Earnings Call Transcript - CNXC Q3 2024

Operator, Operator

Thank you for standing by and welcome to Concentrix Third Quarter Fiscal Year 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to hand the call over to Sara Buda, Investor Relations. Please go ahead.

Sara Buda, Investor Relations

Great, thank you operator and good evening. Welcome to the Concentrix Third Quarter Fiscal 2024 Earnings Call. This call is the property of Concentrix and may not be recorded or rebroadcast without the written permission of Concentrix. This call contains forward-looking statements that address our 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 expectations, events, or developments. Please refer to today'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 Annual Report on Form 10-K and in our other public filings with the SEC. Also, during the call, we will discuss non-GAAP financial measures, including adjusted free cash flow, non-GAAP operating income, non-GAAP operating margin, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, non-GAAP EPS, and constant currency revenue growth. A reconciliation of these non-GAAP measures is available in the news release and on the company's investor relations website under financials. With me on the call today are Chris Caldwell, our President and CEO, 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 up the call for your questions. Now I'll turn the call over to Chris.

Chris Caldwell, President and CEO

Thank you, Sara. Hello everyone, and thank you for joining us today for our third-quarter 2024 earnings call. Today, I'm going to walk you through our current demand environment, the opportunities we are seeing in our business, and most importantly, the positive changes we are making to harness these opportunities to drive long-term value creation. Let's start with what we see in front of us today and how our market has changed over this last quarter. Our business, like all businesses, is going through a significant transformation. We see this across our clients and across sectors. Clients are under pressure to show both innovation and cost control. Every client we speak with has brought forward AI on their agenda, as a way to optimize processes, demonstrate their Board's relevance, and reduce costs. In some cases, the environment is used as a reason clients are pushing their partners and vendors on different economic outcomes. What we've seen in the past few months is an acceleration in the pace of change, driving more technology adoption, movement in delivery location, and requests for investment by clients for their transformations that are now taking priority. Transitions that might have taken several quarters are now happening in a significantly shorter timeframe. So, what does this mean for us? First, it validates that we have the right strategy and the right model to capitalize on this moment. Because of the investments we've made in our technology and that of our technology partners, our global scale, and domain expertise, clients are looking to us to lead them through their AI journey to drive innovation, reduce costs, and embrace new economic models. Second, it means we need to focus on winning the right business, and in some cases, walking away from transactional price-led commodity business where there is no desire or ability from the client to automate. As we mentioned, this now represents less than 7% of our business, a marked decline from the 13% only two years ago. With the pace of Generative AI, we expect this portion of the business to decline even further and faster. Essentially, we are proactively disrupting our own business with confidence. In doing so, we see some short-term bumps, but we believe that we are building the right business for the long term. Let me give you some examples of how this is playing out currently. We are winning new logos from competitors. An example in Q3 is a win with an airline that has been with their existing partner for decades before awarding us the entire business. Our technology leadership is allowing us to drive automation to improve performance and reduce costs for the client while enhancing the customer experience. This win leverages the power of Concentrix with our Catalyst capabilities, our Generative AI solutions to support the client across 15 lines of business and 10 languages. We are also driving change in our existing business. One of many examples in Q3 is from a large infrastructure company that we have serviced for five years. This quarter we deployed an AI bot that in the first month handled 40% of all transactions completely autonomously with a high customer satisfaction rate. For us, this resulted in an immediate 12% reduction in revenue in the near term and some margin pressure as we made upfront investments in technology for a longer-term contract with the client. By automating simple transactions and delighting the client with the innovation, the client is already having us focus on more complex work, which will lead to increased revenue and margins when fully ramped by mid-next year. More importantly, it is leading to new opportunities for us to deploy technology into their enterprise. We are also expanding relationships with larger transformational opportunities. In the third quarter with an existing client, we won a large transformational program that we have been working on for close to a year that is all incremental business to us. This is with a large financial organization where we will take over the complete servicing of a specific segment of customers. This includes the back office, technology, and servicing of all the customers. This win encompasses third-party technology partners, our own Gen AI tools, Catalyst services, and our client success organization. The initial five-year contract is valued at over $150 million in revenue. This is a remarkable win and marks one of our first large-scale transformational wins with our new model. Strategically, it is significant as no traditional competitors were engaged in this pursuit as they didn't have a complete solution. We're also winning the majority of client consolidation opportunities. Of the 22 client consolidation opportunities we saw in Q3, we were winners in 80% of them. With global scale, differentiated technology, and domain expertise, we are well-positioned to win. In fact, in Q3, we saw our highest quarterly contract revenue bookings since our combination one year ago today. We are also partnering with leading complementary technology partners. We continue to increase our capabilities across multiple key technology partner solutions. For example, last week at the Salesforce Dreamforce event, we participated with a large presence and gained significant interest in our technology solutions that complement Salesforce, as well as our ability to customize and configure Salesforce. Although these examples span many different sectors and have varying deliverables, they exemplify the current operating environment. Client requests for transformation investments are increasing in exchange for longer contracts. There are periods of revenue decline on a client-by-client basis when we deploy some of our new technology, but we have demonstrated our ability to win more business over time from these clients as we help them automate transactions. We are winning higher complexity deals and walking away from commodity business if there is no desire to automate. Clients are using this moment to consolidate providers, and technology from our partners and our own IP is helping us embed ourselves within our clients' environments. This deep integration creates higher value, stickier revenue long-term. We see this in our cross-sell and upsell ratios that show an increase when we have our solutions embedded. As we have seen increased demand for Generative AI automation, we quickly mobilized to both increase our capabilities and make our tools commercially available. Our investment in the development of our tools has increased to a run rate of approximately $100 million on an annual basis. This is proving to be the right strategy and brings me to today's announcement of our launch of iX Hello. This is our first product in our new Intelligent Experience Technology Suite, aimed at helping organizations harness the power of Generative AI across their operations. With our launch of iX Hello, we are giving customers an LLM agnostic generative AI productivity tool that automates and accelerates common internal tasks. iX Hello integrates across internal applications to boost productivity, visibility, and quality of work with an on-brand, compliant, and secure environment. The genesis of our product strategy is straightforward. Clients saw what we were doing internally, and they realized it was what they wanted. A proven, trusted Gen AI productivity tool that integrates knowledge across their front office and back office platforms is flexible and LLM agnostic that operates in a highly secure, trusted environment. Our increase in investment has not only allowed us to make necessary changes to commercialize IP, but also enhance our practices around our technology partners' products. As always, our clients are at the center of the decision on what to deploy in their environments. We now have close to 1,000 clients who are using Generative AI solutions we have implemented at scale every day. In short, as we saw in our Q3 result and our Q4 outlook, the operating environment is very dynamic right now. Q3 came in largely as we expected. Revenue was above the midpoint of our guidance at 2.6% pro forma, cost, and currency growth in the quarter. Our net operating income was within our guidance range, but at the low end as we incurred more costs than we anticipated to shift a large number of programs offshore sooner than expected and to absorb some upfront technology investment to secure longer-term deals as discussed. Looking at Q4, we have lowered our expectations, which Andre will give more details on. To continue investment levels, we are actively reallocating capital toward our technology and transformation work to ensure that we are winning the right long-term business. We are focused on ensuring we are moving with velocity and proactively transforming our business to gain share and position ourselves for long-term value creation. Our teams are aligned, and we are excited about the future ahead. I'd like to thank our dedicated game changers for their hard work and commitment to excellence and our clients for their trust in their business. Now I'll turn the call over to Andre.

Andre Valentine, Chief Financial Officer

Well, thank you, Chris, and hello everyone. I'll begin with a look at our financial results and then discuss our outlook for the fourth quarter. We delivered third-quarter revenue of $2.4 billion, reflecting 2.6% in pro forma, constant currency growth, calculated as if the Webhelp combination was completed at the beginning of 2023. Looking at our revenue growth by vertical, on a pro forma, constant currency basis, revenue from retail, travel, and e-commerce clients grew 8% year-over-year, a continuation of the solid growth we've been driving in this vertical through a combination of share gains and new client wins. Revenue from banking, financial services, and insurance clients grew 5%, which is relatively consistent with prior quarters this year. Our recent wins in this sector indicate further opportunities for growth. Our other vertical grew 6%, an acceleration from the first half of the year, driven primarily by automotive clients where we're bringing unique technology solutions to help them drive their businesses. Our technology consumer electronics clients grew 1% on a pro forma basis, reflecting a balance of the positive effects of share gains against lower volumes in consumer tech. Consistent with the first half of 2024, revenue from communications and media clients decreased 3%. This vertical is an area of high price sensitivity for lower complexity work. Revenue from healthcare clients decreased by 4%, as we have shifted the delivery for a few large healthcare clients offshore during the quarter. Overall healthcare remains a solid vertical for us and there are portions that remain onshore due to compliance and customer preference. But this shift from those clients is having a near-term impact. Turning to profitability, our non-GAAP operating income was $331 million in the quarter, an increase of $100 million compared with the third quarter of 2023. Our non-GAAP operating margin was 13.9%, down about 20 basis points from last year. Our non-GAAP operating margin grew about 40 basis points sequentially from the second quarter. Adjusted EBITDA was $388 million, up from $119 million year-over-year, and our adjusted EBITDA margin was 16.3%, down about 20 basis points year-over-year, but a sequential increase of 40 basis points from last quarter. On a pro forma basis, non-GAAP operating income was essentially flat year-over-year with a 20 basis point margin decrease compared with last year. Non-GAAP net income was $192 million in the quarter, an increase of approximately $49 million compared with the third quarter of last year. Non-GAAP EPS was $2.87 per share, an increase of $0.11 per share year-on-year. GAAP net income was $17 million for the quarter. GAAP results for the third quarter of 2024 included $117 million in amortization of intangibles, $36 million in expenses related to the Webhelp combination and integration, $23 million in share-based compensation expense, $2 million in step-up depreciation, $11 million increase in acquisition contingent consideration, $33 million in net foreign currency losses, $4 million in imputed interest related to the Sellers’ Note issued in connection with the combination, and a $5 million one-time tax expense associated with legal entity restructuring. Our adjusted free cash flow for the quarter was $135 million, net of $63 million in capital expenditures. As we stated in the last call, the adjusted free cash flow metric is calculated as free cash flow excluding the impact of changes in the factory program that we assumed and have continued to operate since the Webhelp combination. Adjusted free cash flow was below expectations for the quarter as a result of client collection delays in the month of August, principally in Europe, that have been caught up in September along with accelerated spending on integration costs. Turning to the balance sheet, at the end of the third quarter, cash and cash equivalents were $246 million and total debt was $4.91 billion, as we repaid $100 million of the principal amount of our term loan in the quarter. Net debt was $4.67 billion at the end of the third quarter. Our net debt was 2.95 times pro forma adjusted EBITDA at quarter end, consistent with the prior quarter. We expect to continue to reduce our net debt and net leverage through the end of 2024. We remain committed to our plan of reducing net leverage to close to 2 times adjusted EBITDA within two years of the close of the Webhelp combination while also supporting our dividend and repurchasing shares. During the third quarter, we repurchased approximately 600,000 shares of our stock for approximately $39 million at an average price of approximately $65 per share. We paid $20 million through our quarterly dividend. We now expect fourth-quarter share repurchases to exceed $30 million, bringing expected full-year repurchases to over $130 million, which is above our previous commitment. And today we were pleased to announce a 10% increase to our quarterly dividend. At quarter end, the remaining authorization on our share repurchase plan was approximately $188 million. Our liquidity remains strong at approximately $1.5 billion, including our over $1 billion line of credit, which is undrawn. We remain committed to investment-grade principles, and our capital allocation priorities remain unchanged. We expect to continue to drive organic growth, realize integration synergies related to the combination, repay debt, while continuing a disciplined program of returning capital to our shareholders through our dividend and disciplined share repurchases. Now I'll turn to the business outlook for the fourth quarter. As Chris mentioned, we are operating in a dynamic environment and we're investing to grow over the long term. From a revenue perspective, while we came in above the midpoint of our guidance in the third quarter, we now expect a slower growth rate in the fourth quarter than we had expected previously. This reflects three factors in the following order in terms of significance: lower volume forecast from some clients in the third quarter, as a result of lower underlying transaction volumes and automation; a larger shift of revenue to lower-cost delivery geographies than expected; and the loss of some commoditized projects that we have chosen to walk away from over price. With a reduction in our revenue outlook for the fourth quarter, accelerated investments in the transformation of our business, and some short-term costs associated with moving programs offshore, we are reducing our previous margin expectations for the fourth quarter. Included in our profitability expectations for the fourth quarter is continued progress on cost synergies. Our year-one synergies will meet our target of $75 million, and our current annual run rate for synergies is approximately $95 million. Many of these synergy savings are being invested back in the business to support transformation activities. We've accelerated our integration spending, as we now believe we can achieve our year-three target of $120 million in synergy savings in 2025. Looking at cash flow, while we expect a significant sequential increase in quarterly adjusted free cash flow in Q4, the reduced profit expectations and higher 2024 integration costs will result in a reduction in our adjusted free cash flow expectations for the full year. With this context, our expectations for the fourth quarter are as follows. We expect fourth quarter revenue of $2.42 billion to $2.47 billion, based on current exchange rates. This equates to pro forma constant currency change ranging from a decrease of 0.5% to growth of 1.5% in the quarter. Our expectations include a 60 basis point tailwind from foreign currency fluctuations. On a pro forma basis, revenue was $2.417 billion in the fourth quarter of 2023. We expect fourth quarter non-GAAP operating income in a range of $335 million to $355 million. At the midpoint of our guidance, this equates to a non-GAAP operating margin of approximately 14.1%. Pro forma non-GAAP operating income for the fourth quarter of 2023 was $365 million. We expect non-GAAP EPS of $2.90 per share to $3.16 per share for the fourth quarter. This assumes interest expense of $74 million, excluding $4 million of imputed interest on the Sellers’ Note. It assumes a non-GAAP effective tax rate in a range of 24% to 25%. We anticipate a weighted average diluted share count of approximately 64.5 million shares for the fourth quarter. We estimate that about 3.7% of net income will be attributable to participating securities, and about 96.3% of total net income will be attributable to common shares for the fourth quarter. Our expectations for the fourth quarter would lead to the following results for the full year 2024. Full year 2024 revenue in a range of $9.591 billion to $9.641 billion, reflecting pro forma, constant currency growth of approximately 2.2% to 2.7%. This is net of approximately a 110 basis point exchange rate headwind. At the midpoint of our expectation for the full year, our growth is 2.5% constant currency pro forma, which was the low end of the full-year range we gave last year. On a pro forma basis, 2023 revenue was $9.486 billion. Full year 2024 non-GAAP operating income will be in a range of $1.306 billion to $1.326 billion. At the midpoint of our guidance, this equates to a non-GAAP operating margin of approximately 13.7%. Pro forma non-GAAP operating income for 2023 was $1.316 billion. Full year non-GAAP EPS will be in a range of $11.05 per share to $11.31 per share, reflecting full-year interest expense of approximately $307 million, excluding $17 million of imputed interest on the Sellers’ Note, and a non-GAAP tax rate for the full year of 24.4% to 24.7%. Reflected in our full-year non-GAAP EPS expectation is a weighted average diluted share count of approximately 65.1 million shares for the full year and about 3.6% of net income being attributable to participating securities with about 96.4% of total net income being attributable to common shares for the full year. We expect adjusted free cash flow of $625 million to $650 million for 2024 after funding accelerated integration costs. And we expect to reduce our net leverage to approximately 2.8 times adjusted EBITDA by year-end while repurchasing over $130 million of shares during the year and supporting our dividend. Our business outlook and cash flow expectations do not include any future acquisitions or impacts from future foreign currency fluctuations. Looking ahead, while we are not providing guidance for 2025, we see several factors deploying to revenue and cash flow growth next year. We have won several new large-scale programs that will ramp throughout the year. Our integration with Webhelp is entering its final phase, and although we are reinvesting synergy savings into our technology and other initiatives, we do expect materially lower integration costs next year. Finally, we believe that the investments in our new product introductions will begin to pay off. We look forward to giving you more details in our outlook for 2025 on our next earnings call. In conclusion, we met our revenue and profitability expectations for the third quarter. We are investing in and transforming the business by securing large transformational new wins, decreasing our exposure to lower-margin, price-sensitive business, and investing in technology platforms and partnerships to increase our competitive position and drive future growth opportunities. And finally, we will continue to return value to shareholders with our ongoing share repurchase program and our dividend while reducing our leverage. With that, Latif, please open the line for questions.

Operator, Operator

Our first question comes from the line of Joseph Vafi of Canaccord.

Joseph Vafi, Analyst

Hey, guys. Good afternoon. Thanks for taking my call here. Congrats on having a really good bookings quarter with all that other information. So that's great to see. Just kind of wondering, some of the puts and takes here on the top-line to begin with, I know you are kind of walking away from some of the more commodity business, while at the same time, you are winning new business that may not have ramped. I'm just kind of wondering how you see that plus and that minus on the revenue line taking place here over the next few quarters, if you see it as kind of revenue neutral or not? And then a follow-up. Thanks.

Chris Caldwell, President and CEO

Yes, for sure, Joe. It's Chris. So just when we look at the midpoint of our previous Q4 guide, we really see kind of three buckets as Andre talked about from a materiality perspective. The first one was starting in sort of late July and early August, we started to see some clients de-commit from some volume primarily because they weren't seeing the sell-through that they were expecting going into the fourth quarter and also automation that we were putting in. When you lump those two together with the vast majority being sort of volume declines from clients' pull-through sales, it was about a 1% headwind, give or take. If you look at offshoring accounts that were primarily going to offshore in Q1 to Q2 because, frankly, most clients don't want to have too much movement in the fourth quarter if they can help it just because it's normally a big quarter. That was a little over 0.5 basis point of headwind that we had anticipated, but had been anticipated in sort of Q1, Q2 not in sort of Q3, Q4. And then the last, sort of a little less than 0.5 basis point was when we talked about the consolidated wins. Where we are winning about 80%, the ones we didn't win are those that are incredibly price-sensitive, and we didn't chase the price. That is about a little less than 0.5 basis point of headwind that we saw going into Q4.

Joseph Vafi, Analyst

Got it. That's helpful. And then as we look at some of these newer wins that you won here in the quarter and what you're seeing, how are you seeing ramps on those businesses relative to maybe historically or if AI makes some of these ramps a little longer or a little shorter?

Chris Caldwell, President and CEO

Yes, definitely, Joe. We're currently in the planning phase for the airline and are starting to incur costs. We expect to start generating some revenue in late Q4 or early Q1, with full ramp-up anticipated by the end of Q2 or Q3. For the large transformational project, which we're very excited about, we are also focused on planning and the necessary infrastructure build-out, which involves certain costs. However, we won't see revenue from this project until the end of Q2, with full ramp-up expected by the end of Q4 in 2025. This highlights that while our traditional business remains stable, the major transformational wins will take longer and require investment before they start to deliver results.

Joseph Vafi, Analyst

Got it. And then maybe I'm just going to sneak one more in for Andre on the accelerated merger-related costs here in 2025. There are a few moving parts here. Can you just kind of walk us through some of the thinking here on accelerating those investments now? And what were the positives that outweighed the acceleration relative to the thought process there? Thanks.

Andre Valentine, Chief Financial Officer

Yes. So we are very excited about the fact that we could bring some of those synergies forward into 2025. This comes with incurring some costs, heightened integration costs in 2024. But we feel really good about the fact that we believe we can hit $120 million in synergies in 2025, hitting that ultimate synergy number a year ahead of schedule. Why are we doing it? We're doing it so we can reallocate a lot of those resources that cash or that investment towards the transformation activities that Chris has been speaking about, a combination of technology investment, as well as some of the upfront investment in transformational program ramps.

Operator, Operator

Our next question comes from the line of Divya Goyal of Scotiabank.

Divya Goyal, Analyst

Hello, everyone. Andre, if you could provide a little bit more color, maybe this is to do with the acquisition-related expenses. But I noticed that your other expenses picked up pretty materially this quarter. Could you help us understand what exactly that relates to?

Andre Valentine, Chief Financial Officer

Yes. So you're talking about below the line items? That is principally a net of two things. We have $33 million in foreign currency losses that are largely related to intercompany translation related to liabilities or assets that are denominated in non-USD. As the USD has weakened against currencies, particularly the peso, where there's a lot of intercompany balances that drives a noncash expense to that line. We backed that out of our non-GAAP net income and our non-GAAP EPS metric, just like that is offset partially by the change in the contingent consideration in the quarter as well. So those are the two major items that we can't control in any real way, and we will see fluctuations there effectively; however, the non-cash items.

Divya Goyal, Analyst

That's helpful. Also, could Chris or yourself provide a little bit more color in terms of Catalyst business? And how is that trending given the interest rates coming down in the US?

Chris Caldwell, President and CEO

Hi, Divya, so the interest rates have not had any impact as we would have liked to have seen in it. But the Catalyst business, we are really, really happy with. What we're finding is that this is really the enablement partner for our technology providers. So whether we are deploying new cloud solutions or I mentioned Dreamforce, but whether it be Microsoft Copilot or other LLM tools, that's really flowing through our Catalyst team. Our Catalyst team is also providing a lot of the consultation around the transformational deals that we are doing. We found it to be a real asset and one that we want to kind of continue to drive. But we have not seen a step-up change in the large, pure IT digital transformation projects that we've talked about in the past because of interest rates coming down.

Divya Goyal, Analyst

Right. Okay. No, that's helpful. One thing that I wanted a little bit more clarification on was the offshoring element that you mentioned. Revenue seems to have trended okay here but expenses picked up partly because of obviously pulling forward acquisition-related expenses. But you mentioned there was increased offshoring as well; increased offshoring would, in my understanding, impact the revenues and benefit the margins. So just trying to understand those dynamics here.

Chris Caldwell, President and CEO

Yes. Divya, you are correct. The issue is that this offshoring, frankly, we're caught with dual cost because our clients have asked us to move it up. We are doing the right things by the clients by moving it up. You do get some margin compression when you have that dual cost structure in there. The other component of the SG&A that I want to be clear to call out is as we talked about some of the transformational deals like the large infrastructure company or even the large transformational opportunity; we are funding that infrastructure build-out and that technology infrastructure build-out ahead; we are expensing those. We are not capitalizing those, so they are flowing through our SG&A. But in turn, we are getting longer-term contracts with the clients that we'll see margin expansion as we continue to deploy those and ramp those up fully. These two things are muting what you would typically see traditionally, where we offshore and see revenue dip. But then we see the incremental margin increase within a quarter.

Divya Goyal, Analyst

Okay. That’s helpful. Thanks Chris, thanks Andre.

Chris Caldwell, President and CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Vincent Colicchio of Barrington Research.

Vincent Colicchio, Analyst

Yes, good afternoon, guys. Andre, the TCE segment was up, I think, 1% in the quarter, and you have some volume pressures, I think you mentioned there. Is that something we should be concerned about going forward?

Andre Valentine, Chief Financial Officer

Well, that sector has been muted for us for a while. We have two things going on there, which is we're doing well with our clients, and we're gaining share. But what we see is just in the underlying volumes, particularly around consumer technology, we're just seeing muted volumes there. And so we are gaining share, but we are not gaining much in revenue. The great news is, as we gain share, hopefully, over time, the macro improves and people stop sweating their tech and go through refresh cycles; we should see transaction volumes pick up, hopefully, and then we'll be well positioned to return to faster growth there, as we've seen in the past. Right now, doing great from a share gain perspective, but the underlying volumes just aren't there.

Vincent Colicchio, Analyst

And Chris, you had mentioned a lot of success closing on consolidation opportunities. I was wondering if you can give some color on if there is significant legs on this and just kind of what the dynamic is here.

Chris Caldwell, President and CEO

Yes. So Vince, what we are seeing is where clients are either not seeing the growth in their business as they expected, and they are trying to manage costs, it makes sense to deal with fewer partners. If they're looking for a full solution with technology or we are the largest incumbent partner that's performing at the best level, we have a very, very high probability of consolidating that volume from other partners into us. So we do think it has legs. We've talked about it for a while. We're seeing it happen a little faster than we expected. We are seeing it in pretty much all the verticals for the most part. As Andre pointed out, where we are not chasing kind of volume that no one wants to automate, which tends to be where we are being consolidated out because we didn't have high exposure in that within every single client anyhow, but we're just not chasing that work because we believe that, at some point, it needs to get automated. With the tools that are available now, it should be automated sooner than later anyhow. So it's not what we consider a long-term loss.

Vincent Colicchio, Analyst

You talked about rapid change in your industry and rapid movement towards automation. Historically, you talked about trying to automate 10% to 20%, or maybe the number is wrong, of your portfolio. Is there a new number you may want to put out there in terms of how much you want to seek to automate each year?

Chris Caldwell, President and CEO

No, not really, Vince, because what we are seeing is that a lot of this automation we had planned going into end of 2024 and 2025, but what we've seen is a very fast demand for accelerating it because people want to see in-year savings and want to head into 2025 at a new cost structure. We are not seeing automation coming out of the blue of, hey, we've never thought about this. We're seeing proposed timelines that we might have planned to do a quarter or two quarters, or three quarters from now; we need to do it now. We are also seeing not only with our new tools, but some of our partners' tools, things that were a little harder to automate, we can actually bring in ourselves to automate further. We are not seeing a dramatic change in what can be automated for the most part; it's really the timing. The other thing that we talk about from a dynamic industry perspective is really we always talk about things moving offshore, right? Like that's clearly one of the value propositions this industry has. Historically, if you go back and look at Q4, most people are locked and loaded with their capacity plans and do not want to move anything in Q4 because they want to have a bumper back half of the year. This is one of the first times that we've seen clients saying, yes, we know we talked about this in Q1, Q2, we need to do it now. How can you help us, so we can see savings by the end of 2024 and start 2025 at a new cost structure? So that is changing some of the dynamics as well that we historically have not seen.

Vincent Colicchio, Analyst

Thank you.

Operator, Operator

Our next question comes from the line of Ollie Davies of Redburn Atlantic.

Ollie Davies, Analyst

Hi, guys, good evening. I guess you gave the infrastructure example where you said you now handled 40% of transactions autonomously, and that resulted in a 12% reduction in revenue. Is that included in the sort of 7% of business that you see as transactional? Or is that sort of separate for that?

Chris Caldwell, President and CEO

Actually, that's a great question. That was actually outside of the 7% of revenue. While we were able to automate the transactions, it was quite complicated because we had to wait for the right bot technology to make it automatable as fast as we managed to do it. So that's not considered in that 7%.

Ollie Davies, Analyst

So I guess just following on from that, there’s obviously much more than 7% that can't be automated now. Are you able to give us kind of an indication of how much of revenue that would be?

Chris Caldwell, President and CEO

No, because we don't. We also say a little differently; the complexity and the infrastructure cost to put in on some of these larger, more complex automations is quite different than the 7% of revenue, which tends to be very short speed to proficiency and very easy to move like can be moved in weeks. They are very, very different. When we are automating things that, for instance, in that infrastructure company, we've been working for them for five years, we understood their internal system very, very deeply. We had domain subject experts around because they are a regulated business around how we need to deliver for it and what needed to happen around it to train people at a high level of proficiency. Those do take time, and we started working on that transformation project almost six or seven months ago when we originally started it, and then the economics changed, quite frankly, transparently in Q3, where the client asked us to pick up those costs to extend for a longer-term contract, which we were happy to do.

Ollie Davies, Analyst

Okay, great. And then maybe just one more. On the iX Hello tool that you've released today, can you kind of talk about the pricing dynamics there? And I guess, why it won't cannibalize your ability to win volumes that will now be outsourced?

Chris Caldwell, President and CEO

Actually, we are quite comfortable with cannibalizing the right type of business because it drives better embeddedness of our services into our clients. As they consume more technology, that's fantastic for us because obviously the margin profile is more accretive. Right now and in the beta phase of what we've been doing up until we launched, a lot of this has been included in our pricing and bundled in services. What we're seeing is that clients are wanting to buy this and deploy it in their own enterprise or within other competitors' operations, which we are happy for them to do. And it's a per seat price with volume discounts based on how many seats are done.

Ollie Davies, Analyst

Okay, great. Thanks very much, Chris.

Chris Caldwell, President and CEO

No problem.

Operator, Operator

Thank you. Next question comes from Ruplu Bhatacharya of Bank of America. Your line is open.

Ruplu Bhatacharya, Analyst

Hi, thanks for taking my questions. Can you walk us through your thought process in making these Gen AI related investments? I think you mentioned $100 million per year. How do you decide how much to invest and what ROI are you looking for when you invest in products such as this or investments to strengthen your Catalyst business to better cater to Gen AI? So can you just talk about like what returns you are looking for? And how do you know when you've invested enough? How do you measure success?

Chris Caldwell, President and CEO

Yes, for sure, Ruplu. Very good question. So just for clarity, we are at a run rate of $100 million annually right now. What we said in our last conference call, and we are very still clear about is that if we don't see commercial success the way we want to see it, we are certainly going to pare that down. That's not our plan, and we see a clear path to how we want to get there. What we classify as success is that by the end of 2025, that we are getting an ROI on our spend. This spend may fluctuate depending on the return metrics, that the margin profile of that business is accretive to our overall business. Our goal is that the growth rate is accretive to our overall growth rate of the business. That's why we want to do it. We've seen a clear hole in the marketplace around some of the things that we are doing that others are not. We have a deep understanding based on decades of experience of how to manage these interactions and optimize these conversations and optimize businesses as a whole, with that deep domain expertise that when our solution goes in, it is highly, highly customized. A lot of our clients have disparate tech stacks. If they need something that is flexible from an LLM perspective, they need something that's flexible from a tech stack perspective, and we fit in that. Where we have clients who have homogeneous technology environments or environments with a clear direction of tech partners they want to use, we are very, very happy to deploy our partners' technology in those spaces if it fits. So it is quite complementary around how we see it. We're doing it to differentiate ourselves in the marketplace because as I mentioned in the large transformational deal, we knew who the competitors were. There were no other traditional competitors in that space; they weren't even invited to the RFP because they did not have a complete solution and the technical strength to pull off what the client was looking for.

Ruplu Bhatacharya, Analyst

Okay. Just keeping on the investment theme. I think the press release said that the company plans to release additional technology products in the IX suite. How should we think about the impact of that on margins over the next few quarters? And is that the only investment that would impact margins? Or are you hiring more people in Catalyst and trying to build up that business as well? So how should we think about the impact of investments on operating margins?

Chris Caldwell, President and CEO

For sure. So Ruplu, we're producing more products than one at a $100 million run rate. We have a number of others that are already being built and are well down the path, actually doing previews with clients as we speak. There will be some rapid succession of what we're looking at. We have a very clear roadmap of our deliverables over the next number of months to make that happen. That is already baked into the forecast from an OpEx perspective as we mentioned in that $100 million run rate. We are also, as Andre pointed out, accelerating some of the synergy costs and reinvesting and reallocating some of that capital because we need to hire some skill sets that we don't have in our business right now, around some of the Gen AI tools from our partners, and some automation tools that we have within our client set. Our goal is to do this without increasing our operating expense and manage within the lines we are doing right now. The only thing fluctuating our SG&A line that we can see within Q4 — and I don't want to guide for 2025 — is really around these transformational programs where we are getting client requests who say, we need help to transform. If we give you a longer-term contract, would you take some of these upfront costs because we don't have the budget to do it? As long as the economic model works, we're happy to do that for our clients.

Ruplu Bhatacharya, Analyst

Okay. Maybe can I ask about — you talked about programs shifting offshore. Obviously, that impacts you initially in terms of revenue because you're shifting the program. But if it's to a lower cost geography, I mean it should help in margins. Can you talk about the time delta between when you actually move a program to when you can actually start seeing any margin benefit? Also, if you can weave in any thoughts on the overall pricing environment as well? Is it more competitive, less competitive?

Andre Valentine, Chief Financial Officer

Yes. On the offshore movement, you are right. Once we get those programs fully ramped offshore and pass the period where we have duplicate costs, we will get to a better margin spot on those programs. That generally takes about two to three quarters to do that. That’s what you see impacting our Q4 outlook and should give us confidence that we'll see improvement as we go through the back part of 2025. Regarding pricing, what we're seeing in the more commoditized work is high price sensitivity, and we are choosing not to chase that work on price. We're also seeing pricing take the form of different constructs, where clients are asking us to take on more of the upfront investment in transformation, whether that be technology, building out capacity, or even doing some of the training related to those programs. All of that now, the new commercial contract seems to be moving more of that upfront cost onto the provider. We are happy to do that if it allows us to win. As long as we can incorporate that upfront cost into the margin of the program, that means we should see improving margins on those clients over time.

Ruplu Bhatacharya, Analyst

Okay. I'm going to try and... Andre sneak one more question in, and this has been asked in various ways. You've talked about thousands of customers now using Gen AI. On the last call, I think you had said that you had hundreds of proof-of-concepts ongoing. Are those proof-of-concepts now done? Do you think the customer base is now more receptive to using Gen AI? Do you think as these models are getting more advanced, the recent press release from T-Mobile and OpenAI about their new model is smarter and has sentiment detection. Do you think this environment means the lower transactional work will go away and you'll gain more in the Concentrix business, particularly in the consulting space? Do you see that happening? Or do you think that as models get smarter and more capable that the disruption can be greater? Has your thought process on that changed as you talk to more customers and see these new models come up?

Chris Caldwell, President and CEO

Yes, for sure, Ruplu. First, just for clarity, when we talk about close to 1,000 customers, that's close to half our client base using generative AI that we have installed. Some of that is our partner's technology that we've installed, configured, and managed, and some of that is our intellectual property that we've installed and managed. It is real, industrial enterprise use of the AI technology. For clarity, clients are using that for very different purposes. There are clients who employ a full stack where we're managing automated bots, our generative QA system, our generative AI coaching system, and so forth. When it's not customer-facing, clients tend to be very receptive to using it. Those proof-of-concepts frankly go quickly into production. When it relates to high-value engagements with customers, despite the press releases, there is still reluctance to allow the AI to do everything. We continue to see a human being the last connection, but that human is AI-powered to get better answers and help in a more personalized way. We have clients who are now using multiple generative AI solutions in their environments, and we expect that to continue. We don't expect a singular product to dominate all business needs across the enterprise.

Ruplu Bhatacharya, Analyst

Okay, thank you for all the details. You go ahead.

Chris Caldwell, President and CEO

Sorry, Ruplu, just not to go on because I'm sure you're bored of this. The reality is that LLM and generative AI, everyone assumes one solution fits all. What we’re finding is our clients are putting in different types of solutions for different types of functions, and that best fit their cost model and the type of activity they want to automate and the service they want to get.

Operator, Operator

And ladies and gentlemen, that does conclude today's conference call. Thank you for participating. You may now disconnect.