IBEX Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 6 speakers on the call.

Operator

Welcome to the Ibex Third Quarter Full Year 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. To note, there is an accompanying earnings deck presentation available on the Ibex Investor Relations website at investors.

Operator

Ibex.co. I will now turn this conference over to Mr. Michael Dorwal, Investor Relations of Ibex.

Speaker 1

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 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 10 ks filed with the U.

Speaker 1

S. Securities and Exchange Commission on September 13, 2023. As a reminder, as of July 1, 2023, we became a domestic filer and as such are reporting on a U. S. GAAP basis rather than from the previous IFRS standard.

Speaker 1

With that, I will now turn the call over to Ivek's CEO, Bob Dechant.

Speaker 2

Thank you, Mike. Good afternoon, everyone, and thank you all for joining us today as we share our 3rd quarter fiscal 2024 results. For my remarks today, I will briefly review our results for the quarter, which included the strongest adjusted EBITDA margin and EPS quarter in our history. And then I will go into detail and share our strategy to be at the leading edge of the transformation from traditional live agents to a business that also offers AI virtual agents and automated interactions. Our Q3 fiscal resulted in adjusted EBITDA of $19,200,000 delivering record 15.1 percent adjusted EBITDA margin and $0.70 adjusted EPS.

Speaker 2

Revenues for the quarter were slightly down to $126,800,000 versus prior year, primarily due to the completion of a short term project we serviced last year. These results are an output of the structural business we have built. We continue to grow our highest margin services and geographies. Our digital first and integrated omnichannel business grew to 78% of our revenues from 73% prior year. And our higher margin offshore and nearshore regions grew to 76% of our revenue from 72% prior year.

Speaker 2

Our higher revenue, lower margin U. S. Region contracted to 24% of revenue from 28% prior year. We expect these trends to continue as we land and expand with great new clients. I'm again excited to report we had 3 new client wins in the quarter, totaling 15 for the 1st 3 quarters of 2024 as compared to 8 in the same period in FY2023.

Speaker 2

Our pipeline is loaded with great blue chip clients that continue to look to better alternatives to their long tenured relationships with our multibillion dollar competitors. I am also encouraged by the velocity of our pipeline. The signature win for the quarter was with a leading member focused health and fitness company, where we initially began discussions in November of 2023, launched training by the 1st week of January and reached scale by the end of March. We continue to be confident in our ability to compete and win. Our balance sheet remains a position of strength with approximately $50,000,000 in net cash, while generating nearly $10,000,000 in free cash flow in the quarter.

Speaker 2

We were able to leverage the strong position to buy back more than $8,000,000 in shares, demonstrating our Board of Directors' confidence in our business and in our management team. Let me now segue to our AI strategy. The intersection of generative AI and CX continues to create a lot of excitement, potential disruption and headlines for the BPO industry. One of the most important questions is if generative AI will significantly impact live agent client volumes and potentially provide headwinds in the industry. At iVex, we see these potential shifts as opportunity.

Speaker 2

Let me explain. When I arrived here at Ibex 9 years ago, there were 2 distinct trends occurring in the industry. The first being the evolution of CX as a competitive weapon for leading clients, while the second was the acceleration of digital first support. We set a strategy to transform our business and capitalize on these trends. This is what we called BPO 2.0.

Speaker 2

This is the exciting business we have built, fast and flexible, digital first, tech led, leveraging deep analytics and insights, grounded in amazing long tenured clients with trusted relationships, built around branding and culture. We have been and continue to be extremely successful in this transformation. Now the convergence of AI and CX creates another opportunity for Ibex and one that is on a level playing field. We now see the opportunity to transform our business from providing customer support by live contact center agents to one where we will also provide AI virtual agents to resolve certain customer contacts, which in turn will provide significant cost savings for our clients, while creating additional revenue and margin opportunities for Ibex. Our goal is to be on the leading end of this transformation.

Speaker 2

And I am confident in our ability to be successful because many of the key differentiators in our current business position us well for this pivot. We believe one of the critical success factors will be the ability to marry generative AI technologies with customer journeys to create great customer experiences. The combination of being a tech led BPO coupled with our deep analytics capabilities creates a compelling competitive advantage. We will not be the developer of the technology, but rather a builder of the solution. The technology will be provided through strategic partnerships we have built with several best of breed technology companies.

Speaker 2

But the overall solution is being developed by Ibex and leverages our knowledge of the customer journey. This is an example of how our speed and nimbleness allow us to get ahead of our competitors. We believe our size is an advantage as well. While the largest BPOs work through the complexities of massive merger integrations, With 100 of 1000 of additional seats to protect, our sites creates opportunities. Simply put, our new call automation solution, Ibex Automate will likely reduce the number of calls we handle by live agents as well as for our competitors who service the same client.

Speaker 2

However, by implementing this AI solution across the entire enterprise, we expect to cover a greater percentage of the clients' needs compared to what our live agents currently handle. As a result, this will more than compensate for the decrease in live agent volume. Additionally, we have developed a disruptive solution we call Ibex Translate that uses generative AI to translate conversations into various languages that are difficult to support. This solution targets costly old world language translation service companies that result in poor customer experiences. Ibex Translate is gaining tremendous amount of interest and will be 100% accretive to our business.

Speaker 2

IBex is well positioned as a first mover, where we are front and center with our clients developing customer facing AI solutions. In fact, our early success taking this to market has already yielded more than 35 pipeline opportunities with many in the late stages and one recently closed. We continually get feedback from our clients that we are further along than our competitors in developing these types of solutions. Being first to market also strengthens our relationships as a trusted partner. The traction we have and our speed to aggressively market these services provides exciting near and mid term opportunities for growth for Ivex in this next generation of customer experience outsourcing.

Speaker 2

We believe our balance sheet is a competitive advantage as well. While the majority of our competitors are challenged with highly leveraged balance sheets as a result of large acquisitions of more seats, we have been very patient in our M and A strategy. Now with our clear strategy of transforming our business into a provider of customer experiences, whether live agent, AI virtual agent or hybrid, we are able to look to the future and identify companies that can help accelerate this strategy as well as opportunities to invest in our key tech partner ecosystem to create more points of differentiation. In summary, we are very excited and confident in our ability to be a leader in the future models of the BPO industry. We are well on our way to successfully transforming our business.

Speaker 2

Now before I turn the call over to Taylor, I would like to take a moment to recognize and thank our CIO, Jim Ferrado, who recently announced his retirement at the end of the fiscal year in June. Jim's contributions to Ibex cannot be measured simply by traditional IT metrics. Since joining the company in 2015, Jim has had an immeasurable impact on the business. His leadership has been instrumental in the company's success from building our award winning Wavex BPO 2.0 technology platform to enabling our agents to be resilient during COVID as we had to transition thousands of agents to work at home overnight, to keeping our systems safe and secure. Jim has also been key in the development of Ibex's groundbreaking generative AI powered Wave IX, Customer Experience Solution Suite.

Speaker 2

His pragmatic approach and leadership resulted in a world class IT infrastructure and organization that has consistently delivered the best CX solutions for some of the world's greatest companies being recognized globally again and again for excellence. We thank Jim for his near decade of service at Ibex and more than 35 years in the IT and BPO spaces and the legacy he leaves at the company. I will now turn the call over to Taylor to go through our financials. Taylor?

Speaker 3

Thank you, Bob, and good afternoon, everyone. Thank you for joining the call today. In my discussions of our Q3 fiscal year 24 financial results, references to revenue, net income and net cash generated from operations are on a U. S. GAAP basis, while adjusted net income, adjusted earnings per share, adjusted EBITDA and free cash flow are on a non GAAP basis.

Speaker 3

Reconciliations of our U. S. GAAP to non GAAP measures are included in the tables attached to our earnings press release. Our 3rd quarter results are among the strongest in our history. Our record adjusted EBITDA and EPS results were achieved despite the expected 3.6% decline in revenue from the prior year, which resulted in revenue of $126,800,000 versus 131,600,000 dollars On a year over year basis, revenue was impacted by the completion of project related revenue received in the prior year, representing 2 points of the decline and a changing business environment for several of our FinTech and Telecommunication clients.

Speaker 3

Revenue was also impacted by the shift from lower margin onshore to higher margin offshore geographies. The strength of our 15 new client wins across all our key verticals partially offset these headwinds. Revenue mix continued to grow in our higher margin digital and omnichannel services and offshore geographies. Digital and omnichannel delivery now represents 78% of our total revenue versus 73% in the Q3 a year ago, while our offshore and near shore revenues now comprise 76% of total revenue versus 72% in the prior year quarter. Our lower margin onshore region decreased to 24% of total revenue versus 28% in the prior year quarter.

Speaker 3

We expect that these mix shift trends will continue to have a positive impact on our long term margins. GAAP net income was $10,300,000 down from $11,300,000 in the prior year quarter. The change was primarily the result of a $1,300,000 impairment recorded in connection with a strategic decision to exit 2 of our delivery locations as well as a $1,500,000 severance expense as we focus investment on AI technology, HCM and ERP infrastructure as well as our sales and marketing organizations. These investments are important pieces of our strategy to drive and support growth in our business. Our tax rate for the quarter was 11% compared to 14% last year.

Speaker 3

The changes in effective tax rates between these periods was primarily attributable to changes in revenue mix across our taxable jurisdictions and discrete items. We expect the tax rate to return to near 20% in the 4th quarter. Fully diluted EPS was $0.57 compared to $0.59 the prior year quarter. On a non GAAP basis, adjusted net income increased to $12,600,000 from $11,700,000 in the prior year quarter. Non GAAP fully diluted adjusted earnings per share increased to $0.70 from $0.61 in the prior year quarter.

Speaker 3

Adjusted EBITDA increased to $19,200,000 or 15.1 percent of revenue, an all time high from $18,800,000 or 14.3 percent of revenue for the same period last year. The change in adjusted EBITDA margin was primarily driven by our higher gross margin and lower SG and A expenses excluding the impairment and severance expense from our cost optimization efforts undertaken during the quarter. For the Q3 of fiscal year 2024, our top 5, top 10 and top 25 client concentrations remained largely unchanged compared to the prior year at 37%, 54% and 78% respectively of overall revenue, representative of a well diversified client portfolio. Switching to our verticals, retail and e commerce increased to 24.9% of 3rd quarter revenue versus 22% in the prior year quarter. HealthTech increased to 14.6% of 3rd quarter revenue versus 13.8% in the prior year quarter and travel, transportation and logistics increased to 13.1% of 3rd quarter revenue versus 10.7% in the prior year quarter.

Speaker 3

Conversely, our exposure to the telecommunications vertical decreased to 14% of quarterly revenue versus 16.2% in the prior year quarter. Additionally, FinTech decreased to 13.7 percent of revenue for the quarter versus 18.5% in the prior year quarter, impacted by the changing landscape for some client payment support models and geographic shifts from onshore to offshore delivery. Net cash generated from operating activities was a solid $11,400,000 for the quarter compared to 13,600,000 dollars in the prior year quarter. Net cash generated from operating activities was $18,500,000 compared to $24,400,000 for the 9 months ended March 31, 20242023 respectively. Our DSOs were 74 days consistent with 73 at the end of the second quarter and in line with industry average.

Speaker 3

Several larger client payments received the 1st week of April due to the quarter and again falling on a weekend and impacted DSOs at the end of the Q3. Capital expenditures were 1,700,000 dollars or 1.3 percent of revenue in the Q3 of fiscal year 2024 versus $3,700,000 or 2.8 percent of revenue in the prior year quarter as we continue to utilize our available capacity from build out completed in previous years. Free cash flow was a strong $9,700,000 in the current quarter, consistent with $9,800,000 in the prior year quarter. Free cash flow increased to $11,800,000 from $9,200,000 for the 9 months ended March 31, 20242023

Speaker 2

respectively.

Speaker 3

We ended the 3rd quarter with $50,700,000 in cash, down from $57,400,000 as of June 2023, driven by share repurchases during the current year. Net cash was $49,300,000 down from $56,400,000 as of June 2023. We continued with our share repurchase program announced on September 18, 2023 authorizing us to repurchase up to $30,000,000 worth of shares through March 18, 2024. During the 3rd quarter, we repurchased 500,000 shares for 8,100,000 dollars For 9 months ended March 31, 2024, we have repurchased 1,000,000 shares or roughly 6% of our outstanding shares for 18,600,000 Our Board has recently authorized a new share repurchase plan for $30,000,000 over the next year. Our record adjusted EBITDA margin and adjusted EPS was a result of margin improvements across all our regions and the continued growth of our high margin services and geographies.

Speaker 3

We accomplished these results while continuing to invest in advanced AI capabilities to accelerate future revenue growth. In addition, we had another strong quarter of generating free cash flow. We remain confident in our strategy to drive growth in our higher margin offshore regions, accelerated by new client wins and to realize cost savings through optimizing our site footprint that will continue to drive high performing adjusted EBITDA margins in the years ahead. As a result of our efforts, we anticipate delivering full year results near the midpoint of our adjusted EBITDA margin guidance, while revenue will be near the lower end of the guidance provided last quarter. We are also improving our previous capital expenditure guidance as we continue to carefully manage our capacity utilization.

Speaker 3

We remain excited about our business and believe our recent client wins, strength of our pipeline and strategic investments will position us well as we head into fiscal year 2025. With that, Bob and I will now take questions. Operator, please open the line.

Operator

Thank you. At this time, we will conduct a question and answer session.

Speaker 4

As a reminder, to ask a question, you will need to press

Operator

Your line is now open.

Speaker 5

Yes. Hey, guys. Congrats on great profitability.

Speaker 2

Great. Thanks, Dave. Yes, we're really proud of the milestone of punching north of 15%.

Speaker 5

Yes. No, it's great. And maybe if we just start though on sales activity. You called out in the Q I know you called out on the call today too, but you called out in the Q specifically that Q3 kind of marked unthawing of some sales decisions and how Q1 and Q2 were still a little tougher for sales. So things are clearly getting better.

Speaker 5

What's kind of the timeline between like when those get better and then when that kind of goes into revenue? And then kind of also are these bigger than average or kind of normal size wins?

Speaker 2

Yes, Dave, thanks for that question. And yes, so we started seeing at the beginning of our fiscal year that pace velocity and size of deals starting to pick up, okay. So that would have been kind of around the July timeframe. Now the prior two quarters, things were running a little bit slow. So we started getting those and they continued to accelerate into Q3 and some strength into now what I feel like is Q4.

Speaker 2

The so we're excited about that, not only the size and the velocity. Now what we also like is the quality of these new logos and potential new logos. They're blue chips leading brands that are out there that are really looking in my mind looking to challengers to the incumbents. And that plays really well to us. And the challenge to me sits in 2 buckets.

Speaker 2

1 is, can you go deliver as a strong differentiated traditional BPO that leverages technology, etcetera. But the other piece of that decision making is can you drive AI into your business to help them solve, solve interactions. And candidly, and why we why I've leaned into the discussion on AI, Dave, on my remarks is most of what we're seeing is the industry is talking about AI kind of internally. And we are out in front of how AI can impact the customer experience. And so we think those two things work really well for us.

Speaker 2

And that's what the clients are looking. So the size of the opportunities, I think, are great. The brands are kind of what we've historically done, which are just the who's who, the who everybody wants to do business with, and I love the ability for us to compete and to win.

Speaker 5

Got you. Thanks for that. And then maybe just one follow-up. The EBITDA margin was really good, obviously. But what was particularly interesting, even with revenue down a little bit, the margin the gross margin was super strong.

Speaker 5

It was one of the best I think we've ever seen. How are you able to do that? Like is it a mix like a geographic mix or what's happening on the gross margin?

Speaker 2

Dave, so let me take the first cut at this and then Taylor, if you want to add some more color on to this. But look, we the business that we've built is one that is structurally solid that as we grow, we think we grow in our high margin services and geographies. Now right now, we have a few headwinds, but those headwinds are kind of localized to our lower margin U. S. Region.

Speaker 2

And that region, I think I shared, was down about 4% from prior year. But we are growing and landing and expanding with those clients into our Philippine region and our near shore regions. And so that overall structure of our business to me is you put those together and I think our ceiling continues to rise. And so you might have a quarter here that bounces that bounces off or so, but our overall ceiling continues to rise as all of those vectors connect and align. And that's what happened in Q3.

Speaker 2

And as I look out over the next several quarters, I feel like gross margin should we should be able to really have a solid performance around gross margin as a result of that structure. Now, Taylor, you might want to give maybe a little bit more color into kind of some of those details, the regional gross margins, etcetera.

Speaker 3

No, absolutely. And we've had an impressive track record of improving gross margins. If you look at like 6 of the past seven quarters, we've improved gross margins on a year over year basis. And really, it's a combination, as Bob mentioned, we're going into higher margin services and higher margin geographies, which has helped driving the improvement our gross margins. And then recently we've also had a couple regional specific initiatives where we thought we could drive improvement in gross margins and have seen good traction with those initiatives.

Speaker 3

So it's really a combination of profit improvement initiatives as well as higher margin services.

Speaker 5

Got you. Thanks guys.

Speaker 2

Yes. Thanks, Dave. Appreciate it.

Operator

Thank you. This concludes the question and answer session. I would now like to turn it back to Bob Dechant for closing remarks.

Speaker 2

Operator, thank you. So real quickly, very proud of the team and the results that we posted this quarter. As said, those milestones were quite an achievement from this team. I'm also very excited about the trajectory of our business and really the opportunities that AI presents us and where we believe we are going to be on the leading edge of this transformation. With that, thank you all for joining and look forward to chatting with you next quarter.

Speaker 2

Thank you.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Powered by Quartr

Key Takeaways

  • Ibex delivered a record 15.1% adjusted EBITDA margin and $0.70 adjusted EPS in Q3, marking the strongest profitability quarter in company history.
  • Revenue mix shifted toward higher-margin offerings, with 78% digital-first and omnichannel services and 76% offshore/nearshore delivery, while U.S. onshore declined to 24% of revenues.
  • The company launched its AI strategy with Ibex Automate virtual agents and Ibex Translate language-conversion tools, aiming to reduce live agent volumes and drive new revenue streams.
  • Sales momentum accelerated, with 15 new client wins in the first three quarters of FY24 versus eight last year, and a robust pipeline of blue-chip prospects.
  • Ibex’s balance sheet remains strong with ~$50 million net cash, nearly $10 million in free cash flow, and $8 million in share repurchases during the quarter, underscoring board confidence.
AI Generated. May Contain Errors.
Earnings Conference Call
IBEX Q3 2024
00:00 / 00:00