Concentrix Corporation — Fiscal 2024 Second-Quarter Form 10-Q
Reporting period: Three and six months ended May 31, 2024. The interim financial statements are unaudited. Concentrix provides global customer experience, technology, automation, analytics, and business transformation services across technology and consumer electronics, retail/travel/e-commerce, communications and media, banking/financial services/insurance, healthcare, and other industries. The September 2023 Webhelp acquisition materially affects year-over-year comparisons.
Financial Performance and Position
| Metric | Three months ended May 31, 2024 | Year-over-year change | Six months ended May 31, 2024 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $2.381 billion | 47.4% | $4.783 billion | 47.1% |
| Gross profit | $857.6 million | 47.8% | $1.714 billion | 47.6% |
| Gross margin | 36.0% | Up from 35.9% | 35.8% | Up from 35.7% |
| Operating income | $150.2 million | Down 7.6% | $298.6 million | Down 6.3% |
| Operating margin | 6.3% | Down from 10.1% | 6.2% | Down from 9.8% |
| Net income | $66.8 million | Down 15.2% | $118.9 million | Down 28.7% |
| Diluted EPS | $0.98 | Down from $1.51 | $1.74 | Down from $3.18 |
| Adjusted EBITDA | $379.6 million | Up from $258.8 million | $764.0 million | Up from $514.6 million |
| Adjusted EBITDA margin | 15.9% | Down from 16.0% | 16.0% | Up from 15.8% |
Revenue growth was primarily attributable to Webhelp. On a supplemental basis assuming Webhelp had been acquired at the beginning of fiscal 2023, revenue increased approximately 1.8% in both the quarter and six-month period. Foreign currency translation reduced quarterly revenue by $23.0 million and six-month revenue by $35.8 million.
SG&A increased 69.4% in the quarter and 68.0% year to date, reaching 29.7% and 29.6% of revenue, respectively, versus 25.9% in both prior-year periods. The increase reflected Webhelp-related costs, higher amortization, share-based compensation, and acquisition-related and integration expenses. Intangible amortization increased by $76.5 million in the quarter and $153.6 million year to date.
Interest expense and finance charges increased to $82.5 million in the quarter and $164.9 million year to date, primarily due to the senior notes and Sellers’ Note issued in connection with Webhelp. Other income was $19.4 million in the quarter and $26.2 million year to date, including foreign currency gains and reductions in Webhelp acquisition contingent consideration. Effective tax rates were 23.3% for the quarter and 25.6% year to date.
Cash Flow, Debt and Liquidity
- Operating cash flow was $191.5 million for the six months, compared with $237.3 million in the prior-year period.
- Capital expenditures were $116.1 million, producing free cash flow of $75.3 million versus $165.5 million previously. Adjusted free cash flow was $120.6 million, including a $45.3 million change in outstanding factoring balances.
- Cash, cash equivalents and restricted cash totaled $398.1 million at May 31, 2024, including $207.3 million of unrestricted cash and cash equivalents, compared with $516.5 million at November 30, 2023.
- Total debt was approximately $4.925 billion, including $2.150 billion of senior notes, $1.700 billion under the term loan, $351.5 million under the receivables securitization facility, and $759.4 million under the Sellers’ Note.
- Concentrix prepaid $250.0 million of term-loan principal during the first six months, including $150.0 million in the second quarter. No revolving credit borrowings were outstanding.
- Total stated liquidity was $1.498 billion, comprising $207.3 million of cash, $1.0425 billion of undrawn revolving capacity, and $248.5 million of undrawn securitization capacity.
- The receivables securitization facility was amended in April 2024 to increase capacity from $500 million to $600 million and extend its termination date to April 24, 2026.
- The Company was in compliance with its debt covenants at May 31, 2024. The credit facility generally requires a consolidated leverage ratio no greater than 3.75 to 1.0, or 4.25 to 1.0 during specified periods following qualifying acquisitions, and an interest coverage ratio of at least 3.00 to 1.0.
Material Changes and Capital Allocation
- The Webhelp combination added substantial revenue and operating scale but also increased amortization, integration costs, interest expense, leverage, and acquisition-related complexity.
- Goodwill was $5.026 billion and net intangible assets were $2.564 billion at May 31, 2024. The Webhelp purchase price allocation remains preliminary.
- Concentrix repurchased approximately 662,580 shares for $40.6 million during the quarter and 899,685 shares for $62.3 million year to date. Approximately $227.8 million remained available under the repurchase authorization at May 31, 2024.
- The Company paid $41.0 million of dividends during the first six months and announced a quarterly dividend of $0.3025 per share payable August 6, 2024, subject to board approval and other constraints.
- Acquisition-related and integration expenses were $30.9 million for the quarter and $61.1 million year to date, compared with $7.4 million and $13.0 million, respectively, in the prior-year periods.
Outlook, Risks and Unusual Items
The filing does not provide specific quarterly or full-year revenue, earnings, margin, or cash-flow guidance. Management states that available cash, expected operating cash flows, and borrowing capacity should be sufficient for current and planned working-capital and investment needs over the next twelve months.
- Key operating sensitivities include client demand, early termination or variability of contracts, pricing pressure, labor availability and costs, employee turnover, inflation, seasonality, and the ability to achieve scale efficiencies.
- Foreign currency exposure is significant: approximately 79% of second-quarter revenue was generated from non-U.S. operations and approximately 50% was priced in U.S. dollars. A hypothetical 10% adverse currency movement would produce an estimated $100.8 million loss in the fair value of specified hedges, substantially offset by underlying exposures.
- A 100-basis-point increase in interest rates on variable-rate debt would increase estimated annual interest expense by approximately $20.5 million.
- Material risks include cybersecurity and data-protection failures, generative artificial intelligence disruption, geopolitical and macroeconomic conditions, legal or regulatory actions, technology outages, acquisition integration, realization of Webhelp synergies, tax liabilities, and currency movements.
- The Sellers’ Note, with a principal amount of €700 million and a 2% stated interest rate, matures on September 25, 2025 and requires repayment of principal and accrued interest.
- Unrecognized tax benefits were $88.9 million at May 31, 2024; the Company believes approximately $42.2 million to $44.8 million could decrease over the next twelve months, although actual results may differ.
- The Company reported no new material legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were effective; integration of Webhelp operations and internal controls remains ongoing.
Facts Investors Should Verify
- Whether underlying organic growth of approximately 1.8% after normalizing for Webhelp improves and whether anticipated Webhelp synergies offset integration costs.
- The trajectory of GAAP operating margins as acquisition amortization and integration expenses decline or continue.
- Cash conversion, working-capital requirements, factoring activity, and capital expenditures following the decline in free cash flow.
- Debt reduction progress, refinancing requirements for the 2026 maturities, the September 2025 Sellers’ Note, and compliance with leverage and interest-coverage covenants.
- Foreign currency, interest-rate, labor-cost, and client-demand effects on margins and earnings.
- Completion of the preliminary Webhelp purchase price allocation and any resulting changes to goodwill, intangible assets, amortization, or deferred taxes.
- Sustainability of dividends and share repurchases relative to debt repayment and liquidity needs.