TTEC Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Executive Summary TTEC Holdings, Inc. (“TTEC”, “the Company”, “we”, “our” or “us”) is a leading global customer experience as a service (“CXaaS”) partner for many of the world’s iconic brands, Fortune 1000 companies, government agencies, and disruptive growth companies. TTEC helps its clients deliver frictionless customer experiences, strengthen customer relationships, brand recognition and loyalty through personalized interactions, improve their Net Promoter Score, customer satisfaction and quality assurance, and lower their total cost to serve by combining innovative digital solutions with best-in-class service capabilities to enable and deliver simplified, consistent and seamless customer experience across channels and phases of the customer lifecycle. Our CXaaS solutions enhance our clients’ customers experience and help differentiate our clients from their competition. In the fast expanding direct-to-customer ("DTC") channel where experiences are everything, enterprises must become increasingly more customer-centric, virtualized and digitally enabled to acquire, grow and maintain customers. Our mission is to enable and accelerate our clients' path to virtual and digital transformation. We are focused on improving the experience of our clients' customers by leveraging existing and emerging technologies — cloud, omnichannel, analytics, artificial intelligence ("AI"), machine learning ("ML"), robotic process automation ("RPA"), and real-time conversational messaging. The Company reports its financial information based on two segments: TTEC Digital and TTEC Engage. ● TTEC Digital provides the CX technology services and platforms to support our clients’ customer interaction delivery infrastructure. The segment designs, builds and operates the omnichannel ecosystem in a cloud, on premise, or hybrid environment, inclusive of fully integrating, orchestrating, and administrating highly scalable, feature-rich CX technology applications. ● TTEC Engage provides the CX managed services to support our clients’ end-to-end customer interaction delivery, by providing the essential CX omnichannel and application technologies, human resources, recruiting, training and production, at-home or facility-based delivery infrastructure on a global scale, and engagement processes. This segment provides full-service digital, omnichannel customer engagement, supporting customer care, customer acquisition, growth and retention, and fraud detection and prevention services. TTEC Digital and TTEC Engage strategically come together under our unified offering, Humanify ® Customer Experience as a Service, which drives measurable customer results for clients through the delivery of personalized, omnichannel experiences. Our Humanify ® cloud platform provides a fully integrated ecosystem of CX offerings, including messaging, AI, ML, RPA, analytics, cybersecurity, customer relationship management ("CRM"), knowledge management, journey orchestration and traditional voice solutions. Our end-to-end platform differentiates us from many competitors by combining design, strategic consulting, best-in-class technology, data analytics, process optimization, system integration and operational excellence. This unified offering is value-oriented, outcome-based and delivered to large enterprises, governments and disruptive growth companies on a global scale. During 2021, the TTEC global operating platform delivered onshore, nearshore, and offshore services in 20 countries on six continents -- the United States, Australia, Belgium, Brazil, Bulgaria, Canada, Costa Rica, Germany, Greece, India, Ireland, Mexico, the Netherlands, New Zealand, the Philippines, Poland, Singapore, South Africa, Thailand, and the United Kingdom with the help of 58,500 consultants, technologists, and CX professionals. Our revenue for first quarter 2021 was $539.2 million, approximately $63.6 million, or 12% which came from our TTEC Digital segment and $475.6 million, or 88%, which came from our TTEC Engage segment. 32 Table of Contents To improve our competitive position in a rapidly changing market and stay strategically relevant to our clients, we continue to invest in innovation and service offerings for both mainstream and high growth disruptive businesses, diversifying and strengthening our core customer care services with consulting, data analytics, insights, and technology-enabled, outcomes-focused services. We also invest to broaden our product and service capabilities, increase our global client base and industry expertise, tailor our geographic footprint to the needs of our clients, and further scale our end-to-end integrated solutions platform. To this end we have been highly acquisitive in the last several years, including an acquisition early in the second quarter of 2021 of a provider of Genesys and Microsoft cloud contact center services, an acquisition in the second half of 2020 of a preferred Amazon Connect cloud contact center service provider, an acquisition in the first quarter of 2020 of an autonomous customer experience and intelligent automation solutions provider and an acquisition in the fourth quarter of 2019 of a provider of customer care, social media community management, content moderation, technical support and business process solutions for rapidly growing businesses in early stages of their lifecycle. We have extensive expertise in the automotive, communications, financial services, national/federal and state and local government, healthcare, logistics, media and entertainment, e-tail/retail, technology, travel and transportation industries. We serve more than 300 diverse clients globally, including many of the world’s iconic brands, Fortune 1000 companies, government agencies, and disruptive growth companies. COVID-19 Pandemic In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic. Early in second quarter of 2020, we transitioned approximately 80% of our employee population to a work from home environment. Those employees who were considered essential and could not operate effectively while remote work in our brick-and-mortar sites, but most continue to work from home. For those sites that continue to stay opened during the pandemic, we have taken extensive measures to protect the health and safety of our employees, in accordance with the recommendations and guidelines provided by the World Health Organization, the U.S. and European Centers for Disease Control and Prevention, the U.S. Occupational Safety Association, and local governments in jurisdictions where our customer experience centers are located. Although our business experienced some impacts of COVID-19 in the first half of 2020, our implementation of business continuity plans, rapid transition of employees to a work from home environment, and the geographic diversification of our delivery centers allowed us to mitigate potentially more severe impacts and positioned us to continue supporting our commercial and public sector clients without interruptions and provide them with additional support as they experienced surge volumes of customer, patient and citizen COVID-19 related engagement. Through the period ended March 31, 2021 the COVID-19 pandemic has not had a material adverse impact on our operational or financial results. While we expect this positive trend to continue and some of our COVID-19 specific work has transitioned to more traditional business activities for the same clients, there continues to be uncertainty about our COVID-19 and non-COVID-19 related business as the pandemic continues around the globe and some locations where we deliver business are experiencing ongoing COVID-19 infection surges, related lockdown and business interruption. We cannot accurately predict the severity of the economic and operational challenges of a pro-longed COVID-19 pandemic on our clients’ businesses and its effect on the magnitude and timing of their buying decisions. Further, while to date we have been successful in managing service delivery from highly disbursed employee population working remotely and our delivery sites that could not be replaced with work from home delivery, unpredictable lockdown decisions in some jurisdictions where we do business, certain seasonal weather cycles and their potential impacts on power grid and internet availability for our employees working from home may impact our delivery capability with little notice, thus potentially impacting our results of operations in the future. Our Integrated Service Offerings and Business Segments We provide strategic value and differentiation through our two business segments: TTEC Digital and TTEC Engage. 33 Table of Contents TTEC Digital provides the CX technology services and platforms to support our clients’ customer interaction delivery infrastructure. The segment designs, builds and operates the omnichannel ecosystem in a cloud, on premise, or hybrid environment, and fully integrates, orchestrates, and administers highly scalable, feature-rich CX technology applications. These solutions are critical to enabling and accelerating digital transformation for our clients. ● Technology Services: Our technology services design, integrate and operate highly scalable, digital omnichannel technology solutions in the cloud, on premise, or hybrid environment, including journey orchestration, automation and AI, knowledge management, and workforce productivity. ● Professional Services: Our management consulting practices deliver customer experience strategy, analytics, process optimization, and learning and performance services. TTEC Engage delivers the CX managed services to support our clients’ end-to-end customer interaction delivery, by providing the essential CX omnichannel and application technologies, human resources, recruiting, training and production, at-home or facility-based delivery infrastructure on a global scale, and engagement processes. This segment provides full-service digital, omnichannel customer engagement, supporting customer care, customer acquisition, growth and retention, and fraud detection and prevention services. ● Customer Acquisition Services: Our customer growth and acquisition services optimize the buying journeys for acquiring new customers by leveraging technology and analytics to deliver personal experiences that increase the quantity and quality of leads and customers. ● Customer Care Services: Our customer care services provide turnkey contact center solutions, including digital omnichannel technologies, associate recruiting and training, facilities, and operational expertise to create exceptional customer experiences across all touchpoints. ● Fraud Prevention Services: Our digital fraud detection and prevention services proactively identify and prevent fraud and provide community content moderation and compliance. Based on our clients’ preference, we provide our services on an integrated cross-business segment and/or on a discrete basis. Additional information with respect to our segments and geographic footprint is included in Part I, Item 1. Financial Statements, Note 3 to the Consolidated Financial Statements. Financial Highlights In the first quarter of 2021, our revenue increased $107.0 million, or 24.8%, to $539.2 million over the same period in 2020 including an increase of $7.1 million, or 1.7%, due to foreign currency fluctuations. The increase in revenue was comprised of a $121.0 million, or 34.1%, increase for TTEC Engage offset by a $14.0 million, or 18.0%, decrease for TTEC Digital. Our first quarter 2021 income from operations increased $32.7 million, or 80.3%, to $73.4 million or 13.6% of revenue, compared to $40.7 million or 9.4% of revenue in the first quarter of 2020. The change in operating income is comprised of a number of factors across the segments. The TTEC Engage operating income expanded with a 127.3% improvement over the same period last year primarily based on the increase in revenue including volumes in our financial services, commercial and public sector clients experiencing spikes in customer interactions related to COVID-19, and grant income received to offset salaries and rent expenses. The TTEC Digital operating income decreased 59% due to the reduction in the large multi-year government contract offset by increases from the 2020 acquisitions and continued growth in the cloud revenue platform. Income from operations in the first quarter of 2021 and 2020 included $3.9 million and $1.2 million of restructuring charges and asset impairments, respectively. Our offshore customer engagement centers spanning six countries, serve clients based in the U.S. and in other countries with 23,500 workstations, representing 57% of our global delivery capability. Revenue for our TTEC Engage segment provided from these offshore locations represented 29% of our revenue for the first quarter of 2021, as compared to 34% of our revenue for the corresponding period in 2020. 34 Table of Contents Our seat utilization is defined as the total number of utilized workstations compared to the total number of available production workstations. As of March 31, 2021, the total production workstations for our TTEC Engage segment was 41,458 and the overall capacity utilization in our centers was 64% versus 73% in the prior year period. The utilization is lower than the previous year primarily due to COVID-19 protocols requiring the distancing of associates which has reduced the available seat capacity. Adjusted for social distancing protocols, which reduced the available workstations to approximately 20,942, and accounting for all client paid seats as utilized, whether through actual usage or contractual commitments to hold the seats, current utilization is in excess of 127%. Post COVID-19 we expect our clients to leverage a more diversified geographic footprint and an increased mix of work from home vs. brick and mortar seats. We will continue to refine our site strategy and capacity as we finalize plans with our clients and prospects. Some of our clients may be subject to regulatory pressures to serve clients onshore. We plan to continue to selectively retain and grow capacity and expand into new offshore markets, while maintaining appropriate capacity onshore. As we grow our offshore delivery capabilities and our exposure to foreign currency fluctuations increases, we will continue to actively manage this risk via a multi-currency hedging program designed to minimize operating margin volatility. Recently Issued Accounting Pronouncements Refer to Part I, Item I, Financial Statements, Note 1 to the Consolidated Financial Statements for a discussion of recently adopted and issued accounting pronouncements. Critical Accounting Policies and Estimates Management’s Discussion and Analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as the disclosure of contingent assets and liabilities. We regularly review our estimates and assumptions. These estimates and assumptions, which are based upon historical experience and on various other factors believed to be reasonable under the circumstances, form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Reported amounts and disclosures may have been different had management used different estimates and assumptions or if different conditions had occurred in the periods presented. For further information, please refer to the discussion of all critical accounting policies in Note 1 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2020. Results of Operations Three months ended March 31, 2021 compared to three months ended March 31, 2020 The tables included in the following sections are presented to facilitate an understanding of Management’s Discussion and Analysis of Financial Condition and Results of Operations and present certain information by segment for the three months ended March 31, 2021 and 2020 (amounts in thousands). All inter-company transactions between the reported segments for the periods presented have been eliminated. TTEC Digital ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ ​ ​ ​ ​ ​ ​ 2021 2020 $ Change % Change ​ Revenue ​ $ 63,587 ​ $ 77,556 ​ $ (13,969) (18.0) % ​ Operating Income ​ 4,202 ​ 10,258 ​ (6,056) (59.0) % ​ Operating Margin ​ 6.6 % 13.2 % ​ ​ ​ ​ ​ ​ ​ The decrease in revenue for the TTEC Digital segment was related to increases in the cloud platform and the systems integration practice, including the acquisitions of Voice Foundry and Serendebyte, offset by reductions in the large multi-year government contract and in the legacy facility based training business, which the Company has exited. Excluding the large multi-year government contract, the TTEC Digital revenue has increased 23% year over year. 35 Table of Contents The operating income decline is primarily attributable to the reduction in the large multi-year government contract offset by increases in the cloud platform and system integration practice and the exit of the legacy facility based training business. The operating income as a percentage of revenue decreased to 6.6% in the first quarter of 2021 as compared to 13.2% in the prior period. Included in the operating income was amortization expense related to acquired intangibles of $1.2 million and $0.6 million for the quarters ended March 31, 2021 and 2020, respectively. TTEC Engage ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ ​ ​ ​ ​ ​ ​ 2021 2020 $ Change % Change ​ Revenue ​ $ 475,632 ​ $ 354,657 ​ $ 120,975 34.1 % ​ Operating Income ​ 69,222 ​ 30,458 ​ 38,764 127.3 % ​ Operating Margin ​ 14.6 % 8.6 % ​ ​ ​ ​ ​ ​ ​ The increase in revenue for the TTEC Engage segment was due to a net increase of $127.2 million in client programs including certain surge programs for several clients in connection with the COVID-19 pandemic and a $6.5 million increase due to foreign currency fluctuations, offset by a decrease for program completions of $12.7 million. The operating income increased primarily due to the growth in revenue, revenue mix, and increased profitability in several offerings. Included in the first quarter of 2021 is a $6.0 million increase to operating income due to grants received related to COVID-19 relief, which was offset by $3.0 million of restructuring and impairment charges related to several facilities in the U.S. (see Part I. Item 1. Financial Statements, Note 9 to the Consolidated Financial Statements). As a result, the operating income as a percentage of revenue increased to 14.6% in the first quarter of 2021 as compared to 8.6% in the prior period. Included in the operating income was amortization expense related to acquired intangibles of $3.3 million and $3.3 million for the quarters ended March 31, 2021 and 2020, respectively. Interest Income (Expense) For the three months ended March 31, 2021, interest income decreased to $0.2 million from $0.4 million in the same period in 2020. Interest expense decreased to $1.8 million during 2021 from $9.6 million during 2020 due to higher utilization of the line of credit, offset by lower interest rates and a $6.5 million decrease in the charge related to the future purchase of the remaining 30% interest in Motif, Inc. versus the prior year period, which was finalized during the second quarter of 2020. Other Income (Expense) For the three months ended March 31, 2021, Other income (expense), net decreased to net expense of $0.8 million from net income of $3.4 million during the prior year quarter. Included in the three months ended March 31, 2021 and 2020 were a $0.9 million expense and a $3.3 million benefit, respectively, related to the fair value adjustment of contingent consideration for two acquisitions (see Part I. Item 1. Financial Statements, Note 2 to the Consolidated Financial Statements). 36 Table of Contents Income Taxes The effective tax rate for the three months ended March 31, 2021 was 22.5%. This compares to an effective tax rate of 29.2% for the comparable period of 2020. The effective tax rate for the three months ended March 31, 2021 was influenced by earnings in international jurisdictions currently under an income tax holiday, the distribution of income between the U.S. and international tax jurisdictions and the associated U.S. tax impacts of foreign earnings. Without a $1.0 million benefit related to restructuring, $2.4 million of expense related to changes in valuation allowances, a $2.8 million benefit related to equity compensation, and a $1.2 million benefit related to the amortization of purchased intangibles, the Company’s effective tax rate for the first quarter of 2021 would have been 23.7%. Liquidity and Capital Resources Our principal sources of liquidity are our cash generated from operations, our cash and cash equivalents, and borrowings under our Credit Facility. During the three months ended March 31, 2021, we generated positive operating cash flows of $69.8 million. We believe that our cash generated from operations, existing cash and cash equivalents, and available credit will be sufficient to meet expected operating and capital expenditure requirements for the next 12 months. We manage a centralized global treasury function in the United States with a focus on safeguarding and optimizing the use of our global cash and cash equivalents. Our cash is held in the U.S. in U.S. dollars, and outside of the U.S. in U.S. dollars and foreign currencies. We expect to use our cash to fund working capital, global operations, dividends, acquisitions, and other strategic activities. While there are no assurances, we believe our global cash is well protected given our cash management practices, banking partners and utilization of diversified bank deposit accounts and other high quality investments. We have global operations that expose us to foreign currency exchange rate fluctuations that may positively or negatively impact our liquidity. We are also exposed to higher interest rates associated with our variable rate debt. To mitigate these risks, we enter into foreign exchange forward and option contracts through our cash flow hedging program. Please refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk, Foreign Currency Risk, for further discussion. In early April 2021, we drew down approximately $500 million of the availability on the Credit Facility in order to provide funding for the acquisition of Avtex Solutions, Holdings LLC. During the first quarter 2020, we borrowed $350 million under our revolving credit facility as a precautionary measure to provide additional liquidity during the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic. During September 2020, this additional borrowing was repaid. Although we expect that current cash and cash equivalent balances and cash flows that are generated from operations will be sufficient to meet our domestic and international working capital needs and other capital and liquidity requirements for at least the next 12 months, if our access to capital is restricted or our borrowing costs increase, our operations and financial condition could be adversely impacted. The following discussion highlights our cash flow activities during the three months ended March 31, 2021 and 2020. Cash and Cash Equivalents We consider all liquid investments purchased within 90 days of their original maturity to be cash equivalents. Our cash and cash equivalents totaled $144.2 million and $132.9 million as of March 31, 2021 and December 31, 2020, respectively. We diversify the holdings of such cash and cash equivalents considering the financial condition and stability of the counterparty institutions. We reinvest our cash flows to grow our client base, expand our infrastructure, for investment in research and development, for strategic acquisitions and to pay dividends. 37 Table of Contents Cash Flows from Operating Activities For the three months ended March 31, 2021 and 2020, net cash flows provided by operating activities was $ 69.8 million and $62.2 million, respectively. The increase is primarily due to a $25.8 million increase in net cash income from operations offset by a $18.1 million reduction in net working capital. Cash Flows from Investing Activities For the three months ended March 31, 2021 and 2020, net cash flows used in investing activities was $11.8 million and $22.0 million, respectively. The decrease was due to a $5.2 million decrease in capital expenditures and a $5.0 million decrease related to acquisitions. Cash Flows from Financing Activities For the three months ended March 31, 2021 and 2020, net cash flows (used in) provided by financing activities was $(54.2) million and $403.7 million, respectively. The change in net cash flows from 2020 to 2021 was primarily due to a $456.0 million net million reduction in the line of credit. Free Cash Flow Free cash flow (see “Presentation of Non-GAAP Measurements” below for the definition of free cash flow) increased slightly for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to an increase in net cash from operations offset by a decrease in working capital and lower capital expenditures. Free cash flow was $58.2 million and $45.4 million for the three months ended March 31, 2021 and 2020, respectively. Presentation of Non-GAAP Measurements Free Cash Flow Free cash flow is a non-GAAP liquidity measurement. We believe that free cash flow is useful to our investors because it measures, during a given period, the amount of cash generated that is available for debt obligations and investments other than purchases of property, plant and equipment. Free cash flow is not a measure determined by GAAP and should not be considered a substitute for “income from operations,” “net income,” “net cash provided by operating activities,” or any other measure determined in accordance with GAAP. We believe this non-GAAP liquidity measure is useful, in addition to the most directly comparable GAAP measure of “net cash provided by operating activities,” because free cash flow includes investments in operational assets. Free cash flow does not represent residual cash available for discretionary expenditures, since it includes cash required for debt service. Free cash flow also includes cash that may be necessary for acquisitions, investments and other needs that may arise. The following table reconciles net cash provided by operating activities to free cash flow for our consolidated results (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ 2021 2020 ​ Net cash provided by operating activities ​ ​ $ 69,787 ​ $ 62,165 ​ Less: Purchases of property, plant and equipment ​ ​ 11,565 ​ 16,813 ​ Free cash flow ​ ​ $ 58,222 ​ $ 45,352 ​ ​ Obligations and Future Capital Requirements There were no material changes to the Company’s contractual obligations and future capital requirements outside the normal course of business from the date of our 2020 Form 10-K filing on March 1, 2021 through the filing of this report. 38 Table of Contents Future Capital Requirements We expect total capital expenditures in 2021 to be between 3.1% and 3.3% of revenue. Approximately 60% of these expected capital expenditures are to support growth in our business and 40% relate to the maintenance for existing assets. The anticipated level of 2021 capital expenditures is primarily driven by new client contracts and the corresponding requirements for additional customer engagement center capacity as well as enhancements to our technological infrastructure. The amount of capital required over the next 12 months will depend on our levels of investment in infrastructure necessary to maintain, upgrade or replace existing assets. Our working capital and capital expenditure requirements could also increase materially in the event of acquisitions or joint ventures, among other factors. These factors could require that we raise additional capital through future debt or equity financing. We can provide no assurance that we will be able to raise additional capital upon commercially reasonable terms acceptable to us. Client Concentration During the three months ended March 31, 2021, one of our clients represented more than 10% of our total revenue. Our five largest clients, collectively, accounted for 41.8% and 36.0% of our consolidated revenue for the three months ended March 31, 2021 and 2020, respectively. We have had long-term relationships with our top five TTEC Engage clients, ranging from 8 to 21 years, with all of these clients having completed multiple contract renewals with us. The relative contribution of any single client to consolidated earnings is not always proportional to the relative revenue contribution on a consolidated basis and varies greatly based upon specific contract terms. In addition, clients may adjust business volumes served by us based on their business requirements. We believe the risk of this concentration is mitigated, in part, by the long-term contracts we have with our largest clients. Although certain client contracts may be terminated for convenience by either party, we believe this risk is mitigated, in part, by the service level disruptions and transition/migration costs that would arise for our clients if they terminated our contract for convenience. Some contracts with our five largest clients expire between 2021 and 2023, but most of our largest clients have multiple contracts with us with different expiration dates for different lines of work. We have historically renewed most of our contracts with our largest clients, but there can be no assurance that future contracts will be renewed or, if renewed, will be on terms as favorable as the existing contracts.