CNXC - Concentrix Aims For Higher Growth In The Second Half Of 2023

Summary

• Concentrix reported its FQ4 2022 financial results on January 19, 2023.
• The firm provides customer experience and other technology consulting solutions to clients worldwide.
• CNXC stock has produced revenue and operating profit growth but sees challenging conditions from certain client verticals in 2023.
• I'm on Hold for CNXC until we learn the extent of its macroeconomic and foreign exchange headwinds.

A Quick Take On Concentrix

Concentrix Corporation ( CNXC ) reported its FQ4 2022 financial results on January 19, 2023, missing both revenue and EPS consensus estimates.

The firm provides a range of customer experience consulting and related services to organizations worldwide.

I'm cautious as we move further into 2023, so I'm on Hold for CNXC until we see results under changing macroeconomic conditions.

Concentrix Overview

Newark, California-based Concentrix is a global customer experience technology and services company that designs, builds, and operates end-to-end customer experience solutions to enhance customer engagement.

The firm is headed by president and CEO Chris Caldwell, who was previously Executive Vice President and EMJ Data Systems and CEO at Coral Enterprises.

The company's primary offerings include the following:

• Customer experience strategy

• Experience platforms

• Experience design

• Data & analytics

• Automation & operations

• CX management

• Digital engineering

• Enterprise modernization

• Content trust & safety

Concentrix obtains new customers through a variety of methods, such as targeted digital advertising campaigns, social media marketing, and direct mail campaigns.

The company also has a dedicated sales team that reaches out to potential customers and provides them with tailored solutions to meet their needs.

Concentrix's Market & Competition

According to a 2021 market research report by 360 Market Updates, the global market for digital transformation strategy consulting was an estimated $58.2 billion in 2019 and is forecast to reach $143 billion by 2025.

This represents a forecast CAGR of 16.2% from 2020 to 2025.

The main drivers for this expected growth in IT consulting are a large transition from on-premises, legacy systems to cloud-based environments with complex architectures.

There is also expected growth in the number of industries adopting digital transformation strategies, such as manufacturing, finance, and retail, as well as a growing demand for improved customer experience.

IT consulting firms can also leverage their expertise to help companies develop and maintain new or better business models which are better suited to the digital world. Many organizations are turning to IT consulting firms to help them align their digital transformation strategies with their business objectives. This can help companies better leverage technology to improve customer engagement, boost collaboration, and reduce costs.

Also, the COVID-19 pandemic has likely pulled forward significant demand to modernize enterprise systems resulting in increased growth prospects for digital transformation consultancies.

The growth of IT consulting is expected to continue due to the evolving digital landscape, increased demand for improved customer experience, the need to develop and maintain new or better business models, and the accelerated demand for modernization due to the pandemic.

Major competitive or other industry participants include:

• Globant

• Thoughtworks

• EPAM

• Slalom

• Accenture

• Deloitte Digital

• McKinsey

• BCG

• Ideo

• Cognizant Technology Solutions

• Capgemini

• Computer Task Group

• Company in-house development efforts

Concentrix's Recent Financial Performance

• Total revenue by quarter has risen according to the following chart:

• Gross profit margin by quarter has trended slightly higher in recent periods:

• SG&A expenses as a percentage of total revenue by quarter have followed the trajectory shown below:

• Operating income by quarter has risen markedly in recent quarters:

• Earnings per share (Diluted) have trended lower more recently:

(All data in the above charts is GAAP)

In the past 12 months, CNXC's stock price has fallen 27.1% vs. that of TELUS International's ( TIXT ) drop of only 5.5%, as the chart indicates below:

Valuation And Other Metrics For Concentrix

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

As a reference, a relevant partial public comparable would be TELUS International; shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha)

Commentary On Concentrix

In its last earnings call (Source - Seeking Alpha), covering FQ4 2022's results, management highlighted its full-year 2022 performance, which included 'the highest customer satisfaction and innovation scores' since it started surveying customer satisfaction more than ten years ago.

The firm also noted the successful integration of its PK acquisition, which will fortify the company's customer experience technology solutions offerings.

Leadership also expanded its geographic footprint in Europe, Asia and Latin America, and has plans for more footprint expansion in 2023.

However, the company faced macroeconomic headwinds in its FQ4, with clients in the consumer electronics and retail e-commerce verticals reporting particularly weak consumer demand conditions.

As to its financial results, total revenue rose 12% year-over-year on an as-reported basis, while the company faced foreign exchange challenges due to the strong US dollar.

Management did not disclose any company or employee retention rate metrics for the quarter.

Gross profit margin has been trending higher in recent quarters while operating income rose substantially in the quarter just ended.

For the balance sheet, the company ended the quarter with $145.4 million in cash and equivalents and $2.23 billion in long-term debt.

Over the trailing twelve months, free cash flow was $460.7 million, of which capital expenditures accounted for $140.0 million. The company paid $47.1 million in stock-based compensation in the last four quarters.

Looking ahead, management expects fiscal 2023 organic revenue growth to be around 5% in constant currency terms, with higher growth expected in the second half of the fiscal year based on client feedback.

Regarding valuation, the market is valuing Concentrix at lower valuation multiples than competitor TELUS International.

The primary risk to the company's outlook is the prospect of a material macroeconomic slowdown in 2023, which would slow project implementation and new customer wins.

A potential upside catalyst to the stock could include a 'short and shallow' downturn and a return to growth after.

The company's stock price has risen in recent weeks along with the general rise in technology-oriented stocks as the cost of capital outlook has improved.

In the short term, technology stocks appear to be highly dependent on a benign interest rate environment, so investors should proceed accordingly.

As for me, I'm cautious as we move further into 2023, so I'm on Hold for CNXC until we see results under changing macroeconomic conditions.

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