Concentrix Corporation (CNXC) Earnings Call Transcript & Summary

All right. Thank you. Welcome to Cowen's 49th Annual TMT Conference. I'm Bryan Bergin, Cowen services and software analyst. We're very pleased to have Concentrix here, a leading global customer experience, tech services and solutions provider. From senior management, we have Chris Caldwell, CEO; and Andre Valentine, CFO. Before we get into a presentation and a fireside to follow, I wanted to mention that participants can submit questions through the webcasting platform, and we will work those into the conversation as we go. With that, I'm going to turn it over to Chris Caldwell, CEO of Concentrix, to go through a presentation on the company. And then we'll circle back for fireside format following that. Chris?

Great. Thank you very much and appreciate it, Bryan. As Bryan mentioned, we're going to spend about 10 minutes going through a few quick slides to introduce to you the company. So David, we can advance and just give you the safe harbor. I'm sure you'll love to read that at a later date to go through. But clearly, things may change materially as we go through it. And then, David, to the next slide. So first of all, thank you very, very much, and welcome. We really appreciate your interest in Concentrix today. Concentrix was really founded on the principle of building long-lasting relationships that allow us to build very long-lasting scalable businesses. We do this really around focusing on creating levels of engagement between our clients and their customers delivering on our clients' brand promises. So what does that really mean? Well, we're very focused on having deep domain expertise across multiple verticals, which we'll talk a little bit about later. And then what we've done is really develop a significant amount of proprietary technology as well as off-the-shelf technology with our own developers as well as obviously, using off-the-shelf to deploy customized solutions and support these relationships in a very engaging way. And then we backed that all up by using a global team around the world of over 270,000 staff members in 40 different countries that really has allowed us to have a very unique offering for our clients. In fact, it's very likelihood that we have supported all the audience members. And certainly, over the last number of months in your day-to-day interactions with some of your favorite brands. So simple examples of what we do in our business. We might be powering the automated chat bot that allowed you to bank online without necessarily talking to anybody. We might be moderating and managing the content of your favorite social media site, yours or your children's, making sure that it's appropriate and making sure that it's educational in some formats or making sure that it's respecting the rules of the social media platform that we monitor. We might be ensuring that any problems that you have with your favorite e-commerce brand is sorted and resolved quickly, whether it's through the automated instances, whether it be through web instances, whether it be through chat or whether it be through just a standard voice call, that might be us on the other end of the line, making sure that, that goes through. We might be walking you through the upgrade of your last operating system. Hopefully, it went very, very smoothly, but if it's not, we're always there to make sure that we help you out. And then finally, we might be protecting you from fraud and your personal health care and banking accounts that you might not even know. You might not even interact with us, but we might be in a background, ensuring that our clients are able to live up to the brand promises of integrity and trustworthiness and ensuring that your data and protection is paramount. So many, many different things that we do. And we deliver these all across 40 different countries around the world, across of our staff and across our technology platforms. We're able to do this. And one of the things our clients really count on is global consistency and local intimacy. And when you have that global consistency, you're able to be scalable, you're able to be more cost effective. You're able to ensure that your brand promise is the same around the world. But that local intimacy really helps drive better relationships with the end customers because it's nuanced by the local cultural differences that happen around the world. Ultimately, clients see a higher ROI dealing with us, and they see a higher return of retention of their customers. And that's really what we're in the business about. We build these brands with the most -- or we support the brands that are most iconic relationships you can imagine. So I think Fortune 2000 brands. We also have many, many innovative disruptor brands that we support around the world. And if you go to the next page, it really gives you a steal for how our focus on relationships has allowed us to drive a better business. When we look at our organization around the world, we're very focused on both the enterprise clients that we talked about. So over 100 sort of enterprise clients that are in the Fortune -- sorry, Fortune 500, global Fortune 500. But we also focus on the disruptor brands, which we have 105 unique disruptors around the globe. We also have brands that just use our technology from an automation or mobile enterprise perspective. And so really a nice client base across all of our key verticals. Our focus on relationships also allows us to have a long tenure with our clients. In fact, our 15 -- sorry, top 25 clients in an average 15-year tenure, which is really unheard of in this industry. And our client renewal rate of 96% is one of the best, and in fact, that includes many clients that as we've done acquisitions, we've actually parted ways with because they're not aligned to sort of the relationship principles that we drive our business with. We have 270,000 staff members around the world with over 6,500 accredited professionals, which might be PhDs in our analytics department, which might be health care professionals in our wellness department, which might be process engineers. So a huge amount of services that we have within our organization that allow us to support our clients around the world. This has earned us the #2 spot in the CRM, CX solution provider space globally. And clearly, we continue to feel that we can have room for growth as we drive our services forward. When you look at our growth trajectory and you go to the next slide, really, we've done it both through strong organic growth, where we started around 16 years ago. And also some fairly significant acquisitions growth, one being the IBM BPO business. That we purchased back in 2014 and the other being the Convergys business that we purchased back in 2018, which helped us grow to where we are today. What's important to appreciate with these acquisitions is both of those significant disruptive acquisitions, were actually declining businesses where they had over dependence on some verticals that we didn't see as strategic. And also were looking for new capabilities to offer their clients. And so one of the things that we've been able to do is when we've done these disruptive acquisitions has not only stopped the decline in the business. But actually grow the business, actually rebalance the portfolio, drive more technology, drive more automation to the client set and then bring net new clients into the new business, which has allowed us to grow fairly significantly. Between 2019, 2020, clearly, we have been dealing with pandemic. We were able to not only support our businesses through it. We had a very robust growing travel business prior to pandemic that we hope will certainly come back. But that somewhat muted our growth. And clearly, if you looked at our Q4 numbers and Q1 numbers of this year, you'll see that we're back on the trajectory of growth going into the following quarters. If you go to the next slide, David. Now when we talk about rebalancing the portfolio and you've looked at historically, we used to have a fairly large concentration on telecom. Just after the Convergys acquisition, we're close to about 40% of our business being telecom. And through the course of the last 2 years, we've driven that down to below 20%, which has been a significant achievement. And we've replaced it with all faster-growing verticals that we're focused on, whether it be technology, consumer electronics, retail travel, e-commerce, health care, banking and financial services. And we've also replaced it with high-margin business, which has allowed us to grow our operating income as we continue to execute on our plan. The one other key part of our business is very unique is our disruptors. And while some people talk about global disruptors, they're really focused primarily on the North American marketplace from a disruptor perspective. And our disruptive -- our portfolio of clients is actually a global portfolio. We have the leading disruptors, not only in North America, but in Latin America, in Asia Pac, in Europe. And we help these brands grow globally. And just from a disclosure perspective, that growth that's driving our disruptors at 29% over the 5 years to $750 million business, is also part of our verticals that are key to us. So we have disruptors that are in the fintech business. We have disruptors in technology, disruptors in transportation, disruptors in health care and certainly disruptors in financial technology verticals. So very, very complementary to our overall business. David, if you go to the next slide. Why this all comes together to be a very key investment message to us? We believe that there's continued room for growth for us. We are a proven consolidator in a very fragmented industry. In fact, the top 10 of the industry really only represents about 30% of the overall market. So significant ability to continue to consolidate and grow organically within the business, and it's an incredibly large market. We also believe that we have a unique advantage with our investment in technology that we're starting to get really frankly, better scale from as we grow our client base and much deeper engagements because our engagements with integrated technology take a longer time to set up, but certainly drive much longer-lasting relationships with our clients because we actually manage their data within our systems. We have very strong execution. We're the only company to have achieved the scale in 16 years. I think our closest competitor is probably around 25, 26 years that they've taken to achieve the scale that we have. We have an ability to drive better financials when we buy businesses as well as we improve our businesses, strong financial returns. And we've also been very successful in rebalancing the portfolio towards much more strategic and geographic areas. And as the business evolves, we'll be able to continue to execute on that. Finally, from a future growth perspective, we are very well positioned for executing above-market growth. In fact, if you look at our Q4 and Q1 numbers, we're certainly trailing in that -- certainly focused on that execution, seeing that from a trailing perspective. We also continue to invest in digital innovation and have bold M&A plan. So we continue to see a lot of opportunity for both organic and inorganic growth. And with our strong balance sheet right at the moment, disciplined capital deployment, we certainly see us being able to execute on that sooner than later. From our perspective, we are a clear leader in the space and continue to see a large growing market. So Bryan, I'll pass it over to yourself.

All right. Chris, great. Thank you very much for that overview. I think first, where I just wanted to start was pandemic impact. So can you just talk about some of the short-term versus longer-term implications. On the longer-term applications, are there certain types of work you're seeing more opportunity in now that clients may not have and considering pre-pandemic?

For sure, Bryan. So the pandemic has driven a couple of different things. First of all, clearly, a large work at home opportunity that has happened. So we went from having a little less than 5% of our staff work at home to well over 60% of our staff globally working at home through the pandemic. And that has allowed clients to explore different sort of labor models. It's also driven faster adoption of more automation because people are kind of saying, "Hey, we should be automating this versus trying to figure out how to staff of it, which has been very good for the business." And so a lot of different things that have been driven from the pandemic around just how to manage labor, how that works. And I think those things are generally here to stay just in terms of the changes. I think from a client perspective, what we've seen is the consumers purchasing habits have changed pretty radically that we don't see going back. So for instance, more people are ordering things online, no surprise. More people are doing their banking online versus going into a branch, no surprise. More people are sort of trying to make their life simpler by driving more online. And so we've seen an increased demand, pretty significant increased demand from our disruptor clients as well as from the overall market of people trying to help customers doing things touchlessly or nonphysically. And I think a lot of those consumer buying habits have really taken hold and will continue on despite the pandemic. And then the third thing that is probably kind of a short-term impact is that from our perspective, we are running costs within our business. That will go away once a pandemic disappears. So in some countries, we're providing transportation for our staff, because the public transportation is shut down. In some countries, we're providing vaccinations for all of our staff, because the government just doesn't have the infrastructure to provide it. And so we are taking over that role and doing it for our staff. And so those costs, we call out, but they're not insignificant. They range in the last couple of quarters anywhere from $15 million to $30 million a quarter. And we see that as, obviously, going away as the pandemic comes more under control.

Okay. But from a demand standpoint, does -- is the CX industry? Do you anticipate it's a stronger growth profile than it was over the medium term, long-term versus where it was pre pandemic. Did you change your view on that?

Yes, we did change our view. And while we don't have sort of back up analyst data. What we see the market is, pre-pandemic, it was probably 3% to 5% growth. And what we've seen is probably 6% to 8% growth from a market perspective. And so we do see it being stronger through the pandemic. And that's driven not only by sort of consumers changing their buying habits, but it's also driven by a lot of clients thinking about new stuff to outsource that historically they've never outsourced. And that's because either they want to make their cost model more variable, which one, they need to outsource; two, they want more technology and more automation. And therefore, it's easier to work with someone like ourselves who can automate that whole process as well as provide the human assist component for it; and then three, what we're finding is that as customers -- companies are looking at who to partner with outsourcing, who did an amazing job with them during the pandemic and supported them. Has really given them confidence to trust more and we've been sort of the very big beneficiary from that as getting more complex work because of what we did through the pandemic for our clients and supporting them when some of their internal operations didn't go so well or some of their partners weren't able to perform as they had expected.

Okay. So it sounds like you're having success potentially converting some of that surge activity over the short-term into longer-term really?

Absolutely. I mean there is a lot of, I'll call it, pandemic work around, whether it be track and trace lines or vaccines lines for some competitors, a fair amount of their growth numbers. For us it's less than 1%. All of our growth is coming from sustainable long-term client engagements. That's really what we're focused on.

Okay. On the foot -- the operational footprint, I think you mentioned 60% work from home. I think what's the lasting structural change? Where do you think this ultimately settles out?

So that's a great question. And Bryan, certainly, what we've seen is in countries that have gone through it and have effectively passed the pandemic for the most part, we're seeing people wanting to generally return back to bricks and mortars in bigger numbers and probably what people thought during pandemic. So our expectation is that where it will balance out is probably 30% to 40% versus being like 80% or 90%. That being said, what we do see is clients and staff, which we have to enable and are in the process of doing, wanting a much more flexible environment. So they might be in the office 2 or 3 days a week and work from home the rest. They might be coming in once a month for a week and then at home -- sorry, for 3 weeks. So everyone's looking for variable types of work engagements, which I think is fantastic, and it's great for the staff and great for clients. So that's really what we see as sort of long-term structural changes. But the reality of having no physical footprint we just don't see that right at the moment.

Okay. As it relates to your -- some of the visibility in the business, the guidance process, can you talk about the level of visibility you have in your revenue outlook? And things like as it relates to bookings versus pipeline and such? And then also how you approached your guide 1 quarter out versus looking a little bit longer term. How are you thinking about that?

For sure. So Andre, do you want to walk through the guidance mechanism?

Well, sure. So Bryan, good to speak to you. We have pretty good visibility as we enter a quarter. Clients are sharing their volume forecast with us. And given the number of clients we have, we certainly create a bit of a portfolio effect across the group. And so you see that and we guided quarter out, and you see us generally being able to be pretty confident about where those numbers are going to in, and the differences are mostly on the edges of the business about whether there's a spike in volume here or softer volumes there. And those tend to be relatively small changes. And the same is true for profitability. We invested in the systems that allow us to manage to the fluctuations in volumes, relatively small fluctuations and volumes that we see in transactions to still deliver profit within the range that we guide to.

Okay. How would you characterize client decision making? Is it -- are you normal relative to where pre pandemic cycles were? How are you seeing that?

No, Bryan, I think we've seen a significant increase in decision-making. I mean, our sales cycle pre-pandemic was generally 12 to 16 months a lot of the time because there's just a lot of due diligence, a lot of discussions, and we're seeing decisions being made in sort of half that time, if not even less. We're also seeing decisions on POC for digital projects and automation projects being sped up dramatically. And a good example we used on our conference call, I think 2 quarters ago, was we had a client that had talked about putting in some automation for almost 6 months, and they weren't sure about it and when the pandemic hit, they wanted it in 6 weeks. And the reason being is that their internal capacity had disappeared, and really they had no other choice. And it was a great success for them. And now instead of waiting for sort of 6 months to kind of trial and see how it goes. They want sort of full deployment much faster. So we're seeing decision-making happen at a much faster pace than what we saw pre-pandemic.

Okay. Okay. I wanted to dig into the segment that you shed a little bit of light on there around the global disruptors. So can you dig in around that base of customers around 20% of your revenue now. Who are you serving there? Any examples you can share? And in what areas? And I'm curious whether this -- how you see this space? What's different here versus some of the traditional customers?

For sure. So let's start on that first. I mean what we see in the disruptor category, different than our enterprise customers is because their technology stack is basically just been built from scratch. The requirements for automation, the requirements for some of the digitization is not necessarily there. What they're looking for is operational scale. They're looking for help getting into countries. They're looking for help for operational rigor and operational excellence, and they're looking for better ways of governance and they're looking for sort of that expertise around local intimacy in each of the markets that they're going into. So different type of criteria that they're generally looking for. And they also have a different mindset. They tend to be sort of very focused on, this is our business. So everything else that's noncore to us, we're very, very happy to outsource. Where the enterprise clients tend to be, okay, we'll outsource something first, it might be a little easier, then a little more difficult and then a lot more complex. So different sort of buying philosophies and habits that you get within the disruptor category. What we enjoy by the disruptor category is that, as I mentioned, we have a very broad diverse portfolio in this area where we have incredible companies out of Latin America, incredible companies all through Asia Pac, China, Singapore, Indonesia, Thailand, India, huge interesting disruptors that are coming out of India as well as Europe. And so that allows us to have this very big global view of buying trends, very big global views of what's being disruptive, what's not. And allowing us to help those customers scale in a much more meaningful way. Well, we don't talk about clients' names. I will tell you that if you're generally dealing with a disruptor, chances are, we're helping them drive their business and supporting them on a global scale as they continue to reach their goals.