Concentrix Corporation (CNXC) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. My name is Dave Koning. I'm a Senior Research Analyst at Baird. I cover the business process outsourcing industry. And very pleased today to introduce Concentrix, a leading customer care and BPO firm that's been exhibiting very, very good growth in recent quarters. We have Chris Caldwell, the CEO; we have Andre Valentine, the CFO; and David Stein, Head of IR, with us today. And maybe we could just do, Chris, maybe you can kind of kick us off with some slides and then we'll get into Q&A.

Great, for sure. Thank you very much, Dave. We're going to spend about 10 minutes going through some slides and then kick it off to Q&A. So obviously, the safe harbor arrangement talking to that some of our forward-looking comments might change materially, but let's kind of get right into the business conversation. So first off, thank you very, very much for taking your time and appreciate your interest in Concentrix. Concentrix was really founded on the principle that building long-lasting relationships allows you to build long-lasting scalable businesses. And that's what we're very, very focused on. And when you look at our business, it's all about creating amazing levels of engagement between our clients and their customers. And we create these relationships by really delivering on our clients' brand promises for high value, high levels of engagement and sort of white-glove services across all sorts of channels. In fact, there's good likelihood that many members in the audience today have interacted with us in your day-to-day life with your favorite brands. In fact, to kind of give an easy way of looking at what we do, if you look at some of the examples, we might have powered the chatbot that allowed you to do your online banking or maybe book your next flight or travel or trip arrangement where you didn't interact with anybody but just had a technology experience. We might actually be monitoring your favorite content on your favorite social media site, making sure that it's compliant and in line with the guidelines as well as what you're looking at interestingly that's delivered to you. We actually might be ensuring that if you have any problems with your favorite e-commerce brand or your favorite transportation brand, that we resolve your concerns quickly and effectively and make sure that you're happy and have great brand loyalty to those clients that we service. We actually might be walking you through the last upgrade of your last operating system and making sure that it's operational and doing what you expected it to do. So lots and lots of different things that we do from a straightforward engagement, but we also do things that help an engagement standpoint in the back end that you might not know we do. We might be protecting you from fraud on your personal health care account or your banking account without you ever knowing it. But again, giving you confidence in dealing with those brands and having great engagements with the brands. If you look at all of this, we're very focused on delivering these types of engagements with a global consistent manner, with a lot of local intimacy and really about delivering the highest ROI for our clients within their engagements with our customers. We deliver this with a deep, deep domain expertise across multiple verticals, strong investment in technology. And we really focus on delivering clients in multi-geographies, multi-disciplines and multi-lines of business. So really allows us to have a very strong, solid, scalable business. If you go to the next slide, David. Really, the formula for focusing on relationships has allowed us to achieve the #2 spot in the customer CRM and CX marketplace globally. And we've set the record for reaching a scale at a record pace in around 16 years when the next largest player was about 26 years to get to the same level of scale. And we continue to feel that there's a significant amount of opportunities to continue to consolidate in the space and grow. The strength of our relationships, really, we measure in a few ways. One, clearly, client tenure, if you look at our client tenure, 15 years across our top 25 accounts is significant. We also measure how we deliver for our clients around how many geographies we deliver for them in, how many multiple lines of business, multiple support channels. And really, you only get this sort of depth and breadth of relationship when it comes and built on trust, consistent performance and really a willingness for us to continue to push the envelope on the services that we deliver. When you look at our client set, we really have 2 very clear client sets. One is large enterprise players where we're focusing on helping them be more nimble, more being cost-effective, really transforming their business at being much more customer-centric than probably they were prior to working with us. From a disruptor perspective, we are very focused on helping them scale, putting in a lot of operational discipline and growing globally. And when we engage a client, we are focused on ensuring that they want to invest in their brand, deliver superior outcomes and also look for long-term relationships with our partners. We're not after very transactional client relationships. We're after deep, deep rich relationships versus clients for the sake of just clients. If you go to the next slide, as we've grown, we've had a number of very transformational acquisitions. And in fact, if you go back in 2014, we bought the IBM BPO business that had been declining for a number of years. Very, very quickly, we were able to stabilize, rejuvenate the business and start to grow it. And then again, in 2018, we had a significant acquisition where we bought Convergys. Similarly, the business had been declining for about 3 years, and we were able to very quickly stabilize it, look at the client set within that business, grow the right types of clients in that business and grow the overall business to where we are. And we believe still at this point, we're ideally positioned for even further growth. One of the big transformations that we've done all along this way is continue to introduce new technology and new services to the existing client set to grow our share of wallet within those clients and always helping them reinvent their business. And it's been one of our key factors for success and growth over the years. If you go to the next slide, we talked about that rebalancing. One of the big areas of that rebalancing, the portfolio that had been declining with Convergys, was the telecom sector. In fact, after we purchased Convergys, around 40% of our business was telecom. And we've actually brought that down while still growing and improving profitability to under 20% in 2 years, significant, significant milestone, significant transformation of the overall business. That rebalancing is close to being completely done. And we've really replaced it with the strong key verticals that you see on the slide here. Also to point out that our disruptor business is now $0.75 billion and growing at a 29% 5-year CAGR, which is significant. And really showing that we have this great breadth of enterprise clients as well as great breadth of disruptor clients, and they match very, very, very comfortable together. If you go to the next slide, where we see a very compelling investment thesis for our investors is around the fact that we are a very tech-infused industry leader in our space. Number two, we're in a very, very fragmented marketplace that we see additional opportunities to grow pretty significantly. And we're a proven consolidator both from an organic as well as inorganic standpoint. So clearly, key and focused on being #1 in the marketplace. We've got a strong execution record, right? We're one of the only companies to achieve this. We're the only company in this industry to achieve the type of scale within 16 years while improving our financial performance all the way through that. And we've also been incredibly good at the ebbs and flows in this business of rebalancing the portfolio, making sure we're supporting the winning clients within the space and growing their businesses across not only depth and lines of services, but also from a geographic nature as well. And then finally, as we talk about being positioned for growth, we're executing on our plan for above-market growth. You've certainly seen that in our Q4 and Q1 numbers that we've done. That's creating more value within our business. We're continuing to invest significantly in our digital innovation and technology platforms. In fact, we've got 50 of our own, a little over 50 technology platforms that drive unique differentiation within our client set. We're also seeing opportunities within the M&A perspective to add not only to strategic verticals, deep domain expertise, but also pick up new and innovative clients that we see that we can continue to grow within our space. And then with our balance sheet, very, very disciplined capital deployment. We've got very little leverage, a lot of dry powder within our sight, allowing us to both invest organically and inorganically in our business. And so hopefully, that was a short recap of our business. And Dave, look forward to taking some questions.

Yes. Now that was a great review. And it hit kind of a lot of what I was going to even ask in my first question. And it seems like the industry has kind of hit a new stride, and you kind of talked about global disruptors in health care and just some other verticals. And you, in particular, I mean, you're growing above market, right, 12% in Q1. I think 20%, 25% Q2. Maybe talk a little about the industry and how that's been changing and maybe some specifically where you're investing and why you're growing even above market?

For sure. So a lot of industry analysts still see the market growing 3% to 5%. We see it growing a little faster, maybe 6% to 8%. And where we're achieving above that, there's a couple of key drivers. One is our exposure to disruptor marketplace. We're doing very, very well in the disruptor space. And disruptors are taking a lot of the new buying habits from consumers and benefiting from that. So if you think of how your own life has changed in the last 1.5 years in how you consume goods and services, a lot of those are going to disruptors, and we're certainly benefiting from them needing global scale. And we service disruptors around the world that are not only North American disruptors, but we service disruptors in India and Brazil and Europe and China and all over the place. So have an amazing group of clients within that perspective and are benefiting from these new consumer demands. The second thing that we're seeing that we're executing incredibly well on is taking share from our competitors where they had challenges through COVID, whether they had impacts to capacity, whether they weren't able to deploy digital solutions fast enough and basically pick up that share that has added to our growth rate as a sustainable growth of new business we picked up. And then the third thing has really been around our clients who have gone through COVID and said, there are some things that how you engaged during COVID, we trust you because you've been able to execute for us. So things historically that we have not outsourced we'll now give to you to make their cost model more variable. And so we've been able to pick up from that perspective. So we do see it as a big step change, but what's nice is that we see it as a sustainable step change for the foreseeable future as all these new patterns have come into play.

Yes. Well, I guess one other thing, the legacy client base. I'm just all of a sudden thinking like, has anything changed really with some of the legacies like AT&T or Comcast or some of those. Are they hitting a different stride now too or is that pocket pretty stable?

I think generally, I mean, you mentioned clients in the telecom sector. They tend to be pretty stable. I think that the clients that are going through a lot of transformation are more in health care, right? They're looking at how to do more digital and touchless delivery and how to make billing management easier and how to manage sort of health in a more proactive manner. And so that plays into a lot of the strengths that we offer. If you think about banking, the traditional banks are starting to go, look, people don't want to come into a branch to do a mortgage, right? They want to do everything online and very simple. And so the types of advice that you might chat with or call up need to be much more knowledgeable about sort of financial information than just a quick customer service call that's going in. And so we're finding a lot of industries really driving a lot more engagement and innovation. And primarily, those are a lot of the industries that are getting disrupted more by some of the new fintech players and new health care players that are coming into the space. So we benefit from both sides. We benefit from having the expertise and infrastructure to support the enterprise clients who are trying to drive more nimble and customer engagement. And then we benefit from bringing that maturity, security and discipline and regulatory understanding to the disruptors who are trying to enter that space.

And some of those services become a lot more specialized, it seems like, too, because if we go back 20 years, it was like AT&T might have 10 different providers, and it was just kind of going back and forth between provider. But now you're providing something that maybe nobody else is providing. And it seems like pricing is stickier. It's more just differentiated. Is that a fair way to think about it?

Yes. Absolutely. And I think, again, like I mean, if we look at our health care clients a decade ago, we would do a call saying, hey, let me explain your benefits. And then if someone had a claim challenge, it would be another person and we'd have a different kind of conversation. And if there would be something to discuss, it would go to a different team that would do the back office. And now we're looking with analytics in the background looking at fraud that might be happening on a payer side or a fraud on the claimant side and looking at scoring and rating individuals. And then when we look at the type of engagement we're having, whether it be digital or for voice, we might be doing the adjudication on that claim right then and there because of the data and the information that we bring to the table. So very significant changes in the industry. But to your point, they become more unique, more differentiated, more sticky, a lot more tie-ins to the client, longer-term contracts, and that's generally the business we've always been investing in and the business that we're seeing growing.

Yes. Great. Great. Well, if we move a little bit to like the cost structure, right, 270,000-plus employees. How is then the employee base kind of operating through the pandemic? And one question about that, it seems like with inflation, wage rates are rising, but you also had all the stimulus money. And are some of the employees even saying, well, I'd rather just get stimulus because I can make a lot that way instead of working. All these employee thoughts, right, like how are you managing through all that?

A lot of discussion with staff on a daily basis on moods and flows. And really, we look at the conversation on a literally region by country basis. So for instance, stimulus, primarily a North American comment and some European countries. And to your point, people kind of go, hey, do I want to come out of the employment base for a period of time just to kind of health. Sometimes they've had health challenges with COVID and so they needed to do it. But for the most part, pretty stable with a bit of wage uptick in North America that I think everyone has talked about we're seeing. Globally, I think what most people are focused on is, am I in a safe place? Is Concentrix doing all it can do to make sure that I'm healthy, both from a mental wellness perspective and a physical wellness perspective? And am I engaged in the organization? And I've just been incredibly proud of the team around the world just doing an amazing job. I mean, frankly, very, very quickly, we went to a vast majority of our staff work at home. 1.5 years later, some countries that are effectively over COVID for the most part, staff have kind of balanced out of coming in and staying at home. Some countries that are still in the height of the pandemic are effectively all work at home. But productivity, engagement and growth has, as you can see from our numbers, not generally been impacted.

Yes. That's great. And then work from home, how does that play in now over time? Is that a lower cost? Like can you consolidate some of the real estate and kind of save some money from that?

Yes. That's a great question. There's a lot of viewpoints around what percentage will be work at home in this industry. And I've heard some competitors say as high as 80%, 90%. I've heard some competitors say less. We think it will probably be 30% to 40%. And our basis of thinking is driven around our pulse surveys with our staff kind of seeing what they want. Our pulse surveys with clients seeing what they feel they're comfortable with when it gets to normal conditions. And also, we feel with the sort of dynamic that's happening and what people want has changed over the pandemic. So I think if you ask people first month or 2 out, people were like, hey, this is fantastic. I'm working at home. 1.5 years later, they're saying, well, I'd like to kind of get out of my 4 walls. I'd like to interact with more of my teammates. And that's not everybody, but that's a bigger portion of what I think people might think about. And so we're seeing that kind of balancing out. Very easy, by the way, if it goes more work at home. Very easy if it doesn't go as much work at home to add and subtract the facilities to do it. From a cost perspective, work at home, David, it's kind of interesting. In North American markets and in Europe, it might be a little cheaper because everyone has high speed at home. Most people will have a living arrangement that they have some quiet space that they can actually do some work. That is not the same everywhere around the world. So for instance, we're paying for tens and tens of thousands of high-speed Internet access locations where people don't have high speed. We're paying for people to have some space that they can work, phone or some infrastructure they need. We're paying for more remote security than what might be required in sites. So from a cost perspective, it's relatively balanced. And in the markets that there is net-net-net cost savings, generally, you're working with your client to both get the benefit of that. So it doesn't necessarily drop to the bottom line that some people might think.

Got you. Okay. And when we think of all that, well, I guess, first of all, has pricing been pretty stable in the market? Or I guess, what are the puts and takes there?

Yes. No. Pricing has actually been stable for a while. I think there was a few folks who might have lost some business during the early pandemic that were trying to fill up capacity. But honestly, pricing, for the most part, has been very, very, very stable and continues to remain stable. Where we see ourselves being able to differentiate ourselves is really around doing outcome-based pricing contracts. So it's not like a straight transactional or straight how many hours of labor you're going to deliver or anything like that. Because of our technology, we're able to have discussions about, okay, what's your total cost of ownership, and if we can deliver it for less, let's gain share on it. And I think that's really, really exciting. And while it's a small percentage of our billings right now, it's a growing percentage. And it tends to be much better aligned for what our clients want and much better aligned for what we want. And then that sort of pricing element isn't as important because it's all about sort of gain sharing and driving a better level of engagement, better either revenue generation or cost takeout.

Got it. So if we think over the next few years, as that grows, as the shift to more kind of global disruptors that seem to care more about experience than exact price all the time, as scale gets bigger, it seems like margins are probably biased higher. They're already pretty high, but they're probably biased higher, right?

Yes. I think it's a great question. The reality is, the life cycle of disruptors tends to be experience is paramount, pricing is not so paramount until they get to the 4-, 5-, 6-year mark. And then suddenly, they've become that mature disruptor and then they start to say, okay, how do we get the right cost for this, right? And so you do see some pricing degradation in the disruptors as they mature and get scale and everything else that comes along with it, unless you're offering very differentiated services such as compliance, such as technology or a host of other things. But your comment around the ability to see margins improve, we certainly see that. And that's primarily driven by the types of services that we're offering and types of technology that we're offering that tend to be higher value and more of that sort of gain share contracts where you can get more leverage. If you're a straight commodity player, you will see kind of continued compression. But we see a lot of opportunities to continue to improve margin.

Yes. And what about the sales pipeline. I would imagine right during COVID, probably Q2, Q3 of last year, probably a little harder to sign new deals. But was there some pent-up demand and now all of a sudden, tons are coming to you and saying, hey, let's sign now. And how does that translate into revenue? If you signed deals now, is it like a 6-month lag before the revenue hits?

Yes. Great question. I'll tell you, Q2, to your point, was very quiet. No one wanted to sign. No one knew what was going on. No one knew what was happening. We started to see a massive increase in signings in Q3, and we actually called it out on our earnings call of just very, very quick signings. And what was interesting about that was that they were generally quicker to revenue than we'd seen. Most times, people will say, hey, I'm transitioning from this kind of biz or I'm going to ramp you slowly. But just because of the pandemic, and I think people needing execution and just managing their capacity, we were able to achieve that. And I think that put us a little higher than we expected in Q4 and Q1, which we called out on the earnings call to just say, hey, we're seeing faster push to get to revenue, and we're seeing more in-period volumes than what we expected just because of some of the competitors not able to pick up the volume. We've seen very strong signings. I think we called that out in Q4 as well as Q1. To your point, it seems like the decision-making process has sped up a bit, seems that people are more focused on execution around it than what we'd seen in frankly a year ago.

Got you. Yes. Yes. And what about maybe the geo mix, are you seeing demand for different pockets? And how does that, I mean, you're so globally diversified that it would probably take a lot of movement to like have much of an impact. But are there certain regions right now that are more or less in favor and moving towards?

Yes. No. That's a good question. Look, we're seeing good demand in Latin America despite COVID challenges and not necessarily rampant vaccinations that are going on. We're seeing very, very good demand in Latin America and good growth there. In some pockets within Asia, we're seeing very, very good demand. Others are quite impacted by COVID. And so frankly, it's okay, but it's nothing to write home about from that perspective. And then Europe, we're seeing a good market as well. I will tell you though that, that still gets overshadowed right now by North America, which tends to be just doing very, very well in its own right and it's somewhat showing other performance a bit muted just because of how well North America is doing right at the moment.

Yes. Yes. It's kind of amazing from, we were just talking to Visa a couple of hours ago, too, and North America is doing super well at spending, too. So this seems like demand, all sectors are good here.

Yes. No. We've seen that. And we talked about travel and transportation, which was a very fast-growing vertical for us pre-COVID just effectively disappeared overnight, right? It was a 2-plus percent headwind for us. And in the last 45 days, as I think people have indicated in the news and everywhere else, like people are starting to figure out, hey, I can travel domestically. I want to go out. I want to see things. And so we're starting to see that recovery in North America and certainly Europe. No international stuff yet, but certainly in those domestic markets, starting to see signs of life.

Yes. That's great. What about, I know the way you guided, last quarter was 12% growth. You're guiding this current quarter, I think, 21% to 25%. A lot of that is just good momentum. Some of it's on easy comps. Does that slow a little bit again in Q3 just simply because of the comps?

Yes. You're absolutely right. If you look at our Q2, and remember, our Q2 is a little different than everyone else's Q2. We hit the pandemic in Q2 versus others kind of it fell into Q3. We do have an easier comp. That was our biggest quarter of impact. And so from a recognized revenue perspective, it did slow down in Q3, Q4. What we've indicated is, very minimum, we'll grow 10% organically this year. And again, that's the baseline, not the goal. And we're executing well on that.

Yes. Okay. And then what about M&A. I would assume your cash flow, that would be probably a key priority. What would you look for? How big of an acquisition could you do just given leverage? Yes, walk through that.

Yes. I'll let Andre answer the leverage question. Just from a target perspective, there's really 3 things we're focused on. One is driving deeper domain expertise in the verticals we're in. So think banking, health care, insurance, technology, and that's very key to us. Two is technology solutions in those verticals that we can use to deepen our differentiation in those verticals. And then three is really around client set where we are bringing net unique clients that might take us a year or 2 to win them organically, where we can effectively buy that relationship and we can put them on our global footprint and we can expand them out. And a good example of that was actually Convergys. I mean, they were discounted because of the overhang of telecom. They had an amazing client set that we called out from 10 to 150 when we made the acquisition. And that has driven a significant amount of growth because we've been able to leverage those clients across our global footprint. And then Andre, if you want to take the leverage question.

Sure. On the leverage, David, you're right. I mean, you and I have always talked about the strong free cash flow characteristics of this industry. And so that gives us real confidence that we can carry significant amount of leverage. Certainly, comfortable up to 3x and maybe a bit more. And today, we're sitting at, based on trailing 12 months, we're about 1.5x gross leverage. That's going to come down because of our strong free cash flow as well as expanding our EBITDA. So we'll have plenty of room and certainly with the strong free cash flow, comfort with leverage. A good example, going back to the Convergys acquisition is, we levered up to a little bit over 3x in that transaction. And within 2 years generated about $650 million of free cash flow to delever and bring leverage back down to where it was at the spin and making more progress on that as we go forward through 2021.

Yes. That's great. Is free cash flow roughly in line with earnings give or take? Is that kind of the way you look at it?

It really is, David. It should generally, as a rule of thumb, be about equal to kind of our non-GAAP net income. And if you look over time, that's about where it trends to be. There are some puts and takes. You can see certainly some puts and takes as, for instance, that we had in Q4 of last year with that strong growth that we had certainly can pressure that in the short term. But long term, generally, it should be in that range. So nothing has really changed from that regard.

Yes. Got you. And then maybe finally, we've got a minute left. Anything from a regulatory or tax perspective just to think about given so many different places where you're either generating revenue or having people based? Anything just to think about the next couple of years?

Well, certainly monitoring all the events there, right? So we've got, obviously, the discussions with Washington regarding taxes as well as the activity announced just this weekend about looking at kind of global minimum taxes. Generally speaking, we're still kind of in wait-and-see mode on getting more regs around what's going to happen there. My guess is, what we're going to see is some pluses and minuses there. You're going to see some things that will perhaps drive taxes up. You'll see some other things go by the wayside that would be beneficial to us. So again, more when we know it, but not necessarily think it's going to be a huge deal long term. Still, we benefit very much from the fact that we're able to move cash around pretty efficiently these days and can use it wherever we need it for corporate purposes. And we're good about that.

Yes. Great. Well, that's right at the 2:40 mark for us. So we can wrap it up there. But hey, thanks so much for joining us. That was really insightful. Always great to see you guys.

Great. Thanks very much, Dave, always appreciate the time.

All right. Have a great day.

Thank you.

Thanks.