Conference Transcript - CNXC 2026-08-11

Luke Morison, Analyst — Canaccord

So I think we are ready to go here. Thank you all for joining us. I'm Luke Morrison. I'm one of Canaccord's analysts covering the software and IT services sectors. I'm here today, excited to host Chris Caldwell, CEO of Concentrix and Andre Valentine, CFO. Thank you guys for coming. Chris, got a lot to cover here. Maybe let's kick things off for anyone in the room fresh to the story. Maybe just give us the short version of what the business is today. How does that maybe differ from what it was a year or two ago? Things are evolving rapidly. And then maybe just a quick overview of what happened in the most recent quarter.

Chris Caldwell, CEO

For sure. So let's talk about who we are and what we do. We're a leader in driving customer experiences globally. We're number two in the field. We operate in about 75 different countries around the world. We're just under $10 billion from a revenue perspective, and when people think about customer experience, they tend to think about having a phone call, and that couldn't be farther from the truth. Our business is sort of deep integration with our clients where we're delivering unique customer experiences both from the back office and front office perspective, and it really is serviced by kind of three individual pillars. One is sort of designing and building these systems that go into clients. Two is implementing the technology that enabled these systems, and then three is actually providing the services that go along with the technology to deliver the systems for our clients around the world. And when you think about our business, the vast majority of our clients have long, long, long-term relationships with. Our average tenure of our top 25 clients is about 18 years, which is incredibly unique in our business. And we're also very, very diversified from a client-based perspective and a revenue-based perspective. So our top five clients are really about less than 20%, sorry, top 10 clients are less than 20% of our revenue. And when you think of our revenue sources of where we drive revenue from a client base, we're unique in our industry where about a third of our revenue comes from North American-based clients, a third of our revenue comes from European-based clients, and about a third of our revenue comes from Asia-packed clients. So a very, very nice customer mix from what it is. In terms of what our business has changed over the last three years since AI came out, which is always the topic of conversation when it comes in this theater, it's really evolved pretty significantly, but it hasn't dramatically changed. And what I mean by that is that three years ago, we were as equally focused on automating as much as we could for clients. We were equally focused on driving a better cost of serve for our clients, and we're equally focused as really driving better experiences. And AI has just really enhanced that, enabled more of that to happen. And so, frankly, we see that as, frankly, a good thing for our industry to evolve it because we tend to make more off of technology solutions than pure service solutions. The other big change that's happened over the last sort of three years is from a client perspective is sort of where they thought they would service clients, how they would service clients, how they thought the evolution would happen has dramatically changed. So now language barriers have come down. Now there's more automation ability with some of the AI solutions to go in to drive better experiences for a lower cost. And clients are, instead of procuring things with individual partners, maybe 20 partners in their ecosystem, 50 partners in their ecosystem, they're looking more for one or two partners in their ecosystem to drive the full solution for them, which we see is beneficial to our business. When we look at our last quarter, from our performance perspective, revenue growth was relatively anemic. And we're okay to say that because what we're driving under the cover is a significant progress in AI deployments. Our AI solution contract booking was up 400% year-on-year. That's driving a significant sticky type of revenue into our client base. We're seeing that drive a better margin improvement and getting some returns from our investments we've made in over the last couple of years. And we're seeing more opportunities for consolidation in our channel, which also benefits what we're trying to drive in our business. And then, obviously, from a cash flow perspective, we had a very healthy cash flow quarter, which is historically we start to ramp our cash flow in the back three quarters of the year versus a Q1 which tends to be a flat to negative cash flow quarter.

Luke Morison, Analyst — Canaccord

Yep, yep. Okay, fantastic. I just want to touch on, before we get to some of the more exciting stuff, just touch on like two of the factors that may have changed a little bit last quarter. There was this offshoring, you know, change in a little bit of an incremental headwind And then there was, you know, incremental headwind from clients stepping back from supporting certain customer segments. So maybe just starting on the offshoring piece, you know, initially entering the year, you'd planned 200 basis points revenue headwind from that. It's now closer to 300. Maybe just walk us through, like, what's changed, what's driving that trend, and just, like, how client planning is evolving and dynamic in this environment.

Chris Caldwell, CEO

For sure. Both of those trends, the increase in offshoring at an accelerated rate, and frankly, what we're seeing from a client's thinking about their customer segmentation is driven by the same thing, which is clients not getting value from some of their AI investments or not getting as much value as they need from some of their AI investments that are being done, frankly. From an accelerating of offshoring perspective, about 15% of our business can be delivered from another shore than it is. So something in North America could be delivered from someplace in Asia from a lower-cost perspective. So about 15% of our business is that. Through the course of this year, we've seen acceleration. We went into the year thing as about 200 basis points, which is up about 50 basis points from traditionally what we see to 300 basis points of headwind. And that's primarily driven by people thinking, hey, we need to seek some cost savings to be able to hit our numbers. And that's one of the easiest ways to be able to actually deliver those cost savings. From a company perspective, dollar turns into 50 cents. But from a gross margin perspective, sorry, gross margin dollar perspective, it's the So it's actually more accretive to us once we get the transition done, which generally takes three to four quarters. So we see that actually as a positive. And we'll exit this year at around 11%, give or take, that's still able to be offshored from where it's currently being delivered. And so that gets to a smaller piece of the pie. In terms of, you know, that trend continuing on, the reality is most clients are now delivering from the right shore out of the gate. And so we're not necessarily building more capacity in onshore locations where we're not going to need that. It's all based on the offshore. And so we see that as kind of being more beneficial to our business. In terms of clients kind of looking at customer segmentation, saying where are we going to invest where we're not, this is somewhat very unique and came up within the quarter where we had some large clients who you all know who are spending a significant amount of money on AI data center build-outs who said there are some segmentation in our customers that we just do not make money on, which tends to be the S of SMB. And they tend to be in higher-cost countries and European countries and some Asia-packed countries where they go, we're not going to see a return for that. So we're going to take some of this money, and we're going to invest in the enterprise side, which comes back to us. But it's not as much as where they just kind of looked at segments and said, we're no longer going to support that. That's pretty narrow and focused on a specific customer set, and we don't see that expanding out into any of the rest of our clients that we operate with.

Luke Morison, Analyst — Canaccord

Yep, yep. Okay. So just what I'm hearing is that feels like more of a one-off versus an enduring trend that you're seeing across customer segments. Okay. And just maybe like on the offshoring piece, it's going to be 11% exiting the year. Like, how should we, is that going to go to zero eventually? Like, what does that look like in a few years? And does that eventually, you know, become not a headwind?

Andre Valentine, CFO

We think the headwind continues, but likely going back to a more normal level of, call it, 150 basis points of a headwind to 200 basis points per year. And does it go to zero? Probably not. There will always be some amount of work that clients, because of either a brand process or a promise or wanting to give a certain segment of customers white glove treatment, that work will stay onshore. So we don't think it goes all the way to zero. It continues to be a headwind. It's been a headwind, frankly, for as long as I've been in the industry, which is now over 20 years. So we're just seeing it goes through periods where it accelerates. It certainly has accelerated a bit of us here in the second half versus what we guided to.

Luke Morison, Analyst — Canaccord

Yep, yep, okay. And just thinking about visibility, it seems like maybe some of those decisions with customers cutting off certain segments, Those happened a little late in the quarter and just, you know, raises some questions around visibility, just like setting exact numbers aside and what you've guided to, just like what is the tone of conversations today? You know, are you confident that those, you know, one-offs are behind us and that, you know, it's smoother sailing from here?

Chris Caldwell, CEO

So just in terms of relationship with the clients, we're talking to clients on a daily basis about their strategic plans and what they're doing. but equally as they are impacted by economic decisions that are coming in that tend to happen in quarter, what we're seeing is two things, is the ability to execute on their changes, they're looking for a faster turnaround time. So a good example was last year when clients were thinking about going offshore, they would tend to be a six-month planning process and maybe another four or five months of implementation process to actually do it. Now they're looking at trying to do that within the quarter. And similarly, when people are looking at where they're investing in segments and where they're pulling back from segments, they're generally looking at that within 90 to 120 days. And so the visibility has kind of been murky between quarters. But when we look at between now and the end of the year, the visibility is fairly good. I mean, we're generally knowing where people are investing. We're knowing where clients are getting benefits and gains from what we're doing. We know where clients are thinking about doing something different. And, again, it's more the timing within the quarters that we see more murkiness driven by sort of those factors of urgency around what they need to do for their economics.

Luke Morison, Analyst — Canaccord

Yep, yep, okay. Chris, let's pivot over to iX. You know, that's probably the more interesting part of the story right now. It's your software suite. You know, maybe, and you touched on it earlier, you closed a bunch of deals. Deal count is growing rapidly. You're tracking past your, it was originally $100 million in AR for the year. Now it's $120 million. You're tracking past that. You know, just maybe first an overview. Like, what is that suite of software tools? Where are you seeing the most momentum with that? And what's the broader opportunity?

Chris Caldwell, CEO

Yeah, for sure. So to be clear, when we think of our IX suite of products, we have two sort of categories. One is fully autonomous, where whether it's a voice call, a chat, or any type of contact with a client, it's handled in a fully autonomous fashion. The other is where we're augmenting humans with AI to drive better productivity and proficiency. Those are kind of the two tool sets that we have within our IX suite of products. From our fully autonomous product, it's doing okay as where it fits in the market, but we're also finding a lot more success in that space, selling things from Salesforce and Nice and Microsoft and Google and Amazon. There's a lot of fully autonomous solutions that are out there, and we sell a combination. The IX suite part that is doing exceptionally well for us is our augmentation of a human perspective. And what we're seeing, that's 400% number of deal value growth within the second quarter, is we're seeing just huge momentum. And why are we seeing huge momentum is because a client can walk in, see their processes, and instantly get savings from putting in our technology that actually works, is practical, and drives real value from them. not only in terms of driving better productivity, but also the information we're able to give to them about their business around how to market to their customers better, how to be more compliant in their business, how to drive better savings for the clients, and even how to market to their customers in a better fashion. And so we've seen this huge increase in this productivity suite that's come in. And we're selling it by clients coming to our sites and saying, that's what I want, right? They're tired of the flashy demos. They're tired of these promises. They actually want to see a real value delivered by AI in their operations, and this is what we see. Now that we have been commercially doing this product for a year, a couple things that we're seeing. First of all, when we put it into a client's implementation, we actually see revenue decline. We actually see a decline within the first month or two of deployment. We see it kind of bottom out normally about month six and seven, and then we start to see it grow. and by the end of the first year, we're generally seeing the majority of these clients who are on our platform growing faster than our corporate average and faster than they were before we actually started implementing the software, which is really, really important. The second thing that we're seeing is after a year, we're seeing our non-GAAP-OP income increase by about 350 basis points. Very meaningful to us. Why? Because one, we're more efficient running for our client. Two, We can provide better pricing to that client so they're giving us more volume because we become more efficient with more client. And then three, we're actually charging for our software as a typical SaaS-based revenue So we're starting to see the benefit from that come through to our operations as well. And so to your point, we expect to be at about $120 million of ARR at the end of this year, up from sort of almost nothing sort of a year and a bit ago. And that's influencing about $1.4, $1.5 billion of revenue. Our goal is as we scale our IX suite, it impacts more of our revenue, we make a higher margin, we grow faster, while we're also cannibalizing some of our business. And so we're not so concerned about our top-line growth right at the moment. What we're most concerned about is driving very, very sticky revenue, driving higher margins within our business and continue to build out sort of our pure AI revenues within our organization. And that is what's really exciting to us.

Luke Morison, Analyst — Canaccord

Yeah, yeah, fantastic. I just want to touch on one other piece of that. You've called out deployment capacity as sort of a governor on growth within that segment right now. Just talk about how much of a constraint that is. How do you relieve that? What does that look like a year from now?

Chris Caldwell, CEO

Yeah, so we're actively working hard to make sure we're keeping up with deployments right now. And with our sales growth higher than our expectations are, we're a little behind from a deployment schedule. And I think if you read any press release, everyone's looking for forward deployed engineers. We're similarly in the same boat of getting people with the right technical talent, right domain expertise to be able to install it. That being said, we've made great progress in the last two quarters, three quarters of driving faster implementation cycle times with our product by making it more self-serve, by driving better, you know, onboarding tools for it to get it into the organizations faster. And so we do think that we'll fix it by continuing to drive better automation within our own tool as well as we're hiring more of our technical talent to go out and implement it into our client sites and into our sites to deliver the revenue that our expectation is. So we'll get past that. Honestly, that's a great problem to have is that you've got a pipeline that you're trying to install and we're trying to make sure that we're investing in line with growing that revenue.

Luke Morison, Analyst — Canaccord

Yep, yep, okay. You touched on it a little bit. You mentioned, you know, adoption of your IX solutions has skewed heavily towards augmenting people rather than the full autonomy piece. Maybe just, like, talk about where the market is today. How do you see that evolving? Like, where do you play in? What's more competitive?

Chris Caldwell, CEO

Yeah, so when we look at our business, We have about 5% of our business that is highly commoditized, highly transactional. And the reality is a vast amount of this revenue actually is fully automated in some part or fashion. But what clients are seeing is that customers actually still want to talk to a human for whatever reason. There's no need to, but they still want to talk to a human. We think that will continue. What we're seeing with the advancements of AI is two things. First of all, you are able to do more things in a fully autonomous fashion. So for right now, we're doing collections in some countries with fully autonomous bots. We're doing sort of deep process applications with fully autonomous bots where we're taking application data and servicing up a mortgage or whatever the case is. So you are seeing that kind of continuing on. What we're also seeing is that clients are really appreciating where moments that matter with customers actually happen. So for instance, if you in the U.S. want to call your health care provider and find out if your doctor's in network, that could be fully automated. If you're phoning up to say, is my surgery approved and this is what I want, do you want to be talking to a bot or do you want to be talking to a human? I'm sure some healthcare providers would rather you talk to a bot. Most consumers want to talk to a human around how that goes. When something goes wrong in a customer journey, right, do you want to phone up a bot and have a bot tell you that they really care about you or do you want to talk to a human and say, I have a real issue and know that that's being heard and done? these are basic human connection points that we're seeing. And so we're seeing that as you can automate more of the stuff, there's also these more moments that matter that are happening. The second thing that we're seeing is that everyone assumes, and we've got more and more data that supports this, that as you put in automation, volume of contacts actually goes down. It's actually inverse. When you put in more automation, volume of contacts actually go up. Why? Because now when you contact a business, instead of waiting on hold or having a delay or whatever the case is, you get instant service. So now when I have a problem, instead of being kind of, oh, my gosh, I have to kind of contact this brand, it actually allows that friction to really drop, and you have more times you want to contact. And what is happening is that consumers are demanding more brands. They want more service in language. They want more 24-hour support. They want more engagement when they want it. They want more personalized services. And the clients who are really doing that are actually seeing contacts going up, but they're getting more value from each of those contacts, whether it's more sale, building more loyalty, driving down a total cost of delivery, driving to ARPU, all of those things are happening, which is very different than what was probably happening two or three years ago in the space. And the clients who are really thinking about where to deploy AI strategically are seeing the benefits in their customer base, and that's really what we're focused on helping them Great, great.

Luke Morison, Analyst — Canaccord

Great. Maybe last one for you, Chris, and then we'll get to you, Andre. Maybe the debate I hear most often from investors about your IX suite and the potential there is just autonomous agents keep getting better. Why should they believe you're positioned to hold this orchestration piece with IX Hero rather than kind of getting squeezed into a shrinking human exceptions layer?

Chris Caldwell, CEO

That's a great question. So what we're finding is a couple of things. First of all, three years ago, we had almost zero AI services that went along with it. And what I mean by that is everyone assumes AI is plug and play, and it couldn't be farther from the truth. You need to make sure your data is done properly. You need to make sure it's labeled properly. You need to tune the models. You need to do compliance around it. You need to do exception checking on it. There's all these services that are going. Those services for us are becoming a meaningful part of our revenue and are growing at double digits. And so, one, we built this whole net new level of services within our organization that we continue to grow. The second thing is that we're seeing is clients who are buying bespoke solutions for fully autonomous work are going, okay, that's great. I've solved this problem. But when there's an exception, it comes over to a human. When there's a compliance issue, it comes over there. I want someone to own the whole process. And I want someone to own the technology and services that wrap around it so that I can really, truly drive my cost of delivery down. And a great example is we had a client who put in a fully autonomous solution. They said, hey, I'm getting this amount of stuff going through this fully autonomous solution, but my bill is only dropping by about 20%. I thought it would drop by 100% by putting this in with all the stuff that we're doing. And the reality is what was happening is the consumers were finding other ways to contact the brand, other ways to do things. And so we're working with them to say, look, we can fully manage this whole end-to-end process. Not only technology, to make sure the technology is working, as well as the services that kind of go along with it. And that's where we see consumers demanding from their clients and brands, and that's what we see clients wanting to procure from service providers.

Luke Morison, Analyst — Canaccord

Yep, excellent. Andre, let me just pivot over to financials for a bit. You're guiding to roughly 12.5% margins. I think for the back half, Q4, you're exiting, implies around 13%. You know, your history has been a high watermark of, I think, around 14%. Just help put that in perspective. Like, are we going to keep expanding from here? What does the trajectory look like?

Andre Valentine, CFO

Yeah, our story on margins has been pretty consistent this year, which is, you know, we would start to see the margin progress that started for us in the second quarter. We've guided to continued margin progress in Q3 and then sequential progress in Q4. so that our margins in the back half of this year will be slightly higher than they were in the back half of last year. That's a real improvement from where we entered the year and gives us a jumping-off point as we think about margins into 2027. What's driving that is success in rolling out the IX suite, the year-over-year impact that that has when it's been in there for a year with clients, that higher gross margin that we see on those clients, certainly the shore movement, And you've seen us take fairly aggressive restructuring actions as we've deployed AI technology in some of our back office and G&A functions and drive costs out of the business that way. That's where our confidence in this margin trajectory in the back half comes from. And we think that sets us up for continued expansion into next year. We're not guiding the next year yet. Certainly 14% is the direction we want to move in. We'll start tracing those steps, we think, as we start moving through next year. With that, we'll generate really strong free cash flow. So $630 million to $650 million this year. And we think that because of, and we'll have a lot of the cash restructuring expenses that we've incurred this year behind us, we'll use the cash to pay down debt and bring down our cash interest. We think free cash flow goes up as we look out to 27 as well.

Luke Morison, Analyst — Canaccord

Yep, yep, great. Right. And then maybe just hitting on the top line, you know, growth is guided to roughly flat this year, excluding currency. I don't mean to ask you to look past your guidance and say, no, you're not going to. But just thinking about just the factors that are affecting growth right now, how could that curve shape over the next, call it six to eight quarters, as things like offshoring moderates, you know, IX scales, other factors?

Andre Valentine, CFO

Yeah, those things that you just mentioned give us the confidence that we can grow as we go forward. But it's really important to remember we're interested in growing the right business. And we're also interested in deploying the IX suite and AI technologies more broadly as quickly as possible to kind of get through that compression that does naturally come as we drive more efficiency. So we want to grow faster than we are right now, but we're really focused on growing the right business, moving the margins up, and as we do that, generating the strong free cash flow.

Luke Morison, Analyst — Canaccord

Yep, yep, good. And you've touched on it a couple times now, but just talking about debt, you know, you've committed to below 2.6 times this year. It's going down to 2.2 times next. Buybacks are paused in the meantime. Seems the near-term priority is debt pay down. just how should we be thinking about capital allocation going forward in the thinking there?

Andre Valentine, CFO

Yeah, as we think about the remainder of this year and next year, it is all about taking that strong free cash flow. Yes, we have our dividend, and we'll continue to have a dividend, but the vast majority of our free cash flow will go to pay down debt. As we get our leverage down towards 2.2 times by the end of fiscal 27, I think the optionality that we have around capital deployment comes back a bit, right? Debt repayment will always be on the table. But if our shares are still undervalued, as we believe they are today, significantly undervalued, you could see some level of share buyback creep back in. And then always, look, we've been a consolidator in the space. We'll do a creative M&A if we see a target that is the right fit for the company and the right fit to drive long-term value. Yep, excellent.

Luke Morison, Analyst — Canaccord

Okay, Chris, maybe I'll let you wrap up things here. Just if we're thinking about maybe what's most misunderstood about concentrics, and if we're thinking about sitting here a year from now, like what do you want investors in this room to be saying about the business and the perspective to be?

Chris Caldwell, CEO

Yeah, I think what we see from investors most misunderstood is the one of understanding how sticky our revenue is and how integrated we are into our client systems. This is not something that can be ripped and replaced and easily disseminated or disrupted. That's number one. I think the second thing is that what people are not truly appreciating is how much we've changed our revenue sources over the last three years, from our AI services, from our technology sales to our own IP sales. All of those have gone up and are growing significantly faster, and we are actively disrupting our own business versus is waiting for someone to come along and disrupt our own business. And that we're very, very focused on making sure, as Andre says, to get through it and then can continue to grow. So I think that's very much misunderstood. I think what we'd look for investors a year from now, all joking aside, is to say, hey, I've seen some stock appreciation because I know what you're doing. I see your pay down. And we get more fairly valued because right now I think it's pretty ridiculous from where we are from a value perspective. That's number one. The second thing is that we hope that investors a year from now see continued growth from our AI offerings and see that as real high value add to our business and to the client's business and see that as being winning in an AI native space because that's what we're actually in fact doing. And then the third thing is certainly seeing from a debt pay down perspective, as Andre talked about, our free, strong free cash flow, paying down our debt to our leverage levels that gives us the optionality of whether it be buybacks, whether it be more M&A, whether it be, you know, increased dividend, whatever the case is, to make sure that we're driving real value for our shareholders.

Luke Morison, Analyst — Canaccord

I think we're up on time. Thank you guys. Thanks very much. Thanks for having us.

Andre Valentine, CFO

Yeah, absolutely.