Concentrix Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
June 26, 2024

There are 8 speakers on the call.

Operator

Good day, everyone, and thank you for standing by. Welcome to the Concentrix Fiscal First Quarter 20 24 Financial Results 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.

Operator

I would now like to hand it over to the Vice President of Investor Relations, Sarah Butta. Please proceed.

Speaker 1

Thank you, operator, and good evening, everyone. Welcome to the Concentrix Q2 fiscal 2024 earnings call. This call is the property of Concentrix and may not be recorded or rebroadcast without the written permission of Concentrix. This call contains forward looking statements that address our 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.

Speaker 1

We do not undertake to update our forward looking statements as a result of new information or future expectations, events or developments. Please refer to today's earnings release and our most recent filings with the SEC for additional information regarding uncertainties that could affect our future financial results. This includes the risk factors provided in our annual report on Form 10 ks and our other filings with the SEC. Also during the call, we will provide and discuss non GAAP financial measures, including adjusted free cash flow, non GAAP operating income, non GAAP operating margin, adjusted EBITDA, adjusted EBITDA margin, non GAAP net income, non GAAP EPS and constant currency revenue growth. A reconciliation of these non GAAP measures is available in the news release and on the company's Investor Relations website under Financials.

Speaker 1

With me on the call today are Chris Caldwell, our President and CEO 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 to your questions. With now, I'll turn the call over to our CEO, Chris Caldwell.

Speaker 2

Thank you very much, Sarah. Hello, everyone, and thank you for joining us today for our Q2 2024 earnings call. First, let me start off by thanking our clients from Game changers for their contributions who are being included in the Fortune 500 for the first time this year. We started with an idea that companies wanted to deliver a better brand experience for their customers. We believe that by thinking about the customer experience holistically across both back office and front office work, while investing in technology for frictionless engagement, we could create a market opportunity for ourselves.

Speaker 2

Over 20 years, we have grown that idea to a global player in over 70 countries delivering solutions that continue to push the industry forward. I couldn't be prouder of the team or more thankful for the trust of our clients. Now turning to the 2nd quarter performance. We increased revenue 47% as reported and grew 4% on a pro form a constant currency basis in the quarter exceeding our prior guidance. We reported non GAAP operating income of $321, 000, 000 an increase of 46% year on year and in line with our guidance.

Speaker 2

We delivered adjusted EBITDA of $380, 000, 000 an increase of 47% year on year. On a pro form a basis, we grew non GAAP operating income 4% and adjusted EBITDA 2% year on year. We generated more than 200, 000, 000 dollars in adjusted free cash flow this quarter, while returning more than $60, 000, 000 of value to shareholders through dividends and share repurchases. We remain on track to generate $700, 000, 000 of adjusted free cash flow for the full year after integration expenses and on track to complete $120, 000, 000 of share repurchases for the fiscal year, of which we have done over $60, 000, 000 through the end of Q2. Our positive momentum continued in the Q2 giving us confidence to raise our revenue growth guidance for the full year.

Speaker 2

Our revenue guidance does not anticipate any changes in the macroeconomic environment, but it does reflect ongoing client demand for our solutions and the stability of our clients' volumes. We see the same momentum in Catalyst as its growth continues to be accretive, which we expect to continue for all of 2024. From a vertical perspective, we are seeing particular traits in retail cloud on e commerce and banking and financial services that is expected to continue for the rest of 2024. As we mentioned in our Q1 call, we are increasing our investments in our technology while also investing to transition more distance from competitors. In the second quarter, we accelerated these investments while still expecting to increase our non GAAP operating income by 40 basis points for the entire year on a pro form a basis.

Speaker 2

Specifically, we have increased our development spend approximately 1% of revenue through the Q2, an increase of approximately 50 basis points from the start of Q1. This increased investment relates to our development of technology platforms for both clients and internal units as well as an increasing number of pilots that we have underway with clients using generative AI. We see this investment remaining at this level for a few quarters prior to falling more in line with historically what we have spent while revenue from these investments starts to become more meaningful. We also expect to incur approximately $20, 000, 000 to $25, 000, 000 of near term incremental expense to take up some large multiyear program where we are taking share from competitors as clients consolidate capacity with us. These investments again are temporary and revenue follows in subsequent quarters.

Speaker 2

We see both of these as near term and positive investments that will set us up for long term growth and value creation. Now, let's talk about some of our recent wins and the trends we're seeing in the business. As a reminder, our growth strategy is to drive incremental value to clients through a broad set of technologies and services at global scale. Our strategy is working and we're starting to see this reflected in our growth rate and our pipeline building across both existing and new clients. Some examples of wins in the quarter include a major global retail e commerce client where we combine the power of our Vida AI contacts and translation tools with our CX expertise and global footprint to design and implement a new customer solution experience for them across their EMEA operations.

Speaker 2

This allowed our clients move volume from competitors to us resulting in a 20% increase in our revenue and a mid single digit increase in our margin for this specific program, while reducing the cost of the client by double digits. Our use of JNI expertise was a win win for us and our clients. We also won a new large global media client this quarter. We will support the launch of 1 of their new high profile channels in EMEA and consolidate their customer experience operations in Japan and Korea. We will also design and build a generative AI knowledge management solution for their enterprise.

Speaker 2

They wanted a partner that can provide a complete solution delivered globally and securely, which we are able to do. Other wins in the quarter include a global travel client that have a web health relationship in Europe. This quarter, we started to expand our revenues as a combined organization by leveraging our API footprint and our AI based training tools to improve effectiveness and efficiency for our game changers. This resulted in work coming from competitors to us as well as the pitch cancel new revenue streams as they contemplate rolling out our AI solution across their enterprise. Finally, we sold Catalyst Services into a former web health client in Europe to provide specialized digital engineering resource to build, enhance and maintain the client's digital infrastructure and CCaaS platform to support their primary channel for new business.

Speaker 2

To strengthen our existing relationship with the client. These wins underscore the breadth and complexity of solutions that we are delivering for our clients. They also reflect how our business continues to change. At our Investor Day 2 years ago, we talked about 15% of our business being commoditized low complexity transactions. Last year, we updated investors that we were down to 10% and we have reduced that to 7%, meaning 93% of our transactions are medium to high complexity now in our business.

Speaker 2

These wins also demonstrate 2 important factors in our ability to gain market and wallet share. Clients are keeping a broader set of integrated solutions from fewer partners and are doing what's due to our global scale, technology and integrated consulting implementation and support offerings. And secondly, automation and generative AI is continuing to be an area of competitive advantage for us. As we have said before, we believe generative AI presents a tremendous upside opportunity for Concentrix and our clients. We have an increasing number of pilots and solutions going in production with clients now.

Speaker 2

While the level of Genenti adoption readiness varies greatly by vertical and client, there are a few common themes with these pilots' introductions. 1st, the vast majority of pilots and process are looking at using AI to augment a human advisor, to make the advisor more effective than representing our client's brand and enhancing the brand experience for its customers. 2nd, many of these pilots are using generative AI to upgrade or replace existing knowledge platform, chatbot, automation systems and IVR systems. This brings me to the upside opportunity we see as we combine our own AI tool with those of our partners to bring new value to our clients. Many of our technology platforms continue to gain traction in the market.

Speaker 2

We're building on this momentum and we'll be introducing a variety of new products over the coming quarters. This quarter, we filed a patent for DIAL, which stands for generative intelligence from limitless engineer, a platform we developed to automate coding and testing using Gen AI that is helping us to build new platforms faster. From our internal usage, we're seeing up to 40% productivity boost to experienced coders on a transactional path. We believe our investments in both generative AI pilots and technology products will help us expand the share of wallet and share of market long term and superior marketing. Finally, let me touch on the Web Health integration.

Speaker 2

As you can see from these wins we've mentioned, we're starting to see revenue synergies sooner than we expected. This is a testament to the successful integration of our go to market and delivery organizations, which we initiated on day 1 and are largely behind us. The integration is on track as is a realization of planned cost synergies. In summary, our growth strategy is working. We are differentiating Concentrix in the market and delivering incremental value clients for a broad set of technologies and services at global scale.

Speaker 2

And our recent wins offer evidence that AI is an upside opportunity for Concentrix. With that, I'd like to thank our game changers and our clients for the relationships over the last quarter and pass the call over to Andre. Andre, over to you.

Speaker 3

Thank you, Chris, and hello, everyone. I'll begin with a look at our financial results and then discuss our outlook for the rest of the year. The Q2 marked another solid quarter for the company. We exceeded our targets for revenue, delivered profits within our guidance range and drove strong free cash flow. We delivered 2nd quarter revenue of $2, 400, 000, 000 on a pro form a constant currency basis as if the WebHelp combination was completed at the beginning of 2023, we grew revenue by 4%.

Speaker 3

For the first half of the year, our constant currency pro form a growth was 3.4%. So our overall revenue trends remain positive. As you can see from our guidance, we expect this stability to continue in the second half of the year. Looking at our revenue growth by vertical, on a pro form a basis, revenue from retail, travel and e commerce clients grew 10% year over year. Revenue from banking, financial services and insurance grew 6% and our other vertical grew 3%.

Speaker 3

Our technology and consumer electronics clients grew over 3% on a pro form a basis. While this vertical is still lagging some other sectors due to the macro environment, we were happy to see some positive momentum from consumer electronics clients as we gained share with key clients. We continue to see strength in enterprise tech. Revenue from our telco and media clients decreased 3% on a pro form a basis, primarily due to lower volumes from a few North American communications clients as discussed in prior quarters. Turning to profitability, our non GAAP operating income was $321, 000, 000 in the quarter, an increase of $101, 000, 000 compared with the Q2 of 2023.

Speaker 3

Our non GAAP operating margin was 13.5%, down about 20 basis points from last year due to the inclusion of Webhelp, which historically operated a slightly lower non GAAP OI margin. Adjusted EBITDA was $380, 000, 000 up $121, 000, 000 year over year and our adjusted EBITDA margin was 15.9%, roughly flat year on year. On a pro form a basis, our 2nd quarter profitability metrics continued their solid improvement. Non GAAP operating income increased $12, 000, 000 with a 30 basis point margin improvement compared with last year. Adjusted EBITDA was up $8, 000, 000 and our adjusted EBITDA margin was flat when compared with the last year.

Speaker 3

Non GAAP net income was $183, 000, 000 in the quarter, an increase of approximately $46, 000, 000 compared to the Q2 of last year. Non GAAP EPS was $2.69 per share, an increase of $0.06 per share year on year. GAAP net income was $67, 000, 000 for the quarter. GAAP results for the Q2 of 2024 included $116, 000, 000 in amortization of intangibles, dollars 31, 000, 000 in expenses related to the Web Health combination and integration, $22, 000, 000 in share based compensation expense, dollars 2, 500, 000 in step up depreciation, a $7, 000, 000 reduction in acquisition contingent consideration, dollars 14, 000, 000 in net foreign currency gains and $4, 000, 000 in imputed interest related to the seller's note issued in connection with the combination. Our adjusted free cash flow for the quarter was strong at $202, 000, 000 and we remain on track for our full year adjusted free cash flow outlook of $700, 000, 000 net of integration expenses.

Speaker 3

As we stated in our last call, the adjusted free cash flow metric is calculated as free cash flow, excluding the impact of the factoring program we assumed and have continued to operate since the WebHelp combination. During the Q2, the amount of factored accounts receivable decreased by $24, 000, 000 with the outstanding factored balance standing at about 100 and past Webhelp acquisitions of approximately $28, 000, 000 of which approximately $5, 000, 000 resulted in a reduction of adjusted free cash flow. Turning to the balance sheet. At the end of the second quarter, cash and cash equivalents were $207, 000, 000 and total debt was $4, 900, 000, 000 Net debt was $4, 700, 000, 000 at the end of the second quarter and we repaid 150, 000, 000 quarter. We reduced our net debt to 2.97x pro form a adjusted EBITDA at quarter end, a sequential decrease from 3.04 times in the prior quarter.

Speaker 3

We expect to continue to reduce our net debt and net leverage through the end of 2024. We remain committed to our plan of reducing net leverage to close to 2 times adjusted EBITDA within 2 years of the close of the WebHelp combination, while supporting our dividend and buying back stock. During the Q2, we repurchased approximately 660, 000 shares of our stock for approximately $40, 000, 000 at an average price of approximately $61 per share. And we paid $20, 000, 000 through our quarterly dividend. As a reminder, on our Q1 earnings call in March, we committed to $100, 000, 000 in share repurchases over the remaining 3 quarters of 2024.

Speaker 3

We have about $60, 000, 000 more to go on that commitment. At quarter end, the remaining authorization on our share repurchase plan was approximately $227, 000, 000 Our liquidity remains strong at approximately $1, 500, 000, 000 including our over $1, 000, 000, 000 line of credit, which is undrawn. We remain committed to investment grade principles and we are steadfast in our capital allocation priorities. We expect to continue to drive organic growth, realize integration synergies related to the Web Health combination and repay debt, while continuing a disciplined program of returning capital to our shareholders through our dividend and disciplined share repurchases. Now I'll turn my attention to the business outlook for the Q3 and full year 2020.

Operator

And I will see your audio.

Speaker 3

For the Q3, we expect revenue of $2, 350, 000, 000 to 2, 400, 000, 000 dollars based on current exchange rates. This reflects approximately 1.5% to 3.5% pro form a constant currency growth, net of an approximately 205 basis point exchange rate headwind. Pro form a revenue for the Q3 of 2023 would have been $2, 367, 000, 000 assuming the Web Health combination occurred at the beginning of fiscal 2023. We expect non GAAP operating income to be in the range of $330, 000, 000 to $350, 000, 000 in the 3rd quarter. At the midpoint of our guidance, this equates to a non GAAP operating income margin of approximately 14.3%.

Speaker 3

Importantly, this is an increase of 20 basis points over the prior year quarter on both a reported and pro form a basis. On a pro form a basis, non GAAP operating income was $334, 000, 000 in the Q3 of 2023. We expect non GAAP EPS of $2.76 per share to $3.04 per share for the Q3. This assumes interest expense of $75, 000, 000 to $76, 000, 000 excluding $4, 000, 000 of imputed interest on the seller's note. It assumes a non GAAP effective tax rate in a range of 25% to 26%.

Speaker 3

We anticipate a weighted average diluted share for the 3rd quarter. We estimate that about 4% of net income will be attributable to participating securities and about 96% of total net income will be attributable to common shares for the Q3. Turning now to the full year 2024 guidance. Based on our strong start and continued confidence in our strategy and execution, we are increasing our full year 2024 revenue guidance while reiterating our free cash flow guidance. Specifically, our guidance for the full year is as follows.

Speaker 3

We expect 2024 revenue to be in a range of $9, 580, 000, 000 to 9 point $675, 000, 000, 000 reflecting approximately 2.5% to 3.5% pro form a constant currency growth. This is net of an approximately 150 basis point exchange rate headwind. This is an increase to our prior guidance of 1% to 3% year on year growth on a pro form a constant currency basis. We continue to expect 1st year net synergies of $75, 000, 000 The current run rate is approximately $80, 000, 000 on an annualized basis. We do anticipate that some of these synergy savings will be offset by continued ramp up costs and accelerated investment in technology.

Speaker 3

As a result of the investments Chris referred to earlier, we are reducing our non GAAP operating income expectation for the year. We now anticipate non GAAP operating income in the range of $1, 350, 000, 000 to $1, 401, 000, 000 for the year, which represents a 14.3% margin at the midpoint. Importantly, this is an increase of 10 basis points over the prior year and 40 basis points over the prior year on a pro form a basis. We expect non GAAP EPS of $11.40 per share to $12.07 per share. This assumes full year interest expense of $300, 000, 000 to $304, 000, 000 excluding $16, 000, 000 of imputed interest on the seller's note.

Speaker 3

We expect an effective tax rate of approximately 25% to 25.5 percent and a weighted average diluted share count of approximately 65, 100, 000 shares for the full year. In terms of cash flow, we are reiterating our outlook for $700, 000, 000 in free cash flow in 2024 even after funding integration costs. This assumes no change in the amount of factored accounts receivable from the beginning of the year. Our strong free cash flow will position us to further reduce our net leverage to approximately 2.6 times adjusted EBITDA by year end, while repurchasing approximately $120, 000, 000 of shares as we have committed. Our business outlook and cash flow expectations do not include any future acquisitions or impacts from future foreign currency fluctuations.

Speaker 3

In conclusion, we are pleased with our performance in the Q2 and our outlook for the year. We are exceeding our revenue growth expectations with solid execution across key verticals. We're optimistic about our second half and are seeing solid demand for our unique technology and services offerings. We're increasing our competitive position with a broader set of technology and service offerings. With this backdrop, we are increasing our revenue guidance for the year and we are reiterating our expectations for free cash flow.

Speaker 3

We will continue to return value to shareholders with our ongoing share repurchase program and dividend while reducing leverage. With that, Carmen, please open the line for questions.

Operator

Thank you so much. Please press star then 1 to 1 to 2 questions. And it comes from the line of Joseph Vafi with Canaccord Genuity. Please proceed.

Speaker 4

Hey, guys. Good afternoon. Great to see the fine tune up on the guide and welcome Sarah to the team. I thought maybe we would just start with kind of parsing out kind of it looks like you're taking the bull by the horns a little bit on the macro or on the AI front that is and it's turning a little bit more into an opportunity than maybe people have thought previously. And then if we could compare and contrast that to what you're seeing on the macro and how both of those kind of have kind of funneled into the new guidance for the year?

Speaker 4

And then I have a quick follow-up.

Speaker 2

It's Chris. So first of all, you're absolutely right. We are using your term taking bull by the horns from a generative AI perspective. We're seeing very good traction in pilots and getting some things into production into our client base. And we're also seeing the ability where we think that there's misses in the market from a technology solutions perspective on platforms that we have a lot of this base built out for ourselves already.

Speaker 2

But now we need to work on getting it to commercial standards and from a multi tenant perspective and ease of use perspective in large scale rollouts. And so we don't want to miss that opportunity and are taking advantage and leading into it. I think secondarily as for secondly, we also are seeing good traction in taking share as well as winning net new clients with even the AI products that we have right now as we talked about in a couple of our wins. So we see that as being very, very positive and we built that into sort of our guide of seeing our revenue increase, while also seeing some costs associated with moving these pilots and building out the infrastructure that we want that we think will put us in a very, very nice position for further growth. In terms of the macro, we're not seeing really any change.

Speaker 2

We're not seeing it improving. We're not seeing it declining. We're seeing and that's sort of a global comment. We're seeing things fairly stable and steady and clearly any kind of positive changes coming from that. We expect to benefit from it based on the share that we have within our client base.

Speaker 4

Great. That's great color. And then, thanks for that, Chris. And then maybe on 1 for Andre. I know that as we exit this year, some of the web health merger related costs are going to abate and then more cost synergies are going to kick in combined with continued debt pay down, maybe offset a little bit more now at this point by investment in the business.

Speaker 4

And I know you're not providing guidance for next year, but it would be great to get an updated framework on I think you've reiterated your $700, 000, 000 in free cash flow guidance this year, but to kind of provide a little bit of framework for next year would also be helpful. Thanks a lot.

Speaker 3

Happy to do that, Joe, and good to talk to you. Yes, so there are certainly reasons for us to be optimistic that the $700, 000, 000 in free cash flow that we generate this year can go up in 2025. I want to stop close of stop short of guiding for 2025. But the 2 major drivers there will be synergies. We expect in year 1 post close of the combination recognize $75, 000, 000 in net synergies.

Speaker 3

We're already above that run rate as we look at the synergies that we've are realizing right now in the business. We expect that will go up to at least $105, 000, 000 in net synergies in the 2nd year post close of the combination. And then you're right, the integration expenses will drop pretty meaningfully from 2024 to 2025. I would see a drop in the range, could approach $50, 000, 000 or more frankly, of cash integration expenses dropping off. So both of those things would give us some confidence that we could see cash flow go up.

Speaker 3

Obviously, we're also going to be paying down debt. So some opportunity with that and perhaps if we get there, some interest rate reductions to see interest costs also come down from a cash basis and be a bit of a help to us in 2025.

Speaker 4

Great. Thanks a lot guys. Nice see the guide

Speaker 2

up. Thanks, Joe. Thank

Operator

you. 1 moment for our next question.

Speaker 1

Operator, do we have a next question? Okay. I think the question was going to be from Ruplu.

Speaker 5

Hi. Thanks for taking my questions and congrats on inclusion in the Fortune 500 list. Andre, can you help me understand all of the moving pieces to the guidance? Looks like fiscal 2Q revenues beat the midpoint of guidance by $32, 000, 000 and EPS beat by $0.07 But you're guiding fiscal 3Q down sequentially and lower than Street estimates. And if I look at fiscal year revenue guidance increase that looks like it's about $23, 000, 000 at the midpoint and then operating margin is down 50 bps to 14.3% and EPS is $0.36 lower.

Speaker 5

So given all of these different data points, I mean my questions to you would be on the revenue side, was there any pull in of revenue from 2Q to 3Q? Why would there be a sequential decline in 3Q? And is there does that imply a somewhat steeper ramp between 3Q and 4Q to get to the full year?

Speaker 3

So, Ruplu, as we've kind of commented about our revenue guide throughout this year, we want to be prudent in how we guide revenue. And so we think that we have done that with what we've provided here. So having grown at 4% here in Q2, you're right, we are guiding to growth of 1.5% to 3.5% over the balance of the year roughly. Certainly, that's what we're guiding to in Q3. Again, we're just there we're being prudent.

Speaker 3

We are not seeing anything in our clients' volumes. We are not seeing anything in our pipeline that suggests that revenue should decline. And so from a revenue perspective, just being prudent with the guide and frankly quite confident and focused on coming in as we did this most recent quarter, at least in the upper half of what we've guided to, which would put you very, very close to a continuation of the growth rate that we saw here in the first half.

Speaker 5

And then, on operating margins, the 50 basis points lower, 14.3% versus 14.8% for the full year. I think you talked about some investments you're making. Can you elaborate more on what are the investments that you're making and when do you expect to see revenue benefit from those investments?

Speaker 3

Yes. So, Chris, in his script, alluded to 2 major areas where we're investing. So we're investing heavily in technology and our platforms, embedding GenAI into them both for internal use, for our client pilots and for the development of some commercial products. We don't think that and that is certainly weighing on our margins, but we think that's a good investment for the long term. As you see in many of the wins that Chris talked about, technology is at the forefront of what's driving our competitive advantage and driving those wins across the finish line for us.

Speaker 3

So and we also don't think that level of heightened investment is a forever thing. We think it is temporary here through the balance of the year and could even begin to taper as we exit the year. The other major area that we're investing in is transitioning new business to us. That can come in many, many different flavors. It can become transitioning work from a competitor where we incur upfront technology costs.

Speaker 3

It could be upfront training costs. It could be all of those types of things. And so but we're happy to do that because again, we do that in advance. The revenue shows up a few quarters out and the margins on those deals are quite attractive to us. So that's how you think about it.

Speaker 3

You're right. At the midpoint of our guide, we've come down a bit. It's because of these investments. We think it's the right thing to do to grow the business and drive value for the long term.

Speaker 5

Okay. And maybe I'll try and sneak 1 more in. Sorry if I missed this. Did you talk about the growth rate for the new economy clients and for the Catalyst business in fiscal 2Q? And how are sales cycles trending for different size of deals?

Speaker 5

Thank you.

Speaker 3

Yes. So Catalyst continues to we're very, very proud about Catalyst is doing. It's growing quite nicely, grew sequentially from Q1 to Q2 and is meaningfully accretive to the overall growth rate for the business in Q2. And we see that continuing over the back half of the year. New economy clients continue to represent about 25% of revenue, Ruplu.

Speaker 3

And as I commented at your technology conference earlier this month, they are growing faster than the rest of the business, faster than the enterprise clients, although not nearly as fast as they were, call it, 2 years ago. They've become very focused on ROI, on right shoring the work, on embedding technology to become more efficient and all the things frankly that the enterprise clients are interested into. Okay.

Speaker 5

Thank you for all the details.

Speaker 3

Sure. Thanks, Rupu. Next question comes from Divya Goyal with Scotiabank.

Speaker 6

Good evening, everyone. So I had a question on Web Health. Andre, I think you mentioned that there are certain earn out payments that you have to make related to the Webhelp acquisitions that were made prior to you guys acquiring Webhelp. If you could provide some more color on that? And is that going to be an additional is that an additional impact on your guidance as well for the year on the bottom line?

Speaker 3

No. So yes, the payments that we made and they were about $28, 000, 000 in Q2 relate to past acquisitions by WebHelp. So these were things that we're committed to prior to us becoming involved with WebHelp and then closing on the transaction in 2023. There are no they do not impact our bottom line as they were effectively have been accrued for some period of time. So no impact there.

Speaker 3

They do obviously use cash, although most of that payment does not impact our free cash flow. As I alluded to, maybe $5, 000, 000 impact in free cash flow. We don't expect any future further earn outs in 2020 4 related to those acquisitions. I don't believe there are any in 2025 and then a fairly similar amount of earn outs would be expected in 2026. These were all kind of part and parcel with the financial model that we put together as we looked at the transaction and closed the transaction.

Speaker 3

They're playing out exactly as we expect them to.

Speaker 6

That's perfect. And just another question related to Web Health. So you did talk about some of the I think Chris mentioned some of the cross sell synergies of catalyst into Web Health. If either you or Chris could provide a little bit more color into how exactly is that trending and what is the broad attraction that you are seeing for Catalyst into some of these new WebHill clients that you've recently acquired?

Speaker 2

Yes, for sure, Dhivya, it's Chris. So first off, we expected obviously revenue synergies, but we didn't necessarily account for them in the 1st year. They tend to take a while to gain traction and go and we're kind of well ahead of where we expected to be at this point in time, both by the way taking Concentrix clients across to sort of the web health footprint and vice versa as we talked about on the prepared remarks. From a technology perspective, where we're gaining share really across our whole client base, forget about whether it's web client originally or a Concentrix client originally, is integrating our technical services. And the vast majority come from our Catalyst group, some of that comes from our existing client success organization already.

Speaker 2

But ultimately, it's that value proposition of putting everything together that clients are most interested in that has really helped us accelerate our growth rate and start to build the stronger pipeline that we're seeing right now.

Speaker 6

That's helpful. And is it fair to assume that your Catalyst business would be to your point consulting related? So would it be a higher margin business? Or what is the big difference between what you're doing with Catalyst versus your standard business?

Speaker 2

From a margin standpoint? Yes. Good question. So in our Catalyst business, we have our consulting business, we have our analytics business, we have our digital engineering business, our CCaaS business, our cloud migration business. And so there's a lot within our Catalyst business.

Speaker 2

And the margin profile of some is, as you can imagine, higher than our core business. Some is actually lower than our core business because we're doing a

Speaker 4

lot of these pilots and we're doing

Speaker 2

a lot of the build out of these tools within our Catalyst business, which is not necessarily accretive to our overall margin. But what we see long term as we talked about when we started investing in that business is the ability to increase our margins much like we do in our core business to be more accretive than our core business as we go forward. But that's a longer term comment.

Speaker 6

That's all for me. Thank you so much.

Speaker 3

Thank you.

Operator

Thank you. 1 moment for our next question please. All right. And it comes from the line of Vincent Colicchio with Barrington Research. Please proceed.

Speaker 7

Yes. Chris, I like to sort of think a little bit more about your market share gains. Are they coming at the expense of medium sized and smaller players as well as some of your larger competitors?

Speaker 2

Actually, they're coming from both. We won the business from smaller players who weren't able to deliver on a print and didn't necessarily have the investment security that they needed. And we won some good sized business. 1 of the deals that we talked about was from a larger competitor, primarily because we could bring everything together and have the technology solution versus just sort of the operations part of it. And so we see that continuing based on how clients are thinking about their businesses and returning their services right now.

Speaker 7

So if we isolate your larger competitors, do you think you have a more complete portfolio today of what folks are looking for? Or is it or am I overgeneralizing?

Speaker 2

No, absolutely. We think we have a very, very complete portfolio across both the consulting and both the design, the build and the run aspects of delivering services and solutions to clients. Clients are looking for someone who can bring this expertise and by the way do it maturely to their enterprise and kind of reimagine what they're delivering from a customer experience perspective. And that's really where we're gaining new share because the conversations are very different than probably what we had 2 or 3 years ago.

Speaker 7

And as was it early we're seeing the World Health revenue synergies a bit earlier than expected. How are you feeling about seeing a meaningful contribution from revenue synergies in 2025?

Speaker 2

I don't want to guide for 2025, but I think directionally from my comments and from Andre's comments, you can see that we're pretty bullish and confident. And as we expected doing the transaction, that's what we want and we're executing a lot on that plan.

Speaker 7

Okay. And then as the AI automation evolves here, I know we're still very early days, are you seeing any change in the competitive landscape in your technology business?

Speaker 2

I think in the big transformational deals that we're working on and seeing anything called out in Q1 and Q2, we have a different set of competitors. They're much larger, much bigger global integration, development capabilities, technology companies. And we think we compete very, very well with that because we have the domain expertise around what our clients are looking for because we run their businesses as it stands right now. So that's definitely changed from a competitive standpoint. We've also seen sort of smaller VC backed companies talking about AI who kind of are talking about new bells and whistles.

Speaker 2

But again, they don't really necessarily understand what the clients are after and what the intimate knowledge of the domain expertise is. And so therefore, we have a very good competitive advantage against them as we're building out the technology that's very suited for the client base because we know it and those are the main expertise. So we are migrating to different competitors, but we think we're very, very well positioned for sort of the new competitive landscape.

Speaker 7

Thank you, Chris.

Speaker 2

Thank you, Vince.

Operator

Thank you. And with that, ladies and gentlemen, I will conclude the Q and A session and conference for today. Thank you all for participating. And you may now disconnect.

Powered by Quartr
Earnings Conference Call
Concentrix Q2 2024
00:00 / 00:00