IBEX Ltd (IBEX) FY 2024 MD&A

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes thereto included elsewhere in this Form 10-K. Unless otherwise noted, all of the financial information in this Form 10-K is consolidated financial information for the Company. The forward-looking statements in this discussion regarding our industry and the industries we serve, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are subject to numerous risks and uncertainties. See "Cautionary Note Regarding Forward-Looking Statements" and Part I, Item 1A of this Form 10-K. Our actual results may differ materially from those contained in any forward-looking statements.

This Form 10-K 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 fiscal year ended June 30, 2024 compared to the fiscal year ended June 30, 2023. Discussion and analysis for the fiscal year ended June 30, 2023 compared to the fiscal year ended June 30, 2022 may be found in the Company’s Annual Report on Form 10-K for the year ended June 30, 2023 filed with the SEC on September 13, 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 customer experiences (“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 nearly 169 million customer interactions on behalf of our clients, driving a truly differentiated customer experience.

Business Highlights

During the fiscal year ended 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, HealthTech and Travel, Transportation & Logistics verticals. We closed two sites during the year 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, strong free cash flows, new client wins with key clients in strategic verticals, and continued client and vertical diversification. As expected, our new sales pipeline and wins have picked up pace, with eighteen new clients during the fiscal year ended June 30, 2024 compared to ten in the prior year.

Recent Financial Highlights

The Company delivered revenues of $508.6 million during the fiscal year ended June 30, 2024, a 2.8% decline compared to the prior year, largely due to the year over year migration of delivery from onshore to higher margin offshore regions, macroeconomic conditions, and external factors impacting the FinTech and Telecommunication verticals, partially offset by growth in the Retail & E-commerce, HealthTech, and Travel, Transportation & Logistics verticals. Net income during the year ended June 30, 2024 was $33.7 million, a 6.6% increase from $31.6 million during the prior year. The increase was driven by improved operational delivery, increased interest income on invested funds, and lower income tax expense which is attributed to changes in geographic mix, compared to the prior year. Fully diluted earnings per share of $1.84 was up from $1.67 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.

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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 fiscal year 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 fiscal year 2024 compared to prior years. 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 BPO industry is increasingly evaluating and starting to integrate AI into its range of solutions to improve the customer experience and efficiencies. We are moving aggressively to leverage generative AI in our business. We introduced our Wave iX technology on January 30, 2024. We have created a 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. We believe that our approach to bringing a combination of our AI-enabled solutions plus a robust set of third-party AI-enabled solutions to our clients positions the company to not only be a fast-mover in the market, but also to capture an outsized share of AI-impacted future revenue, and to help minimize risk to our overall revenue and provide opportunities for future profitability enhancement. While the initial implementation of some AI-solutions may impact revenue directly derived from traditional agent-driven activities, it is our belief that by remaining on the forefront and bringing these solutions to our clients, we will be able to capture a greater share of AI-enabled revenue work and maintain and grow our overall business and results.

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 outsourcing providers. Demand during the fiscal year ended June 30, 2024 was constrained when compared to prior fiscal years, 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 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 year ended June 30, 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

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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 fiscal year 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 fiscal year 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 June 30, 2024. We regularly evaluate whether to procure additional space or enter into new markets as we continue to add employees and expand geographically to meet the demands of our business.

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 year over year. 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 lengthened in fiscal year 2023 and the first two quarters of fiscal year 2024. We experienced a faster pace of sales activity during the second half of fiscal year 2024.

Client Concentration

During the fiscal year 2024, our largest client accounted for 12% while our three largest clients accounted for 29% of our consolidated revenue. We now have over 55 clients with greater than $1 million in annual revenue. We believe client diversification is an important attribute in a challenging market.

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 fiscal year 2024, the tightening in the global labor market and corresponding wage inflation, as well as increasing facilities expenses have 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

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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.

Attrition Among Customer Facing Agents

The outsourcing industry is generally characterized by high employee turnover. Such turnover has a significant impact upon profitability as recruiting and training expenses are incurred to replace departing agents. We closely monitor the markets where we operate and where we consider expanding operations as part of our efforts to stay competitive on wages. We believe our efforts to cultivate an environment conducive to employee engagement support lower attrition rates.

Increases in Expenses Related to Sourcing or Generating Leads

A key element of our customer acquisition solution is the generation or purchase of leads or projects. We either generate our leads ourselves, often through digital means, or purchase our leads from external sources. Any increase in the cost of sourcing or generating leads or changes in the rate of conversion of those leads could impact our profit margins. We occasionally experience some volatility in our internal lead generation costs, either due to competitive keyword bidding by other digital marketing agencies, or due to bidding restrictions imposed by our clients.

Increased Up-Front Costs Driven by Increased Demand

Aside from short-term increases in demand for which we tend to delay increases in headcount, an increase in demand for customer interaction services typically results in an up-front increase in employee compensation expenses, due to the in-advance need to hire and train additional employees, predominantly delivery center agents, to service client campaigns. As these expenses for hiring and training our employees are typically incurred in a period before the revenues associated with the increase in demand are recognized, it has the effect of causing an initial decrease in our operating profit margins prior to the full impact of the profitability from the additional demand.

Net Effect of Currency Exchange Rate Fluctuations

While substantially all of our revenues are generated in U.S. dollars, a significant portion of our operating expenses are incurred outside of the United States and paid for in the respective foreign currencies, principally the local currencies of the Philippines, Jamaica and Pakistan. During the fiscal year ended June 30, 2024, out of our total employee benefits expenses, 30.9% were incurred in the Philippine Pesos, 15.5% were incurred in the Jamaican Dollar and 8.7% were incurred in Pakistani Rupee. As a result, our operations are subject to the effects of changes in exchange rates against the U.S. dollar. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk.”

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.

Key Operational Metrics

We regularly prepare and review the following key operating indicators to evaluate our business, measure our performance, identify trends in our business, prepare financial projections, allocate resources and make strategic decisions:

Workstations

The number of workstations at all of our delivery centers is a key volume metric for our business. It is defined as the number of physical workstations at a delivery center location used for production (excluding, for example, workstations in training rooms or those used by supervisors). A single workstation will typically be used for

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multiple shifts, and therefore there will typically be more delivery center agents than utilized workstations. This metric can be used by investors as an indicator of how much capacity for work the Company has overall and in a certain region.

Work at home

The number of work at home seats is also a key volume metric for our business. It is defined as the number of production agents working at home (excluding, for example, management and corporate employees). Since 2020, we have enabled work at home seats, particularly onshore, which has allowed us to rationalize a number of delivery center locations, particularly in the United States. This metric may be useful for investors as they seek to understand the shifting dynamics and economics associated with onsite versus at-home work, specifically within our onshore market, as well as provide context for capacity growth without major capital expenditures.

Capacity Utilization

Capacity Utilization is an efficiency metric used within our business. We define Capacity Utilization as the number of on-site workstations in use plus the number of work at home seats divided by the number of on-site workstations, for the period under consideration, across all facilities in the region. This metric may help investors seeking to better understand how much room for revenue growth there is within the existing site footprint, as well as what future needs to capital expenditures may be associated with a need to support revenue growth. This metric also serves as a relative proxy for efficiency in terms of usage of existing space.

During fiscal year 2024, capacity utilization increased from 77% in the prior year to 84% as we continue to utilize capacity in nearshore and offshore geographies and optimize our onshore capacity. Capacity utilization was over 100% in the United States as we continued to migrate towards a work at home model.

The following table displays our capacity utilization by region for the fiscal years ended June 30, 2024 and 2023:

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Results of Operations

The following summarizes the results of our operations for the fiscal years ended June 30, 2024 and 2023:

Fiscal Years Ended June 30, 2024 and 2023

Revenue

Our revenue was $508.6 million for the fiscal year ended June 30, 2024, a decrease of $14.5 million, or 2.8%, compared to the prior year. This decrease was primarily driven by macroeconomic factors impacting the FinTech and Telecommunication verticals, which decreased $26.0 million, or 26.8%, and $9.0 million, or 10.5%, respectively, compared to the prior year. These decreases were partially offset by increases in the Retail & E-commerce vertical of $7.8 million, or 6.4%, HealthTech vertical of $6.8 million, or 11.3%, and Travel, Transportation & Logistics vertical of $6.2 million, or 10.0% from the prior year.

As a percentage of total revenue, the revenue from our Retail & E-commerce vertical increased to 25.4% for the fiscal year ended June 30, 2024 compared to 23.2% in the prior year, the revenue from our HealthTech vertical increased to 13.1% compared to 11.5%, and the revenue from our Travel, Transportation & Logistics vertical increased to 13.4% compared to 11.9%. Conversely, the revenue from our FinTech vertical decreased to 14.0% for the fiscal year ended June 30, 2024 compared to 18.5% in the prior year, and the revenue from our Telecommunication vertical decreased to 15.0% compared to 16.3% in the prior year.

Operating Expenses

Cost of services

Cost of services was $356.5 million during the fiscal year ended June 30, 2024, a decrease of $18.5 million, or 4.9%, compared to the prior year. 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 increases in reseller commissions and lead expenses.

Payroll and related costs were $274.4 million during the fiscal year ended June 30, 2024, a decrease of $12.7 million, or 4.4%, compared to the prior year. As a percent of revenue, payroll costs decreased to 54.0% during the fiscal year ended June 30, 2024 compared to 54.9% in the prior year, reflecting the continuing trend of migrating volume to lower cost regions.

Facilities expenses, including rent and utilities, were $48.9 million during the fiscal year ended June 30, 2024, a decrease of $3.9 million, or 7.3%, compared to the prior year. Telecom, local transportation and other site

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related expenses were $11.9 million during the fiscal year ended June 30, 2024, a decrease of $1.7 million, or 12.6%, compared to the prior year. These decreases were primarily due to the site optimization efforts completed in the fourth quarter of fiscal year 2023.

Reseller commissions and lead expenses were $12.0 million during the fiscal year ended June 30, 2024, an increase of $0.6 million, or 5.0%, compared to 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.

Selling, general, and administrative expense (“SG&A”)

SG&A expense was $93.1 million during the fiscal year ended June 30, 2024, an increase of $4.5 million, or 5.1%, compared to 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, and facilities expenses, partially offset by decreases in share-based compensation expense and insurance expense.

The increase in payroll and related costs of $1.9 million was primarily driven by severance costs of $1.4 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 $1.6 million due to continued investments in cybersecurity and core business management systems. During the fiscal year ended June 30, 2024, we determined that the estimated fair value of the operating lease asset and certain assets at two of our delivery centers no longer exceeded their carrying value, and recorded total impairment losses of $1.5 million. These increases were partially offset by decreases in share-based compensation.

Depreciation and amortization expense (“D&A”)

D&A expense was $19.5 million during the fiscal year ended June 30, 2024, an increase of $0.5 million or 2.5%, compared to the prior year. The increase was primarily driven by the timing of additions resulting in higher D&A for our onshore and offshore regions, partially offset by decreases in our nearshore regions. As a percentage of revenue, D&A increased to 3.8% during the fiscal year ended June 30, 2024 compared to 3.6% in the prior year.

Income from operations

Income from operations was $39.4 million during the fiscal year ended June 30, 2024 compared to $40.5 million during the prior year. The operating margin was 7.8% during the fiscal year ended June 30, 2024, consistent with the prior year despite the aforementioned macroeconomic factors impacting our historical growth trends, as well as the impairment losses and severance costs recorded during the current year.

Interest income

Interest income during the fiscal year ended June 30, 2024 was $2.1 million compared to $0.6 million for the prior year as income from invested funds increased compared to the same period in the prior year.

Interest expense

Interest expense during the fiscal year ended June 30, 2024 was $0.5 million, down from $0.8 million during the prior year, driven by lower borrowings.

Provision for Income Taxes

Income tax expense was $7.3 million during the fiscal year ended June 30, 2024, a decrease of $1.4 million when compared with the prior year, primarily due to a lower effective tax rate in the current year. The effective tax rate was 17.9% and 21.7% for the fiscal years ended June 30, 2024 and 2023, respectively. The changes in effective tax rate between these periods was primarily attributable to changes in revenue mix across our taxable jurisdictions and discrete items recorded in the prior year.

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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 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, adjusted net income margin, 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 domestic filer conversion and legal and settlement costs), severance costs, impairment losses, warrant contra revenue, foreign currency gains, share-based compensation expense, gain on sale of subsidiaries, and loss on lease terminations, net of the tax impact of such adjustments. We define adjusted net income margin as adjusted net income divided by revenue. We define adjusted earnings per share as adjusted net income divided by weighted average diluted shares outstanding.

We use adjusted net income, adjusted net income margin, 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, adjusted net income margin, 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, adjusted net income margin, 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, adjusted net income margin, and adjusted earnings per share may not be comparable to other similarly titled measures of other companies and have 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, investors should consider adjusted net income, adjusted net income margin, 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.

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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 years presented:

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 domestic filer conversion and legal and settlement costs), severance costs, impairment losses, interest income, warrant contra revenue, foreign currency gains, share-based compensation expense, gain on sale of subsidiaries, and loss on lease terminations. Adjusted EBITDA margin is a non-GAAP profitability measure that represents adjusted EBITDA divided by revenue.

We use EBITDA, adjusted EBITDA, and adjusted 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 adjusted 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 adjusted EBITDA margin are widely used by investors, securities analysts, and other interested parties as a supplemental measure of performance.

EBITDA, adjusted EBITDA and adjusted 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

2 The tax impact of each adjustment is calculated using the effective tax rate in the relevant jurisdictions.

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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 adjusted EBITDA margin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

•EBITDA, adjusted EBITDA and adjusted 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, investors should consider EBITDA, adjusted EBITDA and adjusted 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 adjusted EBITDA margin for the years presented:

Net income margin

Net income margin increased to 6.6% for the fiscal year ended June 30, 2024 compared to 6.0% during the prior year. The increase was driven by improved margins due to client migration to higher margin offshore regions, increased interest income on invested funds, and lower income tax expense which is attributed to changes in geographic mix, compared to the prior year.

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Adjusted EBITDA margin

Despite the aforementioned macroeconomic factors impacting our historical growth trends, adjusted EBITDA margin increased slightly to 12.8% compared to the prior year, primarily due to the site optimization efforts completed in the fourth quarter of fiscal 2023 and the migration of clients to higher margin offshore locations.

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 investors 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 years presented:

Net cash provided by operating activities during the fiscal year ended June 30, 2024 was $35.9 million compared to $41.9 million during the fiscal year ended June 30, 2023. The decrease was primarily driven by a decline in absolute revenue due to client migration to offshore locations, lower training revenue recognized, investments in our technology, sales and marketing, and client service functions, and higher use of working capital of $3.6 million.

Free cash flow during the fiscal year ended June 30, 2024 was $27.0 million, an increase of $4.1 million from the prior year. The increase is due to decreased capital expenditures during the fiscal year ended June 30, 2024 as we utilized capacity built out over the last two years, partially offset by a decrease in net cash inflow from operating activities.

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 investors 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:

The increase in cash and cash equivalents as of June 30, 2024 is primarily due to lower capital expenditures and debt repayments, offset by an increase in share repurchases and lower operating cash flow, compared to the prior year.

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The increase in net cash as of June 30, 2024 is primarily due to lower capital expenditures and debt repayments, partially offset by an increase in share repurchases and lower operating cash flow compared to the prior year.

JOBS Act Accounting Election

We qualify as an EGC pursuant to the provisions of the JOBS Act. The JOBS Act permits an EGC 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 EGC 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

Our principal sources of liquidity are cash and cash equivalents, cash flows from operations, and the unused availability under our existing credit facility, described in more detail below in “Financing Arrangements.” As of June 30, 2024, the unused availability under our existing credit facility was $79.0 million.

As of June 30, 2024, our total indebtedness was $1.5 million, consisting of our finance leases. We were in compliance with all debt covenants as of June 30, 2024. Refer to Note 8. “Debt”, included in Item 8. “Financial Statements and Supplementary Data” for further information on 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 share repurchases. 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 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 $80.0 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.

The Board may authorize share repurchases of the Company’s common shares and the Company had multiple share repurchase plans during the years ended June 30, 2024 and 2023. On May 1, 2024, the Board authorized the Company’s current share repurchase program of $30 million in share repurchases during the next twelve months. For the years ended June 30, 2024 and 2023, the Company repurchased 1,322,105 and 17,558 shares, respectively, of its common shares totaling $21.7 million, and $0.3 million, respectively. All repurchases under these programs were funded with our existing cash balance.

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The following discussion highlights our cash flow activities during the last three fiscal years.

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 June 30, 2024, we had cash and cash equivalents of $62.7 million, including $5.1 million located outside of the United States, and $2.5 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 June 30, 2024 increased primarily due to lower capital expenditures and debt repayments, offset by an increase in share repurchases and lower operating cash flow, compared to the prior year.

Cash Flows from Operating Activities

Net cash inflow from operating activities during the fiscal year ended June 30, 2024 was $35.9 million compared to $41.9 million during the fiscal year ended June 30, 2023. The decrease in net cash inflow from operating activities was primarily driven by a decline in absolute revenue due to client migration to offshore locations, lower training revenue recognized, investments in our technology, sales and marketing, and client service functions, and higher use of working capital of $3.6 million.

Cash Flows from Investing Activities

During the year ended June 30, 2024, we had net expenditures of $8.9 million on investing activities primarily related to purchases of IT and telecommunications equipment, and capacity expansion in Pakistan.

During the year ended June 30, 2023, we had expenditures of $19.0 million on investing activities primarily related to capacity expansion in Jamaica and Pakistan and investments in information technology.

Cash Flows from Financing Activities

During the year ended June 30, 2024, we expended a total of $21.7 million on financing activities, of which $21.6 million related to purchasing our common shares under the share repurchase programs.

During the year ended June 30, 2023, we expended $13.6 million on financing activities, primarily related to the repayment of debt, both term and revolving, offset by net cash receipts from stock transactions of $1.8 million.

Our cash resources could also be affected by various risks and uncertainties. For additional information, please see the section entitled “Risk Factors.”

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Financing Arrangements

We are party to a number of financing arrangements with banks, financial institutions and lessors that serve to meet our liquidity requirements. The following is a summary of our principal financing arrangement.

PNC Credit Facility

In November 2013, our subsidiary Ibex Global Solutions, Inc. (formerly known as TRG Customer Solutions, Inc.) entered into the PNC Credit Facility with PNC Bank, National Association (“PNC”), which was a three-year $35.0 million revolving credit facility. Between June 2015 and March 2021, the PNC Credit Facility was amended multiple times for increases to the maximum revolving advance amount and extension of the maturity date. In March 2021, the PNC Credit Facility was amended to join Digital Globe Services, LLC, TelSatOnline, LLC and 7 Degrees, LLC as borrowers, with the maximum revolving advance amount increased to $60 million. In September 2021, the PNC Credit Facility was amended to join iSky, LLC as a borrower. In June 2022, the PNC Credit Facility was amended to increase the maximum revolving advance amount to $80 million, with the ability to request increases, up to a maximum revolving advance amount of $95 million (contingent upon lender approval), change the reference rate used from LIBOR to Term Secured Overnight Financing Rate (“SOFR”) and extend the maturity date to May 2026. In May 2024, the PNC Credit Facility was amended for PNC's consent to the assignment of certain customer contracts (the "Contract Assignments") by the borrowers to the Company's subsidiary, Ibex Global FZ-LLC, provided that (i) the contract revenues associated with such Contract Assignments, upon the effectiveness of such Contract Assignments, shall not in the aggregate be greater than $175 million and (ii) the borrowers comply with additional reporting requirements to PNC. Borrowings under the PNC Credit Facility bear interest at SOFR plus a margin of 1.75% and/or negative 0.5% of the PNC Commercial Lending Rate for domestic loans. The PNC Credit Facility also requires a commitment fee of 0.25% per annum of undrawn commitments to be paid quarterly in arrears. The PNC Credit Facility is guaranteed by IBEX Global Limited and secured by substantially all the assets of Ibex Global Solutions, Inc., Digital Globe Services, LLC, TelSatOnline, LLC, 7 Degrees, LLC, and iSky, LLC. The PNC Credit Facility balance as of June 30, 2024 and 2023 was $0.0 million and $0.1 million, respectively.

Contractual obligations

As of June 30, 2024, we have no material off-balance sheet transactions and we are not a guarantor of any other entities’ debt or other financial obligations. For further discussion of contractual obligations, such as debt, leases, and purchase obligations, please refer to our audited consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

The following table summarizes our contractual obligations as of June 30, 2024:

Purchase obligations

Purchase obligations mainly relate to long term telecommunications contracts and enterprise cloud solutions for the continuing operation of our business.

Future capital requirements

We expect capital expenditures in fiscal year 2025 to be between 3.0% and 4.0% of revenue. Because we have heavily invested in capacity expansion and growth over the last few years, we are expecting approximately 40%

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of fiscal year 2025 capital expenditures will be directed to additional growth in the business while 60% will be directed towards maintenance of existing assets.

Our capital expenditure requirements could increase materially in the event of an acquisition or the launch of large new client contracts, which generally require increased capital expenditures for equipment and working capital to support hiring and training activities.

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with U.S. GAAP. Preparation of these financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company’s most critical accounting estimates are those most important to the portrayal of its financial condition and results of operations which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. The Company has identified the following as its most critical accounting estimates. Although management believes that its estimates and assumptions are reasonable, they are based on information available when they are made and, therefore, may differ from estimates made under different assumptions or conditions.

The Company’s significant accounting policies are discussed in Note 1. “Overview and Summary of Significant Accounting Policies” and Note 2. “Revenue from Contracts with Customers”, included in Item 8. “Financial Statements and Supplementary Data” and should be reviewed in connection with the following discussion.

Revenue

The Company recognizes revenues in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Revenues from contact center services, which consist of customer service, technical support and other value-added outsourced back-office services, are recognized as the services are performed on the basis of the number of billable minutes or hours, contractual rates, and other contractually agreed metrics, if applicable. Certain of our client contracts include bonus and penalty provisions, which are typically agreed to with our clients prior to recording the increase or decrease to revenue as a result of these provisions, however, in some cases, we may estimate these bonuses or penalties using the “most likely amount” method based on actual data and historical experience. Revenues related to training that occurs upon commencement of a new client contract or statement of work are deferred and recognized on a straight-line basis over the estimated life of the client program, as it is not considered to have a standalone value to the customer. We estimate the life of the client program based on historical experience and may need to update our assumptions as new facts and circumstances with our clients arise. Changes to the estimates described above could have a material impact on the amount of revenue recognized in any period.

Leases

The Company determines whether an arrangement contains a lease under ASC 842, Leases, at inception. Operating lease assets represent the Company’s right to use an underlying asset for the lease term, and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease expense is recognized on a straight-line basis over the lease term. The Company estimates the lease term and incremental borrowing rate; changes in these estimates could have a material impact on the amount of operating lease assets, liabilities and expense recognized in any period.

For purposes of calculating operating lease liabilities, the Company estimates the lease term, which may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. The Company’s capital investment, relationships with clients serviced at the site, and employee recruitment potential are some of the factors it considers when determining whether it will exercise its option to extend a lease.

The Company determines the incremental borrowing rates based on information available at the lease commencement date. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Interest on finance leases is included in interest expense, net, in the consolidated

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statements of comprehensive income. The Company applies judgment in estimating the incremental borrowing rate including considering the term of the lease, the currency in which the lease is denominated, the impact of collateral, and our credit risk on the rate.

Goodwill Impairment

Goodwill represents the excess of the cost of a business combination over the total acquisition date fair value of the identifiable assets, liabilities and contingent liabilities acquired. Goodwill is not amortized but is tested for impairment at the reporting unit level, on an annual basis or more frequently, if events occur or circumstances change indicating potential impairment. The Company annually tests goodwill for impairment on June 30. In evaluating goodwill for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Qualitative factors that the Company considers include, but are not limited to, macroeconomic and industry conditions, overall financial performance and other relevant entity-specific events. If the Company bypasses the qualitative assessment, or if the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company performs a quantitative goodwill impairment test to identify potential goodwill impairment and measures the amount of goodwill impairment it will recognize, if any.

Warrant to purchase common shares

The Company accounts for a warrant to purchase its common shares as an equity instrument in accordance with the provisions of Accounting Standards Update (“ASU”) No. 2019-08, Compensation – Stock Compensation (Topic 718) and ASC 606, Revenue from Contracts with Customers, which requires entities to measure and classify share-based payment awards granted to a customer by applying the guidance under Topic 718, as of January 1, 2019.

On the grant date, the Company estimated the value of the warrant using a Black-Scholes option pricing model. The assumptions used in our Black-Scholes model were (1) expected term, which was estimated based on the term of the warrant, (2) the risk-free interest rate which is based on the U.S. Treasury yield curve, (3) expected volatility which we estimated based on peer group volatility, and (4) an expected dividend yield based on our anticipated future dividends on our common stock (estimated at zero). These estimates all have an impact on the value attributed to the warrant.

At each reporting period, the Company assesses the likelihood of additional vesting in accordance with service or performance conditions included in the warrant terms. The Company adjusts its estimates for additional contra-revenue when it is probable that additional shares will vest. The timing of any additional estimated vesting and the related fair value at the time of the change in estimate could have a material impact on the transaction price and therefore revenue recorded related to the Amazon contract.

Share-based compensation plans

The Company accounts for its share-based awards in accordance with provisions of ASC 718, Compensation - Stock Compensation. For equity-classified awards, total compensation cost is based on the grant date fair value. For liability-classified awards, total compensation cost is based on the fair value of the award on the date the award is granted and is subsequently re-measured at each reporting date until settlement.

Awards to employees and directors may contain service, performance and/or market vesting conditions. For unvested awards with performance conditions, the Company assesses the probability of attaining the performance conditions at each reporting period. Awards that are deemed probable of attainment are recognized in expense over the requisite service period, which we estimate based on financial projections.

The Company calculates the fair value of option awards using the Black-Scholes model. The assumptions used in our Black-Scholes model are (1) expected term, which was estimated based on the simplified method as we do not have requisite historical data, (2) the risk-free interest rate which is based on the U.S. Treasury yield curve, (3) expected volatility which we estimate based on peer group volatility, and (4) an expected dividend yield based on our anticipated future dividends on our common stock (currently estimated at zero). Changes in

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any of the estimates mentioned above could have a material impact on the share based compensation expense recorded in any period.

Income taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are also recognized for the estimated future effects of tax loss carry forwards. The effect of changes in tax rates on deferred taxes is recognized in the period in which the enactment dates change.

We recognize deferred tax assets to the extent that we determine that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted under the tax law, and results of recent operations. The Company records valuation allowances against its deferred tax assets based on whether it is more likely than not that the deferred tax assets will be realized. If we determine that we are able to realize our deferred tax assets in the future in excess of their net recorded amount, we will make an adjustment to the valuation allowance.

We record uncertain tax positions in accordance with ASC 740, Income Taxes, on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that met the more likely than not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Changes in recognition or measurements are reflected in the period in which the change in estimate occurs.

Commitment and Contingencies

The Company is subject to claims and lawsuits filed in the ordinary course of business. Although management does not believe that any current proceedings will have material adverse effect on its consolidated financial position, results of operations, or cash flows, no assurances to that effect can be given based on the uncertainty of litigation and demands of third parties. The Company records a liability for pending litigation and claims where losses are both probable and can be reasonably estimated. Legal fees are expensed as incurred.