Concentrix Corporation (CNXC) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Concentrix announces acquisition of PK. [Operator Instructions] I would now like to turn the call over to your host, David Stein, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Patricia, and good morning, and thank you all for attending this call on such short notice. This call is the property of Concentrix and may not be recorded or rebroadcast without the permission of Concentrix. Please note that slides accompanying today's remarks -- prepared remarks are available on the Concentrix Investor Relations website under Events and Presentations. Today's discussion contains statements about the expected timing, completion and effects of the proposed transaction and statements addressing future financial results, operating projections and cost estimates. All such statements and other statements on this call, other than historical facts, constitute forward-looking statements as defined under U.S. federal securities laws. Forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements as a result of new information or future events or developments. Please refer to today's materials and our most recent filings with the SEC for additional information regarding uncertainties that could affect our future financial results. This includes the risk factors provided in our annual report on Form 10-K. Also during the call, we will discuss non-GAAP financial measures, including adjusted EBITDA and non-GAAP operating income and adjusted EPS. Please see the information contained in today's announcement for more information on these non-GAAP measures. Joining me today on the call are Chris Caldwell, our President and Chief Executive Officer; and Andre Valentine, our Chief Financial Officer. They will provide a brief overview of today's acquisition announcement followed by a brief question-and-answer session. Now I'll turn the call over to Chris.

Thank you very much, David. Welcome, and thank you all for joining our call today to discuss our announced acquisition of PK. As we approach our 1-year anniversary of being a public company, I can't think of a better way to top it off than with this announcement. Concentrix has always focused on being a leader in the customer experience services space. And with this investment, we believe we'll continue to disrupt the market. Over the last year, we have spent significant amount of time and effort in evaluating numerous M&A opportunities that would further our digital transformation capabilities. And we believe PK is the right fit from a strategy, culture, capabilities and scale perspective. It is a unique opportunity and one we are very happy to have been able to act on. PK will bring to Concentrix over 5,000 talented individuals and a strong management team capable of expanding our digital offerings faster. They have an incredible portfolio of digital transformation services focused on the CX space and help clients create pioneering digital initiatives by providing strategy, engineering, development, analytics and automation that accelerate business outcomes. Over the years, they have gained a well-deserved reputation for being one of the top digital transformation companies in the CX space. PK serves leading companies across a wide breadth of industries, including large global brands in all of our vertical segments. We also currently share several clients, which gives us confidence that the 2 businesses can come together to unlock even more value for our clients and our shareholders. Our rationale for the transaction centers around 4 key points. First, as I mentioned, PK will bring to us a strong portfolio of intellectual assets and advanced technology centered around customer experience. This will truly differentiate us in the marketplace by having deep domain knowledge of the customer journey by industry paired with technology that can accelerate the outcomes of these journeys. Second, PK will significantly enhance our current ability to offer our clients digital transformation and, very importantly, do this at scale. We look at this as being able to offer truly disruptive digital solutions for our clients that have meaningful payback, from developing a digital strategy to engineering the solution to developing and managing the operations backed up with strong big data practice and continuous improvement loops, we can handle the entire digital life cycle. Third, while we already participate in the adjacent IT digital services market, we believe it is important to make further investments to capture more share in this $270 billion market that's growing faster than the core CRM market at 17%. We expect the lines between these 2 markets to become even more blurred, and we want to be a clear winner as this happens. Lastly, this acquisition will enhance the financial profile of our business with accretion to our EPS and growth rates while also allowing for more margin improvement opportunities on both sides of the business. I'll let Andre go into more details on this during his comments. Now let me walk you through 3 real-world examples of how PK adds value to their clients. First, PK has worked with one of the world's largest software companies for over 15 years. Recently, PK helped them with the strategy and execution of moving the company's sales practices to digital channels. This increased the adoption of the clients' technology while increasing the value of the average deal size through the digital channel by 3x and increasing the conversation around their clients' technology with customers by 55%. This has driven a 90 NPS score for PK with this client. With one of the largest United States health care providers that PK has had a 10-year relationship with, they reimagined what self-service could be like. With their development and execution on changing how self-service works, it resulted in an increase of 23% for digital enablement while increasing customer loyalty and engagement at the same time. Lastly, PK works with an international lifestyle footwear brand and over the last 5 years has helped that brand go directly to consumers through a new digital presence. This resulted in increasing the brand's loyalty program by over 1 million members within the first month of launch and achieving a 5% higher order value from members with an 18% higher purchasing frequency. All these examples have driven real meaningful economic value for clients while enhancing the customer experience. With the top 3 digital priorities of CEOs being customer experience, customer loyalty and customer retention, we believe we are perfectly positioned to take advantage of the current market dynamics. As we move forward, our priorities will be to successfully close the transaction and quickly focus on getting the benefit of the 2 organizations together. We will also continue to selectively pursue strategic acquisitions to drive superior solutions for our clients and returns for our shareholders. I would like to extend a very warm welcome to the team that will soon become part of Concentrix from PK. And now I'll turn over the call to Andre, who will walk you through the financial details of this transaction. Andre?

Thank you, Chris, and good morning. As Chris mentioned, we're very excited to strengthen our industry-leading CX transformation and delivery platform. We are acquiring PK for $1.75 billion (sic) [ $1.575 billion ] in cash, with the purchase price subject to customary adjustments, including for net working capital at closing. From a valuation standpoint, we are paying 18.5x PK's anticipated 2022 adjusted EBITDA, in line with recent digital CX transactions and below publicly traded digital assets in the sector. With its strong digital capabilities, complementary client base and cross-sell opportunities, we expect the transaction to be accretive to our growth rate and to adjusted earnings per share. We expect PK revenue for the first 12 months after the close of the transaction to be $530 million, which represents over 20% growth over PK's projected 2021 revenue. Excluding onetime charges, intangible amortization and integration costs, we expect PK to add approximately $85 million of incremental EBITDA and at least $0.50 of earnings per share in the first 12 months after close. We expect further earnings per share accretion in the second year after close. In addition to earnings per share accretion, we also anticipate a cash tax benefit from acquired tax attributes of approximately $45 million over time. Our strong balance sheet allows us to finance the transaction under attractive terms using bank financing. We expect to amend and extend our existing credit facility to increase our term loan to $2.1 billion with a 5-year maturity from close. This includes rolling in our existing $700 million term loan. We expect that the balance of the funding will come from existing capacity on our accounts receivable securitization facility. We expect to have ample liquidity available after the transaction closes. This liquidity will involve an undrawn revolving credit facility, which we also expect to amend and extend as part of our credit facility. We also anticipate cash and short-term investments on hand to be at least $100 million after the close. Post closing, we estimate the net debt to adjusted EBITDA ratio of the combined company to be 2.5x on a trailing 12-month pro forma basis, which is within our target range of up to 3x adjusted EBITDA. We expect that our strong cash flow generation and earnings growth will allow us to bring net leverage to less than 2x by the end of the first year after we closed the transaction, assuming no further acquisitions. Ample liquidity will help us preserve our financial flexibility post close. We expect our financial profile to remain strong and our capital structure principles will remain unchanged. We remain committed to investing in growth and returning capital to investors via our dividend. Our authorization to repurchase shares remains in place, although our near-time -- near-term priorities could shift towards debt reduction versus share repurchase. As for regulatory approval and other customary closing conditions, we expect to complete those quickly and to close the transaction in our fiscal first quarter of 2022. Now Chris and I would be happy to answer any questions you have about the transaction. Patricia, could you open the line for questions, please?

[Operator Instructions] Your first question comes from the line of Ruplu Bhattacharya from Bank of America.

Congrats on the announcement today. Chris, how does this acquisition change the mix of voice versus non-voice services that Concentrix will provide after the close? And is it now at the target mix that you wanted?

Ruplu, so first off, this entire revenue source is all technology and absolutely no voice. It's really developing platforms, writing custom applications, doing big data work with building out the database and analytics. And so really, you can take the entire revenue and put it into sort of non-voice category. I would say, as we've talked before, to us, it's not necessarily the split between voice and non-voice. It's all about the value that we're delivering for the clients. And our voice business continues to go up value. Similarly, our non-voice continues to go up value and support even our voice business. And so frankly, we'll continue to see ebbs and flows in sort of the ratio of voice to non-voice. But clearly, from this perspective, this is a big step in the non-voice category.

Okay. Can you talk about the levers that you have to improve EBITDA margins? It looks like EBITDA margin next year for PK is 16%. Its competitors are probably in the low 20s. So what are some of the levers you have over the next couple of years to improve margins? And maybe you can also talk about the revenue and cost synergies you see with this acquisition.

Yes, for sure. So I'll take a first run and then Andre can certainly add any other comments. So first of all, let's deal with the second part of your question first. From a cost synergy perspective, very little cost synergies. Frankly, this is about growth and this is about investing in where we want to go as an organization and business. So we see the benefit on the revenue side and continue to take share as well as offering disruptive solutions for net new clients that we can bring into our portfolio. And I think we'll spend a lot of time talking about it at the Investor Day in January, but we see these 2 businesses coming together as incredibly complementary. In terms of the levers of the margin, PK has done an amazing job over the last couple of years, investing in building out the management team, investing in building out sort of deep capabilities and a lot of the various digital assets, whether it be sort of cloud management, whether it be big data and driving the work in that, whether it be from API securitization that you need to get to as you get into enterprise scale. And so all of that, we believe, that we can continue to get leverage on as we drive more and more revenue through this business. We also, as you remember, have our own digital business in Concentrix, Tigerspike, that effectively has been subscale. It has done a really good job, but we haven't necessarily been able to grow as fast as we want. By putting those 2 together, we'll see some additional benefits that come out of it. So we do see the ability to drive margin improvement to industry peers over time, and that certainly is top of mind and something we'd see [ sight to ] as we bring the 2 businesses together.

Okay. Got it. And just to follow up on the margin improvement side. I mean what level like -- how quickly can the margins improve? Is there a target margin over the next couple of years?

Yes. So I think we're going to go into more depth of that on the Analyst Day. I think, clearly, we see the ability to see margin improvement year-on-year as we've done in our regular business. And as we continue to say, we see that [ possibly ] in our regular business. So you'll see us move both as we go forward.

Okay. Got it. And maybe for my last question, is there any level of integration or restructuring involved in this transaction?

There is some integration that's involved. We do have a few overlapping offices that we'll put together. But overall, in the scheme of things, it's relatively light. And there's really not a lot of overall restructure. We're looking for everybody to be part of the team going forward, and we're looking at growing the business. And we certainly have the demand that's pent up in our client base to make sure that we have everyone driving the business forward.

Got it. If I can just squeeze one more in. So you're taking on 5,000 employees. So how should we think about OpEx trends over the next year or so?

Yes. So yes, we are picking up that many employees correctly. They are a spread between onshore and offshore resources, between the U.S., India and some in Latin America as well. I think the margin profile here currently at that 16% EBITDA that you've referenced is relatively consistent with the Concentrix margins. And frankly, the P&Ls look relatively similar as well at the gross margin line. So you can kind of back into there where OpEx is. And we certainly see some ability, as Chris has mentioned, to improve margins over time through leveraging some of the investments that PK has made in management talent as well as capabilities that would be sitting on that OpEx line. So we see an opportunity to improve margin in the PK business over time, and that will occur both at the gross margin line as well as leverage on OpEx.

Your next question comes from the line of Shannon Cross from Cross Research.

I wanted to dig a little bit more into the 37% of their revenue coming from cloud engineering and data analytics. Maybe I'm off on this, but it definitely seems like you're picking up some pretty significant IP and moving more in this direction, I guess, is then you leverage it following the acquisition. So can you just give us an idea of what Concentrix was doing prior in this space? I know you mentioned a little bit, but just more details. And then does this take you a step further? Or am I incorrect in thinking that this is a pretty significant acquisition from a tech perspective?

Shannon, it's Chris. It is a very significant acquisition from a tech perspective. And what we see is that this drives us deeper into the enterprise and deeper into the hooks that we need to kind of reimagine when we think about digital experiences that we deliver for customers. And so primarily, before this acquisition, what Concentrix did was, we would do the analytics, but we wouldn't build necessarily the data lake or the big data holding capacity for what enterprises needed to do, right? We would do cloud integration from a mobile app perspective or from a web perspective, but we wouldn't necessarily rewrite the back end or have a deep hooks into the enterprise systems of records that are there that would help drive a better customer experience. PK brings all that to us and, frankly, more in terms of technical talent and ability to drive better digital journeys with clients. And so that's where we see a lot of leverage. That's where we see a lot of stickiness, and that's where we see a lot of sort of really groundbreaking things that we can do as an organization together.

And how significant of an investment will be required to grow this out? I mean -- because I don't know PK well, so I don't know the depth of their capabilities at this point. I'm just curious, as you look at the opportunity you see there, is there something where we're going to see an investment, year or 2 as you really focus on it? Or can you kind of hit the ground running and just leverage what they have?

No, Shannon, we can hit the ground running and leverage what they have. PK has done a very good job over the last couple of years of investing in the management talent, as investing in the bench strength, as investing in these kind of core areas that they want to grow as a business. And so really, as we talked about from a margin improvement standpoint, we're getting more leverage out of that. Clearly, we're going to invest in more go-to-market resources as we bring these together. Clearly, we're going to invest in expanding sort of the presence of where we deliver these services because we have a larger footprint than PK. And so we want those services to be across our broad footprint, but that will be done as we go. And you should see the progression of our business as we go that matches that investment.

Okay. And that kind of brings me into my last question, which is, on Slide 11, you talked about PK having a highly effective global delivery model. I'm just curious, does this change -- like why did you highlight that versus what you have from a Concentrix standpoint, given -- I thought you had one as well. So what, I guess, is different in terms of what they have?

That's a great question, Shannon. So on our services core side, we have a very sophisticated global delivery model. On our technical side, we tended to put a lot of the technical resources. In fact, the vast, vast majority of our technical resources in-country right by the client. And part of that is sort of the nature of the business as you're building scale, that's how you do it. What PK brings to the table is that they have development centers and centers of excellence specifically in this that can support a global footprint at a lower cost structure. And frankly, we'll be able to take advantage of that as we put our Tigerspike business and some of our other digital business together with the PK business to go forward. So that's really why we talked about their sophisticated global delivery model on the technology side.

And we have your next question coming from the line of Vincent Colicchio from Barrington Research.

Yes, Chris, so is senior management tied in with equity and [ non-competes ]? How does that look?

Yes. Vince, we have a very motivated management team of PK coming aboard, and they are engaged in the business, and we have lots of equity owners within the Concentrix business. And it would be nothing to think different of the new folks who are coming into our organization.

And how many years has PK been in business? And what has been the historical organic growth rate?

So the growth rate that we've talked about, Vince, for 2022 is to grow at greater than 20%. And that is below -- significantly below, frankly, the growth rate that it's generated in fiscal '21. There's a little bit of a pandemic recovery in the fiscal '21 revenue growth rate. But that 20% CAGR is consistent with their growth since about 2019, if you bring it forward. So because of that and because of the nature of this work, these tend to be longer-term contracts, longer-term projects where we have very a good visibility into the revenue as we enter 2022. So all of those things make us quite confident in the ability to hit that '22 revenue growth rate of greater than 20%. As for how long the company has been in business, over 10 years.

And in terms of cross-selling, the PK services -- is the selling touch point -- I assume it's different in some cases from your current business. Is that right?

Vince, it's actually a combination. We actually do sell to the same person that might be the Chief Marketing Officer, Chief Digital Officer, Chief Customer Officer, where there's an intersect between both parts of the business, although there are also different areas where PK sells to which might be the CIO or in the technical group that is delivering the digital experiences. And so that you're seeing kind of, frankly, why we get a little excited about this is that we're seeing those markets coming together more and more. So where the digital officers or marketing officers or sales officers or customer officers are the ones who are presiding over both of these streams of purchasing, and we think we're perfectly positioned to take advantage of that.

And in terms of feedback of some of your larger clients, do you get the sense that they would be interested in working with you on some of these new services you're adding?

Yes, absolutely. I mean, Vince, we didn't go out to buy something. It was a sense of, hey, we want to experiment something else. This is, frankly, driven by our clients who are saying, "Hey, we love what you're doing. We love the services, we love what you're doing in digital, you just need more of it. You need more depth, we need more scale. We need more breadth of offerings." And so as we mentioned in the prepared remarks, we've been looking for sort of over 12 months at something that would fit. And what we were looking for is something with deep, deep technical expertise, very focused on the customer engagement journey because that is a unique delivery within it, something that had a similar go-to-market capability that we did. And PK is very focused around vertical, the same verticals that we are focused around. And then also very, very important, this business is around culture. And the culture of the PK team matches very, very closely to the Concentrix team. And so we see that as, frankly, a game right across the board. As part of the due diligence process, clearly, we talked to some clients, actually, 2 of them were shared clients and a few were not. And all of them saw how this comes together as a ability to drive better customer experiences. Because now we have the human element of it, we have the digital element of it, and we can completely remap how they want to go to market or how they want to support their customers in a meaningful way. I think that's the power of these 2 organizations coming together.

You said that they're in similar verticals. Are they in any verticals that are different that you see as maybe attractive to grow your existing business?

They are a few, right? They have deeper concentration in CPG than probably we do. That's part of our retail vertical, but not necessarily a focus and they have some good domain expertise on that. They also in the health care space, while we're both in health care, they're a little deeper into sort of the hospital systems than we are. And so we see some good growth opportunities from there. So when we went through the sort of the vertical go-to-market strategy, we actually saw some very good opportunities to grow within those that we're able to expand our services as well, vice versa, having some of their technology going into some of the areas that were stronger in the vertical set.

We have your next question from the line of Dave Koning from Baird.

Congrats. This is cool. And I guess one thing I noticed, the revenue per employee is pretty massive. I mean it's a lot higher than a lot of IT services firms. Is -- I think it's a little over $100,000 per employee or somewhere around there. Is that due to any sort of concentration more in the U.S.? I know U.S., Argentina, Mexico, India are kind of the delivery centers. But maybe, what's the weightings across those? And is it heavy U.S?

It's about 40% U.S., 40% or so India and the rest in Latin America, David. So I wouldn't say that that's causing the mix. It's really just reflective of the high-value work that's being done here.

Yes. It's impressive. And is it -- what's the labor situation like? And maybe if you look at the Concentrix business, the different types of employees relative to IT services, what's the labor market like in terms of wage inflation, ability to hire across geos right now?

So David, frankly, it is a tight labor market. There's no secret about that. But I think one of the things that we're very positive about is that in this space talented technical people want to work with other technical talented people, and they also want to work on very cool, innovative products and platforms and kind of disrupting sort of business models. And that's really what PK brings to the table. So we see our ability to hire and PK has done a great job of hiring. Coming together being able to really be able to drive a better ability to hire at scale as we go forward. Clearly, there's wage inflation, but we're being competitive in the marketplace. And I think part of it is also from a culture perspective that attracts people. So, so far, no concerns, but absolutely something that we watch out for.

Yes. That sounds good. And maybe one just quick one. The products, you went through it quite a bit already, but how much is overlap directly into CX engineering? It looks like that's the main thing here. But like it is -- when I think of IT services, I think of many different types of development they do across, whether it's ERP or advertising or all sorts of different stuff. Is this pretty pure play 100% CX development? Or do they do stuff across the spectrum a little bit?

Yes, David, it's pretty pure CX and supporting CX. And when I say supporting CX, some of the stuff that they do in building big data or some of the things that they do in API integration and securing APIs, basically, is foundational elements to driving sort of new digital experiences on the front end. And all of what they're focused on is driving those digital experiences. And so that was very, very unique. When you look at a lot of the IT services companies that kind of dabbled in this or not focused on it, but PK is very, very focused on this and everything around at building value into those experiences.

[Operator Instructions] We have your next question from the line of Bryan Bergin from Cowen.

Just a follow-up on that last question. I was curious, does PK have particular core CX and contact center tech strength? So any particular platforms that they work adjacent with where they might have the strongest offering?

Yes. So there's a number of platforms that obviously they partnered with and certified with and developed with. So in the -- well, everything is CX, but Adobe, they're very, very strong in. Obviously, on the cloud side, whether it be Salesforce, Microsoft or Google, they're very strong in. On automation, UiPath. They're also doing Sitecore as well. And then clearly, AWS. And so they've got the full gamut of the tech stack that they can deliver on. Now on top of that, obviously, there's a lot of customized work done on mobile enterprise applications, mobile web applications. And then they also bring that experience along with them as well.

Okay. And then have you partnered with PK in any prior engagements, I heard common clients, but have you ever partnered with them on broader work? And was this transaction a competitive bid process?

We have not partnered with them in the past. It was a competitive bid process that we were very fortunate to win. And really, what we were most focused on was the capabilities that came to the table and also the culture of the PK team that was just very critically important to us.

And I'm showing no further questions at this time. I would now like to turn it back to the speakers for any further comments.

Thank you very much for your interest in Concentrix today and the exciting opportunities that we have of bringing PK into the Concentrix family. We look forward to talking about this on further earnings calls. And also, we will be sending out a date for our Analyst Day in January shortly. Thank you again for listening and look forward to further updates.

And this concludes today's conference call. Thank you all for joining. You may now disconnect.