Concentrix: High Debt And Struggling Margins

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Concentrix Corporation (NASDAQ:CNXC), is a solid company that’s transforming itself into becoming a leader in the Customer Experience (CX) space, which it is doing so through its numerous acquisitions. One of the company’s most notable acquisitions is its purchase of PK, a CX design and engineering company that it paid $1.6 billion for in November 2021. Concentrix financed the purchase through bank debt borrowings and expects PK to contribute $530 million in revenue and $85 million of adjusted EBITDA this year. Concentrix traditionally delivered solutions through call centers but has now pivoted to meet the needs of companies undergoing digital transformation.

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Q1 2022 hedge fund letters, conferences and more

The end goal of a company engaging Concentrix for their CX and digital transformation needs is to increase the loyalty of its customer base. This is achieved by doing away with points-based loyalty programs and instead of using advanced analytics to uncover deep insights into how customers interact with its brand. These insights then allow the company to create relevant and personalized offers for their customers to increase loyalty and repeat purchases.

Concentrix’s Positive Q1 2022 Results

Concentrix is currently down -18.36% YTD despite convincingly beating its revenue and EPS estimates. The company is also trading 27.51% below the MarketBeat consensus price target. Concentrix finished on a Non-GAAP EPS of $2.85, beating it by $0.14, and finished on $1.54B in revenue, beating the estimate by $10M for a 14.1% YoY increase.

The company has a high amount of debt on its books relative to its cash-only accounts. Its debt rose from $800 million to $2.27 billion after receiving a loan for PK. The company also added another company to its roster of acquired companies, Service Source, which it acquired for $131 million in cash. For the rest of the year, GAAP operating income is set to be in the range of $660 million to $700 million, which is up from $554.7 million last year. This bump in operating income looks to be a result of the synergistic growth between Concentrix and its acquired companies which should improve margins faster than revenues in the future.

Concentrix Is Also Facing Headwinds

However, like any stock, Concentrix also has its share of problems. The first is that the company now needs to contend with paying down its swelling debt. The company stated in its earnings call last quarter that getting debt down to a more manageable level will be one of its focuses for the rest of this year. This means that the company's resources will be spent paying down debt instead of returning value to shareholders in the form of increasing its dividend, which is another matter of contention. Concentrix's dividend yield can be seen as significantly below average, as it currently pays $0.75 per share which gives it a yield of 0.51%. This figure is below the US industry average of 1.79% and lower than the US market average of 3.46%.

Concentrix is also struggling with its free cash flow. The company barely broke even last quarter, with capital expenses eroding revenue from operations. A number of reasons were given for the company's usual lack of cash for the quarter, which included seasonality, COVID-19 lockdowns in China, supply chain constraints, and other variables. When asked to give guidance for when FCF will improve, executives said that it should improve moving forward from Q3 this year. Investors can then expect significant volatility in the company's share price until then.

Concentrix’s Technical Outlook

The technicals for Concentrix don't look so good, which mirrors that of most of the market today. Something to note about this stock is that it was sold off significantly after the company posted its Q1 2022 results. Although the company beat its earnings and revenue estimates, the company's lack of FCF in this challenging climate could have spooked some investors and turned the sentiment negative.

As it stands now, the stock is consolidating while also trending lower to the downside. There has also been a flurry of trading over the last few days given the chaotic situation right now in the market. Concentrix looks to be heading lower before true capitulation is felt.


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Article by Matthew North, MarketBeat