This is just a brief update following my more detailed information concentrix (NASDAQ: CNXC) published earlier this month, can be found here.
The company has delivered results and I believe management is sending very good signals Positive, and could be a catalyst for previously hesitant investors.
Concentrix reported third-quarter earnings after the bell yesterday. It initially looked like the share price might fall after the bell, but the market seems satisfied with the information management has received, with the share price currently trading at 10% (as of writing).
Earlier this week, they also announced that the acquisition of Webhelp has been successfully completed, which also means that the stock has entered the profitability stage, with some expectations.
Network help updates
At its January 2022 analyst day, Concentrix guided By 2025, revenue will be approximately $10 billion, of which $8.5 billion will be achieved through organic growth and $1.5 billion through M&A. They spoke of their view that increased industry consolidation will lead to the emergence of a few large players (with revenues in excess of $10 billion) with the scale and expertise to serve global clients on a global scale. This acquisition catapults them into the forefront of the CX industry.
After the acquisition, Concentrix currently has total debt of approximately US$5.2 billion and a net debt/EBITDA level of approximately 3 times. They’ve made it clear that they intend to get this back to roughly 2x over the next 2 years, and given the high level of free cash flow (“FCF”) generated by the business, I see no reason to doubt their internal estimates: it should be able to achieve this. Even at current levels, they maintain an investment-grade profile.
Revenue and operating profit margin increased by about 3% year-on-year. Operating efficiency was quite solid, with operating margins (GAAP and adjusted) broadly in line with the prior year period. (plus or minus a few basis points)
Given the 27% year-over-year decline in GAAP net income, and the subsequent 27% year-over-year decline in GAAP earnings per share, a quick look at the bottom line on the income statement may seem concerning at first glance. This is largely due to the one-time acquisition and financing costs of the aforementioned acquisitions. The smaller headwind was higher interest charges due to rising interest rates, which was expected.
Improvements in working capital plans also drove strong free cash flow generation, which increased 32% year over year. On the earnings call, the CFO expressed confidence that they will be able to maintain this improved efficiency.
In addition to quarterly results and an update on the Webhelp acquisition, management also announced the approval of a 10% dividend increase and the resumption of a stock repurchase program. Looking at the size of these, and considering they’re not all that large, I believe the sentiment and signals behind these actions are telling and provide insight into management’s confidence in its pipeline and future cash generation capabilities.
Typically, following a large acquisition, one would expect the focus to be on reducing leverage. Concentrix said that while they are absolutely focused on this, they are also willing to increase the dividend and restart small buybacks.
The following excerpt from the earnings call also reflects management’s confidence.
Regarding potential cross-selling opportunities:
With our merger with Webhelp now complete, we are already seeing customer demand for our expanded offerings.
On increasing dividends:
Given our continued organic growth, strong free cash flow generation and growing Webhelp portfolio, we are pleased to increase our quarterly dividend by 10%. “
Regarding financial strength and capital allocation:
The increase in our quarterly dividend reflects our financial strength, confidence in our future and our commitment to disciplined capital deployment. “
While the positive signals regarding cross-sales and confidence in reducing debt levels are not unexpected, I do believe sentiment about increasing the dividend is a very positive sign for Concentrix.
Guidance is provided for the combined entity in FY23 as Webhelp will only provide approximately 2 months of contributions. However, management said they will only provide fiscal 2024 guidance with next quarter (and fiscal 2023) results. This makes sense, since by then they should have a better idea of the combined business’s integration timeliness and opportunities.
The global macro environment is also currently in a well-balanced state, market sentiment is under certain pressure, and many indicators indicate that the macro climate will be more severe in the future – which will of course have a knock-on effect on corporate spending and potential project launches. Guidance therefore also gives management the opportunity to provide guidance as accurately as possible.
While Concentrix Corporation is still a long way from what I would consider fair value, it has taken the first step in the right direction. The market may want to see more evidence that generative AI is less of a threat to businesses than initially feared.
Once these concerns are alleviated, Concentrix Corporation’s stock price should recover strongly, and if it turns out that GenAI adoption can indeed be a boost to margins as management suggests, and it does, the stock price could rise sharply. When adopting previous technological changes.