Concentrix (CNXC) Q3 2026 earnings call transcript

Thank you operator and welcome everyone to concentric's 3rd Quarter 2026 earnings call. This call is the property of concentric's and may not be recorded or rebroadcast without the written permission of concentric's. This call contains 4 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 4 looking statements.

We do not undertake to update our 4 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 4 10 K and in our other public filings with the SEC. Also, during the call, we will discuss non gap financial measures, including adjusted free cash flow, non gap operating income, non gap operating margin adjusted. This includes currency revenue growth. A reconciliation of these non gap measures is available in the news release and on the company investor relations website under financials. With me on the call today, our Chris Caldwell, our president and chief executive officer and Andre Valentine, our chief financial officer.

Chris will provide a summary of our operating performance and growth strategy and Andre will cover our financial results and business outlook. Then we'll open the call for your question.

Now I'll turn the call over to Chris.

Thank you, Elise. Hello everyone, and thank you for joining us for our third quarter, 2026 earnings call. I'm trying to start this call by recognizing a milestone that speaks to how far concentric has come over the last few years since generative AI was released and concerns for the viability of the services industry started. Over the last three years, we steadily expanded the services we offer and invested in deployments of AI technology to evolve our business.

This quarter, we crossed the mark that 50% of our revenue now comes from businesses that we generated in the last three years that is very different than our traditional business. These new revenue sources are comprised of 3 billion of revenue that is coming from new and existing clients that has either gone through heavy transformation or has AI influencing the revenue. 1.3 billion of net revenue resulting from the compression of our traditional services using our IX sweet AI platform and finally, 700 million of revenue from new high value services. We brought to the market across growing segments like risk and compliance. Compared to our traditional business, this revenue is growing faster and expected 30% year over year growth rate in fiscal 2026 is more profitable and is stickier with a revenue retention rate four times higher.

We laid this out in more detail in the Q3 investor summary presentation you can find on our website under investor relation events and presentations.

We're planning more investor outreach in the early part of 2027 to break down how we are looking at our business in more detail. But as an introduction, let me share a few other stats that make me confident and excited about the future. We expect our new business revenues to exceed 6 billion in 2027. As we have talked about, we're seeing a margin progression we've expected in our overall business with a 30 basis point improvement year on year in Q3. We are winning new clients and also evolving our existing clients to new services.

As an example, all of our top five clients and more than 90% of our top 100 clients have expanded into new services and offerings with us since the start of fiscal 2023. Our average tenure with our clients remain strong at more than 16 years with our top 25 clients and 15 years for our top 50 clients with a 98% retention rate across our entire client base.

Together, these that show we are building on a solid foundation and we are pushing the evolution of our business as quickly as possible. Turning to our third quarter, we can see these same themes reflecting. We're continuing to prove that as client scale AI, we create more opportunities to grow our business expand profitably and deepen client relationships. We are actively focused on disrupting our own traditional business to take advantage of our momentum. Our sales pipeline continues to be stable with net new logo sales involving AI growing 63% quarter over quarter. Three of our four largest I X sweet wins this quarter came from clients who are already using the product and are now expanding their use cases because of those results, the results we've helped them achieve.

We also brought 61 opportunities, including more than 30,000 advisors live on our I X sweetness quarter. Contributing to our margin expansion, we delivered in Q three and the impact to our revenue growth in our traditional business. Our strategy vision and execution is getting recognized by the market. We're building an identity for concentric as a partner that bridges the gap between AI ambition and operational reality. Through our new realities marking campaign, and it's resonating with clients partners and the industry.

We were recognized by research firms as a leading partner with multi disciplines and Australian vision. As an example, this month ever screws, recognized us as a leader in customer experience management with growth and vision and capability across every geography. We are in the best of category honors for global for human AI, teaming and conversational AI. And together with our strategic partner nights, we received an international CX excellence award for our work with UK technology retailer Curry's. Our technology powered consumer experience solution delivered double digit improvements in customer satisfaction. And just as importantly, we exceeded our profitability guidance for the quarter and expect that momentum to continue into Q four. As a reminder, this marks our second consecutive quarter of record adjusted pre cash flow while continuing to reduce leverage.

While AI is expanding our growth opportunities, we're also navigating industry shifts like hyperscaler spend priorities, which will have a larger impact than previously expected on our revenue in the fourth quarter. In addition, sure mix created about a 3% headwind this quarter as we talked about in our second quarter earnings call. As clients ship budgets and shores, we continue to use a combination of technology, right showing and services to create a bounce for growth and long term profitability in our traditional business.

It's important to note that while the business is evolving, we're doing what we can to accelerate our role of AI. This causes temporary headwinds that results in growing stickier and higher margin revenue and relationships. While this evolution progresses, we're staying disciplined in how we allocate capital.

This quarter we strengthened our balance sheet by reducing net bet net debt by approximately 211 million. And by the end of our fiscal 2026 year, we expect to have completed 900 million of that pay down in the last 3 years. This puts us on track to reduce our net leverage to approximately 2.6 times at year end with further significant debt and leverage plan reduction planned in 2027 to approximately 2.2 times.

At the same time, we're continuing to invest in our future by upskilling our people and expanding specialized AI talent to grow new capabilities.

Looking ahead to Q4, we are pushing accelerated deployments of AI, but we remain confident in the growth opportunity of our new business revenues and the overall market opportunities. We are focused on being the partner of choice to help transform operating models with the right mix of automation, technology, global talent and deep demand expertise. We're seeing a healthy stable pipeline of complex high value opportunities where clients are looking for practical solutions that deliver measurable business outcomes.

While not providing guidance for 2027, we currently expect the growth of our new business revenue to offset much, if not all of our automation efforts in 2027 while driving stable to improved margins across our entire business. We expect the overall business to benefit from consolidation the industry with growth momentum to be more in the back half of the year.

We expect our free cash, free cash generation to be above our 2026 levels. Before I hand it over to Andre, I want to thank our game changers around the world for their commitment to our clients and to each other. Their expertise and innovation make our success possible, and I'd also like to thank our clients for their trust they place in us as they navigate an increasingly complex business environment.

With that, Andre will take you through more details on our quarterly performance and I look for the rest of the year. Andre.

Well, thank you, Chris and hello everyone. I'll begin with a review of our financial results for the third quarter, then discuss our outlook for the fourth quarter and full year 2026. In the third quarter, we delivered revenue of approximately $2.45 billion. On a constant currency basis, this represented a decrease of 0.5%, which is slightly below the lower end of the guidance we provided in June.

Our revenue for the quarter reflects an acceleration of our deployment of AI for clients, as well as client decisions to reduce support for certain customers that we have supported.

Turning to profitability, our nine gap operating income was $309 million above the high end of the guidance range we provide in June. Adjusted EBITDA on the quarter was $363 million.

Our nine gap operating income margin was 12.6%. On our adjusted EBITDA margin was 14.8% with both measures of 30 basis points from the third quarter last year. This increase in margins demonstrates our focus on winning the right business, as well as our discipline and execution in aligning our business investments to areas that we have identified for profit, and enhancing growth while reducing costs in other areas.

This is consistent with our commentary throughout 2026 that we would see year over year margin expansion in the second half of the year.

Nine gap diluted EPS was $2.92 per share. Above the guidance range, we provided in March and June and up 14 cents from the third quarter of 2025.

Our gap results for the third quarter reflect a $1.05 billion non-cash goodwill impairment charge triggered by the trading range of our stock during the quarter. Complete reconciliations of nine gap measures, the comparable gap measures are provided in today's earnings release.

Adjusted free cash flow was $218 million in the third quarter, the highest level we've achieved in the third quarter of any year since our spinoff in 2020. We returned approximately $23 million to shareholders in the quarter through our quarterly dividend. Consistent with our commitment to reducing net leverage at the end of the year, we did not repurst any shares in the quarter.

In the quarter, we reduced total debt by $211 million. Our debt reduction in the quarter included the repayment of $200 million in senior notes that matured in August.

At the end of the third quarter, cash and cash equivalents were approximately $256 million. Total debt was approximately $4.375 billion, and net debt was approximately $4.119 billion. At the end of the quarter, our liquidity was nearly $1.5 billion, including our $1.1 billion undrawn revolving credit facility. Included our outstanding debt at the end of the quarter is $375 million in term loan borrowings that mature in December, 2026.

We expect to repay these borrowings using free cash flow generator over the balance of the year and existing sources of liquidity. In total, we expect to repay over $550 million in gross debt this year and reduce net debt to approximately $3.8 billion by the end of the year.

Now, I'll turn to our outlook. For the fourth quarter and for your 2026, we expect the following. Fourth quarter revenue of $2.41 to $2.46 billion. Based on current exchange rates, these expectations assume it approximate 65 basis point and negative impact of foreign exchange racing to for compared with the prior year period. The guidance implies a constant currency, a revenue decrease in the fourth quarter, ranging from 3 to 5%.

This leads to fiscal year 2026 revenue of $9.827 billion to $9.87 billion based on current exchange rates, which we assume an approximate 80 basis point positive impact of foreign exchange rates compared with the prior year. As such, we expect revenue for the full year to decrease by 0.8% to 0.3% on a constant currency basis.

For the fourth quarter, we expect nine gap operating income of 310 to $320 million. The midpoint of our profitability expectations for the fourth quarter implies a nine gap operating income margin of approximately 12.9% of 20 basis points from the fourth quarter last year. This is consistent with our expectation all year that we would generate year over year margin expansion in the second half of the fiscal year. This guide is translates into an expected nine gap earnings per share of $2.86 to $2.98 for Q4, assuming approximately $63.5 million in interest expense.

61.2 million diluted common shares outstanding and approximately 4.9% of net income attributable to participating securities. For fiscal year 2026, we expect nine gap BPS of $10.97 to $11.09, assuming nine gap interest expense for the year of $265 million approximately 61.1 million diluted common shares outstanding. And approximately 4.9% of net income attributable to participating securities. The nine gap effective tax rate is expected to be approximately 24% for both Q4 and for the full year.

We continue to expect to generate between $630 and $650 million and adjusted free cash flow this year. With this cash generation, we expect to reduce our outstanding debt balance by over $550 million in the year. This expectation includes the funding of our acquisition of Castle Hill to further strengthen our risk and compliance offering in the fourth quarter.

We are committed to reducing our net leverage to approximately 2.6 times adjusted EBITDA by the end of fiscal 2026.

Looking at cash flow beyond 2026, we expect adjusted free cash flow in fiscal 2027 to exceed the amount we generate in 2026. Our confidence or a cash generation in 2027 reflects an expectation of reduced restructuring costs, lower cash interest expense, and that our newer growing sources of revenue require less capital expenditures than our traditional business. Our 2027 cash flow of space expectation would allow us to reduce our gross outstanding debt by over $550 million once again in fiscal 2027 and bring our net debt to below $3.3 billion or roughly 2.2 times adjusted EBITDA by the end of fiscal 2027.

Our confidence in the continued strong cash flow generation of the business is reflected in our increased dividend to 37 cents per share payable in November. In summary, our overall demand environment remains stable. We're confident in our ability to drive margin expansion in the business. We're confident in the continued strong free cash flow generation of the business and our plan to pay down debt and reduce leverage in 2026 and beyond.

And we're in a strong competitive position to drive long term out performance. Now operator, please open the line for questions.

No problem. Hi, Ruth. Chris. So thank you for the question. So two things. Just in terms of what we're seeing right now. Just to put some perspective and size what we're looking at, the hyperscale customers were talking about are two specific clients who, as we talked about in our Q2 call, are looking, stopping support for certain client sets.

Originally, that was going to impact us in Q3 and flow through until sort of Q2 of next year. Right now, the decision is really to have that completely finished by the end of Q4. And so you're seeing an oversized impact in Q4 and then clearly some impact in Q1 and Q2 from that. That again is only two clients.

It's very defined. And those clients are actually growing with us in other areas of the business and other services. And so it's, again, very, very confined part. The second thing that we've talked about is our increase in AI automation sales that we've been doing. Not only did we have a very strong AI pipeline sales pipeline in Q2, which we called out. We also had another one in Q3. And what we talked about in Q2 was the ability to deliver on these AI automations at taste. We've been really happy with how the team has reacted in Q3 and we've been able to deploy those automations much faster than what we originally expected, which I think is a really good thing.

And so we're seeing that impact in kind of Q4 and which will also impact into Q1. And so really when we talk about backend growth opportunity in 2027, we're getting through these two clients who are looking at removing support for their base. We're catching up on the automation deployments that we're doing. And we're also looking at what we're going to be consolidating within the marketplace as we look at Q3 and Q4 really to Q2, Q3, Q4 in 2027. So that just gives you some of the color around what we're seeing from a growth profile perspective.

So clearly Meta announced a news product, an open AI announced a product they called dots. We're seeing more and more companies looking at this type of technology. And in fact, we've built our own technology internally just for ourselves. That's very, very similar to that we're finding productivity games. We're hoping clients right now understand how to engage with it. We're helping clients understand how to support these channels.

And we do see a gentic shopping becoming more and more prevalent in the marketplace and see opportunities for us to grow. With that supporting our clients supporting this, this infrastructure. And so we just see it as part of the evolution of the, of the business. In terms of how we're thinking about spending money on our IX suite, as we've talked about, we're benefiting from some of the ability to lower our cost base with AI internally on our development. And so we brought down our expenditures on our IX suite. We're seeing the growth that we've talked about. We've talked about exiting 2026 with a IR. I've just kind of saw for light something around 120 million.

We're on pace to do that. And then what we've also talked about is how it influences revenue that runs through this platform. And that was the number that I called out of the $1.3 billion that's running through our platform, which, as we've talked about before, is growing faster than our traditional revenue because we're getting optimized work out of it. And it's at a higher profit margin out of that. And so we expect that margin profile to continue to build up. And at some point at critical mass, we expect IX hero to have effectively soft type margins, but that's fair bit away.

Yeah, that's a great question. Since we expected to reach this 50% milestone really at the end of Q4, maybe middle of Q1. And so we've moved it forward a quarter and a half, which is fantastic from a momentum perspective. Our belief is that we need a couple more quarters to continue to kind of drive automation in our traditional business. We believe this in consolidation that happens. But if you, and again, not guiding for 2027, if you kind of read between the lines on 2027, we expect that that momentum is not really going to happen. Until the back half of the year. So that's probably more a 2028 comment. But again, we're moving a couple quarters faster than we expected right now.

So hopefully we can contain that momentum.

Yeah, we're not really guiding yet to fiscal 27 bits, but we'll provide some Colorado. So we've talked about this year. Seeing that celery to being about a three point headwind on growth for us, we see it in that same sort of range. We don't see it being higher, but possibly a touch lower, but so included in what we're seeing right now is our revenue expectations for next year. I probably think it's right in that same range.

Jacob, I'm really glad you asked that question because it was actually kind of the second part of the answer to Vince's question that I didn't give. We do see it abating over time, but maybe not for the reason that you indicated so much as we're really getting to the point where we only as we exit this year have 10, 11% of revenue that we see is as kind of in the pool of stuff that is likely over time to be moveable off shore. So we do see it abating over time more because there's just not that much of it left to move as opposed to anything else. Chris, any impact from the AI playing any role there or not?

Yeah, we're not really seeing that. We're seeing clients who are moving the work and the belief is that as we put an AI to it, they'll continue to leave it where it resides versus pulling it back into a higher cost region.

So on the newer revenue that we talked about that we just kind of cross with 50% mark on the margins are actually very stable and it's competitive, but because we're bringing unique offerings to it. It's at an elevated level where we kind of look at margin pressure for lack of better term is more of the traditional business that might be commoditized and, you know, we'll only go to a certain price point. We're not going to chase price in that type of the business. And so our belief is that as we continue to add more and more of the new revenues as we continue to automate more and more of our traditional revenues that we've got that margin stability as we talked about in the prepared marks certainly in 2027.