Concentrix Corporation (CNXC) Earnings Call Transcript & Summary

All right. We're going to keep rolling here at the 43rd Annual Canaccord Growth Conference. I'm Joe Vafi, Senior Equity Research Analyst here at Canaccord, focused on tech services and fintech. Up next, we're pleased to have with us the management team of Concentrix CEO, Chris Caldwell and CFO, Andre Valentine. Chris and Andre have been working together for quite a while with great results, pro forma for the upcoming merger with an acquisition called Webhelp Concentrix, I think maybe the largest player in customer experience on the planet. Scale does matter in customer care. So this is a great time to be looking at the Concentrix investment case in my view. So with that, Chris and Andre, welcome. Maybe if you want to start, if you want to intro and describe Concentrix for a few minutes in your own words, I think you got some slides, too.

Yes. Thanks. Thanks a lot, Joe, and thanks for having us. I'll try to get through these very, very quickly. So Concentrix, if you don't know us, we are today, the second largest customer experience solutions provider globally. And we're unique in that we can design, build and run our clients CX solutions. From a numbers perspective, our current guide for 2023, ex-Webhelp is to do about $6.6 billion in revenue, have a non-GAAP OI margin at the midpoint of our guide, 14.1% and generate over $0.5 billion in free cash flow. And we do that by serving really a who's who list of clients in very strategic long-term relationships. Our average length of -- or tenure for our top 25 clients is right at 16 or 17 years. This is kind of the market that we serve. So we kind of span across the core CX BPO market. We play very heavily in digital IT services focused there solely on the customer experience. And lastly, in some adjacent markets. And so of those bubbles, we think we cover about a market that's growing and fragmented, and it represents about $550 billion in market size. Joe, you mentioned the Webhelp combination. We announced this transaction at the end of March. We expect to close here by the end of the year. Webhelp in its own right, was the fifth largest provider of these services in the world, real strength in Europe, in Africa and in Latin America, really complements our footprint where we're very, very strong in North America and Asia Pac, adds roughly $3 billion in revenue in 2023 -- for their full year 2023 and about $0.5 billion of adjusted EBITDA. The strategic rationale was quite clear. It enhances our position in that large, growing, fragmented market I spoke to. It also adds just a great set of clients throughout -- particularly throughout Europe, a very, very limited client overlap and then also diversifies our footprint quite nicely. Again, that strength in Europe, Latin America and Africa and will get us to the point where, from a sources of revenue perspective, will be very unique in that about 1/3 of our revenue will come from the Americas, another 1/3 from Europe and 1/3 from Asia Pac. So great diversification there. And obviously, a very attractive financial profile. It's accretive to EPS from day 1 and reaches double-digit accretion in year 2. And so with that, this is our last slide. We think we have a very, very compelling case to make for investors. We're a leader in our space in a large dynamic growing market. We have unmatched capabilities in terms of both technology and footprint. We serve a great set of clients. And we are executing our strategy to grow faster than this market to move our margins up over time and generate really, really strong free cash flow over time. And all those measures just go up as we get ready to close the Webhelp transaction. And so if you look at our valuation and footprint, we serve a great set of clients, and we are executing our strategy to grow faster than this market to move our margins up over time and generate really, really strong free cash flow over time. And all those measures just go up as we get ready to close the Webhelp transaction. And so if you look at our valuation versus our peers versus historical levels, we think we're significantly undervalued and a real opportunity at this point in time for investors. So Joe, I'll turn it over to you for questions.

Thanks, Andre. Maybe we'll just start at a high level being truly at scale, I think, provides you some key competitive advantages for being so large in the customer care industry. Maybe we just start with what some of those benefits are relative to competitors being at scale like as you are?

Yes. For sure, Joe. I mean, from our perspective, what clients look for is sort of a deep domain expertise. And at scale, the number of experts that you could have on any of our verticals is just immense. On top of that, the ability to deliver at scale globally is also a unique differentiation that we see from our competitors because most of our clients are MNCs, Most of our clients want consistent delivery around the world with sort of local intimacy in the local markets, delivering the services that they want. We're also able to, at our scale, invest in areas of technology that we can both drive R&D as well as net new offerings within our marketplace that our smaller peer group can't. And then lastly, from a compliance and regulatory and security perspective, our budgets are fairly significant based on our scale, and that's also something that our large clients are looking for. It's just the security of knowing who they're dealing with, how we're handling their data, how we're protecting their systems and then also in regular regulated industries, how we're handling their business from that perspective as well.

Sure. And I think probably if there's vendor consolidation going on, you're a net beneficiary there too, right?

Absolutely. We generally benefit from vendor consolidation primarily because we're either one of the largest partners that client is currently working with or two, we're bringing some automation or expertise to the table that is more efficient by giving more volume to us.

Right. The Webhelp deal, I think, Andre, you put your -- the slides up and showed the kind of strategic rationale. And I think it does make a lot of sense. I believe the current macro right now is it is what it is, right? But it does seem like Webhelp is executing maybe a little bit better than the industry right now in this period while the deal has been announced, but it hasn't closed yet. Is that the case?

That is correct. I mean we have seen the growth. And obviously, if you look at our proxy with it, they're growing a little faster than what we modeled when we talked about doing the acquisition. We believe that's faster than the marketplace in which they operate within -- in Europe and Latin America. So we do see that as accretive and sort of additional validation around why we thought the company was very valuable and worth combining with.

Great. And maybe you could remind us the kind of accretion goals that you set out because I believe it is going to be accretive deal when it does close, right?

Yes. So we expect first year accretion to be mid- to high single digits, reaching double digits by year 2. And that's on the back of -- we have clear identifiable synergies here. We've done some integration planning. We see a clear path to $120 million in synergies by year 3, $75 million of which we think will hit in year 1. And we have a real track record of doing this kind of scale M&A in the history of the company and going out with a synergy target and then at least achieving that target, if not going past it.

Right. And that M&A track record includes Convergys. It includes the customer care business of IBM, right? And just a real impressive ride. So you guys, congrats on that over the years. Maybe we talk a little about the macro, the updated view there. It is what it is. I know it is creating some headwinds in the industry, but love to hear the kind of real-time thoughts you have on where we are right now.

Yes, certainly. I think when we look at our 2 parts of our business, on our IT services part of our business, clearly, we've seen large transformation projects being put on hold, if not being delayed about when they start. Primarily, that's driven by a lot of our clients who are looking at sweating their technology assets. On the inverse, what we've seen is a lot of smaller projects tying into our core services that are looking at driving better efficiencies, quick ROIs. And so we're getting a lot of good traction from that. And so we're pretty excited from that perspective. On our core business, you really have to look at the end markets, both by geography and by vertical. And what we're seeing is definitely slowness in retail, some e-commerce, definitely seeing slowness in telecommunications, sort of subscription services, as you can think of from that more discretionary consumer spending areas that are being driven from that. And then consumer electronics, personal tech also tend to be a little slower. On the flip side, we're seeing good strength in BFSI, good strength in health care, good strength in enterprise tech, where we're seeing either necessity of consumption and/or in consumer -- sorry, in enterprise tech, where clients see the benefit of deploying some of these services and technology and getting better ROI themselves. So we're seeing the benefit of that as well.

Great. And then maybe what's going on in mix delivery mix these days with the macro, the way it is. I know you're well positioned in low-cost geos to provide service and what that may mean right now?

Yes, absolutely. So I think if you look at where business was 1.5 years ago, most clients would look at doing something onshore to begin with and then maybe transitioning it to offshore. We're generally seeing almost all new deals start at the shore, which is the most economic for their type of service that they're delivering, which tends to be nearshore or offshore. So less growth in sort of onshore capabilities. That's primarily in North America and U.K. comment. I think what we're also seeing is that clients as a whole are kind of repositioning their footprint. For us, not a big impact because we've seen a lot of that transition, but anything in North America that could be done offshore for the most part has already gone there just from a cost perspective and efficiency perspective.

Fair enough. Maybe we just switch gears and talk about our favorite subject, which is artificial intelligence. And obviously, a lot of buzz and a lot of interest in how that is going to come to bear in the customer care industry. So maybe some of your most updated thoughts, I'm sure Chris and Andre, you spent some time on this.

Just a little.

Just a little. And so it would be great to hear your most updated thoughts here.

Yes. So obviously, it continues to evolve, right? And a month ago is very different than where we are now. But we're seeing effectively directionally the same thing we talked about 6 months ago. which is, for the most part, clients see this as a productivity and proficiency gaining tool for staff members out of the gate. They see it as an ability to bring people up them, get better capacity out of them, make things easier for them as well as then having those individuals service their customers in a more efficient manner. That's the primary driver that we're seeing right now. And a lot of the use cases, POCs and solutions we're putting in production are focused around that area. We're also seeing some clients obviously talking about how do they actually use this to either upgrade their chatbot technology or have it take over the work completely. That tends to be a little further long tail. And while we do have some things in production, they're generally on small programs. The vast majority of clients that we're talking to right now are most concerned about predictability, reliability of the results that are coming out when it's talking to their end customers directly. And before they start to unleash things, they really want to make sure that from a security perspective, from a co-tanglement of data perspective and privacy prospective data and predictability of results at enterprise scale, they can really count on it, and it's just not there yet. I think with a lot of the new players into the market from a technologies perspective, proprietary large language models are coming down in price. I think that will get more people to look at adopting them. I think from a capability perspective, you're getting a lot more people thinking through how they're going to actually put this into their tech stack. But you're also getting a lot of our clients realizing that they're not prepared to digest or ingest this technology because their data is just not in a good enough shape to actually manage it, and that's where we come in to really help and play that. Net-net, we see it as a positive. We see it as another tool in our kind of toolkit as we have with all the technology driving better automation and, frankly, better results for the customers.

Right. I want to -- I have a few questions here, but one is this early on in this kind of exploration of the technology and perhaps some initial pilots and things. Do you have a feel for kind of the cost of using this technology versus another solution, maybe another automation solution that may have been around for a while and -- or versus even a human doing the function?

Yes, that's a great question. The reality is, is that what people might not really appreciate a generative AI is it's a higher cost to it from a run perspective when you buy the tokens and just from a data storage perspective than when you get from traditional AI that's been out for about 2 years. And so while we're seeing some clients talk about generative AI, what really the solution that works for them is more of a machine learning AI that is much more cost effective, much more sort of directive on the answers that it gives and effectively does what it needs to do for the client at a much lower cost. Also depending on where the work done and the complexity of the work that's being done on a few models that we've basically run through and shown from a cost model perspective in terms of the interactions back and forth and the systems you have to deal with, it's actually more cost effective to do this offshore with people than an actual large language model at full scale. And so there's definitely a lot more equations than people first get when they look at it. I think maybe that ChatGPT did this service giving it free to begin with because everyone assumed that it's going to be free. But the reality in an enterprise model, that's just not the case. There's a lot of other costs that kind of come along with it. And so we are getting adoption of non-AI generative tools out of having the conversations around generative AI tools.

Sure. And then it does feel like there's perhaps an opportunity because I think you mentioned enterprise data sets may not be in the right shape to leverage the generative AI capability, knowledge management data could be an old system. It's -- maybe it's not in the cloud for sure, in some instances, right? And so how do you see the -- it seems like there's a big lift just in kind of CX-specific customer or digital transformation that needs to happen first? And how are you looking at that opportunity? Because it seems like it could be a pretty nice AI readiness and assessment practice, for example, right?

Yes. Absolutely, for sure. I mean we invested in a company called PK about 1.5 years ago, primarily because we saw the need for building out better data lakes for doing much more integrated models for basically curating our clients' enterprise technology. And really, a lot of those are the building blocks that you need to drive generative AI in an enterprise. You need to make sure that people understand where the data is, how it's done securely, how to manage it, how to curate everything that goes along with it and also the feedback loop. And so everything that we're doing now along that journey about making a better source of truth and better data within our clients is going to help enable the next generation of AI as we go forward. And clearly, to your point, very good practice. All net new revenue, almost all of our conversations with clients starting off around generative AI, start with that consultative approach around what do you really need to do to power this? And how quickly can you get there?

Does -- I mean Concentrix as a scale player, obviously, Webhelp is going to be a large transaction. But it feels like there could be more opportunities in kind of CX specific IT out there. I mean it's obviously a -- it's theoretically a higher margin, higher growth business than the core business. Does it make sense to -- especially with this AI wave potentially building to do more M&A in the IT side of the business at this point?

Yes. We certainly see the opportunity of building out more on the technical services side with sort of tuck-ins as we see the right opportunities for us. PK and our Catalyst business is primarily a North American business. And so our goal has always been to kind of spread out those capabilities globally so that we can deliver those services consistently globally. And so certainly, with Webhelp that helps build our presence within Europe pretty significantly. And if there's a right opportunity to bring in the right skill set faster inorganically, then that's certainly something that we would look at.

Sure. Fair enough. And do you have a budget at this point for your AI technology? Or I mean we've just seen some players in tech services, say, we're spending $1 billion on standing up a practice in this area or something like that.

Yes. I'd love to be their auditor and audit those numbers. The reality is, is that we're spending what we need to spend to not only build out the practice but also have the right engagement. And I think from our perspective, we're not labeling as just AI. It's about driving automation within that client. And if it's AI, fantastic, if it's generative AI, great. If it's classic RPA or doing some other system changes that drive the right end product, that's what we're going to do. Internally, what we're making sure of is that we've got a scale team that can not only understand the technology, deploy the technology, secure the technology and then kind of administer and run the technology as we go forward. And that we're spending within our current SG&A line and the benefits that we're getting from rolling out generative AI internally, which we've done a fair bit of, we're reinvesting into driving more capabilities for our clients.

Fair enough. And as we look kind of into the second half of the year, I think sometimes in predicting volumes of how much volume one of your customers may be providing to you or estimating that you're going to service. It could be given the macro, they may be being a little bit too optimistic or too conservative in their forecast. And this year may be a little more heightened in that sense. And just wanted to get an idea of your ability to scale up if demand is bigger than some of their perhaps conservative or dire predictions of what they think they're going to need here in the macro?

Yes, for sure. I will say, we definitely saw clients misgauge both conservatively and pessimistically in our Q4 and Q1. And we are finding that they're getting more accurate. So that's a positive. Let's all hope that the economy turns around and there's requirements of scale, we can scale very, very, very quickly. I mean, if you look at during the pandemic, tens of thousands of individuals we brought on, tens of sites we brought on, new countries we brought on and very, very short scale to manage demand. That's one of the benefits that clients have working with us is that we're able to drive that scale very, very quickly for them in the right region at the right cost perspective to support their business.

Fair enough. Maybe we also kind of touch on your balance sheet and capital allocation at this point. I mean, obviously, Webhelp is going to close. Just give us an idea of kind of leverage post close. I think you're also a dividend paying stock. And so there's a few uses for your, I guess, $0.5 million -- $0.5 billion a year of free cash flow, right?

Yes. So we're really pleased. Last week, in fact, we closed on the financing for the Webhelp transaction. So good to have that behind us, happy with how that got executed. When we closed the transaction, our pro forma net leverage will be just over 3x. And we've been very clear with the street on our anticipation or expectation that we'll be able to delever to about 2x net leverage within 2 years. Again, we're going to generate strong free cash flow, even more free cash flow as we come together with Webhelp as we get the synergies. We do have a dividend. We'll continue to support that. . And we do have a buyback authorization. And we've said we'll at least do enough buyback to be anti-dilutive. And so the good news is we can kind of -- with our strong free cash flow, we can walk and chew bubble gum at the same time. We can delever. We can support the dividend, do some anti-dilutive share repurchase and probably still have some room to consider whether -- if something happened or there was a small tuck-in M&A, if you want to do a little bit more buyback, but we have the room to do that in the model.

Maybe you can just remind us, congrats on closing that financing, what terms were on that?

Yes. So they were senior unsecured bonds, spread over 3-, 5- and 10-year tranches. If you kind of blend the interest rate about 6.7% all in.

And that was kind of in the pricing range you were expecting..

Very much so. What we talked when we announced the transaction, the accretion and so forth, it was based on getting to a 6.5% blended borrowing rate there. We think that with perhaps swapping some of the debt as we intend to euro-based bonds, we can save 25, 30 basis points and bring it within that modeled level. So we feel good about doing that and taking that uncertainty off the table.

Great. We're almost out of time. So I just thought maybe if there are some things we didn't touch on that you wanted to bring up if there's any other.

I suspect more Gen AI questions.

That's enough for me.

Yes. Thank you, I appreciate that. No. From our perspective, I think, overall, we see sort of the industry as a whole a little more impacted than what reality is around Gen AI putting to the side. and that in the economy where we see ourselves right now, we're starting to see clients started going, okay, if it's going to consistently be where it is right now, we can start to think about driving more consolidation with our vendors, which we think will be the benefit of. If the economy goes down even further, it will drive more consolidation. And obviously, if the economy goes up, we'll see some benefits. So we see some ability to see some good growth coming out regardless of which way the economy goes in the next couple of quarters from just an overall health of the market perspective. We also see sort of net new opportunities coming through from the Webhelp transition. We talked often times about cost takeout which we've got clear numbers. But really, a lot of it was about driving growth, and we see some good revenue synergies, which we haven't factored in, into any of our forecasts or anything else that we have from that. And we're on track to obviously close that deal at the end of the quarter. And so coming together, to your point, we don't often think about being the biggest as being the most important. We think about being the best quality of services and the best differentiated service we can deliver. We think we're very, very well positioned at the end of the year to do that.

Great. Well, thanks, guys. Congrats on building such a big company and being a leader in the industry over the last 15 or 16 years, I guess, has it been?

20 years at this year -- this month. Yes.

Great. So thanks for being with us, Chris and Andre from Concentrix.

Thanks for having us.

Thank you very much. Appreciate it.