Company: Concentrix (CNXC)
Business: Concentrix provides technology-infused customer experience (CX) solutions and runs customer service for 2,000 customers globally. They are the second largest outsourced CX company globally and provide CX process optimization, technology innovation, front- and back-office automation, analytics and business transformation services. It also offers customer lifecycle management, customer experience/user experience strategy and design, as well as analytics and actionable insights.
Stock Market Value: $4.8B ($72.59 per share)
Activist: Impactive Capital
Percentage Ownership: 5.11%
Average Cost: $106.48
Activist Commentary: Impactive Capital is an activist hedge fund founded in 2018 by Lauren Taylor Wolfe and Christian Alejandro Asmar. Impactive Capital is an active ESG (AESG) investor that launched with a $250 million investment from CalSTRS and now has almost $3 billion. In just five years, the firm has made quite a name for itself as an AESG investor. Wolfe and Asmar realized that there was an opportunity to use tools, notably on the social and environmental side, to drive returns. Impactive focuses on positive systemic change to help build more competitive, sustainable businesses for the long run. Impactive will use all the traditional operational, financial and strategic tools that activists use, but will also implement ESG change that the firm believes is material to the business and drives profitability of the company and shareholder value. Impactive looks for high quality businesses that are usually complex and mispriced, where it can underwrite a minimum of a high-teens or low-20% internal rate of return over a three- to five-year holding period. The firm also seeks active engagement with management to set up multiple ways to win.
Impactive Capital has reported a 5.11% interest in CNXC for investment purposes.
Behind the scenes
Concentrix, the second-largest outsourced CX company globally, is a high-quality business. It has a 96% retention rate, average client tenure of 15 years and high switching costs, with tailwinds via shift to outsourcing. Once clients choose an outsourced provider, they are extremely loyal, largely due to the complexity of implementation, which can take up to 12 months. This sticky and profitable growth has led the company to grow operating margins nearly 600 basis points from 8.3% in 2016 to 14% in 2022. Additionally, Concentrix has very low cyclicality, showing resilience across various economic conditions, including Covid. The company’s scale benefits have created a competitive advantage, positioning it to take share and drive more than 30% IRR. Concentrix has grown both organically and via acquisition over the past 15 years to get to its leading position in the sector. Just last month it acquired Webhelp, creating a diversified global CX leader. Combined, Concentrix and Webhelp could generate double-digit profit and free cash flow growth.
However, Concentrix trades at the lowest multiple in its history – a mid-teens free cash flow yield and less than 7 times earnings, while peers trade at 18 times earnings. This dislocation is largely driven by generative AI fears despite Concentrix being a stable business that is capital light and growing. But technological innovation is not a new factor in this industry. Since 1994, the CX industry has seen the creation of the internet, text-based chat bots, email and an initial wave of artificial intelligence-based chat bots five years ago. The net effect of this innovation has been that the major players have grown their business fifty-fold. Impactive thinks that AI will be no different, that these AI risks are overblown and that it has the potential to be transformative in how it allows companies to be productive and grow their top line. Customer service and human interaction will always be an important factor to a growing enterprise, and AI has the potential to drive demand as we have seen in both the health insurance and airline industries.
Historically, Impactive has utilized an activist toolbox focused on strategic initiatives, operational improvements, capital structure and ESG. The firm sees significant strategic and capital allocation opportunities here: Concentrix is poised to generate 80% of its current market capitalization in capital available to deploy over the next three years, generating $2.5 billion in free cash (50% of the current market cap), and it will have $1.5 billion of debt capacity to deploy into accretive acquisitions and share repurchases, which could drive substantial earnings growth. Impactive is often a value-added stockholder and can be very helpful in helping the company analyze how to use this cash, whether for share repurchases, investing in organic growth or consolidating mergers and acquisitions.
On the ESG front, there is tremendous opportunity to improve employee retention. CX industry turnover can range from 20% to 60% per year and replacing one employee can cost about 20% to 30% of a worker’s yearly wage. Impactive is currently working with the company to implement creative solutions to do so, including building breakrooms in Asia, offering free feminine hygiene products in the Caribbean, and implementing flexible schedules for working parents in the United States.
Impactive believes that there is a significant return opportunity here with a base case IRR of 24% to 45% and an upside case IRR of 78%, assuming normalized growth over the next three years and execution of synergies following the Webhelp combination.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.