Release Date: September 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Concentrix Corp (CNXC, Financial) reported third-quarter revenue of $2.4 billion, reflecting 2.6% pro forma constant currency growth.
- The company saw significant wins, including a large transformational program with a financial organization valued at over $150 million in revenue.
- Concentrix Corp (CNXC) is proactively disrupting its own business to focus on long-term value creation, with a marked decline in transactional price-led commodity business.
- The company is leveraging its technology leadership to drive automation and improve performance, as evidenced by a win with an airline and a large infrastructure company.
- Concentrix Corp (CNXC) is launching new products like iX Hello, aimed at helping organizations harness the power of generative AI, which has garnered significant interest.
Negative Points
- The company has lowered its fourth-quarter revenue expectations due to lower volume forecasts, larger shifts to lower-cost delivery geographies, and the loss of some commoditized projects.
- Non-GAAP operating income was at the low end of guidance due to higher-than-anticipated costs for shifting programs offshore and upfront technology investments.
- Revenue from healthcare clients decreased by 4% due to shifts in delivery locations, impacting near-term performance.
- The company is experiencing margin pressure from dual costs associated with moving programs offshore and upfront investments in technology for longer-term contracts.
- Adjusted free cash flow was below expectations due to client collection delays and accelerated spending on integration costs.
Q & A Highlights
Q: Can you explain the impact of walking away from commodity business and winning new business on your revenue over the next few quarters?
A: Chris Caldwell, CEO: We see three main factors affecting our revenue: clients de-committing from volume due to lower sell-through and automation, accelerated offshoring, and not chasing highly price-sensitive work. These factors combined create a headwind, but we expect new business to ramp up and offset these impacts over time.
Q: How are the ramps for new business wins compared to historical trends, especially with AI involvement?
A: Chris Caldwell, CEO: Traditional business ramps haven't changed much, but large transformational projects take longer and incur upfront costs. For example, a recent airline win will start generating revenue in late Q4 or early Q1, fully ramping by Q2/Q3. A large financial project will start revenue in late Q2 2025, fully ramping by Q4 2025.
Q: What drove the increase in other expenses this quarter?
A: Andre Valentine, CFO: The increase is mainly due to $33 million in foreign currency losses related to intercompany balances and changes in contingent consideration. These are non-cash items and are backed out of our non-GAAP metrics.
Q: Can you provide more color on the Catalyst business and its performance?
A: Chris Caldwell, CEO: The Catalyst business is performing well, especially as an enablement partner for technology providers. It supports cloud solutions and various AI tools, and is integral to our transformational deals. However, we haven't seen a significant step-up in large IT digital transformation projects due to interest rates.
Q: How does increased offshoring impact your revenue and margins?
A: Chris Caldwell, CEO: Increased offshoring initially creates dual costs, leading to margin compression. However, once fully ramped, it benefits margins. Additionally, upfront investments in technology for transformational deals are expensed, impacting SG&A but leading to long-term margin expansion.
Q: What is the outlook for the technology, consumer electronics (TCE) segment given current volume pressures?
A: Andre Valentine, CFO: The TCE segment has been muted due to lower consumer tech volumes despite share gains. We expect improvement as macro conditions improve and tech refresh cycles resume, positioning us for faster growth.
Q: Can you elaborate on the success and future potential of client consolidation opportunities?
A: Chris Caldwell, CEO: We are seeing clients consolidate providers to manage costs, and we are winning about 80% of these opportunities. This trend is expected to continue across various verticals, enhancing our market position.
Q: How do you decide on the level of investment in GenAI and Catalyst, and what ROI are you targeting?
A: Chris Caldwell, CEO: We are currently at a $100 million annual run rate for GenAI investments. Success is defined by achieving ROI by the end of 2025, with margin and growth rate accretive to our overall business. Investments are made to differentiate ourselves and meet client needs for flexible, customized solutions.
Q: How will additional technology products in the iX suite impact margins?
A: Chris Caldwell, CEO: The $100 million run rate includes multiple products in the iX suite. We are also reallocating capital from synergy savings to hire necessary skill sets. The goal is to manage within current operating expenses while supporting transformational programs.
Q: How does the shift to offshore programs affect margins and the pricing environment?
A: Andre Valentine, CFO: Offshore shifts take about two to three quarters to realize margin benefits due to initial dual costs. The pricing environment is competitive, especially for commoditized work, but we are focusing on transformational deals with better long-term margins.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
