Q2 2021 Concentrix Corp Earnings Call
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Good day, and thank you for standing by and welcome to the Concentrix as first fiscal second quarter, 2020, 1 and financial results Conference call.
At this time all participants are in a listen only mode. After the speaker presentation. There will be a question answer session to ask a question. During the session you will need to press star 1 on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and.
And now I'll turn the conference over to your Speaker today, David Stein, Vice President of Investor Relations. Please go ahead.
Thank you and good morning, welcome to the Concentrix second quarter fiscal 2021 earnings call. This call is the property of Concentrix and may not be recorded or rebroadcast without the permission of Concentrix. This call contains forward looking statements that address our expected future performance and that by their nature address matters.
They're uncertain these.
These uncertainties may cause our actual future results to be materially different than those expressed and our forward looking statements.
We do not undertake to update our forward looking statements as a result of new information or future events or developments.
Please refer to yesterday's earnings release, and our most recent filings with the SEC for additional information regarding uncertainties that could affect our future financial results.
This includes the risk factors provided in our annual report on form 10-K.
Also during the call, we will discuss non-GAAP financial measures, including free cash flow and non-GAAP operating income adjusted EBITDA and adjusted EPS as well as constant currency revenue growth.
A reconciliation of these non-GAAP measures is available in the news release and on the Concentrix Investor Relations website under financials.
With me on the call today are Chris Caldwell, our President and Chief Executive Officer, and Andre Valentine, Our Chief Financial Officer, Chris will provide a summary of our operating performance and growth strategy and Andre will cover our financial results and business outlook. Then we'll open the call for your questions now.
Now I'll turn the call over to Chris.
Thank you very much David good morning, everyone and welcome to our second quarter earnings call for fiscal 2020.1.
During the second quarter, we continued to see our value proposition resonate and the market coupled with strong momentum and our sales and solid execution and our operations driving our performance to exceed exceed pre COVID-19 levels, we had record revenue of $1.37 billion and the second quarter, representing organic revenue growth of 29%.
Paired with last year.
On a constant currency basis revenue increased by 24%.
Our second quarter non-GAAP operating income improved to $172 million up 155% and adjusted EBITDA increased 113% to 208 million compared with last year.
And the second quarter, while the U S and some parts of Europe started to open up we saw continued effects of the COVID-19 pandemic and certain regions, particularly Asia, where we invested in support and resources for our staff to care for themselves and their families and we focused on humanitarian efforts for all of our staff and their families as they experienced thousands of additional.
<unk> cases across India, Philippines, Vietnam and Malaysia.
Parts and thoughts go out to all those affected with the uptick and cases and lockdowns over 70% of our staff worked at home and the quarter. Our work at home performance remains in line with our pre COVID-19 levels when stock based and our facilities.
Happily in recent weeks, we have seen a return to relatively stability as COVID-19 cases have started to decrease.
Our results and the second quarter included a net COVID-19 impact on profit of $10 million and we expect a similar impact and the third quarter.
Our second quarter was also very strong for bookings nearly surpassing our record third quarter of 2020 for renewals and expansion and new logo wins. Our travel vertical is also now starting to show signs of recovery and our communications sector has started to reach a point of stability, which we expected.
Andre will provide more details on the accelerated growth and each of our verticals.
To focus on our significant new business wins with iconic and disruptive brands for a moment, we signed more than 2 dozen new clients, including more than a dozen new disruptor brands. Our revenue from the structure clients is now on a run rate to exceed $1 billion of total annual revenue.
We're also happy to see new client signings growth across our geographies and geography by geography footprint versus being concentrated in 1 region.
Driving our business growth is our combination of deep domain expertise digitally enabled global delivery and the ability to invest and secure technical infrastructure that is highly adaptable and scalable to support our clients' needs are.
Our unique value proposition intentionally automates lower complexity transactions on behalf of our clients, which leads to a stickier more profitable relationships and more opportunities for growth with existing and new programs are.
Our solutions help transform client businesses through increased efficiency and by delivering greater customer experiences.
Example, for large retail and E Commerce company. This quarter, we recently transform their existing contact model, reducing the human assist portion by a factor of 3.
And then through digital self service and chat bots, and we improved the client net promoter score by 2.5 times.
Our clients value our clients value, our technology, and <unk> solutions and rated us with high performance scores for innovation and our second quarter.
Additional example of our wins and the second quarter include volume acceleration with 1 of the world's largest social media firms, providing sales and content moderation services further penetration within 2 larger financial institutions to provide remediation services anti money laundering services and know your customer services sales of these vocs's.
Platforms additional implementations of Amazon connect and significant growth with existing disruptor clients and Fintech travel and E Commerce industries among others.
We also see a significant opportunity to deploy more complex digital engagement as clients are seeing superior levels of customer experience as an imperative coming out of Covid.
And going into the second half of the year. We are encouraged by the strength and breadth of our pipeline continue to grow both from a size perspective and frequency of multiple offerings engagements.
Among these strong growth opportunities some business challenges do come to manage and areas where fanatical about include the ongoing impact of Covid and ensuring we are taking care of our team members around the world.
We are also focused on continuing to upskill and invest and our staff is the work. We are delivering is more complex than ever before this quarter. We're also taking a meaningful step forward by increasing our wages across North America, and United States for starting positions to ensure we can meet the demand of our growth and be more socially responsible to the communities we operate and.
As a global company, whose roots run through 6 continents and grow deeper every day, we have a long standing commitment to our people and the communities, we live and work and as part of that commitment. We are very happy to have released our first environmental social and governance report with our earnings this quarter. The report provides more details on our <unk>.
Efforts and corporate social responsibility the investments, we're making and our progress and having a measurable and meaningful impact to our staff and their communities. While we expect this report to evolve as we move forward..1 thing that will not change is our commitment to doing the right thing for all of our stakeholders our staff our clients our shareholders and the communities we work in income.
Average you to visit the Investor Relations section of our website and download a copy.
In summary, we are deepening our client relationships relentlessly innovating with new digital solutions and expanding into emerging markets, while we selectively pursue strategic acquisitions to drive superior return for our shareholders.
Based upon strong results year to date, we are confident and exceeding the goals. We discussed on our last earnings call of constant currency revenue growth above 10%.
For fiscal 2021 and margins meaningful Li above pre COVID-19 levels. We are confident we will achieve our stated goal of growing faster than the market with progression and our profit margins.
And finally, I would like to thank our exceptional staff for their commitment to execution and our clients for their trust and our talented board of directors for their support and Mentorship.
Now I'll turn the call over to Andre.
Thank you Chris good to be with you today I'll.
I'll begin with a review of our financial results for the second quarter, and then discuss our business outlook for the third quarter.
As anticipated in our guidance last quarter, our revenue and profit growth accelerated in the second quarter and I'm pleased that we delivered results at the higher and if our guidance range.
Revenue was 1.3 dollars 7 billion.
Constant currency basis revenue increased organically by over 24% compared with last year.
Reported revenues included a foreign currency benefit of $45 million.
And as Chris mentioned, our strong growth reflects increased demand across a broad set of existing and new clients and all of our verticals. We also saw growth in every region, and which we operate and the quarter.
The magnitude of the increase reflects the extreme COVID-19 impacts and the second quarter of last year.
Still even normalizing for Covid impacts, we believe we grew slightly faster and the second quarter than we did and the first quarter of 2021.
Our top performing vertical in terms of year over year revenue growth was retail and travel and E Commerce, which grew 38% due to strong e-commerce volumes and increases with travel and tourism clients as the domestic travel market began to pick up.
Our banking financial services, and insurance and healthcare verticals each grew approximately 36%.
Revenue from technology, and consumer electronics clients grew by approximately 24, 27%.
I am pleased to report that we were able to achieve that relative stability, we expected and the communications and media vertical as revenues and this vertical grew slightly on a sequential basis.
On a combined basis, we also grew with clients and our other verticals by 15%.
Contributing to this growth across our strategic verticals, where our over 115 global disruptor clients, which represented about 19% of our second quarter total revenue approximately $260 million and quarterly revenue and grew by 47% year over year.
Turning to profitability, our non-GAAP operating income was $172 million and our non-GAAP operating margin was 12, 6% and the quarter.
Second quarter, adjusted EBITDA was $208 million.
And our adjusted EBITDA margin was 15, 2%.
Our profitability reflects flow through from strong revenue growth, which more than offset the impact of COVID-19 expenses on a net basis COVID-19 expenses approximated $10 million reduction and profit and the second quarter.
In terms of net income and our second quarter non-GAAP net income was $125 million and adjusted EPS was $2.37.
GAAP results for the second quarter included $35 million of amortization of intangibles and $9 million of share based compensation expense.
GAAP diluted EPS was $1.50 per share.
Our effective GAAP tax rate of 34% and the second quarter includes a $9 million charge related to the tax impact from.
And from the movement of our non core insurance solutions business to assets held for sale as part of our efforts to fine tune our business portfolio.
For clarity the Sis business provides administrative services to life insurance clients and is unrelated to the CX services, we provide to the insurance industry.
Our non-GAAP tax rate was 26%.
Moving to cash flow cash flow from operations and the second quarter totaled approximately $203 million and capital expenditures and the quarter were $29 million.
Accordingly, we generated free cash flow of $174 million and the quarter. We continue to expect capital expenditures for the full year to be and a range of 3.5% to 4% of revenue.
Turning now to the balance sheet and.
At the end of the second quarter cash and cash equivalents was $131 million and total interest bearing debt was $959 million during.
During the quarter, we paid down $150 million on our term loan reducing our outstanding principal balance on net loan to $700 million.
Net debt was $828 million at quarter end.
At the end of the second quarter gross leverage approximate 1.2 times trailing 4 quarters, adjusted EBITDA and liquidity remains strong with over $819 million of cash.
Undrawn lines of credit and capacity on our AR securitization.
Our current liquidity gives us significant financial flexibility our priorities for capital deployment remain growing the existing business through funding organic and strategic growth opportunities. We remain comfortable with up to 3 times gross leverage which provides ample capacity for future disciplined M&A.
Now I'll turn to our expectations for the third quarter.
Given the record demand for CX solutions.
We expect third quarter revenue to be and a range of 135 billion to 1.4 or $1 billion. This translates to 6% constant currency revenue growth at the midpoint of the range.
<unk> and approximately 2 point positive impact of foreign exchange rates compared with the third quarter of last year.
We expect third quarter non-GAAP operating income of $160 million to $174 million, reflecting flow through from strong revenue growth balanced with investments and program ramps and increases in wages for our staff across the globe.
The staff wage increases include a meaningful investment to increase the minimum wage the company will pay to our staff and the U S.
We expect interest expense to be approximately $6 million from the third quarter and effective tax rate of 27% and 28% and a weighted average diluted share count of approximately 52 million shares.
Our non-GAAP operating income guidance for the third quarter excludes approximately $34 million related to the amortization of intangibles and $10 million of share based compensation expense.
Based on our strong year to date performance our guidance for the third quarter and strong new business signings were confident that we will meaningfully exceed the revenue goal of $5.3 billion or double digit revenue growth that we discussed and our last earnings call.
Similarly, we are confident that we will exceed our profitability goal of margins above pre COVID-19 levels that we discussed on our last earnings call again by a meaningful amount.
And you expect that foreign exchange rates will have about a 2 point positive impact on full year 2021 revenue compared with 2020.
In closing we are very.
We're encouraged by the results of the second quarter, we are confident and our expectations for the third quarter and beyond.
Finally.
We are a well positioned global leader and a large fragmented and growing market executing a plan to grow organically faster than that market.
As a proven successful consolidator and market with a strong balance sheet, we are well positioned to deliver sustained growth margin progression and strong free cash flow.
At this time Victor please open the line for questions.
Of course.
As a reminder to ask a question you will need to press star 1 on your telephone and tooling.
A question just press the pound key.
Once again and Starwood for questions 1 more for.
Questions.
Our first question will come from the line group Blue line.
Yeah from Bank of America.
You may begin hi, Thank you for taking my questions and congrats on the strong quarter.
Chris you've talked several times about disruptor clients being a focus for the company can you maybe just talk about how that relationship progresses with these disruptor to clients is it all inflationary and defense that.
Revenue and year to more than year, 1 and year 3 more than year, 2 and on average how many years does it take for a disruptor client to become mature and then possibly started asking for discounts.
And I appreciate the congratulations from a disruptor perspective, it really comes into.
A couple of categories I mean, we look at Disruptors in terms of are they going to be a leader and their space are they doing something that's truly disruptive.
And frankly, whereas their focus on the end markets and.
As you would expect there are some disruptors, who will start small with us very very small and we will grow extremely rapidly and get to a level of maturity within 24 to 36 months. There is others that will grow to a moderate level and sort of be consumed by somebody else and the space or consumed by sort of an existing.
Enterprise clients and then there are some that will.
Not make the other series raises and will be relatively small and might disappear generally what we find from a maturity curve perspective, its somewhere between that I'll call. It 48 months and maybe <unk>.
7 years that they start to kind of look at how they do procurement differently than what they've historically done and the past what we offer to them, though is sort of a significant amount of agility significant amount of ability to scale. The global diversity significant amount of insight into sort of regulatory issues and some places security issues and such.
And places.
And then access to technology that from a capital base, they might not be able to invest and as they start out, but certainly is high value to them as they continue to grow so lots of different offerings, we offer into into that disruptor space.
Great. Thanks for all the details on that from my next question.
And Chris can you talk about what impact do you think competitors Sykes going private and being purchased by the <unk> group will have and the industry and that's part of that can you talk about the pricing environment and.
And your focus on outcomes based pricing how is that trending.
Yeah for sure. So I mean, certainly first I'd like to wish Chuck Sykes. Congratulations he has been a great competitor and certainly a legend and the industry and a fantastic operator.
From our perspective, we historically have not really competed with with a company outside of and some technology spaces.
But.
And the pricing environment, historically remind remained stable whether it's.
Private or public competitors.
And generally the market and what clients are starting to change their attention to is really to your second point outcomes based pricing or outcomes based performance incentives and Thats really where I think we shine because we like those contracts they tend to give us much more leverage we're able to invest more and those contracts and get better benefit from them.
And so we see that as something that will continue to progress in this environment and then takes out sort of a.
Simple price the price comparison and the marketplace.
Got it from.
And last 1 if I can ask 1 to Andre.
Andre Your revenue guide at the midpoint for fiscal <unk> is mostly flat sequentially, but operating margin guide it looks like down 40% sequentially to 12, 1% can you maybe just talk about the puts and takes impacting operating margin and.
And then how does how do those factors trend going forward. Thank you.
Happy to and good to speak with you real blue and so.
Trend, there and Youre right and the midpoint relatively flattish from a revenue perspective and down just a tick.
Sequentially from a margin perspective.
In the third quarter, we invest pretty heavily in ramps into the fourth quarter and so that is certainly the largest of the.
And the puts and takes as we think about rolling forward from Q2 to Q3.
On top of that as Chris and I, both mentioned and we are doing some things globally with staff wages across.
Across our across the globe.
And the real focus also on.
The entry level wages for our U S staff, and so that will have an impact as well.
But again, so thats kind of how we get to that guidance. We think it's balanced guidance and we're very confident we will achieve it.
Okay. Thanks again for all the details congrats on the strong execution and results.
Thank you.
Our next question comes from the line of Shannon Cross from Cross research and Andy.
Again.
Thank you very much.
Can you talk a bit about how the conversations with customers have changed and sort of hopefully we are in the post COVID-19 world or what what some other customers have learned about what they want to do internally versus outsourcing I'm just curious.
And what kind of new opportunities.
And it might be there following what we've all gone through during the last year and then I have a follow up question. Thank you.
But for sure Shannon.
A couple of kind of high level trends first of all we see as a whole.
Clients looking for more touchless ways of engaging with clients and.
And sort of a physical environment and certainly that's been driven by e-commerce and been driven by more sort of services and products delivered to their homes. That's been driven by more sort of digital engagements, where you don't actually have to talk to somebody or chat with somebody and so we're seeing those are really the focus around conversations and how to reduce customer effort.
And how to reduce contact points and how to make the experience sort of delightful and a very simplistic way and so that's also changed some of what.
What their priorities have been around saying when we outsource something instead of outsourcing 1 component of that in order to get full leverage in order to take out more costs and drive a better experience. They are actually looking at sourcing more end to end of the process so that.
For instance, we can take all of that and then not only put and our own technology put on our own staff around it does I don't know digital experience for it and deliver it to the clients.
That has opened up and we made comments about this and sort of Q3 and Q4 scripts and even Q1 is that we're seeing our clients, who we've had long standing relationships with.
And give us more stuff that historically has not been outsourced and so we see that as a very positive trend.
Great. Thank you and then I'm curious.
Is there a potential from more asset sales when you look at the.
Yeah.
Various companies and capabilities that you have and and on the flip side of that how are you thinking about M&A. These days.
So Shawn just on the asset sales you are talking about our divestiture of the Gis business, Yeah, Yeah, exactly yes, no I mean, we're very happy with the portfolio of services that we have and frankly have been investing more and more <unk> was a bit of a unique instance, where we took it as far as we could and then.
Wasn't tying into the rest of our core core focus around customer experience and so wanted to make sure that that team, we're able to continue to grow and so that worked out very very well for all parties involved.
I think from our perspective, when we look to the M&A environment. We've talked about this evaluations are on the higher side right at the moment, we're very focused on making sure that we're disciplined and the type of transaction that we would do to drive the right shareholder returns and we're also very focused and getting capabilities and technology that will increase our <unk>.
Overall ability to deliver better experiences for our clients, we're not after bulk for bulker size for size.
Because we've already attained that and now it's all about really driving superior value to our clients.
Okay, and maybe a clarification just have and wages is this going to hit from an expense perspective, all in the current quarter and or will it be something that sort of low through the model over the next few quarters. Thank you.
It's really and the guidance Shannon and starts to.
I don't want use the word impact, but the investments starts this quarter and that started this quarter and will continue to be and our guidance going forward, but effectively as increase.
And for what we're doing within the wage category.
Okay. Thank you.
Thank you.
Once again that Starwood questions and your next question comes from the line of Vince and <unk>.
Gil from Barrington Research you may begin.
Yes, Chris Great quarter.
Curious the communications and media segment.
And a nice quarter.
Should we expect that to be stable going forward or will we see some real sequentially and then similar.
Question on the travel market.
So Vince.
And from the telecommunications standpoint, we're pretty happy with where it is and we've kind of mentioned that we're seeing stability. So you'll see some growth youll see some.
And frankly, ebbs and flows but really what we're looking at as a percentage of business and we don't see a material change from where that is even though the rest of the business is growing so.
That would indicate there's some underlying uptick but really we look at as a percentage of business more so than anything else and are very happy with where it is and we're happy with the clients that we're doing and the services, we're delivering and the profitability of those returning.
Returning to us in terms of the travel vertical and clients pre COVID-19. It was 1 of our fastest growing verticals both in the disruptor category as well as and sort of the established travel company category and hospitality category.
What we're seeing is very encouraging much sooner than we expected with signs of life and the domestic travel markets. Both in Europe and in North America. So that we definitely want to grow we definitely want to see continued increases and it will somewhat be reliant on how people feeling about travel and how sustainable travelers and then certainly.
And how business travel kicks in.
A couple of components to that but absolutely we expect to see that vertical grow overtime.
And.
You mentioned the pandemic impacting.
Some of your foreign locations.
And I apologize if I missed it but.
Yes.
And as the delivery business delivery disruption and then.
And any of those markets incrementally from.
And last quarter.
The team is just an amazing amazing team.
And the countries and frankly have just done a remarkable job we increased our work at home presence as we kind of called out almost 10%.
And the and the reason, we increased that significantly more but globally and moved a whole number is up about 10% to about 70% work at home and the performance has been in line, if not a little bit better than and facilities and some of those regions. So and extremely happy with how delivery has been able to execute and how we've been able to support the clients.
And then Andre.
Was there anything unusual and other income.
This quarter.
And that really so what primarily shows up there Vince is.
Foreign currency translation gains and we.
We do do some hedging there to try and minimize those.
Volatility there.
What you see coming through is again there is some of the forward points that we do get on the hedges that we put in place.
And so as we think about that line on a go forward basis, I would think about it being relatively neutral and flat.
Okay. Thanks for answering my questions Jordan.
Thank you once again Thats star 1 for questions.
And I'm showing no further questions at this time I would like to turn the call over to Chris for any closing remarks. Thank you very much we very much appreciate your interest and Concentrix. Today. We are pleased with our performance year to date and are confident and the strength of our business model and track record of being a consolidator in the space.
We really continue to see ourselves performing better than the market growth rate with margin expansion and the market leader and CX solutions. We're passionately focused on continuing strong execution and our operations to drive continued growth and our valuation. Thank you again and have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Sure.
And.
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