Welcome to the IBEX's Third Quarter [Full] (ph) Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a Q&A session. [Operator Instructions] Please remember that today's call is being recorded. I would now like to turn the conference over to Mr. Michael Darwal, Investor Relations of IBEX. Sir, you may begin.

Good afternoon, and thank you for joining us today. Before we begin, I want to remind you that matters discussed on today's call may include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward-looking statements reflect our opinion as of the date of this call and we undertake no obligation to revise this information as a result of new developments, which may occur. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our annual report on Form 20-F filed with the U.S. Securities and Exchange Commission on October 4, 2022. With that, I'll turn it over to Bob Dechant, CEO.

Thank you, Mike. Good afternoon, everyone, and thank you all for joining us today as we share our third quarter fiscal 2023 results. Nearly three years have passed since our IPO of August 2020, highlighted by a number of great moments for IBEX. Earlier this month, on Monday, May 1, we proudly celebrated by ringing the closing bell at Nasdaq. As a public company, IBEX has built a track record of transformation and execution. Our journey from IPO to today continues to get stronger and better. Once again, I'm extremely proud of how well our business is performing: first, we delivered outstanding financial results, where we again [stairstep] (ph) profitability across our key metrics, including adjusted EBITDA margin, net income, EPS and free cash flow; second, we continued strong double-digit growth in our digital-first BPO 2.0 clients that resulted in robust growth in our more profitable offshore, nearshore and rest of world regions; next, we continued to make strategic moves to position our business for long-term enhanced results; lastly, I am proud of the progress we continue to make on the ESG front. We set a new standard in adjusted EBITDA margin with an all-time high 18.5% or $24.4 million, up 390 basis points from a year-ago quarter. This is the second straight quarter margin has been above 18% and we believe we are now at a new normal. Net income increased to $11.7 million from $6.6 million. Free cash flow increased to $13.4 million from $5.9 million. And EPS was $0.59 per share. Revenue grew to $131.6 million, up 8.4% when normalizing for the Q4 FY '22 exit of a low margin legacy client. More importantly, revenue with our digital-first BPO 2.0 clients grew at 12.3% and is now 78% of our overall business. And revenue in our higher…

Thank you, Bob, and good afternoon, everyone. First, it has been a great privilege to be part of the IBEX family for nearly two decades and I am extremely proud of everything we have accomplished. More importantly, I want to follow-up on Bob's comments regarding our confidence in the positive direction of our business. Our strategy of providing BPO 2.0 services to clients in our higher-margin regions while remaining focused on improved onshore profitability is a core driver in achieving profitable revenue growth. Our fundamental financial drivers are strong, as evidenced by our revenue growth, adjusted EBITDA margin improvement, increased free cash flow and only minimal borrowings. We believe we are well positioned in the marketplace for future growth because of the strategic decisions we are making today. In my discussions of our third quarter fiscal year 2023 financial results, references to revenue, net income and net cash generated from operations are on an IFRS basis, while adjusted net income, adjusted earnings per share, adjusted EBITDA and free cash flow are on a non-GAAP basis. Reconciliations of our IFRS to non-GAAP measures are included in the tables attached to our earnings press release. Third quarter revenue increased 1.9% to $131.6 million compared to $129.1 million in the prior-year quarter. Excluding the legacy client that we exited in Q4 fiscal year '22, our revenue increased 8.4% over the prior-year quarter. Revenue growth was driven by our higher-margin regions, offset by lower onshore revenue. We continue to experience high growth in our BPO 2.0 clients as this cohort grew by 12.3% over the prior-year quarter and now represents 77.6% of our total revenue versus 70.4% in the prior-year quarter. However, we are experiencing some macroeconomic headwinds which are contributing to longer new client sales cycles and impacting near-term revenue growth. Net income…

Thank you. [Operator Instructions] Our first question will be coming from the line of David Koning of Baird. And also please wait for you...

Congrats on incredible margins.

Yes, thanks, Dave. We're really excited about everything we've done here structurally that are driving these margins, kind of continuing where we were and even getting better from Q2.

Yes. Well, that's great. I guess my question on that I know 17% roughly this year and it has been 18% the last couple of quarters now. I guess first of all, is that sustainable for -- like into the future now -- into next year? And it seems like a lot of that's being driven by gross margin, which I think echoes kind of your geo mix comments. Is that all fair to say?

Yes, it is Dave. I think it's sustainable and hopefully we can even improve upon that by continued selling in. We have the strong pipeline of clients that continue to go into our high-margin regions, with a lot of capacity available still that will drive strong margin flow through. And then, we've -- as I said, we've rationalized our U.S. footprint, some sizable capacity moved out that will be completed this quarter. So this quarter -- so as we move into FY '24, we really like the position we're in.

Yes, great. And I guess my follow-up. The revenue guide down -- I mean it makes a lot of sense if you're moving offshore that revenues would be trimmed a little bit, but how much really was just that mix shift and how much is a little bit of volume trim?

Yes. So, great question on that. And so, first and foremost, what I would say is consumer demand is down, and we've all been hearing that. And so that does impact the business. What I would say is the macro environment has pushed some deals out a little bit and that's -- and that's moved revenue to the right. We're confident that it hasn't moved it off the table, it's just moved it a little bit right. And then, the third leg is really then the rationalization, working with our clients to -- we've done such great work in places like the Philippines that we just said, let's accelerate it, great for us, great for them. And so, those are good partnerships at play then to our -- kind of our overall health of our business.

Got you. Well, thanks, guys. Great job.

Thanks, David.

Thank you. [Operator Instructions] The next question will be coming from Tobey Sommer of Truist. Your line is open.

Thank you very much. I wanted to ask a question about free cash flow. [indiscernible] this year and as you kind of get a full annualized impact of the accelerated move towards more profitable markets, what does it look like in 2024? Even in broad strokes, if you can talk about EBITDA margin versus what you perceive to be the CapEx trend over time? Thanks.

Sure. So, let me touch on just maybe at the -- kind of the high level structural, and then I'll pass over to you, Karl, if that makes sense. But -- so thanks for the question, Tobey. So here's what we like. We believe we're at a real new normal here, strong EBITDA. As you know, we've spent a lot on the CapEx over the last several years in the COVID world with our build outs, and now we're harvesting that. And so, you've seen our CapEx go down sizably over the quarter. So, those are, let's say, some of the kind of the big moves. Interestingly enough is I think our trailing 12 months on free cash flow is about $44 million. So those are really good trends that I think we'll continue to work into FY '24 and beyond. So, Karl, maybe from there you might want to just touch on a few more elements.

Sure. Thanks for the question, Tobey. I think just open broad strokes just structurally just to kind of reemphasize what Bob's been mentioning previously, just the new normal with the adjusted EBITDA, greater dollars, greater percentage, the lower CapEx, and if we maintain, which we are, our discipline on our DSOs, which are in the low 60s, all those point to strong conversion when you're looking at the free cash flow. So, structurally, we think as we've increased the EBITDA and we kind of maintain the focus on working capital with lower CapEx, that will lead to stronger free cash flow.

I appreciate that. How low do you think you could drive the U.S. footprint down as a percentage of sales over time and still have sort of that easy-to-reach presence that domestic clients sometimes like to have as they're beginning a relationship with the firm?

Yes, and your instincts are right on that, Tobey, around what clients want, and so it's important to have that, as well as then in the world of FinTech and healthcare, those footprints we do have clients that we believe will stay in that region forever with us. Now, we shared in the slides, et cetera, the view of our revenues by region. I thought that would be helpful. And so for the quarter, the U.S. is down to 28%. But a lot of the moves and shifts, et cetera, occurred during the quarter. So, as you -- as we exit, let's say, this quarter Q4, I think we'll be in the low 20%s. How much further below that? I still think there's a viable place for us and the U.S. So, would it get below 15%? Probably not. So, maybe stay kind of in that 15% to 20% range. But what I do want to point out is the margin structure. And so -- and we did this at the expense of top-line growth, exiting a really low-margin client that was all U.S., and then things like that. We have the U.S. margins structured really well with further gains as now we have that capacity and that we did the site rationalizations. That will benefit us really for -- well for -- in all of FY '24. So that 15% to 20% range for us is now no longer kind of at a low margin and weighting down our overall margin structures, and we're really happy what we've done in that position going forward.

Okay. Thanks. Last question for me. Are clients well versed enough in the application of generative AI and adopting it internally in their organizations? Is that kind of being thrust upon you from that direction? Or are they expecting outsourced providers like IBEX to drive the change and adoption? I just kind of want to understand the push versus pull dynamic between your customers?

Sure. Great question. There's a wide range, but I would -- if I summarize, I would say the flow is Board to CEO to management in our clients, and then management, I think they're looking, right? They're trying to understand. They're reaching out to get better understanding of the applications of that and where it could. And I think that creates opportunities like us -- for us where, A, we've already been deploying these internally. But we also have a wide range of where our clients might be leaning towards deploying. And so, harvesting that information, grabbing that and then having those discussions, I think we play a very important role with our clients in developing those strategies and making them kind of be successful with that.

Thank you.

Thank you. [Operator Instructions] And our next question will be coming from Ryan Potter of Citi. Your line is open.

Hey, thanks for taking my question. Wanted to start on the transition from U.S. to offshore. I guess how much of this is being driven by you yourself trying to push towards the higher-margin regions versus clients trying to move work to also focus on cost savings on their own? And in terms of the higher, I guess, margins in terms of what's being left in the U.S., is that mostly being done work-from-home aspects or you've kind of rationalized the office footprint there or the type of service is less in the U.S.?

Sure. And Ryan, thanks for joining us today. And also let me -- hopefully, I can hit all of those, and if I don't, feel free to touch on things that I missed. But so the move is really collaborative. And it's with clients that we've had footprints in the Philippines. We've had foot prints in the U.S. We've had clients that say, "Hey, let us try. Let us see how it goes." They may be first-time movers into the Philippines. Inevitably, the performance that we are delivering for that -- those sets of clients is really strong to where we collectively have stepped back and say, "These are the things that we would do if we were you," and to drive costs out of their enterprise, but while not sacrificing the customer experience. And so what's really good is their collaborative. And so it's not one -- it's not them, it's not it's us, it's us as partners really working together. And as a result, the transitions have been really, really good. Now in the -- your question then around the U.S. and kind of how we're operating, we have, let's say, about 85% work-at-home model in the U.S. And that has enabled us to take sites offline a couple of years ago and then this continued approach. And so, we like that model because it allows us to stay very lean on our costs -- on our fixed costs in the U.S. It allows us to hire in a much broader environment in the U.S. So, we have not had any challenges hiring because our pipeline is expanded, because you don't have the geographic limiters in the work-at-home model. And what we've found is our clients are very receptive to that because they know that those -- all of those elements are taking place that enable it to still be a sustainable operating model. And so when you put all of that together and the type of clients that we've sold into the U.S., we have a pretty good operating model now, strong margins and a trajectory that's, I'll say, up into the right.

Got it. That makes sense. And I guess with this move being more collaborative with clients and -- have you seen like additional volumes coming your way from clients as you made this move to offshore to offset some of the revenue hit? And then, a separate question, I know you mentioned lengthening of sales cycles, but have you also seen ramps from clients being delayed on already closed deals at all?

Yes. So, a couple of good questions. When the larger clients that we've had that have -- that we've then moved, they have looked and say, "Who are our performers?" And they have actually consolidated out a couple of our competitors in that move. So, we have gotten market share around those moves and now we have less competitors because they've kind of, let's say, rationalized them outside of their enterprise. So, I think we've done well from that perspective. And then, Ryan, I apologize, the second part of your question, if you could just repeat that would be great.

Yes, alongside the lengthening of the sales cycle for new logos, are you seeing ramps on already closed deals being delayed at all [indiscernible] as well?

Yes. And so, here's an interesting thing, and let me just talk a little bit about the pipeline, if I could, and then get to your answer. Our pipeline is strong. Our industry has historically been -- there's two really strong areas of this industry over the years. One is when clients are growing rapidly and they need scale. And those decisions -- that's what we've been under the last several years, because of just the growth of the digital-first. And so those decisions are made fast. And the velocity of those deals typically are done quickly. There's always a second growth element in our business, which is on downturns. But those typically clients start being a little bit more deliberate and they start making sure their chess pieces as they move to take cost out are well thought. And so, I feel like that's where we are right now that the ramps are slowed, might be pushed out to the right. I think as clients are thinking a little bit more deliberately. Now inevitably, they have to -- kind of -- I think the three big buzz words for them to compete is outsourcing, offshoring and AI. And so -- but I -- so I kind of view that as we move that our growth side will -- those things will start coming together, let's say, kind of in our late this year, next year, again, depending on kind of what happens in the macros. But usually it takes a little bit more time and I think that's kind of how I'm thinking this thing might play out. But hopefully that helps give a little bit of clarity of kind of how we were thinking about the pipeline. And so overall, I feel it's in a good environment over the long haul.

Great. Very helpful. Thanks again, and best of luck, Karl.

Thank you.

Thank you. That concludes today's Q&A session. I would like to turn the conference back over to Bob Dechant for closing remarks. Please go ahead.

Thanks, operator. And so, appreciate everyone joining us today. Hopefully, you can see from both Karl and my perspective, our belief in the strength of what we've done here at IBEX, the trajectory of this business and, inevitably, our ability to win and compete in this environment. So, thank you all for your trust, confidence in IBEX, and we look forward to talking to you next quarter. Bye.

This concludes today's conference. You may all disconnect. Everyone, enjoy your evening.