Good afternoon. I'm Alok Matapur kar, Managing Director of Tech Investment Banking with JP Morgan. We're joined today by Andre Valentine, who's CFO of Concentrix, a leader in digital CX. Andre, great to have you back. Welcome back.
It's always great to be here. Alok, thanks for having us. It's been a great day.
Andre, I thought maybe we could start with an introduction and a brief overview of the company for those who are less familiar.
Yeah, happy to do that. You know, and probably appropriate. We only spun out from SYNNEX about four years ago, so maybe for some investors, still a fairly new story. But we are a nearly $10 billion business services outsourcing leader, and kind of started with a heritage, if you will, in customer experience, but have invested both organically and inorganically over time to move into digital IT services, consulting, and most recently, AI products and services, all still around the CX space. We generate an EBITDA margin of 16%-16.5% in that range, and we'll generate free cash flow this year of $625 million-$650 million. We are very, very proud of those metrics. All of those metrics tend to be moving in the right direction. We will grow this year, guiding to the top end of our growth guidance, 1.5% constant currency growth.
From an investment perspective, we think we're an underappreciated story. If you look at where we trade, clearly generative AI risk is an overhang for our stock. Yet we see AI as an opportunity for our business, just as we have all the other technologies that we've adapted to and evolved with over the last 20 years. We see AI as yet another tailwind for our business, and we're proving that each quarter as we continue to grow.
On that note, Andre, a few of your peers reported recently, and it feels like demand is stabilizing in the industry. What is your observation?
Ours would be exactly in line with that. It's been stable. I would not say that the macroeconomic backdrop is fantastic, but it's about where it's been. With that, we've been able to grow in verticals where we aren't seeing underlying transaction volume. We're growing through share gains. Where there are opportunities to grab growth due to underlying transaction volume, we're aligned with the right clients and we're growing with them.
A lot of headlines around tariffs, potential downturn, a lot of potential boom and doom. Are you seeing any impact in your business? Anything clients are saying to you?
You know, anecdotal evidence of some impact, yes. But when I step back at 30,000 ft, we're really not seeing an impact. Interestingly, we provided our guidance at the end of our first quarter, four days before the Liberation Day. I'm not sure that sitting here today, we would have guided any differently given what's transpired. Things continue to be stable. Tariffs are just part of that stable backdrop for us. We're just continuing to execute and try to deliver our second quarter.
Going back to 30,000 ft, how do you balance short-term performance against long-term innovation, especially in light of AI?
Yeah, the management team at Concentrix and the board are quite aligned on this. We're managing this business for the long term. A great example of that is the heightened investment we've made beginning in last year, our fiscal 2024, to productize, well, first roll out across over half of our clients' generative AI-powered tools, and then productize those tools and bring them to market beginning late last year and starting to see some traction here this year. Clearly, even with that, we're able to grow margins, grow free cash flow. That is the balance we have. We're managing this business for the long term, really trying to future-proof the business, if you will, and think about where the market is going. You have seen that with not just what we've done with generative AI, but some past M&A transactions as well.
Look, this is a DNC, so we'll talk a lot about AI. Do you see the competitive landscape changing in terms of whether competitors are doing things more differently, even startups that are AI natives emerging? How do you see that evolving?
Yeah, we do see the landscape changing. We had the foresight, frankly, to see that it was going to change. If you look back at some of the transactions that we've done, getting into the digital IT services space at scale by acquiring PK Global, the WebHelp transaction, most recently, some of the organic investment we've been making in software products and services, all of that is aimed at dealing with a changing competitive set. More and more now, when we compete for a deal, particularly a larger, more transformative deal, we're not seeing our typical CX BPO competitors. We're seeing Accenture, and we're seeing TCS, and we hold our own against them because of the domain expertise that we have. As it relates to startups, we feel like we have a real advantage over them.
We have, again, the experience that comes with delivering customer experience solutions at scale and doing that on a global basis. That domain expertise is very important and helps us, we feel, positions us to win against those startups, as do the investments we've made in partnerships with leading brands like Microsoft, Google, and Salesforce.
Let's talk a little bit more about that evolution beyond CX into tech services, BPO. Recently, you mentioned you've ancillary services, north of $1 billion. That's growing nicely. Your Catalyst business, that's $800 million. Can you share, can you elaborate more on what those services are and how do you see the growth playing out?
Yeah, that billion dollars of revenue that we talked about on our Q4 earnings call is really a set of revenues that we have now at scale that we didn't have at scale, call it two to three years ago. Major components would be B2B revenue generation, services, data analytics, data annotation, financial crimes and compliance services such as KYC or anti-money laundering. All those things are new services. That cohort of revenue, call it a billion dollars or so, is growing mid-single digits. Frankly, part of our growth algorithm to get to mid-single digit growth is for those businesses to grow faster. We think the opportunity is there as we bring them to scale, and we're investing to do that. You mentioned Catalyst. This is where we do our detailed engineering work, data engineering, implementation of CCaaS services, et cetera.
Think of it as kind of a consultancy, if you will. It gives us a unique ability against our core CX BPO competitors, where we can actually go in and design and build their CX platforms for them and do that at scale and also run it for them in our centers. That is a unique capability as we compete against kind of our traditional competitors.
Andre, you mentioned products before, and you launched your iX Hello platform in September 2024. Tell us what it is. Tell us also a little bit about your thinking behind going into products from a fundamentally services company.
Yeah, so when generative AI became the main point of conversation with our clients, what we noticed was a reluctance to invest meaningfully with us in those capabilities. We started investing and deploying the capability across our own centers. We did that, and we're at a point now where it's deployed across over half of our clients. What happened then about a year, year and a half ago is our clients started to see the software running in our centers and running at scale and delivering kind of real-world solutions using the technology, things that they could understand and get their arms around, and were very practical. They indicated that they had an interest in perhaps licensing that software from us. We said, that's great. That's not how we developed this software.
We had to invest a little bit to make it multi-tenant, make it more configurable and easier to deploy, and we've done that. The software, the suite does three things. We have either fully automates workflows to drive a solution for a client or augments a human advisor to make them super efficient and effective and proficient much faster. Lastly, around data, using data to drive a much more personalized customer experience as we interact with that customer on behalf of one of our client brands. That's what the software does. It's early days in terms of the uptake. We're pleased at this point. I will say the financial model maybe has changed a little bit from what we first expected.
First, we expected it to be solely a SaaS license model, and certainly there is some of that, but it's also being bundled into solutions for our clients where we're also running the customer experience. There's a bit of a bundling into the per unit rate, and we're also seeing it play out a little bit in some game share situations. The economic model is changing a bit, perhaps versus our initial expectations, but again, early days and pleased so far.
What kind of investments are you seeing you need to make to keep this going and grow it? Any idea about the payoff period?
Yeah, so our thoughts on this are that we've been pretty clear with investors. We want to, we've invested very, very quickly to kind of get to market while we saw the opportunity. We think the run rate of investment we're making right now is kind of the high watermark for that investment, with some opportunity to rationalize it slightly as we move forward. Where the payoff is, is we actually start to see revenue generation here flowing through at margins that are significantly higher than our traditional margins. That will start to offset some of that run rate of investment. If, and we've said this, if we don't see that level of traction, there's an ability to rationalize the investment forward, rationalize the investment a bit more than I have in play.
Yeah. Andre, zooming out a little bit, ChatGPT burst onto the scene end of 2022. How has your view evolved on the impact to your business, to your industry? The ancillary of that is, where do you see the opportunity?
Yeah, so as it relates to when ChatGPT came out, our point of view at that point in time was we very much wanted to be on our front foot and help clients implement the technology. That is exactly what we've done. We also understood, because we understand the technology, that the pace of adoption would be probably slower than expected and that the depth of automation would be different than some of the cases that were out there. I would say that is very much how it has played out. What we are seeing is a real focus in using generative AI primarily to augment a human advisor. We're seeing a real reluctance to turn the technology loose in the wild without a human in the loop.
Where most of the full deployment to drive full automation is happening, it's actually happening to replace earlier technologies, earlier automation technologies, and do it in a grander and more effective way. That is really how it's playing out. We're seeing clients come to that point of view as well. We're also starting to see investors understand that this is likely how it's going to play out. From an opportunity perspective, again, we're very much on the front foot in helping our clients implement the technology. In our Catalyst business, we're doing systems implementation work and consulting work to deploy the technology. We're also seeing opportunities to help clients with the tuning, training of the models, et cetera. For these reasons, we continue to see generative AI as a tailwind for the business. Sure, automation will continue.
That's been going on in the industry for quite a while. We don't see generative AI significantly increasing the pace or depth of automation versus technologies that we've deployed before.
What hurdles do you see to adoption? In the past, when you were here, we talked about security concerns, hallucination, privacy, technology, sort of cannibalization.
I think you're answering my question. Yeah, I think you just answered the question.
That's the question.
Yeah.
Or has anything changed?
I don't really think so. I do think you see a number of reports out there that say, look, there have been all these proof of concepts, all this, and a lot of them just fail. They fail around concerns about just the things that you've mentioned, data privacy, security, hallucinations, and so forth. That is why we've seen this pivot, not a pivot that we expected, that is that most of the technology is being deployed with a human in the loop to drive a better customer experience more efficiently and get that human advisor to a level of proficiency much faster.
As you see potentially a delinking to headcount of revenue, do you see the engagement with clients changing from TNM to outcome-based or fixed price?
You know, outcome-based pricing has been talked about in this industry for well over a decade now, and it has been a very, very slow evolution. Even though I mentioned back when I was talking about our iX suite of services, that the gain sharing is a way that we get compensated for the deployment of the software, the vast majority of the work that we do, both that we do today that is in our pipeline, is still very much time and material space. At some rate, times a unit on the fringes, yes, we're seeing more openness towards some level of outcome-based pricing, gain sharing, transaction-based pricing, where we say it captures some of the efficiencies as we deliver. That evolution continues to be very slow.
All right. In your recent calls, you've talked about the benefits of share gains. Are there a set of companies you're taking share from, or what is driving that?
Yeah, so one of the things that we've said would happen is we kind of went into a, I wouldn't call it a downturn, but whatever the economy's been going through for what feels like the last three years is that as clients had volumes that were stable or maybe even down a bit, they would look to consolidate volumes with less providers. That's, if you look at our history and how we built the company, we've invested to win in client consolidation. As we've talked about on recent earnings calls, we're winning those opportunities at about an 80% clip. We've made investments in capabilities, in security, and in a global footprint that really positions us to win. By the way, we do this work for our clients, and we do it really, really well. Obviously, we're stack ranked number one or two.
They're going to consolidate work with us. We're winning work from a combination of middle-tier providers who aren't able to make the same investments we are, maybe don't bring the same domain expertise around generative AI that we do. We're winning against boutiques who maybe can't scale or provide the global footprint that we do. We're winning from both the smaller providers as well as that mid-tier.
Last couple of quarters, consumer-oriented verticals such as travel, consumer tech were quite strong. Do you see that sustained? Longer term, do you see the vertical mix shifting?
You know, we have a very diverse mix of verticals, and they take turns leading the charge for us. Right now, doing quite well in e-commerce and travel. We see that continuing, albeit there's a combination there of underlying volumes and share gains and new logo wins, particularly as it relates to travel. In consumer electronics, we've said, look, we're not really seeing underlying volume strength there, but we are gaining share with some of our larger clients in that sector, again, for just the reasons I talked about, the fact that we do the work well, we do it for them in any country in the world they want it done, and can provide a depth of services and breadth of capabilities that are really unmatched.
Andre, I'd like to turn to capital allocation. You mentioned M&A, and you've clearly been a leading consolidator in the sector. What is your approach going to be towards M&A? Are there any guiding principles there?
Yeah, I think the first guiding principle starts with what would we look to add in M&A. About a year and a half ago, we closed on our combination with WebHelp, which really kind of rounded out our global footprint, added a great client mix, as well as some capabilities. I think we're kind of, with that transaction behind us and now fully integrated, we're kind of done with the need to expand footprint through M&A or the need to go for scale for scale's sake. Things that would interest us would be client sets that we believe we could sell our unique set of capabilities into and grow. We would look for strength in a particular vertical, and we would look at strength in a particular horizontal offering, and we'd look for adding technological capabilities.
I think right now, very focused on making the sticking to the commitments we made in terms of capital allocation to using our strong free cash flow to pay down debt and get our leverage levels down.
You partially refinanced your debt in April. Would you share your thinking behind that?
Yeah, so a couple of things. We went to the market because we have a seller's note, a note due back to the sellers of WebHelp that is due in September of this year. We wanted to have certainty about our ability to meet that obligation. We went to the market and entered into a deferred draw term loan that will effectively fund when that seller's note, it's a $700 million a year note, when that's due. We've got that off the table. At the time, opportunistically, banks expressed interest in providing credit to us, right? It was as simple as that. Opportunistically, we took the opportunity to issue $750 million of term loan debt that was at parity with our existing term loan obligation and used that $750 million to pay down a portion of our existing term loan.
In the process, we moved the maturity of $750 million of term loan debt from December of 2026 into April of 2028, which just seemed like a good thing to do. We think we'll generate enough free cash flow from now till the end of 2026 when that term loan is due to pay it off or get very close to that and certainly can take care of it at that point.
You mentioned return of capital. I'd like to double-click on that. I think you plan to return over $240 million to shareholders in fiscal year 2025 through repos and buybacks. Given the perception that your own shares are undervalued, but those also of your peers, how do you balance that?
Yeah, the good news is the strong free cash flow that we generate gives us the opportunity to do multiple things. Of the $625 million of free cash flow we'll generate this year, $625 million-$650 million, we'll use $150 million, roughly, for share repurchases. We think, obviously, that's a very creative use of the cash. We have a dividend that will use up roughly $90 million of cash. That's $240 million of capital return to shareholders, leaving still the majority of our free cash flow for debt repayment, which again is in line with the commitment we made when we closed or announced the acquisition with a combination with WebHelp. We're kind of doing that. We also think that making progress and bringing leverage down will enhance our profile to new investors.
We hear often from new investors that current leverage levels give them some pause in getting involved in the story. We think that's an opportunity for us. Clearly, we do think our shares are undervalued. Hence, we are buying back the $150 million of shares this year. As it relates to M&A, that's something we'll look at opportunistically. Right now, the focus, and this is what we said when we combined with WebHelp, the focus for the first two years is paying down debt with some level of capital return through buyback and dividend.
Couple of questions on business performance. Do you have any exposure to U.S. government revenue?
We really don't. So we don't have any contracts with the U.S. government.
Any thoughts on growth and margins for H2?
Yeah, so we've talked about our guide this year, and I always said that we've tried to be conservative with this. The reason we're conservative, by the way, is we don't think we're actually being valued based on our guide. We believe that if you look at our valuation, we're being valued as if we could see revenues decrease. Why not be conservative with your guide in that setting? In saying that we're being conservative with our guide, we're very much focused on delivering the high end of our guide. It's all a long way of saying, if you look at what we delivered in Q1 at 1.3%, if you look at our guide for Q2 at the high end, it's 125 basis points of growth.
That would imply some level of modest acceleration of growth if we're going to hit the 1.5% that's the high end of our guide for the year. That's what we're focused on trying to achieve. We think we can do that based on new business that we signed late in fiscal 2024 and new business that we signed here in Q1 and the strong pipeline we entered Q2 with. After we close out Q2, we won't be looking to it takes a while for a new sign to turn into revenue in this business. It will largely be baked as we exit the quarter. The feelings about growth also are underpinned by our clients' forward volume forecasts for us, which they've gotten quite accurate in their forecasts there.
We've covered a wide range of topics. Let me just pause to see if there's any questions from the audience. Okay, let's keep going. So Andre, looking ahead, what areas do you believe will drive growth for Concentrix and for the industry? What is it that you find most exciting in terms of future prospects, and how is that influencing your investment decisions?
Yeah, I think I've been in this business for a long time, right? It just evolves, right? I think we're going to continue to evolve with a client need and with the technological capabilities that are at our disposal. Things that have me excited, certainly we've already talked about that $1 billion cadre of revenue that is kind of very ancillary services. We think we can grow that and grow that faster, and it'll be more impactful as it gets to scale. I think you'll also see, and we've seen a little bit of this, larger transformational deals where we are taking ownership of more of an end-to-end process for a client. We talked a bit about it on our third quarter earnings call last year about a major win with a U.S.
financial services company where we're literally taking over their business, if you will, their business processes in a non-U.S. country where we are doing everything from designing the process, implementing the system, and then running their business there on their behalf. I think those types of things are exciting to us. Obviously, our iX product suite is something we're excited about. We're excited about seeing that grow and be accretive to margins over time. Those would be things that I'd list. Yeah, that would be it.
I think you touched on this as you were doing the introduction, but what is the one misperception or misunderstanding of Concentrix that you would like to clear?
Yeah, I probably did touch on it, which is the overhang that generative AI has created for the stock. Concentrix has been around for 20 years, and we've lived through many technologies that were going to be going to have a negative impact on our top line. They all had an impact on our business. Speech recognition, IVR had an impact. Mobile apps had an impact. RPA, machine learning AI, now generative AI, they all have an impact. We evolve with them. The other impact it drives is clients don't really want to figure this out themselves, and they turn to trusted partners. If you look at our top 25 clients, they've been clients for 17 years on average. These are long-term, very strategic relationships. As each of these technologies have come about, they've led to more outsourcing.
They've led to more overall contacts between a brand and their customers. We think that just continues. We continue to see technology as a tailwind for our business, and we're here to maximize that.
As you help clients navigate their challenges, AI-related or otherwise, do you feel you have the people or go out and find them, or it's a combination?
Yeah, I think largely we have the people. Now, obviously, if we are more successful in certain areas, we'll have to scale up to have more people to deliver the service. I think we have the gray matter in the areas we need to around AI products, the partnership relationships that we've talked about, etc., to drive revenue.
Good. Any questions from the audience? Any questions from anyone online? Hearing none. One last closing question, Andre, anything else that we have not asked you that you wish the audience knew?
Not really. This conversation has been a lot like the conversations we've been having all day with investors. I just think we're pleased to be here. We're very, very optimistic about the year and about the future. We've talked about a path to getting to mid-single-digit growth. We haven't talked about that too much here today, but certainly part of that is growing that billion dollars of revenue at a faster rate, seeing the contribution from product revenues, etc. We believe that while we're not guiding to that, certainly for this year or next, it's out there for us in the relatively near term. We think that will unlock a real opportunity for investors when we get there. Because I think right now, in the low single-digit growth, rough economic backdrop, generative AI overhang, I think all those things get better if we can grow just a bit faster.
That's what the team's executing towards every day.
Excellent. Any final questions from the audience? Good. Hearing none. It's a wrap.
Very good. Thank you very much. It's a pleasure.