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Quick Value 7.31.23 ($CNXC)
Concentrix - CRM BPO service provider at ~6x EBITDA 8.6x FCF with 25% revenue CAGR since 2017
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Concentrix Corp ($CNXC)
This one was requested by a few subscribers (hint: leave some comments for stocks you’d like reviewed and I’ll probably add them to my list).
What they do…
Concentrix Corp (CNXC) is a 2020 spin-off from IT product distributor, TD Synnex (SNX). They call themselves a CX/UX solutions provider (short for customer experience and user experience). It’s a pretty vague term but the business model is closely related to IT BPO companies like Cognizant, Infosys, IBM, etc. with a focus on customer service. They’re effectively acting as an outsourced customer service department for large organizations, answering their customer inquiries from phone, email, chat, etc. They generally enter into long-term contracts with clients and earn revenue based on fixed price or per-unit contracts.
An investor presentation highlights this as a $90bn market with 6 top companies holding ~40% of that revenue.
This business grew inside of Synnex and had a highly acquisitive history before spinning out in 2020. They’ve done 15+ acquisitions since the company was created within Synnex in 2004.
Revenue went from $160m in 2012 to a pro-forma ~$10bn in 2023 (with the recently announced Webhelp acquisition). There were a handful of step change acquisitions in there like IBM’s CX business in 2014, Convergys in 2018, PK in 2021, ServiceSource in 2022, and now Webhelp slated to close in 2023.
They serve a variety of industries — tech, e-commerce, retail, banking, telecom, healthcare. As an outsourced call center / customer service provider, a large portion of revenue comes from the Philippines and India.
Why it’s interesting…
I see 2 main attractions to this stock…
1) Successfully scaled via acquisition
The revenue chart above really emphasizes the path from CNXC being nothing in 2004 to $5.5bn in 2021 and pro-forma ~$10bn in 2023 with another pending acquisition.
In March 2023, CNXC announced they would acquire Webhelp for ~$4.8bn in a mostly stock and cash transaction. CNXC will issue 14.9m shares (from 51.5m today) plus cash, a seller note, and assumed debt. Webhelp is expected to close by yearend 2023 but other acquisitions totaled $2.85bn cumulatively since 2017.
“Stock prices follow earnings” but unfortunately for CNXC that hasn’t been the case. Both margins and EPS have grown substantially since the spin-off (and years leading up to it).
EPS grew from $2.40 in 2017 to $11.75 in 2022
EBITDA margins expanded from 12.6% in 2017 to 16.3% in 2022
This is likely one of the most successful acquisition programs I’ve seen; margins and per-share earnings have steadily increased along with revenue. And all of this growth took place without any increase in share count.
So what about this pending Webhelp acquisition?
It’s a $4.8bn deal and will add $500m in EBITDA for a 9.6x purchase price. Webhelp also has a history of solid performance with 15% revenue growth from 2018-2023E and the deal will lower concentration from top customers, reduce exposure to APAC region, and balance out end markets served.
The shares being issued to Webhelp were set when CNXC stock was at $120/share. Add in ~$3bn for the combination of cash, seller note, and assumed debt at closing and the deal price goes to $4.2bn or 8.4x EBITDA.
Leverage will jump to 3x at closing and they’ll spend the first 2 years post-close getting back to 2x leverage (likely with some buybacks in there too).
2) Valuation down to very cheap levels
Shares came out of the late-2020 spin around $80 and ran to $200+ by early 2022. Since then, it’s been a steady decline to today’s ~$80/share.
Initially, the stock carried a lofty 11x EBITDA valuation that the fundamentals justified. While the share price was falling, fundamentals continued to do well. Eventually the EBITDA multiple was cut in half from 10-11x to ~6x where the stock trades today.
Peers in the CX space have all experienced a similar level of multiple compression. A few stocks like TELUS and TTEC are trading at slightly higher valuations; although it doesn’t look like there’s a ton of difference in leverage, margin profile, growth rates, etc.
For good measure, I added traditional BPO companies like DXC, Cognizant, and the IBM spin-off Kyndryl on the list and they trade at similarly low multiples but didn’t experience the recent multiple compression.
Was the market value for this business correct before? Or do they have it right now?
Summing it up…
This is a really impressive set of fundamentals and by the looks of it, management is set to do it again with Webhelp adding another $500m in EBITDA + $120m deal synergies.
My main issue is fully understanding the market for these services and the competitive nature. At a high level it sounds like an outsourced call center operation that CNXC staffs with lower cost overseas labor. It also sounds like they’re trying to expand their TAM by adding adjacent services and offerings. Seems like a pretty straightforward business model but also one that’s likely very competitive. Perhaps there are benefits to being one of only a few scaled players in working with the largest global clients?
From a valuation standpoint this has plenty of upside if the stock were to recover anywhere near recent/historic trading multiples but that’s an overly simplistic mean reversion bet. What gets them there? And why did multiples cut in half in the first place? Are investors worried that AI/ChatGPT will displace a large chunk of earnings?