Q3 2024 Concentrix Corp Earnings Call
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Episode 2
Speaker Change: Thank you for standing by and welcome to Concentrix 3rd Quarter, fiscal year 2024, financial results conference call.
Speaker Change: and Stein, all participants aren't in listen only mode.
Speaker Change: After the Speaker presentation, there will be a question and answer session.
Speaker Change: To ask a question during the session, you will need to press star 1-1 on your telephone. To remove yourself from the queue, you may press star 1-1 again. I would now like to hand the call over to Sarah Buddha. Investor Relations, please. Go ahead.
Sarah Buddha: Great, thank you, operator, and good evening. Welcome to the Consentrix 3rd Quarter Festival 2024 earnings call. This call is the property of Consentrix and may not be recorded or reprint cast without the written permission of Consentrix.
Speaker Change: This call contains forward-looking statements that address our future performance and that by their nature address matters that are uncertain. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements.
Speaker Change: We do not undertake to update our forward-looking statements as a result of new information or future expectations events or developments.
Speaker Change: Please refer to today's earnings release in our most recent filings with the SEC for additional information regarding uncertainties that could affect our future financial results.
Speaker Change: This includes the risk factors provided in our annual report on Form 10K and in our other public filings with the SEC.
Speaker Change: Also during the call we will discuss non-gap financial measures including adjusted free cash flow, non-gap operating income, non-gap operating margin, adjusted EBITDA, adjusted EBITDA margin, non-gap net income, non-gap BPS and constant currency revenue growth.
Speaker Change: A reconciliation of these non-gap measures is available in the news release and on the company's investor relations website under financial.
Speaker Change: with me on the call today, or Chris Caldwell, or President in CEO, and Andre Valentine, or Chief Financial Officer. Chris will provide summary of our operating performance in growth strategy, and Andre will cover our financial results in business outlook. Then we'll open up the call for your questions.
Speaker Change: Now I'll turn the call over to Chris.
Chris: Thank you, Sarah. Hello, everyone, and thank you for joining us today for our third quarter, 2024 earnings call. Today, I'm going to walk you through our current demand environment. The opportunities we're seeing in our business, and most importantly, the positive changes we are making to harness these opportunities to drive long-term value creation.
Chris: Let's start with what we see in front of us today, and how our market has changed over this last quarter.
Chris: Our business, like all businesses, is going through a significant transformation.
Chris: We feed us across our clients and across sectors.
Chris: Clients are under pressure to show both innovation and cost control. Every client we speak with has brought forward AI on their agenda as a way to optimize processes, show their board's relevance and reduce costs.
Chris: In some cases, the environment is used as a reason clients are pushing their partners and vendors on different economic outcomes.
Chris: What we've seen in the past few months is an acceleration in the pace of change driving more technology adoption, movement in delivery location, and asks for investment by client for their transformations that are now taking priority.
Chris: Transitions that might have taken several quarters are now taking place in a significant shorter timeframe.
Chris: So, what does this mean for us?
Chris: First, it validates that we have the right strategy and the right model to capitalize on this moment.
Chris: is of the investment we've made in our own technology and that of our technology partners, our global scale and domain expertise clients are looking to us, to lead them through their AI journey to drive innovation, reduce costs, and embrace new economic models.
Chris: Second, it means we need to focus on winning the right business and in some case, walking away from transactional, price-led commodity business where there is no desire or ability from the client to automate.
Chris: As we said, this now represents less than 7% of our business, a mark declined from the 13% only two years ago. With a pace of gender to the AI, we expect this portion of the business to decline even further and faster.
Chris: Essentially, we are proactively disrupting our own business with confidence.
Chris: In doing so, we see many small bumpiness in the short term, but we believe that we are building the right business for the long term. Let me give you some examples of how this is playing out currently.
Chris: We are winning new logos from competitors. An example in Q3 is a win with an airline who has been with their existing partner for decades before awarding us the entire business.
Chris: Our technology leadership is allowing us to drive automation to improve performance and reduce costs for the client while enhancing the customer experience.
Speaker Change: This whim leverages the power of concentric with our countless capabilities, our gender-to-v-a-i solutions to support the clients across 15 lines of business and 10 languages.
Speaker Change: We are driving change in our existing business.
Speaker Change: One of the many examples in Q3 is from a large infrastructure company that we have serviced for five years. This quarter, we deployed an AI bot that in the first month handled 40% of all transactions completely autonomously with a high customer satisfaction rate.
Speaker Change: For us, this resulted in an immediate 12% reduction in revenue in the near term and some margin pressure as we made up-front investments in technology for a longer term contract with the client.
Speaker Change: By automating the simple transactions and delighting the client with the innovation, the client is already having a focus on more complex work, which will lead to increased revenue and margin when fully ramps middle of next year.
Speaker Change: More importantly, it is leading to new opportunities for us to deploy technology into their enterprise.
Speaker Change: We are also expanding our relationship with larger transformational opportunities.
Speaker Change: In the third quarter, with an existing client, we want a large transformational program that we have been working on for close to a year that is all incremental business to us. This is with a large financial organization where we will take over the complete servicing of a specific segment of customers.
Speaker Change: This includes the back office, technology, and servicing of all the customers. This win encompasses third-party technology partners, our own Jenny I tools, Caldwell Services, and our client-success organization.
Speaker Change: In this shall five-year contract is valued at over $150 million US dollars in revenue.
Speaker Change: This is a remarkable win, and marks one of our first large-scale transformation wins with our new model. Strictedically, it was significant as well as no traditional competitors were engaged in this pursuit as they didn't have a complete solution.
Speaker Change: We're also winning the majority of client consolidation opportunities.
Speaker Change: of the 22 client consolidation opportunities we saw in Q3, we were winners in 80% of them.
Speaker Change: with global scale, differentiated technology and domain expertise were well positioned to win. In fact, in Q3, we saw our highest quarterly contract revenue bookings since our combination one year ago today.
Speaker Change: We're also partnering with leading complementary technology partners.
Speaker Change: We are continuing to increase our capabilities across multiple key technologies partner solutions.
Speaker Change: For example, last week at Salesforce Dreamforce event, we participated with a large present and gained significant interest in our technology solutions that complement Salesforce as well as our ability to customize and configure Salesforce.
Speaker Change: Although these examples span many different sectors and have varying deliverables, they are good examples of the current operating environment.
Klein: Klein's request for transformation investments are increasing next change for longer contracts.
Klein: There are periods of revenue decline on a client-by-client basis when we deploy some of our new technology but we have demonstrated our ability to win more business overtime from these clients as we help them automate transactions.
Klein: We are winning higher complexity deals and walking away from commodity business if there's no desire to automate. Clients are using this moment to consolidate providers. And technology from our partners and our own IP is helping us embed ourselves within our clients' environment.
Klein: The Deep Integration creates higher value, secure revenue long term. We see this in our cross-cell and not-cell ratios that show an increase when we have our solutions embedded.
Klein: As we have seen increased demand for gender to the AI automation, we quickly mobilize to both increase our capabilities and make our tools commercially available.
Klein: As we discussed during our last investor call, our investment in the development of our tooled increased to a run rate of approximately $100 million on an annual basis.
Klein: This is proving to be the right strategy and brings me to today's announcement of our launch of IX Hello. This is our first product in our new Intelligent Experience Technology Suite aimed at helping organizations harness the power of gender to the AI across their operations.
Klein: With our launch of IX Hello, we are giving customers an LOM Agnostic Journal of AI Productivity tool to automate and accelerate common internal tasks.
Klein: Ixelo integrates across internal applications to boost productivity, visibility, and quality of work with an on-brand, compliant, and secure environment.
Klein: The genesis of our product strategy is very straightforward.
Speaker Change: Client saw what we were doing internally and they realized it was what they wanted. A proven trusted Jenny I. Product Tiffy tool that integrates knowledge across their front office and back office platforms. It's flexible and LOM-agnostic that operates in a highly secure trusted environment.
Speaker Change: Our increase in investment has not only allowed us to make necessary changes to commercialize IP, but also enhance our practices around our technology partners' products.
Speaker Change: As always, our clients are at the center of the decision on what to deploy in their environments.
Speaker Change: We now have close to 1000 clients who are using gender to AI solutions, we have implemented at scale every day.
Speaker Change: In short, as we saw in our Q3 result, and our Q4 outlook, the operating environment is very dynamic right now. Q3 came in largely as we expected. Revenue was above the midpoint of our guidance at 2.6 Proforma, Causton Currency, Growth, and the Quarter.
Speaker Change: and Joe I was within our guidance range, but at the low end, as we incurred more cost to me anticipated, to shift a large number of programs offshore, sooner than expected, and to absorb some upfront technology investment in order to secure longer-term deals as discussed.
Speaker Change: Looking at Q4, we have lowered our expectations which Andre will give more details on. In order to continue investment levels, we are actively reallocating capital towards our technology and transformation work to ensure that we are winning the right long-term business.
Speaker Change: We are acutely focused on ensuring we are moving with velocity and proactively transforming our business to gain share and position us for long-term value creation.
Speaker Change: Our teams are lined and we're excited about the future ahead. I'd like to thank our dedicated game changes for the hard work and commitment to excellence and our clients for the trust and their business. Now I'll turn the call over to Andre.
Andre: Well, thank you, Chris, and hello, everyone. I'll begin with a look at our financial results and then discuss our outlook for the fourth quarter.
Andre: We delivered their quarter revenue of $2.4 billion, reflecting 2.6% in pro-forma cost and currency growth, calculated as if the web health combination was completed at the beginning of 2023.
Andre: Looking at our revenue growth by a vertical, on a pro-formatastic currency basis, revenue from retail, travel and e-commerce clients, grew 8% year over year. A continuation of the solid growth we've been driving in this vertical through a combination of share gains and new client wins.
Andre: Revenue from banking, financial services and insurance clients grew 5%, which is relatively consistent with prior quarters this year. Our recent wins in the sector indicate further opportunities for growth.
Andre: For our other verbal group, 6% an acceleration from the first half of the year, driven primarily by automotive clients where we're bringing unique technology solutions to help them drive their businesses.
Andre: Our technology consumer electronics clients grew 1% on our pro-forma basis reflecting a balance of the positive share gains against lower volumes in consumer tech.
Andre: Consistent with the first half of 2024, revenue from communications and media clients decreased 3%. This vertical is an area of high price sensitivity for low or complexity work.
Andre: and revenue from healthcare clients decreased by 4% as we have shifted the delivery for a few large healthcare clients offshore during the quarter.
Andre: Overall, healthcare remains a solid vertical for us, and there are portions that remain on shore due to compliance and customer preference. But this short ship from those clients is having a near-term impact.
Andre: During the profitability, our non-gap operating income was $331 million in the quarter, an increase of $100 million compared with the third quarter of 2023.
Andre: Our 9-gap operating margin was 13.9% down about 20 basis points from last year. Our 9-gap operating margin grew about 40 basis points sequentially from the second quarter.
Andre: Adjusted EBITDA was $388,990,000 a year, and our Adjusted EBITDA margin was 16.3% down about 20 basis points year on year, but a sequential increase of 40 basis points from last quarter.
Andre: On a pro-forma basis, 9-gap operating income was essentially flat year-on-year with a 20 basis point margin decrease compared with last year.
Andre: 9Gapnet income was $192 million in the quarter, an increase of approximately $49 million compared with the third quarter of last year. 9Gap EPS was $2.87 per share, an increase of 11 cents per share share year on year.
Speaker Change: GapNet income was $17 million for the quarter. Gap results for the third quarter of 2024 included $117 million in amortization of $36 million in expenses related to the web help combination and integration.
Speaker Change: 23 million dollars in share-based compensation expense.
Speaker Change: 2 million dollars in step-up depreciation.
Speaker Change: 11 million dollar increase in acquisition, contingent consideration.
Speaker Change: 33 million dollars in net foreign currency losses, 4 million dollars in imputed interest related sellers note issued in connection with the combination, and a 5 million dollar one-time tax expense associated with legal entity restructuring.
Speaker Change: Our adjusted free cash flow for the quarter was $135 million, net of $63 million in capital expenditures.
Speaker Change: As we stated in the last call, the adjusted free cash flow metric is calculated as free cash flow excluding the impact of changes in the factory program that we assumed and have continued to operate since the web help combination.
Speaker Change: Adjusted free cash flow was below expectations for the quarter as a result of client collection delays in the month of August, principally in Europe, that have been caught up in September, and accelerated spending on integration costs.
Trey: Trey's a balance sheet at the end of the third quarter, Cash and Cash equivalents were $246 million. And total debt was $4.91 billion as we repaid 100 million of the principal amount of our term loan in the quarter.
Trey: Net Dead was $4.67 billion at the end of the third quarter.
Trey: Our net debt was 2.95 times pro-form adjusted to EBITDAI quarter-end consistent with the prior quarter.
Trey: We expect to continue to reduce our net debt and net leverage through the end of 2024. We remain committed to our plan of reducing net leverage to close the two times adjusted EBITDA within two years of the close of the web help combination, also supporting our dividend and repurchasing shares.
Trey: During the third quarter, we were purchased approximately 600,000 shares of our stock for approximately $39 million and average price for approximately $65 per share. And we paid $20 million to reportedly give it in.
Trey: We now expect fourth quarter share repurchases to exceed 30 million dollars, bringing expected full-year repurchases to over 130 million dollars, which is above our previous commitment. And today, we were pleased to announce the 10% increase to our quarterly dividend.
Trey: At Quarter-End, the remaining authorization on our share we purchased plan was approximately $188 million. Our liquidity remains strong at approximately $1.5 billion, including our over $1 billion line of credit, which is undrawn.
Trey: We remain committed to investment grade principles and our capital allocation priorities remain unchanged.
Trey: We expect to continue to drive organic growth, realize integration strategies related to the combination, repay debt, while continuing a discipline program of returning capital to our shareholders through our dividend and discipline and share repurchases.
Speaker Change: Now, I'll turn to the business outlet for the fourth quarter.
Speaker Change: It's Chris mentioned we're operating in a very dynamic environment and we're investing to grow over the long term.
Speaker Change: from a revenue perspective while we came in above the mid-point of our guidance in the third quarter. We now expect a slower growth rate in the fourth quarter than we'd expected previously.
Speaker Change: This reflects three factors in the following order in terms of significance.
Speaker Change: Lower volume forecast from some clients in the third quarter as a result of lower underlying transaction volumes and automation.
Speaker Change: A larger shift of revenue to lower cost, delivery geographies, then expected.
Speaker Change: and the loss of some commoditized projects that we have chosen to walk away from overpriced.
Speaker Change: with the Reduction and our revenue outlook for the fourth quarter, accelerate investments in transformation of our business and some short-term costs associated with moving programs offshore. We're reducing our previous margin expectations for the fourth quarter.
Speaker Change: Included our profitability expectations for the fourth quarter is a continued progress on cost synergies. Our year one synergies will meet our target of $75 million. Our current annual run rate percentages is approximately $95 million.
Speaker Change: Many of these synergy savings are being invested back in the business to support transformation activities. We've accelerated our integration spending as we now believe we're going to achieve our year 3 target of $120 million in synergy savings in 2025.
Speaker Change: Looking at cash flow while we expect a significant sequential increase in quarterly adjusted free cash flow in Q4. The reduced profit expectations and higher 2024 integration costs will result in reduction in our adjusted free cash flow expectations for the full year.
Speaker Change: with this context, our expectations for the fourth quarter of ours follows.
Speaker Change: We expect fourth quarter revenue of $2.42 billion to $2.47 billion based on current exchange rates.
Speaker Change: This equates to proformatastic currency change ranging from a decrease of 0.5% to growth of 1.5% in the quarter.
Speaker Change: Our expectations include a 60 basis point tailwind from foreign currency fluctuations.
Speaker Change: On a pro-form of Ace, this revenue was $2.417 billion in the fourth quarter of 2023.
Speaker Change: We expect fourth quarter 9 gap operating income in a range of 335 million to 255 million dollars.
Speaker Change: At the mid-point of our guidance is equates to a 9-gap operating margin of approximately 14.1%. Pro-form a 9-gap operating income for the fourth quarter of 2023 was $365 million.
Speaker Change: We expect nine Gap EPS of $2.90 per share to $3.16 per share for the fourth quarter. This assumes interest expense of $74 million, excluding $4 million of a beauty interest on the sellers now.
Speaker Change: It assumes a non-gap effective tax rate in a range of 24% to 25%.
Speaker Change: We anticipate a way of average Duluth chair count, approximately 64.5 million shares for the fourth quarter.
Speaker Change: We estimate that about 3.7% of net income will be attributable to purchase paying securities and about 96.3% of total net income will be attributable to common shares for the fourth quarter.
Speaker Change: Our expectations for the fourth quarter would lead to the following results for the full year 2024.
Speaker Change: for your 2024 revenue and a range of 9.591 billion dollars to 9.64 billion dollars, reflecting pro-forma cost and currency growth of approximately 2.2 percent to 2.7 percent.
Speaker Change: This is net of an approximately 110 basis point exchange rate headwind.
Speaker Change: At the midpoint of our expectation, for the full year, our growth is 2.5% constant currency, a pro forma, which was the low end of the four year range we gave last quarter. On a pro forma basis, 2023 revenue was $9.486 billion.
Speaker Change: For your 2024 9-gap operating income will be in a range of 1.306 billion to 1.326 billion dollars.
Speaker Change: at the midpoint of our guidance that's equates to a 9-gap operating margin of approximately 13.7%. Proform a 9-gap operating income for 2023 was $1.316 billion.
Speaker Change: For you, 9-gab BPS will be in a range of $11.5 per share to $11.31 per share, reflecting 4-year interest expense of approximately $27 million.
Speaker Change: Excluding $17 million of imputed interest on the seller's note, and a non-gap tax rate for the full year of 24.4% to 24.7%.
Speaker Change: Reflected in our full year in the on-gap EPS expectation.
Speaker Change: is a weighted average diluted share count of approximately 65.1 million shares for the full year.
Speaker Change: and about 3.6% of net income being attributable to purchase paying securities with about 96.4% of tolerating income being attributable to common shares for the full year.
Speaker Change: Respect, adjusted free cash flow of 625 million, this is this $50 million for 2024, after funding accelerated integration costs.
Speaker Change: and we expect to reduce our net leverage to approximately 2.8 times adjusted EBITDA by year end. While we're purchasing over 130 million dollars of shares during the year and supporting our dividend.
Speaker Change: Our business outlook and cash flow expectations do not include any future acquisitions or impacts from future foreign currency fluctuations.
Speaker Change: Looking ahead, while we're not providing guidance for 2025, we do see several factors, the point to revenue and cash flow growth next year.
Speaker Change: We have won several new large-scale programs that will ramp throughout the year. Our integration with web help is entering its final phase. And although we are reinvesting synergy savings into our technology and other initiatives, we do expect materially lower integration costs next year.
Speaker Change: Finally, we believe that the investments in our new product introductions will begin to pay off. We look forward to giving you more details in our outlook for 2025 on our next earnings call.
Speaker Change: In conclusion, we met our revenue and profitability expectations for the third quarter.
Speaker Change: We are investing in and transforming the business by securing large transformational new wins Decreasing our exposure to lower margin price sensitive business That investing in technology platforms and partnerships to increase our competitive position And drive future growth opportunities
Speaker Change: and finally, we will continue to return value to shareholders for their ongoing share repurchase program and our dividend while reducing our leverage.
Speaker Change: With that now, let's ease, please open the line for questions.
Speaker Change: Thank you as a reminder to ask a question you will need to press star 1-1 on your telephone to remove yourself from the queue. You may press star 1-1 again. Please stand by while we compile the Q&A roster.
Speaker Change: Our first question.
Speaker Change: comes from the line of Joseph Buffy of Cannaquard.
Joseph Buffy: Hey guys, good afternoon. Thanks for taking my call here.
Joseph Buffy: Maybe we can, congrats on actually having a really good book in quarter with all that other information. So that's, that's great to see. Just kind of wondering, you know, some of the puts and takes here on the top line to begin with.
Speaker Change: You know, I know you're kind of walking away from some of the more commodity business while at the same time.
Speaker Change: You're a winning new business that may not have ramped. I'm just kind of wondering how you see that plus and that minus on the revenue line.
Speaker Change: You know, kind of taking place here over the next few quarters if you see as kind of revenue neutral or not, and then follow up, thanks.
Chris: Yeah, for sure, Joe, and it's Chris. So, just when we look at the midpoint of our previous Q4 guide, we really see kind of three buckets as Andre talked about from the interiality perspective. The first one was...
Speaker Change: Starting in sort of later July and earlier August, we started to see some clients decommet for some volume primarily because they weren't seeing the soldier that they were expecting going into the fourth quarter.
Speaker Change: and also automation that we were putting in. When you love those two together with the vast majority being sort of boiling declines from clients.
Paul Thurseld: Paul Thurseld.
Speaker Change: It was about a 1% headwind give or take.
Speaker Change: If you look at off-shoring accounts that we're primarily going to offshore in Q1 to Q2 because frankly, most clients don't want to have too much movement in the fourth quarter. If they can help it just because it's normally a big quarter, that was a little over half a basis point of headwind that was going, which we had anticipated, but had been anticipated in sort of Q1, Q2, not in sort of Q3, Q4.
Speaker Change: And then the last sort of little less than half a basis point was when we talked about the consolidated winds, where we're winning about 80%.
Speaker Change: The ones we didn't win are those kind of ones that are incredibly price sensitive. We didn't chase the price. And that is about a little less than half a basis point of headwind that we saw going into Q4.
Speaker Change: Got it. That's helpful, and then, you know, as we look at some of these kind of newer winds that...
Speaker Change: that you want here in the quarter and what you're seeing, you know, how are you seeing ramps on those businesses relative to, you know, maybe historically or if AI makes some of these ramps a little longer or a little shorter.
Speaker Change: Yeah, for sure, Joe. So if you look at the airline, we will start. We're already in the planning phase and then kind of incurring costs, but when it starts to connect to revenue, we'll be late.
Speaker Change: I'm sort of late Q4, early Q1, where we'll start to come in with a little bit of revenue and it will be kind of fully ramped by sort of end of Q2, Q3.
Speaker Change: When you look at the large transformational project that we're very, very excited to have won, we are now spending time on the planning and moving and kind of infrastructure build out that we have to do, which we're incurring costs. We won't see revenue until the end of Q2 with a sort of fully ramp until the end of Q4 of 2025. So it kind of gives you a feel where things of traditional business haven't really changed too much, but the biggest transformational men certainly will take longer and in-gursem expense to happen to make that kick-in.
Speaker Change: and then maybe I'm just going to speak one more in for Andre on the accelerated.
Andre: Merger-related costs here in 2025, you know, there are kind of a few moving parts here. Please just kind of walk us through some of the thinking here on accelerating those investments now.
Speaker Change: You know what were the positives that outweigh the acceleration relative to the thought process there. Thanks.
Speaker Change: Yeah, so we were very excited about the fact that we could bring some of the synergies forward into 2025. And obviously, that comes with incurring some costs, heightened integration costs here in 2024. But we feel really good about the fact that we feel that we can hit $120 million in synergies in 2025, you know, hitting that ultimate synergy number a year ahead of schedule.
Speaker Change: Why are we doing it? We're doing it so we can reallocate a lot of those resources that cash or that investment towards the transformation activities that Chris has been speaking about a combination of technology investment as well as some of the content investment in transformational program ramps.
Speaker Change: Great, thanks very much, Andre.
Chris: Thank you.
Speaker Change: and next question.
Shabank: Comments on the line of David Kuyall, let's go, Shabank.
David Kuyall: If you could provide a little bit more color and maybe this is to do with the acquisition related expenses, but I did, I noticed that your other expenses picked up pretty materially this quarter could you help us understand what exactly was that related to?
Speaker Change: Yeah, so you talking about below the line items.
Speaker Change: Yeah, that is principally, they need that of two things so we have $33 million in foreign currency losses.
Speaker Change: that have largely related to the inter-community translation related to...
Speaker Change: Liabilities or assets that are denominated in non-USD. So, as the USD is weakened versus currency, particularly the the peso, where there's a lot of inter-competitive balances, that kind of drives.
Speaker Change: That kind of nine cash expense to that line and we backed that out of our non-gap knitting come in our non-gap EPS metric just like and then that is all set partially by the
Speaker Change: by the change in the contingent consideration in the quarter as well. So those are the two major items that, frankly, were...
Speaker Change: We can't control in any real way we will see fluctuations there, there effectively, however, that nine cash items.
Speaker Change: That's helpful. Also, Chris, or yourself, we're quite a little bit more tolerant in terms of cabless business and house start funding, given the interest rates coming down in U.S.
Speaker Change: So the interest rates have not had frankly any impact as we would have liked to have seen in it, but the countless business were really really happy with.
Speaker Change: We're finding that this is really the enablement partner for our technology providers, so whether we're deploying new cloud solutions or mentioned green force, but you know, whether it be Microsoft co-pilot or some of the other LLM tools, that's really flowing through our catalyst team. And our catalyst team is also providing a lot of the consultation around the transformational deals that we're doing. And so we found it to be a real asset, and one that we want to continue to drive. But we have not seen sort of a step-up change in the large pure IT digital transformation projects that we've talked about in the past.
Speaker Change: because of interest rate coming down.
Speaker Change: Okay, no, that's the couple. One thing that I wanted a little bit more clarification on was the offshoeing element that you mentioned. So revenue seems to have tended okay here.
Speaker Change: but expenses they've got partly because of obviously pulling over the acquisition related expenses. But you mentioned there was increased off-shoring as well. Increase off-shoring.
Speaker Change: would, in my understanding, in fact, the revenue and benefit the margins, but just trying to understand those dynamics here.
Speaker Change: Yeah, David, you're totally correct. The issue is that this off-shoring, frankly, we're cut with dual cost because our clients have asked us to move it up.
Speaker Change: and, in fact, that we're doing the right things by the clients by moving it up. And so you do get some margin compression when you have that school cost structure in there. The other component of the SGNA that, you know, one of the very clear to call out is as we talked about some of the transformational deals like a large infrastructure company or even the large transformation opportunity. We are funding that infrastructure bill, that technology infrastructure bill, that ahead.
Speaker Change: We are expensing those, we are not capitalizing those, so they're flowing through our FGNA, but in turn we're getting longer term contracts with the clients that will see margin, you know, expansion as we continue to deploy those and ramp those up fully. And so those two things.
Speaker Change: are somewhat muting what you would typically see traditionally where we offshore and we see that revenue dip, but then you see the incremental margin increase within a quarter.
Speaker Change: Okay, let's help those, thanks Chris, thanks Andre.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: A next question comes from the line of Vincent Caldio, a Barrington Research.
Vincent Caldio: Yes, Good afternoon, guys.
Vincent Caldio: The tech, the TCE, as I say, a segment was up, I think, 1% of the quarter, and you have some volume pressures. I think you mentioned there. Is that something we should be concerned about going forward?
Speaker Change: Well, you know, that sector has been muted for us for a while. We have two things going on there, which is, you know, we're doing well with our clients and we're gaining share. But what we see is just in the underlying volumes, particularly around consumer technology, whether that's it.
Speaker Change: and Anconsumer Electronics, we're just seeing very, very muted volumes there. And so we're gaining share, but we're not in the process of gaining share, gaining much in the way of revenue.
Speaker Change: The Great News is, as we gain share.
Speaker Change: is hopefully over time the macro improves and people stop sweating their tech and go through refresh cycles. We should see transaction volumes take up there hopefully and then we'll be well positioned to return to faster growth there as we see in the past. It's just right now.
Speaker Change: doing great from a shared game perspective, but the underlying volume should start there.
Chris: and Chris, you had mentioned a lot of success closing on consolidation opportunities. I was running if you can give some color on, if there's significant lags on this and just kind of with the dynamics here.
Chris: Yeah, so Vince, what we're seeing is that we're clients are either not seeing the growth in their businesses they expected and they're trying to manage costs that make sense to deal with less partners
Speaker Change: And if they're looking for sort of a full solution with technology or where the largest incumbent partner that's performing at the best performing partner.
Speaker Change: Then we have a very, very high probability of consolidating that volume from other partners into us and so we do think it has legs, we have talked about it for a while We're seeing it happen a little faster than we expected and we are seeing it in
Speaker Change: Pretty much all the verticals for the most part, and as Andre pointed out,
Andre: where we're not chasing kind of.
Andre: Um...
Andre: Volume that normal thought of May, it's highly priced sensitive. That tends to be where we're being consolidated out, because we didn't have the highest exposure in that within every single client anyhow, but we're just not chasing that work because honestly we believe that at some point it needs to get automated and with the tools that are available now, it should be automated sooner than later anyhow. So it's not.
Andre: what we consider a long-term loss.
Speaker Change: You talked about, you know, rapid change in your industry and rapid movement towards automation, you know, and I think you start at least to talk about trying to automate
Speaker Change: 10 to 20% of the numbers wrong of your portfolio. Is there a new number you may want to play a put out there in terms of how much you want that you seek to automate each year?
Speaker Change: Now, not really, not really events because what we're seeing is that a lot of this automation we had planned going into 20 and 2024 and 2025
Speaker Change: But what we've seen is a very fast demand of accelerating it, because people want to see in-year savings and they want to kind of get into 2025 at a new cost structure. And so we're not seeing, you know, automation coming out of the blue of, hey, we've never ever thought about this. We're seeing, hey, we're planning on doing this.
Speaker Change: You know, a quarter or two quarters, three quarters from now, we need to do it now and then we're also seeing not only with our new tools but some of our partners tools, things that we're a little harder to automate.
Speaker Change: We actually can bring in ourselves to automate a little further, but we're not seeing sort of a dramatic
Speaker Change: Change in what can be automated for the most part. It's really the timing. The other thing that we talked about from a dynamic industry perspective is really, we always talk about things moving offshore, right? That's clearly one of the value propositions this industry has.
Speaker Change: Again, with somewhat unique is historically if you go back and look at Q4, most people are locked and loaded with a capacity plan and do not want to move anything in Q4 because they want to have sort of a bumper.
Speaker Change: Boxed out for the year.
Speaker Change: and this is one of the first times that we've seen clients saying, yeah, we know we talked about this in Q1 Q2. We need to do it now. How can you help us so that we can see the savings by the end of 2024 and start 2025 in a new cost structure? And so that is changing some of the dynamics as well that we historically have not seen.
Speaker Change: Oh, thank you.
Speaker Change: Thank you.
Speaker Change: and next question.
Speaker Change: comes from the line of Ali Davies of Redburn Atlantic.
Ali Davies: I guess you gave the kind of infrastructure example, you know, where you said you know, handle 40% of transactions or tonnorslay and that was kind of a 12% reduction revenue. Is that included in this sort of 7% of business that you see as transactional or is that sort of separate for that?
Speaker Change: Actually, that's a great question. That was actually outside of the 7% of revenue while we were able to kind of automate the
Speaker Change: Transaction, it was quite complicated and we had to wait for the right bot technology to be able to actually make it Automated as fast as we were able to do it. So that's not considered in sort of that that that's 7%.
Speaker Change: Oh, that's the game. Yeah, so I guess following on from that, you know, there's obviously much more than a certain percentage, you know, it can't be automated now, so you know, it would give us kind of an indication of, you know, how much of revenue that would be.
Speaker Change: Now, because we don't, we also see a little differently. Like the complexity and the infrastructure cost to put in some of these larger, more complex automations is a little different than the end of the domain knowledge that goes into how you need to manage these types of transactions.
Speaker Change: It's very different than sort of that 7% of revenue, which tends to be very short-speaked to proficiency, very easy to move like literally can move it in kind of weeks.
Speaker Change: and their very very different. And so, when we're automating things that, for instance, in that infrastructure company, we've been working for them for five years. We understood their internal system very, very deeply. We had domain subject experts around, because they're a regulated business.
Speaker Change: Around how we need to deliver for it and what need to happen around for it and to train people in that high level of proficiency. So those do take a while and we started working on that transformation project.
Speaker Change: All most six or seven months ago when we originally started it and then the economics changed quite frankly transparent in Q3 with a client asked us to pick up those costs to extend for a longer term contract which we were happy to do.
Speaker Change: Okay great and then maybe just one more on the sort of the IX hello tool that you've, you know, sort of released a day can you kind of talk about the pricing dynamics there and, you know, guess why I won't kind of, you know, cannibalise your ability to win.
Speaker Change: In a volume set, we'll now be off short.
Speaker Change: Also, well, we're quite comfortable with the cannibalizing the right type of business because it drives better embeddedness of our services into our clients.
Speaker Change: and as they consume more technology, that's fantastic for us because obviously, you know, the Martian profile is more creative. Right now, and in the beta phase of what we've been doing up until when we launched, a lot of this has been included in our pricing and has been bundled in services.
Speaker Change: What we're seeing as a client are wanting to buy this in the toy this on their own enterprise or within other competitors' operations which we're happy for them to do and it's a per se price. I would volume this count based on how many seats that are done.
Speaker Change: Okay, great. Thanks very much, Chris. The problem.
Speaker Change: Thank you. Once again to ask a question, please press star 1, 1 on your telephone. Again, star 1, 1 on your telephone, to ask a question.
Speaker Change: Next question comes from the line of flu flu, about a charia of Bank of America. Your line is open.
Ebrahim Poonawala: Alright, thanks for taking my questions. Can you walk us through your thought process and making these January-related investments? I think you mentioned 100 million per year.
Speaker Change: How do you decide how much to invest and what ROI are you looking for when you invest in products such as this or investments to strengthen your capital as business to better cater to Jenny I. So can you just talk about like what returns are you looking for and how do you know when when enough when you've invested enough? Well, how do you measure success?
Speaker Change: Yeah, for sure, we're a very good question. So just for clarity.
Speaker Change: We're on a run rate of 100 million annually right now, but what we said in our last conference call and we're very still clear about is that if we don't see commercial success the way we want to see commercial success
Speaker Change: We're certainly going to pair that down. That's not our plan and we can see sort of a clear path to how we want to get there. But that's not a one rate of investment we're committing to.
Speaker Change: in definitely by any stretch of the imagination.
Speaker Change: What we classify as success is that by the end of 2020...
Speaker Change: Five, that we are getting an ROI on our spend.
Speaker Change: and that's been, I might mention, might fluctuate depending on the return metrics of it.
Speaker Change: that the margin profile of that business is a treat of to our overall business.
Speaker Change: and that hopefully our goal is that the growth rate is a creative to our overall growth rate of our business. That's what our goal is for those products.
Speaker Change: of why we want to do it. What's key to understand is that we've seen a clear hole in the marketplace around some of the things that we're doing that others are not.
Speaker Change: We have a deep understanding based on decades of experiences of how to manage these interactions and how to optimize these conversations and optimize businesses as a whole with that deep domain expertise.
Speaker Change: that when our solution goes in, it's highly, highly customized.
Speaker Change: and a lot of our clients have disparate text acts.
Speaker Change: So they need something that's flexible from an LLM perspective, they need something that's flexible from a text act perspective and we fit in that
Speaker Change: Where we have clients who have sort of homogeneous technology environments or environments where they've got a clear direction of tech partners they want to use, we're very, very happy to deploy our, our
Speaker Change: You know, our partner's technology into those spaces if it sets and so it's really quite complementary around how we see it and we're doing it to differentiate ourselves in the marketplace because as I mentioned in the large transformational deal
Speaker Change: There was no other, we knew who the competitors were. There was no other traditional competitor in that space. They weren't even invited to the, to the, to the RP, because they did not have a complete solution, and they did not have the technical strength to pull off what, what the client was after.
Speaker Change: Okay, just keeping on the investment team, I think the press release said that the company plans to release additional technology products in the IX suite. How should we think about the impact of that on margins over the next few quarters? And is that the only investment that would impact margins or are you hiring more people in catalyst and trying to build up that business as well? So how should we think about the impact of investments on operating margins?
Speaker Change: For sure, so Rupert, like at a hundred billion dollar run rate, I have to, I am, we definitely are producing more products than one. So we have a number of others that are already being built and well down the path and are actually doing previews with clients as we speak. And so there will be some rapid succession of what we're looking at, and we've got sort of a very clear roadmap of what our deliverables are over the next number of months to make that happen. Thank you very much.
Speaker Change: That is already baked into the forecast from an apex perspective as we mentioned in $100 million one rate.
Andre: We are also as Andre pointed out, accelerating some of the synergy costs and reinvesting and reallocating some of that capital because we do need to hire.
Andre: Some skill sets, so we don't have in our business right now, around some of the Jenny I tools from our partners, some automation tools that we have within our client sector, and so that our goal is to do without increasing our operating expense.
Speaker Change: and management in the lines we are doing right now. The only thing that is flexoring or SGN A line that we can see within Q4 and Duck.
Speaker Change: and I don't want to guide for 2035, so let's just talk about Q4. Is really around these transformational programs where we are getting a number of requests from clients who say we need help to transform.
Speaker Change: You've got the capabilities to do it. If we give you a longer-term contract, would you take some of the burden of these costs up front because we don't have the budget to do it? And as long as the economic model works out, we're more than happy to do that with four-four clients.
Speaker Change: Okay, maybe, can I ask about, you talked about programs shifting offshore?
Speaker Change: So obviously that impacts you initially in terms of revenue because you're shifting the program But if it's to a lower cross geography, I mean it should help in margins So can you talk about like, you know, what is that time belt between when you actually move a program to when you can actually start seeing any margin benefit?
Speaker Change: and within that question, if you can also weave any thoughts on the overall pricing environment as well. Is it more competitive, less competitive?
Speaker Change: Yeah, so on the offshore movement, you're right, you know, once we get those programs fully ramped offshore and we get past the period where we have duplicate costs, where we can rationalize some of the costs that we're supporting those programs on shore, we will get to a better margin spot on those programs that generally takes about 2 to 3 quarters.
Speaker Change: and that's what you see kind of impacting our Q4 outlook and should give us some confidence that we'll see improvement as we go through the back part of 2025.
Speaker Change: from a pricing environment perspective. I'll let Chris come in as well. But what we've seen is, certainly.
Chris: You know, in the more commoditized work we're seeing very, very heightened.
Chris: Price sensitivity there, and we're choosing not to change that work on price.
Chris: We're also seeing pricing, take the form of these different constructs where clients are asking us to take on more of the upfront investment in transformation, whether that be technology, building out capacity, or even doing some of the training.
Chris: Related to those programs, all of that now, the new commercial construct seems to be moving a bit more of that upfront cost onto the provider. But you know, we're happy to do that if it allows us to win the work. And as long as we can build that upfront cost into the margin of the program, that means we should see improving margin on that program over time.
Chris: Okay, I'm going to try and Andre's sneak one more question in and this has been asked in various different ways, but I'm going to advocate in another way. You've talked about...
Speaker Change: Thousands of customers now using Denny Eye. On the last call, I think you have said that you had hundreds of proof-of-concepts that we're going on. So are those proof-of-concepts now done? And do you think that the customer base that you have is now prone or is now more receptive to using Denny Eye?
Speaker Change: And if that is the case, do you think that, you know, as these models are getting more advanced, we just had a press release from a team of island, opening it where their new model is more, it's smarter, it can have sentiment detection.
Speaker Change: Do you think that given this environment, that you still think that...
Speaker Change: The Lord transactional work will go away and that you gain more work in the concentric business, more in the consulting type of space. Do you see that happening or do you think as models get...
Speaker Change: Again, get smarter and more capable that the disruption can be more. So has your thought process on that changed as you've talked to more customers and as you're seeing these new models come up?
Eric Lewis: Eric Lewis, Chris, so a couple of things in the accident. It's a good question. The first thing just for clarity, when we talk about close to a thousand customers, that's close to half our client base.
Speaker Change: is using gender-to-day eye that we have installed, and some of that is our partner technology that we've installed and can figure and merge. Some of that is obviously our intellectual property that we've installed and managed.
Speaker Change: and that is using at scale, data date, using operations. This is not proof of concept stuff. This is real industrial enterprise use of the AI technology.
Speaker Change: and for clarity, when you look at what clients we're using that for, it is very different. There's some clients who are using a full stack where we're doing automated bot, where we're using our gender VI QA system, where we're using our gender VI coaching system, where we're using our gender VI path system, all sorts of things like that. When it's not...
Speaker Change: Customer Facing, clients tend to be very receptive to using it, and those proof of concepts frankly go very quickly into production.
Speaker Change: When it is anything to do with an external brand engagement.
Speaker Change: We continue to see this by all the press releases everyone talking about we continue to see a reluctance
Speaker Change: to interface with high value interactions with customers.
Speaker Change: Where the AI is doing everything, what we see.
Speaker Change: and still this day and still conversations is that it's normally a human the last connect, but that human is AI powered to get better answers, better help, service in a more intimate, personalized way, and deliver what they need to do. And so we still see that playing out to this case. Obviously with a model getting more advanced.
Speaker Change: that will somewhat change, but as we've seen and shown, as we've kind of automated and put the technology in, we've won net new business that historically hasn't.
Speaker Change: hasn't been there. In terms of proof of concepts, we still have hundreds of proof of concepts, but very transparently.
Speaker Change: Some we roll out and the client goes
Speaker Change: Okay, we've done the economic model on this. It's going to cost too much to do the queries to an L.M., versus how we can do it. Otherwise, we're going to kill it. Others are like, yes, this is perfect. Let's get it into production as quickly as possible. And so, you know, this quarter we added, um,
Speaker Change: I think 25 new, I think it's 25 new, at scale implementations of our Jedi technology into our client base, from POCs. And so we are converting them, but we're always having these net new POCs coming into the ecosystem.
Speaker Change: Okay, thank you very much for the people. Sorry, Ruply, just not nothing going, I'm sure you're bored of this, but the reality is is that.
Speaker Change: LLMs and Genre II, they've gone as soon as it's one solution fits all.
Speaker Change: and what we're finding more and more is our clients are putting in different types of solutions for different types of functions and features and departments that best fit their cost model and the type of activity they want to automate and the type of service that they want to get.
Speaker Change: and so we do have clients who have multiple genitive AI solutions in their environment and we expect that to continue. We don't expect there to be sort of one product that does everything for everyone across the entire enterprise.
Speaker Change: Okay, thank you for all the details, appreciate it.
Speaker Change: Welcome, thank you and ladies and gentlemen that does conclude today's conference call. Thank you for participating. You may now disconnect.
Speaker Change: Music Music
Speaker Change: and his name is David Stein, and his name is David Valentine.
Speaker Change: Episode 2
Speaker Change: Music
Speaker Change: Thank you for standing by and welcome to Concentrix 3rd Quarter, fiscal year 2024, financial results conference call.
Speaker Change: and Stein, all participants aren't in listen only mode.
Speaker Change: After the Speaker presentation, there will be a question and answer session.
Speaker Change: To ask a question during the session, you will need to press star 1-1 on your telephone. To remove yourself from the queue, you may press star 1-1 again. I would now like to hand the call over to Sarah Boota, Investor Relations. Please, go ahead.
Sarah Boota: Great, thank you, operator, and good evening. Welcome to the Consentrix, third quarter, fiscal 2024 earnings call. This call is the property of Consentrix and may not be recorded or repricased without the written permission of Consentrix.
Speaker Change: This call contains forward-looking statements that address our future performance and that by their nature, address matters that are uncertain. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements.
Speaker Change: We do not undertake to update our forward-looking statements as a result of new information or future expectations events or developments.
Speaker Change: Please refer to today's earnings release in our most recent filing with the SEC for additional information regarding uncertainty that could affect our future financial results.
Speaker Change: This includes the risk factors provided in our annual report on Form 10K and in our other public filing with the SEC.
Speaker Change: Also, during the call, we will discuss non-gap financial measures, including adjusted free cash flow, non-gap operating income, non-gap operating margin, adjusted EBITDA, adjusted EBITDA margin, non-gap net income, non-gap BPS and constant currency revenue growth.
Speaker Change: of Reconciliation of these non-Gat measures is available in the news release and on the company's investor relations website under financials.
Speaker Change #100: with me on the call today, or Chris Caldwell, or President and CEO, and Andre Valentine, or Chief of Financial Officer. Chris will provide summary of our operating performance in growth strategy, and Andre will cover our financial results in business outlook. Then we'll open up the call for your questions.
Speaker Change #100: Now I'll turn the call over to Chris.
Chris: Thank you, Sarah. Hello everyone and thank you for joining us today for our third quarter 2024 earnings call. Today, I'm going to walk you through our current demand environment. The opportunities we are seeing in our business and most importantly, the positive changes we are making to harness these opportunities to drive long-term value creation.