Ladies and gentlemen, thank you for standing by, and welcome to the Concentrix Fourth Quarter and Full Year 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be question-and-answer session.

[Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to one of your speakers today, Mr. David Stein, Vice President of Investor Relations. Sir, please go ahead..

Thank you, Michelle, and good morning. Welcome to the Concentrix Fourth Quarter and Full Year Fiscal 2020 Earnings Call. This call contains forward-looking statements that address our expected 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 events or developments.

Please refer to yesterday'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 Form 10 information statement.

Also during the call, we will discuss non-GAAP financial measures, including free cash flow, non-GAAP operating income, adjusted EBITDA and adjusted EPS as well as constant currency revenue growth. A reconciliation of these non-GAAP measures is available in the news release and on the Concentrix Investor Relations website under financials.

With me on the call today are Chris Caldwell, our President and Chief Executive Officer; 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 the call for your questions.

Now, I'll turn the call over to Chris..

First, expanding wallet share through deepening relationships with our clients; second, relentlessly innovating and developing our new digital solutions; third, investing further in emerging markets around the globe; and finally, selectively pursuing strategic acquisitions, building on our track record as a proven successful industry consolidator.

Finally, I would like to thank our exceptional staff for their dedicated service, our clients for their trust and our new very talented diverse Board of Directors for their support. And with that, I would like to turn the call over to Andre.

Andre?.

Well, thank you, Chris, and good morning. I'll begin with a look at our financial results for the fourth quarter and then discuss our business outlook for the first quarter of fiscal 2021. We experienced a strong improvement in revenue and profitability in the fourth quarter. Revenue in the fourth quarter was $1.3 billion.

On a constant currency basis, revenue increased 6.3% compared with last year. Reported revenue reflected a positive foreign currency impact of $12 million. Our strong growth was generated by a number of our strategic verticals.

Revenue from the technology and consumer electronics vertical grew approximately 19%, reflecting strong growth across a broad-based group of clients.

Revenue from clients in the retail, travel and e-commerce vertical grew by approximately 20% as growth with several retail and e-commerce clients more than offset the expected lower volumes from travel and tourism clients.

Revenue from travel and tourism clients was just under 5% of total revenue in the fourth quarter of 2020, down from approximately 6% last year, reflecting an approximate 1% impact on the overall company growth rate for the quarter. Revenue from health care clients grew 17%, largely as a result of strong seasonal volumes.

Our strong growth across these verticals was partially offset by a 12% reduction in revenue from communications clients. Revenue from communications clients was approximately 18% of total revenue in the fourth quarter, down from 22% last year, reflecting a nearly 3% impact on the overall growth rate for the quarter.

The rebalancing of our vertical mix has made us less reliant on the communications vertical. Importantly, we believe this rebalancing of our portfolio mix is nearly complete, and we expect it will have a significantly less pronounced impact on our 2021 revenue growth.

Contributing to the growth across our strategic verticals were our nearly 100 global disruptor clients, representing about 17% of our fourth quarter total revenue, which grew by roughly 20% -- 25% year-over-year. Turning to profitability, as expected, profit improved meaningfully on a sequential basis compared with the third quarter.

On a year-over-year basis, non-GAAP operating income was $175 million in the fourth quarter compared with $165 million last year. Our non-GAAP operating margin was 13.5%, down slightly from 13.6% in the fourth quarter last year.

Fourth quarter adjusted EBITDA was $211 million compared with $198 million last year, and our adjusted EBITDA margin was 16.2% compared with 16.3% last year. Our profitability reflects flow-through from revenue growth and synergy attainment. On a net basis, COVID-19 expenses approximated $21 million in the fourth quarter.

Fourth quarter results also reflect increased investment in support of strong new program ramps that will turn into revenue through the next two quarters. In terms of net income, in the fourth quarter, non-GAAP net income was $107 million compared with $80 million last year. Adjusted EPS was $2.07 compared with $1.55 last year.

GAAP results for the fourth quarter of 2020 included $37 million of amortization of intangibles; $14 million of acquisition, integration and spin-off related expenses; and $4 million of share-based compensation expense.

I'll point out that our treatment of share-based compensation expense in our non-GAAP measures is different than how it has historically been presented in the SYNNEX results. We made this change to be more comparable to our industry peers. GAAP EPS was $1.25 compared to $0.62 last year.

Our tax provision presented in the earnings release reflects taxes as if we are on a stand-alone basis, even though we will be part of the SYNNEX fiscal 2020 U.S. tax return. Our standalone effective GAAP tax rate of 44% in the fourth quarter was higher than our expected future tax rate.

COVID-19 impacts resulted in lower overall taxable income for full year 2020, which increased our exposure to certain U.S. base erosion and anti-abuse taxes. Moving forward, under current tax regulations and with expected improvements in profitability, we expect our effective tax rate to approximate 29% on both a GAAP and non-GAAP basis.

Now I'll move to a few other financial details from the quarter. In terms of cash flow, fourth quarter cash flow from operations totaled $119 million, and capital expenditures totaled $65 million, generating $54 million of free cash flow in the quarter.

Capital expenditures were elevated in the fourth quarter, primarily as we made investments to support work from home services. On an ongoing basis, we expect capital expenditures to fall in a range of 3.5% to 4% of revenue.

We expect about half of our capital expenditures to be for maintenance and about half related to new capabilities, investing in technology, digital and security to support work at home and to drive organic growth.

Turning to the balance sheet, at the end of the fourth quarter, cash and cash equivalents were $153 million, and net debt was $992 million. About 89% of our cash was held outside the U.S.

On November 30th, we incurred our initial borrowings under our $1.5 billion five-year credit facility and our two-year $350 million accounts receivable securitization program.

Total debt outstanding at the end of the year was $1.145 billion, and this includes $900 million in borrowings on our 5-year term loan under the credit facility and $250 million in borrowings under the AR securitization net of issuance costs.

At the end of the year, gross leverage was approximately 1.8 times adjusted EBITDA and liquidity remained strong with over $850 million of cash, undrawn lines of credit and capacity on our AR securitization. Our current liquidity gives us significant financial flexibility.

Our priorities for capital deployment include growing existing business through funding organic and strategic growth opportunities. Now, I will discuss our business outlook for the first quarter of fiscal 2021.

Balancing the continued uncertainty related to COVID-19 with our current business momentum, we expect revenue to be in a range of $1.26 billion to $1.31 billion. This includes an approximately 2% positive impact of foreign exchange rates compared with comparable period in 2020.

Our profitability expectations include non-GAAP operating income in a range of $148 million to $162 million. We expect interest expense in the first quarter to be approximately $8 million. We expect an effective tax rate of approximately 29% and a weighted average share count of approximately 52 million shares.

Our non-GAAP operating income guidance excludes approximately $34 million related to the amortization of intangibles and $7 million of share-based compensation expense.

While we do not guide further than one quarter out, we feel confident in our ability to grow Concentrix at or above industry growth rates while increasing non-GAAP operating margin overtime.

Our expectations for fiscal '21 include a typical seasonal pattern for the business for sequential volumes rolling off and impacting revenue and profitability for the first half of the year as sequential increases beginning in the third quarter.

Our business outlook does not include any future acquisition-related impacts or transaction or integration costs. Also not included in the guidance are impacts from future currency fluctuations. In closing, we are pleased with our results, and we are confident in our outlook.

We are a well-positioned global leader in a large, fragmented and growing market. We're executing a plan to grow organically faster than the market, and we expect the impact of portfolio rebalancing to have a much smaller negative impact on our growth rates as we move forward.

As a proven, successful consolidator in our market with a strong balance sheet, we believe we're in a great spot to deliver sustainable growth, margin progression and strong free cash flow. At this time, Michelle, please open the line for questions..

Thank you. [Operator Instructions] Our first question comes from the line of Ruplu Bhattacharya with Bank of America. Your line is open. Please go ahead..

Thanks for taking my question and congrats on the strong results in the first quarter as a public company. Chris, maybe can you talk about your thoughts on inorganic growth? You had strong organic growth this quarter, but in the past, you've talked about potential -- your propensity for M&A.

Just what -- any thoughts on the potential size and which end markets -- I mean, what would make sense for Concentrix from an inorganic standpoint?.

Thanks, Ruplu.

So from my perspective, I mean, really what we're looking at is what's additional accretive to our client base, either from adding unique clients into our client set that we have service offerings to take advantage of and/or sort of capabilities, as I've talked about in the past, to go into the verticals that we're already dealing with.

Good example would be commercial banking, we're very interested in because we're very strong in the retail business. From a size perspective, really, we're quite open.

It's really about what we believe has the highest return for our shareholders, and what is the fastest we can have additive to our revenue and profitability when you look at doing the acquisition..

Got it.

And can you comment on the mix of voice versus non-voice services that you have currently? And what would be the long-term target? And can you just talk about some of the non-voice services that you provide today? And how should we think about that mix going forward?.

So, non-voice continues to kind of creep up as we go ahead and automate a lot of the voice and put in more IVR and more digital solutions for our clients. That being said, voice still continues to be strong.

I think we've talked about trying to get to a 50-50 split and that still is sort of our goal over a period of time, and we continue to make progress towards that.

That being said, we have found clients who are looking for sort of true high-end customer experience, wanting a balance between voice and non-voice solutions to kind of handle their customer demand, but overall, that's directionally where we're headed..

Got it. And maybe just last one more question. In terms of working from home, I think you said that 60% of the workforce is currently working from home. In the past, you've talked about needing some time to judge the productivity of people working from home.

I mean, do you think that people working from home are equally effective versus working in the office? And how should we think about -- I think you said the long-term target was around 30%, 35%.

So how should we think about people getting back into the offices? I mean, what timeframe are we thinking about? And just related to that, you've also talked about like international expansion.

I mean, do you need to hire more staff to do that or -- and the go-to-market in trying to expand internationally? Can you just comment on the move back into the call centers as well as the -- your plan for international expansion, how the go-to-market there kind of works?.

Yes. For sure, first off, I wouldn't call them call centers. The reality is that our sites deliver a lot of services, voice, non-voice, technical solutions, development and just a host of different types of services out of our physical delivery sites. In terms of the work at home, productivity for the whole is better in most regions.

I will tell you, there are some regions just because of the -- how people live and they might have a higher density of living capacity within the regions, the productivity is at par to delivery sites or maybe just a tiny bit less. So it is a bit of a flux.

There is not one answer fits all around it, but overall, we're very happy with the productivity that we're seeing from our team members around the world.

In terms of when we look at getting back to a 30%, that's really something that we've kind of ballparked out based on the type of work we do, based on some staff who are looking forward to getting back and being with a team group within a physical building.

But our expectation is, probably 2022 discussion, not in 2021 based on vaccine rollouts and based on where our staff are and a whole host of other things, we're in no rush to bring people back. It's really about when the right time for our team members to come in. And then the last question in regards to sort of hiring up for international expansion.

We have a very distributed sales and account management team and obviously, clearly, the operations team around the globe with local team members in all the markets that we serve for the most part.

And so really, we will continue to add and invest in those areas, in the verticals that we want to grow in those markets, but there is no real need to go out and hire significantly more in order to grow that business in a regional nature..

Got it. Thanks for all the details and congrats again on the strong results as well as the strong guidance. Thank you..

Great, thanks very much..

Thank you. And our next question comes from the line of Shannon Cross with Cross Research. Your line is open. Please go ahead..

I guess, my first question is -- and obviously, work from home, it plays very strongly into this, but I'm curious what else you've kind of learned about your business given COVID with such a -- I don't know, people-intensive nature of the business.

So I'm just curious what things you put in place where might think that there is more opportunity for automation or if there is anything else that you've learned and that's also from the standpoint of COVID-related costs. How quickly you expect some of those to wind down? And where we might see that? And then I have a follow-up..

Shannon, good to talk again. I think first off, what we've learned from just the overall business model is how robust the services business model is.

We provide and support businesses day in and day out and in effect, are very tied at the hip to our clients to make sure that they're successful in the marketplace and through COVID and through all the ups and downs, really showed the strong working relationships that we have with our clients.

From a staff perspective, the reality is that things that -- and we've talked about this in the past, things that we could automate that, historically, we've been talking to clients that might have taken a few months to get decided during covet, those decision time frames have been turned around very, very, very quickly because it's easier to manage.

It's faster. Sometimes it's more cost effective in a quicker period of time. And so, we've seen a lot more consumption of our digital services in a faster period of time than historically how we've rolled them out. From a care and taking care of our staff perspective, we put a big emphasis on mental health.

We put a big emphasis on making sure that there is comfort within the whole environment and tips on how to be productive in the home environment as well as different digital training delivery to make sure that our staff are up to speed and what they need to do as well as, frankly, recruiting digitally.

And so, if you look at all the processes that historically might have been done in the site, very quickly, we've been able to expand that in a purely automated and digital caution for our team members around the world, which has allowed us to kind of scale very, very quickly from a work in home perspective..

And then, Shannon, to your question on the COVID-19 costs. Those costs that we're incurring are very much around being fanatical about delivering for our clients and keeping and being fanatical about our staff and keeping them safe.

And so certainly, as we think about our guidance for the first quarter, you should assume that those similar level of spending is likely in there, and we think that will be with us for certainly a few quarters as we look out into 2021..

Okay. And then I guess my final question is just, with regard to the sales process and the customers you're talking to.

If you could give us any idea, if you've been able to expand into maybe incremental, not verticals but tangential areas with the conversations that you've had with your customers, again, COVID has probably opened up some opportunities, I would assume, rather than close down some given the nature of your business?.

Shannon, so we haven't expanded our verticals that we're focused on delivering for. We're very focused on keen to build up deeper domain knowledge within the verticals that we've called out as being strategic to us.

I think in terms of offerings, what has happened with our clients is that they're looking at giving us more of their work and asking us to kind of transform that work in whether it be, as I talked about, more digital solution, more automation, sort of one more stop shop, and not only within one region, in multiple regions.

So when we talk about gaining share, that's really what we're talking about is gaining share across their share of wallet by offering a more comprehensive one-stop solution.

That has gotten us into some work within those verticals that perhaps, we might not have always focused on, but it's been the right thing to do for these clients to build a stronger relationship and certainly be a more valued partner to them..

Thank you. And our next question comes from the line of Dave Koning with Baird. Your line is open. Please go ahead..

Great job..

Thank you, David..

Yes. Yes. I guess, first of all, I'm interested just the shift of business over time. I mean, you've done a great job diversifying away from the telecom clients, and now it sounds like an increasing portion is within the global disruptors.

Does that change the margin dynamics overtime? Like are those global disruptors a little higher yielding or different services you provide? Whatever it is that kind of generates potentially higher margins? Like is this just a really good mix shift, both from a revenue and margin standpoint?.

So David, it's a bit of a combination. Like first of all, within the verticals that we service that are not mobile disruptors, clearly, we've seen margin progression as we move up the stack in value as we put in more technology, more automation.

And that's obviously continued our goal, and we continue to message that we believe that there is more room to continue to progress our operating income over the coming quarters and years as we go forward as we brought it up over the last three to five years.

From a disruptive perspective, they are consuming similar services to a lot of our enterprise clients, albeit differently.

And when I say differently, they tend to look at different geo deliveries, they tend to look at more rapid scale, they tend to look at less onshore mix and more offshore mix, which tends to have a higher-margin out of a date, which does help us overall in our margin mix as we go forward.

So as you see that progress, is part of our margin story as we see margin improvements and increases over the coming quarters and years..

Okay, got you and thanks on that. And I guess, secondly, just on long-term margins. I mean, you've done a really nice job just overall with margins, but is the at-home mix sustainable? And will that help overtime? I mean I guess that's really the question.

Like is -- are you -- is there parts of the business now that are just going to be long-term at better margin just simply because you have more people at home?.

Yes. David, the way I look at it is, first of all, we have a very variable cost model from a facilities perspective. So if for whatever reason, we want to continue to have a larger percentage of work at home, then we could look at removing facilities from our infrastructure.

That has not seemed to be the case, and that hasn't seemed to be the messaging from clients at this point in time. But should we go down that path, we can certainly do it.

When we talk about sort of that 30% of our business kind of remaining at work at home, where it makes sense for the client, where it makes sense for our staff members, we would certainly support that.

And that margin profile is slightly better, but it's not significantly better because there is a lot of investment costs that we do in some of the regions for our work at home staff that are costs that you might not necessarily appreciate, whether it be more mental health services, whether it be more bandwidth services, whether it be different security costs and a whole list of other things that go into our work at home solution.

So while it does help, again, it's not a vast call out that would say, if we stayed at 60% of our staff work at home that you'd see a large margin improvement..

David, we would probably see more of the long-term drivers of margin progression being growth in the strategic verticals, growth in emerging markets, where margins can be higher, again infusing more technology into our offerings and kind of moving up the stack, as Chris has mentioned, becoming more efficient in our delivery through the introduction of technology, and then with the growth, some leverage on G&A.

So those are kind of the long-term drivers to margin progression. Those have been the things that have allowed us to kind of get to where we are that plus acquisition synergies. And those are the things that I think we will drive margins -- give us confidence that we can drive margins higher as we go forward..

Got you. Well, okay, and then maybe if I can just sneak one more in. I saw something interesting from Fiserv as a bank software company that we cover. They talked about within their banks, 33% lift in calls to the call centers of banks, and I thought that was interesting.

And just wondering that, that maybe is a little bit of unsustainable call volume throughout pandemic, but at the same time, you've also had e-com probably sustainably good now forever maybe, right? Like -- so it seems like there is a little crosscut, there might be a little kind of one-time revenue, but then some that's just permanently maybe better, too.

And maybe if you could kind of isolate, like is there some extra growth right now? Or maybe are we just in a sustainably better kind of situation?.

I mean....

Sorry, we're getting a bit of back. David, we see both. We see one-time volume that's coming through that's primarily driven by the pandemic.

We've talked about this, people wanting to refinance their mortgages because of lower interest rates or people who are looking for telemedicine or telehealth consults or whatever the case may being that, that is clearly driven by the environment that we're in.

We've also seen -- and what we're supporting a lot of our growth on is sustainable long-term switch to an outsourcing model and long-term sustainable type of volume of business, whether it be digital, voice and non-voice, doesn't really matter, of the new models.

And some of that, as an example, is coming from retail traffic, which is now driving more e-commerce through traditional retailers, which we benefited from and/or the fintechs who are doing more things virtually versus walking into a branch. That's sustainable, that's here to stay and will continue to grow..

So -- go ahead, operator..

I was just going to say, I'm showing no further questions, sir..

All right. Well, at this time, thank you all very much for your participation on the call today, and we will end the call..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day..