Concentrix Corporation (CNXC) Earnings Call Transcript & Summary

Good afternoon. [indiscernible], Managing Director, Tech Investment Bank JPMorgan. Thrilled to have our guests here, Concentrix Corporation, a global leader in digital CX. Joining us today are Chris Caldwell, CEO; and Andre Valentine, CFO. Welcome, guys.

Thank you very much.

Thanks for having us.

So I thought maybe we could start with having you provide a brief introduction and overview of the company.

Sure. I'd be glad to do that. And thanks again for having us. So Concentrix Corporation, we are a leading global provider of customer experience solutions with -- in 2022, we had roughly $6.3 billion in revenue, generated over $1 billion in adjusted EBITDA and nearly $500 million in free cash flow. We serve over 130 of the Fortune Global 500 brands. And we've been investing in capabilities to not only run the CX solutions for these clients, but to help them design and build the CX solutions. And that's really -- being able to do that at scale, we see as a meaningful differentiator for us versus our traditional peers. It's a really, really exciting time for us at Concentrix. About 2 months ago, we announced the combination with Webhelp, who is based in Paris, France. They are, in their own right, a leading CX provider with nearly $3 billion in revenue expected in 2023 and a very impressive over 10% revenue compound annual growth rate over the past 5 years, and that's all organic. Strong capabilities, particularly in Europe, Latin America and Africa that they bring to the mix and a very, very strong client list with very limited overlap versus what we have at Concentrix. On a combined basis, 2023 revenues for the two companies will be nearly $10 billion and combined EBITDA will be about $1.6 billion on an adjusted basis. The combination really puts us in a position where we have great revenue diversification with nearly 1/3 of each of our revenue coming from the Americas, from EMEA and from Asia Pacific. And finally, I'll just wrap up, this is a very, very attractive financial profile for investors. We expect accretion in year 1 to be mid- to high single digits and achieving double-digit EPS accretion by year 2. So that's kind of an overview of the company and some of the recent developments we're very excited about, and we'll turn it back to you for questions.

Great. Andre, you mentioned Webhelp. So maybe that's a good place to start. Can you share any background of the deal? And what attracted you to this particular company versus other alternatives? And how does it position the company stronger in the competitive landscape, a combined company?

For sure, look, from our perspective, we've talked to investors for the last 2 years about the requirements to build out more of our footprint in Europe and to continue to strengthen our footprint in Latin America. And when we looked at all of the competitors in that space, one competitor that continued to come up above all the others in terms of capability, domain knowledge, least amount of overlap with Webhelp. And frankly, they weren't a seller. And it took us a long time to kind of work through a way that we can combine the two businesses that would drive value for the organizations. And our thesis for what we thought would happen has really translated into conversations with clients after we've announced the acquisition and combination of the two companies coming together is the fact that they get access to a now European footprint for Concentrix clients and that the Webhelp clients get access to an Asia Pac, North American footprint. We also built a very strong Latin American footprint and opened up an African footprint for us. So very, very excited about how the two organizations are going to come together.

Any update on progress with the transaction when you expect to close?

For sure. So as we've talked about, we are thinking about the back half of this year. We're still in progress for that and planning. We started sort of the discussions around how to do the integration, clearly through the clean room process. So we're making good progress from that perspective. And we're working on our proxy to come out and certainly believe that we're on the time line that we indicated when we first announced the acquisition.

And zooming out a little bit, Chris, you've always talked about consolidation in the space. You did this transaction, we saw teleperformance acquired material. What is driving that? And do you expect this to continue in the future?

Yes, we certainly believe that the industry is going to continue to consolidate. Our thesis is that there's going to be a few global players, which we plan to be one, sort of, plus $10 billion and growing, and then there's going to be a number of boutiques that are smaller, let's say, call it, $500 million to $1 billion range. And then really, there's nothing left in the middle. And that's primarily because clients are looking for deeper relationships with fewer partners. They're looking for more capabilities from those partners. And the barriers to entry increasing, not only from a compliance perspective, regulatory perspective, security perspective, that you need that critical scale to be able to make the investments. And so really, that client buying behavior, we don't see changing. We just see increasing.

Speaking of client behavior, you've talked about how in tough macro backdrops, you see a focus on cost cutting, you see vendor consolidation. What are you seeing in terms of client behavior in this environment? And also second part of that question, are you seeing a difference across verticals that you serve?

Yes. So first off, you are correct. When you see a sustained period of down economic cycle, you tend to get clients who start to think about their cost structure. And they look at consolidating partners during that time period. They look at outsourcing more during that time period. They might look at retaining some work in-house to keep some muscle memory. But long and the short of it is when you get that sustained down ramp, you get that decisions around how they're going to work with their partners more. And historically, we've always benefited from that, and we expect to benefit from that. There's always that transition period time that we're going through right at the moment where clients are kind of making those decisions. When we look at verticals, primarily it's what you'd expect with consumption type of impact on macroeconomics. We see impact in retail being down, e-commerce as being much lighter, consumer electronics demand is not as robust as what you would expect and what you had sort of 6 or 7 months ago. The outlier is travel. Regardless of what's going on in the macroeconomic areas, people are traveling. People are spending money on travel, and that still seems to be very, very robust. Other things that are doing generally well, banking. Traditional banks are continuing to figure out how to change the dynamic from a cost to serve, that's benefiting us. Healthcare companies continuing to benefit us. So it's a bit of a mix, but overall, as you'd expect, as we go through these times.

Topic this year, gen AI, what do you see in terms of the impact on the industry? Do you see it as an opportunity, as a threat, both?

Yes. Actually, we see it as an opportunity. And it's funny to us. It's been something that's just the evolution of the tools that are out there. I think to investors, this is the first time they've actually been -- actually able to interact with technology that has a change for them. So when investors heard about RPA many years ago, they're calling, okay, that's kind of interesting is B2B, but now investors can actually see how chat AI can interact. But from an industry perspective, we've always been focused about automating our business and automating our clients' business because, to us, it's not about volume, it's about value. And there's quite a difference. So we expect that it will impact some volume, but we believe that we will be able to increase the value much like we've done with RPA, much like we've done with driving mobile applications and all sorts of other work that we do. We do also expect that it will be far more beneficial for driving better productivity and better proficiency from a staffing perspective, more so and first, which isn't going to have as much impact on revenue by any stretch of the imagination. We also think what people are underestimating is that these things don't run on their own. They require a lot of services that go along with it from consulting, from implementation services to the management of making sure that the systems don't hallucinate to making sure that they're delivering the right answers all the time. All of those are, frankly, margin-rich opportunities for us because we're the last mile with that client to develop those services for their clients. And that's really what we're seeing and how clients are engaging with us right now is understanding how to put and implement the technology.

Chris, any specific examples that pop to mind, any verticals because you've been talking more automation and AI for some time now in terms of what you're already doing or what clients have begun to ask you to do?

Yes. So let's separate that a little bit. From an AI perspective, we've been using AI, more machine learning for probably the last 1.5 years to 2 years. And we've got very good demonstrable examples of where we've implemented it into our systems and implemented it into our processes and seeing real tangible benefits. Probably the biggest one is how we've automated a significant amount of our QA where you would use to have people kind of look at 10%, 15% of the transactions and make sure that they were up to the right standards and doing the right things to where now, we can actually look at 100% of the transactions and we give client sentiment, give feedback to customers about problems with their products or processes. We've been able to do this without increasing our headcount at all and actually bringing our headcount down in the QA function, and we have it deployed across tens of thousands of desktops, over 50,000 desktops we've got it deployed on. So that's going very well, and we're going to continue to roll that out. Gen AI is slightly different, higher cost model, right? Every query to a large language model has an impact of a cost. And so, right now, a lot of people are trying to figure out what that cost model is, how it's going to scale and can it be more accurate? And where we're seeing clients really getting interested is saying, can we search the knowledge base faster and get better information back to our staff who are handling the customer interaction in a more efficient manner? They're more interested in that. So think of clients that have large knowledge bases. Healthcare companies are a great example. If you've ever tried to phone a healthcare company up and ask about your medical benefits in the U.S., you know that you normally put on hold a few times or the chat we'll say, let me look this up for a little bit. All of a sudden, you can get that contextual information back a lot faster and then have that interaction with that adviser. So we see real benefit in that and some good POCs in the health care space. Similarly, believe it or not, in travel and transportation, when you're dealing with an airline and you're looking at all the rules and regulations of fare classes and changes and visa registration, all sorts of stuff that you can imagine, we've got some good POCs around how to do that and how to interact with those knowledge basis. Same with training, speeding up with training. We've got some good POCs from that perspective with generative AI. So very, very excited. In terms of the interaction with a live customer, we have clients who are trying to figure out the best way of doing it, but no client is prepared to risk their brand until they know that every single answer is accurate and not going to get them into trouble and end up on the front page of the newspaper. That is certainly some time away.

And that's a key question also for me, which is there is regulation, there's governance risk security. You mentioned hallucination. What are you sensing in terms of the rate of adoption by clients on mass of Gen AI specifically?

Yes. We see it as being very slow. This is the first time that a technology has come out where clients have actually put the brakes on where we talk to clients and say, would you like to try instead. Look, we've got to figure this out first. We've got to figure out how to make sure that the integrity of our brand is protected, that the integrity of information is protected when it's impacting the customer directly. And we think that some of the adoption will actually be in replacing chatbots and other types of older technology that's not giving as much contextual impact to their customers. And we see that as coming along, first, more so than any wholesale change that's coming along. And again, it goes back to that driving our productivity and proficiency where we see a lot more interest and a lot more value to the brands.

Is it too early to have a point of view on the financial impact of Gen AI specifically? Or are you beginning to form new release in areas in which it will drive maybe margins up -- given revenue up?

Yes. So we see it from this perspective, and it really along three different areas. The first is historically how automation has impacted our financials. And generally, what happens is that there is some revenue erosion because you're taking, let's say, a dollar transaction for lack of better terms as an example, and cutting it down because it's all technology based. But from a margin dollar perspective, we actually see it increasing pretty significantly because there's a lot less cost to produce that revenue. And so automation to us has been frankly, very, very profitable. And one of the reasons we've been able to raise our op income margin pretty significantly over the last number of years. And so expect that to be very, very healthy. The second thing that we look at from a generative AI perspective is the actual cost of delivering generative AI. It's more expensive than people realize and where people think it will hit the lower value transactions first. The reality is that on our models that we've seen, you can still do things cheaper with people offshore than you can with generative AI on a lot of the basic transactions and people don't necessarily [ realize ] that until they start getting into the cost models of paying for the tokens and everything else and the infrastructure that goes along with it. So we think that will be delayed a little bit. But again, when it comes through, stuff is already being done offshore. It will have a lower impact to revenue and sort of similar to higher-margin dollar impact. If stuff has been doing onshore and being replaced with it, it will have more of an impact to revenue, but it's significantly better impact to gross margin dollars on the back end, which is clearly what we're continuing to try and drive from a margin profile perspective as we go through. The last sort of economics that we look at in terms of our model that we think is very, very beneficial of what I talked about before. All these additional services around how we deliver generative AI, the consulting, implementing it, keeping it running giving feedback loop back to the clients. As we've done that in other parts of our business, that's been very, very good for us. And so we expect to see all this new incremental revenue that comes through that we don't even have now that will add to our growth.

Yes. And Chris, I would add, you haven't even touched on the opportunities for our cost base. So there's some meaningful cost that, frankly, clients don't really see, but have to be there to have an adviser or a brand ambassador have a good interaction with a customer. And so we're talking here about the training, the quality monitoring, the scheduling and all those types of things. Those are meaningful monthly costs that we have. Can we automate all of that? No. But can we reduce the cost there a bit? I think we absolutely can. And that will -- I think those benefits will largely accrue to us.

And look, one thing that we haven't necessarily talked about, and I'm not sure investors always appreciate is that we've continually focused on driving automation within our business, as we've talked about, helping us to drive up our margin profile. And as we've done that, what we found is that clients as a whole look to outsource more to us because we're more efficient and gain better efficiencies over time by driving this automation. And so while there might be initial impact from a revenue perspective, you generally gain from it because you're getting more of the volume from the clients that they want to outsource.

As you drive more efficiency, more productivity, do you see an impact on changes in contract structures, more outcome-based versus time and materials, more fixed price and so on. And this may, by the way, be happening regardless of Gen AI, but maybe especially because of?

Yes, I think some of that is continuing to evolve. We continue to talk about outcomes-based pricing becoming a little more popular. It's certainly not anywhere near a material amount of our revenue. A material amount of our revenue is still tied to some sort of transactional nature, but we do get more people kind of interested in it. I think economically, what it changes is that the benefits of automation don't flow all to us. The clients also participate in that benefit, either driving lower cost of operations or other types of lower cost structures around doing it. And that's absolutely fair, but we always similarly benefit from it as well. And we see that continuing on with Gen AI and everything else that comes along from an automation perspective.

As you think about leveraging Gen AI, do you have the people that you would need? Would you look outside a bit of both?

That's a great question. And that's where we think we are very, very differentiated. We made an acquisition a year ago of PK, which was a professional IT services firm and so we literally have thousands upon thousands of engineers and consultants and analytics folks who've been very quickly been able to get involved in the generative AI conversation because we've been doing AI/ML. We've been doing data lakes and analytics already. We've been doing the journey mapping consulting already. And now at scale, we can deliver these services to folks who want to start building in Gen AI into their ecosystem and customer journeys.