Q2 2023 Concentrix Corporation Earnings Call

June 28, 2023

Yeah.

[music].

Good day and thank you for standing by welcome to Concentrix is fiscal second quarter 2023 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and.

Answer session to ask a question during the session you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, David Stein Vice President of <unk>.

<unk> relations.

Thank you and good evening welcome to the Concentrix second quarter fiscal 2023 earnings call. This call is the property of Concentrix and may not be recorded or rebroadcast without the written permission of Concentrix. It's call contains forward looking statements that address our expected future performance and that by their nature address.

Matters that are uncertain.

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 today's earnings release and our most recent filings with the SEC for additional information.

Regarding uncertainties that could affect our future financial results.

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

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.

Now I'll turn the call over to Chris.

Thank you David Good evening, everyone and welcome to our second quarter earnings call for fiscal 2023.

During the quarter, we received many investor questions about the impacts of the ongoing macroeconomic environment the status of our transformative combination with web help.

And the emergence of generative AI technology I will provide a brief update on each of those topics today I would also encourage those listings to download our updated ESG report from our web site that we just released.

Now, let's begin with our Q2 results.

We were disappointed in not being within our guidance I am pleased that as a team we did grow and drive margin expansion and strong cash flow in the quarter. Despite the fact that certain clients saw volumes that were well below their expectations entering the quarter.

Reported revenue in the second quarter was $1 6 billion up 3%.

On an organic constant currency basis revenue grew by one 6% our second quarter non-GAAP operating income improved to $221 million growing three 6%.

Adjusted EBITDA increased to three 5% to $259 million compared with last year and both are non-GAAP and.

And adjusted EBITDA margins were up 10 basis points over last year.

This reflects our ability to manage our cost structure dynamically when volumes from clients are lower than their expectations.

non-GAAP EPS was $2 69 per share compared with $2 93 per share last year, largely reflecting the expected impact of higher interest rates.

While we continued to see volume softness we also experienced relative strength across certain strategic verticals, particularly with clients in the healthcare travel insurance and certain parts of our technology portfolio.

The volume softness that we've seen in recent quarters in the retail E Commerce consumer electronics and Telecom industries continued and in some cases intensified with certain clients, despite us maintaining or growing share within those clients from a catalyst perspective, our large project that we've talked about on past calls.

We will have no further ramp this year, reflecting conversations within the last few weeks driven by budget pressures at the client we are adjusting our outlook and cost structure accordingly.

Regarding client driven provider consolidation opportunities within our existing base, we continue to see clients wanting to work with fewer partners, who can support end to end processes. This trend favors partners like Concentrix, who have the breadth of capabilities to serve clients in the strategic partner role currently clients or face.

With a dilemma regarding whether to cut costs by consolidating partners or holding excess capacity. These decisions are occurring more slowly than we originally expected. Additionally, while we are gaining share by winning provider consolidation opportunities. The volumes. We are consolidating with clients are starting at a reduced level.

We see these factors as temporary and if the softness persists, we expect clients will speed up their plans for consolidation, which we believe benefit us.

From a sales perspective, we signed business with two dozen new logos in the quarter. The pipeline of new business has remained solid although clients are focused on optimizing their cost structure, rather than expansion and we're seeing smaller deals and slower approval processes. Once we have been chosen as the partner from our Concentrix perspective.

Right from a catalyst perspective, we're very happy with new wins coming in the combine our CX operations and digital service offerings again, these wins tend to be smaller as large transformational projects are taking much longer to transact. We also view this as temporary and believe digital transformation remains.

<unk> two clients in the long term.

A few examples of our Q2 wins that demonstrate our broad set of capabilities include for a very large global generate of AI provider. We were awarded and are now providing generative AI moderation services. We were selected due to our experienced and critical trust and safety content support as well as our footprint and innovative way.

As we came up with to train the models.

For large consumer electronics brand in Asia Pacific, We proposed a transformational omnichannel CX delivery model to drive improved customer experience, while lowering the cost to serve in high cost markets. We designed and built a solution with AI enabled translation services, which are providing an accelerated more profitable path to growth for our <unk>.

Client, we were selected because of our domain knowledge the ability to integrate complex technology and our understanding of the local markets. They were looking to grow in.

For a major airline operating in EMEA, we were selected to become the primary provider to drive improved experiences and drive better support across all key languages, incorporating new digital and AI powered capabilities and replacing other providers unable to provide a full solution. We were selected because of our multilingual footprint.

<unk> ability to integrate technology and the ability to lower the number of partners. The airlines had to deal with to get a full solution.

For large consumer communications brand in EMEA, we won a significant new agreement to deliver Reimagined service models for improved customer acquisition and retention using sophisticated analytics and AI enabled technologies, we were selected because of our understanding of the market our robust sales capabilities and our ability to automate manual work they were.

Currently challenged with.

In catalysts, we identified opportunities to improve a large transportation companies software implementation speed and support costs are proactive approach helped us secure the consulting engagement as the exclusive provider declined embraced our recommendations leading to a shift in our product strategy and further engagement around their product development.

We were selected because of demonstrated expertise in software development implementation practices and managed services or software environments, while having a focus from the customer experience of the user during transition of software.

And all of these examples of clients needs to align to our sellers one approach while demonstrating the effectiveness of our design build run go to market strategy. We have remained disciplined in our approach to pricing in the current market and on selling profitable sustainable programs for the future to build on our unique capabilities.

From an operating perspective, we continued to achieve strong customer satisfaction and innovation scores, which we believe will again help us to be a continued partner of choice.

Moving to our proposed transformative combination with web help we recently filed our proxy statement that provides more insight into the transaction.

And have made great progress on integration planning since announcing the combination.

The share purchase agreement has now been signed we are starting to receive approvals from various regulatory agencies and have made strong progress towards completing the financings.

As we discussed on our last call wed help will diversify our revenue client base vertical focus and global footprint.

<unk> will also add capabilities and deep domain expertise to our European African and Latin American market presence.

The potential combination has been very well received by clients of both companies and we believe there is a strong potential for growth in selling web helps capabilities into our client base as well as selling our capabilities to more than 1000 additional web help clients as we have successfully done in past combinations.

<unk> also brings recognized an exceptionally technology enabled solutions, including anti money laundering know your customer and payment processing services and telehealth, which we believe we can expand into many concentrix clients and regions.

The combination is expected to be accretive from the outset, we project mid to high single digit earnings per share accretion in the first year followed by double digit.

In the second year. Additionally.

Additionally, we feel very confident about achieving cost synergies of $120 million by the third year through various measures such as <unk> systems, harmonization and real estate footprint Russell rationalization as two examples.

That helps performance in the first quarter surpassed expectations with low double digit constant currency like for like growth. This was above wealth helps planned growth for the quarter.

We continue to expect the web help will exceed 8% like for like revenue growth for the full year 2023, and we will deliver approximately $500 million in 2023, adjusted EBITDA consistent with our expectations when we announced the transaction back in March.

Three months since signing the combination that we believe the rationale for the web help transaction has only been strengthened and we look forward to realizing the benefits of the transaction for our clients staff and shareholders. We expect we continue to expect the combination to be completed by the end of this year.

Now I would like to spend a few minutes discussing our perspective on generative AI.

As background, we have been using various forms of AI for over two years as a technology enabled industry leader, we already deploy AI tools across 60% of our business and are on track to have this close to 80% by year end.

Many of these tools help drive productivity and proficiency of our advisors, while some have completely automated work with machine learning chat bots and natural language processing <unk>.

We have talked about a number of these use cases on prior earnings calls.

Our depth of experience comes from Trialing, a myriad of AI tools in our business over the years and identifying tools that are scalable and secure for deployment. This gives us a rich understanding of the opportunities and challenges of sustainable deploying the technology in our clients' environment and workflow our depth of experience with established forms of AI.

As well as our current client discussions have helped inform our point of view regarding generative AI in the current market.

We see generative AI as a continued evolution in enhancing solutions, we can deliver to our clients. Our conversations about generative AI are centered around security data management and how does it fit the technology into the advisor and customer workflows, we help our clients design build and run wild.

While harnessing this exciting advancement has the potential to drive substantial value for us and our clients. We believe theres some resistance to large scale deployment due to concerns about the ownership of data the security of proprietary information and customer exposure to AI hallucinations or brand damaging engagement.

While we will help our clients navigate these concerns we continue to believe that the near term focus for using this new technology will be on driving the productivity and proficiency of advisors before opportunities to fully automate work start to gain traction.

We have many use cases in place that are proving out our thesis that generative AI will create new revenue opportunities and greater margin expansion opportunities for us while saving our clients costs, our processes and philosophies have proven successful with past technological advancements and we believe generative II will be the same.

In addition to the multiple examples of new business wins in the quarter that we called out earlier, most of which use machine learning AI and the solution. Our generative AI proof of concepts also spanned multiple industries and clients.

Few example of our use cases that are currently being done.

We are working on leveraging proprietary large language model to ensure accuracy and compliance and regulatory industries regulated industries, we've seen benefits of being able to review materials far faster than we can with current tool for compliance.

We have a pilot currently where we are using generative AI to condense training materials and provide gen. AI videos of courseware at a fraction of the cost that we can do currently.

This already is being tested in production and we expect to ramp this up to thousands of staff over the coming months.

We are working with a large airline taking notes from interactions with customers and convince will get down for training and coaching that provides insight into how and advisors working our proof of concept is currently saving about 45 minutes to 60 minutes a day for our coaches on preparing materials for their sessions with the advisors.

We expect it to be rolled out across the entire program and other accounts starting in our fourth quarter.

Lastly, using gen. II, we have been able to greatly speed up of clients' ability to scan through the knowledge basis and provide summary information back to an adviser to help them with their conversation with customers. This use case went into production last week on our program and we're seeing the desired results a faster time to serve with greater ability to solve.

The customer problems faster.

And all of these we are working with our clients to evaluate the cost structure of generative AI and determined it machine learning or other types of automation are more cost effective.

Jim.

Does have a cost factor to it and we expect that it will cause some clients to continue to look at other methods of automation or offshoring first as generative AI costs inevitably will come down.

Our investment in developing our catalyst business has significantly expanded our capabilities and being able to design build and run generative AI solutions at scale with thousands of staff are able to deliver strategy design and technically integrate the solutions when the need occurs we view this as a unique capability that differentiates us significantly.

Difficultly from our traditional CX peers.

We believe that the role of Concentrix will remain crucial even as clients have the option to purchase large language models directly.

Generative AI is not a plug and play technology in the enterprise environment and services are required to ensure a consistent and positive outcome. When a company's brand reputation is on the line the implementation in last mile tasks, such as model tuning feedback gathering training exception handling are requiring human involvement.

And deep domain expertise as a result, we believe that Concentrix will play an indispensable role in assisting clients with these critical elements, allowing us to add higher value services that don't exist today. So our clients can fully utilize the benefits of this technology.

We have the experience the expertise and the vision to leverage this technology to drive significant value for our clients and our business.

Now with all automation, we expect some revenue impact over time, but we believe it will be offset by new work and increased margin potential we expect a modest acceleration in the volume of transactions, we already automate each year and the economics for us and our clients will depend on where those transactions are currently serviced from where.

We're committed to delivering outstanding outcomes and maintaining our leadership position in the AI and automation space in summary, despite despite facing macroeconomic challenges that have impacted volumes for some clients. We achieved revenue growth and margin expansion. This quarter. We are successfully planning for the combination with web help and invest.

And harnessing the power of generative AI, while continuing to drive strong positive cash flows.

We are focused on aligning with the changing demands of our clients to enhance our long term partnership for Concentrix in the market that we serve finally I wanted to take a moment to express my appreciation to our dedicated one billing staff their hard work resilience and unwavering commitment to excellence are the driving force behind our success.

I'd like to thank our clients for their trust and our talented board of directors for their support with that I will turn the call over to Andre Andre.

Thank you, Chris and Hello, everyone I'll begin with a look at our financial results for the second quarter, and then discuss our business outlook for the third quarter and our full year 2023, we.

We delivered revenue growth and margin progression in the second quarter revenue in the second quarter was $1 61 billion up.

Up 3% on an as reported basis.

The improvement in reported revenue includes a one six point negative impact from foreign currency fluctuations and a positive 3% impact from acquisitions organic constant currency growth was below our expectations for the quarter at one 6% a reflection of certain clients having.

Lower volumes than they expected.

The shortfalls to volume expectations were most pronounced with a few large clients in the communications and consumer electronics verticals and.

And a number of clients across our retail vertical.

In catalysts, we saw client spending reductions and the change in the large project that Chris mentioned earlier.

In terms of client verticals, we grew in each of our four strategic verticals in the quarter with revenue from health care clients, leading the way growing by approximately 11% on both an as reported and organic constant currency basis.

Revenue from retail travel on ecommerce clients posted 4% growth as reported and 6% on constant currency organic growth.

Strong growth continued with travel clients.

Revenue from banking financial services and insurance clients grew by 2% on a reported basis and four 5% on an organic constant currency basis revenue.

Revenue from technology, and consumer electronics clients grew 8% as reported and about 1% organic constant currency basis.

Revenue from communications clients decreased by 6% as reported and on an organic basis revenue from.

Clients in the other vertical decreased 8% as reported and about 7% on an organic constant currency basis in the second quarter driven by reduced spending by one government client based on changing social spending priorities.

Our new economy clients grew 2% year over year and represented 23% of second quarter revenue.

While we saw growth with new economy clients, particularly in travel and E. Commerce clients. This was partially offset by reduced year over year revenue from crypto in fintech clients that represent a five point year over year headwind on our new economy client revenue growth in the second quarter.

non-GAAP operating income was $221 million in the second quarter compared with $213 million last year.

Our non-GAAP operating margin of 13, 7% was up 10 basis points from the second quarter last year.

Adjusted EBITDA was $259 million.

Compared with $250 million in the second quarter of last year.

Our adjusted EBITDA margin of 16% was up 10 basis points from the second quarter last year.

non-GAAP net income in the second quarter was $141 million.

Compared with $155 million last year earnings per share were $2 69.

Per share on a non-GAAP basis, compared with $2 93 per share last year.

GAAP results for the second quarter of 2023 included $39 million of amortization of intangibles.

$7 million of share based compensation expense and $32 million of acquisition and integration expenses.

Of the transaction and integration costs incurred in Q2, approximately $8 million is reflected in GAAP operating income.

$12 million is reflected in interest expense and $12 million is reflected in other expense.

$12 million included in interest expense relates to fees associated with the bridge financing that was put in place for the web help transaction.

The $12 million reflected in other expense relates to embark to market loss.

On options that were purchased a hedge the FX impact.

Movements between sign and close on the portion of the web help purchase price that is denominated in euros.

Our GAAP tax rate was 25, 6% in the second quarter and our non-GAAP tax rate was 25, 3%.

Turning to cash flow second quarter cash flow from operations totaled $133 million and capital expenditures were $32 million.

This resulted in free cash flow of $101 million in the quarter.

Included in our free cash flow for the quarter were approximately $5 million of cash costs related to acquisitions, our year to date free cash flow totaled $166 million approximately $24 million above the prior year period.

We continue to expect free cash flow for the full year to exceed $500 million, excluding web help transaction and integration costs.

Moving to the balance sheet at the end of the second quarter cash and cash equivalents were $153 million in debt outstanding was $2, one 3 billion.

Net debt was $1 $98 billion at the end of the quarter.

During the quarter, we paid a quarterly dividend of <unk> $27.05 per share and today, our board declared another quarterly dividend of $27 five.

<unk> per share to be paid during the third quarter.

We also repurchased 39000 shares of our stock for approximately $5 million in the quarter and average price.

$126 per share under a <unk> five one plan that we entered into earlier in the year.

Share repurchases under the plan ceased with the announcement of our web help combination data regulatory consider considerations related to the transaction.

After filing our proxy statement last week, we expect to continue our share repurchase activity in the third quarter.

We have $339 million remaining on our share repurchase authorization and has been our intent to repurchase shares to offset dilution. We believe that our shares are undervalued and that continued modest share repurchase at this valuation is warranted and will be accretive to EPS.

At the end of the second quarter gross leverage was approximately two times adjusted EBITDA and net leverage was approximately one nine times on a trailing four quarters pro forma basis.

Our liquidity remains strong at approximately $1 4 billion.

Including our one point year over for $3 billion Undrawn line of credit cash.

On hand, and additional capacity under our AR securitization.

Now I'll take a moment to review elements of the web help combination.

As I said, when we announced the combination on a pro forma basis. The combination of web help will add $3 million in 2023 revenue and approximately $500 million in 2023, adjusted EBITDA to Concentrix.

The combined company will have $9 $6 billion in revenue and almost $1 $6 billion and combined EBITDA in fiscal year 2023 on a pro forma basis.

We expect earnings per share accretion of mid to high single digits in the first full year after close and double digit accretion in the second year.

We also expect to realize $75 million in synergies in the first year after close growing to a $120 million in synergies in year three.

Not included in our model identifiable revenue synergy upside exists related to opportunities that the companies couldn't pursue separately prior to the combination.

When announced the transaction was valued at $4 $8 billion, which included approximately $14 9 million shares in Concentrix stock to be issued at closing valued at $120 per share.

500 million euros in cash to be paid at closing.

$700 million euros in deferred consideration in the form of a two year note payable to wed hoped our shareholders that will bear interest at 2%.

The $14 9 million shares to be delivered to closing is a fixed number of shares is not impacted by changes in our stock price post announcement.

Accordingly, with the recent reduction in trading value of our common stock. The current value of the transaction is below the originally announced $4 8 billion.

The transaction consideration also includes 750000 additional concentric shares that vest based on certain conditions, including if the concentric share price appreciates to over $170 per share.

Within a specified period following closing.

Transaction was structured to maintain investment grade rating for the debt that we will issue since we announced the transaction we have amended and expanded our revolving credit facility to include an increase in our term loan a to up to $214 $5 billion at the time that the combination closes. We have also increased the size of our undrawn.

Revolver and.

In addition to the increased borrowings in our term loan a we now expect to finance the transaction.

Due to the issuance of approximately $2 2 billion in.

In senior unsecured bonds with maturity split between three years five years and 10 years.

As disclosed in our recently filed proxy statement and based on current market conditions and our investment grade credit rating. We now forecast the financing that we will incur to complete the transaction will be at a weighted average interest rate of 675%.

A little over 30 basis points below the rate, we anticipated when we announced the combination.

We continue to estimate that our net debt to adjusted EBITDA will be about three times on a pro forma basis. When the combination closes later this year.

As we said at the time of our announcement of the combination of our strong free cash flow generation and adjusted EBITDA growth.

It gives us a clear path to reducing leverage and we are committed to reducing our net leverage to about two times within two years after the transaction closes.

Regarding our capital allocation priorities after the transaction closes our focus will be on organic growth. The successful integration of wet help realizing the planned synergies and repaying debt.

We're committed to investment grade principles, we will prioritize paying down debt and reducing our net leverage while continuing our dividend and disciplined share repurchases to offset the dilution of equity grants as I mentioned on our last call. We plan to provide guidance for the combined business after the transaction closes.

Now I'll turn to our business outlook for the third quarter and for the full year fiscal 2023.

For clarity our guidance does not include any contribution from warehouse or any costs that we will incur related to the combination.

We are growing in each of our four strategic verticals and we're seeing growth across most of our regions. We're seeing stability in revenue and catalyst and expect sequential growth each quarter and catalysts in the second half of 2023.

However, we are seeing near term impacts from certain clients in.

In communications, we are seeing a meaningful impact on our revenue expectations for the year for catalyst driven by the delay to the large project that Chris discussed earlier.

We're seeing lower than expected revenues from a few large clients, we mentioned earlier, reflecting the lower volumes they are experiencing.

Finally, our revenue expectations from retail clients have been reduced by lighter than expected volumes across many clients in this vertical.

Our expectations does that include any improvement in the macroeconomic environment and continued to reflect needed seasonal volumes in line with what we experienced in fiscal 2022.

As a result of these factors we are revising our revenue expectations for the fiscal year. However, we remain focused on maintaining our profit margins, while confirming our expectations for strong free cash flow generation for the year.

For the third quarter, we now expect organic constant currency revenue growth to be in a range of one five to two 5%.

Based on current exchange rates, we expect.

A point to point.

Positive year over year impact on reported revenue in the third quarter, we expect the timing of our 2022 acquisitions to contribute approximately $28 million of incremental year over year revenue growth in the third quarter.

Based on these assumptions, we expect reported third quarter revenue to be in a range of $1 63 5 billion to one.

$165 billion based on current exchange rates.

Our profitability expectations for the third quarter include non-GAAP operating income in a range of $225 million to $235 million.

This equates to a non-GAAP operating margin of 14, 1% at the midpoint of the range similar to the third quarter last year.

We expect interest expense in the third quarter to be approximately $35 million, excluding any impact related web help combination. We also expect an effective tax rate of 26% weighted average diluted share count of approximately 51 5 million shares.

Moving to our outlook for the entire year.

Now expect 2023 constant currency organic revenue growth to be in the range of 2% to 3%.

Based on current exchange rates, we expect a five point negative impact on reported revenues for the full year.

We expect the timing of our 2022 acquisitions to contribute approximately $156 million of incremental year over year revenue growth for the full year.

This equates to reported full year revenue in a range of $6 $5 75 billion to $6 six towards euro $1 billion.

Our full year profitability expectations now include non-GAAP operating income in a range of $920 million to $945 million. This equates to a non-GAAP operating margin of 14, 1% at the midpoint of the range up 10 basis points from the prior year.

We expect full year interest expense to be approximately $138 million, excluding any impact related to the web help combination. We also expect an effective tax rate of approximately 26% weighted average diluted share count of approximately 51 5 million shares again, excluding any impact from the shares to be issued.

To complete the web help combination.

We continue to expect strong free cash flow for the year with free cash flow growing to over $500 million in 2023, an increase of at least 8% over 2022.

Our business outlook does not include acquisition related impacts our transaction and integration costs associated with our acquisition of webmd or any future acquisitions also not included in the guidance are impacts from future currency fluctuations are future share repurchases.

In closing we are focused on margin expansion and cash flow generation, while taking advantage of the market opportunity that generative AI poses.

And completing and successfully integrating the web help combination we believe that our focus on these areas will position us for future growth and value creation.

At this time operator, please open the line for questions.

Yeah.

Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Our first question comes from Vincent Colicchio with Barrington, You May proceed.

Yes.

Thank you for taking my questions So Chris.

Sir your guidance it looks like Youre expecting.

Meaningful pickup in sequential growth in Q4, what is driving that.

So Vince as we talked about earlier.

We do have two large contracts one way we've talked about in catalyst rich will not ramp the other one is at plan and.

Confirm kind of ramping as we expected planned for the for the rest of the year as.

As we've talked about that's a fairly big driver of the growth that we're seeing within Q4.

And then also as we looked at the areas that are growing they continue to grow we've looked at obviously meeting the expectations of the clients, who have not been able to kind of meet their volume expectations that they've had.

So thats, partly offset but when you put the two together that gives us.

What we're seeing within the fourth quarter as you look at the guide for the year.

One one fairly sizable difference versus last year is our expectation.

As I said that we expect to see sequential growth within catalyst.

Quarterly as we go through the back half of the year.

So that is different than what we were experiencing last year, and we will kind of be the.

The thing that makes this year's pattern look different than last year other than that pretty much the same as last year's pattern.

And in terms of the vendor consolidation.

Discussions.

I think you may have touched on this but.

What portion of the amount that.

It is not coming in this year do you think you might you may see in the next year next fiscal year.

So.

So it's difficult to answer what we're having is sort of a positive conversations we've clearly won a bunch of the vendor consolidation.

Although it's coming in at lower volumes.

We have a number of clients who are kind of sitting on the fence so to speak.

And saying look if we continue to see the depressed volumes that we're seeing we're definitely going to have to consolidate.

But those pulling the trigger is taking a little longer than expected we are not.

Anticipating anything meaningful in the next two quarters.

From a vendor consolidation perspective outside of ones that we've already been given and a ramping and are dealing with.

I suspect that will roll into next year and probably the most appropriate time to talk about that is when we close the web help combination and then kind of give a guide for what we see in the back half of the year.

Front half back half of next year.

And then one last one.

The strategic verticals.

Performing quite well should we expect that to continue in the second half.

The weakest I think of the four as the technology and consumer electronics side should we expect that to continue.

Yes, so vince on sort of health care and some of the others.

The insurance.

Youll see what we foresee is that kind of continued strength in the back half of the year.

Consumer electronics and technology is a tale of two cities are consumer electronics, we continue to see frankly is andre called out.

Some of our larger clients suffering from some fairly big volume declines within that space, but.

That's offset by some of the technologies space that we've seen.

Some some very good strong growth and we expect to see probably that continue on in the back half of the year with continued muted consumer electronics, but some good strong growth in the technology side.

Okay ill go back in the queue. Thank you.

Thank you Vince.

Okay.

Thank you.

Our next question comes from <unk> <unk> with Bank of America You May proceed.

Hi, Thanks for taking my questions.

Chris revenues in fiscal <unk> grew one 6% in constant currency, whereas you had expected it to grow 3% to 5% Youre guiding <unk> to 2% constant currency growth youre, taking down the full year from 5% to two 5%.

I guess my question would be what is the market growing at based on your estimate.

And why what gives you confidence that.

Net revenues can be weaker.

It's two 5% the right number and what is giving you confidence in that.

So a couple of different things.

I am not sure we are hearing different market growth numbers frankly and.

And it's more based on region and by industry and so for instance, we see Europe growing faster, we're experiencing that ourselves clearly other public companies, who have large European exposures are seeing that versus what sort of North America is growing and similar we're seeing some good growth in Asia Pac and.

Some public companies that are exposed to that are seeing some things. So it's a bit of a mixed bag.

What I will tell you is we feel that and what we're hearing from our clients is we're keeping if not growing our share across the categories that we're in and competing in and the business that we're competing in.

So we feel good about that that's probably.

The big takeaway from from all of it.

In terms of how we've looked at the back half of the year.

When we looked at our Q1, we came in at a higher midpoint of the guide.

Said within Q1 that.

We had some clients who were forecasting lower and delivered way more we had some clients who are who are.

Forecasting more and delivered less and we've had that similar expect a similar experience in Q.

Two the differences is that we're seeing some of the clients are Andre pointed out sort of retool their infrastructure for lack of a better term in terms of what they are actually out putting into the marketplace.

And when we see that we tend to kind of feel like they've reached.

Position of stability in terms of what their expectations are and it's muted from what we originally anticipated and so as we've gone through and looked at our Q3 numbers.

Expectations for full year, we've effectively had many many conversations with clients in regards to what they are seeing from a capacity perspective, what their tooling to what their share is where we will take share where we will hold share.

And then put it through our own sort of calculations in regards to who is generally over promised and under Levered and vice versa.

To come up with where we see the numbers and I think that gives us as confident as we can be on where we see Q.

Q3, and Q4 and as we've tried to kind of point out.

It's very identifiable chunks of business.

We have seen.

Very different expectations in more clients at forecasted where the rest we have seen good growth and good performance I think through this the takeaway though.

Is that we're very focused on margin preservation margin growth and also cash flow growth and despite coming in less than what we had hoped for and we were disappointed in Q2. The reality is is that the team adjusted very very quickly to make sure that we delivered on our cash flow and margin performance goals and that's certainly what our goals are.

As we go into Q3, and Q4 as well as obviously hitting our guidance that we've laid out.

Okay. My next question, let me ask you about the new economy clients.

This set of clients was growing 47% year on year to four quarters ago. I think you said they grew 2% year on year. This quarter. So what are you hearing from them any idea. When this set of clients can turnaround do you think this is like another one to two quarter weakness or or what is it.

Your take on when when this set of clients can see stronger growth.

Yes.

Question.

You have to Peel back the onion, a little bit on these clients.

We're seeing weakness in this portfolio of clients is Andre pointed out primarily crypto year on year, which is now de minimis to us kind of going forward.

And then also in some of the Fintech and to be more specific we are seeing weakness in north American based direct to consumer fintech, which have dramatically cut back their customer acquisition and spend and a more focused at.

Driving.

Frankly, real tangible profitable returns and I think when you when you look at that combination that's about a 5% headwind, which obviously roll off.

Next year. So my expectation is that we'll continue to see muted.

Performance within this portfolio.

Accounts, probably until the back half of the year early early next year.

When either they start to spend more to expand.

Or obviously.

Economy might turn around and or we.

We continue to add clients since that portfolio, which were which were doing.

Okay. Thank you for that let me ask Andre question. So Andre the operating environment is weaker revenue growth is lower.

You're taking on a lot of debt for the web help acquisition. So talk to us about what is giving you confidence in being able to service that debt and as part of that if you can weave in some of the margin drivers in and what your expectations are for cash flows in and why you think that those consisting.

Yes, so one of the things that's really great about this business group flew through cycles as how it generates cash and I go back as.

As far back as in this industry as far back as the global financial crisis, and the participants even back then.

Revenues for software able to drive really strong free cash flow. So.

Really starts with our ability to have.

It's a.

A very variable.

The cost base.

So we can.

Quickly react as we did in this quarter to preserve margins.

Then other margin drivers as we go forward, we'll be again getting into higher value services, including now higher value services around helping our clients.

Implement generative AI.

Obviously, we can still get.

Some leverage on our <unk>.

As we grow even at these muted levels.

And then when we add in you mentioned the web help in taking on to get there.

We add in web how generate strong free cash flows and then the synergies from that transaction kind of on top of things, which will be accretive both to margins and free cash flow. So all of that has us very very confident.

Even at the increased interest rates that we can generate strong free cash flow such as we are frankly in the concentrix business. This year will be able to do it even more so on a combined basis with went out and with the synergies and pay.

Pay down debt.

We've demonstrated our ability to do that in past transactions the convergence transaction, the PK transaction and we've hit the targets we've set for ourselves both in terms of synergies, but more importantly.

Getting our debt levels down and getting in down frankly more quickly than we indicated we would at the time that we did the transaction, but feel very confident with web helpful. It will be able to do the same.

Okay. Let me ask one last question from the prepared remarks it sounded.

Like web help had stronger growth I think you mentioned something about 8% year on year constant currency was that right.

And why do you think that is it a difference in geographies thats, causing that.

Did that we had better performance so what do you attribute that to.

Yes, so what we said was.

On a.

Like for like constant currency basis.

Low low double digit growth and so.

That's the growth rate in the first quarter that is.

<unk> expectations that web how pad for the quarter or that we had based on the diligence that we did what we built into our model for this year is eight to eight 5% growth in the web health business.

We remain very very confident that they can deliver that and this really speaks to.

The quality of the asset here that we're combining with their strong footprint in.

In EMEA, particularly with nearshore and offshore.

Offerings supporting European languages, as well as the very very strong operations and strong growth that they're seeing in Latin America. If you look at.

Kind of why the rationale for this combination if you look at other public peers, who break out their revenue growth rates by region Europe is growing.

Well as as Latin America, and frankly, we're growing well there as well, but we are subscale.

And so.

That's what I would read into their results and that's why we're so excited about it.

Completing the combination.

The great progress, we're seeing on the integration.

And then moving forward together.

Okay. Thank you for taking my questions I appreciate it.

Sure.

Thank you and as a reminder to ask a question you will need to press star one on your telephone.

Our next question comes from Joseph <unk> with Canaccord Genuity you May proceed.

Hey, guys. Good afternoon, thanks for taking the questions maybe maybe just.

Couple ones based on your comments, Chris on the AI front.

Could you, maybe perhaps give us a little more color I know you mentioned costs being a factor in the technology and its implementation versus potentially other solutions I think it'd be inter.

Interesting to hear what it's early days, but the cost of some of this technology versus maybe traditional servicing of those volumes and I have a couple of follow ups.

Yes for sure for sure Joe so traditional and even sort of the.

I don't want to call it traditional AI, but they either we've deployed thus far machine based learning our natural language processing.

Generally the cost model is based on per seat per license per current transaction and.

It doesn't necessarily have to deal with the type of transaction or the length of transaction that is being encouraged so for instance.

Asking a very simple question too.

To having a back and forth that last 10 minutes generally the same price and you get some variability out of that the way generative AI is currently priced and the way. The models work is that you actually pay per sort of and I am very simplifying us per character that youre asking it to do and back and forth so longer queries take more time take.

More money and cost for that kind of goes back and forth, but that plus as you look at the proprietary information that you are uploading into the cloud for storage perspective, you are paying for the stores that kind of goes along with that then you are paying for the technology licenses the technology deploying to kind of give that last mile application to the client.

Theres a lot more costs associated with it and so for some transactions or some productivity gains in proficiency gains that makes sense for others. It doesn't because you don't get the.

The benefit of it the real comp.

Conversations, we're having with clients around generative AI right now, though cost is one factor, but it's more about predictability of results where if.

One or two questions coming up with the same answer it but if you ask a 10000 questions does it come up with the same answer or does it start to hallucinate and kind of give some some odd feedback.

Clients that are to a customer that people don't want necessarily going direct and then two around the security of their data and around who owns the data most of the generative AI kind of implementations in instances and everything like that right now as youre, giving up unless youre spending a vast sum of money youre, giving up sort of that data.

The journey of AI cloud providers.

In order for them to kind of tune their models make things better for everybody and we just.

When we talk to our clients. They are just not prepared to do that yet for that change, possibly but right now they are more focused on how do they own the data how do they own the learnings how is it aligns their brand how does it get predictable resolved how is it secure.

And so a lot of that focus is now saying, okay, well, let's focus on <unk>.

Proficiency of our staff delivering services, because if there is a hallucination or something else than a human is there to make sure that safeguarded and then also the queries and back and forth to human can handle a lot of the back and forth and really then kind of search and <unk>.

Engineered the prompts for lack of better term to what the information is that that customer is looking for much faster and thats what were seeing in our in our proof of concept. That's what we're deploying right now and we're seeing the benefits as expected we're seeing faster resolution time for customers, we're seeing higher <unk> scores because as faster resolution.

We're seeing an easier experience for the advisor in order to get the information.

And because we were able to get things done faster the client saved some money from it because they have more capacity with less.

<unk>.

They have more capacity for less money and effect.

They look at it if that makes sense.

Okay.

Yes fair enough and then we've seen some of the other players I guess in the broader ecosystem maybe.

Especially also over in the IC side of things kind of announce major AI investment initiatives of their own internally to build the practice up.

Is that something that makes sense.

For Concentrix to do and kind of.

Earmark real.

Material budget for this stuff at this point or is it really.

A function of.

Helping clients.

On their journey and.

Maybe spending.

An investment there as it comes.

Along.

Yes, Joe that's a great question.

The reality is a lot of press releases I think are somewhat misleading.

Ron where the spend is going and what its for the reality is is that we are building up the practices pretty aggressively as we speak.

The extension of learnings, we already have the investments that we have put into catalyst are significant and that gives us the ability to scale.

The proof of concepts much faster.

Two into production and.

As a whole as a company we spend tens of millions of dollars on R&D and our own technology and development that hasnt slowed down or stopped or anything like that.

We continue to see that as critical investments for our future and so I think we're at the right investment level and we will continue to ramp it up as we drive more and more into production and when one more business around it.

Fair enough and then just one final one on the.

The large catalyst project that's been.

I guess I guess is it fair to call it delayed and not canceled at this point and then is there any kind of you ask.

If it's just delayed win.

It may start to.

Start to ramp again, thanks, a lot guys.

Yes, John No problem just for clarity we won this project back and I'm sad to say in sort of Q3 of last year.

The original plan from the client was to kind of get to full production in Q2 Q3 of this year and the reality is as we staffed up fairly heavily and.

The work for it started trickling in and we started doing work for it and we continue to work for us, but the big.

Bang for lack of a better term when they want it all the scrum teams and all the work done just continued to get pushed out and various reasons. They were doing a restructuring they were aligning to a new technology stack et cetera, et cetera, et cetera, and really it's within the last couple of weeks that.

They sat down and said Hey, we need to continue this we need to get this done we need to continue to support the stock.

But we just are going to push out the budget for sort of large scale ramp in implementation.

We both were expecting for sort of our Q3 and Q4. So it's not castle, we are getting revenue from it but at a much lower run rate and it will frankly pushed the project out further but at this much lower run rate versus what we had expected. So that does have a fairly big impact to us as we called it out.

From a size wise perspective for the back half of this year I do not expect that in the front half of next year. It will come back in a meaningful way I think it will continue to kind of slowly increase.

As the client kind of aligns budgets and it comes back on to be a priority, but it's absolutely not canceled it's still there and we're still billing for it just at a much reduced rate as we talk about the sequential.

Growth that we expect in catalyst over.

Over the back half of the year. It is not really a major contributor to that at all at this point in our expectations. What we are seeing are some nice smaller wins that are helping catalyst for a stabilized revenue and then begin to grow as we expected they actually grew slightly sequentially in Q2.

And we expect that could accelerate a bit in Q3, and even more into Q4, but again not based on that large contract on a bunch of other smaller wins across the verticals.

Great. Thanks, Chris Thanks Andre thank.

Thank you very much.

Thank you and I now like to turn the call back over to Chris Caldwell for any closing remarks.

Great. Thank you very much everybody for joining us today, we are always very much appreciate your interest in Concentrix and we're committed to maintaining strong profitability and cash flow generation.

Especially around executing our strategic objectives, we look forward to talking to you next quarter. Thank you very much everybody.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Okay.

Yes.

Okay.

Yes.

[music].

Okay.

Yes.

[music].

Yes.

Okay.

Yes.

Okay.

Sure.

Yes.

Sure.

Yes.

Okay.

[music].

Okay.

So.

Okay.

[music].

Okay.

[music].

Yes.

Okay.

[music].

Uh huh.

Yes.

Sure.

Yes.

Sure.

Okay.

Yes.

[music].

Okay.

[music].

Okay.

No.

Okay.

[music].

Okay.

[music].

Yes.

Okay.

So.

Okay.

[music].

Okay.

Yes.

Okay.

Yes.

[music].

Okay.

Yes.

Sure.

Okay.

Sure.

Yes.

Okay.

Yes.

Okay.

[music].

Okay.

No.

Hum.

[music].

Okay.

[music].

Yes.

Yeah.

[music].

Good day and thank you for standing by welcome to Concentrix as fiscal second quarter 2023 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one one on your tell.

The phone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, David Stein, Vice President of Investor Relations.

Thank you and good evening welcome to the Concentrix second quarter fiscal 2023 earnings call. This call is the property of Concentrix and may not be recorded or rebroadcast without the written permission of Concentrix. This call contains forward looking statements that address our expected future performance and that by their nature address.

The 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 today's earnings release, and our most recent filings with the SEC for additional information regarding uncertainties that could affect our future financial results.

This includes the risk factors provided in our annual report on Form 10-K 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'll open the call for your questions.

Now I'll turn the call over to Chris.

Thank you David Good evening, everyone and welcome to our second quarter earnings call for fiscal 2023.

During the quarter, we received many investor questions about the impacts of the ongoing macroeconomic environment the status of our transformative combination with wed hoped.

Now, let's begin with our Q2 results, while we were disappointed in not being within our guidance I'm pleased that as a team we did grow and drive margin expansion and strong cash flow in the quarter. Despite the fact that certain clients saw volumes that were well below their expectations entering the quarter.

Reported revenue in the second quarter was $1 6 billion up 3%.

On an organic constant currency basis revenue grew by one 6% or.

Our second quarter non-GAAP operating income improved to $221 million growing three 6%.

Adjusted EBITDA increased to three 5% to $259 million compared with last year and both are non-GAAP and adjusted.

Good EBITDA margins were up 10 basis points over last year.

This reflects our ability to manage our cost structure dynamically when volumes from clients are lower than their expectations. non-GAAP EPS was $2 69 per share compared with $2 93 per share last year, largely reflecting the expected impact of higher interest rates.

We will have no further ramp this year, reflecting conversations within the last few weeks driven by budget pressures at the client we are adjusting our outlook and cost structure accordingly.

Are faced with a dilemma regarding whether to cut costs by consolidating partners or holding excess capacity. These decisions are occurring more slowly than we originally expected. Additionally, while we are gaining share by winning provider consolidation opportunities. The volumes. We are consolidating with clients are starting at a reduced level with <unk>.

These factors are temporary and if the softness persists, we expect clients will speed up their plans for consolidation, which we believe benefit us.

From a concentrix perspective from a catalyst perspective, we're very happy with new wins coming in the combine our CX operations and digital service offerings again, these wins tend to be smaller as large transformational projects are taking much longer to transact. We also view this as temporary and believe digital.

<unk> remains essential to clients in the long term.

Out of ways, we came up with to train the models for.

For a large consumer electronics brand in Asia Pacific, We proposed a transformational omnichannel CX delivery model to drive improved customer experience, while lowering the cost to serve in high cost markets. We designed and built a solution with AI enabled translation services, which are providing an accelerated more profitable path to growth for our core.

Client, we were selected because of our domain knowledge the ability to integrate complex technology and our understanding of the local markets. They were looking to grow in.

Ability to integrate technology and the ability to lower the number of partners. The airline had to deal with to get a full solution.

For a large consumer communications brand in EMEA, we won a significant new agreement to deliver Reimagined service models for improved customer acquisition and retention using sophisticated analytics and AI enabled technologies, we were selected because of our understanding of the market our robust sales capabilities and our ability to automate manual work they were.

Currently challenged with.

We were selected because of demonstrated expertise in software development implementation practices and managed services or software environments, while having a focus on the customer experience of the user during transition of software.

From an operating perspective, we continued to achieve strong customer satisfaction and innovation scores, which we believe will again help us to be a continued partner of choice.

Moving to our proposed transformative combination with well, we recently filed our proxy statement that provides more insight into the transaction.

And have made great progress on integration planning since announcing the combination.

The share purchase agreement has now been signed we are starting to receive approvals from various regulatory agencies and have made strong progress towards completing the financings.

As we discussed on our last call wed help will diversify our revenue client base vertical focus and global footprint.

<unk> help we will also add capabilities and deep domain expertise to our European African and Latin American market presence. The potential combination has been very well received by clients of both companies and we believe there is a strong potential for growth in selling let helps capabilities into our client base as well as selling our.

<unk> to the more than 1000 additional web help clients as we have successfully done in past combinations wed.

The combination is expected to be accretive from the outset, we project mid to high single digit earnings per share accretion in the first year followed by double digit.

Accretion in the second year. Additionally, we feel very confident about achieving cost synergies of $120 million by the third year through various measures such as <unk> systems, harmonization and real estate footprint rationalization as two examples.

That helps performance in the first quarter surpassed expectations with low double digit constant currency like for like growth. This was above web helps plan growth for the quarter.

We continue to expect the web help will exceed 8% like for like revenue growth for the full year 2023, and will deliver approximately $500 million in 2023, adjusted EBITDA consistent with our expectations when we announced the transaction back in March.

Now I would like to spend a few minutes discussing our perspective on generative AI.

Many of these tools help drive productivity and proficiency of our advisors, while some have completely automated work with machine learning chat bots and natural language processing <unk>.

We have talked about a number of these use cases on prior earnings calls.

As well as our current client discussions have helped inform our point of view regarding generative AI and the current market.

Few example of our use cases that are currently being done.

We have a pilot currently where we are using generative AI to condense training materials and provide gen. AI videos of courseware at a fraction of the cost that we can do currently.

This already is being tested in production and we expect to ramp this up to thousands of staff over the coming months.

We expect it to be rolled out across the entire program and other accounts starting in our fourth quarter.

Lastly, using gen. II, we have been able to greatly speed up our clients' ability to scan through the knowledge basis and provide summary information back to an adviser to help them with their conversation with customers. This use case went into production last week on our program and we're seeing the desired results of faster time to serve with greater ability to solve.

The customer problems faster.

And all of these we are working with our clients to evaluate the cost structure of generative AI and determine if machine learning or other types of automation are more cost effective.

<unk> does have a cost factor to it and we expect that it will cause some clients to continue to look at other methods of automation or offshoring first as generative AI costs inevitably will come down.

Our investment in developing our catalyst business has significantly expanded our capabilities and being able to design build and run generative AI solutions at scale with thousands of staff able to deliver strategy design and technically integrated solutions. When they need occurs we view this as a unique capability that differentiates us significantly.

<unk> from our traditional CX peers.

We believe that the role of Concentrix will remain crucial even as clients have the option to purchase large language models directly.

Generative AI is not a plug and play technology in the enterprise environment and services are required to ensure a consistent and positive outcome. When a company's brand reputation is on the line the implementation and last mile tasks, such as model tuning feedback gathering training exception handling are requiring human involvement.

We have the experience the expertise and the vision to leverage this technology to drive significant value for our clients and our business.

Now with all automation, we expect some revenue impact over time, but we believe that will be offset by new work and increased margin potential we expect a modest acceleration in the volume of transactions, we already automate each year and the economics for us and our clients will depend on where those transactions are currently serviced from where.

We're committed to delivering outstanding outcomes and maintaining our leadership position in the AI and automation space in summary, despite fit despite facing macroeconomic challenges that have impacted volumes for some clients. We achieved revenue growth and margin expansion. This quarter. We are successfully planning for the combination with web help and invest.

And harnessing the power of generative AI, while continuing to drive strong positive cash flows.

We are focused on aligning with the changing demands of our clients to enhance our long term partnership for Concentrix in the market that we serve finally I wanted to take a moment to express my appreciation to our dedicated a one billing staff their hard work resilience and unwavering commitment to excellence are the driving force behind our success.

I would like to thank our clients for their trust and our talented board of directors for their support with that I will turn the call over to Andre Andre.

Thank you, Chris and Hello, everyone I'll begin with a look at our financial results for the second quarter, and then discuss our business outlook for the third quarter and full year 2023, we.

We delivered revenue growth and margin progression in the second quarter revenue in the second quarter was 161 billion up 3% on an as reported basis.

Lower volumes than they expected.

This shortfall to volume expectations were most pronounced with a few large clients in the communications and consumer electronics verticals.

And a number of clients across our retail vertical.

In catalysts, we saw client spending reductions and the change in the large project that Chris mentioned earlier.

Revenue from retail travel on ecommerce clients posted 4% growth as reported and 6% on constant currency organic growth.

Strong growth continued with travel clients.

Revenue from banking financial services and insurance clients grew by 2% on a reported basis and four 5% on an organic constant currency basis.

Revenue from technology, and consumer electronics clients grew 8% as reported and about 1% organic constant currency basis.

Revenue from communications clients decreased by 6% as reported and on an organic basis.

Revenue from clients in the other vertical decreased 8% as reported and about 7% on an organic constant currency basis in the second quarter driven by reduced spending by one government client based on changing social spending priorities.

Our new economy clients grew 2% year over year and represented 23% of second quarter revenue.

While we saw growth with new economy clients, particularly in travel and E. Commerce clients. This was partially offset by reduced year over year revenue for crypto and fintech clients that represent a five point year over year headwind on our new Academy client revenue growth in the second quarter.

non-GAAP operating income was $221 million in the second quarter compared with $213 million last year.

Our non-GAAP operating margin of 13, 7% was up 10 basis points from the second quarter last year.

Adjusted EBITDA was $259 million.

Compared with $250 million in the second quarter of last year, our adjusted EBITDA margin of 16%.

<unk> was up 10 basis points from the second quarter last year.

non-GAAP net income in the second quarter was $141 million compared with $155 million last year earnings per share were $2 69.

Per share on a non-GAAP basis, compared with $2 93 per share last year.

GAAP results for the second quarter of 2023 included $39 million of amortization of intangibles and.

$11 million of share based compensation expense and $32 million of acquisition and integration expenses.

Of the transaction and integration costs incurred in Q2, approximately $8 million is reflected in GAAP operating income.

$12 million is reflected in interest expense and $12 million is reflected in other expense.

The $12 million included in the interest expense relates to fees associated with the bridge financing that was put in place for the web help transaction with <unk>.

<unk> million dollars reflected in other expense relates to a mark to market loss.

On options that were purchased a hedge the FX impact.

Elements between sign and close on the portion of the web help purchase price that is denominated in euros.

Our GAAP tax rate was 25, 6% in the second quarter and our non-GAAP tax rate was 25, 3%.

Turning to cash flow second quarter cash flow from operations totaled $133 million and capital expenditures were $32 million. This resulted in free cash flow of $101 million in the quarter.

Excluding web help transaction integration costs.

Moving to the balance sheet at the end of the second quarter cash and cash equivalents were $153 million in debt outstanding was $2. One $3 billion net debt was $1 98 billion at the end of the quarter.

During the quarter, we paid a quarterly dividend of $27.05 per share and today, our board declared another quarterly dividend of $27 five.

<unk> per share to be paid during the third quarter.

We also repurchased 39000 shares of our stock for approximately $5 million in the quarter and an average price of $126 per share under a <unk>. One plan that we entered into earlier in the year.

Share repurchases under the plan ceased with the announcement of our web help combination data regulatory consider.

Iterations related to the transaction.

After filing our proxy statement last week, we expect to continue our share repurchase activity in the third quarter.

At the end of the second quarter gross leverage was approximately two times adjusted EBITDA and net leverage was approximately one nine times on a trailing four quarters pro forma basis.

Our liquidity remains strong at approximately $1 4 billion, including our one point.

<unk> four $3 billion Undrawn line of credit cash on.

On hand, and additional capacity under our AR securitization.

Now I'll take a moment to review elements of the web help combination.

As I said, when we announced the combination on a pro forma basis. The combination of web help will add $3 billion in 2023 revenue and approximately $500 million in 2023, adjusted EBITDA to Concentrix.

The combined company will have $9 $6 billion in revenue and almost one $6 billion and combined EBITDA in fiscal year 2023 on a pro forma basis.

We expect earnings per share accretion of mid to high single digits in the first full year after close and double digit accretion in the second year.

We also expect to realize $75 million in synergies in the first year after close growing to $120 million in synergies in year three.

While not included in our model identifiable revenue synergy upside exists related to opportunities that the companies could pursue separately prior to the combination.

When announced the transaction was valued at $4 8 million, which included approximately $14 9 million shares in Concentrix stock to be issued at closing valued at a $120 per share.

$500 million euros in cash to be paid at closing.

$700 million euros, and deferred consideration in the form of a two year note payable to wed hoped to help shareholders that will bear interest at 2%.

The $14 9 million shares to be delivered at closing is a fixed number of shares is not impacted by changes in our stock price post announcement.

Accordingly, with the recent reduction in trading value of our common stock. The current value of the transaction is below the originally announced $4 8 billion.

The transaction consideration also includes 750000 additional concentric shares that will vest based on certain conditions, including if the concentric share price appreciates the over $170 per share within a specified period following closing.

The transaction was structured to maintain investment grade rating for the debt that we will issue since we announced the transaction we have amended and expanded our revolving credit facility to include an increase in our term loan a to up to $214 $5 billion at the time that the combination closes. We have also increased the size of our undrawn.

On revolver.

In addition to the increased borrowings on our term loan a we now expect to finance the transaction.

Due to the issuance of approximately $2 2 billion in.

In senior unsecured bonds with maturity split between three years five years and 10 years.

A little over 30 basis points below the rate, we anticipated when we announced the combination.

We continue to estimate that our net debt to adjusted EBITDA will be about three times on a pro forma basis. When the combination closes later this year.

As we said at the time of our announcement of the combination of our strong free cash flow generation and adjusted EBITDA growth gives us a clear path to reducing leverage and we are committed to reducing our net leverage to about two times two years after the transaction closes.

Regarding our capital allocation priorities after the transaction closes our focus will be on organic growth. The successful integrations of wet now realizing the planned synergies and repaying debt.

We are committed to investment grade principles, we will prioritize paying down debt and reducing our net leverage while continuing our dividend and disciplined share repurchases to offset the dilution of equity grants as I mentioned on our last call. We plan to provide guidance for the <unk> business after the transaction closes.

Now I'll turn to our business outlook for the third quarter and for the full year fiscal 2023.

For clarity our guidance does not include any contribution from warehouse or any costs that we will incur related to the combination.

We are seeing near term impacts from certain clients.

In communications, we are seeing a meaningful impact on our revenue expectations for the year for catalyst driven by the delays in the large projects that Chris discussed earlier.

We're seeing lower than expected revenues from a few large clients, we mentioned earlier, reflecting the lower volumes they are experiencing.

Finally, our revenue expectations from retail clients have been reduced by lighter than expected volumes across many clients in this vertical.

Our expectations do not include any improvement in the macroeconomic environment and continued to reflect needed seasonal volumes in line with what we experienced in fiscal 2022.

As a result of these factors we are revising our revenue expectations for the fiscal year. However.

We remain focused on maintaining our profit margins, while confirming our expectations for strong free cash flow generation for the year.

For the third quarter, we now expect organic constant currency revenue growth to be in a range of one five to two 5%.

Just on current exchange rates, we expect.

A two.

Based on these assumptions, we expect reported third quarter revenue to be in a range of $1 63, 5 billion to $1 65 $1 billion based on current exchange rates.

Our profitability expectations for the third quarter include non-GAAP operating income in a range of $225 million to $235 million.

This equates to a non-GAAP operating margin of 14% at the midpoint of the range similar to the third quarter last year.

We expect interest expense in the third quarter to be approximately $35 million, excluding any impact related web help combination.

We also expect an effective tax rate of 26% weighted average diluted share count of approximately 51 5 million shares.

Moving to our outlook for the entire year.

Now expect 2023 constant currency organic revenue growth to be in the range of 2% to 3% based.

Based on current exchange rates, we expect a five point negative impact on reported revenues for the full year.

We expect the timing of our 2022 acquisitions to contribute approximately $156 million of incremental year over year revenue growth for the full year.

This equates to reported full year revenue in a range of $6 $5 75 billion.

To six six towards Euro a $1 billion.

Our full year profitability expectations now include non-GAAP operating income in a range of $920 million to $945 million.

This equates to a non-GAAP operating margin of 14, 1% at the midpoint of the range up 10 basis points from the prior year.

Complete the web help combination.

We continue to expect strong free cash flow for the year with free cash flow growing to over $500 million in 2023, an increase of at least 8% over 2022.

In closing we are focused on margin expansion and cash flow generation, while taking advantage of the market opportunity that generative AI poses.

And completing and successfully integrating the web help combination.

Believe that our focus on these areas will position us for future growth and value creation.

At this time operator, please open the line for questions.

Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Our first question comes from Vincent Colicchio with Barrington, You May proceed.

Yes.

Thank you for taking my questions So Chris.

What are your guidance it looks like youre expecting meaning.

A meaningful pickup in sequential growth in Q4.

What is driving that.

So Vince as we talked about earlier.

We do have two large contracts one way, we talked about in catalyst rich will not ramp the other one is at plan and.

I have confirmed kind of ramping as we expected planned for the for the rest of the year.

As we talked about that's a fairly big driver of the growth that we're seeing within Q4 and then also as we looked at the areas that are growing.

To grow we've looked at obviously meeting the expectations of our clients, who have not been able to kind of meet their volume expectations that they've had.

So thats, partly offset but when you put the two together that gives us what we're seeing within the fourth quarter as you look at the guide for the year.

Yes.

One one fairly sizable difference versus last year is our expectation.

As I said that we expect to see sequential growth within catalyst.

Quarterly as we go through the back half of the year.

So that is different than what we were experiencing last year, and we will kind of be the.

The thing that makes this year's pattern look different than last year other than that pretty much the same as last year's pattern.

And in terms of the vendor consolidation.

Discussions.

I think you may have.

<unk> on this but.

What portion of the amount that.

It is not coming in this year do you think you might you may see in the next few extra.

Next fiscal year.

So to.

To be honest, that's difficult to answer what we're <unk>.

Having a sort of positive conversations with clearly won a bunch of the vendor consolidation business, although it's coming in at lower volumes, but we have a number of clients who are kind of sitting on the fence. So to speak and saying look if we continue to see the depressed volumes that we're seeing we're definitely going to have to consolidate but.

Those pulling the trigger is taking a little longer than expected we are not.

Anticipating anything meaningful in the next two quarters.

From a vendor consolidation perspective outside of ones that we've already been given and a ramping and are dealing with.

I suspect that will roll into next year and probably the most appropriate time to talk about that is when we close the web help combination and then kind of given a guide for what we see in the back half of the year.

And half back half of next year.

And then one last one.

The strategic verticals.

Performing quite well should we expect that to continue in the second half and the weakest I think of the four as the technology and consumer electronics side should we expect that to continue.

Yes, so vince on sort of health care and some others.

Insurance.

Youll see what we foresee is that kind of continued strength in the back half of the year.

Consumer electronics and technology is a tale of two cities are consumer electronics, we continue to see frankly is andre called out.

Some of our larger clients suffering some some fairly big volume declines within that space, but.

That's offset by some of the technologies.

We've seen.

Okay ill go back in the queue. Thank you.

Thank you Vince.

Thank you.

Our next question comes from <unk> <unk> with Bank of America You May proceed.

Hi, Thanks, Thanks for taking my questions.

Chris.

<unk> and fiscal <unk> grew one 6% in constant currency, whereas you had expected it to grow 3% to 5% Youre guiding treat you to 2% constant currency growth that youre, taking down the full year from 5% to two 5%.

I guess my question would be what is the market growing at based on your estimate.

And why what gives you confidence that.

Net revenues can be weaker I mean, why is two 5% the right number.

What is giving you confidence in that.

So a couple of different things.

I'm not sure we are hearing different market growth numbers, frankly, and it's more based on region and by industry and so for instance, we see Europe growing faster, we're experiencing that ourselves clearly other public companies, who have large European exposures are seeing that versus what.

Sort of North America is growing and similar we're seeing some good growth in Asia Pac and some public companies that are exposed to that are seeing some things. So it's a bit of a mixed bag.

I'll tell you is we feel that and what we're hearing from our clients is we're keeping if not growing our share across the categories that we're in.

In in competing in and the business that we're competing in.

We feel good about that that's probably.

The big takeaway from from all of it.

In terms of how we've looked at the back half of the year.

When we looked at our Q1, we came in at a higher midpoint of the guidance and we said within Q1 debt.

We had some clients who were forecasting lower and delivered way more we had some clients who are who are.

<unk> forecasting more and delivered less and we've had that similar expect a similar experience in Q.

And when we see that we tend to kind of feel like they've reached.

Position of stability in terms of what their expectations are and it's muted from what we originally anticipated and so as we've gone through and looked at our Q3 numbers.

And then put it through our own.

Sort of calculations in regards to who is generally over promised and under delivered and vice versa to.

To come up with where we see the numbers and I think that gives us confidence as we can be on where we see Q.

Q3, and Q4 and as we've tried to kind of point out.

It's very identifiable chunks of business.

<unk> seen.

Very different expectations in more clients at forecasted where the rest we have seen good growth and good performance I think through this the takeaway though.

As we go into Q3, and Q4 as well as obviously hitting our guidance that we've laid out.

Okay.

Next question, let me ask you about the new economy clients.

Take one win win this set of clients can see stronger growth.

Yes so.

Great question.

Thank you have to Peel back the onion, a little bit on these clients, where we're seeing weakness in this portfolio of clients is Andre pointed out primarily crypto year on year, which is now de minimis to us kind of going forward.

Frankly, real tangible profitable returns and I think when you when you look at that combination that's about a 5% headwind, which obviously will lap.

Next year. So my expectation is that we'll continue to see muted performance within this portfolio.

Accounts, probably until the back half of the year early early next year.

When either they start to spend more to expand.

Or obviously.

Adam you might turn around <unk>.

We continue to add clients into that portfolio, which we are which we're doing.

Okay. Thank you for that let me ask Andrea question. So Andre the operating environment is weaker revenue growth is lower.

We're taking on a lot of debt for the web help acquisition. So talk to us about what is giving you confidence in being able to service that debt and as part of that if you can weave in some of the margin drivers in.

And what are your expectations.

<unk>, our cash flows and why you think that those can sustain.

Yes, so one of the things that's really great about this business group flew through cycles as how it generates cash and I'll go back.

As far back as in this industry as far back as the global financial crisis, and the participants even back then.

Revenues were soft we're able to drive really strong free cash flow. So it really starts with our ability to have.

Yes.

A very variable.

The cost base so.

So we can.

Quickly react as we did in this quarter to preserve margins I think than other margin drivers as we go forward, we'll be again getting into higher value services, including now higher value services around helping our clients.

Implement generative AI.

Obviously, we can still get.

Some.

Leverage at our G&A as we grow even at these muted levels.

And then when we add in you mentioned, the web Alvin and taking on to get there.

We add in web help generate strong free cash flows and then the synergies from that transaction kind of on top of things, which will be accretive both to margins and free cash flow. So all of that has us very very confident.

Even at the increased interest rates that we can generate strong free cash flow such as we are frankly in the concentrix business. This year, we will be able to do it even more so on a combined basis with went out and with the synergies and pay.

Pay down debt.

Getting our debt levels down and getting them down frankly more quickly than we indicated we would at the time that we did the transaction I feel very confident with web helpful. It will be able to do the same.

Okay. Let me ask one last question from the prepared remarks it sounded.

Like web help had stronger growth I think you mentioned something about 8% year on year constant currency was that right.

And why do you think that is it a difference in geographies thats, causing that.

Did that we had better performance so what do you attribute that to.

Yes, so what we said was.

On a.

Like for like constant currency basis.

Low low double digit growth and so.

That's the growth rate in the first quarter that is.

<unk> expectations that web how pad for the quarter or that we had based on the diligence that we did what we built into our model for this year is eight to eight 5% growth in the web business. So we.

We remain very very confident that they can deliver that and this really speaks to.

The quality of the asset here that we're combining with their strong footprint in.

In EMEA, particularly with nearshore and offshore offerings supporting European languages, as well as the very very strong operations and strong growth that they're seeing in Latin America. If you look at.

Kind of what are the rationale for this combination if you look at other public peers, who break out their revenue growth rates by region.

Europe is growing.

Quite well as is Latin America, and frankly, we're growing well there as well, but we are subscale.

So.

That's what I would read into their results and it's why we're so excited about.

Completing the combination.

The great progress, we're seeing on the integration.

And then moving forward together.

Okay. Thank you for taking my questions I appreciate it.

Sure.

Thank you and as a reminder to ask a question you will need to press star one on your telephone.

Our next question comes from Joseph <unk> with Canaccord Genuity you May proceed.

Hey, guys. Good afternoon, thanks for taking the questions maybe maybe just.

Couple ones based on your comments, Chris on the AI front.

Could you, maybe perhaps give us a little more color I know you mentioned costs being a factor in the technology and its implementation versus potentially other solutions I think it'd be.

So here, it's early days, but the cost of some of this technology versus maybe traditional servicing of those volumes.

Couple of follow ups.

Yes for sure for sure Joe so traditional and even sort of the.

I don't want to call it traditional AI, but they either we have deployed this form machine based learning our natural language processing.

Generally the cost model is based on per seat per license per current transaction.

And it doesn't necessarily have to deal with the type of transaction or the length of transaction that is being current so for instance.

Asking a very simple question too.

More money and cost for that kind of goes back and forth, but that plus as you look at the proprietary information that you're uploading into the cloud for storage perspective, you are paying for the stores that kind of goes along with that then you are paying for the technology licenses the technology deploying to kind of give that last mile application to the client.

Theres a lot more cost associated with it and so for some transactions or some productivity gains in proficiency gains that makes sense for others. It doesn't because you don't get the.

The benefit of it the real comp.

Conversations, we're having with clients around generative AI right now, though cost is one factor, but it's more about predictability of results where if.

One or two questions coming up with the same answer it if you ask a 10000 questions does it come up with the same answer or does it start to hallucinate and kind of give some some odd feedback.

Clients that are to a customer that people don't want necessarily going direct and then two around the security of their data and around who owns the data most of the generative AI kind of implementations in instances and everything like that right now because youre, giving up unless youre spending a vast sum of money youre, giving up sort of that data too.

The journey of AI cloud providers.

In order for them to kind of tune their models make things better for everybody and we just when we talk to our clients. They are just not prepared to do that yet will that change, possibly but right now they are more focused on how do they own the data how do they own the learnings how is it aligns their brand how does it get predictable resolved how is it six.

Cure.

And so a lot of that focus is now saying, okay, well, let's focus on <unk>.

Proficiency of our staff delivering services, because if there is a hallucination or something else than a human is there to make sure that safeguarded and then also the queries and back and forth. The human can handle a lot of the back and forth and really then kind of search and <unk>.

Engineered the prompts for for lack of better term to what the information is that that customer is looking for much faster and thats what were seeing in our in our proof of concept. That's what we're deploying right now and we're seeing the benefits as expected we're seeing faster resolution time for customers, we're seeing higher <unk> scores because it is faster resolution.

We're seeing an easier experience for the advisor in order to get the information.

And because we were able to get things done faster the client saved some money from it because they have more capacity with less.

<unk>.

Well they have more capacity for less money and effect.

They look at it if that makes sense.

Okay.

Yes fair enough and then we've seen some of the other players I guess in the broader ecosystem maybe.

Especially also over in the <unk> side of things kind of announced like major AI investment initiatives of their own internally to build the practice up.

Is that something that makes sense.

For Concentrix to do and kind of.

Earmark real.

Material budget for this stuff at this point or is it fairly.

A function of.

Helping clients.

On their journey and.

Maybe spending on.

An investment there as well.

Along.

Yes, Joe that's a great question.

The reality is a lot of press releases I think are somewhat misleading.

Where the spend is going and what its for the reality is is that we are building up the practices pretty aggressively as we speak.

Extension of learnings, we already have the.

The investments that we have put into catalyst are significant.

And that gives us the ability to scale sort of a proof of concept is much faster.

Into into production and.

As a whole as a company we spend tens of millions of dollars on R&D and our own technology and development that hasnt slowed down or stopped or anything like that.

Fair enough and then just one final one on.

The large catalyst project Thats been I guess, I guess is it fair to call it delayed and not canceled at this point and then is there any kind of view as to that.

If it's just delayed win.

It may start to.

Start to ramp again, thanks, a lot guys.

Yes, John No problem just for clarity, we wanted those project back and I'm sad to say in sort of Q3 of last year.

The original plan from the client was to kind of get to full production in Q2 Q3 of this year and the reality is as we staffed up fairly heavily and.

The work for it started trickling in and we started doing work for it and we continue to work for it but the big.

They sat down and said Hey, we need to continue this we need to get this done we need to continue to support the stock.

But we just are going to push out the budget for sort of large scale ramp in implementation.

We both were expecting for sort of our Q3 and Q4. So it's not canceled we are getting revenue from it.

Much lower run rate and it will frankly pushed the project out further but at this much lower run rate versus what we had expected. So that does have a fairly big impact to us as we called it out.

From a size wise perspective for the back half of this year I do not expect that in the front half of next year. It will come back in a meaningful way I think it will continue to slowly increase.

Growth that we expected catalyst over.

And we expect that could accelerate a bit in Q3, and even more into Q4, but again not based on that large contract that hit on a bunch of other smaller wins across the verticals.

Great. Thanks, Chris Thanks Andre thank.

Thank you very much.

Thank you and I now like to turn the call back over to Chris Caldwell for any closing remarks.

Great. Thank you very much everybody for joining us today, we always very much appreciate your interest in Concentrix, and we're committed to maintaining strong profitability and cash flow generation.

Especially around executing our strategic objectives, we look forward to talking to you next quarter. Thank you very much everybody.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

Q2 2023 Concentrix Corporation Earnings Call

Request a DemoDemo

CNXC

Concentrix

Earnings