Thank you for standing by and welcome to Concentrix Third Quarter Fiscal Year 2024 Financial Results Conference Call. At the time all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Sara Buda, Investor Relations. Please go ahead.

Great, thank you operator and good evening. Welcome to the Concentrix Third Quarter 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. 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-K and in our other public filings with the SEC. Also, during the call, we will 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. 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 up the call for your questions. Now I'll turn the call over to Chris.

Thank you, Sara. Hello everyone, and thank you for joining us today for our third quarter 2024 earnings call. Today, I'm going to walk you through our current demand environment, the opportunities we are seeing in our business, and most importantly, the positive changes we are making to harness these opportunities to drive long-term value creation. Let's start with what we see in front of us today and how our market has changed over this last quarter. Our business, like all businesses, is going through a significant transformation. We see this across our clients and across sectors. Clients are under pressure to show both innovation and cost control. Every client we speak with has brought forward AI on their agenda, as a way to optimize processes, show their Board's relevance, and reduce costs. In some cases, the environment is used as a reason clients are pushing their partners and vendors on different economic outcomes. What we've seen in the past few months, is an acceleration in the pace of change, driving more technology adoption, movement in delivery location, and asks for investment by clients for their transformations that are now taking priority. Transitions that might have taken several quarters are now taking place in a significant shorter timeframe. So, what does this mean for us? First, it validates that we have the right strategy and the right model to capitalize on this moment. Because of the investments we've made in our own technology and that of our technology partners, our global scale and domain expertise, clients are looking to us to lead them through their AI journey to drive innovation, reduce costs, and embrace new economic models. Second, it means we need to focus on winning the right business, and in some cases, walking away from transactional price-led commodity business…

Well, thank you, Chris, and hello, everyone. I'll begin with a look at our financial results and then discuss our outlook for the fourth quarter. We delivered third quarter revenue of $2.4 billion, reflecting 2.6% in pro forma, constant currency growth, calculated as if the Webhelp combination was completed at the beginning of 2023. Looking at our revenue growth by vertical. On a pro forma, constant currency basis, revenue from retail, travel, and e-commerce clients grew 8% year-over-year, a continuation of the solid growth we've been driving in this vertical through a combination of share gains and new client wins. Revenue from banking, financial services, and insurance clients grew 5%, which is relatively consistent with prior quarters this year. Our recent wins in this sector indicate further opportunities for growth. Our other vertical grew 6%, an acceleration from the first half of the year, driven primarily by automotive clients where we're bringing unique technology solutions to help them drive their businesses. Our technology consumer electronics clients grew 1% on a pro forma basis, reflecting a balance of the positive effects of share gains against lower volumes in consumer tech. Consistent with the first half of 2024, revenue from communications and media clients decreased 3%. This vertical is an area of high price sensitivity for lower complexity work. And revenue from healthcare clients decreased by 4%, as we have shifted the delivery for a few large healthcare clients offshore during the quarter. Overall healthcare remains a solid vertical for us and there are portions that remain onshore due to compliance and customer preference. But this sure shift from those clients is having a near-term impact. Turning to profitability, our non-GAAP operating income was $331 million in the quarter, an increase of $100 million compared with the third quarter of 2023. Our…

[Operator Instructions] Our first question comes from the line of Joseph Vafi of Canaccord.

Hey, guys. Good afternoon. Thanks for taking my call here. Congrats on actually having a really good bookings quarter with all that other information. So that's great to see. Just kind of wondering, some of the puts and takes here on the top-line to begin with, I know you are kind of walking away from some of the more commodity business, while at the same time, you are winning new business that may not have ramped. I'm just kind of wondering how you see that plus and that minus on the revenue line kind of taking place here over the next few quarters, if you see as kind of revenue neutral or not? And then a follow-up. Thanks.

Yes, for sure, Joe. It's Chris. So just when we look at the midpoint of our previous Q4 guide, we really see kind of three buckets as Andre talked about from a materiality perspective. The first one was starting in sort of later July and earlier August, we started to see some clients de-commit from some volume primarily because they weren't seeing the sell-through that they were expecting going into the fourth quarter and also automation that we were putting in. When you lump those two together with the vast majority being sort of volume declines from clients pull-through sales, it was about a 1% headwind, give or take. If you look at offshoring accounts that were primarily going to offshore in Q1 to Q2 because, frankly most clients don't want to have too much movement in the fourth quarter, if they can help it just because it's normally a big quarter. That was a little over 0.5 basis point of headwind that was going, which we had anticipated, but had been anticipated in sort of Q1, Q2 not in sort of Q3, Q4. And then the last sort of a little less than 0.5 basis point was when we talked about the consolidated wins where we are winning about 80%, the ones we didn't win are those kind of ones that are incredibly price sensitive, we didn't chase the price. And that is about a little less than 0.5 basis point of headwind that we saw going into Q4.

Got it. That's helpful. And then as we look at some of these kind of newer wins that you won here in the quarter and what you're seeing, how are you seeing ramps on those businesses relative to maybe historically or if AI makes some of these ramps a little longer or a little shorter.

Yes, for sure, Joe. So if you look at the airline, we will start – we are already in the planning phase and kind of incurring costs. But when it starts to connect to revenue will be late -- sort of late Q4, early Q1 where we'll start to come in with a little bit of revenue, and it will be kind of fully ramped by sort of end of Q2, Q3. When you look at the large, transformational project that we're very, very excited to have won, we are now spending time on the planning and moving and kind of infrastructure build-out that we have to do, which we are incurring costs, we won't see revenue until the end of Q2 with sort of fully ramped until the end of Q4 of 2025. So it kind of gives you a feel where things of traditional business haven't really changed too much, but the biggest transformational wins certainly will take longer and incur some expense to happen to make that kick in.

Got it. And then maybe I'm just going to sneak one more in for Andre on the accelerated merger-related cost here in 2025. There are kind of a few moving parts here. Can you just kind of walk us through some of the thinking here on accelerating those investments now? And what were the positives that outweighed the acceleration relative to the thought-process there? Thanks.

Yes. So we are very excited about the fact that we could bring some of those synergies forward into 2025. And obviously, that comes with incurring some costs, heightened integration costs in 2024. But we feel really good about the fact that we feel that we can hit $120 million in synergies in 2025, hitting that ultimate synergy number a year ahead of schedule. Why are we doing it? We are doing it so we can reallocate a lot of that -- those resources that cash or that investment towards the transformation activities that Chris has been speaking about, a combination of technology investment, as well as some of the upfront investment in transformational program ramps.

Great. Thanks very much Andre.

Our next question comes from the line of Divya Goyal of Scotiabank.

Hello, everyone. Andre, if you could provide a little bit more color and maybe this is to do with the acquisition-related expenses. But I noticed that your other expenses picked up pretty materially this quarter. Could you help us understand what exactly would that relate to?

Yes. So you're talking about below the line items?

Yes.

Yes. That is principally a net of two things. So we have $33 million in foreign currency losses that are largely related to -- intercompany translation related to liabilities or assets that are denominated in non-USD. So as the USD has weakened versus currencies, particularly the peso, where there's a lot of intercompany balances that kind of drives -- that kind of noncash expense to that line. And we backed that out of our non-GAAP net income and our non-GAAP EPS metric, just like -- and that is offset partially by the change in the contingent consideration in the quarter as well. So that -- those are the two major items that -- frankly, we can't control in any real way, and we will see fluctuations there effectively, however the non-cash items.

That's helpful. Also, could Chris or yourself provide a little bit more color in terms of Catalyst business? And how is that trending given the interest rates coming down in the US?

Hi, Divya, so the interest rates have not had, frankly any impact as we would have liked to have seen in it. But the Catalyst business, we are really, really happy with. What we're finding is that this is really the enablement partner for our technology providers. So whether we are deploying sort of new cloud solutions or I mentioned Dreamforce but whether it be Microsoft Copilot or some of the other LLM tools, that's really flowing through our Catalyst team. And our Catalyst team is also providing a lot of the consultation around the transformational deals that we are doing. And so we found it to be a real asset and one that we want to kind of continue to drive. But we have not seen sort of a step-up change in the large, pure IT digital transformation projects that we've talked about in the past because of interest rates coming down.

Right. Okay. No, that's helpful. One thing that I wanted a little bit more clarification on was the offshoring element that you mentioned. So revenue seems to have trended okay here but expenses picked up partly because of obviously pulling forward acquisition-related expenses. But you mentioned there was increased offshoring as well, increased offshoring would, in my understanding, impact the revenues and benefit the margins. So just trying to understand those dynamics here.

Yes. Divya, you are totally correct. The issue is that this offshoring, frankly, we're caught with dual cost because our clients have asked us to move it up. And frankly, we are doing the right things by the clients by moving it up. And so you do get some margin compression when you have that dual cost structure in there. The other component of the SG&A that I want to be very clear to call out is as we talked about some of the transformational deals like the large infrastructure company or even the large transformational opportunity, we are funding that infrastructure build-out and that technology infrastructure build-out ahead we are expensing those. We are not capitalizing those, so they are flowing through our SG&A. But in turn, we are getting longer-term contracts with the clients that we'll see margin expansion as we continue to deploy those and ramp those up fully. And so those two things are somewhat muting what you would typically see traditionally, where we offshore and we see that revenue dip. But then you see the incremental margin increase within a quarter.

Okay. That’s helpful. Thanks Chris, thanks Andre.

Thank you.

Thank you. Our next question comes from the line of Vincent Colicchio of Barrington Research.

Yes, good afternoon, guys. Andre, the TCE, as I say segment was up, I think, 1% in the quarter, and you have some volume pressures, I think you mentioned there. Is that something we should be concerned about going forward?

Well, that sector has been muted for us for a while. We have two things going on there, which is we're doing well with our clients, and we're gaining share. But what we see is just in the underlying volumes, particularly around consumer technology, whether that -- and consumer electronics, we are just seeing very, very muted volumes there. And so we are gaining share, but we are not in the process of gaining share, gaining much in the way of revenue. The great news is, as we gain share is hopefully, over time the macro improves and people stop sweating their tech and go through refresh cycles, we should see transaction volumes pick up there, hopefully and then we'll be well positioned to return to faster growth there, as we've seen in the past. And just right now, doing great from a share gain perspective, but the underlying volumes just aren't there.

And Chris, you had mentioned a lot of success closing on consolidation opportunities. I was wondering if you can give some color on if there is significant legs on this and just kind of what the dynamic is here.

Yes. So Vince, what we are seeing is that where clients are either not seeing the growth in their business as they expected, and they are trying to manage costs, it makes sense to deal with less partners. And if they're looking for sort of a full solution with technology or we are the largest incumbent partner that's performing at the best-performing partner, then we have a very, very, very high probability of consolidating that volume from other partners into us. And so we do think it has legs. We have talked about it for a while. We're seeing it happen a little faster than we expected. And we are seeing it in pretty much all the verticals for the most part. And as Andre pointed out, where we are not chasing kind of volume that no one wants to automate, it's highly price sensitive that tends to be where we are being consolidated out because we didn't have the highest exposure in that within every single client anyhow, but we're just not chasing that work because honestly, we believe that -- at some point, it needs to get automated. And with the tools that are available now, it should be automated sooner than later anyhow. So it's not what we consider a long term loss.

You talked about rapid change in your industry and rapid movement towards automation. And I think historically, you talked about trying to automate 10% to 20% or maybe the number is wrong of your portfolio. Is there a new number you may want to put out there for -- in terms of how much you want to seek to automate each year?

No, not really, Vince, because what we are seeing is that a lot of this automation we had planned going into end of 2024 and 2025, but what we've seen is a very fast demand of accelerating it because people want to see in-year savings and they want to kind of get into 2025 at a new cost structure. And so we are not seeing automation coming out of the blue of, hey we've never ever thought about this. We are seeing, hey, we are planning on doing this a quarter or two quarters, three quarters from now, we need to do it now. And then we are also seeing not only with our new tools, but some of our partners tools, things that were a little harder to automate, we actually can bring in ourselves to automate a little further. But we are not seeing sort of a dramatic change in what can be automated for the most part, it's really the timing. The other thing that we talk about from a dynamic industry perspective is really -- we always talk about things moving offshore, right? Like that's clearly one of the value propositions this industry has. Again, what's somewhat unique is historically, if you go back and look at Q4, most people are locked and loaded with their capacity plans and do not want to move anything in Q4 because they want to have sort of a bumper back half of the year. And this is one of the first times that we've seen clients saying, yes, we know we talked about this in Q1, Q2, we need to do it now. How can you help us, so that we can see the savings by the end of 2024 and start 2025 in a new cost structure. And so that is changing some of the dynamics as well that we historically have not seen.

Thank you.

Our next question comes from the line of Ollie Davies of Redburn Atlantic.

Hi, guys good evening. And a couple for me. I guess you gave the kind of infrastructure example where you said you now handled 40% of transactions autonomously and that was kind of a 12% reduction in revenue. Is that included in the sort of 7% of business that you see as transactional? Or is that sort of separate for that?

Actually, that's a great question. That was actually outside of the 7% of revenue. While we were able to kind of automate the transaction, it was quite complicated, and we had to wait for the right bot technology to be able to actually make it automatable, as fast as we were able to do it. So that's not considered in sort of that 7%.

So I guess just following on from that, there's obviously much more than 7% that can't be automated now, so are you able to give us kind of an indication of how much of revenue that would be?

No, because we don't. We also say a little differently, like the complexity and the infrastructure cost to put in on some of these larger, more complex automations is a little different than the -- and the domain knowledge that goes into how you need to manage these types of transactions, it's very different than sort of that 7% of revenue which tends to be very short speed to proficiency, very easy to move like, literally can move it in kind of weeks and they're very, very different. And so when we are automating things that, for instance in that infrastructure company, we've been working for them for five years. We understood their internal system very, very deeply. We had domain subject experts around because they are a regulated business around how we need to deliver for it and what needed to happen around for it and to train people in that high level of proficiency. So those do take a while, and we started working on that transformation project almost six months or seven months ago, when we originally started it and then the economics changed, quite frankly transparently in Q3, where the client asked us to pick up those costs to extend for a longer-term contract, which we were happy to do.

Okay. Great. And then maybe just one more. On the -- sort of the iX Hello tool that you've sort of released today. Can you kind of talk about the pricing dynamics there? And I guess, why it won't kind of cannibalize your ability to win volumes that will now be offshore -- outsourced?

Actually, we are quite comfortable with the cannibalizing the right type of business because it drives better embeddedness of our services into our clients. And as they consume more technology, that's fantastic for us because, obviously the margin profile is more accretive. Right now and in the beta phase of what we've been doing up until when we launched, a lot of this has been included in our pricing and has been bundled in services. What we're seeing is that clients are wanting to buy this and deploy this on their own enterprise or within other competitors' operations, which we are happy for them to do. And it's a per seat price with volume discounts based on how many seats that are done.

Okay, great. Thanks very much Chris.

No problem.

Thank you. [Operator Instructions] Next question comes from the line of Ruplu Bhatacharya of Bank of America. Your line is open.

Hi, thanks for taking my questions. Can you walk us through your thought process in making these Gen AI related investments? I think you mentioned $100 million per year. How do you decide how much to invest and what ROI are you looking for when you invest in products such as this or investments to strengthen your Catalyst business to better cater to Gen AI. So can you just talk about like what returns are you looking for? And how do you know when enough -- when you've invested enough? How do you measure success?

Yes, for sure, Ruplu. Very good question. So just for clarity, we are at a run rate of $100 million annually right now. But what we said in our last conference call, and we are very still clear about is that if we don't see commercial success the way we want to see commercial success, we are certainly going to pare that down. That's not our plan, and we can see sort of a clear path to how we want to get there. But that's not a run rate of investment we are committing to indefinitely by any stretch of the imagination. What we classify as success is that by the end of 2025, that we are getting an ROI on our spend. And that spend, as I might mention, might fluctuate depending on the return metrics of it, that the margin profile of that business is accretive to our overall business. And that hopefully, our goal is that the growth rate is accretive to our overall growth rate of our business. That's what our goal is for those products of why we want to do it. What's key to understand is that we've seen a clear hole in the marketplace around some of the things that we are doing that others are not. We have a deep understanding based on decades of experience of how to manage these interactions and how to optimize these conversations and optimize businesses, as a whole with that deep domain expertise that when our solution goes in, it is highly, highly customized. And a lot of our clients have disparate tech stacks. So if they need something that's flexible from an LLM perspective, they need something that's flexible from a tech stack perspective, and we fit in that. Where we have clients who have sort of homogeneous technology environments or environments where they have got a clear direction of tech partners they want to use, we are very, very happy to deploy our partners' technology into those spaces if it fits. And so it is really quite complementary around how we see it. And we're doing it to differentiate ourselves in the marketplace because as I mentioned in the large transformational deal, we knew who the competitors were. There was no other traditional competitor in that space, they weren't even invited to the RFP because they did not have a complete solution, and they did not have the technical strength to pull off what the client was after.

Okay. Just keeping on the investment theme. I think the press release said that the company plans to release additional technology products in the IX suite. How should we think about the impact of that on margins over the next few quarters? And is that the only investment that would impact margins? Or are you hiring more people in Catalyst and trying to build up that business as well. So how should we think about the impact of investments on operating margins?

For sure. So Ruplu, like at a $100 million run rate, I have to -- we definitely are producing more products than one. So we have a number of others that are already being built and well down the path and are actually doing previews with clients as we speak. And so there will be some rapid succession of what we're looking at. And we've got sort of a very clear road map of what our deliverables are over the next number of months to make that happen. That is already baked into the forecast from an OpEx perspective, as we mentioned in that $100 million run rate. We are also, as Andre pointed out, accelerating some of the synergy costs and reinvesting and reallocating some of that capital because we do need to hire some skill sets that we don't have in our business right now, around some of the Gen AI tools from our partners, some automation tools that we have within our client set. And so that -- our goal is to do without increasing our operating expense and manage within the lines that we are doing right now. The only thing that is fluctuating our SG&A line that we can see within Q4 and I don't want to guide for 2025. So let's just talk about Q4 is really around these transformational programs where we are getting a number of requests from clients who say, we need help to transform. You've got the capabilities to do it. If we give you a longer-term contract, would you take some of the burden of these costs upfront because we don't have the budget to do it. And as long as the economic model works out, we are more than happy to do that for our clients.

Okay. Maybe can I ask about -- you talked about programs shifting offshore, so obviously that impacts you initially in terms of revenue because you're shifting the program. But if it's to a lower across geography, I mean it should help in margins. So can you talk about like what is that time delta between when you actually move a program to when you can actually start seeing any margin benefit? And within that, the question, if you can also weave in any thoughts on the overall pricing environment as well? Is it more competitive, less competitive?

Yes. So on the offshore movement, you are right. Once we get those programs fully ramped offshore and we get past the period where we have duplicate costs, where we can rationalize some of the costs that we're supporting those programs onshore, we will get to a better margin spot on those programs. That generally takes about two to three quarters to do that. And that's what you see kind of impacting our Q4 outlook and should give us some confidence that we'll see improvement as we go through the back part of 2025. From a pricing environment perspective, I'll let Chris comment as well. But what we're seeing is, certainly in the more commoditized work, we are seeing very, very high price sensitivity there, and we are choosing not to chase that work on price. We're also seeing pricing pick the form of these different constructs where clients are asking us to take on more of the upfront investment in transformation, whether that be technology, building out capacity or even doing some of the training related to those programs. All of that now -- the new commercial contract seems to be moving a bit more of that upfront cost on to the provider. But we are happy to do that if it allows us to win the work. And as long as we can build that upfront cost, into the margin of the program, that means we should see improving margins on that program over time.

Okay. I'm going to try and, Andre sneak one more question in, and this has been asked in various different ways. But I'm going to ask it in another way. You've talked about thousands of customers now using Gen AI. On the last call, I think you had said that you had hundreds of proof-of-concepts that were going on. So are those proof-of-concepts now done? And do you think that the customer base that you have is now prone or is now more receptive to using Gen AI? And if that is the case, do you think that as these models are getting more advanced, we just had a press release from T-Mobile and OpenAI, where their new model is more smarter, it can have sentiment detection, do you think that given this environment that you still think that the lower transactional work will go away and that you'll gain more work in the Concentrix business, more in the consulting type of space. Do you see that happening? Or do you think as models get smarter and more capable that the disruption can be more. So has your thought process on that changed as you've talked to more customers and as you're seeing these new models come up?

Hi Ruplu, it's Chris. So a couple of things in that because it is a good question. The first thing just for clarity, when we talk about close to 1,000 customers, that's close to half our client base is using generative AI that we have installed. And some of that is our partner's technology that we've installed and configure and manage, some of that is obviously our intellectual property that we've installed and managed. And that is using at scale day-to-day using our operations. This is not a proof-of-concept stuff. This is real, industrial enterprise use of the AI technology. And for clarity, when you look at what clients are using that for, it is very different. There are some clients who are using a full stack where we're doing automated bot where we're using our generative QA system, where we are using our generative AI coaching system, where we are using our generative [AI TAS] (ph) system, all sorts of things like that. When it's not customer-facing, clients tend to be very receptive to using it. And those proof-of-concepts, frankly go very quickly into production. When it is anything to do with an external brand engagement, we continue to see despite all the press releases, everyone talking about, we continue to see a reluctance to interface with high-value interactions with customers where the AI is doing everything. What we see and still this day still conversations is that it's normally a human the last connect but that human is AI-powered to get better answers, better help service in a more intimate personalized way and deliver what they need to do. And so we still see that playing out to this case. Obviously, with the model is getting more advanced, that will somewhat change. But as we've seen and shown as we've kind of automated and put the technology in, we've won net new business that historically hasn't been there. In terms of proof-of-concepts, we still have hundreds of proof-of-concepts, but very transparently, some we roll out and the client goes, okay, we've done the economic model on this. It is going to cost too much to do the queries to an LLM versus how we can do it other ways. We are going to kill it. Others are like, yes, this is perfect. Let's get it into production as quickly as possible. And so this quarter, we added, I think, 25 new -- I think it's 25 new at scale implementations of our Gen AI technology into our client base from POCs. And so we are converting them, but we are always having these new POCS coming into the ecosystem.

Okay, thank you for all the details. You go ahead.

Sorry, Ruplu, just not to go on because I'm sure you're bored of this. But the reality is, is that LLM and generative AI, everyone assumes that one solution fits all. And what we're finding more and more is our clients are putting in different types of solutions for different types of functions and features and departments that best fit their cost model and the type of activity they want to automate and the type of service that they want to get. And so we do have clients who have multiple generative AI solutions in their environment, and we expect that to continue. We don't expect there to be sort of one product that does everything for everyone across the entire enterprise.

Okay, thank you for all the details. Appreciate it.

And ladies and gentlemen, that does conclude today's conference call. Thank you for participating. You may now disconnect.