May 05, 2023 - 2:56pm EST by
2023 2024
Price: 19.10 EPS 0 0
Shares Out. (in M): 19 P/E 0 0
Market Cap (in $M): 352 P/FCF 0 0
Net Debt (in $M): 53 EBIT 0 0
TEV (in $M): 404 TEV/EBIT 0 0

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Ibex (IBEX) is an IT consulting firm providing low-cost BPO (business process outsourcing) solutions for outsourced customer service agents through largely offshore delivery centers across Jamaica, Nicaragua, the Philippines, Pakistan, and Senegal. The stock trades cheap on an EV/EBITDA basis at 4.2x consensus CY24 versus peers at 5x - 8x. There’s an underappreciated margin expansion over the next 12-months as they ramp up capacity in their existing buildout post-COVID restrictions and benefit from contractual price increases that continue to phase in. At the same time, growth headwinds are fading as the legacy business seems to have stabilized last print. They should also see FY24 revenue uplift as their strong customer lands from the last 12 months ramp spend. As a result, we think it’s a timely investment with both margin expansion and revenue acceleration over the next 12 months. We see fair value at $38 or 6x CY24 EBITDA, which is still below BPO peers given scale and the lack of differentiated technology overlay. Key risks include workforce reduction initiatives by customers, vendor consolidation in BPO, customer concentration, and concerns around the risks of automation in the contact center and customer service space.

Company Overview:

IBEX was a roll of up two 2004 BPO acquisitions by The Resource Group combined with a home-grown digital marketing solution. It was spun out of TRG Financial in ‘2H 2020 through a $100M IPO. TRG still maintains a 30% ownership position.

IBEX offers outsourced contact center agents through offshore, nearshore, and onshore delivery centers. They leverage a proprietary tech stack and analytics in combination with these global delivery centers to provide outsourced digital and omnichannel customer experience, or IBEX Connect. Geographical diversity at their 30+ delivery centers allow them to offer 24/7 coverage with both nearshore and offshore agents depending on customer preference. Outsourced agents handle typical call center inquiries like information requests and technical/sales support, as well as other value-add back-office functions like finance/accounting, marketing support, sales operations, and HR administration. IBEX connect is delivered through an omni-channel platform which integrates voice, email, chat, SMS, and social media.

Other outsourced offerings include IBEX Digital or digital marketing and e-commerce, and IBEX CX or digital customer experience surveys and analytics. These are typically higher margin add-ons. Their offerings cover the entire customer lifecycle across digital marketing (acquisition), customer engagement (retention), and feedback analytics. The majority of their revenue comes from IBEX Connect.

The business model is fairly simple. Most customer contracts are based on an hourly fee per agent or payment per transaction (per minute or per call). IBEX invests in upfront capex to build out contact centers in low-cost regions. They then hire/manage contact center employees and charge customers a margin on top of employee payroll. A lot of the cost structure is fixed upfront to build out the delivery centers. As with most capex heavy businesses, marginal increase in capacity utilization leads to strong flow through to the bottom line. Gross margins for the business are 30-35%.

Their business mix has improved since IPO. Voice was originally their dominant delivery method of customer engagement with voice only at 83% of interactions in 1H 2020 vs. today their omni-channel and digital only business accounts for 73%.

IBEX has fairly high customer concentration, but it’s much better than some of their peer and they have shown improvement over the last few years. At IPO in 2020, their top 3 customers accounted for 45% of revenue. Today, their top 5 clients currently account for 40.8% of revenues, and their top 10 account for 58.8%. Industry mix is also a little lumpy with their top three verticals being FinTech/HealthTech at 27.9%, Retail & E-commerce at 26.9%, and Telecommunications at 16.7%. Telecommunications exposure has fallen from 36.2% at IPO.


The customer care segment of the BPO industry is mature and slow growing, with industry growth CAGR of 2.9% from 2015-2020 according to IDC. IBISWorld expects 2021-2025 industry growth CAGR of 2.4%. Key industry trends include the rise of omnichannel communications, best-shore/flexible delivery models, and vendor consolidation within customer accounts.

While the industry is mature and slow growing, it’s also fragmented with a lot of smaller players. The top 10 providers control less than 30% of the market. As a medium sized BPO, Ibex has benefited from vendor consolidation and customer emphasis on best-shore/flexible delivery capabilities. They recently referenced a large customer with 12 BPO providers who consolidated down to 6 providers, which allowed Ibex to upsell their services and become the second largest vendor in that customer account. They beat out several billion dollar plus vendors in that deal. They’ve achieved an NRR of 140%+ over the last five years driven by upselling customers on new geographies and services. Their client retention remains at the high end of the BPO industry and their NPS score of 68 compares favorably to peers.

Bull Thesis:

·  Underappreciated margin expansion story over the next 12-months

We estimate a 4-5% EBITDA margin expansion over the next year or a 19% FY24 EBITDA margin. This compares to street expectations for 0.4% y/y improvement to 15.7% FY24 EBITDA margin, although it’s hard to put too much stock in street numbers given the lack of coverage. This is essentially betting that their most recent quarterly EBITDA margin in Q2’23 is sustainable and has a little more upside (18% Q2’23 EBITDA margin, +3.3% q/q and +4.5% y/y). IBEX indicated that last quarter’s margin expansion was not driven by onetime line items, but instead from churning a low margin legacy customer and a ramp in delivery center capacity from 50% last year to 62% in Q2 after the lifting of COVID restrictions in delivery center locations. They also benefited from contractual COLA price increases. They instated COLA price increases to keep up with rising labor costs in 40% of their revenue base between June 2022 and March 2023 with increases gradually layering in.

These margin tailwinds should continue over the next few quarters. There’s probably another quarter of COLA price increase upside from the 40% referenced above plus whatever they’ve been able to instate since Q2 earnings. Pre-covid capacity typically ran at 75-80% so there’s room for another ~15% of capacity additions in current delivery centers. These are high margin additions with much of the cost fixed and paid upfront. They recently indicated 4,500 seats that they can fill in high margin regions or $150M worth of capacity. This will have an outsized impact on FCF margins as the company anticipates little capex buildout until FY25 with capex expected to be ~4% of revenue over the next two years versus 8-9% historically. Aside from ramping capacity and price increases, they also called out a low utilization onshore US delivery center that they intend to shut down.

It’s important to note that they are switching accounting practices from IFRS to GAAP starting in Q4. The company hasn’t provided details yet on the impact, but directionally it should slightly lower EBITDA, lower D&A, and keep EPS roughly consistent.

·  Growth headwinds fading as legacy business appears to have stabilized; potential for revenue acceleration in FY24

Overall revenue momentum has remained steady with a CAGR of 9.5% from FY18 to FY22 or 7.7% to 11.4% growth per year. They’ve called out their legacy customer base as a headwind to growth in the past. BPO 2.0 customers, or their core base, grew 16.9%. y/y in Q2’23 and now represents 77.3% of their revenue base vs. 59.7% last year. Legacy customers continues to fall as a % of revenue, and BPO 2.0 customers continue to outpace overall growth. For Q2, they grew overall revenue 5.5% y/y but grew 12.6% when excluding the loss of a large but low margin customer in the quarter. They’ve grown their pipeline by 40% y/y to $400M in Q2’23. They also added 23 new logos in FY22 with a weighting towards the back half of the year, which should continue to scale into FY23 and FY24. New customer lands typically scale revenue 2x in year 2 and 2.5x - 3x total by year 3. FY24 would represent year 2 for the strong customer lands in FY22. Given the above, we think its reasonable to expect FY24 growth of 12% -15% which is still below the current run rate of their BPO 2.0 business. This compares to street expectations for 9.3% FY24 topline growth.


IBEX currently trades at 4.1x consensus CY24 EBITDA versus lower quality outsourcing peers at 5x-8x and higher quality peers at 10x-12x. We see fair value at 6x CY24 EBITDA. IBEX has shown better revenue stability and customer retention than peers, and at least an in-line multiple is justified in our opinion. With higher margin and growth expectations than the street, this would equate to a $36 share price with the catalyst for the re-rating driven by acceleration in revenue and margins.


-  Contact center automation may reduce the total number of contact center seats and will at least act as a headwind to seat growth. Advancements in chatbot technology with the advent of large language models will certainly lead to more and more automation of customer service functions. It’s unclear how long it will take for advancements in automation to work their way through the industry, what the magnitude of impact will be, and to what extent customer interactions will still need to be managed by a physical person. We view this as the biggest risk to the thesis and the space.

-  EBITDA margin improvements could be at risk if IBEX is forced to increase investment in tech in the near term to keep up with contact center automation

-  Vendor consolidation could act as a headwind for mid-sized BPO’s like IBEX if customers opt to consolidate further under the largest providers

-  Workforce reduction initiatives may be a headwind to growth

-  Customer concentration and key customer risk 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


- Margin improvement proves sustainable in over the next few quarters

- Revenue acceleration in FY24

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