Q4 2021 Concentrix Corp Earnings Call

January 19, 2022

Ladies and gentlemen, thank you for standing by and welcome to concentrates fiscal fourth quarter 2021 financial results Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

Ask a question during this session you will need to press Star then one on your telephone.

Please be advised that today's conference is being recorded if you would.

Require any further assistance.

Please press Star then zero.

I would now like to turn the conference over to your speaker for today, David <unk> you may begin.

Thank you to Wanda and good morning, welcome to the Concentrix fourth 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 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.

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 will open the call for your questions now I will turn the call over to Chris.

Thank you very much David good morning, everyone and welcome to our fourth quarter 2021 earnings call ending our first year as a public company I'd be remiss in not recapping some of our major accomplishments not only did we grow faster than the market at 17% and adjusted constant currency, but the growth came from all verticals and all.

All geographies, our non-GAAP operating margin came in at a record 13, 1%, which was a 230 basis point improvement.

It's important to note that our growth has come from sustainable business with shorter term COVID-19 work being only about 1% of our revenue.

We have also made significant progress in evolving our offering in 2021. Some unique offerings include the release of our <unk> Essentials platform now we have 15000 daily users in our <unk> business. We also became an Amazon connect partner and are now seeing growth in seats under management.

And our marketing solutions business, we launched our EEV consumer experience index to help automakers attract more electric vehicle customers.

We have also increased our technology penetration by 71% over last year into our new economy accounts with them buying technology and services together now.

All of this has increased the number of clients that has given us a 10 out of 10 on innovation by 60% year on year with innovation always top of mind for us I Couldnt think of a better way to end the year than announcing our PK acquisition.

This acquisition allows us to deliver even more technology solutions for the CX marketplace at scale all of this and more continues to position us as the CX digital solutions leader in the global market.

Now specific to the fourth quarter, our revenue of $1 7 billion represented an increase of 13% compared with last year on a reported basis.

On an adjusted constant currency basis revenue increased 14%.

non-GAAP operating income of $203 million was up 16% compared with last year.

Adjusted EBITDA increased 13% to $238 million compared with $211 million last year, our strong growth in the quarter came across all verticals, including double digit growth in our key strategic verticals technology retail e-commerce , and travel banking and finance and healthcare.

Contribution from our new economy clients is continuing to make a positive impact with fourth quarter, new economy client revenue of $329 million. Our annual run rate is now over $1 3 billion from these clients you will notice that we changed our description of these clients to new economy, rather than disrupt our clients.

It is a terminology change and not a change in the underlying client set just did more aptly describes them.

As expected, we did see supply chain impacts for a few of our clients, which impacted our transaction volumes with these clients and we ended the quarter slightly.

Our unique approach to intentionally infusing digital technology and analytics is driving high levels of sales success. During the fourth quarter. We signed two dozen new clients example of our wins include a broad range of new clients and Fintech retail travel and media, providing a full spectrum of services. We are also starting to make <unk>.

Traction supporting web three evolution and while early days the potential is promising with a supporting many of the market leaders.

Going into the new year, our pipeline remains strong in all verticals and geographies, particularly in tech banking finance E Commerce and travel.

From an operating perspective, we maintained strong performance levels in the quarter with 65% of our talent continuing to work from home, we continue to maintain high levels of satisfaction with our clients and staff our client.

Scorecards continues to outperform pre COVID-19 levels.

Our excellent results, leading position and strong balance sheet gave us the flexibility to continue to invest in the business to drive total shareholder returns.

Consistent with our capital deployment strategy during the fourth quarter, we paid $13 million in dividends and repurchased $25 million of our stock at an average price of about $181 per share.

The solid close to the year and additional strong new business signings gives us confidence in our ability to grow faster than the market again in 2022, while continuing to see margin expansion over the longer term.

Now turning to our PK acquisition I would like to welcome all new 5000 team members to Concentrix. The depth of experience is impressive and we can clearly see the value of the combination.

We have started the process of integrating our PK Tiger Spike and marketing solutions business into one we're calling this combined team concentrix catalyst as the expertise in design consulting and execution around digital solutions is truly a catalyst for our clients to think differently about what the art of the possible can be.

Our clients view the combination of deep domain expertise digitally enabled global delivery and the ability to invest in secure adaptable and scalable technology infrastructure as key differentiators.

The reception of both existing and prospective clients encourages us that our strategy is working we will continue to keep you up to date on our progress.

Turning to the first quarter outlook and client opportunity perspective demand for end to end solutions remains at historic highs the market demand for digital customer experience services and solutions has accelerated.

We believe we are re imagining reimagining what the customer.

Experienced can be for our clients and that resonates with what they want to take with their brands, while we do see tighter labor markets in a few countries and continuing impact from the current Covid variance spikes. This is helping demand for technology automation, which we are focused on taking advantage of.

Our overall pipeline remains very strong and healthy with the right mix and type of opportunities we are after to grow.

I would also like to thank our Philippines team, who dealt with the impact of Typhoon re that was both impactful from a human a humanitarian perspective as well as a business perspective in December the management team did an amazing job taking care of the team and their families. While fully recovering from the storm within a few short weeks.

In summary, we had a great first year as a public company focused on transforming everything CX for our clients and their customers. We remain bullish on the CX market fundamentals and our ability to execute to create value for our clients and our shareholders, we will be going into more detail on our Investor Day next week on Tuesday January 25.

While we had hoped for an in person gathering and appreciated all interest in attending in person due to venue restrictions and limitations of large in person gatherings investor date will now be a fully virtual event.

We're eager to share more about our progress and the incredible opportunity we have in the customer experience industry now I will turn the call over to Andre Andre.

Thank you, Chris and Hello, everyone.

I will begin with a look at our financial results for the fourth quarter, and then discuss our business outlook for fiscal 2022.

We experienced strong revenue and profit improvement in the fourth quarter.

Revenue in the fourth quarter was $147 billion.

Adjusted constant currency basis revenue increased 14% compared with last year.

The strong growth in the quarter across all of our strategic verticals was led by increases with large technology and travel clients revenue.

Revenue from technology, and consumer electronics clients grew approximately 17%.

Revenue growth grew 15% in both the retail travel and e-commerce vertical and the banking financial services and insurance vertical.

Revenue from health care clients grew 14%.

This strong growth across our strategic verticals, where over 125, new economy clients, representing about 22% of our fourth quarter revenue, which grew 48% year over year.

Turning to profitability non-GAAP operating income was $203 million in the fourth quarter compared with $175 million last year. Our non-GAAP operating margin was 13, 9% up 40 basis points from 13, 5% in the fourth quarter last year.

Adjusted EBITDA was $238 million.

Compared with $211 million in the fourth quarter last year, our adjusted EBITDA margin was 16, 2% in line with last year.

Profitability in the fourth quarter reflects flow through from revenue growth continued investment in seasonal our new program ramps and continued COVID-19 related costs.

non-GAAP net income in the fourth quarter was $158 million compared with $107 million last year.

Adjusted EPS was $2 99 per share compared with $2 seven last year.

GAAP results for the fourth quarter of 2021 included $34 million of amortization of intangibles and $11 million of share based compensation expenses and $1 million of expenses related to the acquisition of PK.

Turning to cash flow fourth quarter cash flow from operations totaled $182 million and capital expenditures totaled $36 million.

This resulted in free cash flow of $146 million in the quarter moving.

Moving forward, we expect capital expenditures to approximate 3% of revenue.

Turning to the balance sheet at the end of the fourth quarter cash and cash equivalents were $182 million and.

Net debt was $620 million.

During the fourth quarter, we paid a quarterly dividend of <unk> 25 per share. We also repurchased 138000 shares of our stock for approximately $25 million.

As of today, we have $475 million remaining on our.

Share repurchase authorization.

Given the PK acquisition and our near term focus on debt reduction, we expect our near term priorities for free cash flow to be our dividend and debt reduction with some modest share repurchase activity.

As I said, when we announced the PK acquisition in November with its strong digital capabilities complementary client base and cross sell opportunities. We expect the PK acquisition to be accretive to our growth rate and adjusted earnings per share.

We closed the PK transaction at the end of December .

As we indicated when we announced the transaction we financed the acquisition by entering into an amended credit facility under.

Under the amended facility, we increased our term loan to $2 $1 billion with a five year maturity from the transaction close and we increased our revolving credit facility to $1 billion.

The $2 $1 billion term loan includes rolling in our previously outstanding $700 million term loan.

So the funding for the transaction came from approximately $200 million in borrowings under our AR securitization facility.

Pro forma for the transaction close the net debt to adjusted EBITDA ratio of the combined company was two four times on a trailing 12 month pro forma basis.

That is within our target range of up to three times adjusted EBITDA, We expect that our strong cash flow generation and earnings growth will allow us to bring net leverage to less than two times by the end of 2022.

Assuming no further acquisitions.

Ample liquidity will help us preserve our financial flexibility post close we expect our financial profile remains strong and our capital structure principles remain unchanged, we remain committed to investing in growth and returning capital to investors via our dividend.

Now I will discuss our business outlook for the first quarter and full year of 2022.

For the first quarter, we expect revenue to be in a range of 151 billion to $1 $5 4 billion.

This includes PK revenues for two months of approximately $78 million and nearly two point negative impact of foreign exchange rates compared with the comparable full period in 2021, and a little over a one point headwind related to businesses that we divested in the third quarter of 2021.

On a pro forma adjusted constant currency basis, our revenue guidance equates to 9% to 12% revenue growth.

Our profitability expectations for the first quarter include non-GAAP operating income in a range of $190 million to $205 million.

Our expectations for the first quarter of 2022 include a negative impact of $10 million to $15 million in both revenue and profit from the surge of Covid cases globally, which is impacting staff availability.

This impact is much shorter in duration and less acute than we experienced at the beginning of the pandemic.

We expect interest expense in the first quarter to be approximately $9 million, we expect an effective tax rate of approximately 25% to 26% and a weighted average share count of approximately 52 million shares.

We expect to have a preliminary purchase price allocation for the PK acquisition later in the first quarter, allowing us to provide a full reconciliation of our non-GAAP operating income outlook to the comparable GAAP measure on our next call.

Moving to our outlook for the entire year, we expect 2022 revenue to be in a range of $6 45 to $6 $6 billion. This includes approximately $485 million in revenue from PK for 11 months following the acquisition.

This revenue expectation for PK for fiscal 2022 is in line with our stated expectation at the time that we announced the transaction.

Also included in our expectation is a little over a one point negative impact of foreign exchange rates compared with 2021.

And a little over half a point headwind related to the businesses, we divested in the third quarter of 2021.

On a pro forma adjusted constant currency basis, our revenue guidance for 2022 equates to 9% to 12% revenue growth.

Our full year profitability expectations include non-GAAP operating income in a range of $890 to $930 million, we expect full year interest expense to be in a range from $50 million to $54 million with an effective tax rate of approximately 25% to 26%.

And our weighted average share count of approximately 52 million shares.

Our business outlook does not include amortization of intangibles stock based compensation or any future acquisition related impacts for transaction or integration costs.

Also not included in the guidance are impacts from future currency fluctuations.

In closing we are very pleased with our excellent results for the fourth quarter and for the full year 2021, and we're very confident in our outlook for 2022, we are well positioned global leader in a fragmented and growing market.

We're executing our plan to grow faster than the market on an organic basis and as a proven consolidated in a market with a strong balance sheet I believe we're in a great spot to deliver sustainable growth margin progression and strong free cash flow. We look forward to speaking with all of you next Tuesday at our Investor day with that now operator would you. Please open the lines.

For questions.

Ladies and gentlemen, as a reminder to ask a question you May Press Star then one on your telephone.

Or withdraw your question Keith.

Thats Star one to ask a question. Please standby, while we compile the Q&A roster.

Our first question comes from the line of <unk> with Bank of America. Your line is open.

Hi, Thank you for taking my questions I.

A couple for Chris and one for Andre.

Chris My first question relates to the revenue growth in fiscal 'twenty two.

If I take out X.

PK looks like Youre guiding for about 8% year on year organic growth.

The last time, you talked about market growth I believe the commentary was that.

Given recovery out of Covid the market itself was growing 6% to 8%, which is faster than the long term, 3% to 5%. So can you. Please update us on what you expect the market itself to grow in fiscal 'twenty, two and would you say that the growth in fiscal 'twenty two for concentrix as above market growth and if so can you just talk about your strategy this year.

We're driving above market growth and who are you taking share from.

Hey, This is Andre I know the question was for Chris, but I will start if you go back to my prepared remarks on a pro forma basis.

Adjusted for constant currency and taking into account the.

The divestitures.

We're guiding to roughly 9% to 12%.

Growth in <unk> in 2022, PK is part of that growth.

As I said is.

Accretive to our overall growth rate by about a point in that number so that implies to me that the underlying is growing at an 8% to 11% organic rate.

That would be my clarification, there, Chris where do you see the market growing yeah. Andrew Good question as I have stated while analysts are still talking about a sort of 3% to five or.

Range within that period of growth for the next year to two years to three years, we've actually felt that the market in 2021 was growing sort of 6% to 8%, we still see as I mentioned in my prepared remarks that the market is a little more robust, but I also made mention that we're driving a lot more technology and automation and so that.

Does have some impact to sort of topline growth numbers, but to Andres point, we still believe we're growing faster than the market and still believe in 2022, we will grow faster than the market.

In terms of your other question just in terms of share and where it's coming from we are seeing our wins come from sort of very two distinct camps. One is from consolidation where people are using us as the premier partner and we're seeing kind of consumption of other people share which is coming from.

Traditional CX players some new.

Economies TX players.

We are getting because of our scale and operational discipline and the fact that they can buy technology and the services from us together.

Also seeing frankly, net new opportunities that are coming to us from clients, which historically have not outsource but.

It's one piece of the puzzle that we don't have it.

In a process and we're doing everything else for them and so they are now seeing the benefit of moving that across to us and so that's really where we're seeing the growth coming from those two areas.

Okay, great. Thanks for clarifying all of that Chris.

Maybe for my second question.

Our focus on margins.

It looked like historically fiscal <unk> seems to be a sequentially lower margin quarter from <unk>.

Even though revenues can be higher so I was wondering if you can just double click on that 100 basis points of operating margin decline.

I think <unk>, you reported 13, 9% operating margin and if I look at the midpoint of guidance for fiscal <unk> I think it's like 12, 9%. So just if you can just.

Just kind of give us some details on what's driving that and then how should we think about margin improvement for the rest of the year in fiscal 'twenty two to get back to your fiscal 'twenty two midpoint of guidance of 13, 9% operating margin.

Yes, so I'll take the question in two parts. The first question is really around your comment about the first quarter margins tend to be a little lighter than the fourth quarter and that is historically correct and that tends to be because we get higher occupancy and utilization within the fourth quarter, just because of seasonality and a few other things that happen and then in the first quarter you tend to be <unk>.

<unk> some of your stuff and Youre getting less occupancy within it and so you tend to see that historically I would say there are some anomalies this year with the.

Despite some COVID-19 and typhoon that hit in the Philippines, but generally you've got somewhat not necessarily back them out, but that's probably where youre seeing some of the margin erosion why we kind of are talking about the pull forward your guidance is because as we've.

Executed through the course of 2021 and as you've seen from some of our track record. We expect that we will make that up through the course of the year and continuing to see the margin expansion growth based on our offerings and what we have in our pipeline.

Okay got it and then thanks for the details on that maybe for my last question. If I can just ask one for Andre.

It looks like the tax rate in <unk> was about 21%, which was lower than I guess, we had guided 27% to 28% and also if I look at the fiscal 'twenty two guidance, 25% to 26%. So it was just two.

Two points lower than the previous guide. So can you just just kind of give us some details on what's driving that lower tax rate.

Yes.

Thanks, that's a great question and glad to provide some detail. So so in Q4.

You are right we saw lower.

Tax rate, both on a GAAP and non-GAAP basis than we expected.

Largely reflecting.

Final jurisdictional mix of our income.

For the full year as we analyzed it and that creates some adjustments, which has can have kind of a.

Outsized effect.

On your Q4 rate.

I would point you more towards the full year non-GAAP tax rate of what I believe is about 25, 5%.

Which is right at the midpoint of where we're guiding for 2022, So we do think.

That with.

Kind of our current jurisdictional mix as we look forward.

We'll see a tax rate.

For the full year that is pretty much in line.

Kind of midpoint guide being.

In line with with what we saw for the full year 'twenty one.

Okay. Thanks for all the details and congrats on the strong execution. Thank.

Thank you very much.

Thank you.

Our next question comes from the line of Shannon Cross with Cross Research. Your line is open.

Thank you very much.

I'm wondering can you talk a bit about what you're hearing from customers and seeing in terms of signing.

Are you seeing customers extend the more willing to sign longer contracts and how are you.

Putting into these contract any kind of accelerators are offset to potential inflationary environment actually got potential to the inflation.

Shannon don't be so positive my goodness.

So.

The first question is it really depends on the offering that we're delivering there is not generally a change.

Primarily primary services, unless it's very complex services of extending the contracts longer our average contract is about three years.

And obviously, we keep the contracts much longer because they evergreen and they continue to build.

Built when.

When we're selling technology and services together, where we're actually taking over a whole process you tend to get the sort of the three to five year horizon from a contract perspective, but it's not materially different than what we've seen before from how cost.

Is built and generally that's an ongoing conversation regardless of what the contract says because it's a combination of.

As the demand change in the type of services you are performing.

As the automation technology come in which helps offset some of the inflationary pressures.

All of that kind of plays a mix and so those conversations with clients is on a.

Sort of a fairly regular basis and then we do have some contracts that have a built in cola.

Cost of living.

Indexing system that kind of come through based on the country and based on some data points that are mutually agreeable between the client and ourselves, but but that's a smaller portion of the overall contract mix.

Okay. Thanks, and then can you talk a bit about what youre seeing with PK.

Judge success of the integration, maybe kpis to watch for.

<unk>.

The opportunity how far you think you can take some of their technology into your existing customer base and vice versa.

Yes, so thats a great question and there's a couple of things and by the way, we're going to a fair a bit more detail on the investor day around how we see the complementary client set.

Technology and skills come together, but some of the prepared remarks, Shannon pointed out I mean in our new economy clients, which historically are not big tech buyers.

Is up 71% from clients in that segment that are buying technology and services together because people are starting to realize that there's real power of automating. The journey map, there's real power to kind of bringing in new processes versus trying to do it bye bye.

Sure workforce and so we're seeing a high demand for this and one of the reasons why we were very excited about being able to do the PK acquisition was the fact that we can now deliver at scale, because we were able to do it but we were starting to outstrip, our internal resources to be able to to do it and I'll tell you the client discussions so far and again.

Early days, but so far are incredibly positive because.

They see the power of these two things coming together, where you have got deep domain expertise in the journey map, you've got deep domain expertise around how to deliver services at scale and understanding the processes or specific to the client and then you've got this really robust talent.

We're able to automate that and drive better efficiencies through that so both clients who are using both companies already.

<unk> have already started to think differently about how they can engage us and what value. We can add to them and then we've had it very good.

Sort of.

Feedback and conversations from our existing clients about wanting to get in front of those.

Services and bringing the two powers together.

In terms of metrics and how we look at it we are looking at it through that and doing it I suspect that we'll start to talk about kind of combination deals that are coming through and percentage of.

Tech sales that we go through on a more regular basis going forward. So that people can see that and then ultimately as we've talked about over time, we see our <unk>.

Margin being able to continue to increase and that will be driven by the combination of both tech and services.

Together.

Great. Thank you and look forward to virtually seeing you next week.

Thank you very much.

Thank you.

As a reminder, ladies and gentlemen that star one to ask a question.

Our next question comes from the line of <unk>.

<unk> with Barrington Research your line is open.

Yes, Chris I was just curious.

Verticals should grow fastest in 'twenty two I assume it's your core verticals.

So part of the question is what will telecom media I'm, sorry communications and maybe it looked like.

Sort of.

Sizable drop sequentially.

Thank you.

Hey, guys. So a couple of things as we kind of mentioned.

Fintech are doing very very well for us and that's primarily based on sort of just people's buying habits.

Consumer offerings are now available in that space and so we continue to see very very robust growth in that.

Health care E Commerce, we see very robust growth in that and as we've called out twice travel is actually starting to really rebound and what's interesting is that the wins, we're having and travel are almost all domestic travel, which if you remember historically, we were never in that space, we were almost all in the.

The.

With Tech right now is just sort of supply chain constraints with some of our clients that they are just seeing.

They don't see the demand going away, they just aren't able to ship as much as they would like and so we expect to see sort of strong growth through that through the course of the year, primarily catch up as well as sort of net new products that are coming to market in terms of media and communications, our media side is doing well and.

<unk> continues to grow quite quite well.

And Thats, primarily driven by a lot of our content safety.

Services that we do and content moderation services that we do in our trust services that we do in that space.

On the telecommunications side as we've talked about we want to kind of bring it down it's now bouncing around between.

17% give or take of our business, we're very comfortable with that space.

As we see new offerings from our technology side going into telecommunications, we see that might kind of bump up a little bit, but it's different offerings than what historically, we've always done in the telecom space.

And we don't see it kind of.

Jumping up substantially larger than where it is at this present time based on how we focused on on getting it to where it is.

And has there been any.

Given the inflation that we've talked about has there been any flexibility on the client side in terms of giving some relief on prices.

Yes so.

Certainly there are some but I don't want to overblow. The reality is that the conversations we're having both from a tight labor market and inflationary perspective is really about changing how they are doing processes and putting more technology in place. So that they can do more with less and thats really the conversations we're focused on having and really <unk>.

Discussions around the total cost of delivery versus a unit of labor so to speak.

That's more appealing to us and frankly more appealing to the clients versus just trying to chase the.

Inflationary labor market.

Your response makes sense, but I guess I was I should've asked Blake.

The pure labor intensive contact center work Youre doing there is there any relief on that side I mean, I know, that's a very competitive business.

Assume theres not too much relief is that right.

First I would say that.

The work that we do in that space has evolved pretty dramatically into sort of very higher value engaged conversations and they tend to have sort of certification levels like in our health care business, our financial services business. There's a lot of education that goes into them. So it's a different type of market and different payscale than what you might think.

But.

When we're delivering those types of services there is always opportunities to talk to the clients around.

Pricing them appropriately for the type of skill set that you need.

So that's really where.

We see ourselves and those conversations are ongoing but really the focus is more about driving better automation better efficiencies than needing to increase head.

Count.

In a linear fashion.

And then one last question.

Sorry, if this has been answered before but I don't recall.

The integration of PK will you be integrating the systems that theyre on what's your system, how will that work.

Yes.

Clearly, we will be getting to one HRS system in one accounting system.

We've done that many many times as we've integrated acquisitions, we do that fairly quickly.

We have some unique tool sets that are very focused on there.

Type of business and engagement around resource management, we actually will be moving a lot of our concentrix team members onto some of those tools.

Just to get better efficiencies and better benefit so that's pretty.

Standard and easy for US there is no systems that disrupt the client that are being touched as as we do this integration.

Okay. Thanks for answering my questions.

Perfect.

Thank you.

I'm showing no further questions in the queue I would now like to turn the call back over to Chris for closing remarks, great. Thank you very much for all your interest in Concentrix today and as a reminder, we look forward to talking with all of you at our Investor Day next week, hopefully you are all healthy and well and have a great day, thanks very much everybody.

Ladies and gentlemen that concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

[music].

Ladies and gentlemen, thank you for standing by and welcome to concentrate its fiscal fourth quarter of 2021 financial results Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press Star then one on your telephone please.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star then zero.

I would now like to turn the conference over to your speaker for today, David <unk> you may begin.

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.

This includes the risk factors provided in our annual report on Form 10-K .

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 will open the call for your questions now I will turn the call over to Chris.

In all geographies, our non-GAAP operating margin came in at a record 13, 1%, which was a 230 basis point improvement.

It's important to note that our growth has come from sustainable business with shorter term COVID-19 work being only about 1% of our revenue.

In our marketing solutions business, we launched our <unk> consumer experience index to help automakers attract more electric vehicle customers we.

We have also increased our technology penetration by 71% over last year into our new economy accounts with them buying technology and services together now.

This acquisition allows us to deliver even more technology solutions for the CX marketplace at scale all of this and more continue to position us as a CX digital solutions leader in the global market.

Now specific to the fourth quarter, our revenue of 147 billion represented an increase of 13% compared with last year on a reported basis.

On an adjusted constant currency basis revenue increased 14%.

non-GAAP operating income of $203 million was up 16% compared with last year.

The contribution from our new economy clients is continuing to make a positive impact.

With fourth quarter, new economy client revenue of $329 million. Our annual run rate is now over $1 3 billion from these clients you will notice that we changed our description of these clients to new economy, rather than disrupt our clients. It's a terminology change and not a change in the underlying client set just did more apt.

Please describe them as.

As expected, we did see supply chain impacts for a few of our clients, which impacted our transaction volumes with these clients and we ended the quarter slightly.

<unk> supporting web three evolution and while early days the potential is promising with a supporting many of the market leaders.

Going into the new year, our pipeline remains strong in all verticals and geographies, particularly in tech banking finance E Commerce and travel.

On an operating perspective, we maintained strong performance levels in the quarter with 65% of our talent continuing to work from home, we continue to maintain high levels of satisfaction with our clients and staff our client.

Scorecards continues to outperform pre COVID-19 levels.

Our excellent results, leading position and strong balance sheet gave us the flexibility to continue to invest in the business to drive total shareholder returns.

Consistent with our capital deployment strategy during the fourth quarter, we paid $13 million in dividends and repurchased $25 million of our stock at an average price of about $181 per share.

Now turning to our PK acquisition I would like to welcome all new 5000 team members to Concentrix. The depth of experience is impressive and we can clearly see the value of the combination.

Our clients via the combination of deep domain expertise digitally enabled global delivery and the ability to invest in secure adaptable and scalable technology infrastructure as key differentiators.

The reception of both existing and prospective clients encourages us that our strategy is working we will continue to keep you up to date on our progress.

We believe we are re imagining reimagining what the customer.

Experienced can be for our clients and that resonates with what they want to take with their brands, while we do see tighter labor markets in a few countries and continuing impact from the current Covid variance spikes. This is helping demand for technology and automation, which we are focused on taking advantage of our.

Our overall pipeline remains very strong and healthy with the right mix and type of opportunities we are after to grow.

While we had hoped for an in person gathering and appreciated all interest in attending in person due to venue restrictions and limitations of large in person gatherings Investor day will now be a fully virtual event.

We're eager to share more about our progress and the incredible opportunity we have in the customer experience industry now I will turn the call over to Andre Andre.

Thank you, Chris and Hello, everyone.

I will begin with a look at our financial results for the fourth quarter, and then discuss our business outlook for fiscal 2022.

We experienced strong revenue and profit improvement in the fourth quarter.

Revenue in the fourth quarter was $147 billion.

On an adjusted.

Constant currency basis revenue increased 14% compared with last year.

The strong growth in the quarter across all of our strategic verticals was led by increases with large technology and travel clients.

Revenue from technology, and consumer electronics clients grew approximately 17%.

Revenue grow grew 15% in both the retail travel and e-commerce vertical and the banking financial services and insurance vertical.

Revenue from healthcare clients grew 14% <unk>.

Contributing to this strong growth across our strategic verticals, where over 125, new economy clients, representing about 22% of our fourth quarter revenue, which grew 48% year over year.

Adjusted EBITDA was $238 million.

Compared with $211 million in the fourth quarter last year, our adjusted EBITDA margin was 16, 2% in line with last year.

Profitability in the fourth quarter reflects flow through from revenue growth continued investment in seasonal on new program ramps and continued COVID-19 related costs.

non-GAAP net income in the fourth quarter was $158 million compared with $107 million last year. Adjusted EPS was $2 99 per share compared with $2 seven last year.

Turning to cash flow fourth quarter cash flow from operations totaled $182 million and capital expenditures totaled $36 million.

This resulted in free cash flow of $146 million in the quarter moving.

Moving forward, we expect capital expenditures to approximate 3% of revenue.

Turning to the balance sheet at the end of the fourth quarter cash and cash equivalents were $182 million and net debt was $620 million.

During the fourth quarter, we paid a quarterly dividend of <unk> 25 per share. We also repurchased 138000 shares of our stock for approximately $25 million.

As of today, we have $475 million remaining.

And our share repurchase authorization.

We closed the PK transaction at the end of December .

As we indicated when we announced the transaction we financed the acquisition by entering into an amended credit facility.

Under the amended facility, we increased our term loan to $2 $1 billion with a five year maturity from the transaction close and we increased our revolving credit facility to $1 billion.

The $2 $1 billion term loan includes rolling in our previously outstanding $700 million term loan.

The balance of the funding for the transaction came from approximately $200 million in borrowings under our AR securitization facility.

Pro forma for the transaction close the net debt to adjusted EBITDA ratio of the combined company was two four times on a trailing 12 month pro forma basis.

Assuming no further acquisitions.

Now I will discuss our business outlook for the first quarter and full year of 2022.

For the first quarter, we expect revenue to be in a range of 151 billion to $1 $5 $4 billion.

This includes VK revenues for two months of approximately $78 million and nearly two point negative impact of foreign exchange rates compared with the comparable full period in 2021, and a little over a one point headwind related to businesses that we divested in the third quarter of 2021.

On a pro forma adjusted constant currency basis, our revenue guidance equates to 9% to 12% revenue growth.

Our profitability expectations for the first quarter include non-GAAP operating income in a range of $190 million to $205 million.

This impact is much shorter in duration and less acute than we experienced at the beginning of the pandemic.

Moving to our outlook for the entire year, we expect 2022 revenue to be in a range of $6 45 to $6 $6 billion.

This includes approximately $485 million in revenue from PK for 11 months following the acquisition.

This revenue expectation for PK for fiscal 2022 is in line with our stated expectation at the time that we announced the transaction.

Also included in our expectation is a little over a one point negative impact of foreign exchange rates compared with 2021, and a little over half a point headwind related to the businesses, we divested in the third quarter of 2021.

On a pro forma adjusted constant currency basis, our revenue guidance for 2022 equates to a 9% to 12% revenue growth.

And our weighted average share count of approximately 52 million shares.

Our business outlook does not include amortization of intangibles stock based compensation or any future acquisition related impacts for transaction or integration costs.

Also not included in the guidance are impacts from future currency fluctuations.

And as a proven consolidated in our market with a strong balance sheet I believe we're in a great spot to deliver sustainable growth margin progression and strong free cash flow. We look forward to speaking with all of you next Tuesday at our Investor Day.

With that now operator would you. Please open the line for questions.

Thank you, ladies and gentlemen, as a reminder to ask a question you May Press Star then one on your telephone to withdraw your question questions Alky again, Thats Star one to ask a question. Please standby, while we compile the Q&A roster.

Our first question comes from the line of <unk> with Bank of America. Your line is open hi, Thank you for taking my questions.

I have a couple for Chris and one for Andre.

Chris My first question relates to the revenue growth in fiscal 'twenty two.

If I take out X.

Teekay looks like Youre guiding for about 8% year on year organic growth.

The last time, you talked about market growth I believe the commentary was that.

We're driving above market growth and who are you taking share from.

Hey, This is Andre I know the question was for Chris, but I will start if you go back to my prepared remarks on a pro forma basis.

Adjusted constant currency and taking into account the.

The divestitures.

We're guiding to roughly 9% 12%.

Growth in <unk> in 2022, PK is part of that growth.

As I said is.

Accretive to our overall growth growth rate by about one point in that number so that implies to me that the underlying is growing at an 8% to 11% organic rate.

That would be my clarification, there, Chris where do you see the market growing yeah. Andrew Good question as I have stated while analysts are still talking about a sort of three to five or.

Does have some impact to sort of topline growth numbers, but to Andres point, we still believe we're growing faster than the market and still believe in 2022, we will grow faster than the market.

Traditional CX players some new.

Our economy CX players.

We are getting because of our scale and operational discipline and the fact that they can buy technology and the services from us together.

Also seeing frankly, net new opportunities that are coming to us from clients, which historically have not outsource but it's.

It's one piece of the puzzle that we don't have an.

Okay, great. Thanks for clarifying all of that Chris.

Maybe for my second question.

Our focus on margins.

It looked like historically fiscal <unk> seems to be a sequentially lower margin quarter from <unk>.

Even though revenues can be higher so I was wondering if you can just double click on that 100 basis points of operating margin decline.

I think in <unk>, you reported 13, 9% operating margin and if I look at the midpoint of guidance for fiscal <unk> I think it's like 12, 9%. So just if you can just.

Sizing some of your staff and Youre getting less occupancy within it and so you tend to see that historically I would say there are some anomalies this year with despite.

Okay got it and then thanks for the details on that maybe for my last question. If I can just ask one for Andre.

It looks like the tax rate in <unk> was about 21%, which was lower than I guess, you had guided 27% to 28% and also if I look at the fiscal 'twenty two guidance, 25% to 26%, so which is.

Two points lower than the previous guide. So can you just just kind of give us some details on what's driving that lower tax rate.

Yes.

Good question, <unk> and glad to provide some detail so so in Q4.

You are right we saw lower.

Tax rate, both on a GAAP and non-GAAP basis than we expected as largely reflecting.

And a final jurisdictional mix of our income.

For the full year as we analyzed it and that creates some adjustments, which has can have kind of a.

Outsized effect.

On your Q4 rate.

I would point you more towards the full year non-GAAP tax rate of what I believe is about 25, 5%.

Which is right at the midpoint of where we're guiding for 2022, So we do think.

That with.

Kind of our current jurisdictional mix as we look forward.

We'll see a tax rate.

For the full year that is pretty much in line.

Kind of midpoint guide being.

In line with with what we saw for the full year 'twenty one.

Okay. Thanks for all the details and congrats on the strong execution. Thank.

Thank you very much.

Thank you.

Our next question comes from the line of Shannon Cross with Cross Research. Your line is open.

Thank you very much.

I'm wondering can you talk a bit about what you're hearing from customers and seeing in terms of signing.

Are you seeing customers extend the more willing to sign longer contracts and how are you.

Putting into these contract any kind of accelerators are offset to potential inflationary environment actually got potential to the inflationary environment.

Shannon don't be so positive my goodness.

So.

The first question is it really depends on the offering that we're delivering there is not generally a change.

Primarily primary services, unless it's very complex services of extending the contracts longer our average contract is about three years.

And obviously, we keep the contracts much longer because they evergreen and they continue to build.

Is built and generally that's an ongoing conversation regardless of what the contract says because it's a combination of.

As the demand is change in the type of services you're performing.

As the automation technology come in which helps offset some of the inflationary pressures.

All of that kind of plays a mix and so those conversations with clients is on a.

Sort of a fairly regular basis and then we do have some contracts that have a built in cola.

A living.

Okay. Thanks, and then can you talk a bit about what youre seeing with PK.

Judge success of the integration, maybe kpis to watch for.

Yeah.

The opportunity how far you think you could take some of their technology into your existing customer base and vice versa.

Yes, so that's a great question and there's a couple of things and by the way, we're going to a fair a bit more detail on the investor day around how we see the complementary client set.

And technology and skills come together, but some of the prepared remarks that endpoint to that I mean in our new economy clients, which historically are not big tech buyers.

Sure workforce and so we're seeing a high demand for us and one of the reasons why we were very excited about being able to do the PK acquisition was the fact that we can now deliver at scale, because we were able to do it but we were starting to outstrip, our internal resources to be able to to do it and I'll tell you the client discussions so far and again.

Early days, but so far are incredibly positive because.

We're able to automate that and drive better efficiencies through that so both clients who are using both companies already.

I've already started to think differently about how they can engage us and what value. We can add to them and then we've had very good.

Sort of.

Feedback and conversations from our existing clients about wanting to get in front of those.

Services and bringing the two powers together.

In terms of metrics and how we look at it we are looking at it through that and doing it I suspect that we'll start to talk about kind of combination deals that are coming through and percentage of.

Tech sales that we go through on a more regular basis going forward. So that people can see that and then ultimately as we've talked about over time, we see our <unk>.

Margin being able to continue to increase and that will be driven by the combination of both tech and services.

Together.

Great. Thank you and look forward to virtually seeing you next week.

Thank you very much.

Thank you.

As a reminder, ladies and gentlemen that star one to ask the question.

Our next question comes from the line of Colin.

<unk> with Barrington Research your line is open.

Yes, Chris I was just curious.

Verticals should grow fastest in 'twenty two I assume it's your core verticals and also part of the question is what will telecom media I'm, sorry communications or maybe it looked like.

Sort of.

Sizable drop sequentially.

Thank you.

Hey, so a couple of things as we kind of mentioned.

<unk> are doing very very well for us and that's primarily based on sort of just people's buying habits, and what consumer offerings are now available in that space and so we continue to see very very robust growth in that.

The.

International space and so not only do we see additional growth in domestic space, but hopefully at some point the international travel comes back and hopefully at that point. We're the beneficiary of that Tech is also doing well for us our challenge with Tech right. Now is just sort of supply chain constraints with some of our clients that theyre just seeing.

<unk> continues to grow quite quite well.

And that's primarily driven by a lot of our content safety.

Services that we do and content moderation services that we do in our trust services that we do in that space.

On the telecommunications side as we've talked about we want to kind of bring it down it's now bouncing around between.

17% give or take of our business, we're very comfortable with that space.

And we don't see it kind of.

Jumping up substantially larger than where it is at this present time based on how we focused on on getting it to where it is.

And has there been any.

Given the inflation that we've talked about has there been any flexibility on the client side in terms of giving some relief on prices.

Yes so.

Certainly there are some but I don't want to overblow. The reality is that the conversations we're having both from a tight labor market and inflationary perspective is really about changing how they're doing processes and putting more technology in place. So that they can do more with less and thats really the conversations we're focused on having and really <unk>.

<unk> is around the total cost of delivery versus a unit of labor so to speak and that's more appealing to us and frankly more appealing to the clients versus just going to chase.

Inflationary labor market.

Your response makes sense, but I guess I was I should've asked like.

The pure labor intensive contact center work Youre doing there is there any relief on that side I mean, I know, that's a very competitive business.

Assume theres not too much relief is that right.

First I would say that.

The work that we do in that space has evolved pretty dramatically into sort of very higher value engaged conversations and they tend to have sort of certification levels like in our health care business, our financial services businesses. There's a lot of education that goes into them. So it's a different type of market and different pay scale than what you might think.

But.

When we're delivering those types of services there is always opportunities to talk to the clients around <unk>.

Pricing them appropriately for the type of skill set that you need and so that's really where.

We see ourselves and those conversations are ongoing but really the focus is more about driving better automation better efficiencies than needing to increase head.

Count.

In a linear fashion.

And then one last question.

Sorry, if this has been answered before but I don't recall.

The integration of PK will you be integrating the systems that theyre on what's your system, how will that work.

Yes.

Clearly, we will be getting to one HRS system and one <unk>.

<unk> system.

We've done that many many times as we've integrated acquisitions, we do that fairly quickly.

We have some unique tool sets that are very focused on there.

Type of business and engagement around resource management, we actually will be moving a lot of our concentrix team members onto some of those tools just to get better efficiencies and better benefit so that's pretty.

Standard and easy for US there is no systems that disrupt the client that are being touched as as we do this integration.

Okay. Thanks for answering my questions.

Perfect.

Thank you.

Im showing no further questions in the queue I would now like to turn the call back over to Chris for closing remarks, great. Thank you very much for all your interest in Concentrix today and as a reminder, we look forward to talking with all of you at our Investor Day next week, hopefully you are all healthy and well and have a great day, thanks very much everybody.

Ladies and gentlemen that concludes today's conference call. Thank you for participating you may now disconnect.

Q4 2021 Concentrix Corp Earnings Call

Request a DemoDemo

CNXC

Concentrix

Earnings