Good day and thank you for standing by. Welcome to the Concentrix Fiscal Third Quarter 2022 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Stein, Vice President of Investor Relations. Please go ahead.

Thank you, Elizabeth, and good morning. Welcome to the Concentrix third quarter fiscal 2022 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 expected 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. We do not undertake to update our forward-looking statements as a result of new information or future events or developments. Please refer to yesterday'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-K. Also during the call, we will discuss non-GAAP financial measures, including free cash flow, non-GAAP operating income, adjusted EBITDA and adjusted EPS, as well as adjusted constant currency revenue growth. A reconciliation of these non-GAAP measures is available in the news release and on the Concentrix Investor Relations website under Financials. With me on the call today are Chris Caldwell, our President and Chief Executive Officer; 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 for your questions. Now, I'll turn the call over to Chris.

Thank you very much, David. Good morning, everyone, and welcome to our third quarter earnings call for fiscal 2022. First, several of our regions have dealt with extreme weather over the last few weeks. And I'd like to send our thoughts out to our teams who continue to focus on keeping our staff safe and delivering for our clients, they continue to do an outstanding job. Now, before digging into our operational results, I want to discuss the economy and changing dynamics with some of our clients as they work to address persistent challenges in the current macro environment. In times like these, our clients need to drive revenue generation, do more with less through automation and retain customers by ensuring the best possible experience. We believe our disruptive and differentiated customer experiences offering uniquely positions us to address these needs holistically. Our pipeline for new business continues to be strong, and clients who are seeing weakness in their business, we're helping roll them a consolidating work with us. Historically, we have done well in both good and more challenging economic times by helping our clients meet their goals. I remain optimistic that we can achieve our long-term financial objectives. Our culture values being flexible, tenacious and thinking of the success of our clients in all of our actions. Now turning to our third quarter results. We executed well in the quarter, continuing to deliver solid revenue growth and profit improvements in line with our guide. Reported revenue in the third quarter was $1.58 billion, up 13.1%, including a higher-than-anticipated foreign exchange headwind. On a constant currency basis, revenue increased by 17.3% and organic constant currency was 7.5%. Our third quarter non-GAAP operating income improved to $221 million, growing 22% and adjusted EBITDA increased 20% to $258 million compared with…

Well, thank you, Chris, and hello, everyone. I'll begin with a look at our financial results for the third quarter and then discuss our business outlook for the fourth quarter. We delivered solid revenue growth, impressive margin improvement and strong cash generation in the third quarter. Revenue in the third quarter was $1.58 billion, up 13.1% on an as-reported basis. The improvement in reported revenue includes a 4.2% negative impact from foreign currency fluctuations. This higher-than-expected currency impact reflects the further weakening of the euro, the British pound, the Japanese yen and the Australian dollar during the quarter. As a reminder, approximately 1/3 of our revenue is denominated in currencies other than the U.S. dollar. Adjusted organic constant currency growth was 7.5%. Revenue increased across all of our verticals in the third quarter. On a percentage basis, revenue increases with healthcare clients once again led the way, growing by approximately 26%. Revenue grew 24% in the retail, travel and e-commerce vertical. Our technology and consumer electronics vertical grew 12%. Revenue from banking, financial services and insurance clients grew by 11%. Communications and media client revenues grew 7% in the quarter, with all of that growth driven by the contribution of the Catalyst acquisition. Once again, each of our four strategic verticals grew by 10% or more on an organic constant currency basis in the quarter. Our new economy clients generated strong growth of 27% year-over-year and represented 23% of third quarter revenue. The diverse nature of our new economy clients from a vertical and geographic perspective remains a strength of our business. As discussed in our second quarter earnings call, our year-over-year organic growth in the third quarter continued to be impacted by an approximate 1-point headwind related to programs that moved offshore in Q2 of 2022 earlier than we…

[Operator Instructions] Our first question comes from the line of Vincent Colicchio with Barrington Research.

Yes, Chris, nice quarter. What gives you confidence in the -- if I've got the number right, 7% sequential growth in Q4?

So Vince, I mean, clearly, we spent a lot of time working through all of our portfolio, seeing our new wins at what time they'll ramp. We've taken into account with what we've seen from a software perspective from supply chain and volume from clients. And we're obviously 29 days into sort of the quarter. So we're very confident that that's where we're going to land for the rest of Q4.

It was good to hear that you're seeing some vendor consolidation, some of the things you'd like to see in a challenging environment. Curious, if there's been any slowing in sales cycles?

No, there's actually been no real slowing in sales cycles. What we have noticed is that some larger deals are coming to market. We clearly called out two that we won. Those deals always take longer, but they aren't elongated for the size of the deal that they are. So traditional deals are the same sales cycle, consolidation deals tend to be going through the same sort of traditional sales cycle. The larger deals that are coming in are a bit longer, but again, in traditional timelines for those types of deals. So we see the market for a pipeline perspective and from a deal perspective, honestly, relatively stable and feels quite strong.

And are you seeing a meaningful increase in the willingness to outsource more work due to cost pressures?

Yes. We are seeing clients -- new prospective clients as well as existing clients having more conversations around how to make more of their cost model variables. And then clearly, you've seen in the news a number of companies who have reduced their force. That work is still being done, still needs to be done and that historically will come to providers like ourselves to pick up some of that, not all of it, but some of that work to get done. And so we still see that continuing on for a couple of quarters and certainly, a number of our sales lead generation discussions come from those discussions.

And one last one and I'll go back in the queue. Your new economy client base, you had mentioned you're diversified there, very impressive performance. Curious if there's any exposure. I would suppose, overall, there's not much. But how meaningful is the exposure to companies that are reliant on financing?

Yes. In our new economy group, it's very little. It's not -- nothing. We do have a few clients who continue to need to raise funds. But as a percentage of our revenue in that portfolio, it's not meaningful, Vince.

[Operator Instructions] Our next question comes from the line of Ruplu Bhattacharya with Bank of America.

My first question, I guess, maybe I'll follow up on the question on new economy clients. Chris, I think what you said was the revenue from new economy clients grew about 27% year-on-year in the quarter. I mean if I just go back historically last couple of quarters, I think the growth rates you've talked about is more in the 40% range. So I mean, did you see any incremental weakness in that growth? How should we think about that? Yes, I mean, 27% is significant growth. I'm not saying that it's not strong growth, but it just seems a decel from prior quarters?

Yes, Ruplu, you are correct. There is a bit of a deceleration. And we've been talking about that for a while, thinking that sort of in the 40s was more elevated. Primarily two things occurred around that. One, you've seen customers in that space kind of cut back on their own spending because of lower volumes, that is part of it. I think also what we're seeing, just in terms of aggressiveness of ramping into net new markets in that space, is also being a little more cautiously done. And so we expect that the new economy clients still to be very robust growth, still be above our sort of corporate average, and we're super happy with sort of the portfolio of the clients we had because you've got to remember, a chunk of our new economy clients are from different regions and not North American based, which provides some diversification of that revenue flow. But we definitely saw some of those things that we expected coming into the third quarter and going into the fourth quarter.

Okay. Chris, I mean, last quarter, you talked about seeing some customers who maybe because of the macro wanted to pull forward their move offshore, right? And I think you guided $50 million of revenue hit for the full year. Has that trend accelerated? Have you seen -- are you seeing more customers wanting to offshore? And just your thoughts on that going forward?

Yes. Ruplu, great question. That was actually, I think, I believe, in our second quarter, we brought forward, I'll call it, the offshoring revenue to do. As sort of a reminder, the vast majority of that work should have probably started offshore originally, but started onshore primarily because of COVID. And really, we sped it up. And at the time and what we've seen subsequently is that new deals are coming into the shore that they should be delivered from so in sort of the right ratios for the right reasons. And the work that is onshore that we do onshore is there for a specific reason, whether it's a brand promise from the client, whether it's for security or regulations, whatever the case may be. So in our portfolio business, we have seen no additional change in how people are thinking of where to deliver their work from. That effectively we encapsulated in sort of our Q2 timeframe.

Okay. Maybe one more for you, and then I have a couple for Andre. But you talked about these two large deals. Can you give us some more details? Are these with existing customers you had? Or are these new wins with new customers? And then what type of work is this? And you said it's from the Catalyst business. So I'm assuming that these are more involved, more higher, how should I say it, it's more involved and more in-depth work? And how large are these contracts? And how many years are these contracts for. So any details you can provide would be helpful.

Yes, for sure. So let's start off with the Catalyst win. The Catalyst win was an existing client that we had. We were one of many providers within that client. The client is a Fortune 100 firm. The client went out to approximately like 30 or 40 large, large, large IT digital transformation companies, including incumbents, which we were one of. And their objective was to come down to one or two strategic partners. Their objective was to get better sort of end-to-end management of their application development, application support and sort of strategy around digital execution. And it took almost, gosh, nine months, 10 months that they went through this very exhaustive process, looking at capabilities, looking ability to scale, looking at expertise, looking at security, it is incredibly, incredibly rigorous. And we were the only sort of incumbent to win out of this. They brought in one or two other partners who were smaller, but we became the key strategic partner for this client and are taking over the work of the other people who are in, so if you consider kind of a consolidation play. And we are really driving not only a lot of cleanup in their application stacks and the tech stack, also building out new technology for them, driving more automation for them and more sort of self-service for them. It is tens of millions of dollars, significant, significant deal, and it's a multiyear deal based on what we've signed up for. So extremely, extremely happy about that. Very technical, sort of best-in-class digital transformation capabilities, a significant win for us. The other client that we won within -- since our last earnings call, is more of our traditional operations business. It is a new client to us. It was a many months process business. It is a client who is looking at not only making more of their cost variable because there will be a rebadge component to it, but they're also looking at a transformation element to come into the business and basically drive automation, drive sort of different shoring of work for the business as well as driving analytics and some technology into their business. And so we were picked as their prime transformation partner, and we'll be going and rebadging some of the work and then building out on our global footprint. It is worth hundreds of millions of dollars over the next five years. And clearly, we'd obviously like to extend it past that, but what's signed up for is hundreds of million dollars over the next five years. And it's also a Fortune 100 firm. Hopefully, that provides you some color on those two opportunities.

Yes. Thanks for all the detail there, Chris. Andre, I have a couple of questions for you as well. It looks like from the fiscal year guide for operating margin, it looks like it implies about 14% operating margin. As we think about moving forward, do you think that there are more headwinds or tailwinds for margin improvement? Maybe you can talk about like what are some of the drivers that you see for margin growth from there? And then as part of that, if you can talk about the pricing environment. I think you've said in the past that you're trying to drive a better pricing mechanism in terms of more outcomes-based pricing. So just your progress on that? And just how should we think about what are the headwinds and tailwinds for margins over the next couple of quarters?

Sure. Good to talk to you, Ruplu. Yes, so we feel really great about the margin expansion we've driven this year. You're right, we're at 14% for the full year guide, 15% in the fourth quarter. The full year guide is up 90 basis points from last year. You'll remember from our Investor Day, we've indicated that our goal for 2025 is to move that margin up to 14.5%. So certainly, we do think there are still more levers for us to pull to continue to move margins up over time. We're not going to update that target at this point. That's still our target for 2025. But here are the things that we think we can do from a margin perspective. Certainly, as you think about some of the two transactions, particularly that Chris talked about, the ability to do more complex transformational things, whether that be in the Catalyst space or in the CX space, that complexity, the introduction of technology, all provide opportunities to increase margins because the value of the work is going up. Certainly, we can also introduce tech, as Chris alluded to, with Recruit CX and the CX quality tool that we're doing to become more productive in what we do internally and drive margins that way. Lastly, as we continue to show strong organic growth we can certainly see leverage in our G&A, and we'll also continue to work, particularly on -- with the recently closed ServiceSource acquisition to get to a full run rate of synergies there. So lots of reasons to believe we can move margins up over time. Yes, the pricing environment really hasn't changed all that much over the last couple of quarters. So two things I will say about it is we have been successful as we have dealt with inflation across the globe, most pronounced in North America and in parts of Europe. We've been very successful in getting price increases over time to keep up with those increases. And that speaks, I think, to the value of the services that we provide to our clients. You mentioned outcomes-based pricing. I would say still fairly early days in terms of the amount of outcomes-based pricing that's currently in our portfolio. We are seeing more of it coming through in some of our pipeline but it is still not the preponderance of the deals that we see, nor our current set of deals that we're executing on.

Got it. And then just for my last question, if I can ask you, your thoughts on capital allocation in this environment. I mean how -- I know you've closed on ServiceSource. Is there a lot of integration involved in that? And are you guys open to further M&A versus buying back stock? I know you still have authorization. And I saw that the Board authorized a dividend increase. Just maybe comment on the timing of that, like why now? And just your thoughts on how you would allocate capital going forward. And sorry, another part of that is if you can please talk about CapEx as well, CapEx needs going forward. And thanks for all the details. So I appreciate you taking all my questions.

Sure. Happy to. So I'll start with ServiceSource and the integration costs there. If you look at our release, we are suggesting that there will be another $15 million of integration costs to come through in Q4. If you go back to when we announced the deal, we thought that the integration cost would be roughly $44 million over the process, and we think we're in line with that, having spent what we spent in the third quarter, suggesting we'll spend another $15 million in Q4 and then some still to come in probably in the first half of next year. From a capital allocation perspective, our thoughts there really are unchanged. We still continue to view accretive M&A as an important part of our strategy. And so we will continue to look for interesting client sets through M&A, through domain expertise, whether that be in a vertical or a geography and certainly, technology as we think about what we would be interested in, in an M&A perspective. Beyond that, certainly, we're going to continue to generate strong free cash flow. And absent M&A, we'll look to delever. We're still committed to the -- getting under 2x net leverage by the end of this year. That's a commitment we made when we bought PK. At the time, we didn't think we'd be quite as active in share buyback as we have been nor did we know we were going to buy ServiceSource. And yet, we feel good about our cash generation. It's still going to get us under that 2x by the end of the year. As for the dividend, I think it just shows the confidence that we have in the business and our ability to generate free cash flow and to return some capital to shareholders. The timing -- this is the first year anniversary of our initiation of the dividend. And so it seemed like a prudent time to recommend to the Board and get their approval to increase the dividend. That's really the story on that.

[Operator Instructions] We have a follow-up question from the line of Vincent Colicchio with Barrington Research.

Yes. Chris, healthcare had a really -- it looks like a really strong growth quarter. It's still a relatively small vertical for you. Thought maybe you'd give us your thoughts on the longer-term outlook here and if this could become one of your bigger verticals ultimately.

Yes. So Vince, healthcare is -- you're correct on all accounts. Healthcare is a very key vertical to us, very strategic. It is growing well. We continue to make investments to continue to grow it. It tends to be a little lumpy from a growth perspective, just as you win kind of deals in that space. And we would like to see it increase its size within our sort of two strategic verticals. But other than that, and kind of the pull forward of how big it could be off the table, just to know that we are focused on growing healthcare as a key strategic vertical for us.

And then one last one. You had said that in North America and Europe, wages remain elevated. Any signs of green shoots for, lack of a better word, of improvement there or no?

I will tell you, in the last probably quarters become more stable, I guess, is the best way of putting it, where it's probably more predictable than what we're seeing is still sort of elevated areas. But I'll say that the heat of sort of maybe at the beginning of the year is starting to cool off. We're not having any problems meeting our commitments in our sort of operations business in those markets. But we're also sort of being very aggressive in making sure that we're competitive within the marketplace. Probably too early to tell if it's a bigger change than that, but just outside of the heat coming out a little bit.

Thank you. I would now like to turn the conference back over to Chris Caldwell for closing remarks.

Thank you very much, everybody, for joining us today. We always very much appreciate your interest in Concentrix, and we look forward to talking to you next quarter. Thanks very much, everybody. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.