What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-08 compared with 2023-08-04 · 68 added, 72 removed, 140 unchanged (50% of the section changed)

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This unified offering is value-oriented, outcome-based and delivered to large enterprises, hypergrowth companies and public sector agencies on a global scale.

During 2023, the TTEC global operating platform delivered onshore, nearshore, and offshore services in 23 countries on six continents -- the United States, Australia, Belgium, Brazil, Bulgaria, Canada, Colombia, Costa Rica, Egypt, Germany, Greece, Honduras, India, Ireland, Mexico, the Netherlands, New Zealand, the Philippines, Poland, Singapore, South Africa, Thailand, and the United Kingdom with the help of 63,900 consultants, technologists, and CX professionals.

Our revenue for second quarter 2023 was $600.4 million, approximately $117.6 million, or 20% which came from our TTEC Digital segment and $482.8 million, or 80%, which came from our TTEC Engage segment.

During 2023, 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, Colombia, Costa Rica, Germany, Greece, India, Ireland, Mexico, the Netherlands, New Zealand, the Philippines, Poland, South Africa, Thailand, and the United Kingdom with the help of 64,400 consultants, technologists, and CX professionals.

Our revenue for third quarter 2023 was $603.0 million, approximately $133.3 million, or 22% which came from our TTEC Digital segment and $469.7 million, or 78%, which came from our TTEC Engage segment.

To improve our competitive position in a rapidly changing market and to lead our clients with emerging CX methodologies, 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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Financial Highlights

In the second quarter of 2023, our revenue decreased $3.9 million, or 0.6%, to $600.4 million over the same period in 2022 including a decrease of $1.2 million, or 0.2%, due to foreign currency fluctuations.

The decrease in revenue was comprised of a $3.2 million, or 2.8%, increase for TTEC Digital and a decrease of $7.0 million, or 1.4%, for TTEC Engage.

Our second quarter 2023 income from operations decreased $4.6 million, or 12.8%, to $31.3 million or 5.2% of revenue, compared to $35.9 million or 5.9% of revenue in the second quarter of 2022.

In the third quarter of 2023, our revenue increased $10.5 million, or 1.8%, to $603.0 million over the same period in 2022 including an increase of $6.0 million, or 1.1%, due to foreign currency fluctuations.

The increase in revenue was comprised of a $17.1 million, or 14.7%, increase for TTEC Digital offset by a decrease of $6.6 million, or 1.4%, for TTEC Engage.

Our third quarter 2023 income from operations decreased $10.2 million, or 28.7%, to $25.4 million or 4.2% of revenue, compared to $35.6 million or 6.0% of revenue in the third quarter of 2022.

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

The TTEC Digital operating income decreased 33.5%.

The revenue mix contributed to a healthier margin percentage but was more than offset by the incremental investment in CX leadership and engineering talent, sales and marketing and technology developments.

The TTEC Engage operating income decreased 3.9% over the same period last year primarily driven by the lower revenue, the ramp of several new programs, geographic expansion, and the impairment of real estate leases.

Income from operations in the second quarter of 2023 and 2022 included $4.1 million and $11.8 million of restructuring charges and asset impairments, respectively.

Our offshore customer experience centers spanning six countries serve clients based in the U.S.

The TTEC Digital operating income increased 48.8% over the same period last year primarily driven by increased revenue, increased offshore footprint in the center for excellence contributing to a healthier margin percentage, one-time product sales, and reductions in overhead expenses.

The TTEC Engage operating income decreased 51.2% over the same period last year primarily driven by lower revenue, training costs related to existing programs, geographic expansion, and the impairment of real estate leases.

Income from operations in the third quarter of 2023 and 2022 included $5.5 million and $4.1 million of restructuring charges and asset impairments, respectively.

Our offshore customer experience centers spanning nine countries serve clients based in the U.S.

and in other countries with 21,550 workstations, representing 68% of our global delivery capability.

Revenue for our TTEC Engage segment provided in these offshore locations represented 32% of our revenue for the second quarter of 2023, as compared to 29% of our revenue for the corresponding period in 2022.

Revenue for our TTEC Engage segment provided in these offshore locations represented 32% of our revenue for the third quarter of 2023, as compared to 28% of our revenue for the corresponding period in 2022.

Our seat utilization is defined as the total number of utilized workstations compared to the total number of available production workstations.

As of June 30, 2023, the total production workstations for our TTEC Engage segment was 32,900, a net decrease of 3,900 workstations over the same period last year, with an overall capacity utilization of 74% versus 69% in the prior year period.

As of September 30, 2023, the total production workstations for our TTEC Engage segment was 31,600, a net decrease of 2,500 workstations over the same period last year, with an overall capacity utilization 76% versus 72% 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 and a gradual return to sites in certain locations.

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 in comparison to pre-COVID.

Post COVID-19, our clients started to leverage a more diversified geographic footprint and an increased mix of work from home versus brick and mortar seats in comparison to pre-COVID.

We will continue to refine our site strategy and capacity as we finalize plans with our clients and prospects.

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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, 2022.

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, 2022.

Results of Operations

Three months ended June 30, 2023 compared to three months ended June 30, 2022

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 June 30, 2023 and 2022 (amounts in thousands).

Three months ended September 30, 2023 compared to three months ended September 30, 2022

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

Three Months Ended June 30,

Three Months Ended September 30,

Operating Income

Operating Margin

The increase in revenue for the TTEC Digital segment was driven by an increase in professional services and recurring revenue offerings.

The operating income decrease is primarily attributable to continued investments in CX leadership, engineering talent, sales and marketing, product engineering, and $0.7 million in restructuring charges.

These additional expenses more than offset the favorable revenue mix over the prior year which benefited from a higher percentage of offshore delivery, and decreased amortization expense.

Operating income as a percentage of revenue decreased to 6.1% in the second quarter of 2023 as compared to 9.4% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $4.3 million and $4.8 million for the quarters ended June 30, 2023 and 2022, respectively.

Three Months Ended June 30,

The increase in revenue for the TTEC Digital segment was driven by an increase in recurring revenue offerings and one-time product sales.

The operating income increase is primarily attributable to the higher percentage of offshore delivery and decreased overhead expenses.

Operating income as a percentage of revenue increased to 8.9% in the third quarter of 2023 as compared to 6.9% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $4.3 million and $4.4 million for the quarters ended September 30, 2023 and 2022, respectively.

Three Months Ended September 30,

Operating Income

Operating Margin

The decrease in revenue for the TTEC Engage segment was due to a net increase of $20.7 million in client programs offset by a decrease for program completions of $26.9 million and a $0.8 million decrease due to foreign currency fluctuations.

The operating income decreased primarily due to decreased revenue, the ramp costs for the new programs, incremental growth-oriented investments, geographic expansion, and $3.5 million of restructuring and impairment charges.

These were offset by a net reimbursement from insurance of $2.1 million from the cybersecurity incident.

As a result, operating income as a percentage of revenue decreased slightly to 5.0% in the second quarter of 2023 as compared to 5.1% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $4.7 million and $4.8 million for the quarters ended June 30, 2023 and 2022, respectively.

The decrease in revenue for the TTEC Engage segment was due to a net increase of $8.6 million in client programs and a $5.8 million increase due to foreign currency fluctuations offset by a decrease for program completions of $21.0 million.

The operating income decreased primarily attributable to decreased revenue, training costs related to existing programs, incremental growth-oriented investments, geographic expansion, and $4.8 million of restructuring and impairment charges.

As a result, operating income as a percentage of revenue decreased to 2.9% in the third quarter of 2023 as compared to 5.8% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $4.6 million and $4.6 million for the quarters ended September 30, 2023 and 2022, respectively.

Interest Income (Expense)

For the three months ended June 30, 2023 interest income increased to $1.1 million from $0.3 million in the same period in 2022.

For the three months ended September 30, 2023 interest income increased to $1.3 million from $0.5 million in the same period in 2022.

Interest expense increased to $20.3 million during 2023 from $10.6 million during 2022 due to higher utilization of the line of credit and higher interest rates.

Other Income (Expense)

For the three months ended June 30, 2023 Other income (expense), net decreased to expense of $3.6 million from income of $6.1 million during the prior year quarter.

Included in the three months ended June 30, 2023 was a $3.6 million expense related to the fair value adjustments of contingent consideration for the Faneuil acquisition (see Part I.

For the three months ended September 30, 2023 Other income (expense), net decreased to income of $0.7 million from income of $3.9 million during the prior year quarter.

Included in the three months ended September 30, 2023 was a $0.1 million expense related to the fair value adjustments of contingent consideration for the Faneuil acquisition (see Part I.

Financial Statements, Note 2 to the Consolidated Financial Statements).

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

The effective tax rate for the three months ended June 30, 2023 was 61.9%.

Included in the three months ended September 30, 2022 was a gain of $2.0 million due to insurance recovery related to property damages and a net $2.1 million expense related to the fair value adjustments of contingent consideration accruals and receivables for one acquisition.

The effective tax rate for the three months ended September 30, 2023 was 74.7%.

This compares to an effective tax rate of 15.2% for the comparable period of 2022.

The effective tax rate for the three months ended June 30, 2023 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 September 30, 2023 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.

After a $1.4 million of Non-GAAP adjustments, the Company’s normalized tax rate for the second quarter of 2023 was 22.3%.

Results of Operations

Six months ended June 30, 2023 compared to six months ended June 30, 2022

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, 2023 and 2022 (in thousands).

After Non-GAAP adjustments, the Company’s normalized tax rate for the third quarter of 2023 was 20.5%.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

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 nine months ended September 30, 2023 and 2022 (in thousands).

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

Six Months Ended June 30,

Nine Months Ended September 30,

Operating Income

Operating Margin

The increase in revenue for the TTEC Digital segment was driven by increases in the recurring revenue offerings and professional services.

The increase in revenue for the TTEC Digital segment was driven by increases in the recurring revenue offerings, professional services, and one-time product sales.

The operating income decrease is primarily attributable to continued investments in CX leadership, engineering talent, sales and marketing, product engineering, and $5.3 million of restructuring and impairment charges.

These additional expenses more than offset the higher revenue and favorable revenue mix over the prior year which benefited from a higher percentage of offshore delivery, and decreased amortization expense.

Operating income as a percentage of revenue decreased to 3.4% for the six months ended June 30, 2023 as compared to 7.5% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $8.7 million and $11.1 million for the six months ended June 30, 2023 and 2022, respectively.

Six Months Ended June 30,

These additional expenses more than offset the higher revenue, favorable revenue mix from the growing professional services, higher percentage of offshore delivery, and decreased amortization expense.

Operating income as a percentage of revenue decreased to 5.4% for the nine months ended September 30, 2023 as compared to 7.3% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $13.0 million and $15.5 million for the nine months ended September 30, 2023 and 2022, respectively.

Nine Months Ended September 30,

Operating Income

Operating Margin

The increase in revenue for the TTEC Engage segment was due to a net increase of $95.5 million in client programs including the acquisition of Faneuil, and offset by a $6.1 million decrease due to foreign currency fluctuations and a decrease for program completions of $57.4 million.

Operating income increased due to the acquisition of Faneuil, other revenue increases, a reduction in total facility costs and a net reimbursement from insurance of $7.3 million from the cybersecurity incident.

These were partially offset by the ramp costs for new programs, incremental growth-oriented investments, geographic expansion, and $5.9 million of restructuring and impairment charges.

As a result, operating income as a percentage of revenue decreased to 6.8% for the six months ended June 30, 2023 as compared to 7.0% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $9.3 million and $8.0 million for the six months ended June 30, 2023 and 2022, respectively.

The increase in revenue for the TTEC Engage segment was due to a net increase of $102.9 million in client programs including the acquisition of Faneuil offset by a $0.3 million decrease due to foreign currency fluctuations and a decrease for program completions of $77.1 million.

Operating income decreased due to the ramp costs for new programs, training costs related to existing programs, incremental growth-oriented investments, geographic expansion, increase in amortization expense, and $10.7 million of restructuring and impairment charges.

These were partially offset by the acquisition of Faneuil, other revenue increases, a reduction in total facility costs and a net reimbursement from insurance of $7.3 million from the cybersecurity incident.

As a result, operating income as a percentage of revenue decreased to 5.5% for the nine months ended September 30, 2023 as compared to 6.6% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $14.0 million and $12.6 million for the nine months ended September 30, 2023 and 2022, respectively.

Interest Income (Expense)

For the six months ended June 30, 2023 interest income increased to $2.3 million from $0.5 million in the same period in 2022.

For the nine months ended September 30, 2023 interest income increased to $3.6 million from $1.0 million in the same period in 2022.

Interest expense increased to $56.7 million during 2023 from $20.5 million during 2022 due to higher utilization of the line of credit and higher interest rates.

Other Income (Expense)

For the six months ended June 30, 2023 Other income (expense), net decreased to net expense of $2.9 million from net income of $7.4 million during the prior year period.

Included in the six months ended June 30, 2023 was a gain of $4.5 million due to insurance recovery related to property damages and a net $6.8 million expense related to the fair value adjustments of contingent consideration accruals and receivables for one acquisition.

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

The effective tax rate for the six months ended June 30, 2023 was 36.2%.

For the nine months ended September 30, 2023 Other income (expense), net decreased to net expense of $2.2 million from net income of $11.3 million during the prior year period.

Included in the nine months ended September 30, 2023 was a gain of $4.5 million due to insurance recovery related to property damages and a net $6.9 million expense related to the fair value adjustments of contingent consideration accruals and receivables for one acquisition.

Included in the nine months ended September 30, 2022 was a gain of $4.1 million due to insurance recovery related to property damages and a net $2.1 million expense related to the fair value adjustments of contingent consideration accruals and receivables for one acquisition.

The effective tax rate for the nine months ended September 30, 2023 was 42.2%.

This compared to an effective tax rate of 17.7% for the comparable period of 2022.

The effective tax rate for the six months ended June 30, 2023 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 nine months ended September 30, 2023 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.

After $6.4 million of Non-GAAP adjustments, the Company’s normalized tax rate for 2023 was 24.5%.

After Non-GAAP adjustments, the Company’s normalized tax rate for 2023 was 23.5%.

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 six months ended June 30, 2023, we generated positive operating cash flows of $144.9 million.

During the nine months ended September 30, 2023, we generated positive operating cash flows of $113.2 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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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.

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Quantitative and Qualitative Disclosures About Market Risk, Foreign Currency Risk, for further discussion.

The following discussion highlights our cash flow activities during the six months ended June 30, 2023 and 2022.

We are also exposed to higher interest rates associated with our variable rate debt.

The following discussion highlights our cash flow activities during the nine months ended September 30, 2023 and 2022.

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 $114.8 million and $153.4 million as of June 30, 2023 and December 31, 2022, respectively.

We consider all liquid investments purchased within three months of their original maturity to be cash equivalents.

Our cash and cash equivalents totaled $151.6 million and $153.4 million as of September 30, 2023 and December 31, 2022, respectively.

We diversify the holdings of such cash and cash equivalents considering the financial condition and stability of the counterparty institutions.

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Cash Flows from Operating Activities

For the six months ended June 30, 2023 and 2022, net cash flows provided by operating activities was $144.9 million and $91.3 million, respectively.

The increase is primarily due to a $37.4 million decrease in net cash income from operations offset by a $91.0 million variance in net working capital.

For the nine months ended September 30, 2023 and 2022, net cash flows provided by operating activities was $113.2 million and $118.8 million, respectively.

The decrease is primarily due to a $63.7 million decrease in net cash income from operations offset by a $58.1 million variance in net working capital.

Cash Flows from Investing Activities

For the six months ended June 30, 2023 and 2022, net cash flows used in investing activities was $32.9 million and $178.1 million, respectively.

For the nine months ended September 30, 2023 and 2022, net cash flows used in investing activities was $54.5 million and $206.8 million, respectively.

The decrease was due to a $142.4 million decrease in acquisitions and a $9.8 million decrease in capital expenditures.

Cash Flows from Financing Activities

For the six months ended June 30, 2023 and 2022, net cash flows (used in)/provided by financing activities was ($115.0) million and $93.7 million, respectively.

For the nine months ended September 30, 2023 and 2022, net cash flows (used in)/provided by financing activities was ($71.5) million and $111.8 million, respectively.

The change in net cash flows from 2022 to 2023 was primarily due to a $160.0 million net change in the line of credit and an increase of $28.1 million related to payments of contingent consideration offset by a $4.0 million decrease 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) increased for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 primarily due to a decrease in net cash from operations, an increase in working capital and lower capital expenditures.

Free cash flow was $112.0 million and $55.5 million for the six months ended June 30, 2023 and 2022, respectively.

Free cash flow (see “Presentation of Non-GAAP Measurements” below for the definition of free cash flow) increased for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to a decrease in net cash from operations, an increase in working capital and lower capital expenditures.

Free cash flow was $58.5 million and $54.2 million for the nine months ended September 30, 2023 and 2022, 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 June 30,

Six Months Ended June 30,

Net cash provided by operating activities

Three Months Ended September 30,

Nine Months Ended September 30,

Net cash (used in) provided by operating activities

Purchases of property, plant and equipment

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Client Concentration

During the six months ended June 30, 2023, one of our clients represented more than 10% of our total revenue.

Our five largest clients, collectively, accounted for 36.3% and 34.7% of our consolidated revenue for the three months ended June 30, 2023 and 2022, respectively and 35.4% and 35.8% of our consolidated revenue for the six months ended June 30, 2023 and 2022, respectively.

During the nine months ended September 30, 2023, one of our clients represented more than 10% of our total revenue.

Our five largest clients, collectively, accounted for 34.5% and 34.3% of our consolidated revenue for the three months ended September 30, 2023 and 2022, respectively and 35.1% and 35.3% of our consolidated revenue for the nine months ended September 30, 2023 and 2022, respectively.

We have had long-term relationships with our top five TTEC Engage clients, ranging from 17 to 24 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