Concentrix Corporation (CNXC) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Concentrix Second Quarter 2026 Financial Results Conference Call. [Operator Instructions] I will now hand the conference over to Elise Brassell, Corporate Communications and Investor Relations. Elise, please go ahead.

Thank you, operator, and welcome, everyone, to Concentrix' Second Quarter 2026 Earnings Call. This call is the property of Concentrix and may not be recorded or rebroadcast without written permission of Concentrix. This call contains forward-looking statements that address our expected future performance and that, by their nature, address matters that are uncertain. These uncertainties may cause our actual future 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 expectations, events or developments. Please refer to today's earnings release 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 and in other public filings with the SEC. Also, during the call, we will discuss non-GAAP financial measures, including adjusted free cash flow, non-GAAP operating income, non-GAAP operating margin, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, non-GAAP EPS and constant currency revenue growth. A reconciliation of these non-GAAP measures is available in the news release and on the company Investor Relations website under Financials. With me on the call today are Chris Caldwell, our President and Chief Executive Officer; and Andre Valentine, our Chief Financial Officer. Chris will provide a summary of our operating performance and growth strategy, and Andre will cover our financial results and business outlook. Then we'll open the call for your questions. Now I'll turn the call over to Chris.

Thank you, Elise. Hello, everyone, and thank you for joining us on our second quarter 2026 earnings call. Our second quarter marked an acceleration in many areas in the evolution of our business. A few key statistics we are very excited about. First, we saw a record level of contract signings for our iX Suite of technology, up 400% year-over-year for the number of deals. We saw increases of 25% year-on-year in the number of deals where we sold technology with our services. We saw an increase of 80% year-on-year in the number of deals where we sold AI and technology with our services. We saw a record second quarter cash flow. We improved our efficiency by increasing our revenue per non-billable headcount by 14% year-on-year. We saw margin expansion sequentially of 10 basis points with a clear path to continued expansion. While early days, the momentum we see in the parts of the business we have been investing in are paying off, while we are being prudent about managing our cost structure to drive better returns. Our key message today is we are continuing to effectively execute our strategy, and we're making the right investments in the business for long-term shareholder value. Now let's break down some of these areas further. First, on our iX Suite of technology, we closed almost 100 deals in the second quarter and are now focused on keeping up with demand for deployments. While we have improved our implementation speed by 12% through the quarter, we need to be faster to take advantage of the demand. We are on track to double our iX Suite revenue by the end of this fiscal year, hoping to surpass $120 million in annual recurring revenue. While growing, our iX Suite is still a small percentage of our total revenue. What really excites us about this is now we have clients using our solution for the year and the economics are becoming clearer. We now have 11% of our revenues influenced by iX Suite deployments. While we can see some revenue decreases when we first deploy the platform from driving automation and productivity gains, these tend to be short-lived. We are seeing clients with iX Suite growing significantly faster than our consolidated average and delivering almost 350 basis points better margin and starting to buy additional licenses for clients' internal operations by the end of the first year of installation. Our subscription with clients already deployed grew 24% year-on-year for new license revenue. This is because our technology works in enterprise settings and drives real value. One other important point for investors to appreciate, of the top [ 75% ] (sic) [ 75 ] of our clients, 97% have AI in production. The vast majority have multiple AI solutions deployed for multiple use cases for CX versus homogenous technology stack. The solutions we are putting in with our partners and our own technology are delivering real value because we have deep domain knowledge of the processes. The environments of clients are getting more complex with AI, not less, and that provides additional opportunities for us to manage these environments and sell additional services. It also shows AI has not significantly cannibalized our revenue or opportunities when our client base has adopted it. Second, while Andre will talk through the strong cash flow results in more detail, it's important to appreciate that as we stated at the beginning of the year, we are focused on reducing our debt. We believe it is the best way to deliver value to our shareholders when the stock price is more volatile than we would all like. Third, we saw a path this quarter to accelerate the use of AI internally within our own organization and align our cost structure to the profit potential of the various areas of our business. This drove a higher restructuring charge than we anticipated at the beginning of the quarter. But on a cash basis, even after some reinvestment, we expect to cover the charge in 6 to 9 months. We are not completely done yet and expect that we will spend an additional $75 million in restructuring this year while still hitting our free cash flow guide, reducing our net leverage below 2.6x and continuing to reduce our debt in 2027. Lastly, as we have called out, we have some very fast-moving parts of our business that are benefiting from the current environment of enterprises needing AI expertise that are practical, real and well thought out. We are focused on keeping up with the demand as quickly as possible by ensuring we continue to have the right resources available in the right markets with the right vertical expertise. We are doing this successfully by rebalancing our priorities of spend in real time. Now turning to the marketplace. We are definitely seeing increased financial pressure on our clients as they try and cope with their own investment needs and their current operating environments. This has created demand for more of our automation solutions, but also increased the urgency of moving work offshore and caused certain clients to prioritize spend across their client base, resulting in reduced spend overall. Combined, this has resulted in approximately 2% additional headwind going into our third quarter that we see for the rest of the year. While the market is competitive, we are being very prudent to ensure we have the right economic returns on our business. We have a strong competitive offering to help clients reduce their total cost of delivery with right shoring and automation. This environment and the faster deployments of our technology do mute revenue, but we see the path to a greater return as we demonstrated with higher margins this quarter and faster growth further out as more of our business mix changes. In fact, this is exactly where Concentrix excels. We're solving the AI ROI challenges with putting the right tools and services together for clients. As AI gets more complex, clients increasingly are looking for partners who can deliver across the full ecosystem, which plays directly to our strengths. While others may excel in 1 or 2 areas, a few can match our integrated model and is helping us win more complex deals and demonstrating greater value to our clients. As an example, 2 of our largest cross-sell wins in the quarter added AI services for existing Fortune 500 clients. This dynamic is fundamental to our growth strategy and reinforces our confidence in the trajectory ahead. In the back half of the year, we're staying focused on winning complex, high-value work with practical technology-led solutions that solve real business problems and running more efficiently so we can invest in new areas of growth while improving our profit margins. I would like to thank our game changers for their passion this quarter and our clients for their partnership. And with that, Andre, I'll turn it over to you.

Well, thank you, Chris, and hello, everyone. We're very happy with how our investments are progressing. Our growth in the second quarter came in slightly below our guidance at 0.6% in constant currency terms and within our guidance at nearly 2% as reported. We believe this reflects an acceleration of offshoring and some clients' reallocation of spending away from certain customer segments rather than anything that would mute our enthusiasm for the business areas that we've been investing in over the last 2 years that are helping to drive our business forward. We saw strong growth in areas that tend to be less impacted by shore movement, banking, financial services and our AI solutions, while consumer electronics, media and telecom saw the acceleration of offshoring have a more pronounced effect. As we mentioned on our last earnings call, the decrease in health care client revenue was driven by reduced participation in open enrollment at the start of the year. Turning to profitability. Our non-GAAP operating income was $292 million, within the guidance range we provided on our last call. Our non-GAAP operating income margin was 11.9%. Adjusted EBITDA in the quarter was $347 million, a margin of 14.1%. Our non-GAAP operating income and adjusted EBITDA margins were up 10 basis points and 20 basis points, respectively, from the first quarter of 2026. This improvement demonstrates our focus, discipline and execution on aligning our business investments to areas in which we have identified growth and margin potential above the consolidated business while reducing costs in other areas. Later, I will discuss our expectations for the second half of 2026, and you will see that we expect the improvement in margins to accelerate sequentially through the second half of the year. Non-GAAP diluted earnings per share was $2.63 in the quarter, in line with the guidance range we provided in March and up $0.02 from the first quarter of 2026. Our GAAP results for the second quarter and our expectations for the third quarter reflect restructuring charges related to accelerating movement of work offshore and aligning our cost structure for investment in higher growth and higher profit areas while accelerating the automation of other parts of our business. Complete reconciliations of non-GAAP measures to the comparable GAAP measures are provided in today's earnings release. Adjusted free cash flow was $242 million in the second quarter, the highest level we've achieved in the second quarter of any year since our spin-off in 2020. We returned approximately $23 million to shareholders in the quarter through our quarterly dividend. Consistent with our commitment to being below 2.6x net leverage at the end of the year, we did not repurchase any shares in the quarter. In the quarter, we reduced total net debt by $228 million to approximately $4.32 billion. At the end of the second quarter, cash and cash equivalents were $263 million and total debt was approximately $4.585 billion. At the end of the quarter, our liquidity was nearly $1.5 billion, including our $1.1 billion undrawn revolving credit facility. Included in our outstanding debt at the end of the quarter was $200 million of senior secured -- unsecured notes due in August of 2026. We intend to repay the notes using our third quarter free cash flow and existing sources of liquidity. Also included in our outstanding debt at the end of the quarter is $375 million in term loan borrowings that mature in December of 2026. We expect to repay these borrowings using free cash flow generated over the balance of the year and existing sources of liquidity. In total, we expect to repay over $550 million in debt this year and reduce net debt to approximately $3.8 billion by the end of the year. Now I'll turn to our outlook. For the third quarter, we expect the following: revenue of $2.465 billion to $2.490 billion. Based on current exchange rates, we expect an approximate 75 basis point negative impact of foreign exchange rates compared with the prior year period. The guidance implies constant currency revenue growth for the quarter ranging from 0% to 1%. Third quarter non-GAAP operating income of $295 million to $305 million. This implies a non-GAAP operating income margin of 12.0% to 12.2%. Third quarter non-GAAP EPS of $2.65 to $2.77 per share, assuming approximately $65 million in interest expense, 60.9 million diluted common shares outstanding and approximately 4.8% of net income attributable to participating securities. The non-GAAP effective tax rate is expected to be approximately 25% for the third quarter. For the full year 2026, we expect the following: revenue of $9.925 billion to $10.025 billion. Based on current exchange rates, we expect an approximate 75 basis point positive impact of foreign exchange rates compared with the prior year. The guidance implies constant currency revenue growth for the year ranging from 0.25% to 1.25%. This represents a decrease from our previous revenue growth expectation for the year. Primary driver of the reduction is the continued acceleration of mix shift to offshore locations, which now represents a nearly 300 basis point headwind. Our previous expectations for the year assumed a 200 basis point headwind from shore movement. We also see some clients' reallocation of spending away from certain customer segments as they manage their enterprise spend. Non-GAAP operating income of $1,200 million to $1,230 million. This implies a non-GAAP operating margin of 12.1% to 12.3%. At the midpoint of our guidance for the second half of 2026, we expect our non-GAAP operating margin to be 12.5%, a slight increase over the second half of fiscal 2025. This is consistent with our expectation that we expressed early in the year that margins in the second half of fiscal 2026 would improve sequentially to the point where they were up year-over-year versus the second half of fiscal 2025. We expect non-GAAP earnings per share of $10.83 to $11.18 per share, assuming non-GAAP interest expense of approximately $265 million, 61.1 million diluted common shares outstanding and approximately 4.8% of net income attributable to participating securities. The non-GAAP effective tax rate is expected to be approximately 24.5% for the full year. We continue to expect to generate between $630 million and $650 million in adjusted free cash flow this year, with the fourth quarter being our highest cash flow quarter as in previous years. With this cash generation, we expect to reduce our outstanding debt balance by over $550 million this year. We're committed to reducing our net leverage to below 2.6x adjusted EBITDA by the end of fiscal 2026. Looking at cash flow beyond 2026, with our continued evolution of our cost structure and growth in our AI-enabled businesses, we expect adjusted free cash flow in fiscal 2027 to exceed the amount we generate in 2026. This would allow us to reduce our outstanding debt by over $550 million once again in fiscal 2027 and bring our net debt to below $3.3 billion roughly 2.2x adjusted EBITDA by the end of fiscal 2027. In summary, our demand environment is stable. We're confident in our ability to drive margin expansion in the second half of 2026. We're confident in the continued strong free cash flow generation of the business and in our plan to repay debt and reduce leverage in 2026 and beyond. And we're in a strong competitive position to drive long-term outperformance. Now operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Luke Morison with Canaccord Genuity.

So the 2% headwind for the year, you framed as a mix of accelerated offshoring the client reallocation or reduced spend. Maybe just to start, can you help us split those? Like how much is offshoring? When we think about that offshoring shift, like is that still -- do you still characterize that as largely gross profit neutral over the medium term? And then like how much is just genuine reduction in client volumes and budgets here?

Luke, it's Chris. Thanks for the question. So to answer the first part, we originally planned for about 2% headwind offshoring at the beginning of the year. We're now seeing that closer to 3% going into the third quarter. And that pickup started happening sort of mid-Q2, frankly, where we had some clients who are needing to move faster to see some cost savings. We expected that there's work to eventually head offshore, but normally, we were expecting that probably in the early part of the new year. But just with the pressures they're pushing faster, which we are accommodating. On the client -- our clients who are thinking about reprioritizing their spend and have started to reprioritize their spend, that is about 1%. And what we're seeing is where clients are looking at high-cost markets and certain segmentation of customer bases and deciding that they're no longer going to support these customer bases at all. It's not that the volume is being automated, it's not going away. They're simply just not going to support. And that is about a 1% headwind. And again, those decisions were made within the second quarter when we're working with clients as they look to kind of rationalize and figure out their spend over the next little while. In terms of the offshoring comment in regards to profit and revenue, it does help profit once we get past the duplicate costs that normally takes about 2 quarters or so to 3 quarters. And revenue, depending on which country it ends up in, does decline. But from a profit percentage perspective, it is more helpful to us.

Got it. That's helpful. And maybe just real quick on that. Like as we look out into next year and think about those 2 different vectors of drag, how should we be thinking about that playing out? Do you see this being a durable headwind? Or is this more near term and maybe we'll see that we were originally guiding to an inflection later in the year this year. Is that just getting pushed out? Or how should we think about that playing out next year?

Yes, Luke, the way we look at it this way, over the past probably 20 years, when clients have looked at unsupporting segments of customers, they think this is a great idea from a cost savings perspective until they start to see ARPU fall or they start to see client churn increase and then they start to come back and figure out how do they need to invest to kind of continue to support those customers and grow the revenue. So I don't want to say it's temporary as in a quarter or 2. I mean these are big changes that are making their strategy, but I don't think that is a de facto way they're going to operate their business. We've already seen clients kind of start to wonder if that was the best thing to do even in these early days. In terms of the offshoring mix, look, we had expected, and we've talked about this before that we, at the beginning of the year, have about 15% of our business that we believe can go offshore. We expected it to go down to around 13%, give or take, with all the pluses and minuses by the end of the year. We now expect it to be probably around 11%-ish when we exit the year. That is a finite amount of funnel, and we don't even think all of that will go. It's just that is what is possible to go based on what we're seeing in the business right now. And so our expectations is that this acceleration is primarily driven by budgets and will probably be more moderate in 2027. But for what we're seeing right now and what we know is moving, we see it accelerating by that 1%.

Your next question comes from the line of Ruplu Bhattacharya with Bank of America.

My first question is on margins. So Andre, the full year guide at the midpoint implies about 12.2% operating margin versus the prior guide was about 12.5%. So that 30 bps of reduction, can you help us quantify where that is -- what is impacting that? And then you're still expecting in the second half for margins to be up year-on-year. What is giving confidence in that? And then I have a follow-up.

Sure. Happy to do it. And thank you, Ruplu, for your question. Yes. So the driver of the reduction in the margin guide is driven largely by the pulldown in the revenue and some of the duplicate costs that come with some of the movement offshore. Our confidence in driving the improvement in margin into Q3 where the midpoint of our guide is 12.1% and implied margin close to 13% in the fourth quarter, all comes from the restructuring actions that we're taking as well as getting some of the -- through some of the duplicate costs related to the shore movement, getting some of the revenue to the higher-margin offshore delivery. And again, then also some of our technology solutions getting to more scale and working through the deployment on the iX Suite solutions that we sold in Q2, getting to those where they're generating revenue in Q3 and even more so in Q4.

Okay. Let me ask a question on revenues. How much is revenue over billable headcount versus non-billable headcount? I think you said that revenue per non-billable headcount grew 14%. Can you help us quantify that a little bit better, Chris?

Yes, for sure, Ruplu. So what we have been doing is driving more automation and using AI internally. And in Q2, we were able to deploy some of our own AI tools internally. That allowed us to reduce our non-billable headcount even with net new adds in some of the technology areas that our revenue per non-billable headcount grew 14%. Clearly, our headcount with billable people tends to be more linear just because of what we're doing and how we're driving it. That clearly will start to differentiate more as we put more fully autonomous solutions into -- and more tech solutions into our client base. That's grown a little bit, but just because of our footprint of where people are and what the bill rates are as labor rates, probably not as applicable as our own internal efficiencies on the non-billable headcount.

Got it. Let me sneak in one more question, if I can. In terms of your full year guide, I think you said that there could be another 11% of the business that could want to move offshore. What have you factored in, in terms of conservatism into the guidance? I mean, do you think some of that can accelerate and again, move into this year in terms of trying to move offshore? And in terms of being conservative when it comes to lower volumes, which end markets have you been more conservative in factoring into the guide? And has this impacted your decision to spend on AI-related tools? And how should we think about that spend going forward?

Ruplu, that was a longer question for sneak in, but we'll try and get it through it all. First, a couple of things. When we look at our guide and our conservatism, we have been believing that the outsourcing -- sorry, offshoring will accelerate a tiny bit more than what the 3% is, but we've kind of factored that in. We don't expect there to be other clients who sort of look at moving away from supporting customer bases. These are clients who are kind of very specific to certain markets that we saw them take action. We have no other clients who are indicating that. So we're being as conservative as we believe. In terms of the other revenue that could be outsourced -- sorry, offshored at the next level, our expectation is that will continue to go down by 1.5% to 2.5% probably the next year or so. I don't want to guide past that. But really, we're getting to lower and lower places that clients have either made a public pledge that work will be done in market and/or it is work that is regulated to be done in market that can't move unless there's some legal change that needs to go along with that. And so as frustrating as it is that has seen that speed up, ultimately, it was going to happen over probably a longer period of time. In terms of investing in AI tools, look, we are starting to see some really strong headwind -- sorry, headways with our iX Suite that is offsetting some of the headwinds of just sort of the general marketplace. And so we are investing in forward deployed engineers. We're investing in subject matter expertise. We're investing in expertise around some of our partner technology as well to make sure that we can keep up with that demand. We see those as being the right investments. As we called out in sort of the prepared remarks, now that we've had our own proprietary tech out there for a year, we see what's happened. We see that, yes, some revenue decreases to begin with. But at the end of the year, it's growing significantly faster than without the technology. We're seeing almost 350 basis points of margin improvement on those clients, and we're seeing them buy the technology for their internal deployments as well. And so all of that absolutely encourages us to make sure that we're investing. Just to be very clear, though, what we said last year was that we will be profitable by the end of 2025 on our AI investments, and that is the case. And now as we get more leverage on those investments, we continue to drive them to be more accretive to our overall business.

Your next question comes from the line of Dave Koning with Baird.

Great. And I guess, first of all, when we look at margins in the back half, I know they're up slightly, but that's off a pretty easy comp with all the tariffs in the second half -- the tariff impacts in the back half of last year. So clearly, there's some headwinds still in some of the investments you're making. But does this now leave a really easy comp for next year? Like if you're selling more iX, the offshore shift hurts these next couple of quarters, but helps next year. Is this going to be a big outsized margin impact into next year?

Dave, I don't want to guide to next year. What I will tell you is that what we're going through, we are seeing really strong momentum, not only in our partner technology, but our own technology. We're seeing that drive higher margin profile business. Also as we get through our duplicate cost of moving stuff onshore to offshore, there's margin appreciation there. And we do believe that we start to get more operational leverage when -- as we build up all sort of this tech installation and deployment talent, we do think we get more and more leverage of that as we put on more revenue to that area. So all of that would lead to believe that there's still margin expansion capabilities. The magnitude of that, I think we'll talk about at the end of this fiscal year.

Probably, Dave, the thing we're probably the most confident in is our ability to increase our free cash flow again next year. That's why you heard me be specific in my commentary about that and our plans to use that to continue to pay down debt.

Yes. Got you. And then just as a follow-up, I mean, it sounds like a little over 1% revenue headwind -- or I guess, 1% impact relative to the old guidance and about 1% impact from more offshore shift, give or take. I mean is that -- does that imply that volumes actually are unchanged from what you were expecting before?

Yes. Dave, the volumes have been pretty consistent. I mean what we plan to automate is being automated at sort of the levels that we expect to be automated. Clients' automations are kind of going the way they expected. Some not as successfully as they are hoping for and providing more opportunities for services for us in getting that working. But that's pretty much on plan. Like it's very clean when we look at the movement of work about what's going offshore. And it's also very clean when we see clients saying, look, we're not going to support this set of customers in this market anymore because our costs are too much for our revenue model in that market. that is just very, very clean and discrete.

Your next question comes from the line of Vincent Colicchio with Barrington Research.

Yes, Chris, congrats on the strong traction in the iX Suite. I'm curious what percentage of the iX Suite bookings are replacing with legacy revenue versus generating incremental spend?

That's interesting. So Vince, the way I would look at it is if you think of the iX Suite revenue, this is all incremental revenue to us because we've never had a product like this or a technology product like this. And the size of it, at the end of this fiscal, we were just talked about it kind of passing $120 million of annualized recurring revenue. The reality is that what we're seeing is the influence in the rest of the business is more interesting to us because it's driving higher growth across that set of customers. And so 11% of our revenue now is influenced by iX Suite, consider that growing much faster than the rest of the revenue that we have. As we deploy every new deal, we expect to see that kind of increase over sort of 6, 8, 9 months as we get to full year maturity. And I think it will influence more and more and more. Where that is winning us new revenue is, one, driving more consolidation from other competitors. We're also seeing where clients are giving us more work to do from their own captives or from their own facilities as well because we've got the technology. So all of that kind of encourages us that as we sell more, we'll see more of the benefits come through faster.

As a follow-up, are you seeing a slowing in consolidation, which has been a benefit in recent quarters?

We didn't see much consolidation in Q2 or frankly, we don't expect to see much consolidation in Q3. We expect to see more near the end of the year. And primarily in some consumer electronics, we expect to see some. We expect to see some in probably social media and telecom, which are traditional markets that tend to consolidate near the end of the year after they get through some of the holiday seasons. And so that's where we expect to pick up some additional share.

And then just a small clarification for Andre. What's the size of the total restructuring program now? And over what time does it play out, Andre?

Yes. The total spend this year, and this is in the tables, will be a total of $175 million. So we expect $45 million in spending in Q3 and then an additional $30 million in Q4, then we should be done all up and all in. And again, when we talk about the $630 million to $650 million in free cash flow, I just want to reiterate that is after those restructuring expenses. So that's an all up, all-in number. And that is really -- as we expect those expenses to come down significantly next year, that is one of the reasons why we expect to see our free cash flow go up as we look out to fiscal year 2027 to the point where we were confident enough about it to bring it up on this call.

We have now reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.