Concentrix Corporation Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended August 31, 2021. The company became independent from SYNNEX through a spin-off completed December 1, 2020; 2020 comparative financial statements were prepared on a combined, stand-alone basis and may not be directly comparable in all respects.
Business Context
Concentrix provides technology-infused customer experience solutions, including process optimization, automation, analytics, and business transformation services. It operates in more than 40 countries across six continents and serves clients across technology and consumer electronics, communications and media, retail, travel and ecommerce, banking and financial services, healthcare, and other markets.
Key Financial Metrics
| Metric | Q3 FY2021 | Q3 FY2020 | Change |
|---|---|---|---|
| Revenue | $1.397 billion | $1.164 billion | 20.1% increase |
| Gross profit | $481.3 million | $412.5 million | 16.7% increase |
| Gross margin | 34.4% | 35.5% | Down 110 basis points |
| Operating income | $151.4 million | $76.8 million | 97.2% increase |
| Operating margin | 10.8% | 6.6% | Up 420 basis points |
| Net income | $109.8 million | $45.4 million | 141.8% increase |
| Diluted EPS | $2.08 | $0.88 | Increase |
| Metric | Nine Months FY2021 | Nine Months FY2020 | Change |
|---|---|---|---|
| Revenue | $4.120 billion | $3.419 billion | 20.5% increase |
| Gross profit | $1.450 billion | $1.203 billion | 20.6% increase |
| Gross margin | 35.2% | 35.2% | Unchanged |
| Operating income | $414.5 million | $188.6 million | 119.8% increase |
| Operating margin | 10.1% | 5.5% | Up 460 basis points |
| Net income | $281.5 million | $100.2 million | 181.0% increase |
| Diluted EPS | $5.35 | $1.94 | Increase |
Cash Flow, Liquidity, and Debt
- Operating cash flow was $332.1 million for the first nine months, compared with $388.6 million in the prior-year period.
- Capital expenditures were $112.9 million, resulting in reported free cash flow of $219.3 million versus $282.3 million previously.
- Cash, cash equivalents, and restricted cash totaled $155.6 million at August 31, 2021; cash and cash equivalents alone totaled $154.2 million.
- Total debt was $869.0 million before debt discounts and issuance costs, consisting of $700.0 million under the Term Loan and $169.0 million under the securitization facility. Net long-term debt was $865.8 million.
- The company repaid $200.0 million of Term Loan principal and made net repayments of approximately $81.0 million under the securitization facility during the nine months.
- There were no borrowings under the $600 million revolving credit facility. Management reported total liquidity of approximately $935 million, including cash and available borrowing capacity.
- The company was in compliance with all debt covenants at August 31, 2021. The Credit Facility matures in November 2025, while the securitization facility terminates in October 2022.
Material Changes Versus the Prior Comparable Period
- Revenue growth occurred across all industry verticals. Nine-month growth was strongest in healthcare at 29.3%, retail, travel and ecommerce at 27.6%, and technology and consumer electronics at 26.3%.
- Third-quarter gross margin declined because of delivery-geography mix and wage increases, while nine-month gross margin remained stable.
- SG&A declined 1.7% in the quarter and increased 2.1% year to date, but SG&A as a percentage of revenue improved materially because of scale efficiencies, lower COVID-19 costs, and prior-year acquisition and integration expenses.
- Interest expense declined substantially because current-year debt had lower balances and more favorable terms than prior-year borrowings from SYNNEX.
- Foreign currency translation increased reported revenue by approximately $22.5 million in the quarter and $93.0 million year to date.
- COVID-19-related costs declined to approximately $6 million in the quarter and $26 million year to date, compared with approximately $13 million and $65 million, respectively, in the prior-year periods.
- In July 2021, Concentrix sold Concentrix Insurance Solutions and another non-CX solutions business for approximately $73.7 million of cash consideration, generating a pre-tax gain of approximately $13.2 million. The sales did not qualify as discontinued operations.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide specific quantitative revenue or earnings guidance.
- Management stated that current cash, operating cash flow, and borrowing capacity should be sufficient for operating and investment needs for at least the next twelve months.
- The company expects seasonally higher revenue and margins in the fourth quarter, but results remain dependent on client activity and consumer trends.
- Key risks include COVID-19 developments, labor availability and wage inflation, employee turnover, foreign currency movements, client concentration and early contract termination, cybersecurity and data protection, business disruptions, competition, and economic conditions in major operating geographies.
- One client represented 11.9% of third-quarter revenue and 11.7% of nine-month revenue; one client represented 14.9% of accounts receivable at August 31, 2021.
- All outstanding debt was variable-rate debt. Management estimated that a 100-basis-point increase in interest rates would increase annual interest expense by approximately $8.7 million, holding other factors constant.
- The company had approximately $62.2 million of unrecognized tax benefits and estimated that $11 million to $28 million could decrease over the following twelve months, although actual results may differ.
- In September 2021, the board declared a quarterly dividend of $0.25 per share and authorized a share repurchase program of up to $500 million with no termination date.
- The company reported no material changes to previously disclosed risk factors, no new material legal proceedings, and effective disclosure controls as of the reporting date.
Important Facts for Investors to Verify
- Assess comparability of 2021 results with 2020 because the company completed its SYNNEX spin-off during the period and prior-year results were combined and allocated.
- Monitor whether revenue growth is sustained after adjusting for foreign currency benefits, acquisitions, divestitures, and pandemic-related comparisons.
- Evaluate the effect of wage inflation, labor availability, delivery-location mix, and client pricing on gross margin.
- Review debt maturities, variable-rate exposure, covenant compliance, and the October 2022 termination date of the securitization facility.
- Consider cash conversion, working-capital requirements, capital expenditures, and the potential effect of the dividend and $500 million repurchase authorization on liquidity.
- Track client concentration, foreign exchange exposure, COVID-19 developments, and the potential tax indemnification obligations related to the spin-off.