Q3 2021 Concentrix Corp Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to Concentrix fiscal third quarter 2021 financial results conference call. At this time all participant lines are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If you would like to ask a question Press Star then one on your touch.
Tom telephone.
As a reminder, today's call is being recorded if you require any further assistance. Please press Star then zero I would now like to turn the call over to your host today, David Stein Vice President Investor Relations. Please go ahead.
Sarah and good morning, welcome to the Concentrix third 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 that are uncertain. These uncertainties may cause our actual future results to be materially different than those expressed in our forward looking statements. We.
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 non-GAAP operating income adjusted EBITDA and adjusted EPS as well as adjusted constant currency revenue growth.
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 I'll turn the call over to Chris.
Thank you very much David good morning, everyone and welcome to our third quarter earnings call for fiscal 2021.
I'll be covering our announcement about our new dividend and share repurchase program later in my comments, but first wanted to start off with a strong operating results, we delivered outstanding organic growth and profit progression in the third quarter. What pleases me. Most is a broad range, where the growth is coming from and also the sustainability of the work that we are we.
As a reminder, at less than 1% of our revenue comes from Covid specific programs.
In the third quarter, we recorded revenue of $5.0 billion, representing reported revenue growth of 20% compared with last year on.
On an adjusted constant currency basis revenue increased 19% or.
Our third quarter non-GAAP operating income improved to 182 million up 49% compared with last year, adjusted EBITDA increased 40% to $215 million and non-GAAP earnings per share increased 63% to $51.0
We delivered these strong results, while continuing to invest in our stock our client relationships and our technology platforms.
Digging into our operating results in more detail in the third quarter, we saw revenue growth across all verticals, particularly in technology retail banking and healthcare.
Revenue from our travel and transportation clients, one of our fast growing some verticals before COVID-19 for the first time exceeded pre pandemic levels in the third quarter with particular strength in Europe and Asia. This is encouraging as we look to regain the business we lost from pandemic. Additionally, during the quarter we drew.
Broad based growth across all geographies.
While we are encouraged by these growth trends. Nevertheless, COVID-19 continue to impact our team and operations during the quarter, we experienced virus or just primarily in Asia and continued to invest in the physical and mental health of our staff, including providing vaccine support in many of the regions we operate in.
Our work at home stop state level at 70%, even as we experienced COVID-19 related impacts in the third quarter. We remained strong overall performance demonstrating the resilience of our operating model. Our results include a net COVID-19 impact on profit of approximately $6 million in.
In addition to the strong revenue and profit performance in the third quarter. We continue to see very strong new business signings. This included all time high new logo acquisition.
Once again, we signed more than two dozen new clients in the quarter, including over a dozen new disruptor brands. Our revenue from disruptor clients is now on a run rate approaching $2.0 billion of total annual revenue.
Part of our success in winning new business is due to our digital transformation capabilities and disciplined processes. Our end to end solutions help transform client businesses through increased efficiency and by delivering greater customer experiences for their customers.
Many of our large enterprise clients and disruptor clients are benefiting from our digitally enabled solutions for.
For example, we recently helped a large technology company transform its customer journey.
How they deliver their services reduce traditional interactions and moved more into self service using technology, we implemented.
This increase their customer satisfaction by over 50%, resulting in a significant increase in sales through their channel, while reducing their costs by about 30%.
Another example of how we're delivering differentiated services for our clients as a high growth Fintech company that was having difficulty meeting demand with their internal resources and a few partners that we're unable to scale.
We're able to consolidate much of the volume help optimize their customer journey map drove efficiencies and effective result across our credit card loan and retail banking business delivered cost savings of 35%.
And within 24 months have reached their larger partner status.
Our clients view, our combination of deep domain expertise digital enabled global delivery and the ability to invest in the secure adaptable and scalable technology technology infrastructure as key Differentiators. We are proud to have received all time high scores for innovation from our clients during the third quarter.
We will be stepping up our investment in our technology platform to continue this momentum as we see long term benefits of this strategy.
We see a significant opportunity to deploy more complex digital engagement as clients seek superior levels of customer experience.
Our sales pipeline continued to grow across all regions and verticals during the quarter and we expect the fourth quarter to be another strong quarter of new business signings.
This gives us confidence in our ability to drive incremental growth in future quarters. We now expect above market adjusted constant currency revenue growth of approximately 17% for the full year with meaningful profit margin expansion well above pre COVID-19 levels looking forward, we are bullish on the <unk> market.
Fundamentals client demand for innovative digital and technology solutions, and our ability to execute for opportunities for value creation.
Our continued strong financial position provides flexibility for us to invest in the business and enhance shareholder value across multiple areas based on our current financial strength and our confidence in the future today, we announced a quarterly dividend and share repurchase program as part of our capital deployment plan to increase shareholder value we are.
Pleased to initiate a quarterly dividend of <unk> 25 per share in the fourth quarter.
We are also pleased that our board has authorized a $500 million stock repurchase program.
We are still committed to continuing to look for accretive M&A targets and even with our announcement today, we have an ability to invest significantly in the right acquisitions.
In summary, we expect to achieve faster than market growth with margin expansion as a market leader. We are passionately focused on continuing to drive superior execution and enhance shareholder value.
We'd like to thank our exceptional staff for their commitment to execution, our clients for their trust and our board of directors for their support and Mentorship and our investors for their confidence in Concentrix before I turn the call over to Andre I want to let you know we're planning to hold an investor day in January 2022 to review our progress since our spin off last year.
And the incredible opportunity and our superior ability to lead in the CX industry. So look for a save the date communication later this quarter now I will turn the call over to Andre Andre.
Thank you Chris.
Good to be with you today.
I'll begin with review of our financial results for the third quarter, and then discuss our business outlook for the fourth quarter.
We delivered strong revenue growth with margin expansion in the quarter.
Our revenue of $5.0 billion came in at the high end of our guidance for the quarter.
Reported revenue included a foreign currency benefit of $23 million.
As discussed on our earnings call last quarter.
Divested non CX elements of our insurance business as well as a small mobile networks business during the quarter.
To help evaluate our constant currency revenue growth without the impact of these divestitures.
Produced a new metric adjusted constant currency revenue growth, which removes the impact of both foreign currency translation and the divested businesses.
On this adjusted constant currency basis revenue increased 19% in the third quarter.
This strong growth reflects increased demand across a broad set of existing and new clients in all verticals and in every region.
Our top performing vertical in terms of year over year revenue growth with banking and financial services and insurance, which grew 27% due to strong increases with multiple banking and fintech clients.
Revenue from retail travel and e-commerce clients grew 26%.
Technology, and consumer electronics, and health care verticals each grew by approximately 24%.
Communications and media client revenue grew 7% against the prior year quarter, while growing slightly sequentially.
On a combined basis, we grew with clients in our other verticals by 11%.
Contributing to the growth across our strategic verticals, where our more than 115 global disruptor clients.
These clients represented about 21% of our revenue in the quarter or approximately $293 million and grew by 54% year on year.
Turning to profitability non-GAAP operating income exceeded our guidance for the third quarter, our non-GAAP operating income was $182 million.
And our non-GAAP operating margin was 13, 8% in the quarter.
Third quarter, adjusted EBITDA was $215 million and our adjusted EBITDA margin was 15, 4%.
Wrong profitability reflects flow through from strong revenue growth, which more than offset the continued impact of COVID-19 on the business.
In terms of net income.
In the third quarter non-GAAP net income was $132 million and adjusted EPS was $51.0 sets up 63% from the prior year.
GAAP results for the third quarter included 34 million of amortization of intangibles $9 billion of share based compensation expense and a pretax gain of $13 million related to the divestitures I mentioned earlier.
GAAP diluted EPS was $2 eight.
Our effective GAAP tax rate was 28% in the third quarter.
Moving to cash flow cash flow from operations in the third quarter totaled approximately $93 million and capital expenditures in the quarter were $42 million.
Capital spending was approximately 3% of revenue and we continue to invest in support of growth, particularly in support of <unk>.
Work from home and digital offerings and security.
Accordingly, we generated free cash flow of $51 million in the quarter.
We continue to expect capital expenditures for the full year to be in the range of three 5% to 4% of revenue.
Also in the quarter, we received proceeds of $74 million from the divestitures.
Turning now to the balance sheet.
At the end of the third quarter cash and cash equivalents totaled $154 million.
Total interest bearing debt with $866 million net.
Net of issuance costs.
This debt consisted of $700 million on our term loan and 169 million borrowed against our accounts receivable securitization.
During the quarter, we paid down $94 million of borrowings using divestiture proceeds and free cash flow.
Net debt was $712 million at quarter end.
We ended our third quarter with gross leverage of approximately 1.0 times, our trailing four quarters adjusted EBITDA and 0.8 times on a net leverage basis.
Our liquidity remains strong with over $935 million of cash undrawn lines of credit and capacity on our accounts receivable securitization.
Our current liquidity gives us significant financial flexibility.
As Chris mentioned, our strong results financial position and free cash flow generation create options for us to invest in the business and enhance shareholder value.
Our priority for capital deployment remains growing the existing business through funding organic and strategic growth opportunities.
We have the financial flexibility to do this while providing disciplined returns of cash to shareholders. We remain comfortable with up to three times gross leverage which provides ample capacity for future disciplined M&A.
Now I'll turn to our expectations for the fourth quarter.
Given the continued strong demand for CX solutions solutions, we expect fourth quarter revenue to be in the range of 144 billion to $49.0 billion.
This translates to a range of 11% to 14% and adjusted constant currency revenue growth.
The adjusted constant currency growth includes an approximate negative $9 million combined year over year impact.
From the divested businesses and currency translation.
We expect fourth quarter non-GAAP operating income of 195 million to $205 million.
Reflecting flow through from strong seasonal revenue growth.
For the fourth quarter, we expect interest expense to be approximately $5 million and we expect an effective tax rate of 27% to 28% and a weighted average diluted share count.
Approximately 52 million shares.
Our non-GAAP operating income guidance for the fourth quarter excludes approximately $34 million related to the amortization of intangibles and $11 million of share based compensation expense.
Our guidance for the fourth quarter implies full year 2021 revenue of just under $11.0 billion.
Or approximately 17% revenue growth on an adjusted constant currency basis.
We expect the combined impact of divested businesses and foreign exchange rates will be just above a one point positive impact on the full year 2021 reported revenue compared with 2020.
Our guidance also implies that our full year 2021, non-GAAP operating income margin will be approximately 13%.
In closing we are very encouraged by our results and the progress we are making across the business. We are confident in our expectations for the fourth quarter and beyond.
We're a global leader in a large fragmented and growing market executing a plan to grow organically faster than that market.
As a proven industry consolidator with a strong balance sheet, we are well positioned to deliver sustained growth margin progression free cash flow.
And enhance shareholder returns.
At this time, Sir please open the line for questions.
Thank you.
To ask a question you will need to press Star then one on your telephone to lift.
Your question. Please press the pound key again that is star then one if you will.
I'd like to ask a question.
Our first question comes from the line of.
<unk> Bhattacharya with Bank of America. Your line is now open.
Thank you for taking my questions.
Congrats on the quarter and congrats on the capital return plan with the dividend.
Maybe for my first question I'd like to ask Chris.
Maybe on pricing can you give us an idea of what percent of your contracts are based on FTE or full time employee based pricing versus other pricing mechanisms such as output based pricing or gain.
Like transaction pricing or gain sharing and the reason I asked this is as you see your mix shifting away from voice to more non voice services as you've quite more value do you think that.
That mix of pricing mechanism towards more performance based pricing can happen and do you see that mix shifting.
Yes.
I would answer in two parts. So I think right now what we've said is we still have more than 50% of our revenue.
Yes.
Our component tied to a unit of measure might be pursuing transaction other type of metric.
So we use that as sort of directly related to costs.
And then our gain share or.
While much of the gain share model continues to grow so the deals that we're winning now more and more of that percentage is becoming.
Gain share model, which we like we enjoy.
We will drive our margins going forward and aligns our.
Yeah.
Loaned us with our clients, but we still have a lot of older business that we continue to work through that is based on a unit of measurement.
Got it thanks for that.
Can I ask you about labor.
Labor costs as well as the competition for labor again, as you mix shift more towards higher value services are you seeing more competition for skilled labor and then just how is that trending in the in the face of Covid in the current environment.
Yes, I think actually looking at markets are always competitive and we go after staff, who are our top tier staff and want to make sure that we create the right environment and culture to hire them and retain them and have them grow their careers with us. So we have not had a challenge to do.
Point, but we're always very focused on making sure that we do have the rate environment and we are competitive in the marketplace.
We are creating an environment that people want to join and continue to grow their careers with us.
Got it I have a couple of quick ones for Andre if I can sneak them in.
Could you remind us of what the typical seasonal where seasonality is going from <unk> to <unk> <unk>.
He was typically a strong quarter for you guys I think youre guiding for 5% sequentially and Youre guiding above the street. So that's.
That's great, but it just seems a little conservative just given past historical performance or maybe thats being impacted by the divestitures. So can you just remind us on what typical seasonality is and how that compares to that yeah I think.
Typical seasonality is just as you've suggested flu, which is the fourth quarter is a strong quarter from a seasonal perspective and you see that in our guide.
Admittedly, we are not guiding to as much sequential growth as we had last year.
Q3 was still a little bit impacted last year by Covid.
Certainly as we entered that quarter and so that probably contributed a little bit to the sequential ramp that you saw last year.
So if you think about some of the verticals, where we're seeing growth.
Particularly around.
Consumer electronics and tech, but also in banking financial services and insurance those have a little bit less of a seasonal component to them.
Some of the other verticals that we're in and so.
That might be muting things, just a little bit but again.
<unk>.
Have signaled all along that we expected.
Wrong sequential growth from Q3 to Q4, and I think our guidance reflects that.
Right. Okay. Thanks, Thanks for the details on that and then very last question for me is.
On the capital return plan.
Can you help us think about the buyback.
<unk> put a new authorization in but how should we be thinking about the cadence of the buyback.
And just also in terms of you mentioned M&A a couple of times I mean, what is the focus in terms of like what size of an acquisition or what parameters you keep in mind when you look at acquisitions. Thanks again.
Sure So I'll be happy to do that and Chris can come back cleanup, but anything I Miss.
I would say as it relates to the pace and I certainly don't want to predict.
How fast we will enter the market under the share repurchase plan, but I think if you look at what we're doing with both the dividend and the share repurchase youre going to see us start.
Fairly modestly in terms of capital return.
That said, we do believe our shares are undervalued.
But we also believe that investing in organic <unk>.
And accretive M&A is the best way and the best use of capital to drive shareholder value. So again that we purchased as part of kind of a balanced capital allocation plan that includes.
Accretive M&A on a disciplined basis, along with the dividend.
You look at the size of the authorization.
Pretty much.
In line with if you look at our peer groups.
Is.
Their most recent authorizations as a percent of outstanding and I would imagine our pace will be.
In line with that so certainly as you put the $500 million in place.
That is out there to be used over.
Fairly long period.
So I think that probably gives you some color on that as for the M&A.
We're very very focused on that.
And we as Chris mentioned, we have ample capacity.
To do M&A of various sizes frankly.
And so we're going to be disciplined in what we do.
So we could certainly have the firepower to do large acquisitions, but also are focused on tuck ins that increase the value of the platform I'll, let Chris.
Add anything he would like to add to that.
I would agree Andre Ripley will talk about the financial returns and the strategic significance to the M&A if it matches those too.
That's more.
Important to us than sort of frankly the size when you look at just.
Straight dollar value.
Got it thanks for all the details and congrats again on the quarter.
Thanks, so much.
Thank you. Our next question comes from the line of Shannon Cross with Cross Research. Your line is now open.
Hi, This is Matthew Marietta, one for Shannon Cross I, just got a couple here.
Can you walk us through the puts and takes on the operating margin.
Quarter, you performed pretty well ahead of guidance is there anything specific to call out there.
Maybe quantify the impact from wage increases during the quarter and how we should model that going forward.
Thanks.
Yes. So if you think about our performance we came in roughly $7 million to $8 million above the high end of our guidance range and we were at the high end for revenue. So that you would probably think that.
Maybe we should have come in there what we saw in the quarter and what drove the over performance versus our guide was yes, we really did have.
Strong performance.
The ramps.
Offset some of the <unk>.
<unk> investment we did see good response early response to the U S wage adjustments that we made.
Improving hiring and attrition and I'd also partnering with our clients.
To ensure that we have the skilled staff to deliver.
The exceptional customer experience that we do and on balance we saw a little bit less net COVID-19 spend and I would say those three things kind.
<unk>.
Where each kind of equally weighted towards that kind of $8 million $7 million to $8 million of over performance is at the high end.
Of our guide.
Great. That's helpful. Thank you just.
Just one more.
<unk> got some pretty broad based demand across the board for the last few quarters.
Looking into fiscal 'twenty two.
I know these growth rates this growth rate levels are probably not sustainable.
Tougher comps, but do you see any verticals that are going to start slowing down or vice versa, maybe ramping up.
Going into 'twenty, two and then just one more thought on this.
Was there anything to call out specific from a geographic perspective.
Thank you.
Yes Matthew.
Looking at first let me ask you answer the second question first from a geographic perspective, we were actually happy because we saw strong demand in growth frankly in all our geographies which is.
It seems there is a couple of quarters that we've actually seen that now each geography, a little bit of a different mix of about one.
Growing faster than others.
Called out for instance, travel and transportation in Asia and Europe.
One of those but overall really really happy.
I'll tell you, we see still strong demand sort of across all of our key verticals going into next year, we see in consumer electronics, we see a small JV Sip syntax.
Syntax in the banking area certainly in healthcare.
And.
Recall that we're seeing in travel and transportation starting to come back in certain market. So.
As a hopefully COVID-19 gets more under control.
We hope to benefit from from that vertical growing back to where.
It was from a number of clients perspective, it's certainly now back to where it was from a dollar perspective, but we see a lot more opportunities coming into the future with that vertical.
And since the one that we won't continue to grow well.
Okay. Thank you so much.
Thank you.
Our last question comes from the line of Vincent Colicchio with Barrington Research. Your line is now open.
Yes, Chris It was nice to see telecom grow again sequentially.
We can.
Expect continued growth there.
Going forward.
Yes.
As we've talked about.
There is some telecom business, we actually very much like an it's based around the consumption of services that we offer and the technology, we offer and as we.
We mentioned, we've kind of gone to the bottom of where we want to bring the telecom portfolio and then it will start to grow based on what it is but some of the new services, we do so.
I would consider that it would continue to grow but obviously were growing.
Overall business faster.
And bigger and so it will probably stay roughly around the percentage of business that we are.
We're seeing it out now.
And then on the acquisition side.
Are you finding.
I know you guys are.
Careful in terms of.
Bill and diligent in terms of what you pay for deals.
Are you finding.
The most part.
Opportunities being too expensive right now.
I think we've said, we're seeing sort of unrealistic expectations from some of the people looking to sell their businesses in the marketplace.
Driven by sort of the very robust public markets and private equity that likes the space.
Being said there are other opportunities that makes sense and what we're most focused on as I go back to does that have a strong strategic fit to us.
We will drive the right financial returns as the business runs without doing any unnatural acts and is it something that will drive better shareholder value over the longer term and so provided matches up to that.
We will we will execute.
And sort of complete that trial completed transaction.
Those parameters.
And are you seeing any movement on pricing in any of your geographies, giving the.
Tightness of the labor market.
No pricing is pretty.
Pricing is pretty steady and sort of going back to an earlier question in the Q&A.
Tend to be focused more on doing gained share.
Aligning our economics to our clients' economics, which changed it.
Then pricing becomes much more complex around those types of things.
And so therefore, it really hasnt necessarily changed things are always competitive in this marketplace, but but generally steady from a pricing perspective.
Most of my other questions were answered thank you.
Great. Thank you very much.
Thank you there are no further questions I will now turn the call back to Chris Caldwell for closing remarks.
Thank you very much everybody for joining us today, we are always very much appreciate your interest in Concentrix. We're extremely pleased with our strong execution and are confident in the strength of our business model and the track record for being a consolidator in the CX industry again, they look for the save the date for our Investor Relations day coming up in January 2022.
Look forward to senior next quarter, Thanks, very much everybody I appreciate it.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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Good day, ladies and gentlemen, and welcome to Concentrix fiscal third quarter 2021 financial results conference call. At this time all participant lines are in a listen only mode.
Later, we will conduct a question and answer session and instructions will be given at that time.
If you would like to ask a question Press Star then one on your Touchtone telephone.
As a reminder, today's call is being recorded.
If you require any further assistance. Please press Star then zero I would now like to turn the call over to your host today, David Stein Vice President Investor Relations. Please go ahead.
Thank you Sarah and good morning, welcome to the Concentrix third 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 that are uncertain. These uncertainties may cause our actual future results to be materially different than those expressed in our forward looking statements. We.
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 non-GAAP operating income adjusted EBITDA and adjusted EPS as well as adjusted constant currency revenue growth of <unk>.
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 I'll turn the call over to Chris.
Thank you very much David good morning, everyone and welcome to our third quarter earnings call for fiscal 2021.
I'll be covering our announcement about our new dividend and share repurchase program later in my comments, but first wanted to start off with our strong operating results, we delivered outstanding organic growth and profit progression in the third quarter. What pleases me. Most is the broad range, where the growth is coming from and also the sustainability of the work that we are win.
As a reminder, at less than 1% of our revenue comes from Covid specific programs.
In the third quarter, we recorded revenue of $5.0 billion, representing reported revenue growth of 20% compared with last year on.
On an adjusted constant currency basis revenue increased 19% or.
Our third quarter non-GAAP operating income improved to $182 million up 49% compared with last year, adjusted EBITDA increased 40% to $215 million and non-GAAP earnings per share increased 63% to $51.0
We delivered these strong results, while continuing to invest in our stock our client relationships and our technology platforms.
Digging into our operating results in more detail in the third quarter, we saw revenue growth across all verticals, particularly in technology retail banking and healthcare.
Revenue from our travel and transportation clients, one of our fast growing some verticals before COVID-19 for the first time exceeded pre pandemic levels in the third quarter with particular strength in Europe and Asia. This is encouraging as we look to regain the business we lost from pandemic. Additionally, during the quarter.
<unk>, we drove broad based growth across all geographies.
While we are encouraged by these growth trends. Nevertheless, COVID-19 continue to impact our team and operations during the quarter, we experienced <unk>, primarily in Asia and continued to invest in the physical and mental health of our staff, including providing vaccine support in many of the regions we operate in.
Our work at home stop state level at 70%, even as we experienced COVID-19 related impacts in the third quarter. We remained strong overall performance demonstrating the resilience of our operating model. Our results include a net COVID-19 impact on profit of approximately $6 million in.
In addition to the strong revenue and profit performance in the third quarter. We continue to see very strong new business signings. This included all time high new logo acquisition.
Once again, we signed more than two dozen new clients in the quarter, including over a dozen new disruptor brands. Our revenue from disruptor clients is now on a run rate approaching $2.0 billion of total annual revenue.
Part of our success in winning new business is due to our digital transformation capabilities and disciplined processes. Our end to end solutions help transform client businesses through increased efficiency and by delivering greater customer experiences for their customers.
Many of our large enterprise clients and disruptor clients are benefiting from our digitally enabled solutions for.
For example, we recently helped a large technology company transform its customer journey.
Modeled how they deliver their services reduce traditional interactions.
More into self service using technology, we implemented.
This increase their customer satisfaction by over 50%, resulting in a significant increase in sales through their channel, while reducing their cost by about 30%.
Another example of how we're delivering differentiated services for our clients as a high growth Fintech company that was having difficulty meeting demand with their internal resources and a few partners that we're unable to scale.
We're able to consolidate much of the volume help optimize their customer journey map drove efficiencies and effective result across our credit card loan and retail banking business delivered cost savings of 35%.
And within 24 months have reached their larger partner status.
Our clients view, our combination of deep domain expertise digital enabled global delivery and the ability to invest in the secure adaptable and scalable technology technology infrastructure as key Differentiators. We are proud to have received all time high scores for innovation from our clients during the third quarter.
We will be stepping up our investments in our technology platform to continue this momentum as we see long term benefits of this strategy.
We see a significant opportunity to deploy more complex digital engagement as clients seek superior levels of customer experience.
Our sales pipeline continues to grow across all regions and verticals during the quarter and we expect the fourth quarter to be another strong quarter of new business signings.
This gives us confidence in our ability to drive incremental growth in future quarters. We now expect above market adjusted constant currency revenue growth of approximately 17% for the full year with meaningful profit margin expansion well above pre COVID-19 levels looking forward, we are bullish on PX market.
Fundamentals client demand for innovative and digital and technology solutions, and our ability to execute our opportunities for value creation.
Our continued strong financial position provides flexibility for us to invest in the business and enhance shareholder value across multiple areas based on our current financial strength and our confidence in the future today, we announced a quarterly dividend and share repurchase program as part of our capital deployment plan to increase shareholder value we are.
Pleased to initiate a quarterly dividend of <unk> 25 per share in the fourth quarter.
We are also pleased that our board has authorized a $500 million stock repurchase program we.
We are still committed to continuing to look for accretive M&A targets and even with our announcement today, we have an ability to invest significantly in the right acquisitions.
In summary, we expect to achieve faster than market growth with margin expansion as a market leader. We are passionately focused on continuing to drive superior execution and enhance shareholder value.
I'd like to thank our exceptional staff for their commitment to execution, our clients for their trust and our board of directors for their support and Mentorship and our investors for their confidence in Concentrix before I turn the call over to Andre I want to let you know we're planning to hold an investor day in January 2022 to review our progress since our spin off last year.
And the incredible opportunity and our superior ability to lead in the CX industry. So look for a save the date communication later this quarter now I will turn the call over to Andre Andre.
Thank you Chris.
Good to be with you today.
I'll begin with review of our financial results for the third quarter, and then discuss our business outlook for the fourth quarter.
We delivered strong revenue growth with margin expansion in the quarter.
Our revenue of $5.0 billion came in at the high end of our guidance for the quarter.
Reported revenue included a foreign currency benefit of $23 million.
As discussed on our earnings call last quarter.
Divested non CX elements of our insurance business as well as a small mobile networks business during the quarter.
To help evaluate our constant currency revenue growth without the impact of these divestitures, we've introduced a new metric adjusted constant currency revenue growth, which removes the impact of both foreign currency translation and the divested businesses.
Unless adjusted constant currency basis revenue increased 19% in the third quarter.
This strong growth reflects increased demand across a broad set of existing and new clients in all verticals and in every region.
Our top performing vertical in terms of year over year revenue growth was banking financial services and insurance, which grew 27% due to strong increases with multiple banking and fintech clients.
Revenue from retail travel and e-commerce clients grew 26%.
Technology, and consumer electronics, and health care verticals each grew by approximately 24%.
Communications and media client revenue grew 7% against the prior year quarter, while growing slightly sequentially.
On a combined basis, we grew with clients in our other verticals by 11%.
Contributing to the growth across our strategic verticals, where our more than 115 global disruptor clients. These clients represented about 21% of our revenue in the quarter or approximately $293 million and grew by 54% year on year.
Turning to profitability non-GAAP operating income exceeded our guidance for the third quarter, our non-GAAP operating income was $182 million.
And our non-GAAP operating margin was 13, 8% in the quarter.
Third quarter, adjusted EBITDA was $215 million and our adjusted EBITDA margin was 15, 4%.
The strong profitability reflects flow through from strong revenue growth, which more than offset the continued impact of COVID-19 on the business.
In terms of net income.
In the third quarter non-GAAP net income was $132 million and adjusted EPS was $51.0 up 53% from the prior year.
GAAP results for the third quarter included 34 million of amortization of intangibles $9 billion of share based compensation expense and a pretax gain of $13 million related to the divestitures I mentioned earlier.
GAAP diluted EPS was $2 eight.
Our effective GAAP tax rate was 28% in the third quarter.
Moving to cash flow cash flow from operations in the third quarter totaled approximately $93 million and capital expenditures in the quarter were $42 million.
Capital spending was approximately 3% of revenue and we continue to invest in support of growth, particularly in support of our work from home and digital offerings and security.
Accordingly, we generated free cash flow of $51 million in the quarter.
We continue to expect capital expenditures for the full year to be in the range of three 5% to 4% of revenue.
Also in the quarter, we received proceeds of $74 million from the divestitures.
Turning now to the balance sheet.
At the end of the third quarter cash and cash equivalents totaled $154 million.
Total interest bearing debt was $866 million net of issuance costs.
This debt consisted of $700 million on our term loan and 169 million borrowed against our accounts receivable securitization.
During the quarter, we paid down $94 million of borrowings using divestiture proceeds and free cash flow.
Net debt was $712 million at quarter end.
We ended our third quarter with gross leverage of approximately 1.0 times, our trailing four quarters adjusted EBITDA and 0.8 times on a net leverage basis.
Our liquidity remains strong with over $935 million of cash undrawn lines of credit and capacity on our accounts receivable securitization.
Our current liquidity it gives us significant financial flexibility.
As Chris mentioned, our strong results financial position and free cash flow generation and create options for us to invest in the business and enhance shareholder value.
Our priority for capital deployment remains growing the existing business through funding organic and strategic growth opportunities.
We have the financial flexibility to do this while providing disciplined returns of cash to shareholders. We remain comfortable with up to three times gross leverage which provides ample capacity for future disciplined M&A.
Now I'll turn to our expectations for the fourth quarter.
Given the continued strong demand for CX solutions solutions, we expect fourth quarter revenue to be in the range of 144 billion to $49.0 billion.
This translates to a range of 11% to 14% and adjusted constant currency revenue growth.
The adjusted constant currency growth includes an approximate negative $9 million combined year over year impact.
From the divested businesses and currency translation.
We expect fourth quarter non-GAAP operating income of 195 million to $205 million, reflecting flow through from strong seasonal revenue growth.
For the fourth quarter, we expect interest expense to be approximately $5 million and we expect an effective tax rate of 27% to 28% and a weighted average diluted share count of approximately 52 million shares.
Our non-GAAP operating income guidance for the fourth quarter excludes approximately $34 million related to the amortization of intangibles and $11 million of share based compensation expense.
Our guidance for the fourth quarter implies full year 2021 revenue of just under $11.0 billion or approximately 17% revenue growth on an adjusted constant currency basis.
We expect the combined impact of divested businesses and foreign exchange rates will be just above a one point positive impact on the full year 2021 reported revenue compared with 2020.
Our guidance also implies that our full year 2021, non-GAAP operating income margin will be approximately 13, 8%.
In closing we are very encouraged by our results and the progress we are making across the business. We are confident in our expectations for the fourth quarter and beyond.
We are a global leader in a large fragmented and growing market executing a plan to grow organically faster than that market as.
As a proven industry consolidator with a strong balance sheet, we are well positioned to deliver sustained growth margin progression free cash flow.
And enhance shareholder returns.
At this time, Sir please open the line for questions.
Thank you.
Ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key again that is star then one.
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Our first question comes from the line of.
<unk> Bhattacharya with Bank of America. Your line is now open.
And thank you for taking my questions.
Congrats on the quarter and congrats on the capital return plan with the dividend.
Maybe for my first question I'd like to ask Chris.
Maybe on pricing can you give us an idea of what percent of your contracts are based on FTE or full time employee based pricing versus other pricing mechanisms such as output based pricing or gain.
Transaction pricing or gain sharing and the reason I ask this is as you see your mix shifting away from voice to more non voice services as you provide more value do you think that.
That mix of pricing mechanism towards more performance based pricing.
Can happen and do you see that mix shifting.
Yes, so I would answer in two parts I think right now what we've said is we still have more than 50% of our revenue.
Yes.
Poland tied to a unit of measure might be pursuing transaction.
Metric that we use.
That is sort of directly related to costs.
And then our gain share or.
While much of the gain share model continues to grow so the deals that we're winning now more and more of that percentage is becoming.
Gain share model, which we like we enjoy we think it will.
We'll drive our margins going forward the aligns our.
Lined up with our clients, but we still have a lot of older business that we continue to work through that is based on measurement.
Got it thanks for that.
Can I ask you about labor.
Labor costs as well as the competition for labor again, as you mix shift more towards higher value services are you seeing more competition for for skilled labor and then just how is that trending in the in the face of Covid in the current environment.
Yes, I think actually.
Markets are always competitive and we go after.
Who are our top tier staff and want to make sure that we create the right environment and culture to hire the entertain them and have them grow their careers with us. So we have not had a challenge to this point, but we're always very focused on making sure that we do have the right environment and we are competitive in the marketplace.
We are creating an environment that people want to join and continue to grow their careers with us.
I have a couple of quick ones for Andre if I can sneak them in.
Could you remind us of what the typical seasonal our seasonality is going from three Q4 Q4 is typically a strong quarter for you guys I think you're guiding for 5% sequentially and youre guiding above the street. So that's that's great, but it just seems a little conservative just given past historical performance or maybe that's.
Being impacted by the divestitures. So can you just remind us on what typical seasonality is and how that compares to that yeah. I think typical seasonality is just as you've suggested <unk>, which is the fourth quarter.
He is a strong quarter from a seasonal perspective, and you see that in our guide.
Literally we are not guiding to as much sequential growth as we had last year.
Q3 was still a little bit impacted last year by Covid.
Certainly as we entered that quarter and so that probably contributed a little bit to the sequential ramp that you saw last year.
So if you think about some of the verticals, where we're seeing growth.
Particularly around.
Consumer electronics and tech, but also in banking financial services and insurance those have a little bit less of a seasonal component to them.
Some of the other verticals that we're in and so.
That might be meeting things, just a little bit but again.
Have signaled all along that we expected.
Wrong sequential growth from Q3 to Q4, and I think our guidance reflects that.
Right. Okay. Thanks, Thanks for the details on that then very last question for me is on.
On the capital return plan.
Can you help us think about the buyback.
You've put a new authorization in but how should we be thinking about the cadence of the buyback.
And just also in terms of you mentioned M&A a couple of times I mean, what is the focus in terms of like what size of an acquisition or what parameters you keep in mind when you look at acquisitions.
Okay.
Sure So I'll be happy to do that and Chris can comeback cleanup, but anything I Miss.
I would say as it relates to the pace and I certainly don't want to predict.
How fast we will enter the market under the share repurchase plan, but I think if you look at what we're doing with both the dividend and.
And the share repurchase youre going to see us start fairly modestly in terms of capital return.
That said, we do believe our shares are undervalued.
But we also believe that investing in organic and accretive M&A is the best way and the best use of capital to drive shareholder value. So again, the repurchase as part of kind of a balanced capital allocation plan that include.
Accretive M&A on a disciplined basis, along with the dividend.
If you look at the size of the authorization.
Pretty much in.
In line with if you look at our peer groups.
Is.
Their most recent authorizations as a percent of outstanding and I would imagine our pace will be.
Finally in line with that so certainly as you put the $500 million in place.
That is out there to be used over a fair.
Fairly long period.
So I think that probably gives you some color on that adds for the year.
M&A.
We're very very focused on that.
And we as Chris mentioned, we have ample capacity.
To do M&A of various sizes frankly.
And so we're going to be disciplined in what we do.
So we certainly have the firepower to do large acquisitions, but also are focused on tuck ins that increase the value of the platform I'll, let Chris.
Ed anything he would like to add to that.
I would agree Andre reply with two choices about the financial returns and the strategic significance to the M&A if it matches up to.
That's more.
Important to us than sort of frankly the size when you look at just.
Straight dollar value.
Got it thanks for all the details and congrats again on the quarter.
Thanks, so much.
Thank you. Our next question comes from the line of Shannon Cross with Cross Research. Your line is now open.
Hi, This is Matthew Marietta from Shannon Cross I, just got a couple here.
Can you walk us through the puts and takes on operating margin.
<unk> performed pretty well ahead of guidance is there anything specific to call out there.
Maybe like quantify the impact from the wage increases during the quarter and how we should model that going forward.
Thanks.
Yes. So yes, if you think about our performance we came in roughly $7 million to $8 million above the high end of our guidance range and we were at the high end for revenue. So that you would think.
Maybe we should have come in there what we saw in the quarter and what drove the over performance versus our guide was yes, we really did have.
Our strong performance.
On the ramps that offset some of the.
Expected investment we did see a good response early response to the U S wage adjustments that we made.
Proving hiring and attrition and I'd also partnering with our clients to ensure that we have the skilled staff to deliver.
The exceptional customer experience that we do and on balance we saw a little bit less net COVID-19 standard I would say those three things kind of.
Where each kind of equally weighted towards that kind of $8 million $7 million to $8 million of over performance is at the high end of our guide.
Great. That's helpful. Thank you.
Just one more.
You've got some pretty broad based demand across the board for the last few quarters.
Trying to get a sense looking into fiscal 'twenty two.
No I know these growth rates this growth rate levels are probably not as sustainable given the tougher comps, but do you see any vertical.
We're going to start slowing down or vice versa that you see maybe ramping up.
Going into 'twenty, two and then just one more thought on that.
Anything to call out specific from a geographic perspective.
Thank you.
Yes Matthew.
Looking at first let me ask you answer the second question first from a geographic perspective, we were actually happy because we saw strong demand in growth frankly in all our geographies which is.
Sure.
It seems there is a couple of quarters that we've actually seen that now each geography is a little bit of a different mix about one <unk>.
Growing faster than others.
Called out for instance, travel transportation and Asia and Europe.
As one of those but overall really really happy I will tell you, we see still strong demand sort of across all of our key verticals going into next year, we see in consumer electronics, we see a small JV.
Syntax in the banking area.
And in healthcare.
And.
As we called out we're seeing travel and transportation starting to come back in certain market. So as hopefully COVID-19 gets more under control.
We hope to benefit from that.
Vertical growing back to where.
It was from a number of clients perspective, it's certainly now back to where it was from a dollar perspective, but we see a lot more opportunities coming into the future with that vertical.
So.
One that will continue to grow well.
Okay. Thank you so much.
Yes.
Thank you.
Last question comes from the line of Vincent Colicchio with Barrington Research. Your line is now open.
Yeah, Chris It was nice to see a telecom grow again sequentially should we expect continued growth there.
Going forward.
Yes, Vince.
We've talked about.
There is some telecom business is actually very much like an it's based around the consumption of services that we offer and the technology, we offer and as.
We mentioned, we've kind of gone to the bottom of where we want to bring the telecom portfolio and then it will start to grow based on what it is but some of the new services, we do so.
I would consider that it would continue to grow but obviously were growing.
Overall business faster.
And bigger and so it will probably stay roughly around the percentage of business that we are.
We're seeing it out now.
And then on the acquisition side.
Are you finding.
I know you guys are.
You know a.
Careful in terms of.
And diligent in terms of.
What's your pay for deals.
Are you finding.
For the most part.
Opportunities being too expensive right now.
Okay.
I think we've said.
We're seeing sort of unrealistic expectations from from some of the people are looking to sell their businesses in the marketplace, both driven by sort of the very robust public markets and private equity that.
<unk> space.
That being said there are other opportunities that makes sense.
We're focused on as I go back to does that have a strong strategic fit to us.
What would drive the right financial returns.
The business runs without doing any unnatural acts and is it something that will drive better shareholder value over the longer term and so provided matches up that.
We will we will execute.
So we've got to complete a transaction.
And those parameters.
And are you seeing any movement on pricing in any of your geographies given the tightness.
Tightness of the labor market.
Uh huh.
No pricing is pretty.
Pricing is pretty steady and sort of going back to an earlier question in the Q&A, we tend to be focused more on doing gained share.
Aligning our economics to our clients' economics rich changes.
And then pricing becomes much more complex around those types of things.
And so therefore, it really doesn't necessarily change things are always competitive in this marketplace, but but generally steady from a pricing perspective.
Most of my other questions were answered thank you.
Great. Thank you very much.
Thank you there are no further questions I will now turn the call back to Chris Caldwell for closing remarks.
Thank you very much everybody for joining us today, we are always very much appreciate your interest in Concentrix. We're extremely pleased with our strong execution and are confident in the strength of our business model and track record for being a consolidator in the CX industry again, they look for the save the date for our Investor Relations day coming up in January 2022.
Look forward to see you next quarter, thanks, very much everybody appreciate it.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.