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Good day and thank you for standing by. Welcome to Concentrix's Fiscal Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, David Stein, Vice President of Investor Relations.
Thank you and good evening. Welcome to the Concentrix second quarter fiscal 2023 earnings call. This call is the property of Concentrix and may not be recorded or rebroadcast without the written 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 today'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 adjusted 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'll open the call for your questions.
Now I'll turn the call over to Chris.
Thank you, David. Good evening, everyone, and welcome to our second quarter earnings call for fiscal 2023. During the quarter, we received many investor questions about the impacts of the ongoing macroeconomic environment, the status of our transformative combination with Webhelp and the emergence of generative AI technology. I will provide a briefed update on each of those topics today. I would also encourage those listening to download our updated ESG report from our website that we just released.
Now, let's begin with our Q2 results. While we were disappointed in not being within our guidance, I am pleased that as a team, we did grow and drive margin expansion and strong cash flow in the quarter, despite the fact that certain clients saw volumes that were well below their expectations entering the quarter. Reported revenue in the second quarter was $1.6 billion, up 3%. On an organic constant currency basis, revenue grew by 1.6%. Our second quarter non GAAP operating income improved to $221 million , growing 3.6%.
Adjusted EBITDA increased 3.5% to $259 million compared with last year and both our non GAAP OI and adjusted EBITDA margins were up 10 basis points over last year. This reflects our ability to manage our cost structure dynamically when volumes from clients are lower than their expectations.
Non GAAP EPS was $2.69 per share compared with $2.93 per share last year, largely reflecting the expected impact of higher interest rates. While we continue to see volume softness we also experience relative strength across certain strategic verticals, particularly with clients in the healthcare, travel, insurance and certain parts of our technology portfolio. The volume softness that we have seen in recent quarters in the retail, e-commerce, consumer electronics and telecom industries continued and in some cases intensified with certain clients despite us maintaining or growing share within those clients. From a catalyst perspective, our large project that we have talked about on past calls will have no further ramp this year reflecting conversations within the last few weeks, driven by budget pressures at the client. We are adjusting our outlook and cost structure accordingly.
Regarding client driven provider consolidation opportunities within our existing base, we continue to see clients wanting to work with zero partners who can support end-to-end processes. This trend favors partners like Concentrix who have the breadth of capabilities to serve clients in the strategic partner role. Currently, clients are faced with a dilemma regarding whether to cut costs by consolidating partners or holding excess capacity. These decisions are occurring more slowly than we originally expected. Additionally, while we are gaining share by winning provider consolidation opportunities, the volumes we are consolidating with clients are starting at a reduced level. We see these factors as temporary and if the softness persists, we expect clients will speed up their plans for consolidation, which we believe benefit us.
From a sales perspective, we signed business with two dozen new logos in the quarter. The pipeline of new business has remained solid although clients are focuses on optimizing their cost structure rather than expansion, and we are seeing smaller deals and slower approval processes once we have been chosen as the partner. From a Concentrix perspective -- sorry, from a Catalyst perspective, we're very happy with new wins coming in that combine our CX operations and digital IT service offerings. Again, these wins tend to be smaller as large transformational projects are taking much longer to transact. We also view this as temporary and believe digital transformation remains essential to clients in the long term.
A few examples of our Q2 wins that demonstrate our broad set of capabilities include for a very large global generative AI provider, we were awarded and are now providing generative AI moderation services. We were selected due to our experience in critical trust and safety content support as well as our footprint in innovative ways we came up with to train the models. For a large consumer electronics brand in Asia Pacific, we proposed a transformational omnichannel CX delivery model to drive improved customer experience, while lowering the cost to serve in high cost markets. We designed and built the solution with AI enabled translation services, which are providing an accelerated more profitable path to growth for our client. We were selected because of our domain knowledge, the ability to integrate complex technology and our understanding of the local markets they were looking to grow in.
For a major airline operating in EMEA, we were selected to become the primary provider to drive improved experiences and drive better support across all key languages, incorporating net digital and AI powered capabilities and replacing other providers unable to provide a full solution. We were selected because of our multilingual footprint, ability to integrate technology and the ability to lower the number of partners the airlines had to deal with to get a full solution. For large consumer communications brand in EMEA we won a significant new agreement to deliver reimagined service models for improved customer acquisition and retention using sophisticated analytics and AI enabled technologies. We were selected because of our understanding of the market, our robust sales capabilities and our ability to automate manual work they were currently challenged with.
In Catalyst, we identified opportunities to improve a large transportation company's software implementation, speed and support costs. Our proactive approach helped us secure the consulting engagement as the exclusive provider. The client embraced our recommendations leading to a shift in their product strategy and further engagement around their product development. We were selected because of demonstrative expertise in software development, implementation practices and managed services of software environments, while having a focus on the customer experience of the user during transition of software. In all of these examples, the clients need is aligned to our sellers want approach, while demonstrating the effectiveness of our design, build, run go to market strategy. We have remained disciplined in our approach to pricing the current market and on selling profitable, sustainable programs for the future to build on our unique capabilities. From an operating perspective, we continue to achieve strong customer satisfaction and innovation scores, which we believe will again help us to be a continued partner of choice.
Moving to our proposed transformative combination with Webhelp. We recently filed our proxy statement that provides more insight into the transaction and have made great progress on integration planning since announcing the combination. Their share repurchase agreement has now been signed. We have started to receive approvals from various regulatory agencies and have made strong progress towards completing the financing. As we discussed on our last call, Webhelp will diversify our revenue, client base, vertical focus and global footprint. Webhelp will also add capabilities and deep domain expertise to our European, African and Latin American market presence. The potential combination has been very well received by clients of both companies and we believe there is a strong potential for growth in selling Webhelp’s capabilities into our client base, as well as selling our capabilities to the more than 1,000 additional Webhelp clients as we have successfully done in past combinations. Webhelp also brings recognized and exceptionally technology enabled solutions including anti money laundering, know your customer and payment processing services and telehealth, which we believe we can expand into many Concentrix clients and regions.
The combination is expected to be accretive from the outset. We project mid- to high single digit earnings per share accretion in the first year followed by double digit accretion in the second year. Additionally, we feel very confident about achieving cost synergies of $120 million by the third year through various measures such as IT systems harmonization and real estate footprint rationalization as two examples. Webhelp's performance in the first quarter surpassed expectations with low double digit constant currency like for like growth. This was above Webhelp's planned growth for the quarter. We continue to expect that Webhelp will exceed 8% like for like revenue growth for the full year 2023 and will deliver approximately $500 million in 2023 adjusted EBITDA, consistent with our expectations when we announced the transaction back in March.
Three months since signing the combination, we believe the rationale for the Webhelp transaction has only been strengthened and we look forward to realizing the benefits of the transaction for our clients, staff and shareholders. We expect -- we continue to expect the combination to be completed by the end of this year.
Now, I would like to spend a few minutes discussing our perspective on generative AI. As background, we have been using various forms of AI for over two years as a technology enabled industry leader, we already deploy AI tool across 60% of our business and are on track to have this close to 80% by year end. Many of these tools help drive productivity and proficiency of our advisors, while some have completely automated work with machine learning chatbots and natural language processing IVRs. We have talked about a number of these use cases on prior earnings calls. Our depth of experience comes from trialing a myriad of AI tools in our business over the years and identifying tools that are scalable and secure for deployment. This gives us a rich understanding of the opportunities and challenges of sustainable deploying the technology in our clients' environment and workflow. Our depth of experience with established forms of AI as well as our current client discussions have helped inform our point of view regarding generative AI in the current market.
We see generative AI as a continued evolution and enhancing solutions we can deliver to our clients. Our conversations about generative AI are centered around security, data management and how to fit the technology into the advisor and customer workflows we help our clients design, build and run. While harnessing this exciting advancement has the potential to drive substantial value for us and our clients, we believe there is some resistance to large scale deployments due to concerns about the ownership of data, the security of proprietary information, and customer exposure to AI hallucinations or brand damaging engagement. While we will help our clients navigate these concerns, we continue to believe that the near term focus for using this new technology will be on driving the productivity and proficiency of advisors before opportunities to fully automate work start to gain traction.
We have many use cases in place that are proving out our thesis that generative AI will create new revenue opportunities and greater margin expansion opportunities for us while saving our clients costs. Our processes and philosophies have proven successful with past technological advancements and we believe generative AI will be the same. In addition to the multiple examples of new business wins in the quarter that we called out earlier, most of which use machine learning AI in the solution, our generative AI proof of concepts also spend multiple industries and clients. A few example of our use cases that are currently being done, we are working on leveraging proprietary large language models to ensure accuracy and compliance and regulatory -- regulated industries. We have seen benefits of being able to review materials far faster than we can with current tools for compliance.
We have a pilot currently where we are using generative AI to condense training materials and provide gen AI videos of courseware at a fraction of the cost that we can do currently. This already is being tested in production and we expect to ramp this up to thousands of staff over the coming months. We're working with a large airline taking notes from interactions with customers and [indiscernible] down for training and coaching that provides insight into how an advisor is working. Our proof of concept is currently saving about 45 minutes to 60 minutes a day for our coaches on preparing materials for their sessions with the advisors. We expect it to be rolled out across the entire program and other accounts starting in our fourth quarter.
Lastly, using gen AI we have been able to greatly speed up a client's ability to scan through their knowledge bases and provide summary information back to an advisor to help them with their conversation with customers. This use case went into production last week on a program and we're seeing the desired results of faster time to serve with greater ability to solve the customer problems faster. In all of these, we are working with our clients to evaluate the cost structure of generative AI and determine if machine learning or other types of automation are more cost effective. Gen AI does have a cost factor to it and we expect that it will cause some clients to continue to look at other methods of automation or offshoring first as generative AI costs inevitably will come down.
Our investment in developing our Catalyst business has significantly expanded our capabilities in being able to design, build and run generative AI solutions at scale with thousands of staff able to deliver strategy, design and technically integrate the solutions when the need occurs. We view this as a unique capability that differentiates us significantly from our traditional CX peers. We believe that the role of Concentrix will remain crucial even as clients have the option to purchase large language models directly. Generative AI is not a plug and play technology in the enterprise environment and services are required to ensure a consistent and positive outcome when a company's brand reputation is on the line. The implementation and last mile tasks such as model tuning, feedback gathering, training, exception handling are requiring human involvement and deep domain expertise. As a result, we believe that Concentrix will play an indispensable role in assisting clients with these critical elements allowing us to add higher value services that don't exist today so our clients can fully utilize the benefits of this technology. We have the experience, the expertise and the vision to leverage this technology to drive significant value for our clients and our business.
Now with all automation, we expect some revenue impact over time, but we believe it will be offset by new work and increased margin potential. We expect a modest acceleration of the volume of transactions we already automate each year and the economics for us and our clients will depend on where those transactions are currently serviced from. We are committed to delivering outstanding outcomes and maintaining our leadership position in the AI and automation space.
In summary, despite facing macroeconomic challenges that have impacted volumes for some clients, we achieved revenue growth and margin expansion this quarter. We are successfully planning for the combination with Webhelp and investing in harnessing the power of generative AI, while continuing to drive strong positive cash flows. We are focused on aligning with the changing demands of our clients to enhance our long-term partnership for Concentrix and the market that we serve.
Finally, I want to take a moment to express my appreciation to our dedicated award winning staff. Their hard work, resilience and unwavering commitment to excellence are the driving force behind our success. Also, I'd like to thank our clients for their trust and our talented Board of Directors for their support.
With that, I'll turn the call over to Andre. Andre?
Thank you, Chris, and hello, everyone. I'll begin with a look at our financial results for the second quarter and then discuss our business outlook for the third quarter and the full year 2023. We delivered revenue growth and margin progression in the second quarter. Revenue in the second quarter was $1.61 billion, up 3% on an as-reported basis. The improvement in reported revenue includes a 1.6 point negative impact from foreign currency fluctuations and a positive 3% impact from acquisitions. Organic constant currency growth was below our Q2 expectations for the quarter at 1.6%, a reflection of certain clients having lower volumes than they expected. The shortfalls to volume expectations were most pronounced with a few large clients in the communications and consumer electronics verticals and a number of clients across our retail vertical. In Catalysts, we saw client spending reductions and the change in the large project that Chris mentioned earlier.
In terms of client verticals, we grew in each of our four strategic verticals in the quarter, with revenue from health care clients leading the way, growing by approximately 11% on both an as-reported and organic constant currency basis. Revenue from retail, travel and e-commerce clients posted 4% growth as reported and 6% on constant currency organic growth as strong growth continued with travel clients. Revenue from banking, financial services and insurance clients grew by 2% on a reported basis and 4.5% on an organic constant currency basis.
Revenue from technology and consumer electronics clients grew 8% as reported and about 1% on an organic constant currency basis. Revenue from communications clients decreased by 6% as reported and on an organic basis. Revenue from clients in the other vertical decreased 8% as reported and about 7% on an organic constant currency basis in the second quarter, driven by reduced spending by one government client based on changing social spending priorities.
Our new economy clients grew 2% year-over-year and represented 23% of second quarter revenue. While we saw growth with new economy clients, particularly in travel and e-commerce clients, this was partially offset by reduced year-over-year revenue from crypto and fintech clients that represented a 5 point year-over-year headwind on our new economy client revenue growth in the second quarter.
Non-GAAP operating income was $221 million in the second quarter compared with $213 million last year. Our non-GAAP operating margin of 13.7% was up 10 basis points from the second quarter last year. Adjusted EBITDA was $259 million compared with $250 million in the second quarter of last year. Our adjusted EBITDA margin of 16.0% was up 10 basis points from the second quarter last year. Non-GAAP net income in the second quarter was $141 million compared with $155 million last year. Earnings per share were $2.69 per share on a non-GAAP basis compared with $2.93 per share last year.
GAAP results for the second quarter of 2023 included $39 million of amortization of intangibles, $11 million of share-based compensation expense and $32 million of acquisition and integration expenses. Of the transaction and integration costs incurred in Q2, approximately $8 million is reflected in GAAP operating income. $12 million is reflected in interest expense and $12 million is reflected in other expense. The $12 million included in the interest expense relates to fees associated with the bridge financing that was put in place for the Webhelp transaction. The $12 million reflected in other expense relates to a mark-to-market loss on options that were purchased to hedge the FX impact of movements between sign and close on the portion of the Webhelp purchase price that is denominated in euros. Our GAAP tax rate was 25.6% in the second quarter and our non-GAAP tax rate was 25.3%.
Turning to cash flow. Second quarter cash flow from operations totaled $133 million and capital expenditures were $32 million. This resulted in free cash flow of $101 million in the quarter. Included in our free cash flow for the quarter were approximately $5 million of cash costs related to acquisitions. Our year-to-date free cash flow totals $166 million, approximately $24 million above the prior year period. We continue to expect free cash flow for the full year to exceed $500 million, excluding Webhelp transaction and integration costs.
Moving to the balance sheet. At the end of the second quarter, cash and cash equivalents were $153 million and debt outstanding was $2.13 billion. Net debt was $1.98 billion at the end of the quarter. During the quarter, we paid a quarterly dividend of $0.275 per share. And today, our Board declared another quarterly dividend of $0.275 per share to be paid during the third quarter. We also repurchased 39,000 shares of our stock for approximately $5 million in the quarter at an average price of $126 per share under a 10b5-1 plan that we entered into earlier in the year. Share repurchases under the plan ceased with the announcement of our Webhelp combination due to regulatory considerations related to the transaction.
After filing our proxy statement last week, we expect to continue our share repurchase activity in the third quarter. We have $339 million remaining on our share repurchase authorization and has been our intent to repurchase shares to offset dilution. We believe that our shares are undervalued and that continued modest share repurchase at this valuation is warranted and will be accretive to EPS. At the end of the second quarter, gross leverage was approximately 2 times adjusted EBITDA and net leverage was approximately 1.9 times on a trailing four quarters pro forma basis. Our liquidity remains strong at approximately $1.4 billion, including our $1.043 billion undrawn line of credit, cash on hand and additional capacity under our AR securitization.
Now, I'll take a moment to review elements of the Webhelp combination. As I said when we announced the combination, on a pro forma basis the combination of Webhelp will add $3 billion in 2023 revenue and approximately $500 million of 2023 adjusted EBITDA to Concentrix. The combined company will have $9.6 billion in revenue and almost $1.6 billion in combined EBITDA in fiscal year 2023 on a pro forma basis. We expect earnings per share accretion of mid- to high single digits in the first full year after close and double-digit accretion in the second year. We also expect to realize $75 million in synergies in the first year after close, growing to $120 million in synergies in year three.
While not included in our model, identifiable revenue synergy upside exists related to opportunities that the companies couldn't pursue separately prior to the combination. When announced, the transaction was valued at $4.8 billion, which included approximately 14.9 million shares of Concentrix stock to be issued at closing, valued at $120 per share. EUR500 million in cash to be paid at closing, EUR700 million in deferred consideration in the form of a two year note payable to Webhelp shareholders that will bear interest of 2%. The 14.9 million shares to be delivered at closing is a fixed number of shares. It is not impacted by changes in our stock price post announcement.
Accordingly, with the recent reduction in trading value of our common stock, the current value of the transaction is below the originally announced $4.8 billion. The transaction consideration also includes 750,000 additional Concentrix shares that will vest based on certain conditions, including if the Concentrix share price appreciates to over $170 per share within a specified period following closing. The transaction was structured to maintain investment-grade rating for the debt that we will issue.
Since we announced the transaction, we have amended and expanded our revolving credit facility to include an increase in our term loan A to up to $2.145 billion at the time that the combination closes. We have also increased the size of our undrawn revolver. In addition to the increased borrowings in our term loan A, we now expect to finance the transaction through the issuance of approximately $2.2 billion in senior unsecured bonds with maturities split between three years, five years and 10 years.
As disclosed in our recently filed proxy statement and based on current market conditions and our investment-grade credit rating, we now forecast the financing that we will incur to complete the transaction will be at a weighted average interest rate of 6.175%, a little over 30 basis points below the rate we anticipated when we announced the combination. We continue to estimate that our net debt to adjusted EBITDA will be about 3 times on a pro forma basis when the combination closes later this year. As we said at the time of our announcement of the combination, our strong free cash flow generation, and adjusted EBITDA growth gives us a clear path to reducing leverage, and we are committed to reducing our net leverage to about 2 times within two years after the transaction closes.
Regarding our capital allocation priorities. After the transaction closes, our focus will be on organic growth, the successful integration of Webhelp, realizing the planned synergies and repaying debt. We are committed to investment-grade principles. We will prioritize paying down debt and reducing our net leverage while continuing our dividend and disciplined share repurchases to offset the dilution of equity grants. As I mentioned on our last call, we plan to provide guidance for the combined business after the transaction closes.
Now I'll turn to our business outlook for the third quarter and for the full year fiscal 2023. For clarity, our guidance does not include any contribution from Webhelp or any costs that we will incur related to the combination. We are growing in each of our four strategic verticals, and we're seeing growth across most of our regions. We're seeing stability in revenue in Catalysts and expect sequential growth each quarter in Catalysts in the second half of 2023. However, we are seeing near-term impacts for certain clients.
In communications, we are seeing a meaningful impact on our revenue expectations for the year for Catalyst driven by the delay to the large project that Chris discussed earlier. We're seeing lower-than-expected revenues from a few large clients we mentioned earlier, reflecting the lower volumes they are experiencing.
Finally, our revenue expectations from retail clients have been reduced by larger-than-expected volumes across many clients in this vertical. Our expectations do not include any improvement in the macroeconomic environment and continue to reflect muted seasonal volumes in line with what we experienced in fiscal 2022. As a result of these factors, we are revising our revenue expectations for the fiscal year. However, we remain focused on maintaining our profit margins while confirming our expectations for strong free cash flow generation for the year.
For the third quarter, we now expect organic constant currency revenue growth to be in a range of 1.5% to 2.5%. Based on current exchange rates, we expect a [0.2 point] positive year-over-year impact on reported revenue in the third quarter. We expect the timing of our 2022 acquisitions to contribute approximately $28 million of incremental year-over-year revenue growth in the third quarter. Based on these assumptions, we expect reported third quarter revenue to be in the range of $1.635 billion to $1.650 billion based on current exchange rates.
Our profitability expectations for the third quarter include non-GAAP operating income in a range of $225 million to $235 million. This equates to a non-GAAP operating margin of 14.0% at the midpoint of the range, similar to the third quarter last year. We expect interest expense in the third quarter to be approximately $35 million, excluding any impact related to the Webhelp combination. We also expect an effective tax rate of 26% and a weighted average diluted share count of approximately 51.5 million shares.
Moving to our outlook for the entire year. We now expect 2023 constant currency organic revenue growth to be in the range of 2% to 3%. Based on current exchange rates, we expect a 0.5 point negative impact on reported revenues for the full year. We expect the timing of our 2022 acquisitions to contribute approximately $156 million of incremental year-over-year revenue growth for the full year. This equates to reported full year revenue in a range of $6.575 billion to $6.640 billion.
Our full year profitability expectations now include non-GAAP operating income in a range of $920 million to $945 million. This equates to a non-GAAP operating margin of 14.1% at the midpoint of the range, up 10 basis points from the prior year. We expect full year interest expense to be approximately $138 million, excluding any impact related to the Webhelp combination. We also expect an effective tax rate of approximately 26% and a weighted average diluted share count of approximately 51.5 million shares, again, excluding any impact from the shares to be issued to complete the Webhelp combination.
We continue to expect strong free cash flow for the year with free cash flow growing to over $500 million in 2023, an increase of at least 8% over 2022. Our business outlook does not include acquisition-related impacts or transaction and integration costs associated with our acquisition of Webhelp or any future acquisitions. Also not included in the guidance are impacts from future currency fluctuations or future share repurchases.
In closing, we are focused on margin expansion and cash flow generation, while taking advantage of a market opportunity that generative AI poses and completing and successfully integrating the Webhelp combination. We believe that our focus on these areas will position us for future growth and value creation.
At this time, operator, please open the line for questions.
Thank you. [Operator Instructions] Our first question comes from Vincent Colicchio with Barrington. You may proceed.
Yes. Thank you for taking my questions. So Chris, part of your guidance, it looks like you're expecting a meaningful pickup in sequential growth in Q4. What is driving that?
So Vince, as we talked about earlier, we do have two large contracts, one that we talked about in Catalyst, which will not ramp. The other one is at plan and has confirmed kind of ramping as we expect a plan for the rest of the year. As we talked about, that's a fairly big driver of the growth that we're seeing within Q4. And then also as we looked at the areas that are growing, they continue to grow. We've looked at obviously muting the expectations of the clients who have not been able to kind of meet their volume expectations that they've had, so that's partly offset. But when you put the two together, that gives us what we're seeing within the fourth quarter as you look at the guide for the year. .
Yes. I think one fairly sizable difference versus last year is our expectation. As I said, that we expect to see sequential growth within Catalyst quarterly as we go through the back half of the year. So that is different than what we were experiencing last year, and we'll kind of be the thing that makes this year's pattern look different than last year. Other than that, pretty much the same as last year's pattern.
And in terms of the vendor consolidation discussions, I think you may have touched on this, but what portion of the amount that is not coming in this year do you think you may see in the next fiscal year?
So Vince, to be honest, it's difficult to answer. What we're having is sort of positive conversations. We've clearly won a bunch of the vendor consolidation business, although it's coming in at lower volumes. But we have a number of clients who are kind of sitting on the fence, so to speak, and saying, look, if we continue to see the depressed volumes that we're seeing, we're definitely going to have to consolidate, but those -- pulling the trigger is taking a little longer than expected.
We are not anticipating anything meaningful in the next two quarters from a vendor consolidation perspective outside of ones that we've already been given and are ramping and are dealing with. I suspect that will roll into next year and probably the most appropriate time to talk about that is when we close the Webhelp combination and then kind of give a guide for what we see in the back half of the year -- sorry, front half, back half of next year.
And then one last one. The -- your strategic verticals are performing quite well. Should we expect that to continue in the second half? And the weakest, I think, of the four is the technology and consumer electronics side, should we expect that to continue?
Yes. So Vince, on sort of health care and some of the others, banking insurance, you'll see what we foresee is that kind of continued sort of strength in the back half of the year. Consumer electronics and technology is a tale of two cities. Consumer electronics, we continue to see, frankly, as Andre called out, some of our larger clients suffering some fairly big volume declines within that space. But that's offset by some of the technology space that we've seen, some very good, strong growth. And we expect to see probably that continue on in the back half of the year with continued muted consumer electronics, but some good strong growth in the technology side.
Okay. I’ll go back in the queue. Thank you.
Thank you, Vince.
Thank you. Our next question comes from Ruplu Bhattacharya with Bank of America. You may proceed.
Hi. Thanks for taking my questions. Chris, revenues in fiscal 2Q grew 1.6% in constant currency, whereas you had expected it to grow 3% to 5%. You are guiding 3Q to 2% constant currency growth, you're taking down the full year from 5% to 2.5%. I guess my question would be, what is the market growing at based on your estimate? And what gives you confidence that revenues can't be weaker? I mean, why is 2.5% the right number? And what is giving you confidence in that?
So Ruplu, a couple of different things. I'm not sure we are hearing different market growth numbers, frankly, and it's more based on region and by industry. And so for instance, we see Europe growing faster. We are experiencing that ourselves. Clearly, other public companies who have large European exposures are seeing that versus what sort of North America is growing. And similar, we're seeing some good growth in Asia Pac and some public companies that are exposed to that are seeing the same things. So it's a bit of a mixed bag. What will tell you is, we feel that -- and what we're hearing from our clients is, we're keeping, if not growing our share across the categories that we're in and competing in and the business that we're competing in. So we feel good about that. That's probably the big takeaway from all of it.
In terms of how we've looked at the back half of the year, when we looked at our Q1, we came in at the higher midpoint of the guidance. And we said within Q1 that we had some clients who were forecasting lower and delivered way more. We had some clients who were forecasting more and delivered less. And we've had that similar experience in Q2. The difference is that, we're seeing some of the clients that Andre pointed out, sort of retool their infrastructure for lack of a better term, in terms of what they're actually outputting into the marketplace. And when we see that, we tend to kind of feel like they've reached the position of stability in terms of what their expectations are, and it's muted from what we originally anticipated.
And so, as we've gone through and looked at our Q3 numbers and expectations for full year, we've effectively had many, many conversations with clients in regards to what they're seeing from a capacity perspective, what they're tooling to, what their share is, where we will take share, where we will hold share. And then put it through our own sort of calculations in regards to who is generally overpromised and underdelivered and vice versa to come up with where we see the numbers.
And I think that gives us as confident as we can be on where we see Q3 and Q4. And as we've tried to kind of point out, very identifiable chunks of business that we have seen very different expectations than what clients had forecasted, where the rest we have seen good growth and good performance. I think through this, the takeaway, though, Ruplu is that we're very focused on margin preservation, margin growth and also cash flow growth. And despite coming in less than what we had hoped for and we were disappointed in Q2, the reality is that, the team adjusted very, very quickly to make sure that we delivered on our cash flow and margin performance goals, and that's certainly what our goals are as we go into Q3 and Q4, as well as obviously hitting our guidance that we've laid out.
Okay. For my next question, let me ask you about the new economy clients. I mean, this set of clients was growing 47% year-on-year three, four quarters ago. I think you said they grew 2% year-on-year this quarter. So what are you hearing from them? Any idea when this set of clients can turn around? Do you think this is like is another one to two quarters so weakness? Or what is your take on when this set of clients can see stronger growth?
Yes. So Ruplu, great question. I think you have to peel back the onion a little bit on these clients. Where we're seeing weakness in this portfolio of clients is, as Andre pointed out, primarily crypto year-on-year, which is now de minimis to us kind of going forward. And then also in some of the fintechs. And to be more specific, we are seeing weakness in North American-based direct-to-consumer fintechs which have dramatically kind of cut back their customer acquisition and spend and are more focused at kind of driving frankly, real tangible, profitable returns.
And I think when you look at that combination, that's about a 5% headwind, which obviously will lap next year. So my expectation is that we'll continue to see muted performance within this portfolio of accounts, probably until the back half of the year, early next year when either they start to spend more to expand or obviously, economy might turn around and/or we continue to add clients into that portfolio, which we're doing.
Okay. Let me ask Andre a question. So Andre, the operating environment is weaker. I mean revenue growth is lower. You're taking on a lot of debt for the Webhelp acquisition. So talk to us about what is giving you confidence in being able to service that debt? And as part of that, if you can weave in some of the margin drivers and what your expectations are for cash flows and why you think that those can sustain.
Yes. So one of the things that's really great about this business, Ruplu, through cycles is how it generates cash. And I go back as far back as -- in this industry as far back as the global financial crisis and the participants even back then when revenues were soft, we're able to drive really strong free cash flow. So it really starts with our ability to have a very variable cost base so we can quickly react as we did in this quarter to preserve margins. I think the other margin drivers as we go forward will be, again, getting into higher value services, including now higher-value services around helping our clients implement generative AI.
Obviously, we can still get some leverage on our G&A as we grow even at these muted levels. And then we add in, you mentioned the Webhelp and taking on the debt there. We add in Webhelp, generate strong free cash flows and then the synergies from that transaction kind of on top of things, which will be accretive both to margins and to free cash flow. So all of that has us very, very confident even at the increased interest rates that we can generate strong free cash flow, such as we are, frankly, in the Concentrix business this year, we'll be able to do it even more so on a combined basis with Webhelp and with synergies and pay down debt.
We've demonstrated our ability to do that in past transactions, the conversion transaction, the PK transaction, and we've hit the targets we've set for ourselves, both in terms of synergies, but more importantly, getting our debt levels down and getting down, frankly, more quickly than we indicated we would at the time that we did the transaction. I feel very confident with Webhelp, we'll be able to do the same.
Okay. Let me ask one last question. From the prepared remarks, it sounded that like Webhelp had stronger growth. I think you mentioned something about 8% year-on-year constant currency. Was that right? And why do you think that is? Is it a difference in geographies that's causing that? It just sounded that they had better performance. So what do you attribute that to?
Yes. So what we said was on like-for-like constant currency basis, low double-digit growth. And so that's the growth rate in the first quarter. That is above expectations that Webhelp had for the quarter or that we had based on the diligence that we did. What we've built into our model for this year is 8% to 8.5% growth in the Webhelp business. So we remain very, very confident that they can deliver that. This really speaks to the quality of the asset here that we're combining with their strong footprint in EMEA, particularly with nearshore and offshore offerings supporting European languages as well as the very, very strong operations and strong growth that they're seeing in Latin America.
If you look at kind of one of the rationales for this combination. If you look at other public peers who break out their revenue growth rates by region, Europe is growing quite well as is Latin America. And frankly, we're growing well there as well, but we are subscale. And so, that's what I would read into their results, and it's why we're so excited about completing the combination, the great progress we're seeing on the integration and then moving forward together.
Okay. Thank you for taking my questions. Appreciate it.
Sure.
Thank you. [Operator Instructions] Our next question comes from Joseph Vafi with Canaccord Genuity. You may proceed.
Hi, guys. Good afternoon. Thanks for taking the questions. Maybe just a couple ones based on your comments, Chris, on the AI front. Could you maybe perhaps give us a little more color? I know you mentioned cost being a factor in the technology and its implementation versus potentially other solutions. I think it'd be interesting to hear what -- it's early days, but the cost of some of this technology versus maybe traditional servicing of those volumes. And I have a couple of follow-ups.
Yes, for sure, Joe. So traditional and even sort of the, I don't want to call it traditional AI, but the AI that we've deployed, that's more machine-based learning or natural language processing, generally, the cost model is based on per seat, per license per current transaction and doesn't necessarily have to deal with the type of transaction or the length of transaction that is being incurred. So for instance, asking a very simple question to having a back and forth at last 10 minutes, generally the same price and you get some variability out of that. The way generative AI is currently priced in the way the models work is that, you actually pay per sort of, and I'm very simplifying this, for character that you're asking it to do and back and forth.
So longer queries take more time, take more money and cost more that kind of goes back and forth with it. Plus, as you look at the proprietary information that you're uploading into the cloud for a storage perspective, you're paying for the storage that kind of goes along with it. Then you're paying for the technology licenses, the technology deploying to kind of give that last mile application to the client. So there's a lot more costs associated with it. And so for some transactions or some productivity gains and proficiency gains that makes sense. For others, it doesn't, because you don't get the benefit of it.
The real conversations we're having with clients around generative AI right now though, cost is one factor, but it's more about predictability of results where if -- it’s not one or two questions coming up with the same answer. It's like if you ask a 10,000 questions, does it come up with the same answer? Or does it start to hallucinate and kind of give some odd feedback to a client that -- or to a customer that people don't want necessarily going direct.
And then two, around the security of their data and around who owns the data. Most of the generative AI kind of implementations and instances and everything like that, right now is you're giving up unless you're spending a vast sum of money, you're giving up sort of that data to the generative AI cloud providers in order for them to kind of tune their models, make things better for everybody. And we just -- when we talk to our clients, they are just not prepared to do that yet.
Will that change? Possibly. But right now, they're more focused on how do they own the data, how they own the learnings, how it aligned to their brand, how does it give predictable results, how is it secure? And so, a lot of that focus is now saying, okay, well, let's focus on proficiency of our staff delivering services because if there's a hallucination or something else, then a human is there to make sure that it's safeguarded.
And then also the queries and back and forth, the human can handle a lot of the back and forth and really then kind of search and engineer the prompts for lack of a better term, to what the information is that, that customer is looking for much faster. And that's what we're seeing in our proof of concepts. That's what we're deploying right now. And we're seeing the benefits as expected. We're seeing faster resolution time for customers. We're seeing higher CSAT scores because it has faster resolution. We're seeing an easier experience for the adviser in order to get the information. And because we're able to get things done faster, the clients save some money from it because they have more capacity with less -- well, they have more capacity for less money in effect is the way they look at it, if that makes sense.
Yes. Fair enough. And then we've seen some of the other players, I guess, in the broader ecosystem, maybe especially also over in the IT side of things kind of announced like major AI investment initiatives of their own internally to build the practice up. Is that something that makes sense for Concentrix to do and kind of earmark real material budget for this stuff at this point? Or is it really a function of helping clients on their journey and maybe spending on investment there as it comes along?
Yes. Joe, that's a great question. The reality is, a lot of press releases, I think, are somewhat misleading around where the spend is going and what it's for. The reality is that, we are building up the practices pretty aggressively as we speak. It's an extension of learnings we already have. The investments that we have put into Catalyst are significant, and that gives us the ability to scale sort of the proof of concepts much faster into production. And as a whole, as a company, we spend tens of millions of dollars on R&D in our own technology and development. That has been slowed down or stopped or anything like that. We continue to see that as critical investments for our future. And so, I think we're at the right investment level and we'll continue to ramp it up as we drive more and more into production and win more and more business around it.
Fair enough. And then just one final one on the large Catalyst project that's been -- I guess is it fair to call it delayed and not canceled at this point? And then, is there any kind of view as to -- if it's just delayed, when it may start to ramp again? Thanks a lot guys.
Yes, Joe. No problem. Just for clarity. We won this project back, and I'm sad to say, in sort of Q3 of last year. And the original plan from the client was to kind of get to full production in Q2, Q3 of this year. And the reality is, as we staffed up fairly heavily. And the work for it started trickling in, and we started doing work for it, and we continue to do work for it. But the big bank for lack of a better term, when they wanted all the scrum teams and all the work done just continue to get pushed out and various reasons, they were doing a restructuring, they were aligning to a new technology stack, et cetera, et cetera, et cetera. And really, it within the last couple of weeks that they sat down and said, hey, we need to continue this. We need to get this done. We need to continue to support the stock, but we just are going to push out the budget for sort of large-scale ramp and implementation that we both were expecting for sort of our Q3 and Q4.
So it's not canceled. We are getting revenue from it, but it is a much lower run rate. And it will frankly, push the project out further, but at this much lower run rate versus what we had expected. So that does have a fairly big impact to us as we called it out from a size-wise perspective for the back half of this year. I do not expect that in the front half of next year, it will come back in a meaningful way. I think it will continue to kind of slowly increase as the client kind of aligns budgets, and it comes back on to be a priority. But it's absolutely not canceled, it's still there, and we're still billing for it just at a much reduced rate.
Yes. And as we talk about the sequential growth that we expect in Catalyst over the back half of the year, it is not really a major contributor to that at all at this point in our expectations. What we are seeing are some nice smaller wins that are helping catalysts for a stabilized revenue and then begin to grow as we expect it to. It actually grew slightly sequentially in Q2, and we expect that to accelerate a bit in Q3 and even more in Q4. But again, not based on that large contract but on a bunch of other smaller wins across the verticals. .
Great. Thanks, Chris. Thanks, Andre.
Thank you very much.
Thank you. And I'd now like to turn the call back over to Chris Caldwell for any closing remarks.
Great. Thank you very much, everybody, for joining us today. We always very much appreciate your interest in Concentrix, and we're committed to maintaining strong profitability and cash flow generation, especially when executing our strategic objectives. We look forward to talking to you next quarter. Thank you very much, everybody. .
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.