IBEX Ltd 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this "Form 10-Q"), the financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (the "Annual Report"), as filed with the Securities and Exchange Commission (the "SEC"), and the information included under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report. In addition to historical data, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in our forward-looking statements as a result of various factors, including but not limited to those discussed under "Cautionary Note Regarding Forward-Looking Statements" in this Form 10-Q and under Part I, Item 1A, "Risk Factors" in the Annual Report. This Form 10-Q includes certain historical consolidated financial and other data for IBEX Limited (“ibex,” “we,” “us,” “our” or the “Company”). The following discussion provides a narrative of our financial condition and results of operations for the three and nine months ended March 31, 2024 compared to the three and nine months ended March 31, 2023 . Overview ibex delivers innovative business process outsourcing (“BPO”), smart digital marketing, online acquisition technology, and end-to-end customer engagement solutions to help companies acquire, engage, and retain valuable customers. Today, ibex operates a global CX delivery center model consisting of 29 delivery centers around the world, while deploying next-generation technology to drive superior customer experiences for many of the world’s leading companies across various verticals, including Retail & E-commerce, HealthTech, FinTech, Utilities and Logistics. ibex leverages its diverse global team of approximately 30,000 employees together with industry-leading technology, including its Wave iX platform, to manage customer interactions on behalf of our clients, driving a truly differentiated customer experience. Business Highlights During the third quarter of our fiscal year ending June 30, 2024, the Company continued to deliver a solid financial performance, in particular, growth in our digital first solutions with leading clients in our Retail & E-commerce and Travel, Transportation & Logistics verticals. We closed two sites during the quarter to optimize utilization in our onshore and nearshore geographies. Despite macroeconomic conditions impacting our historical growth trends, as well as the unfavorable impact on our revenue from shifting mix from onshore to offshore geographies, the business performed well in several important areas, including profitability and new client wins with key clients in strategic verticals. As expected, our new sales pipeline and wins have picked up pace, with fifteen new clients during the nine months ended March 31, 2024 versus eight in the prior year period. Recent Financial Highlights The Company delivered revenues of $126.8 million during the three months ended March 31, 2024, a 3.6% decline compared to same quarter in the prior year, largely due to the year over year shift of delivery from onshore to higher margin offshore regions, macroeconomic conditions, and external factors impacting the FinTech and Telecommunications verticals, partially offset by revenue increases in the Retail & E-commerce and Travel, Transportation & Logistics verticals. Net income during the three months ended March 31, 2024 was $10.3 million, a decrease of 8.6% from $11.3 million during the same quarter in the prior year. Fully diluted earnings per share for the three months ended March 31, 2024 of $0.57, a decrease of 3% from $0.59 per share during the same quarter in the prior year. The Company delivered revenues of $384.0 million during the nine months ended March 31, 2024, a 3.7% decline compared to same period in the prior year, largely due to aforementioned factors and macroeconomic conditions. Net income during the nine months ended March 31, 2024 was $23.8 million, a decrease of 12.0% from $27.1 million during the same period in the prior year. The decrease in net income was primarily driven by 25 Table of Contents lower revenue, including training revenue recognized, impairment losses and severance costs related to our continued optimization efforts, and planned investments in our technology, sales and marketing, and client service functions as we continue to focus on revenue growth. Fully diluted earnings per share for the nine months ended March 31, 2024 was $1.29, a decrease of 10% from $1.44 per share during the same period in the prior year. Trends and Factors Affecting our Performance There are a number of key trends and factors that have affected and may affect our results of operations. Macroeconomic Trends Macroeconomic factors, including but not limited to, increasing inflation and interest rates, global economic and geopolitical uncertainty, changes in foreign currency exchange rates, and the impact that these factors are having on our clients and their customers, have also impacted our financial results during the nine months ended March 31, 2024. Some of our customers have increased their focus on cost reduction, resulting in decisions to shift work from onshore sites to offshore sites, which has contributed to a modest decline in revenue during the nine months ended March 31, 2024 when compared to the same period in the prior year. We expect that these factors will continue to impact our operations in the near term; however, we also believe that they present opportunities with both new and existing clients, as companies maintain a focus on cost reduction. Artificial Intelligence ("AI") With the increasing applicability of AI in enhancing business processes, the customer care industry is starting to integrate AI into its range of solutions to improve the customer experience and improve efficiencies. The proliferation and evolution of generative AI may have impacts on the CX sector. Potential automation in back-end and middle-office business processes, as well as potential increased use of bots to respond to pre-defined queries, could impact assisted customer interactions. Additionally, productivity, data availability and quality due to generative AI could result in an increased volume of work, as agents may be up-skilled to deploy improved analytical capabilities. However, the adoption of generative AI also presents key challenges in the forms of data security, governance, implementation and coordination of an overall customer service solution. These challenges create opportunities for trusted CX partners. We are moving aggressively to develop the “Next wave of Wave iX” by leveraging generative AI in our business. We introduced WaveiX on January 30, 2024. We have created our three-pronged AI strategy, which continues to keep ibex at the forefront of digital transformation. Our solutions are focused on increasing agent productivity, providing deeper customer insights to elevate the customer experience and putting AI in front of the customer journey with voice and chat bots. We believe we are well positioned to leverage our leadership position in adopting new technology in the CX sector and to create significant value for our clients through the application of AI. More information on the risks related to the adoption of AI is described in Part 1. Item 1A of the Annual Report. Client’s Underlying Business Performance Demand for customer interaction services reflects a client’s underlying business performance and priorities. Growth in a client’s business often results in increased demand for our customer engagement solutions. Conversely, a decline in a client’s business generally results in a decrease in demand for our customer engagement solutions, shifting volume to lower cost geographies, and potential increases in demand for our customer acquisition and expansion solutions. The correlation between business performance and demand for outsourced customer interaction solutions can therefore be complex, and depends upon several factors, such as industry consolidation, client investments in growth, and overall macroeconomic environment, all of which can result in short term revenue volatility for providers. Demand during the nine months ended March 31, 2024 was constrained when compared to the same period in the prior year, due in large part to the aforementioned macroeconomic conditions. Capacity Utilization As a significant portion of our customer interaction services are performed by customer-facing agents located in delivery centers, our margins are impacted by the level of capacity utilization in those facilities. We incur substantial fixed costs in operating such facilities. The greater the volume of interactions handled, the higher the 26 Table of Contents utilization level of workstations within those facilities and the revenues generated to cover those fixed costs, thus the greater the percentage operating margin. As demand for delivery locations has continued to shift towards lower cost geographies during the nine months ended March 31, 2024, we have continued to fill the additional capacity in our offshore region and expect this capacity to be absorbed quickly as clients and prospective clients look to relocate work to cost advantageous markets in the near term. We continue to realize cost savings as we optimize the number of onshore and nearshore delivery centers. Labor Costs When compensation levels of our employees increase, we may not be able to pass on such increased costs to our clients or do so on a timely basis, which tends to depress our operating profit margins if we cannot generate sufficient offsetting productivity gains. During the nine months ended March 31, 2024, we continued to see increasing wage pressure in all of our geographies, in part brought on by the current global inflation and labor shortage, which is increasing competition for contact center agents from other sectors of the economy. During the nine months ended March 31, 2024, we have offset some of these wage increases with higher agent quality and increased productivity, higher agent retention, and increased client prices under contractual cost of living adjustments (“COLA”). Furthermore, our overall labor cost as a percentage of revenue is impacted by the aforementioned shift in delivery location from onshore delivery centers to offshore centers. Delivery Location We generate greater profit margins from our work carried out by agents located in offshore and nearshore geographies compared to our work carried out from onshore locations in the United States. As a result, our operating margins are influenced by the proportion of our work delivered from these higher margin locations. Over time we have expanded and further diversified our delivery network by adding facilities in these locations, offering a significant relative cost advantage. Our percentage of workstations in nearshore and offshore centers is approximately 95% as of March 31, 2024. We regularly evaluate new markets to continue to service our clients. Provider Performance Generally, our clients will re-allocate spend and market share in favor of outsourcing providers who consistently perform better and add more value than their competitors. Such re-allocation of spend can either take place on a short-term basis as higher performing providers are shielded by the client against demand volatility, or on a longer term basis as the client shifts more and more of its overall outsourcing spend and volume to higher performing providers. Our revenues have generally increased as a result of performance-based market share gains with our existing clients, as well as due to our new client wins. Sales Cycles and New Client Wins We have a strong track record of winning key new client accounts and as a result of our land and expand strategy, we have been successful in winning an increasing number of new client engagements, and subsequently increasing our revenues with these clients period over period. Historically, our in-year new client wins have generated 2.5x to 3.0x revenue in the second and third years of the engagement. However, in the slowing economic environment, our sales cycles were lengthening in fiscal year 2023 and the first two quarters of fiscal year 2024. We have seen sales activity pick up pace in the third quarter of fiscal year 2024. Client Concentration During the nine months ended March 31, 2024, our largest client accounted for 13%, while our three largest clients accounted for 29% of our consolidated revenues. We believe client diversification is an important attribute in a challenging market. Seasonality Our business performance is subject to seasonal fluctuations. These seasonal effects cause differences in revenues and expenses among the various quarters of any financial year, which means that the individual quarters should not be directly compared with each other or be used to predict annual financial results. 27 Table of Contents Pricing Our revenues are dependent upon both volumes and unit pricing for our services. Client pricing is often expressed in terms of a base price per minute or hour as well as, in limited cases, with bonuses and occasionally penalties depending upon our achievement of certain client objectives. During the fiscal year ended June 30, 2023 and the nine months ended March 31, 2024, the tightening in the global labor market and corresponding wage inflation, as well as increasing facilities expenses has resulted in us pursuing and successfully negotiating price increases or COLA with many of our clients. The current economic environment is also encouraging our clients to consider locating more of their support offshore. Within our customer engagement solutions, pricing for services delivered from onshore locations is higher than pricing for services delivered from offshore locations, largely driven by higher wage levels in onshore locations. Accordingly, a shift in service delivery location from onshore to offshore locations results in a lower price for our clients and a decline in our absolute revenues; however, our margins tend to increase, in percentage and often in absolute terms, as compared to onshore service delivery. Results of Operations The following summarizes the results of our operations for the three and nine months ended March 31, 2024 and 2023: Three Months Ended March 31, Nine Months Ended March 31, ($000s) 2024 2023 2024 2023 Revenue $ 126,795 $ 131,557 $ 384,038 $ 398,687 Cost of services 87,083 91,693 271,163 287,636 Selling, general and administrative 23,565 22,139 71,462 64,946 Depreciation and amortization 4,865 4,674 14,853 13,933 Income from operations $ 11,282 $ 13,051 $ 26,560 $ 32,172 Interest income 431 205 1,529 391 Interest expense (124) (105) (339) (553) Income before income taxes $ 11,589 $ 13,151 $ 27,750 $ 32,010 Provision for income tax expense (1,279) (1,872) (3,940) (4,938) Net income $ 10,310 $ 11,279 $ 23,810 $ 27,072 Three Months Ended March 31, 2024 and 2023 Revenue Our revenue was $126.8 million during the three months ended March 31, 2024, a decrease of $4.8 million, or 3.6%, compared to the prior year quarter. This decrease was primarily driven by macroeconomic factors impacting the FinTech and Telecommunications verticals, which decreased $7.0 million or 28.7%, and $3.6 million or 16.7%, respectively, from the comparative period. These decreases were partially offset by increases in the Retail & E-commerce vertical of $2.7 million, or 9.3%, and Travel, Transportation & Logistics vertical of $2.5 million, or 17.7% from the comparative period. As a percentage of total revenue, the revenue from our Retail & E-commerce vertical increased to 24.9% during the three months ended March 31, 2024 compared to 22.0%, and the revenue from our Travel, Transportation & Logistics vertical increased to 13.1% compared to 10.7% during the prior year quarter. Conversely, the revenue 28 Table of Contents from our FinTech vertical decreased to 13.7% compared to 18.5%, and the revenue from our Telecommunications vertical decreased to 14.0% compared to 16.2% during the prior year quarter. Operating Expenses Cost of services Cost of services was $87.1 million during the three months ended March 31, 2024, a decrease of $4.6 million, or 5.0%, compared to the prior year quarter. The decrease in cost of services was primarily due to decreases in payroll and related costs, facilities, telecom, reseller commissions and lead costs, and printing and production related expenses. Payroll and related costs were $67.2 million during the three months ended March 31, 2024, a decrease of $3.2 million, or 4.5%, compared to the prior year quarter. As a percent of revenue, payroll cost decreased to 53.0% during the three months ended March 31, 2024 compared to 53.5% during the prior year quarter, reflecting the continuing trend of shifting volume to lower cost regions. Facilities expenses, including rent and utilities, were $12.2 million during the three months ended March 31, 2024, a decrease of $0.7 million, or 5.7%, compared to the prior year quarter. Telecom, reseller commissions and lead costs, and local transportation and other site related expenses were $6.0 million during the three months ended March 31, 2024, a decrease of $0.7 million, or 10.6%, compared to the prior year quarter. These decreases were primarily due to the site optimization efforts completed in the fourth quarter of fiscal year 2023. Selling, general and administrative expense (“SG&A”) SG&A expense was $23.6 million during the three months ended March 31, 2024, an increase of $1.4 million, or 6.4%, compared to the prior year quarter. The increase in SG&A expense was primarily due to impairment losses, severance costs, and IT expenses, partially offset by decreases in variable compensation, travel, and shared-based compensation expense. During the three months ended March 31, 2024, the Company eliminated certain positions that it considered redundant and incurred approximately $1.3 million in severance costs. We also determined that the estimated fair value for certain assets at two of our delivery locations no longer exceeded their carrying value, and recorded impairment losses of $1.3 million during the three months ended March 31, 2024. IT expenses increased $0.3 million due to continued investments in core business management systems. These increases were partially offset by decreases in variable compensation, travel, and share-based compensation expense. Depreciation and amortization expense (“D&A”) D&A expense was $4.9 million during the three months ended March 31, 2024, an increase of $0.2 million or 4.1% compared to the prior year quarter. As a percentage of revenue, depreciation and amortization expense increased to 3.8% during the three months ended March 31, 2024 compared to 3.6% in the comparative period. Income from operations Income from operations was $11.3 million during the three months ended March 31, 2024 compared to $13.1 million compared to the prior year quarter. The operating margin was 8.9% for three months ended March 31, 2024, down from 9.9% for the three months ended March 31, 2023. The decrease was primarily driven by lower revenue and the impairment losses and severance costs, partially offset by lower facilities costs, variable compensation, travel, and share-based compensation expense. Interest income Interest income during the three months ended March 31, 2024 was $0.4 million compared to $0.2 million for the three months ended March 31, 2023 as income on invested funds increased compared to the prior year quarter. 29 Table of Contents Interest expense Interest expense during the three months ended March 31, 2024 was $0.1 million, consistent with the prior year quarter. Provision for Income Taxes Income tax expense was $1.3 million during three months ended March 31, 2024, a decrease of $0.6 million when compared with the same period of the prior year, primarily due to lower pre-tax income and a lower effective tax rate in the current year. The effective tax rate was 11.0% and 14.2% for the three months ended March 31, 2024 and 2023 , respectively. The changes in effective tax rates between these periods was primarily attributable to changes in revenue mix across our taxable jurisdictions and discrete items recorded in the quarter. Nine Months Ended March 31, 2024 and 2023 Revenue Our revenue was $384.0 million during the nine months ended March 31, 2024, a decrease of $14.6 million, or 3.7%, compared to the same prior year period. This decrease was primarily driven by macroeconomic factors impacting the FinTech and Telecommunications verticals, which decreased $22.6 million or 29.5%, and $8.3 million or 12.4%, respectively, from the comparative period. These decreases were partially offset by increases in the HealthTech vertical of $6.3 million, or 14.6%, Retail & E-commerce vertical of $5.6 million, or 6.0%, and Travel, Transportation & Logistics vertical of $3.2 million, or 6.9%, from the comparative period. As a percentage of total revenue, the revenue from our Retail & E-commerce vertical increased to 25.8% during the nine months ended March 31, 2024 compared to 23.5%, the revenue from our HealthTech vertical increased to 12.9% compared to 10.8%, and the revenue from our Travel, Transportation & Logistics vertical increased to 13.0% compared to 11.7% during the same prior year period. Conversely, the revenue from our FinTech vertical decreased to 14.0% compared to 19.2%, and the revenue from our Telecommunications vertical decreased to 15.2% compared to 16.7% during the same prior year period. Operating Expenses Cost of services Cost of services was $271.2 million during the nine months ended March 31, 2024, a decrease of $16.5 million, or 5.7%, compared to the same prior year period. The decrease in cost of services was primarily due to decreases in payroll and related costs, facilities, telecom, local transportation and other site related expenses, partially offset by an increase in reseller commissions and lead expenses. Payroll and related costs were $208.4 million during the nine months ended March 31, 2024, a decrease of $13.4 million, or 6.0%, compared to the same prior year period. As a percent of revenue, payroll costs decreased to 54.3% during the nine months ended March 31, 2024 compared to 55.6% during the same period in the prior year reflecting the continuing trend of shifting volume to lower cost regions. Facilities expenses, including rent and utilities, were $37.7 million during nine months ended March 31, 2024, a decrease of $1.8 million, or 4.6%, compared to the same period in the prior year. Telecom, local transportation and other site related expenses were $10.9 million during the nine months ended March 31, 2024, a decrease of $1.9 million, or 14.7%, compared to the same period in the prior year. These decreases were primarily due to the site optimization efforts completed in the fourth quarter of fiscal year 2023. Lead expenses were $9.2 million during the nine months ended March 31, 2024, an increase of $0.7 million, or 8.7%, compared to the same period in the prior year. These increases were primarily due to increases in the utilization of our third-party affiliates for inbound inquiries as well as search engine costs in connection with our digital sales and marketing efforts, which may continue throughout the remainder of fiscal year 2024. 30 Table of Contents Selling, general and administrative expense (“SG&A”) SG&A expense was $71.5 million during the nine months ended March 31, 2024, an increase of $6.5 million, or 10.0%, compared to the same period in the prior year. The increase in SG&A expense was primarily due to impairment losses, increases in payroll and related costs (including severance), IT expenses, legal and professional fees, and facilities expenses, partially offset by decreases in share-based compensation expense. The increase in payroll and related costs of $2.9 million was primarily driven by severance costs of $1.3 million related to the elimination of certain positions that we considered redundant, and investments in our technology, sales and marketing, and client service teams as we continue to focus on revenue growth. IT expenses increased $1.5 million due to continued investments in cybersecurity and core business management systems. The increase in legal and professional fees of $0.9 million was primarily related to strategic projects and higher compliance expenses. Facilities expense, including rent and utilities, increased by $0.6 million as the business continues to expand in our offshore region. During the nine months ended March 31, 2024, we determined that the estimated fair value for certain assets at two of our delivery centers no longer exceeded their carrying value, and recorded impairment losses of $1.3 million. These increases were partially offset by decreases in share-based compensation expense. Depreciation and amortization expense (“D&A”) D&A expense was $14.9 million during the nine months ended March 31, 2024, an increase of $0.9 million or 6.6%, compared to the same prior year period. As a percentage of revenue, depreciation and amortization expense increased to 3.9% during nine months ended March 31, 2024 compared to 3.5% in the comparative period. Income from operations Income from operations was $26.6 million during the nine months ended March 31, 2024 compared to $32.2 million compared to the same period in the prior year. The operating margin was 6.9% for nine months ended March 31, 2024, down from to 8.1% for the nine months ended March 31, 2023. The decrease was primarily driven by lower revenue, impairment losses, severance costs, and planned investments in our technology, sales and marketing, and client service functions as we continue to focus on revenue growth, partially offset by lower share-based compensation expense. Interest income Interest income during the nine months ended March 31, 2024 was $1.5 million compared to $0.4 million for the nine months ended March 31, 2023 as income on invested funds increased compared to the same period in the prior year. Interest expense Interest expense during the nine months ended March 31, 2024 was $0.3 million, down from $0.6 million during the nine months ended March 31, 2023 driven by lower borrowings. Provision for Income Taxes Income tax expense was $3.9 million during nine months ended March 31, 2024, a decrease of $1.0 million when compared with the same period in the prior year, primarily due to lower pre-tax income and a lower effective tax rate in the current year. The effective tax rate was 14.2% and 15.4% for the nine months ended March 31, 2024 and 2023 , respectively. The changes in effective tax rates between these periods was primarily attributable to changes in revenue mix across our taxable jurisdictions and discrete items recorded in the quarter. 31 Table of Contents Non-GAAP Financial Measures We present non-GAAP financial measures because we believe that they and other similar measures are widely used by certain investors, securities analysts and other interested parties as supplemental measures of performance and liquidity. We also use these measures internally to establish forecasts, budgets and operational goals to manage and monitor our business, as well as evaluate our underlying historical performance, as we believe that these non-GAAP financial measures provide a more helpful depiction of our performance of the business by encompassing only relevant and manageable events, enabling us to evaluate and plan more effectively for the future. The non-GAAP financial measures may not be comparable to other similarly titled measures of other companies, have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our operating results as reported in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Non-GAAP financial measures and ratios are not measurements of our performance, financial condition or liquidity under U.S. GAAP and should not be considered as alternatives to operating profit or net income (loss) or as alternatives to cash flow from operating, investing or financing activities for the period, or any other performance measures, derived in accordance with U.S. GAAP. Adjusted net income and adjusted earnings per share Adjusted net income is a non-GAAP profitability measure that represents net income before the effect of the following items: non-recurring expenses (including legal and settlement costs), severance costs, impairment losses, warrant contra revenue, foreign currency gains and losses, gain on sale of subsidiaries, and share-based compensation expense, net of the tax impact of such adjustments. We define adjusted earnings per share as adjusted net income divided by weighted average diluted shares outstanding. We use adjusted net income and adjusted earnings per share internally to establish forecasts, budgets and operational goals to manage and monitor our business, as well as evaluate our underlying historical performance. We believe that adjusted net income and adjusted earnings per share are meaningful indicators of performance as it reflects what we believe is closer to the actual results of our business performance by removing items that we believe are not reflective of our underlying business. We also believe that adjusted net income and adjusted earnings per share may be widely used by investors, securities analysts and other interested parties as a supplemental measure of performance. Adjusted net income and adjusted earnings per share may not be comparable to other similarly titled measures of other companies and has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our operating results as reported under U.S. GAAP. Because of these limitations, you should consider adjusted net income and adjusted earnings per share in conjunction with other U.S. GAAP financial performance measures, including net income from operations and net income, among others. 32 Table of Contents The following table provides a reconciliation of net income and net income margin to adjusted net income and adjusted net income margin, and diluted earnings per share to adjusted earnings per share for the periods presented: ($000s, except per share amounts) Three Months Ended March 31, Nine Months Ended March 31, 2024 2023 2024 2023 Net income $ 10,310 $ 11,279 $ 23,810 $ 27,072 Net income margin 8.1 % 8.6 % 6.2 % 6.8 % Non-recurring expenses — 84 — 876 Severance costs 1,506 — 1,506 — Impairment losses 1,257 — 1,257 — Warrant contra revenue 299 260 893 856 Foreign currency gains (471) (325) (571) (422) Gain on sale of subsidiaries — (246) — (246) Share-based compensation expense 466 1,318 2,741 3,973 Total adjustments $ 3,057 $ 1,091 $ 5,826 $ 5,037 Tax impact of adjustments 1 (809) (696) (1,480) (1,406) Adjusted net income $ 12,558 $ 11,674 $ 28,156 $ 30,703 Adjusted net income margin 9.9 % 8.9 % 7.3 % 7.7 % Diluted earnings per share $ 0.57 $ 0.59 $ 1.29 $ 1.44 Per share impact of adjustments to net income 0.12 0.02 0.24 0.19 Adjusted earnings per share $ 0.70 $ 0.61 $ 1.53 $ 1.63 Weighted average diluted shares outstanding 18,036 19,065 18,458 18,861 EBITDA, adjusted EBITDA, and adjusted EBITDA margin EBITDA is a non-GAAP profitability measure that represents net income before the effect of the following items: interest expense, income tax expense, and depreciation and amortization. Adjusted EBITDA is a non-GAAP profitability measure that represents EBITDA before the effect of the following items: non-recurring expenses (including legal and settlement costs), severance costs, impairment losses, interes t income, warrant contra revenue, foreign currency gains and losses, gain on sale of subsidiaries, and share-based compensation expense. Adjusted EBITDA margin is a non-GAAP profitability measure that represents adjusted EBITDA divided by revenue. We use EBITDA, adjusted EBITDA, and a djusted EBITDA margin internally to establish forecasts, budgets and operational goals to manage and monitor our business, as well as evaluate our underlying historical performance. We may use adjusted EBITDA as a vesting trigger in some performance-based restricted stock units. We believe that EBITDA, adjusted EBITDA and a djusted EBITDA margin are meaningful indicators of the health of our business as they provide additional information to investors about certain non-cash or non-recurring charges that we believe may not continue at the same level in the future or be reflective of our long-term performance. We also believe that EBITDA, adjusted EBITDA and a djusted EBITDA margin are widely used by investors, securities analysts, and other interested parties as a supplemental measure of performance. 1 The tax impact of each adjustment is calculated using the effective tax rate in the relevant jurisdictions. 33 Table of Contents EBITDA, adjusted EBITDA and a djusted EBITDA margin may not be comparable to other similarly titled measures of other companies and have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our operating results as reported under U.S. GAAP. Some of these limitations are as follows: • although depreciation and amortization expense is a non-cash charge, the assets being depreciated and amortized may have to be replaced in the future. EBITDA, adjusted EBITDA and a djusted EBITDA margin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; • EBITDA, adjusted EBITDA and a djusted EBITDA margin are not intended to be a measure of free cash flow for our discretionary use, as they do not reflect: (i) changes in, or cash requirements for, our working capital needs; (ii) debt service requirements; (iii) tax payments that may represent a reduction in cash available to us; and (iv) other cash costs that may recur in the future; • other companies, including companies in our industry, may calculate similarly titled measures differently, which reduces their usefulness as comparative measures. Because of these and other limitations, you should consider EBITDA, adjusted EBITDA and a djusted EBITDA margin in conjunction with U.S. GAAP financial performance measures, including cash flows from operating activities, investing activities and financing activities, net income, net income margin, and other financial results. The following table provides a reconciliation of net income and net income margin to EBITDA, adjusted EBITDA and a djusted EBITDA margin for the periods presented: Three Months Ended March 31, Nine Months Ended March 31, ($000s) 2024 2023 2024 2023 Net income $ 10,310 $ 11,279 $ 23,810 $ 27,072 Net income margin 8.1 % 8.6 % 6.2 % 6.8 % Interest expense 124 105 339 553 Income tax expense 1,279 1,872 3,940 4,938 Depreciation and amortization 4,865 4,674 14,853 13,933 EBITDA $ 16,578 $ 17,930 $ 42,942 $ 46,496 Non-recurring expenses — 84 — 876 Severance costs 1,506 — 1,506 — Impairment losses 1,257 — 1,257 — Interest income (431) (205) (1,529) (391) Warrant contra revenue 299 260 893 856 Foreign currency gains (471) (325) (571) (422) Gain on sale of subsidiaries — (246) — (246) Share-based compensation expense 466 1,318 2,741 3,973 Adjusted EBITDA $ 19,204 $ 18,816 $ 47,239 $ 51,142 Adjusted EBITDA margin 15.1 % 14.3 % 12.3 % 12.8 % Net income margin Net income margin was 8.1% for the three months ended March 31, 2024 compared to 8.6% during the prior year quarter and 6.2% for the nine months ended March 31, 2024 compared to 6.8% during the prior year period. The decreases were primarily driven by lower revenue , planned investments in our technology, sales and marketing, and client service functions as we continue to focus on revenue growth, and the impairment losses and severance costs recorded during the third quarter of our fiscal year 2024. 34 Table of Contents Adjusted EBITDA margin Adjusted EBITDA margin was 15.1% for the three months ended March 31, 2024 compared to 14.3% during the prior year quarter, and 12.3% for the nine months ended March 31, 2024 compared to 12.8% during the prior year period. The increase for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was primarily driven by cost optimization efforts undertaken during the quarter and the shift of work to higher margin offshore locations. The decrease for the nine months ended March 31, 2024 compared to the nine months ended March 31, 2023 was primarily driven by lower revenue , including training revenue recognized, a nd planned investments in our technology, sales and marketing, and client service functions as we continue to focus on revenue growth. Free cash flow Free cash flow is a non-GAAP liquidity measure that represents net cash provided by operating activities less capital expenditures. While we believe that free cash flow provides useful information to investors in understanding and evaluating our liquidity position in the same manner as our management, our use of free cash flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Further, other companies, including companies in our industry, may adjust their cash flows differently, which may reduce the value of free cash flow as a comparative measure. The following table reconciles net cash provided by operating activities to free cash flow, for the periods presented: Three Months Ended March 31, Nine Months Ended March 31, ($000s) 2024 2023 2024 2023 Net cash provided by operating activities $ 11,431 $ 13,569 $ 18,478 $ 24,424 Less: capital expenditures 1,691 3,725 6,635 15,231 Free cash flow $ 9,740 $ 9,844 $ 11,843 $ 9,193 Net cash Net cash is a non-GAAP liquidity measure that represents cash and cash equivalents less total debt. We believe that net cash provides useful information to investors in understanding and evaluating our ability to pay off debt. Our use of net cash has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Further, other companies, including companies in our industry, may adjust their cash or debt differently, which may reduce the value of net cash as a comparative measure. Net cash is calculated below: March 31, June 30, ($000s) 2024 2023 Cash and cash equivalents $ 50,665 $ 57,429 Debt Current $ 585 $ 413 Non-current 820 600 Total debt $ 1,405 $ 1,013 Net cash $ 49,260 $ 56,416 The decrease in cash and cash equivalents and net cash was primarily driven by stock repurchases during the nine months ended March 31, 2024. 35 Table of Contents JOBS Act Accounting Election We qualify as an emerging growth company pursuant to the provisions of the JOBS Act. The JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use the extended transition period until we are no longer an emerging growth company or until we choose to opt out of the extended transition period affirmatively and irrevocably. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements applicable to public companies. Liquidity and Capital Resources As of March 31, 2024, our principal sources of liquidity were cash and cash equivalents totaling $50.7 million, cash flows from operations, and the unused availability under our existing credit facilities of $80.0 million. As of March 31, 2024, our total indebtedness was $1.4 million, consisting of our finance leases. We were in compliance with all debt covenants as of March 31, 2024. See Note 6, "Debt" in the consolidated financial statements included in this Form 10-Q for additional information regarding our debt. We use these resources to finance our operations, expand current delivery centers, open new delivery centers, invest in upgrades of technology, service offerings, and for other strategic initiatives, such as acquiring or investing in complementary businesses or intellectual property rights, or stock buybacks. Our future liquidity requirements will depend on many factors, including our growth rate and the timing and extent of spending to engage in the activities mentioned above. We believe that our existing cash balance together with cash generated from our operations, and availability under our existing credit facilities will be sufficient to meet our liquidity requirements for at least the next twelve months. To the extent additional funds are necessary to meet our long-term liquidity needs as we execute on our business strategy, we anticipate that they will be obtained through the utilization of current availability under our $80 million revolving credit facility (as amended, the "PNC Credit Facility") with PNC Bank, N.A. ("PNC"), additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such additional financing may not be available on favorable terms, or at all. If we are unable to raise additional funds when desired, our business, financial condition and results of operations could be adversely affected. On September 18, 2023, the Company announced that the board of directors (the "Board") had authorized a share repurchase program under which the Company may repurchase up to $30 million of its shares over the next six months beginning September 18, 2023 (the “Share Repurchase Program”). During the three and nine months ended March 31, 2024, we repurchased 501,549 and 1,124,876 shares of our common shares under the Share Repurchase Program for $8.1 million and $18.6 million, respectively, which we funded with available cash. The Share Repurchase Program expired on March 18, 2024. The following discussion highlights our cash flow activities during the nine months ended March 31, 2024: Nine months ended March 31, ($000s) 2024 2023 Net cash inflow / (outflow) from Operating activities $ 18,478 $ 24,424 Investing activities (6,635) (15,316) Financing activities (18,583) (13,748) Effects of exchange rate difference on cash and cash equivalents (24) (515) Net decrease in cash and cash equivalents $ (6,764) $ (5,155) Cash and cash equivalents at beginning of the period 57,429 48,831 Cash and cash equivalents at the end of the period $ 50,665 $ 43,676 36 Table of Contents Cash and cash equivalents The Company manages a centralized global treasury function with a focus on safeguarding and optimizing the use of its global cash and cash equivalents. The majority of the Company’s cash is held in large U.S. banks in U.S. dollars and outside of the U.S. in U.S. dollars and foreign currencies in regional or local banks in the countries it operates in. The Company believes that its cash management policies and practices effectively mitigate its risk relating to its global cash. However, the Company can provide no assurances that it will not sustain losses. As of March 31, 2024, we had cash and cash equivalents of $50.7 million, including $5.5 million located outside of the United States, and $2.2 million that is subject to certain local regulations on repatriation. As of June 30, 2023, we had cash and cash equivalents of $57.4 million, including $5.6 million located outside of the United States, and $1.7 million that is subject to certain local regulations on repatriation. Our cash position as of March 31, 2024 decreased primarily due to share repurchases during the period, partially offset by lower capital expenditures and debt repayments compared to prior periods. Cash Flows from Operating Activities Net cash inflow from operating activities during the nine months ended March 31, 2024 decreased to $18.5 million compared to $24.4 million during the same period in the prior year. The decrease in net cash inflow from operating activities was primarily driven by weaker operating results due to lower revenue, including training revenue recognized, net changes in operating assets and liabilities of $0.4 million, and higher cash taxes paid during the nine months ended March 31, 2024. Free cash flow for the nine months ended March 31, 2024 increased t o $11.8 million compared to $9.2 million during the same period in the prior year , due to lower capital expenditures as we utilize available capacity, offset by lower operating cash flow. Cash Flows from Investing Activities During the nine months ended March 31, 2024, we had net expenditures of $6.6 million on investing activities primarily related to purchases of IT and telecommunications equipment. During the nine months ended March 31, 2023, we had expenditures of $15.2 million on investing activities related to purchases of leasehold improvements, IT and telecommunications equipment. Cash Flows from Financing Activities During the nine months ended March 31, 2024, we expended $18.6 million on financing activities, related to purchasing our common shares under the Share Repurchase Program for $18.6 million. During the nine months ended March 31, 2023, we expended $13.7 million on financing activities, including $15.3 million related to the repayment of debt, both term and revolving, offset primarily by net cash received from issuance of common stock of $1.6 million. Critical Accounting Policies and Estimates The Company’s consolidated financial statements and accompanying notes included in this Form 10-Q are prepared in accordance with U.S. GAAP. A summary of the Company’s significant accounting policies and critical accounting estimates can be found in the "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section of the Annual Report. There have been no material changes to our significant accounting policies or critical accounting estimates as reported in the Annual Report. The Company capitalizes qualifying implementation costs in accordance with ASC 350-40, Goodwill and Other, Internal-Use Software. During the nine months ended March 31, 2024, the Company commenced the upgrade of our Enterprise Resource Planning and Human Capital Management systems to a cloud computing software solution, and capitalized $1.2 million and $2.4 million of qualifying implementation costs during the three and nine months ended March 31, 2024, respectively. The Company will continue to capitalize qualifying 37 Table of Contents implementation costs until the new software solution is substantially complete and ready for the Company's intended use. Recent Accounting Pronouncements Refer to Note 1, "Overview and Summary of Significant Accounting Policies" in the consolidated financial statements included in this Form 10-Q for additional information regarding recently adopted accounting pronouncements.