Concentrix Corporation — Fiscal 2022 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Concentrix provides global customer experience solutions and technology, including customer engagement, automation, analytics, digital transformation and design engineering services across technology, communications, retail and travel, financial services, healthcare and other industries. The filing covers the three and six months ended May 31, 2022; all financial statements are unaudited.
The December 27, 2021 acquisition of PK, a CX design engineering company with more than 5,000 employees, materially expanded the company’s digital transformation capabilities. PK contributed $124.0 million of second-quarter revenue and $207.2 million of first-half revenue.
Key Financial Metrics
| Metric | Q2 FY2022 | Q2 FY2021 | Six Months FY2022 | Six Months FY2021 |
|---|---|---|---|---|
| Revenue | $1.568 billion | $1.370 billion | $3.104 billion | $2.723 billion |
| Gross profit | $558.9 million | $482.7 million | $1.097 billion | $968.8 million |
| Gross margin | 35.6% | 35.2% | 35.3% | 35.6% |
| Operating income | $156.9 million | $128.2 million | $304.7 million | $263.1 million |
| Operating margin | 10.0% | 9.4% | 9.8% | 9.7% |
| Net income attributable to Concentrix | $113.1 million | $82.9 million | $223.4 million | $171.7 million |
| Diluted EPS | $2.14 | $1.57 | $4.23 | $3.26 |
| Adjusted EBITDA | $249.9 million | $208.3 million | $487.8 million | $420.9 million |
| Adjusted EBITDA margin | 15.9% | 15.2% | 15.7% | 15.5% |
Second-quarter revenue increased 14.5%, while six-month revenue increased 14.0%. Reported revenue included unfavorable foreign-currency translation of $36.7 million in the quarter and $62.3 million for the first six months. On an adjusted constant-currency basis, revenue increased approximately 9.4% in the quarter and 10.0% for the first six months, excluding acquired and divested businesses.
Second-quarter operating income rose 22.4% and six-month operating income rose 15.8%. Net income benefited from lower effective tax rates of 22.8% in the quarter and 23.7% for the first six months, compared with 33.7% and 30.9%, respectively, in the prior-year periods.
Cash Flow, Debt and Liquidity
- Six-month operating cash flow was $212.5 million, compared with $239.1 million in the prior year.
- Capital expenditures were $71.2 million, producing reported free cash flow of $141.3 million versus $168.4 million in the prior year.
- Cash used in investing activities was $1.637 billion, primarily reflecting $1.565 billion paid for the PK acquisition.
- Cash and cash equivalents were $163.4 million at May 31, 2022, compared with $182.0 million at November 30, 2021.
- Total debt was approximately $2.303 billion net of debt discounts and issuance costs, consisting primarily of a $1.995 billion term loan and $211.0 million under the accounts receivable securitization facility, plus the $105.0 million current term-loan portion.
- Liquidity was approximately $1.302 billion, including cash, $1.000 billion of undrawn revolver capacity and $139.0 million of undrawn securitization capacity.
- The company was in compliance with its debt covenants at May 31, 2022. The credit agreements require a consolidated leverage ratio no greater than 3.75 to 1.0 and interest coverage of at least 3.00 to 1.0.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher client volumes across all primary verticals and the contribution from PK, partially offset by divestitures and currency translation.
- Gross margin increased in the quarter but declined for the six-month period, reflecting PK’s impact and changes in delivery-geography mix.
- SG&A increased 13.4% in the quarter and 12.3% for the first six months due to PK-related costs, higher amortization, share-based compensation and acquisition-related expenses. SG&A as a percentage of revenue improved to 25.6% from 25.9% in the quarter and to 25.5% from 25.9% for the first six months.
- Interest expense increased 92.3% in the quarter and 50.5% for the first six months because of the additional borrowings used to finance PK.
- Goodwill increased from $1.814 billion to $2.926 billion and net intangible assets increased from $655.5 million to $1.038 billion, primarily due to the PK acquisition.
- The company repurchased 366,704 shares for $57.9 million during the quarter and had $417.1 million remaining under its $500 million authorization at May 31, 2022. It also paid quarterly dividends of $0.25 per share.
Guidance, Outlook, Commentary and Risks
The filing does not provide a clear numerical revenue, earnings or margin forecast. Management stated that current cash balances, operating cash flow and available credit are expected to support operating, working-capital and investment needs for at least the next twelve months.
Management highlighted seasonality, with revenue and margins typically higher in the fourth quarter, and ongoing exposure to labor costs, employee turnover, inflation, foreign exchange, client demand, pricing pressure and delivery-center geography. Approximately 78% of second-quarter revenue was generated from non-U.S. operations and approximately 67% was priced in U.S. dollars.
Key risks include continued COVID-19 effects, the conflict in Ukraine and broader economic or supply-chain disruption, cyberattacks and data-protection failures, inability to integrate acquisitions, competitive pressure, loss of key personnel, early termination or reduced demand under client contracts, currency fluctuations, higher tax liabilities and variable-rate debt exposure. A 100-basis-point increase in interest rates was estimated to increase annual interest expense by approximately $23.1 million.
In May 2022, Concentrix announced an agreement to acquire ServiceSource International for approximately $131 million, inclusive of ServiceSource’s net cash. Closing was expected in the second half of fiscal 2022, subject to stockholder and regulatory approval. On July 6, 2022, after the reporting date, the securitization facility was amended to increase capacity to $500 million, extend maturity to July 5, 2024 and transition a reference rate from LIBOR to SOFR.
Important Facts for Investors to Verify
- Whether PK produces the expected revenue growth, synergies and margins after integration, and whether the preliminary purchase-price allocation changes materially.
- The closing, financing and integration consequences of the proposed ServiceSource acquisition.
- Debt paydown, leverage-ratio compliance and sensitivity to higher SOFR and other variable interest rates.
- Whether operating cash flow and free cash flow recover from the year-over-year decline while supporting acquisitions, dividends and share repurchases.
- The effect of foreign-currency movements, inflation and labor-market pressures on gross margin and operating margin.
- The sustainability of the lower effective tax rate, including the impact of uncertain tax positions and geographic income mix.
- Potential effects of COVID-19, geopolitical developments, cybersecurity incidents and client contract terminations on demand and operations.