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Good day and thank you for standing by and welcome to Concentrix's First Fiscal Second Quarter 2021 Financial Results Conference Call.
[Operator Instructions] After the speaker presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions]
I would now like to hand the conference over to your speaker today, David Stein, Vice President, Investor Relations. Please go ahead.
Thank you and good morning. Welcome to the Concentrix second quarter fiscal 2021 earnings call. This call is the property of Concentrix and may not be recorded or rebroadcast without the permission of Concentrix.
This call contains forward-looking statements that address our expected future performance and that by their nature address matters that are uncertain. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements as a result of new information or future events or developments. Please refer to yesterday’s earnings release and our most recent filings with the SEC for additional information regarding uncertainties that could affect our future financial results. This includes the risk factors provided in our Annual Report on Form 10-K.
Also during the call, we will discuss non-GAAP financial measures, including free cash flow, non-GAAP operating income, adjusted EBITDA and adjusted EPS as well as constant currency revenue growth. A reconciliation of these non-GAAP measures is available in the news release and on the Concentrix Investor Relations website under Financials.
With me on the call today are Chris Caldwell, our President and Chief Executive Officer and Andre Valentine, our Chief Financial Officer. Chris will provide a summary of our operating performance and growth strategy and Andre will cover our financial results and business outlook. Then we will open the call for your questions. Now I will turn the call over to Chris.
Thank you very much, David. Good morning, everyone and welcome to our second quarter earnings call for fiscal 2021. During the second quarter, we continued to see our value proposition resonat in the market with couple of strong momentum in our sales and solid execution in our operations driving our performance to the exceed pre-COVID levels.
We had record revenue of $1.37 billion in the second quarter, representing organic revenue growth of 29% compared with last year. On a constant currency basis, revenue increased by 24%. Our second quarter non-GAAP operating income improved to $172 million up 155% and adjusted EBITDA increased 113% to $208 million compared with last year.
In the second quarter, while the US and some parts of Europe started to open up, we saw continued effects of the COVID pandemic in certain regions particularly Asia where we invested in support and resources for our stock to care for themselves and their families. We focused on humanitarian efforts for all of our stock and their families as experienced thousand of additional cases across India, Philippines, Vietnam and Malaysia. Our hearts and thoughts go out to all of those affected.
With the uptick in cases and lockdowns, over 70% of our stock worked at home in the quarter. Our work at home performance remains in line with our pre-COVID levels when stock were based on our facilities. Happily in recent weeks, we've seen a return to relatively stability as COVID cases have started to decrease. Our results in the second quarter included a net COVID impact on profit of $10 million and we expect a similar impact in the third quarter.
Our second quarter was also very strong for bookings, nearly surpassing our record third quarter of 2020 for renewals, expansion and new logo wins. Our travel vertical is also now starting to show signs of recovery and our communication sector has started to reach a point stability which we expected. Andre will provide more details on the accelerated growth in each of our verticals.
To focus on our significant new business wins with iconic and disruptive brands for a moment, we signed more than two dozen new clients including more than a dozen new disruptive brands. Our revenue from disruptive clients is now at a run rate to exceed $1 billion of total annual revenue. We were also happy to see new client signing growth across our geographical footprint versus being concentrated in one region.
Driving our business growth is our combination of deep demand expertise, digitally enabled global delivery and the ability to invest in secure technical infrastructure that is highly adaptable and scalable to support our client's needs. Our unique value proposition intentionally automates lower complexity transactions on behalf of our client, which leaves a stickier, more profitable relationships and more opportunities for growth with existing and new programs.
Our solutions help transform client businesses to increased efficiency and by delivering greater customer experiences. For example, for large retail and e-commerce company this quarter, we recently transformed their existing contact model reducing the human assist portion by a factor of three. Then through digital self-service and chatbots we improved the client's net promoter score by 2.5 times.
Our client's value -- our client value our technology infused solutions and rated us with high performance scores for innovation in our second quarter. Additional example of our wins in the second quarter include volume acceleration with one of the world's largest social media firms providing sales and content moderation services, further penetration within two larger financial institutions to provide remediation services, anti-money laundering services and know your customer services, sales of the VOC essential platforms, additional implementations of Amazon Connect and significant growth with existing disruptor clients in FinTech, travel and e-commerce industries among others.
We also see a significant opportunity to deploy more complex, digital engagements as clients sustain superior levels of customer experience as an imperative coming up COVID. Going into the second half of the year, we are encouraged by the strength and breath of our pipeline that continue to grow both from a side perspective and frequency of multiple offering engagements.
Among these strong growth opportunities, some business challenges due come to manage. Areas we are pinnacle [ph] about include the ongoing impact of COVID and ensuring we're taken care of our team members around the world. We're also focused on continuing to upscale and invest in our stock as the work we are delivering is more complex than ever before.
This quarter we're also taking a meaningful step forward by increasing our wages across North America -- sorry, United States we're starting positions to ensure we can meet the demand of our growth and be more socially responsible to the communities we operate in. As a global company it's rich run through six continents and grow deeper every day, we have a long-standing commitment to our people and the communities we live and work in.
As part of that commitment, we are very happy to have released our first environmental, social and governance report with our earnings this quarter. The report provides more details on our efforts in corporate social responsibility, the investments we're making and our progress in having a measurable and meaningful impact to our stock and their communities. While we expect this report to evolve as we move forward, one thing that will not change is our commitment to doing the right thing for all of our stakeholders; our stock, our clients, our shareholders and the communities we work in. I encourage you to visit the Investor Relations section of our website and download a copy.
In summary, we are deepening our client relationships relentlessly innovating with new digital solutions and expanding into emerging markets while we selectively pursue strategic acquisitions to drive superior returns for our shareholders. Based upon strong results year to today, we are confident in exceeding the goals we discussed on our last earnings call of cost and currently revenue growth above 10% for fiscal 2021 and margins meaningful the above pre-COVID levels. We are confident we will achieve our stated goal of growing faster than the market with progression in our profit margins.
Finally, I would like to thank our exceptional staff for their commitment to execution, our clients for their trust and our talented Board of Directors for their support and mentorship.
I'll now turn the call over to Andre.
Thank you, Chris. Good to be with you today. I'll begin with a review of our financial results for the second quarter and then discuss our business outlook for the third quarter. As anticipated in our guidance last quarter, our revenue and profit growth accelerated in the second quarter and I'm pleased that we delivered results at the higher end of our guidance range.
Revenue was $1.37 billion. On a constant currency basis, revenue increased organically by over 24% compared with last year. Reported revenues included foreign currency benefit of $45 million. As Chris mentioned, our strong growth reflects increased demand across a broad set of existing and new clients in all of our verticals. We also saw growth in every region in which we operate. The magnitude of the increase reflects the extreme COVID impacts in the second quarter of last year.
Still even normalizing for COVID impacts, we believe we grew slightly faster in the second quarter than we did in the first quarter of 2021. Our top-performing vertical in terms of the year-over-year revenue growth was retail travel and e-commerce, which grew 38% due to strong e-commerce volumes and increases with travel and tourism clients as the domestic travel market began to pick up.
Our banking, financial services and insurance and healthcare verticals, each grew approximately 36%. Revenue from technology and consumer electronics clients grew by approximately 27%. I'm pleased to report that we were able to achieve the relative stability we expected in the communications and media vertical as revenues in this vertical grew slightly on a sequential basis. On a combined basis, we also grew with clients in our other verticals by 15%.
Contributing to the growth across our strategic verticals were are over 115 global disruptor clients, which represented about 19% of our second quarter total revenue approximately, $260 million in quarterly revenue and grew by 47% year-over-year.
Turning to profitability, our non-GAAP operating income was $172 million and our non-GAAP operating margin was 12.6% in the quarter. Second quarter adjusted EBITDA was $208 million and our EBITDA margin was 15.2%. Our profitability reflects flow-through from strong revenue growth, which more than offset the impact of COVID expenses. On a net basis COVID expenses approximated $10 million reduction in profit in the second quarter.
In terms of net income in the second quarter non-GAAP net income was $125 million and adjusted EPS was $2.37. GAAP results for the second quarter included $35 million of amortization of intangibles and $9 million of share-based compensation expense. GAAP diluted EPS was $1.50 per share. Our effective GAAP tax rate of 34% in the second quarter includes a $9 million charge related to tax impact from the movement of our non-core insurance solutions business to assets held for sale, as part of our efforts to fine tune our business portfolio. For clarity, the CIS business provides administrative services to life insurance clients and is unrelated to the CX services we provide to the insurance industry. Our non-GAAP tax rate was 26%.
Moving to cash flow, cash flow from operations in the second quarter totaled approximately $203 million and capital expenditures in the quarter were $29 million. Accordingly we generate free cash flow of $174 million in the quarter. We continue to expect capital expenditures for the full year to be a range of 3.5% to 4% of revenue.
Turning now to the balance sheet, at the end of the second quarter cash and cash equivalents was $131 million and total interest-bearing debt was $959 million. During the quarter, we paid down $150 million on our term loan, reducing our outstanding principal balance on that loan to $700 million. Net debt was $828 million at quarter end.
At the end of the second quarter, gross leverage approximated 1.2 times trailing four quarters adjusted EBITDA and liquidity remained strong with over $890 million of cash undrawn lines of credit and capacity on our AR securitization. Our current liquidity gives up significant time and financial flexibility. Our priorities for capital deployment remain growing the existing business through funding organic and strategic growth opportunities. We remain comfortable with up to three times gross leverage, which provides ample capacity for future disciplined M&A.
Now I'll turn to our expectations for the third quarter. Given the record demand for CX solutions, we expect third quarter revenue to be in a range of $1.35 billion to $1.40 billion. This translates to 6% constant currency revenue growth at the midpoint of the range including an approximately two point positive impact of foreign exchange rates compared with the third quarter of last year. We expect third quarter non-GAAP operating income of $160 million to $174 million reflecting flow-through from strong revenue growth balanced with investments in program ramps and increases in wages for our staff across the globe.
These staff wage increases include a meaningful investment to increase the minimum wage the company will pay to our staff in the US. We expect interest expense to be approximately $6 million in the third quarter and effective tax rate of 27% to 28% and a weighted average diluted share count of approximately 52 million shares. Our non-GAAP operating income guidance for the third quarter excludes approximately $34 million related to the amortization of intangibles and $10 million of share-based compensation expense.
Based on our strong year-to-date performance, our guidance for the third quarter and strong new business signs, we are confident that we will meaningfully exceed the revenue goal of $5.3 billion or double-digit revenue growth that we discussed in our last earnings call. Similarly, we are confident that we will exceed our profitably goal of margins above pre-COVID levels that we discussed on our last earnings call again by a meaningful amount. You can expect that foreign exchange rates will have about two point positive impact on full-year 2021 revenue compared with 2020.
In closing, we are very encouraged by the results of the second quarter. We're confident in our expectations for the third quarter and beyond. Finally, we are well-positioned global leader in a large fragmented and growing market, executing a plan to grow organically faster in that market. As a proven successful consolidator in a market with a strong balance sheet, we are well-positioned to deliver sustained growth, margin progression and strong free cash flow.
At this time Victor, please open the line for questions.
[Operator instructions] Our first question will come from the line of Ruplu Bhattacharya from Bank of America. You may begin.
Hi, thanks for taking my questions and congrats on the strong quarter. Chris, you've talked several times about disruptor clients being a focus for the company. Can you maybe just talk about how that relationship progresses with these disruptor clients? Is it all inflationary in the sense that revenue in year two more than year three more than year two and on average how many years does it take for a disruptor client to become mature and then possibly start asking for discounts?
Hi Ruplu and appreciate the congratulations. From a disruptor perspective, it really comes into a couple categories. We look at disruptors in terms of are they going to be a leader in their space. Are they doing something that's truly disruptive? Frankly, where is their focus on the end markets and as you would expect, there are some disruptors who will start small with us very, very small and will grow extremely rapidly and get to a level of maturity within 24 months, 36 months.
There's others that will grow to a moderate level and be consumed by somebody else in the space or consumed by sort of an existing enterprise of our client and then there's some that will not make other series raises and will be relatively small and might disappear. Generally what we find from a maturity curve perspective, it's somewhere between call it 48 months and maybe seven years that they start to kind of look at how they do procurement differently than what they've historically done in the past.
What we offer to them though is a significant amount of agility, significant amount of ability to scale, global diversity, significant amount of insight into regulatory issues and some types of security issues in some places and then access to technology that from a capital base it might not be able to invest in as they start out but certainly is high value to them as they continue to grow. So lots of different offerings we offer into that disruptor space.
Thanks for all the details on that. For my next question Chris, can you talk about what impact you think competitor sites going private and being purchased by the SITEL Group will have in the industry and as part of that, can you talk about the pricing environment and your focus on outcomes-space pricing. How is that trending?
For sure. So certainly first I'd like to with Chuck [ph] congratulations. He's been a great competitor and certainly legend in the industry and a fantastic operator. From our perspective, we historically have not really competed with that company outside of in some technology spaces, but the pricing environment historically remained stable whether it's private or public competitors.
The market is generally the market and what clients are starting to change their attention to is really to your second point outcomes-based pricing or outcomes-based performance incentives and that's really where I think we shine because we like those contracts, they tend to give us much more leverage, we're able to invest more in those contracts and get a benefit from them and so we see that as something that will continue to progress in this environment and then take out sort of a simple price to price comparison in the marketplace.
Got it and for my last one if I can ask one to Andre, under your revenue guide at the midpoint for fiscal 3Q is mostly flat sequentially, but operating margin guide looks like down 40% sequentially to 12.1%. Can you maybe just talk about the puts and takes impacting operating margin and then how does -- how do those factors trend going forward beyond 3Q?
So the real trend there you're right, the midpoint relatively flattish from a revenue perspective and down just a tip sequentially from a margin perspective. In the third quarter, we invest pretty heavily in ramps into the fourth quarter and so that is certainly the largest of the puts and takes as we think about rolling forward from Q2 to Q3.
On top of that, as Chris and I both mentioned, we are doing some things globally with staff wages across the grass to grow with a real focus also on the entry level wages for our US staff and so that will have an impact as well, but again -- so that's not how we get to that guidance. We think it's balanced guidance and we're very confident we'll achieve it.
Okay. Thanks again for all the details. Congrats on the strong execution and end results.
Our next question comes from the line of Shannon Cross from Cross Research.
I was wondering can you talk a bit about how the conversations with customers have changed in sort of hopefully we're in the post-COVID world or what some of the customers have learned about what they want to do internally versus outsource? I'm just curious what kind of new opportunities might be there following what we've all gone through during the last year and they I have a follow-up question thank you?
For sure Shannon. So sort of couple of high level trends. First of all, we see as a whole our clients looking for more customer ways of engaging with clients and physical environment and certainly that's been driven by e-commerce and then driven by more services and parts delivered to their homes. It's been driven by more digital engagements where you don't actually have to talk to somebody or chat with somebody and so we're seeing those are really focus around conversations and how to reduce customer efforts, how to reduce contact points and how to make the experience going forward in a very simplistic way. And so that's also changed some of what their priorities have been around saying when we outsource something instead of outsourcing one component of that in order to get full leverage, in order to take our more cost and drive better experience, they're actually looking out sourcing more end to end of the process so that for instance we can take over that and then not only put in our own technology, put in our own staff around it, design our own digital experience for it and deliver it to the clients.
That has opened up comments about this in sort of Q3 and Q4, especially in Q1 is that we're seeing our clients who have long-standing relationships with give us more stuff that historically has not been outsourced and so we see that as a very positive trend.
And then is there a potential for more asset sales when you look at the various companies and capabilities that you have an and on the flip side of that how are you thinking about M&A these days?
So Shannon, you're talking about our divestiture of the CIS business.
Yes exactly.
No we're very happy with the portfolio of services that we have and frankly have been investing more and more. CIS was a bit of a unique instance where we took it as far as we could and then it wasn't tied into the rest of our core focus around customer experience and so wanted to make sure that that team were able to continue to grow and so that worked out very, very well for all parties involved.
I think from our perspective when we look to the M&A environment, we've talked about this, evaluations are on the higher side right at the moment. We're very focused on making sure that we're disciplined and the type of transaction that we would do to drive the right shareholder returns and we're also very focused and getting capabilities and technology that will increase our overall ability to deliver better experiences for our clients. We're not after bulk for bulk or size for size because we already obtained that and now it's all about really driving superior value to our clients.
Okay. And maybe a clarification just on the wages, is this going to hit from an expense perspective all in the current quarter or will it be something that sort of rolls through the model over the next few quarters? Thank you.
It's really in the guidance Shannon and starts to; I don’t use the word impact but the investment starts this quarter started this quarter and they started this quarter and will continue to be in our guidance going forward, but it effectively is increase for what we're doing within the wage category.
[Operator instructions] Our next question comes from the line of Vincent Colicchio from Barrington Research. You may begin.
Curious communications and media segment had a nice quarter, should we expect that to be stable going forward or see some growth sequentially and then similar question on the travel market?
So Vince from the telecommunication standpoint we're pretty happy with where it is and we kind of mentioned that we're seeing stability. So you'll some growth, you'll some ebbs and flows, but really what we're looking at as a percentage of business and we don’t see a material change from where that is even though the rest of business is growing. So that would indicate there are some underlying uptick but really if look at as a percentage of business more so than anything else and are very happy with where it is and we're happy with the clients that we're doing and the services we're delivering and the profitability its returning to us.
In terms of the travel vertical and clients, pre-COVID it was one of our fastest growing verticals both in the disruptor category as well as in some of the established travel category and health category. What we're seeing is very encouraging much sooner than we expected with signs of life in the domestic travel markets both in Europe and in North America. So that we definitely want to grow. We deftly want to see continued increases and we'll somewhat be reliant on how people feeling about travel and how sustainable travel is and then certainly how business travel kicks in. So couple components to that but absolutely we expect to see that vertical grow over time.
And I think you mentioned the pandemic impacting some of your foreign locations. I apologize if I missed it but has the delivery -- has there been delivery disruption in any of those markets incrementally from last quarter?
No the team is just amazing, amazing team in the countries and frankly have just done a remarkable job. We increased our work at home presence as we kind of called out almost 10% and the reason we increased it significantly more globally and moved our whole numbers up about 10% to about 70% work at home and the performance has been in line if not a little bit better than in facilities in some of those regions. So I am extremely happy with how deliveries have been able to execute and how we're been able to support the clients.
And was there anything unusual in other income this quarter?
Not really. So what primary shows up there Vince is foreign currency translation gains. We do some hedging there to try to minimize those -- volatility there. What you see coming through is a gain there is some of the forward points that we do hit on the hedges that we put in place and so as I would think about that line on a go forward basis, I would think about it being relatively neutral and flat.
Thank you. [Operator instructions] And I am showing no further questions at this time. I'd like to turn the call over to Chris for any closing remarks.
Thank you very much. We very much appreciate your interest in Concentrix today. We are pleased with our performance year-to-date and are confident in the strength of our business model and track record of being a consolidator in the space. We really continue to see ourselves performing better than the market growth rate with margin expansion. As the market leader in CX solutions, we're passionately focused on considering strong execution of our operations to drive continued growth and evaluation. Thank you again and have a great day.
This concludes today's conference call. Thank you for participating. You may now disconnect.