Prepared remarks
Welcome to the Second Quarter 26 Financial Results Conference Call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press 1 to raise your hand. To withdraw your question, press 1 again. I will now hand the conference over to Elise Brassell, Corporate Communications and Investor Relations. Elise, please go ahead.
Thank you, operator, and welcome, everyone, to Concentrix's Second Quarter 26 Earnings Call. This call is the property of Concentrix and may not be recorded or rebroadcast without written permission of Concentrix. This call contains forward-looking statements that address our expected future performance and that, by their nature, address matters that are uncertain. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements as a result of new information or future expectations, events or developments. 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 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 Investor Relations website under Financials. With me on the call today are Christopher A. Caldwell, our President and Chief Executive Officer, and Andre S. Valentine, our Chief Financial Officer. Christopher will provide a summary of our operating performance and growth strategy, and Andre will cover our financial results and business outlook. Then we will open the call for your questions. Now I will turn the call over to Christopher.
Thank you, Elise. Hello, everyone, and thank you for joining us on our second quarter 26 earnings call. Our second quarter marked an acceleration in many areas in the evolution of our business. A few key statistics we are very excited about. First, we saw a record level of contract signings for our IX suite of technology, up 400% year-over-year for the number of deals. We saw increases of 25% year-on-year in the number of deals where we sold technology with our services. We saw an increase of 80% year-on-year in the number of deals where we sold AI and technology with our services. We saw a record second quarter cash flow. We improved our efficiency by increasing our revenue per non-billable headcount by 14% year-on-year. We saw margin expansion sequentially of 10 basis points with a clear path to continued expansion. While early days, the momentum we see in the parts of the business we have been investing in are paying off while we are being prudent about managing our cost structure to drive better returns. Our key message today is we are continuing to effectively execute our strategy, and we are making the right investments in the business for long-term shareholder value. Now let's break down some of these areas further. First, on our IX suite of technology, we closed almost 100 deals in the second quarter and are now focused on keeping up with demand for deployments. While we have improved our implementation speed by 12% through the quarter, we need to be faster to take advantage of the demand. We are on track to double our IX suite revenue by the end of this fiscal year, hoping to surpass $120 million in annual recurring revenue. While growing our IX suite is still a small percentage of our total revenue, what really excites us about this is now we have clients using our solution for a year, and the economics are becoming clearer. We now have 11% of our revenues influenced by IXSuite deployments. While we can see some revenue decreases when we first deploy the platform from driving automation and productivity gains, these tend to be short lived. We are seeing clients with IXSuite growing significantly faster than our consolidated average and delivering almost 350 basis points better margin, and starting to buy additional licenses for clients' internal operations by the end of the first year of installation. Our subscription with clients already deployed grew 24% year-on-year for new license revenue. This is because our technology works in enterprise settings and drives real value. One other important point for investors to appreciate: of the top 75% of our clients, 97% have AI in production. The vast majority have multiple AI solutions deployed for use cases across CX versus a homogeneous technology stack. The solutions we are putting in with our partners and our own technology are delivering real value because we have deep domain knowledge of the processes. The environments of our clients are getting more complex with AI, not less, and that provides additional opportunities for us to manage these environments and sell additional services. It also shows AI has not significantly cannibalized our revenue or opportunities when our client base has adopted it. Second, while Andre will talk through the strong cash flow results in more detail, it is important to appreciate that as we stated at the beginning of the year, we are focused on reducing our debt. We believe it is the best way to deliver value to our shareholders when the stock price is more volatile than we would all like. Third, we saw a path this quarter to accelerate the use of AI internally within our own organization and align our cost structure to the profit potential of the various areas of our business. This drove a higher restructuring charge than we anticipated at the beginning of the quarter. But on a cash basis, even after some reinvestment, we expect to cover the charge in 6 to 9 months. We are not completely done yet and expect that we will spend an additional $75 million in restructuring this year while still hitting our free cash flow guide, reducing our net leverage below 2.6 times and continuing to reduce our debt in 27. Lastly, as we have called out, we have some very fast moving parts of our business that are from the current environment of enterprises needing AI expertise that are practical, real, and well thought out. We are focused on keeping up with the demand as quickly as possible by ensuring we continue to have the right resources available in the right markets with the right vertical expertise. We are doing this successfully by rebalancing our priorities of spend in real time. Now turning to the marketplace. We are definitely seeing increased financial pressure on our clients as they try and cope with their own investment needs in their current operating environments. This has created demand for more of our automation solutions, but also increased the urgency of moving work offshore and caused certain clients to prioritize spend across their client base resulting in reduced spend overall. Combined, this has resulted in approximately a 2% additional headwind going into our third quarter that we see for the rest of the year. While the market is competitive, we are being very prudent to ensure we have the right economic returns on our business. We have a strong competitive offering to help clients reduce their total cost of delivery with right shoring and automation. This environment and the faster deployments of our technology do mean revenue—we see the path to a greater return as we demonstrated with higher margins this quarter and faster growth further out as more of our business mix changes. In fact, this is exactly where Concentrix excels. We are solving the AI-ROI challenges by putting the right tools and services together for clients. As AI gets more complex, clients increasingly are looking for partners who can deliver across the full ecosystem which plays directly to our strengths. While others may excel in one or two areas, few can match our integrated model and help us win more complex deals and demonstrate greater value to our clients. As an example, two of our largest cross-sell wins in the quarter added AI services for existing Fortune 500 clients. This dynamic is fundamental to our growth strategy and reinforces our confidence in the trajectory ahead. In the back half of the year, we are staying focused on winning complex, high-value work with practical technology-led solutions to solve real business problems and running more efficiently so we can invest in new areas of growth while improving our profit margins. I would like to thank our game changers for their passion in the quarter and our clients for their partnership. With that, Andre, I will turn it over to you.
Thank you, Christopher, and hello, everyone. Very happy with how our investments are progressing. Our growth in the second quarter came in slightly below our guidance: 0.6% in constant currency terms, and within our guidance at nearly 2% as reported. We believe this reflects an acceleration of offshoring and some clients' reallocation of spending away from certain customer segments, rather than anything that would mute our enthusiasm for the business areas that we have been investing in over the last two years that are helping to drive our business forward. We saw strong growth in areas that tend to be less impacted by shore movement, including banking, financial services, and our AI solutions, while consumer electronics, media, and telecom saw an acceleration of offshoring and had a more pronounced effect. As we mentioned on our last earnings call, the decrease in healthcare client revenue was driven by reduced participation in open enrollment at the start of the year. Turning to profitability. Our non-GAAP operating income was $292 million, within the guidance range we provided on our last call. Our non-GAAP operating income margin was 11.9%. Adjusted EBITDA in the quarter was $347 million, a margin of 14.1%. Our non-GAAP operating income and adjusted EBITDA margins were up 10 basis points and 20 basis points, respectively, from the first quarter of 26. This improvement demonstrates our focus, discipline, and execution on aligning our business investments to areas in which we have identified growth and margin potential above the consolidated business, while reducing costs in other areas. Later, I will discuss our expectations for the second half of 26 and you will see that we expect the improvement in margins to accelerate sequentially through the second half of the year. Non-GAAP diluted earnings per share was $2.63 in the quarter, in line with the guidance range we provided in March and up $0.02 from the first quarter of 26. Our GAAP results for the second quarter and our expectations for the third quarter reflect restructuring charges related to accelerating movement of work offshore and aligning our cost structure for investment in the higher growth and higher profit areas while accelerating the automation of other parts of our business. Complete reconciliations of non-GAAP measures to the comparable GAAP measures are provided in today's earnings release. Adjusted free cash flow is $242 million in the second quarter, the highest level we have achieved in the second quarter of any year since our spinoff in 2020. We returned $23 million to shareholders in the quarter through our quarterly dividend. Consistent with our commitment to being below 2.6 times net leverage at the end of the year, we did not repurchase any shares in the quarter. In the quarter, we reduced total net debt by $228 million to approximately $4.32 billion. At the end of the second quarter, cash and cash equivalents were $263 million, and total debt was approximately $4.585 billion. At the end of the quarter, our liquidity was nearly $1.5 billion, including our $1.1 billion undrawn revolving credit facility. Included in our outstanding debt at the end of the quarter was $200 million of senior secured unsecured notes due in August 2026. We intend to repay the notes using our third quarter free cash flow and existing sources of liquidity. Also included in our outstanding debt at the end of the quarter were $375 million in term loan borrowings that mature in December 2026. We expect to repay these borrowings using free cash flow generated over the balance of the year and existing sources of liquidity. In total, we expect to repay over $550 million in debt this year and reduce net debt to approximately $3.8 billion by the end of the year. Now I will turn to our outlook. For the third quarter, we expect the following: Revenue of $2.465 to $2.490 billion. Based on current exchange rates, we expect an approximate 75 basis point negative impact of foreign exchange rates compared with the prior year period. The guidance implies constant currency revenue growth for the quarter ranging from 0% to 1%. Third quarter non-GAAP operating income of $295 million to $305 million. This implies a non-GAAP operating income margin of 12.0% to 12.2%. Third quarter non-GAAP EPS of $2.65 to $2.77 per share, assuming approximately $65 million in interest expense, 60.9 million diluted common shares outstanding, and approximately 4.8% of net income attributable to participating securities. Non-GAAP effective tax rate is expected to be approximately 25% for the third quarter. For the full year 2026, we expect the following: Revenue of $9.925 to $10.025 billion. Based on current exchange rates, we expect an approximate 75 basis point positive impact of foreign exchange rates compared with the prior year. Guidance implies constant currency revenue growth for the year ranging from 0.25% to 1.25%. This represents a decrease from our previous revenue growth expectation for the year. The primary driver of the reduction is the continued acceleration of mix shift to offshore locations which now represents a nearly 300 basis point headwind. Our previous expectations for the year assumed a 200 basis point headwind from shore movement. We also see some clients' reallocation of spending away from certain customer segments as they manage their enterprise spend. Non-GAAP operating income of $1.2 billion to $1.230 billion. This implies a non-GAAP operating margin of 12.1% to 12.3%. At the midpoint of our guidance for the second half of 26, we expect our non-GAAP operating margin to be 12.5%, a slight increase over the second half of fiscal 25. This is consistent with our expectation that margins in the second half of fiscal 26 would improve sequentially to the point where they were up year-over-year for the second half of fiscal 25. Expect non-GAAP earnings per share of $10.83 to $11.18 per share, assuming non-GAAP interest expense of approximately $265 million, 61.1 million diluted common shares outstanding, and approximately 4.8% of net income attributable to participating securities. The non-GAAP effective tax rate is expected to be approximately 24.5% for the full year. We continue to expect to generate between $630 million and $650 million in adjusted free cash flow this year with the fourth quarter being our highest cash flow quarter as in previous years. With this cash generation, we expect to reduce our outstanding debt balance by over $550 million this year. We are committed to reducing our net leverage to below 2.0 times adjusted EBITDA by the end of fiscal 26. Looking at cash flow beyond 2026, with our continued evolution of our cost structure and growth in our AI-enabled businesses, we expect adjusted free cash flow in fiscal 27 to exceed the amount we generate in 2026. This would allow us to reduce our outstanding debt by over $550 million once again in fiscal 27 and bring our net debt to below $3.3 billion, roughly 2.2 times adjusted EBITDA by the end of 2027. In summary, our demand environment is stable. We are confident in our ability to drive margin expansion in the second half of 26. We are confident in the continued strong free cash flow generation of the business and in our plan to repay debt and reduce leverage in 2026 and beyond. We are in a strong competitive position to drive long-term outperformance. Now, operator, please open the line for questions.
Questions and answers
Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press 1 to raise your hand. To withdraw your question, press 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Your first question comes from the line of Luke Moore Morrison with Canaccord Genuity. Luke, your line is open. Please go ahead.
Hey, guys. Thanks for taking the question here. So the 2% headwinds for the year, framed as a mix of accelerated offshoring and client reallocation for reduced spend—maybe just to start, can you help us split those? How much is offshoring? When we think about that offshoring shift, do you still characterize that as largely gross profit neutral over the medium term? And then, how much is just genuine reduction in client volumes and budgets here?
Hey, Luke. It is Christopher. Thanks for the question. So to answer the first part, we originally planned for about a 2% headwind from offshoring at the beginning of the year. We are now seeing that closer to 3% going into the third quarter and that pickup started happening sort of mid-Q2, where we had some clients who needed to move faster to see some cost savings. We expected that there is work to eventually head offshore, but normally we were expecting that probably in the early part of the new year, but the pressures are pushing it faster, which we are accommodating. On the clients who are reprioritizing their spend, that is about 1%. What we are seeing is where clients are looking at high-cost markets and certain segmentation of customer bases and deciding that they are no longer going to support customer segments at all. It is not that the volume is being automated or going away. They are simply not going to support them. That is about a 1% headwind, and again, those decisions were made within the second quarter. We are working with clients as they look to rationalize and figure out their spend over the next little while. In terms of the offshoring comment with regard to profit and revenue: it does help profit once we get past the duplicate costs; that normally takes about two to three quarters or so. Revenue depending on which country it ends up in can decline, but from a profit-dollar percentage perspective, it is more helpful to us.
Got it. That is helpful. And maybe just real quick on that: as we look out into next year and think about those two different vectors of drag, how should we be thinking about that playing out? Do you see this being a durable headwind, or is this more near term? Will the inflection you were previously guiding to later in the year just get pushed out, or how should we think about that playing out next year?
Yeah. Luke, the way we look at it is over the past 20 years, when clients have looked at unsupporting segments of customers, they think this is a great idea from a cost savings perspective until they start to see ARPU fall or client churn increase, and then they start to come back and figure out they need to invest to continue to support those customers and grow the revenue. I do not want to say it is temporary as in a quarter or two. These are big changes to their strategy, but I do not think that is a de facto way they will operate their business. We have already seen clients start to wonder if that was the best thing to do even in these early days. In terms of the offshoring mix, we had expected, and we have talked about this before, that at the beginning of the year we had about 15% of our business that we believe can go offshore. We expected it to go down to around 13%, give or take, by the end of the year. We now expect it to be probably around 11%-ish when we exit the year. That is a finite amount of funnel; we do not think all of that will go. It is just that is what is possible to go based on what we are seeing in the business right now. Our expectation is that the acceleration is primarily driven by budgets, and we will probably be more moderate in 2027. But for what we are seeing right now and what we know is moving, we see it accelerating by that 1%.
Understood. Very helpful. Thank you.
Thank you. Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Your line is open. Please go ahead.
Hi. Thanks for taking my questions. My first question is on margins. Andre, the full year guide at the midpoint implies about a 12.2% operating margin, whereas the prior guide was about 12.5%. So that 30 basis point reduction—can you help us quantify where that is and what is impacting that? And then you are still expecting in the second half for margins to be up year-on-year—what is giving confidence in that? Then I will follow up.
Sure. Happy to do it, and thank you, Ruplu, for your questions. Yes. So the driver of the reduction in the margin guide is largely the pull down in the revenue, and some of the duplicate costs that come with some of the movement offshore. Our confidence in driving the improvement in margin into Q3, where the midpoint of our guide is 12.1% and then applied margin close to 13% in the fourth quarter, all comes from the restructuring actions we are taking, as well as getting through some of the duplicate costs related to the shore movement, getting some of the revenue to the higher margin offshore delivery. And again, then also some of our technology solutions getting to more scale by working through the deployment on the IX suite solutions that we sold in Q2 and getting those to generate revenue in Q3 and even more so in Q4.
Okay. Thanks for that. Let me ask a question on revenue per billable head versus non-billable headcount. I think you said that revenue per non-billable headcount grew 14%. Can you help us quantify that a little bit better, Christopher?
Yeah. For sure, Ruplu. What we have been doing is driving more automation and using AI internally, and in Q2 we were able to deploy some of our own AI tools internally that allowed us to reduce our non-billable headcount even with net new additions in some of the technology areas. That is why our revenue per non-billable headcount grew 14%. Clearly, our headcount for billable people tends to be more linear because of what we are doing and how we are driving it. That will start to differentiate more as we put more fully autonomous solutions and more tech solutions into our client base. The growth is a little bit related to our footprint of where people are and what the bill rates are—not as applicable as our own internal efficiencies on the non-billable headcount.
Got it. Let me sneak in one more question if I can. In terms of your full-year guide, I think you said that there could be another 11% of the business that could want to move offshore. What have you factored in, in terms of conservatism into the guidance? Do you think some of that can accelerate and move into this year? In terms of being conservative when it comes to lower volumes, which end markets have you been more conservative in factoring into the guide? And has this impacted your decision to spend on AI-related tools and should we think about that spend going forward? Thanks for taking my questions.
Hey, Ruplu. That was a longer question, but we'll try to cover it. First, when we look at our guide and our conservatism, we have been expecting the offshoring to accelerate a tiny bit more than the 3% we mentioned, but we have factored that in. We do not expect other clients to move away from supporting customer bases broadly—these are clients very specific to certain markets that took action. We have no other clients indicating that, so we believe we are being as conservative as reasonable. In terms of the other revenue that could be outsourced offshore at the next level, our expectation is that it will continue to go down by roughly 1.5 to 2.5 percentage points over the next year or so. I do not want to guide past that, but we are getting to lower and lower places where clients have either made public pledges that work will be done in-market or it is work that is regulated to be done in-market and cannot move unless there is a legal change. As frustrating as it is that we've seen that speed up, ultimately it was going to happen over a longer period. In terms of investing in AI tools, we are seeing strong momentum with our IX suite that offsets some marketplace headwinds. We are investing in more deployment engineers, subject matter expertise, and expertise around some of our partner technology to keep up with demand. These are the right investments. As we called out in the prepared remarks, now that we have had our proprietary tech out there for a year, we see that yes, there can be some revenue decreases to begin with, but by year-end it grows significantly faster with the technology. We are seeing almost 53 basis points of margin improvement on those clients, and we are seeing them buy the technology for their internal deployments as well. All of that encourages us to keep investing. To be very clear, what we said last year was that our AI investments would be profitable by the end of 25—that is the case. As we get more leverage on those investments, they continue to be more accretive to our overall business.
Thanks for all the details. Appreciate it.
Your next question comes from the line of David Koning with Baird. David, your line is open. Please go ahead.
Great. Thank you. When we look at margins in the back half, I know they are slightly up, but that is off a pretty easy comp with the tariff impacts in the back half of last year. So clearly, there are still some headwinds in some of the investments you are making. But does this now leave a really easy comp for next year? If you are selling more IX, the offshore shift hurts these next couple quarters but helps next year. Is this going to be a big outsized margin impact into next year?
Dave, I do not want to guide to next year. What I will tell you is we are seeing really strong momentum, not only in our partner technology but our own technology, and we are seeing that drive a higher margin profile business. Also, as we get through our duplicate costs of moving work onshore to offshore, there is margin appreciation there. And we do believe that we start to get more operational leverage as we build up tech installation and deployment talent. We do think we get more leverage as we add more revenue to that area. All that would lead us to believe that there are still margin expansion capabilities. The magnitude of that we will talk about at the end of this fiscal year.
Probably the thing we are most confident in is our ability to increase our free cash flow again next year. That is why you heard me be specific in my commentary about that and our plans to use that to continue to pay down debt.
Gotcha. And then just as a follow-up, it sounds like a little over 1% revenue headwind, or about 1% impact relative to your old guidance for more offshore shift—give or take. Does that imply that volumes are actually unchanged from what you were expecting before?
The volumes have been pretty consistent. What we planned to automate is being automated at levels we expected. Clients' automations are proceeding as they expected; some not as successfully as they hoped, which provides opportunities for our services to get that working. The movement of work offshore is very clear in terms of what is going offshore, and it is also clear when clients say they are not going to support a set of customers in a market anymore because their costs are too high relative to revenue. Those decisions are clean and discrete.
Gotcha. Thank you.
Your next question comes from the line of Vincent Colicchio with Barrington Research. Vincent, your line is open. Please go ahead.
Yeah, Christopher, congrats on the strong traction in the IX suite. I'm curious, what percentage of the IX Suite bookings are replacing legacy spend versus generating incremental spend?
That's interesting. Vincent, the way I would look at it is that IX suite revenue is incremental to us because we have never had a product like this or a technology product like this. The size of it—end of this call we are talking about passing $120 million of annualized recurring revenue. The influence from the rest of the business is more interesting because it is driving higher growth across that set of customers. Eleven percent of our revenue is now influenced by IXSuite; consider that growing much faster than the rest of our revenue. As we deploy every new deal, expect to see that influence increase over six to nine months as we get to full-year maturity. Where that is winning us new revenue is by driving more work from other competitors, and we are also seeing clients give us more work from their own captives or facilities because we have the technology. All of that encourages us that as we sell more, we see the benefits come through faster.
Thanks for that color. As a follow-up, are you seeing a slowing in consolidation that has been a benefit in recent quarters?
We did not see much consolidation in Q2, and frankly we do not expect to see much in Q3. We expect to see more near the end of the year, primarily in consumer electronics. We expect to see some in social media and telecom, which are traditional markets that tend to consolidate near the end of the year after they get through some of the holiday seasons. That is where we expect to pick up additional share.
And then just a small clarification for Andre: what is the size of the total restructuring program now? And over what time does it play out?
The total spend this year in the program will be $175 million. We expect $45 million in spending in Q3 and then an additional $30 million in Q4. Then we should be done all in. And again, when we talk about the $630 to $650 million of free cash flow, I want to reiterate that is after those restructuring expenses—so that is an all-up, all-in number. We expect those expenses to come down significantly next year, and that is one of the reasons we expect to see our free cash flow go up as we look out to fiscal year 2027, to the point where we were confident enough about it to highlight it on this call.
Alright. Thanks, guys.
We have now reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.