CNXC - Concentrix

[n.r98]

Concentrix(CNXC), recently spun off from Synnex trading at a discount to peers. 

- Made up >50% of EBITDA of Synnex while only contributing ~20% of revenue.

- Synnex incubated the business for awhile. I surmise the spin-off was in mind for quite a long time and the acquisition of Convergys provided it the necessary scale to venture on its own.

- 2 leapfrogging acquisitions; IBM's BPO in 2013 at EV/incremental EBITDA of 4.2x and Convergys at EV/LTM EBITDA 7x. The former propelled CNXC to top 10 in the "identified CX(Customer experience) industry and the latter solidified it as the 2nd largest, only behind Teleperformance. Acquisition of Convergys was a classic value merger; Convergys revenues were declining though margins were improving, due to poor clientele mix - AT&T was 27% of revenue. CNXC has managed to reverse this via clientele portfolio restructuring. The main point: management seems to be careful in acquisition pricing. Contrast this with Teleperformance acquiring Intelenet in 2018 for ~12x EV/LTM EBITDA.

- The industry is fragmented; Teleperformance and CNXC each with ~6% while the remainder is spread among thousands of vendors. Seems like further consolidation will take place. If done right and thus far CNXC has a good track record, then EBITDA will be meaningfully higher in the years to come. In fragmented industry, scale begets scale. Eventually, the offering suite provided by the large players will outstrip the meager offerings of the smaller players.

- Management guiding to $5.3b revenue for fy 21 and with 15.5% EBITDA margins = 821m / ~11x NTM EV/EBITDA. Teleperformance trades at almost twice that multiple. Revenue guidance in such an industry seems rather easy as revenue is recurring and predictable; think average contractual tenureship ~15 years with high quality clients.

My only fear(and what has held me back from investing) is still the limited industry understanding; Infosys and Cognizant operate in India at a larger scale but both are not mentioned as "main competitors" by Tele and CNXC. CNXC also lists Accenture as a competitor but it's not included in their "CX" industry. If it was, then Accenture would be the largest.  Nevertheless, all aforementioned companies trade at a premium to CNXC. 

Anyone with experience here who can explain the industry in a better light and perhaps disprove the conjecture that CNXC is indeed trading at an unwarranted discount. Highly appreciate.

 

Edited April 23, 2021 by n.r98

[Broeb22]

I'm no expert here, though I have invested in other outsourcing-like companies. I think Concentrix' primary business is basically operating call centers. There might be some other fancy-sounding stuff around it, but I think it's basically outsourced customer service. 

In a world where customers demand more seamless experiences, companies are trying to make their customer experience more digital and require less human interaction, I think there are some secular headwinds to this business growing, which is part of why the industry is consolidating right now. If the industry can continue to grow even slowly, then the consolidation play can be a very profitable one. If the industry begins to go into decline, there will still be benefits to consolidation (lower entry multiples, better utilization of labor), but you're kind of pushing a boulder uphill. 

This uncertainty in my mind is why I passed on the Concentrix spin. 

[n.r98]

13 hours ago, Broeb22 said:

I'm no expert here, though I have invested in other outsourcing-like companies. I think Concentrix' primary business is basically operating call centers. There might be some other fancy-sounding stuff around it, but I think it's basically outsourced customer service. 

In a world where customers demand more seamless experiences, companies are trying to make their customer experience more digital and require less human interaction, I think there are some secular headwinds to this business growing, which is part of why the industry is consolidating right now. If the industry can continue to grow even slowly, then the consolidation play can be a very profitable one. If the industry begins to go into decline, there will still be benefits to consolidation (lower entry multiples, better utilization of labor), but you're kind of pushing a boulder uphill. 

This uncertainty in my mind is why I passed on the Concentrix spin. 

The incumbents cite "modest industry growth" due to further outsourcing. They are enjoying growth in certain verticals (i.e. tech, healthcare, financial services). But yes, this industry has been littered with consolidations over the last 5-10 years and if done well, can be accretive; Teleperformance has generated a good CAGR and they have been acquirers at heftier prices. Nevertheless, thank you for your response.

P.s. not a popular fund anymore but seems like Tweedy Browne acquired a position in the last quarter though it hardly amounts to much

Edited April 24, 2021 by n.r98

[SafetyinNumbers]

I have picked up some industry knowledge as I'm invested in Atento (ATTO). To add to your speculation on the timing of the spin, I think it's possible CNXC management could see that ATTO would be available in May 2022 when its major shareholders (GIC, HPS and Farallon) have a lock up agreement come off. They also needed time to rerate which I think is still happening. It's a strange industry because there haven't been many North American listed companies of size until CNXC spun in November and TIXT IPOed earlier this year. There also aren't any financial analysts covering more than one of the names from what I can tell but valuations are healthy except for ATTO.

ATTO trades at 4x EV/EBITDA and management is improving EBITDA margins. Guidance mid point for 2022 is 14.5% although it's not apples to apples with CNXC because of IFRS rules. To compensate, I think 8x 2022E is a good starting point for the low end of intrinsic value. The difference is going from ~$25 (4x) today to ~$80 (8x). A purchase of ATTO by CNXC at that price would still be accretive (on FCF) even before any operational synergies of which there would be plenty.

Greenlight (Einhorn) also recently picked up a position in CNXC and mentioned it very briefly in their Q1 letter after filing a 13F for Q420. If anyone has a call into Greenlight, please pitch ATTO along side CNXC as a Texas hedge (double long!).

I added some links below for support.

There is an ATTO thread here: 

This twitter link shows how industry analyst, Gartner, sees the space:

 

CNXC makes it pretty clear they want to grow in Emerging Markets and through Acquisitions.

 

Einhorn letter:

 

 

[SafetyinNumbers]

On 4/23/2021 at 8:51 AM, Broeb22 said:

I'm no expert here, though I have invested in other outsourcing-like companies. I think Concentrix' primary business is basically operating call centers. There might be some other fancy-sounding stuff around it, but I think it's basically outsourced customer service. 

In a world where customers demand more seamless experiences, companies are trying to make their customer experience more digital and require less human interaction, I think there are some secular headwinds to this business growing, which is part of why the industry is consolidating right now. If the industry can continue to grow even slowly, then the consolidation play can be a very profitable one. If the industry begins to go into decline, there will still be benefits to consolidation (lower entry multiples, better utilization of labor), but you're kind of pushing a boulder uphill. 

This uncertainty in my mind is why I passed on the Concentrix spin. 

I have the opposite view on the industry. The technology is improving productivity meaningfully through the use of AI and digital native support. It lends to consolidation because application of technology is getting more complicated. The same changes also necessitate the need for customers to outsource as their service scores fall behind peers if they don't innovate. I think that sets up a very nice backdrop for an industry leader with a low cost of capital like CNXC. The industry analysts are mainly calling for mid to high single digit revenue growth and margins across the space have been rising as well. 

[Broeb22]

What technology are you referring to that will improve productivity specifically? How specifically is the application of technology becoming more complicated?

Why wouldn’t a customer choose to instead of outsource their call centers to invest in digital technologies that reduce the need for call center reps at all? 
 

I can see analysts calling for high single digits growth in 2021, but are they stating that growth will grow mid-high single digits long-term? Which companies in the space are growing organically at these rates?

[SafetyinNumbers]

From traditional call centre where an agent is interacting 1-1 with a customer to email/text/AI helps an agent deal with on average 2.4 customers at once was the example from ATTO’s investor day in Nov 19, for example. I’m sure that continues to improve.

As it stands now, human intervention is still necessary and specialists are needed to implement new technologies/strategies. I don’t think most companies want to invest in all of the learning necessary when it can be outsourced for less with better results. 

The industry analysts generally have forecasts for several years. I don’t see the trends changing on a dime but maybe they will. I haven’t broken out organic vs growth through acquisitions for the comps. TTEC, for example, talks about a 12% CAGR in it’s addressable markets. TIXT and CNXC are also growing fast. ATTO is guiding to mid single digit CC growth and that includes low single digit CC decline in revenue from their largest customer, Telefonica. 
 

 

[n.r98]

Thanks SafetyinNumbers. Since you mentioned ATTO as the "X" target for CNXC, will have a look after my weekend break. 

Outsourcing of CX is definitely going to continue; most companies would most probably prefer investing capital into the actual business itself and let an expert take care of the CX, lowering efficiency costs. Moreover, human interaction will remain important; I hate dealing with chat bots. Further digging has revealed that perhaps those "real-life" helpers were A.Is too so I'm a little confused; have I been chatting with an A.I bot disguised with a strong Eastern European accent all this while? 

Jokes aside, in the latest 10k, CNXC lists "Our major competitors include Accenture plc, Atento S.A., Cognizant Technology Solutions Corporation, Conduent Inc., ExlService Holdings, Inc., Genpact Limited, Globant S.A., Medallia, Inc., Qualtrics, LLC, Sitel Group, Sykes Enterprises Inc., TaskUs Inc., Teleperformance S.A., TELUS International, TTEC Holdings, Inc., Transcosmos Inc., Webhelp SAS, and WNS (Holdings) Limited."

My understanding of the industry is still foggy. Here CNXC lists Accenture and Cognizant as major competitors and yet claim to be runner-ups in the industry with Teleperformance as the leader. If Accenture and Cognizant are factored in, then Tele and CNXC are small fries. Pardon my ignorance as I have not read all the annual reports of the competitors which I usually deem highly important to truly understand the industry. The disclosures on what exactly they are doing is pretty bad imo. Maybe I'm just a little daft but perhaps this could be a reason for miss-pricing. 

It would be nice if you can enlighten me a little since you are an ATTO shareholder. Also, if ATTO is such a good acquisition target; #1 in LATAM, what is stopping others from snatching it away? My take is that main competitor Tele seems to be scaling up on more full digital-type acquisitions that are not within the traditional BPO sphere as seen with the recent Health Advocate deal. My attraction to CNXC was the history of low multiple acquisitions; buy a perceived troubled asset, diagnose the cancer, remove the cancer. Rinse, repeat and become the "2nd largest" in the industry.

Have a nice weekend  

 

 

[SafetyinNumbers]

I think you have to look at how big Accenture and Cognizant is in the CRM/BPO and which parts of the business they compete in. Accenture and Cogizant do a lot more traditional systems integration and consulting work, I believe but I haven't checked either.

I agree though that there could be competition for ATTO. I could see it being attractive to global players as well as the NA listed companies. For the Asian and European players, they would cement #1 in LATAM and have a base for a near shore attack on the US market. With more services offered digitally, accents are less of an issue as English literacy.

ATTO definitely has problems with lower margins than the peers and a 30% customer in Telefonica. Margins are improving and TEF is getting smaller but it does garner a lower exit multiple. That's why I use an 8x 2022E EBITDA multiple as the low end of intrinsic value which equates to about $80 vs the recent price of $23. It's still a meaningful discount to CNXC's multiple around 11x and is accretive without any operational synergies but there will be plenty. 

Where do you project net debt to be at CNXC in late 2022? I ask because they might be able to fund the deal with mostly debt and use the opportunity to become an investment grade issuer which would make the potential deal even more accretive.

[Broeb22]

Reading the S-1 of TaskUs is also an interesting read. Their growth is much higher than any of the other companies mentioned and it appears to be because they serve the content moderation market, which for obvious reasons is growing very quickly right now. 

It's kind of interesting seeing how TIXT also plays in that space, and I'm sure others mentioned here are as well. 

How durable is the growth from content moderation? I'm sure FB, TWTR, and the rest of social media companies would love to write an algorithm to address this and not require human beings, but it appears that they can't really do that very well (or else they already would have). 

Telus actually appears pretty interesting with a base business that seems to be growing double-digits organically and unlike some others in the outsourcing space they have not been afraid to use their balance sheet to grow significantly and be more efficient from a cost-of-capital perspective. I think they have some overlap with CNXC and others mentioned here, but the TIXT's business mix appears skewed toward higher-growing areas.