IBEX Ltd Q1 FY2022 Earnings Call

Thank you for joining us for the ibex First Quarter Fiscal Year 2022 Earnings Conference Call. All participants are currently in listen-only mode. After the presentations, we will have a question-and-answer session. I will now hand over the call to your host, Brinlea Johnson from Blueshirt Group.

Good afternoon and thank you for joining us today. Before we begin, I want to remind you that the matters discussed today on today's call may include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward-looking statements reflect our opinions as of the date of this call and we undertake no obligation to revise this information, as a result of new developments, which may occur. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our final perspective filed with the Securities and Exchange Commission on August 10, 2020. With that, I'll turn it over to Bob Dechant, CEO.

Thanks Brinlea. Good afternoon, and thank you all for joining us today as we discuss our first quarter fiscal year 2022 financial results. We are excited to speak to you today. As Karl and I share our business overview and our results. First and foremost, we hope you are all staying safe and healthy. The pandemic reminds us each and every day to put our employees and their families first. A critical factor in our success is our people. Without our employees, their driving commitment to put our customers first, we would not have achieved the success we are experiencing today. Many thanks to each of them for their continued commitment to our business. As we shared with you last quarter, we are in the midst of a very exciting year at ibex, marked by key strategic growth initiatives. That includes formally launching our staff augmentation business we call ibex Augment, the expansion of our Wave X Technology and geographic expansion into Honduras, driven by our long-term thinking as we invest for our future and continue to transform our business. As expected, the first quarter proved to be our slowest of what will otherwise be an impressive year for ibex. This was really driven by the tale of two cities, our growth engine now 62% of revenues, and our legacy customer group, largely comprised of telco customers, which experienced a significant one-time reset last year, and is now approaching the tail end of the decline and rough comparisons year-over-year. The growth engine consisting of clients new from FY '16, who are adopting our omni-channel capabilities now make up 62% of our business up from 46% in the prior year, and 52% from Q4 FY '21. This growth continues at an explosive rate. This has driven a remarkable change in the mix of our business including our top clients. Today, our largest client represents 11% of our revenues. In FY '16 our top three clients were approximately 80%. We continue to add to this engine. Our sales organization continues to really set the tone for the business with another strong quarter of revenue growth in the addition of nine new clients across key verticals. As a reminder, this comes on the heels of last year, during which we added 23 new clients, a record for ibex, and we are well on our way to delivering another exceptional year in new client revenue and wins. Our growth model is designed to deploy a land and expand approach with our clients. We deliver exceptional CX results with extremely proficient launches and then showcase the additional insights and partnership missions that Wave X and our business intelligence tools can offer. This allows us to win new lines of business and service with these clients and expand our wallet share with them over time. On average, the revenues in year two of our client relationships are between 2.5 to 3.5 times those in year one revenue with continued strong growth into year three and beyond. We've shared this in a table in our recently filed annual report, which I encourage everyone to review. As an example, one of our strategic clients we won in FY '19, who quickly became a top 10 client for us recently expanded with us in two additional locations in the Philippines and Jamaica, effectively doubling the size of our business. As part of the expansion into new state-of-the-art facilities, ibex was awarded two new lines of business plus additional market share. ibex is consistently ranked in the first two positions for performance in the customers' outsourced BPO network. This growth we had won is expected to move our client into our top three clients later this year. In Q1, this growth was offset by declines in our legacy three clients where one-time events occurred in our two legacy telco customers, one which emerged from bankruptcy, and the other which had a major divestiture last year. This decline, which played out over the last three quarters will be behind us beginning in the third quarter. These clients now represent only 25% of existing revenue exiting the quarter, which going forward will be overshadowed by our new omni-channel business. As a result of our powerful growth engine scaling to such a substantial percentage of our business, as well as our revenue diversification, our client mix has purposefully and structurally changed. This is most evident in the repositioning of our top three clients. As of this quarter, we now have a new number one client when measured by revenue over the last 12 months. This client is one of the most dominant technology providers and marketplaces in the world. This not only represents a meaningful strategic relationship, but a key partner and partial owner in our business with warrants and an underlying common equity ownership. We also believe that we will soon have another high growth omni-channel client entering our top three later this year. These relationships represent a paradigm of ibex 2.0, where we deliver differentiated customer value propositions and a new level of service for our clients. In key strategic relationships like this, we offer a dedicated team in place, not only as an extension of our customer's brands, but internally to support this relationship as well. As a result, these relationships with our clients have become mission-critical extensions of their brands, creating a business that's truly essential, as evidenced by our continued 100% retention within our top 20 clients. Our spending this quarter outpaced our revenues, as we onboard new clients and invest in key long-term growth initiatives. We have added 4,100 new seats in the calendar year representing a 25% increase. While this was initially done to invest ahead of the curve, we ultimately have such a strong backlog and demand from our customers looking to grow with us. In hindsight, it is largely being done just to service that customer base and the new clients. This includes our expansion into Honduras, a new market for ibex, in which we are very excited. We have a strong early mover advantage and are entering the market with a beautiful state-of-the-art CX delivery center, which will serve as our anchor in the region. We believe that we have the ability to become the leader in this market, just as we have done in Jamaica, Nicaragua, and the island of Bohol. We have always invested for our future and will not manage the business for a given quarter. We have a significant pipeline of committed business and we expect to return to growth this quarter. Turning to our balance sheet, we have a strong cash position. The company is currently levered at approximately 1.8 times EBITDA and thus has significant room for increasing leverage when additional opportunities present themselves. While we are of course disappointed by the short-term pause after 16 quarters of impressive revenue growth in achieving record margins along the way, we expect this track record to resume in our current quarter. As such, our guidance is reaffirmed and we are incredibly excited about what's ahead for ibex. I will now turn the call over to Karl.

Thank you, Bob. Good afternoon everyone. Thank you for joining the call today. I'll start off with our first quarter 2022 results and then turn to our fiscal year 2022 guidance. Our technology lead clients continue to grow at an impressive rate and clients continue to rely on ibex as a trusted partner for their significant seasonal volumes. Our HealthTech and FinTech strategic verticals, coupled with our digital-first client wins, continue to outpace our more mature telecommunications clients, providing a platform for utilization of our competitive and differentiating Wave X technology solutions. In my discussion of financial results, references to revenue and net income are on an IFRS basis, while adjusted net income, adjusted EBITDA and adjusted earnings per share are on a non-GAAP basis. Reconciliation of our IFRS to non-GAAP measures are included in the tables attached to our earnings press release. First quarter revenue was flat at $108.6 million compared to $108.8 million in the prior year quarter. Current quarter revenue was impacted by significant decreases related to our legacy top three clients, which now represent only 25% of our revenue, as well as decreases related to our digital marketing volumes. These decreases were offset by continued growth in our clients won since fiscal year '16. This cohort grew by 34% over the prior year quarter, and now represents 62% of our total revenue. In addition, we deferred net training revenue of $3.5 million compared to $1.2 million in the prior year quarter, indicating significant future revenue growth but impacting both revenue and margins in the quarter. Net income in the first quarter was $3 million, compared to a net loss of $3.4 million for the same period last year. On a non-GAAP basis, adjusted net income was $0.9 million versus $5.5 million last year, and adjusted fully diluted earnings per share was $0.05 versus $0.32 in the prior year quarter. Adjusted EBITDA for the first quarter of fiscal year 2022 was $11.5 million, or 10.6% of revenue, compared to $15.8 million or 14.5% of revenue in the prior year. Adjusted EBITDA margin decreased primarily due to significant increases in payroll, and other costs related to ramping new business in the quarter, lower digital marketing volumes and long-term investments in our sales and marketing organization and cybersecurity technologies as we continue to scale up the business. We are excited about the major improvement in our client concentration. On a trailing 12-month revenue basis we now have a new top client who is the leading technology provider and marketplace in the world. Our top three client concentration decreased by almost 10 full percentage points to 28.7% this quarter from 38.1% of overall revenue in the year ago quarter. Our FinTech and HealthTech verticals continue to grow in response to our aggressive investments two years ago, increasing significantly to 20.5% in the first quarter, up from 9.9% in the first quarter of fiscal year '21. The telecommunications vertical decreased to 21.5% of revenue as compared to 33.5% a year ago. Total capital expenditures, including cash and non-cash amounts, were $9.7 million, or 8.9% of revenue in the first quarter of fiscal year 2022 versus $3.2 million, or 3% of revenue last year. We added close to 900 new seats in our high margin nearshore and offshore locations during the quarter, with approximately another 2,300 seats expected to come online in the second quarter. Net cash generated from operations was $6.9 million for the quarter, up 16% compared to $5.9 million in the first quarter of fiscal year 2021. It was positively impacted by decreases in non-recurring costs, cash taxes and working capital offset by lower adjusted EBITDA. DSOs were 63 days for the first quarter, up 10 days from the same period last year and seven days sequentially. The sequential quarterly increase was driven by tightening of collections, while the year-over-year increase was impacted by one of our larger clients reverting to standard payment terms. Non-GAAP free cash flow decreased to $1.6 million from $2.7 million in the prior year. The decrease in free cash flow was primarily driven by an increase in cash capital expenditures of $5.3 million as compared to $3.2 million from last year. On a normalized basis, after the warrant fair value adjustment, we expect our annual tax rate to continue to decrease to the mid-single digits, reflecting the ongoing benefits of our tax planning efforts. Additionally, we will also recognize a deferred tax benefit of approximately $4 million this year. Our balance sheet remains strong, and we ended the quarter with $54 million in cash, total borrowings of $28.3 million and lease liabilities of $86.6 million compared to cash of $57.8 million total borrowings of $28.5 million and lease liabilities of $84 million as of June 2021. Turning now to our fiscal year 2022 guidance, we are reaffirming our guidance for full year revenue growth of 7% to 9% and EBITDA of $69 million to $71 million, with CapEx commitments of $30 million to $35 million. With continued wins from our strategic verticals and digital-first clients, the significant investments we're making to increase our capacity to meet client demand, and new client revenue that will materialize beginning in Q2, we are confident in our guidance for fiscal year 2022. With that, Bob and I will now take questions.

Operator, before we open it up for questions, there's one item I'd like to address. As you may be aware, The Resource Group International Limited TRG is our largest shareholder with a controlling interest in ibex. Last week, TRG’s managing partner, Zia Chishti, was accused of sexual assault and subsequently resigned as CEO, Chairman, and Director of another TRG company Affiniti after discussions with Affiniti's Board. It's very important to note that Mr. Chishti stepped off the Board of ibex in 2017. He has not been involved in any strategy or any business discussions around the company since that time. Additionally, ibex's Board is composed of a vast majority of independent Board members who are unaffiliated with TRG. The Affiniti incident is in no way related to ibex. Ibex is committed to the strong values of our more than 31,000 employees worldwide, our customers and our partners. These recent developments do not in any way impact our promise to maintain those values we hold dear. We want to reiterate to our employees, customers, and partners that ibex maintains a robust, worldwide whistleblower solution for any employee who seeks it. It is overseen by our Chief Legal Officer, Chief People Officer, and ultimately, the audit committee of ibex, which is composed of independent Board members under NASDAQ guidelines to address all the sensitive matters of this nature. More personally, I want to say how proud we are of the work we have done here at ibex around diversity, equity, and inclusion over the many years. When I joined the company, we created an employee-first culture, which includes one of openness, transparency, well-being, and safety that remains at the forefront of ibex today. I'm confident that we will continue to see our company thrive. With that operator Latif, you may now open the line for questions.

Our first question comes from Dave Koning of Baird. Please go ahead.

Yes, and I guess first of all, just thinking through this quarter, the margin was a little lower than normal. But you also got, I would say, the benefit of some of your top clients becoming a little smaller than normal? And maybe is there a correlation there, were some of those larger clients generating higher margin or is it something else? Is it maybe wage inflation? Or maybe just talk through a little more on margins?

Sure, and Dave, great question, thanks for that. Let me frame it this way. If you take our business with our non-legacy three (the legacy telcos), if you look at the clients outside of that, we're growing, and those are our higher margin clients. We've onboarded new clients, and we're growing significantly with that client base. So much so that this quarter, we had significant hiring, about 50% more hiring of new agents this quarter than we did a year ago, and we had great growth from Q1 to Q2 last year. So it's really driven, not by volumes going down outside of those two legacies, it's driven by growth that has accelerated training in the quarter, that we're honestly optimistic that we will now hit, you know, hit stride in Q2, as a result of all that hiring. So it's really front loading, the costs associated with that, and then the cost associated with the buildouts of the centers to accommodate that massive growth.

Got you, yes that's helpful, that makes sense. And then, I guess when we think of the cadence, you talked about growth, resuming in Q2, I assume you mean year-over-year growth? If that's the case, that would require, you know, 8%, 9%, sequential growth in Q2, and then the rest of the year, a little more sequential growth and maybe - is that right, is that how to think about it? And kind of what - I think you kind of hit on it now, but what's kind of driving that sequential lift through the year?

Sure, so Dave, you understand our business flow and model very well. We're excited about this growth that we will be resuming our business towards that double-digit growth. The impact of our downturn of our telco businesses is flattening off, and then in the second half of the year, we'll have really favorable comparisons. So I think you've hit it exactly this quarter; those comparisons will still be down significantly because of what occurred in the back half of last year. This year, layered on in the second half, we won't have that incremental headwind for the business, so I feel that you'll see this business in this quarter rebounding strongly to comparisons in Q3 and Q4.

Next question comes from Tobey Sommer of Truist Securities. Your line is open.

Wanted to ask sort of a broad question, and it has to do with visibility in sort of forward trends in the business. How would you characterize your visibility now, at this juncture? If you could sort of think about it over the period of time you've been public and compare and contrast today versus sort of a period since going public?

So Tobey, great question. I think we have very, very good visibility with our clients, the lion's share of our clients, out over minimally three to four quarters. A lot of that is because we have tight partnerships, and they're very open to say, here's where we see our business going and making sure that we're aligned. I will say, the one area of the business that we didn't have visibility to was one of our clients, telco clients, divesting the business. Of course, we're not going to have visibility to that and the structural changes that occurred there. The other is our client who emerged from bankruptcy. I'll just address, they are a very important client to us. We have not lost market share, but working as a partner with them, we actually work significantly at taking their call volumes down and their collective hours required down significantly to help them drive profitability. So, I feel we have great visibility in this business. I think we have one last element in our new logo business that we continually bring on. We have fantastic visibility, I believe, of that in year, but really out in year two and year three. We've done the analysis of this business over the last three, four, or five years, and we can predict where those revenues will be. And we're extremely excited about that. Our nine new logos for the quarter were material new logos. We set a record last year, not only in number but in in-year revenue by more than 100% of the prior year. We're on pace to beat that this year, and I feel really excited about that. You can use that as your visibility down in the subsequent year two and three of those relationships. We're excited about where that potential takes us.

Thank you. Could I ask you a question about wallet share and I'd like to ask kind of two ends of the spectrum? How do you feel that your sort of customer market share or wallet share is trending in the legacy customers that are sort of important and the largest of your emerging customers? How is ibex performing from that perspective?

Those are some of the most key metrics that I look at, Tobey, so just kudos to your question. I will say with our important three clients that have been with us for over 15 years, our market share has helped serve on that. So our downturn in there is nothing unique to ibex. It's their enterprise volumes; as a result of the two one times have gone down significantly. We've held market share - helped serve on that, maybe have grown market share a percentage point or two, but nothing material. Now on the new clients that we've brought in, we measure those and we are performing so well that we are taking massive market share. I highlighted, the one client that we've effectively doubled the size of our business. This is a classic client that we have gone into where their prior had multibillion-dollar service providers. And we've gone in, and we've taken the lion's share of the market share. So we have the largest market share, more than 50% in that enterprise. With our client that is now number one, we have as much market share in the markets that we've serviced as anybody in that market. I feel most proud of our ability to go in and steal that business based on performance. If you have the right client, I look and you say you have two vectors of growth with that client. One is market share, and number two is, if they're the right clients - which our growth clients, you're going to grow with the wind behind their back. It's almost like you have a double accelerator behind you. We're really excited about how that plays out over the next 12, 24 to 36 months.

Our next question comes from Dan Perlin of RBC Capital Markets. Please go ahead with your question.

Thanks and good evening, I had a question around, obviously, the revenue performance this quarter. I feel like, you know, coming off last quarter, the messaging from you guys was that Q1 is going to be at the low end, if not below the 7% to 9% guide. I think you definitely thought it was going to be a weak quarter, but it’s a lot weaker than I expected? And based on the consensus numbers, it sounds like it was when everyone else expected. So my question is, how much of this was a surprise to you from these three clients and then in the digital volumes, relative to what your expectations were?

So Dan, that's a good question. When we say we're disappointed at the end of the day with where the top line growth was, we were hoping to drive a few percentage points of growth. Now, underlying that was significant ramping that we've done, which is building revenue that goes to clients that, as we were modeling, were kind of looked at from how we run the business, and there are some inherent growth in there. That then, you know, in the accounting worlds got pushed to deferred revenue that will get in overtime. Somewhere between those two numbers, I think we felt we'd be maybe a percentage point or two down from where we thought we would be as we run the business. But I will say, the position we're at right now, the number of seats we've built out, the number of new agents that we've hired in Q1, and the continued hiring in Q2, that are hitting full speed for the quarter. We feel really good about our ability to get this business right back on track and like I said, to hit our full year numbers. If you look at flat growth in Q1, you can kind of, as David highlighted, you can kind of look and model where I think we will go in Q2, Q3, and Q4.

Yes, let me ask it in a different way. When we go on the forward curve, if we look at your, let's just call them the clients that, let's just say, have dragged down your growth, absolute dollars, as we jump off into December's quarter and March and June, have they stopped? Are they going to be near an absolute dollar flat level? And then all this new incremental business that you've won, and you've been building these seats for are going to grow over that? Or are they still declining materially, and you're telling us that this new business, this bolus of new business is going to be so large that the absolute dollars are still going to grow over that, and therefore you're still going to get growth at an accelerating rate throughout the year? Just trying to make sure I understand? Thank you.

Sure yes, fair question. In Q2, we have seen that decline flattened out, so we're very encouraged by that. As we've talked with them about where this is looking out now, two, three quarters out, we kind of feel like it took about three quarters for all of those things to play out, we've leveled, and we look out and overall that business is seeing kind of flat to maybe a very, very minor decline over the next three, four quarters. So we're encouraged by that. This quarter, because the decline started in our Q3 last year, those comparisons will be down fairly sizably. That being said, sequentially, we don't have that incremental headwind for the business. That's why you'll see this business in this quarter rebounding very strongly to comparisons in Q3 and Q4. Does that make sense?

Yes.

And do you follow that?

Yes, yes let me ask just one other follow-up then I'll jump back in the queue. So - are you saying that you're going to grow sequentially, but not year-over-year in December?

No, no, no, no, no, no, no, not at all. No, I feel strong growth for this year. No, no, I think we're resuming to a growth quarter absolutely.

Okay.

With both year-over-year.

Okay.

If you just piece those two puzzles together, year-over-year in our legacy will be down, even though it's flattened. We have significant growth in the outside, in really our new form 16; that new form 16 last quarter was in the 35% to 40% growth range of that business. That's where it was last year - or last quarter, this quarter. We see that they're not accelerating more.

Thank you. Our next question comes from George Melas of MKH Management. Your question, please.

Thank you, good afternoon, gentlemen. I'm fairly new to this story. And I just have a modeling question. I'm trying to understand your CapEx guidance for fiscal 2022. And that $30 million to $35 million, is that just cash CapEx or does that include the leases in there?

George, thanks for joining the call and being interested in the ibex narrative. So, Karl Gabel, why don't you take that call and walk George through your imperative CapEx number? Thanks.

Sure, Bob. Thank you for the question, George. Yes, the $30 million to $35 million is our cash CapEx. And that's made up of both the growth CapEx that Bob has been talking about and also our maintenance CapEx.

And, Karl, why don't you just touch on approximately where our maintenance capex is on an annual basis?

Sure, sure. The maintenance CapEx, if you look at the industry, typically runs around 2%. If you look at it over a three-year period, sometimes you might run a little higher than 2%. Sometimes you might run a little lower than 2%. That would kind of give you a gauge on, you know, the split between the maintenance CapEx and the growth CapEx.

Okay, George, what's interesting is we've built out a lot of seats that we are still today operating, and most of them in a socially distanced environment. So as we hopefully at some point resume to a normal environment, that capacity built out will now have significant capacity to sell into, as we go from just think about 1,000 seat centers that have 500 usable seats to using all 1,000 seats in that center. I shared numbers last quarter, but when we look at this, we have somewhere between 140 and 175 million dollars of new revenues we can sell into these footprints as we get past that, which we’re excited about because that will certainly turn this business into, we believe, a really strong free cash flow business.

Right, but let me just ask that question slightly differently. Your CapEx is actually greater than $30 million or $35 million, because you actually are getting equipment also on a lease basis, is that right?

Yes, I think, and George again, this is Karl. On our balance sheet, and obviously on IFRS 16, you have right of use assets, and you have right of use leases, the assets get capitalized. We have broken that apart this quarter. You can actually see the right of use assets that relate to when you're opening up centers and things like that, under IFRS 16. We're talking about the $30 million to $35 million; it's more or less related to the property and equipment line item.

Okay.

Does that answer your question? Because I didn't underwrite this just a follow-up. The company doesn't own facilities; we rent facilities. So when we're recognizing the asset and liability for the facilities, it will go under a right-of-use asset and liability.

Okay, my question relates to EBITDA then. If we look at EBITDA, should we subtract something from some element for leases in order to get to a real EBITDA, you know, to compare it to the way it was done before when capitalized leases?

Yes, under IFRS 16, and your depreciation and your amortization it will include the amortization that's going through for the right of use assets. So that will be part of your depreciation/amortization. In the pro forma, there was actually a pro forma in there that shows at that time what the metrics would be before and after applying the IFRS 16 accounting. If you have any questions, we can certainly talk after the call.

Thank you. This now ends our Q&A session. I will now turn it back to management for closing remarks.

Latif, thank you very much. In summary, I want to say how proud we are of the work we've done here from a business and financial standpoint, but also around diversity, equity and inclusion, and that's important. We look forward to great things to come and thank you for your attendance and in listening, and we look forward to talking to you next quarter. See you all.

This concludes today's conference call. Thank you for participating. You may now disconnect.