research. Your line is open.

Vincent Colicchio: Yeah, Chris, congrats on a good quarter. I’m curious how significant are the revenue synergies that are baked into your guidance?

Chris Caldwell: Yeah. To be quite honest, Vince, they are quite conservative. We — as we talked when we announced the deal, we did not count on revenue synergies, that was sort of additional extra. We were more focused on getting from cost synergy perspective as we looked at the numbers. What I would tell you is that normally, it takes six to eight months before we start to see real kind of material opportunities that come from bringing two businesses together. We were very happy and surprised that we got a few small deals done within the fourth quarter, but I wouldn’t overread into that. I still think it’s sort of that six to eight-month window before it becomes more material, and we haven’t really looked at that within our guide for the year.

Vincent Colicchio: And then have you baked in — do you have any concerns about client losses due to increased revenue concentration? I know there was not a lot of overlap between the two firms.

Chris Caldwell: Yeah, there wasn’t a lot of overlap between the two firms, which is what really interested us. We haven’t had any feedback from clients that we’re over-indexed with any of them. In fact, a few that we thought we were going to be touching that threshold, actually we’ve done well with in terms of finding new opportunities. So that hasn’t been a concern at all so far, and we don’t see anything in the horizon.

Vincent Colicchio: And the last one for me. You had referred to leveraging AI for productivity purposes as the main driver for you, and not seeing it as a labor substitute. Could you give us your latest thoughts on the latter?