Concentrix Corporation (CNXC) Earnings Call Transcript
June 6, 2022
Earnings Call Speaker Segments
All right. Why don't we get started? Everyone, my name is Dave Koning. I'm a senior research analyst at Baird. I cover services, payments, financial technology and very pleased to introduce Concentrix today, a leader in customer care, business process, outsourcing, IT, kind of the full spectrum around the world. Today, we have CEO, Chris Caldwell, and we have CFO, Andre Valentine. I've known you guys for many, many years now, and thanks again for coming. And with that, why don't I turn it over to Andre to kind of go through a few slides, and then we'll go from there.
Sure. Thanks, David. Good to be here with you, and thanks to Baird for hosting us. I'm going to get through these slides real quickly, so we can get to your Q&A. But real briefly our objective at Concentrix is to be the world's greatest customer engagement company. We think we operate in a very dynamic market that is growing. But we really have a who's who client base, a combination of enterprise clients and new economy clients that we think is unmatched in the industry. And we have industry-leading capabilities and we're investing in the future. And so all of that has us feeling like we can be a market leader, the leader in the market with a great opportunity for revenue growth and margin expansion as we move forward. And we'll talk about some of our long-term targets for that in just a minute. The numbers real quick. Pro forma for an acquisition we closed earlier this year, our 2021 revenues were $6 billion in revenue, roughly $800 million in non-GAAP operating income, strong free cash flow. A couple other numbers I'll highlight. A great tenure with our clients, 16 years for the average tenure of our top 25. We serve over 100 of the Fortune 500 clients, and we have 100 -- more than 125 new economy clients that in our most recent quarter, are growing at a rate of over 40% -- over 45%. As a result, we have a strong, strong history of growth, both organically and inorganically. We've moved from being a fairly small company in 2012, to being $6 billion here pro forma in 2021. That's over a 50% CAGR, both organic and inorganic growth in that. Along that way, we've almost doubled our margins, moving to on a pro forma basis, 13.2% in our most recently completed year with opportunities for margin expansion as we move forward. Really something we think is a little bit misunderstood about us. We really have a who's who of a client base. And so I won't mention any of these bubbles here, but you can see just the very significant role we play throughout the Fortune 500 globally as well as a really strong presence in new economy clients, and we have great breadth across all the major industry verticals. We're not dependent on any 1 or 2 of these verticals for a significant amount of our revenue. Our priorities for future growth are what has gotten us to this point, right? Deeper relationships with our clients, more wallet share and -- is priority number one. Relentless innovation. We're unique in that we try to automate about 10% to 15% of our revenue each year. Our clients value that automation. It's why they grow those deeper relationships with us. We think that's important. We're not -- we're also investing in emerging markets that are growing faster, roughly 20% of our revenue in emerging markets growing faster than our core. And we really have in our DNA a core competency around selective, accretive acquisitions. And so we've done that. We view it as a core competency. And you'll see this as part of our long-term planning as we move forward. In our recently -- earlier this year, we had an Investor Day where we announced these financial targets. We're going to be larger than $10 billion in revenue by 2025. We'll get there through a combination of 9% organic growth through -- 2023 through 2025. And then on top of that, we'll add at least $1.5 billion through M&A. And we've already got a pending transaction that will retire over $200 million of that $1.5 billion. We're going to move our non-GAAP operating income margin from this year's guide, which is at its midpoint, roughly 13.9% non-GAAP OI margin. We're going to move that to 14.5% by 2025. So with that, I'll summarize the slides by saying this. We are innovating to become the greatest company in the customer engagement arena in the world. We're executing a successful strategy that we believe will drive revenue growth and continued margin expansion. We have unmatched capabilities. We've got a great set of clients across both enterprise brands and fast-growing new economy brands, who value what we do for them. And lastly, we would leave you with this. We really feel that our combination of strong revenue growth, margin expansion, strong free cash flow -- strong free cash flow generation, and where we are valued today in the market is a real opportunity for investors. We believe that we're undervalued. All those things that I've just alluded to, a real opportunity for investors as we move forward. So with that, let's get to the Q&A.
Yes. No, thanks for that. That was great. And maybe to kick off, what I've been asking companies is -- basically, is there any evidence that you have seen at all of recession in your business? And where would that even show up? I know you're highly, highly recurring. So it probably doesn't seem like a lot of pressure, but...
Yes. I think most of our clients are asking us what everyone in the room is asking us is, what are you seeing and everyone is generally a healthy level of paranoia. But we haven't seen any material slowdown in our order book, our pipeline, what's flowing through their businesses. There's obviously been some challenges in some of Bitcoin and some other things, which is a very kind of nonmaterial part of our business, but the vast majority continues to execute as we would expect.
Great. What about just some of the macro factors, right? Wage inflation, obviously, higher 10s or I think over 100,000 people, right? Like what's the impact of wage inflation and the ability to price to offset that?
Yes, for sure. So primarily wage inflation in a front level is coming from North America and some parts of Europe. And unlike some of our competitive peers, we actually looked at that middle of last year and went to our clients and said, "This is where we think, wage inflation is going to be for the next 2 years versus the next 6 or 7 months", and kind of planned out a strategy to execute on it. So we've been kind of raising wages. We've been working with clients. Some of that gets passed on to the clients, and they absorb it. Some of it is offset by automation and technology that we're putting into the client set. And then some of it is moving that work to a better cost location, whether nearshore or offshore. So we've had a fairly good handle on it. We've been executing well on it, and therefore, haven't seen any impact into our operating margin expansion as we've been going forward.
Great. And do clients push back on that. We've heard it's actually, I won't say easy, but clients are pretty receptive to some pricing from wage inflation.
I don't think any client wants to hear that the pricing goes up. So receptive is maybe debatable, but I think it's 2 things. It's the type of value of work you provide. If you're providing high-value work and it's very integral to the success of the client, then you're in it together, right? They need the work done. You need to be successful delivering that work. If it's very transactional, then frankly, they'll try and figure out someone else to do the price. I think what they're most receptive to is to say, look at total cost of delivery. And this is what you can do in North America. This is what you can do nearshore, offshore. This is what we can do with technology to take out these costs completely within your business. And I think through that sort of 3 discussion points and what you need to achieve that is a collaborative process, and we've been very successful in getting price increases where we've needed it for the work that we do.
Okay. What about in the Philippines, the back-to-work requirement, back in office with the tax regulators. How is that impacting the business?
So effectively, just for clarity, because I think some people have mischaracterized this. In the Philippines, there are certain tax incentives that you get. And the regulator has come out back in February and said, hey, by April 1, you no longer have this exemption for work at home. If you want this tax treatment, you need to have people back in the office. And a number of people have said, okay, we're going to bring everyone back. We have said we're not going to change anything. If it's good for our staff to work at home, let them work at home. If it's good for them to come into the work, come into work. And there's some cost impact to that from a tax perspective. It's relatively small for us in our scale. It also impacts newer companies sooner, because they have more tax holidays than companies, who have been operating in The Philippines for longer, which we have. And at the end of the day, we feel like driving people into a work environment much like in the U.S. is going to drive attrition, because people have options. And so we've seen it as a benefit for recruiting. We've seen it as a benefit of stability within our workforce by saying we don't care. If you want to work at home, work at home. You want to work in the office, work in office. So we haven't seen any change.
Yes, David. We've guided to a 25% to 26% tax rate this year, both GAAP and non-GAAP, and certainly comfortable with that range, even with the approach we've taken here, which is definitely the right thing to do for both our staff and our clients.
Yes. Okay. Now what about -- I think back 5, 10 years ago, I mean this industry was so heavily focused on telecom. And your business has totally changed, and it's a much, much faster growth business today than years ago. What -- maybe talk through a little bit about what's changed, why in some of the services?
So I think from our perspective, what we started executing on almost a decade ago was trying to get fewer clients, deeper relationships, more lines of business within that client, and more of our own technology in that client. And while it's been a long investment path and certainly taking a while for it to kind of catch on, it's a better strategy because, to your point, the work is stickier, you get much more opportunities for higher value work within those clients, you get much more integrated into their infrastructure so that the cost of change becomes incredibly prohibitive for them to move. And then we've been very selective on the clients that we go after. So we don't want thousands of clients. There are specific clients we're after. We're very, very focused on winning them. Once we win them, we're very focused on growing our share within those clients. And we feel that gives us a level of resilience within our business as we go forward.
And what about even the types of services? I mean it seems like 5, 10, 15 years ago, it was all just inbound call center work. And now there's a lot of new things you do.
Yes, for sure. I mean, actually, we were primarily voice 10 years ago, and we did some non-voice work, now about 60% of our revenue is voice, but 40% is non-voice. But even within what voice, there's a lot of high-value voice like claims management, claims adjudication, high-yield lending, all sorts of things that we go within our voice practice. But to your point, content moderation, a big part of our growing business, content adjudication, claims adjudication, back-office mortgage processing, credit scoring, credit granting. You go on and on and on. And again, within our verticals, what we're most focused on is taking a client and doing everything that we can in their process from start to finish, so that the control of it and running hopefully on our technology, allows us to be a key partner for them as they grow their business.
Yes. And has that mix of business, does it lend itself to be more recurring than maybe in the past?
Yes, absolutely. I mean we're dealing with things, and obviously, clearly, there's a correlation to the volume and the growth of the clients' business to our business. If they're doing very, very well, we'll continue to do well. The reality is, is that it's all reoccurring like a contract length, as Andre pointed out, is 16 years of our top 25 clients. And so these relationships are deep, long. And while ebbs and flows might happen in lines of business with the client, the reality is that we're helping them deliver their service proposition and value proposition day in and day out.
Yes. And you've been in the right place of the industry. I think last year, if I remember right, your new economy clients grew over 40%. What's different, like 10 years ago, there just wasn't that group of clients, it just didn't seem like even in the whole industry, there was that type of clients driving growth, and today there's...
We had a few of them 10 years ago. I don't know if we classify them as new economy. But new economy clients tend to operate very differently than enterprise, right? They are born outsourcers. They want to focus on their core product, their core service. And then everything else, they're really looking for a partner to help facilitate them on their go-to-market strategy and also keep their cost structure incredibly variable versus sort of enterprise clients, which might have more fixed costs. And I think that category over the last, to your point, 5, 6 years, has really grown and exploded and the companies that execute well in that space and know how to deal with these clients appropriately. Have really done well. I think where we had our differentiation is that we have a lot of the enterprise experience. So if you think about a young fintech, who's growing up, when they first start off, they might start with some very simple products, then they get into more complex products, then they get into regulated products, and they need an outsourcer, who is used to dealing with regulatory environments. So used to -- they're looking for an outsourcer, who is used to dealing with sort of enterprise banks, global banks, because that's the type of complexity that they want to get into. And so we fit very well in that space from doing that scale growth, up into where we can now help them in sort of their enterprise compliance and everything else as an example within the fintech business.
We can also help those enterprise brands try to deal with the disruption that's coming from the new economy companies that are trying to enter their space.
Absolutely.
Yes. And how penetrated do you think the market is for either some of those newer services, I guess, even the legacy ones, like is there still a lot of room left?
We talk about this all the time. We believe, depending on which analyst you talk to, that probably 25% to 30% of the possible outsourced -- business is outsourced. So not only do you have this huge amount of organic growth that can just happen in the existing business, but we're also finding that clients are now trying to outsource more than just sort of the transactional work. It goes back to that end-to-end process. And so still, a couple of decades into this industry, we still believe there's a significant amount of growth opportunities, both by just that simple organic outsourcing as well as a deeper process outsourcing that we see coming through our sales right now.
Yes. Okay. And what about client concentration. I know in the past, you had a lot of client concentration, since the big merger, it's diversified away a lot. But do you expect ongoing kind of diversification?
We're actually very comfortable. Where we see our client concentration is probably 1 of the lowest ones in the industry in terms of our top 5 clients representing the percentage of business that they do. And we're really happy with that, right? We don't want 1 client taking a behemoth. We have 1 client that's roughly around 10% of our business, plus or minus, and very, very happy with that. So we're conscious about making sure that we have diversified revenue not only by client, but by geography and by vertical as well, just to make sure that we can deal with the ebbs and flows of the business.
But there's still a lot of opportunity in this top 25.
For sure.
It's the top 5.
Yes. And is the opportunity within the top 5 more to get into new services or even just the volumes like that you share with kind of your competitors, is there room to make that bigger?
Yes. It's a combination of both. Within this industry, our thesis is, is that clients want to deal with fewer partners, and they want to deal with partners, who have deeper breadth of services and they have more global scale, because it's more cost effective for them and they can outsource more complex things to fewer people. So we believe we benefit from that, and we believe we'll continue to benefit from that. On the new services, that's absolutely what happens. When you're dealing with the large clients, they come to you and say, hey, have you thought about this? Have you thought about that? And for some of our larger clients, we run their workforce management, not only for our team, but their internal team as well as all their other partners in the industry, and that's something kind of unique. Same thing with quality. We manage quality for 1 of our clients, not only for our work, their internal work, but all their other outsourcers' works as well, which kind of gives you an understanding of the value that we add to them.
Yes. Yes. What about international demand? Is it a lot different in different pockets of the world than what we're just seeing here in The U.S.? Or is it pretty similar?
No. There's certainly hotter markets in the world. We've been very successful in Brazil. Brazil is a very dynamic, growing market, specifically with fintechs. You've seen a few go public actually in the U.S. A lot of changes there and some rules changed a few years ago about sort of almost encouraging outsourcing. And so -- been very, very good. Some of the region in ASEAN is very fast, very new emerging economies that have a big consumer base that are growing, that a lot of start-ups are doing very, very well in that we support. And in fact, in the new economy companies, we're somewhat unique that a little over 30% of our new economy companies come from outside of North America. Where most people think Silicon Valley or Austin or Raleigh, the reality is, I should add Miami now. But a lot of them that we deal with are actually outside the U.S., which brings a totally different perspective to the types of clients we deal with.
Yes. And what about -- I mean, you basically entered IT services not too long ago as well. How do you see that? Is there a big cross-sell opportunity? Is that kind of the strategy or what you think?
Yes, for sure. We've always built our own technology. The challenge up until recently is that we haven't been able to scale it as fast as we want. And we've never had the credibility or frankly, chops to be able to deal with the systems of record, right? And with our acquisition of PK back in last year December, it adds us not only a significant amount of scale, 6,000 more developers that come along with it, but it also adds to the credibility of writing to the systems of record, whether it be Salesforce, Oracle, SAP, doesn't really matter. And the whole strategy from our perspective is that our clients are looking for the domain expertise around how to run the operations, but they're also looking for the domain expertise of how to deliver technology to drive better customer experiences. And they've been buying this in disparate parts right at the moment. There's very few, in fact, almost nobody who can bring it together. And we believe that we can bring the domain knowledge of how to run the operations. We can now deliver the technology for them as their systems of record and driving that customer experience. That's a unique value proposition. And PK, the client we bought, we actually shared a software company where they were doing all the e-commerce build-out for all their properties and how the order processing was happening. We actually do all the order processing and contract management on the operations side. And when we talk to the client, they said this is fantastic, because we're basically the PMO of both of you people. Now you come together and you just deal with it, and then we'll just pay you for the completed service. That's the Nirvana state that we want to continue to grow within our business.
Yes. Okay. And what about maybe, Andre, just from a financial review perspective, I think you're talking about 9% or so growth in the next few years. What's the mix of existing clients and new clients? And is the confidence in the pipeline? Or do you just kind of take if GDP grows 5%, we can grow 1.5x or whatever it is?
We get there a couple of ways. First of all, as we think about the growth, we still think that, that 75-25 ratio will hold, 75% of the growth will come from existing clients, 25% from new clients. There's a lot of runway still in our existing client base. We see the market right now, David, growing -- for the core kind of CX operations, growing faster than some of the marketing analysts do. They see that 3% to 5%. It feels like it's growing at about 6% for us. Our goal is we've invested to grow faster than the market, so faster than that 6%. On top of that, we've got Catalyst now, which is how we've rebranded PK. That's roughly getting close to 10% of our revenue. And that's in the digital IT services market, growing at 17% -- which is growing at 17%. We think we can grow that business by 20%. That averages up, if you will. That -- you take that 6%, you grow a little bit faster than that. You put about an extra point on for that faster PK Catalyst growth, and you get us to that 9%.
Got you. And yes, what's the difference between -- so obviously, IT outsourcing growing a little faster, but CX and then content moderation, that's been a fast growth piece of some of your competitors. Is that growing well above?
Yes. We've been growing content moderation for many, many years. We don't generally call it out until it became very popular to call out. And it continues to grow exceedingly well and quite rapidly and it looks like there's a significant runway still as governments drive more regulations around content about what's displayed on social platforms as well as other things that are happening in that space. We see a good runway for growth for sure.
Yes. It's certainly 1 of those drivers in our new economy growth rate that's helping us grow at that level.
Okay. Yes. And do you see the political cycle, the election cycle, later this year being a catalyst for probably the August, October time frame or...
I think the amount of media that's created on social networks that need to be content managed and moderated, grows exponentially regardless of election cycles with what's going on that's happening. And I think as more governments start to mandate what needs to happen with content and whether people pay for news or not free for news and all sorts of things like that, that are happening, you'll start to see more complexity kind of into that. By the way, that's 1 part of content management. There's also other parts of content management in autonomous cars. There's content management in mapping. And it's a fairly big category that continues to grow. And I think we're well positioned to take advantage of those areas of growth.
Yes. Okay. And what about margins? I think EBIT is expected to be -- I think it was 13% or so last year, expected to keep moving up towards 14.5%. What are the puts and takes kind of to get you there?
Yes. So it's non-GAAP OI margin, that was 13% last year. The midpoint of our guide this year, getting close to 14%, and our target for 2025 is to get that to 14.5%. The growth drivers there this year and beyond are more higher-value services, certainly. Certainly adding more technology to our offerings, both to make them more valuable, but also to make ourselves more productive. And then lastly, as we've shown, a good leverage on G&A as we grow. So all of those things have us confident that we can get to that 14.5% margin in 2025 and get to the guidance that we have for 2022.
And even in a scenario where wage inflation continues to be high, you can -- you have enough levers, I guess, to offset that?
Yes. Well, you see what we're doing this year. So we definitely are experiencing wage inflation, most notably in North America, but in other pockets as well. As Chris has alluded to, our ability to work with clients, both on pricing, on automation, driving productivity, et cetera, has us confident that we can move our margin up by roughly 80 basis points this year at the midpoint of our guide. We're doing that in the midpoint of our guide for our Q2. So we think we can do that. And so -- and then frankly, if we get there, some investors have said we've been a little bit conservative where we see margins going from there. And certainly, continued wage inflation is a factor that has us being a little cautious there.
Yes. Okay. And what about cash flow? Do you expect that to be a bottom line with earnings? And then what's the expectation for how you use the cash flow?
Yes. We see cash flow -- free cash flow this year being -- and long term being in the range of 80% to 85% of adjusted net income, which is maybe a little bit lower than I would have said sitting here 5 years ago. But remember, we're dealing with pretty substantial growth, which means pretty substantial investment in working capital as we go. So we're comfortable with that 80% to 85%. As for what we do with it, certainly, as I talked about our strategy, 1 of our prongs in our strategy for growth, continue looking for accretive M&A is 1 of the things we want to do. We have a dividend in place. We'll continue to support that. We took on some additional leverage in the PK acquisition. Near term, we'd like to delever a bit to create some dry powder, frankly, for future M&A. And given where our shares are traded right now, we do have a share authorization in place, and that's an option as well. We kind of think we can walk and chew bubble gum at the same time. And so we do think this year, for instance, we've announced we have this pending transaction, buying ServiceSource. That's some accretive M&A for us, and we'll also delever and support the dividend for sure.
Yes. And what type of M&A would you go after in the future, more -- certain, I guess, acquisitions to consolidate the industry or new services like IT or where would you go?
I think from our perspective, we're going to continue to look at consolidating the industry with the right customer set. We're very focused on the client set that companies have. And so if it has the right client set, that's absolutely of interest to us primarily. And then the secondary, it's deep domain expertise that kind of continues to build on our vertical strategy. And then the third one is technology enhancements that we can use to kind of gain leverage not only in our existing business, but also net new customers that we bring to the table.
Yes. And where do you see this 10 years from? I mean you're already so big, $6 billion of revenue. I mean, it's gotten big pretty quickly. What do you see? I mean, could this be $15 billion of revenue in...
Yes. Look, without providing guidance at all...
Beyond 2025.
Yes, beyond 2025, our belief is this. Our belief is that there's going to be continued consolidation in the industry. And our belief is that there's going to be 1 or 2 or 3 players that are plus $10 billion, and we plan to be 1 of them, and they're going to be significant and dominant in the global marketplace. And then there's going to be a lot of boutique that do an amazing job in this type of domain or this type of service or this type of region, and they will do quite well. And the worst thing you want to be is in the middle, because you just won't have a compelling differentiation. You won't be able to invest that's needed both in security and differentiation and technology to be large and you won't be -- have a cost base that's nimble. So that's our theory. And if you take that forward it's worth, then certainly $10 billion by 2025, which we're very confident to get to, we believe that there's additional upside past that.
Yes. Okay. And maybe -- we have about a minute left. Maybe last question. What do you think is the most underappreciated couple of things about the company?
I think what's most unappreciated is the type of complexity work that we do with our client base, and how deep the relationships are with our clients and how resilient they are with our clients. I think sometimes people think of voice and call center is kind of some low value and the reality is that's just not the case. The type of work is very, very, very complex that we do. And then I think the second thing is that people haven't appreciated until recently, how much we've invested in our own technology. You saw over 300 IP assets, patents that we have. That's not what you'd hear from a typical BPO company. And then we've built those technology platforms that are starting to now drive real engagement with our clients and real dependence on our technology for them to be successful, and that drives longevity in this business. And I think that's very much underappreciated when people look at us.
Yes. Well, great. Well, thanks so much. Please join me in thanking Chris and Andre.
Perfect. Thanks very much.
Thank you.
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