What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-05 · 84 added, 54 removed, 146 unchanged (49% of the section changed)

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During 2022, 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 59,600 consultants, technologists, and CX professionals.

Our revenue for first quarter 2022 was $588.7 million, approximately $113.6 million, or 19% which came from our TTEC Digital segment and $475.1 million, or 81%, which came from our TTEC Engage segment.

Our revenue for second quarter 2022 was $604.3 million, approximately $116.6 million, or 19% which came from our TTEC Digital segment and $487.7 million, or 81%, which came from our TTEC Engage segment.

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 technology-enabled, outcomes-focused services, data analytics, insights and consulting.

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To this end we have been highly acquisitive in the last several years, including in April 2022 the acquisition of certain citizen experience assets of Faneuil, Inc.

that include healthcare exchange and transportation services contracts, which will expand our capabilities in the growing public sector market deploying investments to achieve technology-enabled citizen engagement solutions.

that include healthcare exchange and transportation services contracts, which will expand our capabilities in the growing public sector market by building and operating technology-enabled citizen engagement solutions.

We also completed an acquisition early in the second quarter of 2021 of a provider of Genesys and Microsoft cloud contact center services, which followed an acquisition in the second half of 2020 of a preferred Amazon Connect cloud contact center service provider.

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 have extensive expertise in the healthcare, automotive, national/federal and state and local government, financial services, communications, technology, travel, logistics, media and entertainment, e-tail/retail, and transportation industries.

We serve more than 760 diverse clients globally, including many of the world’s iconic brands, Fortune 1000 companies, government agencies, and disruptive growth companies.

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We made additional investments in the hardening of our cybersecurity environment and the operational governance of our information technology systems during the fourth quarter of 2021 and expect to make further investments in 2022.

While the total amount of likely investment has not yet been determined, we anticipate that it will be at least $6 million in 2022 and beyond.

We anticipate the likely investment to be at least $6 million in 2022 and beyond.

The incident and any failure or perceived failure by us to comply with applicable privacy laws in connection with this incident could result in government enforcement actions, regulatory investigations, fines, penalties, and private legal actions, which could impact our results of operations and expenses associated with the incident.

In the first quarter of 2022, we have been served with certain lawsuits alleging data privacy failures, which are typical when cybersecurity incidents result in data exfiltration.

In the first half of 2022, we have been served with certain lawsuits alleging data privacy failures, which are typical when cybersecurity incidents result in data exfiltration.

Other actual and potential consequences of the incident may include negative publicity, loss of client trust, reputational damage, litigation, contractual claims, financial judgement or settlements in excess of insurance, and disputes with insurance carriers concerning coverage.

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COVID-19 Pandemic

Through the period ended March 31, 2022 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 only some of our COVID-19 specific surge work has transitioned to more traditional business activities for the same clients, and our clients continue to reposition their work in post-pandemic environment, leveraging new ways of working, and evolving the use of technology, in an inflationary economy with considerable labor pressures.

These changes bring more opportunities to the Company, while at the same time temporarily or permanently divert certain business volumes.

Through the period ended June 30, 2022 the COVID-19 pandemic has not had a material adverse impact on our operational or financial results.

As of June 30, 2022 only some of our COVID-19 specific surge work has transitioned to more traditional business activities for the same clients, and our clients continue to reposition their work in post-pandemic environment, leveraging new ways of working, and evolving the use of technology.

These changes bring more opportunities to the Company, while at the same time temporarily or permanently diverting certain business volumes.

Based on currently available information, we cannot accurately predict the post-pandemic changes to our clients’ businesses and their effect on the magnitude and timing of our clients’ buying decisions.

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Financial Highlights

In the first quarter of 2022, our revenue increased $49.5 million, or 9.2%, to $588.7 million over the same period in 2021 including a decrease of $5.2 million, or 1.0%, due to foreign currency fluctuations.

The increase in revenue was comprised of a $50.0 million, or 78.6%, increase for TTEC Digital offset by a decrease of $0.5 million, or 0.1%, for TTEC Engage.

Our first quarter 2022 income from operations decreased $25.1 million, or 34.2%, to $48.3 million or 8.2% of revenue, compared to $73.4 million or 13.6% of revenue in the first quarter of 2021.

In the second quarter of 2022, our revenue increased $49.5 million, or 8.9%, to $604.3 million over the same period in 2021 including a decrease of $10.5 million, or 1.9%, due to foreign currency fluctuations.

The increase in revenue was comprised of an $8.6 million, or 8.0%, increase for TTEC Digital and an increase of $40.9 million, or 9.1%, for TTEC Engage.

Our second quarter 2022 income from operations decreased $29.9 million, or 45.5%, to $35.9 million or 5.9% of revenue, compared to $65.8 million or 11.9% of revenue in the second quarter of 2021.

The decrease in operating income is comprised of a number of factors across the segments.

The TTEC Digital operating income increased 51.0% due to the acquisition of Avtex and growth in the cloud revenue platform offset by increased amortization of acquisition related intangible assets.

The TTEC Engage operating income decreased 39.4% over the same period last year primarily related to the ramp of several new programs, change in revenue mix away from COVID-surge programs, increased sales and marketing expenses and expenses of $3.8 million related to the cybersecurity event from the third quarter of 2021.

Income from operations in the first quarter of 2022 and 2021 included $1.7 million and $3.9 million of restructuring charges and asset impairments, respectively.

The TTEC Digital operating income increased 13.7% due to growth in the cloud revenue platform partially offset by a continued investment in sales and marketing, product engineering, and geographic expansion.

The TTEC Engage operating income decreased 55.6% over the same period last year primarily related to the ramp of several new programs, change in revenue mix away from COVID-surge programs, increased sales and marketing expenses, increased amortization of acquisition related intangible assets, and impairments of internally developed software and real estate leases, offset by the acquisition of Faneuil.

Income from operations in the second quarter of 2022 and 2021 included $11.8 million and $2.4 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 21,600 workstations, representing 59% of our global delivery capability.

Revenue for our TTEC Engage segment provided from these offshore locations represented 28% of our revenue for the first quarter of 2022, as compared to 29% of our revenue for the corresponding period in 2021.

Revenue for our TTEC Engage segment provided from these offshore locations represented 26% of our revenue for the second quarter of 2022, as compared to 30% of our revenue for the corresponding period in 2021.

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, 2022, the total production workstations for our TTEC Engage segment was 36,500 and the overall capacity utilization in our centers was 70% versus 64% in the prior year period.

While utilization has increased, it continues to be lower than the previous years primarily due to COVID-19 protocols requiring the distancing of employees which has reduced the available seat capacity.

Adjusted for social distancing protocols, which reduced the available workstations to approximately 19,800, 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 129%.

As of June 30, 2022, the total production workstations for our TTEC Engage segment was 36,800 and the overall capacity utilization in our centers was 69% versus 62% in the prior year period.

This significant improvement was driven by the Company’s site optimization strategy as more and more clients are adopting the @Home operational platform on a permanent basis.

Post COVID-19 we expect our clients to leverage a more diversified geographic footprint and an increased mix of work from home versus 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.

We plan to continue to selectively retain and grow capacity and expand into new offshore markets, while maintaining appropriate capacity onshore, as some of our clients may be subject to regulatory pressures to serve clients onshore.

As we grow our offshore delivery capabilities and our exposure to foreign currency fluctuation increases, we will continue to actively manage this risk via a multi-currency hedging program designed to minimize operating margin volatility.

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Results of Operations

Three months ended March 31, 2022 compared to three months ended March 31, 2021

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, 2022 and 2021 (amounts in thousands).

Three months ended June 30, 2022 compared to three months ended June 30, 2021

All inter-company transactions between the reported segments for the periods presented have been eliminated.

Three Months Ended March 31,

Three Months Ended June 30,

Operating Income

Operating Margin

The increase in revenue for the TTEC Digital segment was driven by the acquisition of Avtex and increases in the cloud platform and the systems integration practice.

The operating income increase is primarily attributable to the increase in revenue offset by additional amortization of acquisition related intangible assets.

Operating income as a percentage of revenue decreased to 5.6% in the first quarter of 2022 as compared to 6.6% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $6.3 million and $1.2 million for the quarters ended March 31, 2022 and 2021, respectively.

Three Months Ended March 31,

The increase in revenue for the TTEC Digital segment was driven by increases in the cloud platform and the systems integration practice.

The operating income increase is primarily attributable to an increase in the cloud revenue platform partially offset by a continued investment in sales and marketing, product engineering and geographic expansion.

Operating income as a percentage of revenue increased to 9.3% in the second quarter of 2022 as compared to 8.9% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $4.8 million and $5.7 million for the quarters ended June 30, 2022 and 2021, respectively.

Three Months Ended June 30,

Operating Income

Operating Margin

The slight decrease in revenue for the TTEC Engage segment was due to a net increase of $38.5 million in client programs, offset by a decrease for program completions of $34.1 million and a $4.9 million decrease due to foreign currency fluctuations,.

The operating income decreased primarily due to the ramp of several new programs, change in revenue mix away from COVID-surge programs, increased sales and marketing expenses, and expenses of $3.8 million related to the cybersecurity event from the third quarter of 2021.

As a result, operating income as a percentage of revenue decreased to 8.8% in the first quarter of 2022 as compared to 14.6% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $3.2 million and $3.3 million for the quarters ended March 31, 2022 and 2021, respectively.

The increase in revenue for the TTEC Engage segment was due to a net increase of $92.0 million in client programs including the acquisition of Faneuil, offset by a decrease for program completions of $41.4 million and a $9.7 million decrease due to foreign currency fluctuations.

The operating income decreased primarily due to the change in revenue mix away from COVID-surge programs, ramp costs for the new programs replacing COVID related work, incremental growth-oriented investments, integration-related costs associated with the Faneuil acquisition, increased amortization of acquisition related intangible assets, and $11.7 million of restructuring and impairment charges related to several real estate leases and internally developed software that will not be used in the future.

As a result, operating income as a percentage of revenue decreased to 5.1% in the second quarter of 2022 as compared to 12.6% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $4.8 million and $3.3 million for the quarters ended June 30, 2022 and 2021, respectively.

Interest Income (Expense)

For the three months ended March 31, 2022 interest income was $0.2 million and $0.2 million in the same period in 2021.

For the three months ended June 30, 2022 interest income increased to $0.3 million from $0.2 million in the same period in 2021.

Interest expense increased to $6.2 million during 2022 from $3.4 million during 2021 due to higher utilization of the line of credit and higher interest rates.

Other Income (Expense)

For the three months ended March 31, 2022 Other income (expense), net increased to net income of $1.3 million from net expense of $0.8 million during the prior year quarter.

Included in the three months ended March 31, 2021 was a $0.9 million expense related to the fair value adjustment of contingent consideration for two acquisitions (see Part I.

Financial Statements, Note 7 to the Consolidated Financial Statements).

The effective tax rate for the three months ended March 31, 2022 was 17.6%.

For the three months ended June 30, 2022 Other income (expense), net increased to net income of $6.1 million from net income of $1.0 million during the prior year quarter.

Included in the three months ended June 30, 2022 was a gain of $2.1 million due to insurance recovery related to property damages.

Included in the three months ended June 30, 2021 was a $0.2 million expense related to the fair value adjustment of contingent consideration for two acquisitions.

The effective tax rate for the three months ended June 30, 2022 was 20.2%.

This compares to an effective tax rate of 17.8% for the comparable period of 2021.

The effective tax rate for the three months ended March 31, 2022 was influenced by earnings in international jurisdictions currently under an income tax holiday, the distribution of income between the U.S.

The effective tax rate for the three months ended June 30, 2022 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 $1.5 million benefit related to equity compensation, a $2.5 million benefit related to the amortization of purchased intangibles, a $1.3 million benefit related to changes in valuation allowances, $0.8 million of expense related to other items, a $0.4 million benefit related to restructuring, and a $1.0 million benefit related to the cybersecurity event from the third quarter of 2021,the Company’s normalized tax rate for the first quarter of 2022 was 21.5%.

Without a $1.5 million benefit related to equity compensation, a $0.6 million benefit from changes to valuation allowances, a $2.5 million benefit related to the amortization of purchased intangibles, a $3.1 million benefit related to restructuring, $0.3 million of expense related to tax contingencies, and a $0.2 million benefit related to other items, the Company’s normalized tax rate for the second quarter of 2022 was 24.3%.

Results of Operations

Six months ended June 30, 2022 compared to six months ended June 30, 2021

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 six months ended June 30, 2022 and 2021 (in thousands).

All intercompany transactions between the reported segments for the periods presented have been eliminated.

Six Months Ended June 30,

Operating Income

Operating Margin

The increase in revenue for the TTEC Digital segment was driven by increases in the cloud platform and the systems integration practice including the acquisition of Avtex.

The operating income increase is primarily attributable to the increased revenue due to the acquisition and other revenue partially offset by increased amortization of acquisition related intangible assets and continued investment in sales and marketing, product engineering and geographic expansion.

Operating income as a percentage of revenue decreased to 7.5% for the six months ended June 30, 2022 as compared to 8.0% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $11.1 million and $6.9 million for the six months ended June 30, 2022 and 2021, respectively.

Six Months Ended June 30,

Operating Income

Operating Margin

The increase in revenue for the TTEC Engage segment was due to a net increase of $138.7 million in client programs including the acquisition of Faneuil, and offset by a $14.8 million decrease due to foreign currency fluctuations and a decrease for program completions of $83.5 million.

Operating income decreased due to the change in revenue mix away from COVID-surge programs, ramp costs for the new programs replacing COVID related work, incremental growth-oriented investments, integration-related costs associated with the Faneuil acquisition, increased amortization of acquisition related intangible assets, and $13.4 million of restructuring and impairment charges related to several real estate leases and internally developed software that will not be used in the future, offset by the acquisition of Faneuil, other revenue increases and reduction of the facility costs.

As a result, operating income as a percentage of revenue decreased to 7.0% for the six months ended June 30, 2022 as compared to 13.6% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $8.0 million and $6.6 million for the six months ended June 30, 2022 and 2021, respectively.

Interest Income (Expense)

For the six months ended June 30, 2022 interest income increased to $0.5 million from $0.4 million in the same period in 2021.

Interest expense increased to $10.0 million during 2022 from $5.2 million during 2021 due to higher utilization of the line of credit offset by lower interest rates.

Other Income (Expense)

For the six months ended June 30, 2022 Other income (expense), net increased to net income of $7.4 million from net income of $0.2 million during the prior year period.

Included in the six months ended June 30, 2022 was a gain of $2.1 million due to insurance recovery related to property damages.

Included in the six months ended June 30, 2021 was a $0.7 million expense related to the fair value adjustments of contingent consideration for two acquisitions.

The effective tax rate for the six months ended June 30, 2022 was 18.7%.

This compared to an effective tax rate of 20.3% for the comparable period of 2021.

The effective tax rate for the six months ended June 30, 2022 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 associated U.S.

tax impacts of foreign earnings.

Without a $3.5 million benefit from restructuring expenses, a $1.0 million benefit related to the cybersecurity incident, a $1.9 million benefit related to changes in valuation allowances, a $5.0 million benefit related to the amortization of purchased intangibles, a $2.9 million benefit related to equity-based compensation, $0.3 million of expense related to tax contingencies, and $0.5 million of expense related to other items, the Company’s normalized tax rate for 2022 was 22.8%.

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, 2022, we generated positive operating cash flows of $13.7 million.

During the six months ended June 30, 2022, we generated positive operating cash flows of $91.3 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, however, if our access to capital is restricted or our borrowing costs increase, our operations and financial condition could be adversely impacted.

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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, 2022 and 2021.

The following discussion highlights our cash flow activities during the six months ended June 30, 2022 and 2021.

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 $156.8 million and $158.2 million as of March 31, 2022 and December 31, 2021, respectively.

Our cash and cash equivalents totaled $163.2 million and $158.2 million as of June 30, 2022 and December 31, 2021, 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.

We reinvest our cash flows to grow our client base, expand our infrastructure, invest in research and development, for strategic acquisitions and to pay dividends.

Cash Flows from Operating Activities

For the three months ended March 31, 2022 and 2021, net cash flows provided by operating activities was $13.7 million and $69.8 million, respectively.

The decrease is primarily due to a $16.4 million increase in net cash income from operations offset by a $39.7 million reduction in net working capital.

For the six months ended June 30, 2022 and 2021, net cash flows provided by operating activities was $91.3 million and $132.8 million, respectively.

The decrease is primarily due to a $27.0 million decrease in net cash income from operations and a $14.6 million reduction in net working capital.

Cash Flows from Investing Activities

For the three months ended March 31, 2022 and 2021, net cash flows used in investing activities was $16.7 million and $11.8 million, respectively.

The increase was due to a $5.1 million increase in capital expenditures.

For the six months ended June 30, 2022 and 2021, net cash flows used in investing activities was $178.1 million and $505.3 million, respectively.

The decrease was due to a decrease related to acquisitions of $339.3 million offset by a $12.2 million increase in capital expenditures.

Cash Flows from Financing Activities

For the three months ended March 31, 2022 and 2021, net cash flows used in financing activities was $3.8 million and $54.2 million, respectively.

The change in net cash flows from 2021 to 2022 was primarily due to a $58.0 million net increase in the line of credit, and a $2.4 million increase in tax payments related to restricted stock units offset by a $9.6 million increase in payments of contingent consideration.

For the six months ended June 30, 2022 and 2021, net cash flows provided by financing activities was $93.7 million and $400.5 million, respectively.

The change in net cash flows from 2021 to 2022 was primarily due to a $310.0 million net change in the line of credit and a $3.4 million increase in dividends to shareholders, offset by a $3.6 million increase in tax payments related to restricted stock units.

Free Cash Flow

Free cash flow (see “Presentation of Non-GAAP Measurements” below for the definition of free cash flow) decreased for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to an increase in net cash from operations offset by a decrease in working capital and higher capital expenditures.

Free cash flow was $(3.0) million and $58.2 million for the three months ended March 31, 2022 and 2021, respectively.

Free cash flow (see “Presentation of Non-GAAP Measurements” below for the definition of free cash flow) decreased for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 primarily due to a decrease in net cash from operations, a decrease in working capital and higher capital expenditures.

Free cash flow was $55.5 million and $109.2 million for the six months ended June 30, 2022 and 2021, respectively.

Presentation of Non-GAAP Measurements

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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,

Three Months Ended June 30,

Six Months Ended June 30,

Net cash provided by operating activities

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Client Concentration

During the three months ended March 31, 2022, one of our clients represented more than 10% of our total revenue.

Our five largest clients, collectively, accounted for 37.0% and 41.8% of our consolidated revenue for the three months ended March 31, 2022 and 2021, respectively.

During the six months ended June 30, 2022, one of our clients represented more than 10% of our total revenue.

Our five largest clients, collectively, accounted for 34.7% and 36.4% of our consolidated revenue for the three months ended June 30, 2022 and 2021, respectively and 35.8% and 39.0% of our consolidated revenue for the six months ended June 30, 2022 and 2021, respectively.

We have had long-term relationships with our top five TTEC Engage clients, ranging from 16 to 22 years, with all of these clients having completed multiple contract renewals with us.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis