Concentrix Corporation (CNXC) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. And why don't we get started? My name is Dave Koning. I'm a senior analyst at Baird. I cover business process outsourcing, really for, I think, the last 17, 18 years now. And I think probably going back that far, Andre, was here with Convergys probably 17, 18 years ago. We've all looked a little younger at the time, maybe a lot younger. But I'm really pleased to introduce Concentrix today. We have Chris Caldwell, CEO, and then Andre is the CFO. It's consumed going to be a nearly $10 billion revenue run rate company with the addition of Webhelp coming up later this year. So with that, why don't we kick it off with some slides, and then we'll do some Q&A.

Well, thanks, David. Andre Valentine here. I'm glad to give you a little bit of an introduction to Concentrix. So real quickly, Concentrix today coming off of a year in 2022, where we're $6.3 billion in revenue, almost $900 million in non-GAAP OI and $460-or-so million of free cash flow. We've really invested over time to be a leader in the customer experience space. And so not only can we run the customer experience operations for our clients, but we've invested to be able to design and build those platforms as well and then ultimately run them for our clients. Those clients, we have over 1,000 of them including 130 of the Fortune Global 500. They are long-tenured clients, and we serve those clients across 40 countries. We're positioned kind of here in a very dynamic marketplace. We deliver customer experience across a fragmented market that we kind of break down into these 3 parts. Our CX BPO market, growing market at about $110 billion in revenue. That's kind of our core. And then recently, we've invested both through M&A and organically to move into the $270 billion digital IT services market. This is where we design and build at scale our clients' customer experience operations And then we are also playing across a number of adjacencies in the CX space, that's about a $320 billion market, growing quickly with things like analytics, voice of the client, consulting, et cetera. As David mentioned, we're very excited. Back at the end of March, we announced our combination with Webhelp, really combining 2 best-in-class customer experience providers to create what we believe is a global leader in the space. The transaction valued at about $4.8 billion, consisting of cash, some stock and note payable back to the sellers. Webhelp of their own right was a large company, $3 billion of expected revenue here this year and nearly $500 million of adjusted EBITDA. That creates, as David said, nearly a $10 billion run rate here in 2023 from a revenue perspective, $1.6 billion nearly in combined pro forma EBITDA, and that's before we get to synergies, very attractive acquisition or combination for investors, mid- to high single-digit non-GAAP EPS accretion in the first year with double-digit accretion accomplished by year 2. And we expect to close that transaction here by the end of the year. The strategic rationale for the deal was quite simple. As we looked across the marketplace for customer experience providers Webhelp was the obvious choice for us, really enhances our position as a leader in this large growing market. Webhelp adds some really marquee clients in attractive growing markets for us, further diversifying our client base. And what we really liked about Webhelp among the many things is very limited overlap between our client set. So we feel really great about that. Webhelp is a leader in providing services in Europe, Latin America and Africa, Concentrix, a leader in providing services for North America and Asia Pac. So when you bring those 2 together, really a global footprint that we believe is unmatched in the industry and diversifies our revenue sources as being about 1/3 each from the Americas, EMEA and Asia Pac, expands our breadth and reach, a global reach of high-value services, digital capabilities, great corporate culture match between the two. And lastly, as I mentioned, accretive in year 1 to our revenue growth, profitability and non-GAAP EPS. So very exciting time. So with that, we'll turn it to you, David, for some questions.

Yes. No, that sounds. I was going to actually kick off with some questions about Webhelp you explained a lot of those. But maybe one thing the delivery so that the regions where the revenue comes from, you explained on the is the delivery any different, whether it being from -- I thought they did some like online type delivery too, like more so maybe than you did, but just the locations of where the delivery comes from, is that much different than the legacy business?

Yes. They actually have a strong delivery footprint in Africa that services Continental Europe. They also have some great delivery in the Nordics and in Eastern Europe, which we were somewhat laid on. And then in Latin America, it adds a number of countries to us as well where they're doing delivery. Similar to us, they have a strong local market presence. So a number of their customers are local market leaders that might be seized or in the local market. And similar to us, they deal with a lot of large companies where they deliver for them in multi geographies, where we see the benefit we can help give them a full world solution.

Yes. Great. And maybe now taking just a step back to the total industry. When we started doing this a couple of decades ago now, I mean it was all AT&T, and it was answering the phones for phone bills. And it was just all of this very low and low. And now -- I mean, explain maybe a few of your services, I mean, it's much higher tech, much higher complexity and some of the stuff you do.

Yes, the complexity of our business has evolved pretty dramatically. When you look at our total revenue, about 10% of our business is those IT services, which are pure development build and design and consulting around IT services. And then when you look at the 90% of our revenue that's there, it's almost 50-50 between voice and non-voice. And when we look at the voice component of our business, a lot of it has turned into very high end, whether it be emergency services, whether it be health care claims management and working with you on what surgeries are going to get done and get approved and so forth and so on to financial advice. You name it, a very significant portion is sort of in-depth conversations with customers and driving value from those conversations. On the nonvoice perspective, it comes similarly back to things that you've seen evolve in our industry, which is chatbots, which is chat, which is content moderation and the services that are kind of powering some of the social media companies as well as some of the new e-commerce companies as well.

And is that also why the margins seem to have gotten a lot better in the last 10 to 12 years to because it's more higher value?

Yes, for sure. I mean we've seen our margins over the last 10 years increase effectively almost 900 basis points, give or take. And it's really a combination of one, getting into higher barrier of entries business, health care and banking, insurance financial. It's a combination of our technology investments, where a significant portion of our clients run on our technology platforms that we've built out over the years. And then it's also continuing to expand our footprint through M&A as well as organic where we get better delivery costs as well as, frankly, a more diversified portfolio of clients, I believe there's a premium to be paid for kind of the services that we offer consistently around the globe.

Yes. Great. And maybe if we talk a little about macro, it seems like the whole services industry has gone through a little bit of a slowdown in what's -- we'll talk about AI in a minute, too, but I think some investors look at it like, oh, this is the beginning of AI when it's really just -- there's little macro pressure across the industry. But maybe talk to a little bit what you're seeing with macro.

Yes, for sure. From a macro experience perspective, it's kind of a unique time. When we're conversations are talking with clients, they're in this kind of debate about what to do. They hear all the stuff about recession. They're definitely seeing it in volumes. Volumes are down generally across a lot of the industry, but they're not also seeing things hit the wall with sort of high unemployment rates. And when that happens, they tend to be in this debate of, do they compress and consolidate partners to get better leverage, do they outsource more? Or are they just trying to hold things the same and kind of feed everyone up a little bit because things might come back and it might be very costly for them to build out the ecosystem and infrastructure again. So in reality, it kind of has kind of petered some of the demand expectations. I think with our business, we operate very, very well when the economy is poor because clients want to outsource more. We operate very well when the economy is booming because they require help for scale. Right now, it's a bit of a mixed bag, right, as clients are kind of going through decisions of whether to outsource more or keep the infrastructure in place or consolidate partners.

Yes. And we're in an economy now where, I mean, you remember, just 2 years ago, everybody is trying to IPO and those revenue at all costs to just get a revenue multiple all of a sudden, companies are like, wait, we need to be profitable. We're not going to like do well in the market. So are you getting more cost-cutting type interest.

We talked about that in the earnings calls about probably April of last year, there was a very defined flip change with clients where they went from to your point, growth at all costs, especially the new economy companies to really about how do they get more of their cost variable and how they take out costs. And it was a very -- like literally within 30 days, every single conversation changed about managing the cost structures and how can we do that?

And it would seem like, it was like the current environment, I mean that can only be continuing. And there's 2 factors in our survey each quarter, we kind of hit how our sales and how our existing client volumes because they can be 2 different things. And I would imagine the existing client volumes might be a little lighter, but sales activity and interest in sales might be really good.

And that's what we're finding. Generally, our pipeline is strong, deals continue to flow through the pipeline as expected, although be it the deals don't ramp as fast and as large as what you do in a booming economy because they tend to be, hey, this is how much volume we need to give you, and here's what it is. So you take it. But to your point, volumes, and we've called this a few times on our calls, in a number of the categories is just down. There's less consumption of their products and services from our client base.

Got you. And Andre, when you started at Convergys, what that is, what, 13, 14 years ago, maybe.

A bit longer than that.

Longer than that. Yes. But I just look back at what was -- like what was AT&T at the time, 20% of revenue?

It got as high as 30% at one point.

30%.

So it's great. As you look across our client base, once we closed the combination with Webhelp, we'll see a situation where our top 5 clients are just 20% of revenue. So I'm not used to that environment. So it's great.

Well, that's -- yes, that's what I was kind of getting at. Not only now top 5 down to 20%, but the diversification of revenue streams and getting back to the cost cutting, but it's like all different types of things that are in there now. So does that create a big maybe mode, but more so mode of growth, like it can't fluctuate that much because you have some stuff that just kind of moves up.

We definitely see that across the verticals. We certainly see continued strength, for instance, surprisingly in travel, but certainly seeing softness in retail and e-commerce, in communications and in consumer electronics. Good strength still in health care and banking and financial services. So it does -- that diversified client base and vertical mix certainly helps.

Yes. So you've created almost this band where it's almost hard to operate too far out of a certain band of growth now.

Yes. We certainly focused on that, both from a vertical diversification perspective, a client diversification perspective. And also what was important with the Webhelp transaction was a geodiversification perspective. We're very focused on getting to this 1/3, 1/3, 1/3 from where our revenue is generated from because we also see those opportunities of taking those clients and kind of spreading them around the globe, which we've been successful doing on the Concentrix footprint, and we believe we'll be even more successful as we bring into it.

Yes. Got you. And I'm actually -- I didn't actually realize because usually North America is like 80% of everybody's clients right, and Europe is often the other 20%. But Asia Pacific is an interesting place. I mean, TDCX has a lot of exposure there and stuff. But I don't feel like I know that market that well and maybe describe some of the dynamics there relative to like North America side.

Yes, and investing in the Asia Pac market for now going on almost a decade. And so we're probably the largest non-Japanese BPO player in Japan. We are in Korea, we're in China. We've been in China since I believe, at '99. And so I have a long history within China, Thailand, Vietnam, Indonesia, Australia, New Zealand, India and so have a very strong footprint there. And it's a really nice combination of domestic clients. And lately, some of those have become, frankly, massive companies that have spread out across the world, which we've helped them support do that as well as provide access to MNCs from North America going into Asia Pac. It's a unique market. It's country by country. There's a lot of complexity to it. But what we offer clients is really the ability to get consistency throughout that region with sort of that local touch of intimacy, which is just super, super important when they think about how to service their customers.

And is it -- is that Asia revenue from Asia call centers often I think because of language?

Yes. So when we talk at 1/3, 1/3, 1/3, that 1/3 is actually revenue from Asia Pac clients coming in from Asia Pac.

Yes. Okay. Got you. What about the FX impacts of -- I mean, you guys have a complex -- I mean, Andre, I remember you always had a really tight FX models, and that's really good. What are all those like factors now with such a diverse geo base?

The good news is for most of the work that Chris just described, we're delivering in country in currency, right? So yes, we're going to see revenue fluctuate as the exchange rate moves between those currencies in the U.S. dollar. But from a cost perspective, we're still kind of mostly focused on the cross-currency risk, a situation where we're billing in the U.S. dollar or the euro, but we're delivering from, for instance, India or the Philippines. We have a significant amount of cross-currency risk there that we hedge quite aggressively. And so all we're trying to do there is kind of as we price new work, make sure that we kind of lock in their currency rates, so it kind of delivers the modeled economics. And it's worked out pretty well for us over time, both in driving some certainty of profitability, reducing the risk, but also some consistency in that we're not seeing large swings from month-to-month or quarter-to-quarter caused by the currency.

Yes. Got you. And maybe we could talk about AI because it's kind of in the press all the time. And from what I've heard, it like almost as roughly 0 impact right now, and it's just kind of a future thought, right? Here's kind of one thing I wonder, companies are asking you, first of all, they save money with outsourcing. Then you have to offshore to save more. And then AI to save more, like eventually, it's almost like you're paying them almost like that's how much they want to save, right? And it's like at some point, do those things, those factors almost not allow for more savings like maybe just talk through some of that impact.

Yes, let's back a little bit. I think to your point, if you go back a decade or 2, the only way clients could save money for the most part was to have a more variable workforce use an outsourcer for it, and it was like go nearshore or offshore and that's how they would save money. The reality is for the last decade, outsourced as a whole, and we pride ourselves as being one of the ones that have kind of pushed a lot of this effort have driven automation. That automation might have come through getting rid of work completely, might have gotten into putting in new technology like IVRs or web learning systems, knowledge bases or RPA or whatever the case may be. And really, the last 1.5 years to 2 years has been AI. Let's define AI as Machine Learning, not generative AI. Let's talk about that as something a little different. And the reality is that as all of this has gone through, the work product that we've done continues to evolve. So if you look at a decade ago, you might have been taking calls from e-commerce about where is my parcel. When was the last time you called an e-commerce player about where was your parcel, hopefully not too many times. The reality that work product has gone away. But now what's happening is we're dealing with third-party resellers on marketplaces and making sure their content is not counterfeit and making sure that reviews a legitimate making sure that fraud is managed and all sorts of stuff like that. All this work product didn't even exist 10 years ago. So people have to appreciate there's always new work product coming and there's more and more tools that allow us to optimize that work product. That's why clients want to work with us. Generative AI, we really see is just a continued evolution of a tool that allows us to do 1 or 2 things, either get rid of the work, right, or make sure that our advisers who are doing that work are more productive and more efficient and more proficient with the work that they're doing. And right now, the reality is that clients are more focused on making their staff and our staff more proficient and better and more productive with generative AI than necessarily getting rid of the work completely. Some of that will happen, but that's not what tends to be the focus right now on the conversations with clients.

Yes. Yes, that was a much better answer than the way I. And would it be almost fair to say that what you do today because you're already doing the outsourcing, the automation, the offshoring, you're saving them so much money that if a company said, "Oh, I'm going to ChatGPT this. If they did it themselves, it would probably cost them a lot more because they would have to figure it all out than what you're already saving them today.

Kind of it. Look, the reality is the way clients purchase technology make decisions differs. Some technology clients -- or some clients say, we want to decide the technology standard, and we want to implement it, then we'll use partners like you to run it and drive it and optimize it everything else. Some technology or some clients think of technology and say, we want to come up with a standard and then we're going to go out to our partners, and our partners are going to go implement it and design it and run it and manage it. And then to your point, some clients are like, we don't want to touch this. You're the experts, you go and deal with it. And so we have clients right now who are talking to us about implementing generative AI, and they're looking at it and saying, okay, how does it fit? How do you secure the data? How do you make sure there's integrity of the product, predictability of the answers, all sorts of stuff like that. So there's a lot more complexity to it than on an enterprise scale than what tend to people see when they just kind of sit down and say, "Hey, please write my wife a birthday note and get away with it, right"? The reality is that's very cool and easy to comprehend. Now try and do 1 million of those and write the same note every time and not insult your wife. Trust me, it's not that easy, right? So the reality is you've got to kind of appreciate these differences to do it, and that's what our clients come to us to do.

Yes. Yes, exactly. That's great. Let's see. How about the security risk of AI, that's an interesting one, right? Because we were talking to one of the fintech companies, they're like the day we put that code out there, we try to like automate with that, that code is out people can see it. Like what do you see as some of the security risk of that?

Yes. I think the reality is most of our corporate enterprise clients do not believe that they want to give their data, their data into an open format or a large language model that is open to others. It just -- some might do it. I would be surprised the vast majority do not want to do it. So that requires them to think about, okay, how do we come up with our own proprietary large language models? And then what GPT generative AI technology we're going to use to kind of do the large language models. There's some open source. There's some people who are looking at closed. We have our own thoughts about how to implement it. But the reality is that it's going to be a very different environment than kind of people signing up to open AI and saying, "Hey, we're going to put our enterprise on it". The second thing that people don't necessarily appreciate around some of the generative AI is the cost, everyone kind of bypasses that. The reality is that a lot of our interactions with clients there's a fair bit of back and forth, contextual understanding, getting the data and nothing like that. If you're paying for tokens, depending on the size of the interaction you're having and the complexity of the interaction that you're having, it's not as cheap as people think. And sometimes basic AI/ML tools, will do it better, faster, cheaper and get the results done. And those are tools available now to do it. So there's a lot more debate and conversation that kind of goes along with it. But overall, you see it as a benefit.

Yes. Got you. And then what about just some labor characteristics today? Like wage inflation for a while was sky high, so as attrition that started to come down a little bit. How do you see that related to the margins and maybe talk through that?

Yes. So you're right. We saw significant wage inflation starting in the midpoint of 2021. We called it out on our earnings call then and talked about it for quite a while. And then we had great success, frankly, in passing those increases along and even moving our margin up over time even in the phase of those inflationary pressures, which were most intense in the U.S. for us and parts of Europe. The rest of the world, we've always dealt with inflation in places like India and the Philippines. So we didn't see that intensify all that much. That's all changed, I would say, over the last couple of quarters. We've seen the level of wage inflation come down. We've also seen it much harder to pass along wage increases to clients. So the environment has changed there. But again, kind of feel pretty good about where we are. From an attrition perspective, attrition has picked up a little bit, but it's still kind of below pre-pandemic levels. So it's manageable where it is right now.

And I would say that when we're having conversations with clients, many times we talk to them about the geographies we're delivering the work product from and say, this is the expectation of where we think costs are going to be in a year, 2 years and 3 years. So would you like to talk about a technology solution? Would you talk about, like should we get rid of this work completely? And it provides an opportunity to have that conversation proactively around how to automate the work and drive better efficiencies for them. They save money. We tend to make a higher margin, become stickier with a client. And frankly, we see it as a win-win for both.

Yes. And that really brings up another important question. So that stickiness factor. I remember going back several years, this 30- and 90-day out clauses. I mean it was really easy for clients to just say, "I don't want to do as many volumes and I'll just shift." Today, you're doing so many different types of processes with a company that it's very, very hard, it seems like to switch volumes away.

Yes. Look, I mean, if we don't deliver on our job, I think a client can figure out a way to get out of our contracts. But the reality is, is that if you look at our tenure of the top 25 clients, sort of 16 years, somewhat unheard of in our industry. And if you look at our top 50 clients, 49 of those clients we deal with, with multi geographies, multiline business, have technology engaged with them and so become very, very sticky. One we don't it's a government client where we have to deliver within that goal region. And that is our focus. Our focus is trying to really be an extension of our brand, of our clients' brand, delivering for them as if we are them and with these tech tools, tie-ins with the domain dollars that we have, we can -- I don't want to say indispensable, but a key part of their supply chain and ecosystem.

And then what's the industry dynamic like today with -- you're huge now. Teleperformance is also quite huge. Sitel and Sykes have combined Teletext still pretty big. But there used to be, it seemed like 10, 12 companies, $1 billion to $4 billion. Now there's really 2 or 3 really big ones and then a bunch of really little ones, right? And what's that dynamic like now?

Yes. Look, our theory on the market, and it's been like this for gosh, probably a decade is that the market is highly fragmented. And we believe that there's going to be 2 or 3 players that are kind of $10 billion and above, and we hope to be one of them. And we expect that there's going to be a lot of companies that are $500 million to $1 billion and are going to be really specialized work product or domain expertise or a region or a country or whatever the case would be. And then it's going to be really, really tough for the ones in the middle, if they survive because the requirements from a security perspective, compliance and regulatory perspective, continued just increase and you need to be able to have size to be able to do that. Clients want fewer partners, so you need to have the footprint to be able to do that. Tech expertise to be able to do that. And it's hard to invest if you're in that middle part. So we expect, over time, there will be -- continue to be a lot more consolidation, both on the top end and then the sort of $500 million to $1 billion, but a few players that are going to sit in the middle.

I've seen some companies over the years, even $100 million to $500 million even, but actually have pretty good margins. They'll do 1 or 2 processes really well, have a handful of good clients. And yes, operate well. Those would seem like great acquisition targets because you could pick them off then and make the margins even better because you can scale them. But is that kind of what you'd be looking for?

Yes, we look from an M&A perspective outside of this large deal with Webhelp is really about domain expertise that we're after and about capabilities. And so there's a number of things within the tuck-in opportunities that $100 million, $500 million, $7 billion, that would be very complementary to us and do it. What we're focused on though is making sure that the value add of the services is sustainable. There's oftentimes companies that get to $100 million that have great margins, $200 million that have great margins. But the services that they're delivering are at that margin because they're relatively new, but they're soon going to get commoditized or brought down because of people going into the space and starting to scale it. So we really look at the sustainability of those margins, the uniqueness of the domain expertise or tech solution that they have. That's what really interests us.

Got you. Well, good, we have a couple of minutes left. Is there anything else that I didn't ask that's kind of important to kind of the story right now?

I'm surprised you didn't ask more Gen AI questions.

Maybe should I ask more. Yes.

No, I think from our perspective, we're very, very confident about where we are within the space. We think that the Webhelp deal certainly differentiates us pretty dramatically from our competitors. And we think our investments in our tech stack, we have well over 10,000 sort of developers and analytics people and everything like that at scale can deliver real value to our clients. And so from a Gen AI perspective, we see it as an evolution, not a disruptive impact to our business that will allow us to continue to automate work, drive better margins, be more integrated to clients. And we expect that we'll be able to continue to add and build out our expertise in the adjacent markets around the core CX to continue to be a consolidator of work for our clients and continue to grow our business. So very, very excited about the market right now and continue to think that there's a lot of opportunities for continued growth.

Yes. And I mean we always think pure customer care work, right? If that's all you did, the margins would be lower, but you've gotten into more processes and more IT outsourcing your margins have gone up and the numbers usually don't lie, right? So it's like we can see it that you're getting more complex.

Correct. The deeper we get with our clients, the more complexity we have in the processes. The more of our clients that use our tech stack, it just continues to add and continues to iterate our business as we go. And so the vision that we've had that we started almost 2 decades ago continues to be the vision that we're executing right now.

Yes. Great. Well, that's about all the time we have. Please join me in thanking Chris and Andre and Concentrix.

Thank you very much.

Thank you.