Concentrix - Q3 2023

Transcript

Operator (participant)

Thank you for standing by, and welcome to Concentrix Fiscal Q3 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. To remove yourself from the queue, you may press star one one again. I would now like to hand the call over to Vice President, Investor Relations, David Stein. Please go ahead.

David Stein (VP of Investor Relations)

Thank you, Latif, and good evening. Welcome to the Concentrix Corporation Q3 fiscal 2023 earnings call. As a result of the combination earlier this week, we now operate as One Concentrix Webhelp. This call is the property of Concentrix Webhelp and may not be recorded or rebroadcast without written permission. 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 and subsequent SEC filings. Also, during the call, we will discuss non-GAAP financial measures, including free cash flow, non-GAAP operating income, adjusted EBITDA, non-GAAP EPS, and adjusted constant currency revenue growth. A reconciliation of these non-GAAP measures is available in the news release and on the company investor relations website under Financials. With me on the call 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.

Chris Caldwell (President and CEO)

Thank you, David. Hello, everyone, and thank you for joining us today for our Q3 earnings call. We are thrilled to have you with us as we discuss our performance in the Q3 and the exciting news that we have closed our transformative combination with Webhelp. We're pleased that we executed to deliver revenue and profit growth with strong cash flow in the Q3. We experienced continued stable demand for high-value and technology-infused services, achieved solid new business signings, and our continued focus on business mix drove margin expansion. We entered the Q4 with a strong pipeline of opportunities that we believe will continue to drive our growth into 2024. The reported revenue in the Q3 was $1.63 billion. On an organic, constant currency basis, revenue grew 1.7%.

Our Q3 non-GAAP operating income increased to $231 million, and adjusted EBITDA increased to $269 million, both growing by over 4% compared with last year. Solid execution yielded 10 basis points improvements in both our non-GAAP OI and adjusted EBITDA margins over last year. Our non-GAAP EPS was $2.71 per share, compared with $2.95 per share last year, largely reflecting the impact of expected higher interest rates. Given our continued organic growth, strong free cash flow generation, and the accretive Webhelp combination, we are pleased to raise the quarterly dividend by 10%. This increased quarterly dividend translates to $1.21 per share on an annualized basis.

We continue to grow in each of our strategic verticals, which more than offset continued volume softness with a few select large clients, as we discussed last quarter. From a Catalyst perspective, we again experienced sequential quarterly revenue growth with our digital CX solutions. Our unique digital IT service capabilities, with thousands of staff able to design, deploy, and integrate technology-infused solutions at scale, differentiates us significantly from our traditional CX peers. From a sales perspective, we continue to focus on our sell-as-one approach with our combined Catalyst and CX operations design, build, and run services. During the quarter, we saw steady demand across multiple geographies and verticals as clients continued to look for differentiated ways to service their customers while managing their cost structure.

While clients are still signing smaller deals that ramp more slowly, we are pleased with the higher complexity work that we will be performing with these new wins. We also see a strong pipeline of opportunities as a combined Concentrix Webhelp organization that we would not have been able to pursue prior to the combination. From an operating perspective, we are delivering exceptional service with record client attainment scores this quarter. Our focus remains on being the best partner for our clients' relationships and winning more opportunities within each account. The more technology-infused services we provide to our clients, the stickier our relationships become. Notably, we've accelerated our progress in the quarter, deploying generative AI solutions both internally and with select clients.

From an internal productivity perspective, our AI analytics-based recruiting platform now supports 8.6 million career site visits and processes 3.3 million applications already this year. It has already allowed our team to scale more cost-effectively, and we see additional benefits as we continue the rollout across our enterprise. Our AI-based workforce management solution optimizes concurrent scheduling and peak management for now over 115,000 of our staff, where we see better utilization and user experience for the team. This again will have additional benefits as we scale up to the rest of our workforce. Our most widely used proprietary AI SmartAssist product improves productivity through automation for over 190 team members now to easily access the tools and provide visibility to the information required to perform their jobs every day easier.

From the ability for AI to enhance our client services, we use an AI-based quality automation platform to drive insights from 100% of our customer interactions where deployed. Now, across tens of thousands of seats, the platform has reviewed 129 million interactions to date, delivering 20%-30% improvements in audit efficiency and insights into customers, clients that see high value. Our proprietary learning bot utilizes AI to simulate real-world customer scenarios for over 60,000 team members during training, establishing better speed to proficiency, reducing new higher average processing time, and improving effectiveness by 5%-10% in their ramp periods. Our cognitive AI bots, developed for client-specific implementations, will handle over 900 million customer interactions by the end of this year, delivering significant value for our clients and a higher margin service for us.

We are actively investing in additional generative AI solutions to further enhance workforce productivity and improve the quality of interactions with customers. We are on track to deploy our AI tools across nearly 80% of our legacy operations business by year-end, and start wide deployment of the tool within our new clients from our combination with Webhelp shortly. Turning to AI with our clients, we are also collaborating with some of the world's largest companies to design, build, and run generative AI-infused solutions across the services value chain. Working with one of our large technology clients in a key project this quarter, we used generative AI to power 35% efficiency gains and deliver releases 30% faster than traditional methods in their software development life cycle.

During the quarter, we also delivered a proof of concept for Generative AI knowledge management that builds 3D Modeling and Augmented Reality solutions for a global retail client that couldn't cost-effectively be done before. Catalyst also launched its first deployment of our new Generative AI-infused offering, Anypath, that we have been developing for close to 2 years. For our first implementation, we seamlessly transitioned the entire CCaaS tech staff of a healthcare client in less than 8 hours, enabling fully automated Generative AI experiences for patients and advisors with our Generative AI intelligence, insights, and reporting capabilities. Historically, this would have taken weeks to months to transition. This has resulted in substantial savings for our clients and a new revenue opportunity for our business. For another key client, we are now working exclusively to train and test a Generative AI tool in advance of it becoming customer-facing.

Using a combination of automation and humans and our unique knowledge of the customer base and domain knowledge, we are building hundreds of thousands of different subject matter conversations to train our AI across multiple categories, with a plan to increase the scope to 1 million conversations in the next six months. With all of these examples, and with many more we have deployed and are working on, I hope it is evident that we see opportunity to grow revenue and be more efficient with AI and see this as a net benefit to our industry. Now, let's turn our attention to the Webhelp combination that sets the stage for a new chapter in our business offering evolution. This combination is a historic milestone in our industry.

As a combined organization, Concentrix + Webhelp possesses distinct strategic advantages that we believe increases our differentiation and will drive our success as a transformative force in the industry. This combination brings new expertise, such as Know Your Customer and Anti-Money Laundering and payment services for our financial clients, IT services at scale in EMEA, deeper domain expertise in a number of our core verticals, and helps create a robust footprint spanning 70-plus countries, enabling us to offer tailored solutions on a global scale. We also gain over 1,000 new clients that we believe have the ability to spend on services and capabilities that Concentrix historically has offered. Our commitment to nurturing a supportive and inclusive workforce is further reinforced by the harmonious integration of our cultures, which are globally renowned for their excellence in workplace practices and commitment to ESG.

We have a clear path to positive financial returns from the combination with Webhelp. We are well on track to achieve enhanced revenue growth, profitability, and Non-GAAP EPS accretion within the first year. We expect double-digit accretion in Non-GAAP EPS in the second year, further underscoring the financial strength of the combination. In addition to these compelling benefits, our integration process is on schedule, and we are confident that we will achieve cost synergies of $120 million by the third year, including $75 million in the first year post-close, with substantial progress made already. Since the announcement, we have been able to spend more time with the Webhelp team, which has given us great confidence that this transaction is the right investment.

We expect the integration work to be completed within 12 months, and I would like to welcome all of our new game changers to the Concentrix Webhelp team. I would also like to welcome our 2 new board members, Olivier, Olivier Duha, Webhelp co-founder and CEO, who becomes vice chair of our board of directors, and Nicolas Gheysens, a GBL partner and director. Finally, I would like to thank our exceptional staff for their commitment to execution, our clients for their trust, our talented board of directors for their support and mentorship, and our investors for your continued support. We look forward to an exciting and prosperous year ahead. Now I'll turn the call over to Andre. Andre?

Andre Valentine (CFO)

Well, thank you, Chris, and hello, everyone. We're excited to have closed our combination with Webhelp earlier this week. Adding Webhelp's talented global staff strengthens our value proposition and solidifies our position as a leading global CX solutions company. Before I provide additional details on the completion of the transaction, I'll first review our Q3 results. Then I'll conclude with guidance for the Q4, including anticipated contributions from Webhelp. In the Q3, revenue increased and non-GAAP profit improved, reflecting continued strong execution. Both our organic constant currency revenue growth rate and our non-GAAP operating income came in within our guidance ranges, with non-GAAP operating income exceeding the midpoint of our guidance. Additionally, our strong cash flow generation reinforces our confidence in achieving our full year expectation of generating over $500 million in free cash flow, not including contributions from Webhelp.

The 3.4% increase in reported revenue in the quarter included a 1.7 point positive year-over-year impact from the acquisition of ServiceSource in July 2022. There was no meaningful impact from currency fluctuations on reported revenue growth in the quarter. On an organic constant currency revenue basis, revenue grew 1.7%, reflecting a continuation of themes from the prior quarter: strong growth in healthcare, banking, financial services and insurance, e-commerce and travel, offset by continued volume softness with a few large clients in the communications and consumer electronics industries. Revenue increased in each of our four strategic verticals in the quarter, with growth from healthcare clients leading the way, up approximately 17% on both an as-reported and organic constant currency basis.

Revenue from retail, travel, and e-commerce clients posted 8% growth as reported and 7% on a constant currency organic basis, including double-digit growth with travel clients. Revenue from banking, financial services, and insurance clients grew by 5% on a reported basis and 6% on an organic constant currency basis. Revenue from technology and consumer electronics clients grew 6% as reported and about 1% on an organic constant currency basis. Revenue from communications clients decreased by 8% as reported and 9% on an organic constant currency basis. Revenue from clients in our other vertical decreased 9% as reported and about 8% on an organic constant currency basis in the Q3. Turning to profitability, non-GAAP operating income was $231 million in the Q3, compared with $222 million last year.

Our Non-GAAP operating margin was 14.1%, up 10 basis points from 14% in the Q3 last year. Adjusted EBITDA was $269 million, compared with $258 million in the Q3 of last year. Our adjusted EBITDA margin was 16.5%, up 10 basis points from 16.4% in the Q3 last year. Q3 interest expense was $49 million, up $29 million from the prior year quarter. Included in the increase was approximately $14 million of interest costs related to the Webhelp combination. This included a charge of approximately $11 million in fees associated with our bridge financing for the Webhelp transaction.

It also includes approximately $3 million in interest expense on our senior notes that were issued on August second, net of interest earnings on the invested proceeds. The remainder of the increase in interest expense was due to higher interest rates, as expected. Other expense of approximately $6 million in the Q3 included a $2 million mark-to-market adjustment related to the purchase price currency, currency hedge for the Webhelp transaction. The remainder of this line item in the P&L relates to foreign currency losses. The non-GAAP tax rate for the quarter was 26.3%. Non-GAAP net income in the Q3 was $141 million, compared with $154 million last year.

The decrease primarily reflects higher interest expense and the change in other income expense, which more than offset the increase in Non-GAAP operating income. Earnings per share were $2.71 on a Non-GAAP basis, compared to $2.95 in the Q3 of last year. GAAP operating results for the Q3 included $40 million of amortization of intangibles, $18 million of expenses related to acquisition-related and integration expenses, and $11 million of share-based compensation expense. Turning to cash flow, our Q3 cash flow from operations totaled $211 million, and capital expenditures were $44 million. This resulted in record Q3 quarterly free cash flow of $167 million.

We continue to expect free cash flow for the full year to exceed $500 million, excluding the cash flow contribution of Webhelp in the Q4 and transaction and integration costs. During the quarter, we paid a quarterly dividend of $0.275 per share. As Chris mentioned, our board has raised our quarterly dividend to $0.3025 per share to be paid during the Q4. This increase to our quarterly dividend reflects our financial strength, our confidence in the future, and our commitment to disciplined capital deployment. Share repurchases resumed in the quarter after our proxy statement filing related to the Webhelp transaction. We repurchased 320,000 shares of our stock for approximately $27 million in the Q3. Repurchases in the Q3 were made at an average price of approximately $84 per share.

At the end of the quarter, we had $312 million remaining on our share repurchase authorization. Moving to the balance sheet. At the end of the Q3, cash and cash equivalents were $2.11 billion, and total debt outstanding was $3.97 billion. Net debt was $1.86 billion at the end of the Q3, a decrease of $117 million from the end of the Q2, and a decrease of $218 million since the beginning of the year. At the end of the Q3, the elevated cash level reflects funds on hand to complete the Webhelp transaction.

The debt balance at the end of the quarter includes $2.15 billion of senior unsecured notes issued to partially fund the Webhelp transaction, and $1.85 billion outstanding on our term loan. Our $1.04 billion revolving credit facility was undrawn at the end of the quarter, and there were no borrowings outstanding on our $500 million accounts receivable securitization facility. At the end of the Q3, net leverage was 1.7x on a trailing four quarters pro forma basis. On Monday, we executed on the closing of the Webhelp combination.

To complete the combination, we paid approximately $525 million to Webhelp shareholders, paid off Webhelp debt of approximately $1.9 billion, issued 14.9 million shares to Webhelp shareholders, and incurred a EUR 700 million two-year note payable to Webhelp shareholders bearing interest at 2%. After the closing, we had cash and cash equivalents totaling approximately $440 million and gross debt of approximately $5.3 billion. Net debt upon closing was $4.85 billion, which represents net leverage of approximately 3.2x on a pro forma adjusted EBITDA basis.

The primary components of our gross debt on the balance sheet post-closing were $2.15 billion in senior notes, $2.14 billion in term loan borrowings, approximately $750 million in notes payable to Webhelp shareholders, and $215 million in borrowings outstanding under our accounts receivable securitization. Our revolving credit facility remained undrawn. The issuance of shares to Webhelp shareholders increased our outstanding share count to approximately 66.6 million shares. Regarding the $2.15 billion of senior notes, on the day the combination closed, we entered into cross-currency swap arrangements for a total notional amount of $500 million of the notes. The arrangements effectively convert $250 million each of the 2026 and 2028 notes into synthetic euro-based debt at lower prevailing interest rates.

In addition to aligning the currency of a portion of our interest payments to the organization's euro-denominated cash flows, the swaps also reduced the weighted average interest rate of the $2.15 billion notes from approximately 6.70% to approximately 6.36%. As we said when we announced the Webhelp transaction, the combination of our strong Free Cash Flow generation and Adjusted EBITDA growth gives us a clear path to reducing leverage, and we're committed to reducing our Net Leverage to about 2x Adjusted EBITDA within 2 years after the transaction closed. Regarding our capital allocation priorities, our focus is on organic growth, the successful integration of Webhelp, realizing the planned synergies, and repaying debt. We're 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. Now, I'll turn my attention to the business outlook for the Q4, including anticipated contributions from Webhelp. The Webhelp contribution to Q4 guidance includes forecasted financial performance for a period of slightly more than two months. For the Q4, we now expect reported revenue to be in a range of $2.19 billion-$2.215 billion based on current exchange rates. Our Q4 expectations reflect approximately 2%-3% of pro forma constant currency growth for the combined organization if the combination had occurred at the beginning of the Q4 of 2022.

Excluding the effect of the Webhelp combination, our expected constant currency growth in the Q4 would be consistent with the prior guidance for the full year. Our profitability expectations for the Q4 include non-GAAP operating income in a range of $330 million-$340 million. At the midpoint of our guidance, this equates to a non-GAAP operating income margin of approximately 15.2%, an increase of 10 basis points over the prior year. Excluding the effect of the Webhelp combination, our expected non-GAAP operating income in the Q4 will be consistent with the prior guidance for the full year 2023. We expect net interest expense in the Q4 to be approximately $72 million, with an effective tax rate of 26% and a weighted average diluted share count of approximately 62 million shares.

Note that the average diluted share count for the Q4 is less than the 66.6 million outstanding shares post-close as a result of the mid-quarter timing of the close. Accordingly, we expect non-GAAP EPS for the Q4 to be in a range of $3.03-$3.15 per share. This expectation for non-GAAP EPS assumes no impact from other income and expense due to the unpredictability of future foreign currency movements. We continue to expect the business to generate robust cash flows, with free cash flow for the combined organization to be in the range of $200 million-$225 million, excluding any transaction and integration costs in the Q4. Our business outlook does not include transaction integration costs associated with the Webhelp combination or any future acquisitions.

Also not included in the guidance are impacts from future foreign currency fluctuations. We continue to expect the Webhelp operations to generate approximately $3 billion of revenue and approximately $500 million of Adjusted EBITDA for the full year 2023, with the combined organization yielding nearly $9.6 billion in revenue and nearly $1.6 billion in combined EBITDA on a pro forma basis for the full fiscal year 2023. We expect earnings per share accretion of mid- to high-single digits in the first full year after close, and double-digit appreciation, accretion in the second year. We also expect to realize $75 million in synergies in the first year after closing, growing to $120 million in synergies in year three. We plan to provide guidance for 2024 on our Q4 results call.

In closing, the Webhelp combination is joining two leading CX providers into a global platform for growth and value creation, bringing in clients from growing markets, further diversifying our marquee client list, and significantly increasing our presence in Europe, Latin America, and Africa. Our range and global reach of high-value services and digital capabilities have been expanded, enhancing support for clients that both companies couldn't adequately serve independently. We have a strong track record of success integrating prior combinations, which will make the combination and integration more seamless. And we believe this highly complementary union creates a unique customer engagement offering that will keep our business resilient through business cycles. We're excited about the combination with Webhelp. We look forward to the growth and value it will create in the future. At this point, Latif, please open the line for questions.

Operator (participant)

Yes, sir. As a reminder, to ask a question, you will need to press star one one on your telephone. Again, that's star one one on your telephone to ask a question. To remove yourself from the queue, you may press star one one again. Please stand by while we compile the Q&A roster. Again, that's star one one on your telephone to ask a question. Our first question comes from the line of Ruplu Bhattacharya, of Bank of America.

Ruplu Bhattacharya (Vice President, Senior Equity Research Analyst)

Hi, thanks for taking my questions. Andre, if you can, I was wondering if you can kind of simplify what the contribution is from Webhelp for Q4 revenues, operating margin, and EBITDA. You gave a lot of details, but I'm not sure I got all of that. So can you please specify how much is the revenue contribution, operating income contribution, and what is the core business doing in the Q4?

Andre Valentine (CFO)

Yeah. So, happy to do that, Ruplu. So, I'll start with revenue. So from a revenue perspective, the legacy Concentrix operations, pre-Webhelp, are very much in line with the prior guidance. So the prior guidance for the full year, Ruplu, was to grow 2%-3% for the full year, and so that will be the contribution from the Concentrix operations will be in line with that guidance. So, that kind of covers that. Webhelp certainly accretive to the overall growth rate, as we expected, and it will be here in the Q4. So, that's that.

From a margin perspective, really, you know, if you go back to when we announced the transaction, the margin profiles of the two businesses were very, very close, both from an EBITDA perspective and a non-GAAP OI perspective. And so included in the guidance, you can pretty much, you know, at the midpoint, that 15.2% non-GAAP OI margin, you can pretty much apply that to both sides. Depreciation is a little bit, we've talked about this in the past, for Webhelp, a little bit higher as a percentage of revenue. So, you might see, you know, 10, 20 basis points or so higher adjusted EBITDA margin coming from the Webhelp side. But again, very complementary, from a margin perspective, in Q4.

And then expect significant margin improvement as synergies start to roll in in earnest as we move into 2024.

Ruplu Bhattacharya (Vice President, Senior Equity Research Analyst)

And again, just to clarify, I mean, based on what you just said, would that imply like about $500 million on the revenue contribution from Webhelp in fiscal 4Q? And then, can you talk about the below-the-line items, like below operating income? Can you remind us what the interest expense is gonna be in the Q4, as well as are there any other expenses? I think you said there was also integration costs. What is the estimate for that for the Q4?

Andre Valentine (CFO)

Yeah, so integration costs in a quarter are a little hard to give an exact estimate on. So overall, the integration costs, what we've said about those, is they will be one for one from a matching the synergy number. So $120 million total in integration costs, somewhat front-loaded, you know, with you know, roughly $80 million or so in the first year, I believe, and $40 million in the second. So think of that $80 million, you know, think of what would that equate to in two months, and you're probably in line there. The other part of your question, I missed it. Oh, the revenue contribution. I think you're a little low at $500 million.

The contribution from Webhelp is higher than that.

Ruplu Bhattacharya (Vice President, Senior Equity Research Analyst)

Okay. And maybe for my last one, maybe our last one to Chris. So you talked about working on some AI, generative AI projects. So Chris, when we think about this, I mean, based on the experience you have now, you know, clients want to understand the impact of generative AI. Do you think, you know? I mean, in the past, you said, like, 10%-15% of volumes can get impacted. I mean, how has your thought changed, if, if at all, now that you're doing more of these projects? And do you think that impact varies by end market, use case? And how should we think about that? I mean, how any way to quantify this at this point in the cycle? Thank you.

Chris Caldwell (President and CEO)

I will, Ruplu. So, a couple of different points there. I think when we talk about 10%-15% of transactions can be automated, that's what we're doing on a yearly basis, regardless of Generative AI or RPA or anything else that's coming along with it. And what we've talked about is that Generative AI can probably increase that by a little bit, but not, you know, dramatically more than that from what we're seeing as we deploy these practices. What's offsetting that is the new revenue streams that we're seeing by deploying these new technologies, both from a design, implementation and running the new technologies and curating the content that goes along with it.

And as we kind of talked in some of the prepared remarks, even net new areas that, you know, we're deploying our own platforms, where we're getting net new revenue flows that are coming in for that. So that clearly is what we're focused on, of offsetting any revenue headwinds, as well as taking more share within the clients. I think what we're seeing right at the moment is that we're able to deploy Generative AI faster than some of our clients can actually deploy it. And so we're seeing the benefits in our operating cost structure and scalability, that we called out a number that are starting to get to scale, and hopefully we'll see additional benefits from those as we get them to...

across the entire enterprise, including the new Webhelp combination, which I, I think offsets any kind of cost mitigation that we might have from any impact from a revenue perspective that's coming in from automation, if that makes sense.

Ruplu Bhattacharya (Vice President, Senior Equity Research Analyst)

Thanks for all the details. Appreciate it.

Chris Caldwell (President and CEO)

No problem. Thank you.

Operator (participant)

Thank you. Again, to ask a question, please press star one one on your telephone. Again, that's star one one on your telephone to ask a question. Our next question comes from the line of Oliver Davies of Redburn Atlantic.

Oliver Davies (Equity Analyst)

Yeah. Hi, guys. I guess a couple of questions. Just firstly, in terms of, you know, you kind of held the revenue growth guidance for the Concentrix legacy business. So can you just talk about what you're seeing in terms of underlying volumes and new client decision, I guess? You know, it looks like healthcare kind of accelerated in the quarter, whereas, you know, most of the other sectors were pretty similar to the last quarter. And I guess following on from that, you know, are clients still looking to offshore where possible, or has anything changed on that front?

Chris Caldwell (President and CEO)

Hi, Oliver. So to answer your first question, what we're seeing is kind of continued consumer, I’ll call it, budgeting for new consumer electronic devices, subscription spending, other things that are time, somewhat discretionary. So we continue to see those volumes depressed across some of our larger clients. But the volume is now becoming more steadily depressed, if that makes sense. It's more stable versus what we saw at the beginning of the year, where it tends to fluctuate. We are seeing growth in the strategic verticals that we've called out, primarily because of net new wins and net new services we're putting into those verticals, such as the healthcare vertical, banking, financial services, and even travel, we're doing quite well at.

And we still see travel, despite sort of my comments about consumers cutting back in some areas, being quite robust, into the future from a volume expectation perspective. From just an overall offshoring, nearshoring comment, as we've talked about before, clients, for the most part, are very focused on managing their cost structure. And so pretty much the majority of all new transactions and deals and ramps of existing clients are tending to be done at the most cost-effective shore environment, whether that be nearshore or offshore. Very few starts, in fact, very, very, very, very few starts are starting out onshore at a higher cost structure. It's just, it's, it's just not in clients' budgets right at the moment.

Oliver Davies (Equity Analyst)

Okay, great. Thanks. And then maybe one for Andre. Just on the Free Cash Flow, just it looks to be driven by working capital. So could you just comment on, you know, the reason for that in terms of Free Cash Flow?

Chris Caldwell (President and CEO)

Hey, Andre, you're not coming through.

Andre Valentine (CFO)

... Sorry about that. We had muted ourselves for a second. So Ollie, you're right. The improvement in free cash flow is largely coming from working capital improvements, and that's really just a focus on the blocking and tackling of getting bills out on time and collected on time, which drove roughly a two-day improvement from the prior quarter in our day sales outstanding. So it's really just an increased focus on that. It's always been a focus, but it's just really good execution by the team in getting the bills out and getting them collected. And we think it's sustainable as we move forward.

Feel very, very confident about the free cash flow guide for the Q4, and feel really good about hitting the guide that we set out at the very beginning of the year to generate, you know, without Webhelp, $500 million or more of Free Cash flow this year. We're definitely on track to do that if you look at how we've done through three quarters.

Oliver Davies (Equity Analyst)

Great. Thanks very much for answering the question.

Andre Valentine (CFO)

Thanks.

Operator (participant)

Thank you. Once again, to ask a question, please press star one one on your telephone. Again, that's star one one on your telephone to ask a question. Please stand by for our next question, which comes from the line of Divya Goyal of Scotiabank.

Divya Goyal (Director, Equity Research, Technology, Software and Services)

Good afternoon, everyone. So Andre, you briefly addressed the part of my question, which was on the guide that you provided. So Chris addressed that, you know, there is some continued, how should I say, slowdown in the macro that's been noted across the business. What level of confidence can we see in terms of the overall guidance that you've provided for Q4? And how should we expect the business to perform going forward, considering obviously what's going on with the AI transformation alongside the macro impact?

Chris Caldwell (President and CEO)

Actually, Divya, why, why don't... Sorry, I was just gonna... Why, why don't I take that? Because it ties into some of the AI conversation that we're talking about. So, a couple of different points to it. When we look at our guidance for Q4, what we've kind of stated before is that we've stripped out the seasonality of the business that historically has been in Q4, primarily based on what we saw last year. And so when we're talking to our clients, and we're looking at their volumes, we're seeing that sort of flatness from a seasonality perspective come through. As I also mentioned, what we're seeing is sort of a steady rate of business from the clients that have seen decreased volumes based on consumer demand.

Those are kind of continuing through, and they've been kind of trailing as we've expected for the last number of weeks and last quarter. So we're kind of looking at that as pulling through to Q4 as well. And then on the third element, from a Generative AI perspective, right now we're seeing Generative AI as an additive revenue to our business, where we're doing the consulting, we're doing the implementations, we're doing the proof of concepts, we're getting services for building out the models, and managing those models as they start to come into production. And so that has real no impact in our Q4, outside of the revenue that we expected, that's already been booked in. Or sorry, that's been sold, and now we're going into the implementation and billing phase.

Divya Goyal (Director, Equity Research, Technology, Software and Services)

That's helpful. Just, following on this, thought process here, I wanted to understand, have you been seeing any pricing pressure or conversely, any margin benefits, given the automation that you are trying to bring across the customers?

Chris Caldwell (President and CEO)

Yeah. So we do see pricing pressure in the highly transactional business. And as we've talked about it, that's about 10% of our business, although it continues to decline. If you think about it, back in February, it was about 13%, now it's down to 10%, and our goal is obviously to continue to drive that down. In that part of the segment, or part of the business, it's very easy to ramp it. It's quite commodity-based business, and there are certainly people who are chasing it for revenue. Our preference is to more focus on the higher value services and, you know, win that business by quality of service, but not worry about it if it goes away from just a pure pricing perspective.

In the higher value services, we're seeing it much more stable from a pricing environment. Clients are more focused on the security of the work that you're doing. They're focused on compliance of the work that you're doing. They're focused on consistency of the work. They're focused on how you're going to actually deliver the outcomes. And so therefore, where we're putting in technology, where we're putting in sort of this automation for driving better efficiencies internally, that is what is supporting our margin stability within those clients. And we expect that that will continue on as we continue to execute on our strategy.

Divya Goyal (Director, Equity Research, Technology, Software and Services)

That's very helpful. Thanks, Chris.

Chris Caldwell (President and CEO)

No problem.

Operator (participant)

Thank you. Again, to ask a question, please press star one one on your telephone. Again, that's star one one on your telephone to ask a question. As there appear to be no further questions in queue, this does conclude today's conference call. Thank you for your participation. You may now disconnect.