Concentrix Corporation (CNXC) Q1 2022 Earnings Report, Transcript and Summary

Hello. Thank you for standing by, and welcome to Concentrix' Fiscal First Quarter 2022 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, David Stein, Vice President of Investor Relations. Please go ahead.

Thank you, Josh, and good morning. Welcome to the Concentrix First Quarter Fiscal 2022 Earnings Call. This call is the property of Concentrix and may not be recorded or rebroadcast without the 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 events or developments. Please refer to yesterday'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. Also during the call, we will discuss non-GAAP financial measures, including free cash flow, non-GAAP operating income, adjusted EBITDA and adjusted EPS as well as adjusted constant currency revenue growth. A reconciliation of these non-GAAP measures is available in the news release and on the Concentrix 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 very much, David. Good morning, everyone, and welcome to our first quarter earnings call for fiscal 2022. We're happy to announce another quarter of strong results as well as solid progress in our Catalyst business with the integration of PK, our latest acquisition. Our strong performance was fueled by existing clients responding with opportunities, robust wins with new clients seeking to benefit from our differentiated CX capabilities and contributions from our PK acquisition. During the quarter, we made great progress in recovering from Typhoon Ray in the Philippines and the surge in COVID that impacted our people and operations that we discussed on our Q4 earnings call. While we have no presence in either Ukraine or Russia, we do have a large community of Ukrainian staff around the world, and our thoughts are with them and their family members during this troubling time. I would like to thank our staff that have been helping with displaced Ukrainians because of the war, especially in our operations that border Ukraine. Our first quarter revenue of $1.54 billion represents an increase of 14% year-over-year on a reported basis. On an adjusted currency -- constant currency basis pro forma to include PK in both periods, we grew by 11%. Our first quarter non-GAAP operating income of $202 million was up 14%, and adjusted EBITDA increased 12% to $238 million compared with last year. Non-GAAP earnings per share increased 25% to $2.85 per share compared with $2.29 per share last year. And contributions from PK have been immediately accretive to earnings as expected. In terms of returning capital to investors, consistent with our capital deployment strategy, we paid $13 million in dividends in the quarter. We did not repurchase shares in the first quarter. As of today, $475 million remain available on our share repurchase authorization program, and we remain committed to modest purchases over time as market conditions warrant. Turning to the integration of PK into our Concentrix Catalyst team. We're making good progress simplifying, harmonizing and optimizing the combined operations. This acquisition allows us to deliver even more technology solutions for the CX marketplace at scale and positions us as a CX digital solutions leader. The expertise in design consulting and execution around digital solutions is truly a catalyst for our clients to think differently about what the art of the possible can be. Having operated as Concentric Catalyst for 3 months, I'm pleased to report that we're on track to our expectations. We're seeing strong demand from strategic client partners for our unique mix of CX digital solutions and have already seen small wins ahead of schedule that we wouldn't have been able to service before the acquisition. During the quarter, we saw growth across our portfolio again. Despite some volume volatility and lower seasonal demand with a few clients, we achieved growth across a broad section of our verticals. New economy client revenue increased 47% to over $350 million in the quarter, positioning us to exceed $1.4 billion in revenue on an annual basis for these clients. We're also seeing some clients looking to move more volume nearshore or offshore now that the pandemic has subsided and to manage their cost structures better. We continue to see strong demand market with higher average deal sizes in our pipeline, particularly with crypto, fintech, technology, travel and health care clients. We won digital transformation and CX solutions businesses with over 2 dozen new logos this quarter and are cautiously optimistic the demand environment will remain solid across verticals, geographies and solutions. From an operating perspective, we maintained strong performance levels and high levels of satisfaction with our clients and staff despite continued tightness in the labor market, primarily in the U.S. and some parts of Europe. During the quarter, supply chain issues have continued for a few of our clients, leading to volatility I mentioned earlier in their volumes, which muted the quarter slightly. To ensure we are as efficient as possible, we recently put into production our CX Quality Insight capabilities, which uses AI to sift through contact records for themes, insights and opportunities for improvement. We expect to roll this solution out across our enterprise over the next 1.5 years. And we are also seeing some very early positive trends on our new Canada Experience platform and our Innovation Hub that improves the work-at-home experience and makes it more social, engaging and collaborative without needing to be in an office. In recognition of our CX capabilities, Concentrix was identified as a leader in NelsonHall's CX Operations, Transformation, NEAT Vendor Evaluation for CX improvement capabilities. We're incredibly proud of this achievement. This report assesses the ability to meet future client requirements while delivering immediate benefits to clients by improving their customer experience. Turning to the second quarter. We continue to feel confident in our guidance for the year, and Q2 will continue to be a step directionally to our goals. The market remains strong, and our operations are solid. In summary, we're focused on transforming everything CX for our clients and our customers. We are deepening our client relationships and relentless to innovating with new solutions and expanding into emerging markets while we selectively pursue strategic acquisitions to drive superior returns for our shareholders. Finally, I would like to thank our exceptional staff for their commitment to execution and our clients for their continued trust. With that, I will now turn the call over to Andre. Andre?

Well, thank you, Chris, and hello, everyone. I'll begin with a look at our financial results for the first quarter and then discuss our business outlook for the second quarter and full year 2022. We delivered strong revenue and profit improvement in the first quarter. Revenue in the first quarter was $1.54 billion. On an adjusted constant currency basis, revenue increased 11% compared with last year. The improvement in reported revenue includes an $83 million contribution from PK, a negative impact of $16 million from businesses divested during the last year and a negative impact of $26 million from foreign currency fluctuations. Revenue increased across all of our verticals in the quarter. The strong growth was led by increases with large clients in the technology, financial services, travel, transportation and tourism and health care industries. Revenue from technology and consumer electronics clients grew by approximately 14%. Revenue grew 19% in the retail, travel and e-commerce vertical. Our banking, financial services and insurance vertical grew by 16%. Revenue from health care clients grew 20% in the quarter. The acquisition of PK contributed revenues to each of our verticals and accounted for most of the increase in the communications and media and other vertical. That said, each of our 4 strategic verticals grew by double digits organically in the quarter. Our new economy clients generated strong growth of 47% year-over-year and represented 23% of first quarter revenue. Virtually all of the growth in revenue from our new economy clients was organic. Turning to profitability. Non-GAAP operating income was $202 million in the first quarter compared with $177 million last year. Our non-GAAP operating margin was 13.1%, the same as the first quarter last year. Adjusted EBITDA was $238 million compared with $213 million in the first quarter last year. Our adjusted EBITDA margin was 15.5%, down 20 basis points from 15.7% in the first quarter last year. Profitability in the first quarter reflects flow-through from revenue growth with existing and new clients; contributions from PK and increased pricing, offset by the surge of COVID cases globally, which impacted staff availability; the Philippines typhoon; investment in new program ramps; and wage inflation. Non-GAAP net income in the first quarter was $151 million compared with $120 million last year. Earnings per share were $2.85 on a non-GAAP basis compared with $2.29 last year. GAAP results for the first quarter of 2022 included $38 million of amortization of intangibles, $15 million of share-based compensation expense and $1 million of expense related to the acquisition and integration of PK. Turning to cash flow. First quarter cash flow from operations totaled $45 million, and capital expenditures were also $45 million. This resulted in break-even free cash flow in the quarter. As a reminder, free cash flow in the first quarter reflects typical year-end payments of incentives and 13th month payrolls in some regions, and therefore, is typically the weakest cash flow quarter of the year. Turning to the balance sheet. At the end of the first quarter, cash and cash equivalents were $142 million, and debt outstanding was $2.345 billion. Net debt was just over $2.2 billion at the end of the quarter. During the quarter, we paid a quarterly dividend of $0.25 per share, and our Board has declared another quarterly dividend of $0.25 per share to be paid during the second quarter. Regarding our stock repurchase program. As of today, we have $475 million remaining on our authorization. As we said, at the time of the PK acquisition, we expect our near-term priorities for free cash flow to be our dividend and debt reduction with some modest stock repurchase activity over time. At the end of the first quarter, gross leverage was approximately 2.5x adjusted EBITDA, and net leverage was approximately 2.3x on a trailing 4 quarters basis pro forma for PK. Liquidity remains strong with approximately $1.2 billion of cash, undrawn lines of credit and capacity on our AR securitization. Our current liquidity provides significant financial flexibility as we move forward. Now I'll discuss our business outlook for the second quarter and full year 2022. For the second quarter, we expect revenue to be in the range of $1.57 billion to $1.60 billion. This includes a 2-point negative impact of foreign exchange rates compared with 2021 and a net 8-point benefit related to businesses acquired and divested in the last year. On a pro forma adjusted constant currency basis, our guidance equates to 9% to 11% revenue growth. Our profitability expectations for the second quarter include non-GAAP operating income in the range of $205 million to $220 million. We expect interest expense in the second quarter to be approximately $13.5 million, an effective tax rate of approximately 25% to 26% and a weighted average share count of approximately 52 million shares. Moving to our outlook for the entire year. We are confirming the guidance we shared on our last earnings call. We continue to expect 2022 revenue to be in a range of $6.45 billion to $6.6 billion. Also included in our expectations is a 2-point negative impact of foreign exchange rates compared with 2021, a net 8-point benefit related to the businesses we have acquired and divested in the past year. On a pro forma adjusted constant currency basis, our guidance for 2022 equates to 9% to 12% revenue growth. Our full year profitability expectations include non-GAAP operating income in a range of $890 million to $930 million. We expect full year interest expense to be in a range of $54 million to $58 million with an effective tax rate of approximately 25% to 26% and a weighted average share count of approximately 52 million shares. Our business outlook does not include any future acquisition-related impacts or transaction or integration costs. Also not included in the guidance are impacts from future currency fluctuations. In closing, we are very pleased with our strong results for the first quarter and very confident in our outlook for the remainder of the year. As a well-positioned global leader in a fragmented and growing market, we're executing on our plan to grow organically faster than the market. As a proven consolidator with a strong balance sheet, I believe we're in a great spot to deliver sustainable growth, margin progression and strong free cash flow. With that, now, Josh, please open the line for questions.

[Operator Instructions] Our first question comes from Ruplu Bhattacharya with Bank of America.

Chris, I think you touched on this in your prepared remarks, but based on what's happening in the macro and the political environment, have any of your customers talked about moving some of the sourcing to different geographies or to different locations? And the second part of the question is compared to 90 days ago, is fiscal '22 shaping up as you had expected in terms of the first half versus second half strength? And can you give us some more details about how the sales cycle times are trending, new logo win rates and maybe how the ramp times are trending for different projects?

For sure, Ruplu. The first thing, in terms of geography of where people are doing the work is, I think Andre alluded to and I talked a little bit about we are seeing sort of a more balanced to sort of pre-COVID where people are putting work, which tends to be more nearshore/offshore than onshore. During COVID, at the height of COVID, we did see sort of a little faster growth with onshore than in prior periods. And we see it kind of going back to sort of pre-COVID levels. So I think that's sort of a returning to business normal perspective. That's really driven by ability to scale labor. That's driven by sort of cost models, and that's driven by sort of how the clients view their economics within the business that they're working through. From a fiscal sort of '22 basis, the year's shaping up how we expected. I mean the supply chain issues we called out as muting sort of 2 quarters of Q4 and Q1, our clients continue to see progress in getting those fixed and continuing to see sort of the benefit of that volume coming through. That's probably the only thing that's dragged on a little longer. Everything else is kind of shaping up how we expected and very happy with how we're executing along our plan, certainly from Q1 and what we're seeing into the next quarter. From a cycle time perspective, generally, deals are taking a little bit longer than during the height of the COVID period. I think we talked about that. Like pre-COVID deals were 12 to 24 months. During COVID, they were a couple of months. We're seeing them stretch a little bit, but not much more than what sort of the fastest deals were in COVID. So we're pretty happy with the cycle times that we're seeing. We don't suspect that they'll turn back to sort of pre-COVID levels, which is frankly good for us. And we looked at that sort of the new trend that's going through of how people are looking at where to place work and the type of solutions that they're looking for and how we are looking at our go-to-market strategy.

Got it. And you typically talk about new logo wins. I mean, any comments this quarter?

Yes. Actually, we're pretty happy with our new logo wins. We called out how many just in terms of our span. But what we tend to look at is the quality of those wins and the type of logos that we're winning, and we're super happy with that. We also look at the diversity of those logos, and we had a nice spread across the portfolios, and frankly, a nice spread around the geos as well as we look at sort of revenue diversification. So frankly, it was just a very, very nice mix. And our pipeline, as we mentioned, continues to be strong. And our pipeline across some of the geos, across some of the verticals is also a very nice mix, which we're really happy to see.

Okay. For my second question, if I can ask Andre. So free cash flow was breakeven in the quarter, and you talked about some of the seasonal aspects of that. So can you talk about how you see cash flow trending through the rest of the year? And as part of that, can you talk about how you see the COVID costs trending? And how should we think about OpEx as well as your CapEx requirements for this year? And finally, if you can talk about your capital allocation priorities for this year.

Sure. So let's start with -- towards the end there. So CapEx, we see roughly 3% of revenue for this year. So not too far off of where it was in Q1. So we see that being relatively at that pace throughout the quarters. From a COVID perspective, certainly, we saw significant impacts as we called out when we guided for Q1 from the Omicron variant that was particularly acute in the -- I would say, the first half or so of the first quarter. So we see that situation improving. And we see COVID costs -- the COVID impact on the P&L coming down as we move out through the balance of the quarters with that driving some of the margin progression that we're guiding to, both in terms of our Q2 guide and the full year. Thinking about your other questions from an OpEx perspective, we think that as we grow throughout the quarters this year, we'll see -- continue to see some leverage on OpEx. Again, that will drive somewhat to the margin improvement. But we also see progress at the gross margin line as being a contributing factor to the margin progression as well. So priorities for capital allocation, I think, was another one of your questions. As we said at the time of the PK acquisition, in the near term, our priorities remain investing to grow the business organically, continuing to support our dividend, and then a focus on deleveraging given the debt we have on our balance sheet post the transaction. That said -- as I also said, we're a proven consolidator in this space. And so we will continue to look for things that add to the platform with the priorities being adding sets of clients that we believe we can grow; adding capabilities that we think our clients will value and want to add to the mix, much like we did with the PK transaction; and looking for sort of domain expertise whether that be in a vertical, a geo, et cetera. From a free cash flow trend perspective, I think we'll see a far more robust free -- I think that if you look at our historical pattern for free cash flow, it will look about like that as we move from Q1 out into the balance of the quarters. So Q1 was breakeven this year. It was actually negative in the last 2 years. So a little bit of improvement, albeit breakeven. What you should see is a pretty significant amount of free cash flow in Q3 and then relatively consistent with past trends as we move throughout Q3 and Q4.

Okay. If I can just squeeze one more in for Chris. So overall, Chris, when you look at this environment, are you seeing customers outsourcing more? Do you see new vertical outsourcing opportunities? And then just on the new Catalyst segment and the acquisition of PK, how has the customer response been? And are you seeing more opportunities on that side of the business?

Yes. So for the first question, we've kind of mentioned this a few times in the remarks on the last couple of earnings calls. We are seeing clients outsourcing more, and we're seeing sort of 2 drivers for that. One is that they're looking for a more total solution of -- a complete set of services and end-to-end and some technology wrapper around it. And in order to kind of accomplish that type of outsourcing arrangement, you just tend to need to outsource more. I think the second thing is that during COVID, what it’s taught organizations is where to spend their time and focus. And it's allowed them to kind of look at some things historically, they might go to outsource and realize that probably the outsourcing way is a little better. I think those trends will continue. And I think this COVID sort of sped it up a little bit. In terms of the Catalyst reception, Catalyst reception has been fantastic. I've been super, super happy with where that's come through. And as I made a comment, we've actually had some small deals. And I don't want to over-magnify it. They are smaller deals that we've gotten. But in the Catalyst business, that's really where you start is sort of these proof of concepts, some new kind of discussion points, and then that starts to grow. But we wouldn't have been able to have these conversations 4 months ago. And so that's really, really encouraging. And then on our strategic client discussion, where they're big clients for us and we're looking at adding new capabilities, those are progressing very well and meeting our expectations. So exceedingly happy with what value we've gone on the Catalyst investments and expect to see continued strong returns from that as we go forward.

Yes. And just as a reminder, Ruplu, what we said about Catalyst this year was that it would grow by 20% or more. And it is on track through Q1. It's ahead of expectations, and we feel like it will be throughout the year. So just feel really good about how that's come together.

Okay. Congrats on the strong execution.

[Operator Instructions] Our next question comes from Vincent Colicchio with Barrington Research.

Chris, any change in your market growth expectation for this year?

No. We're seeing the market continue to grow at -- sort of analysts are still saying 3% to 5%. We think it's a little faster than that. And we continue to see, as Andre pointed out, that we'll even exceed that. So that still seems to be holding steady, and we want to take advantage of it as it continues to grow at those rates.

And you had mentioned in your prepared remarks pushing a new AI tool for the next 1.5 years. Is that an important differentiator?

It is. We've actually had some clients come to us after we demoed it and showed it to them, looking for them to kind of figure out how they implement it in-house as well. There's some strong benefits to it, not only from a compliance standpoint but also from a quality standpoint as well as just improving the customer experience. Because normally, you sample 10%, 15% of the calls. We're now able to sample significantly more in sort of the 80% to 90% type of calls and chat interactions. And that just drives a lot more meaningful, statistically relevant insights into the discussions with the clients. So we do think it's a differentiator, and we see a lot of benefits from it.

And are you benefiting from vendor consolidation in your traditional CX business?

We are. We continue to see good benefits from the consolidation. Obviously, there was a lot more during the COVID time frame, but we still see a steady pace. I think we continue to say about 75% of our growth comes from sort of existing clients. And a chunk of that is from sort of taking other partners out of our client ecosystems as we take over work with our services and our portfolio of what we can deliver for them.

And I assume on the traditional side, you're benefiting from the PK acquisition as well in terms of companies looking for larger vendors, but especially with your new capabilities. Is that correct?

Yes. I think -- absolutely, we're -- as I say, early days, but we have some wins under our belt, which we weren't honestly expecting combined wins within the first quarter. So again, very small wins, but very strong, good early indicators that our thesis for why we did this is the right pieces to do. I think what's more important is the longer-term conversations we're having with our bigger clients, both traditional and new economy, by the way. These are not just in one segment or one vertical. This is broad-based sort of acceptance of these capabilities coming together. And the capabilities that the acquisition provided us and the Catalyst team can deliver are really sort of very, very focused, very unique on the CX experience. And everything from that design thinking, the journey mapping, actually being able to build the technology at scale, actually being able to now integrate it with services is unique in our space. And so frankly, just very happy with how that's come together for us.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Chris Caldwell for any further remarks.

Great. Thank you very much for joining today. We always very much appreciate your interest in Concentrix. Our unique mix of CX capabilities combined with our commitment to innovation has really us confident to stay differentiated. We believe we will continue to grow faster than the market and expand our profit margins in 2022 and beyond. Thank you very much, and have a good day.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.