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”; pronounced “T-TEC”) is a leading global customer experience (“CX”) as a service (“CXaaS”) partner for many of the world’s most iconic companies, disruptive hypergrowth brands, and large public sector agencies. TTEC designs, builds, orchestrates, and delivers seamless digitally enabled customer experiences that increase brand value, customer loyalty, revenue, and profitability through personalized, outcome-based interactions. We help clients improve their customer satisfaction while lowering their total cost to serve by combining innovative digital solutions with service capabilities that deliver a frictionless CX across numerous real-time digital and live interaction channels and different phases of the customer lifecycle. The Company operates and reports its financial results of operation through two business segments: TTEC Digital and TTEC Engage. ● TTEC Digital is one of the largest pure-play CX technology service providers with expertise in CX strategy, digitization, analytics, process optimization, system integration, cloud-based technology solutions, and transformation enabled by our proprietary CX applications and technology partnerships. TTEC Digital designs, builds, and operates robust digital experiences for clients and their customers through the contextual integration and orchestration of customer relationship management (“CRM”), data, analytics, CXaaS technology, and intelligent automation to ensure high-quality, scalable CX outcomes. ● TTEC Engage provides the digitally enabled CX managed services to support our clients’ end-to-end customer interaction delivery at scale. The segment delivers omnichannel customer care, technology support, order fulfillment, customer acquisition, growth, and retention services with industry specialization and distinctive CX capabilities for hypergrowth brands. TTEC Engage also delivers digitally enabled back office and industry specific specialty services including artificial intelligence (“AI”) operations, and fraud management services. TTEC Digital and TTEC Engage strategically come together under our unified offering, Humanify ® CXaaS, which drives measurable customer results for clients through the delivery of personalized and seamless omnichannel experiences. Our Humanify ® cloud platform provides a fully integrated ecosystem of CX offerings including messaging, AI, machine learning, robotic process automation, analytics, cybersecurity, CRM, knowledge management, journey orchestration, and traditional voice solutions. Our end-to-end CXaaS platform differentiates us from competitors by combining design, strategic consulting, technology, data analytics, process optimization, system integration, and operational excellence along with our decades of industry know-how. 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 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. 29 Table of Contents 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 were highly acquisitive in the last several years, including our acquisition in April 2022 of certain public sector assets of Faneuil, Inc. that included healthcare exchange and transportation services contracts. The acquisition expanded our capabilities in the growing public sector market by adding the building and operating of technology-enabled citizen engagement solutions to our offerings. We also completed an acquisition early in the second quarter of 2021 of a provider of Genesys and Microsoft cloud contact center services. 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. Our Integrated Service Offerings and Business Segments We provide strategic value and differentiation through our two business segments: TTEC Digital and TTEC Engage. TTEC Digital is one of the largest pure-play CX technology service providers with expertise in CX strategy, digitization, analytics, process optimization, system integration, cloud-based technology solutions, and transformation enabled by our proprietary CX applications and technology partnerships. TTEC Digital designs, builds, and operates robust digital experiences for clients and their customers through the contextual integration and orchestration of CRM, data, analytics, CXaaS technology, and intelligent automation to ensure high-quality, scalable CX outcomes. ● Technology Services: Our technology services design, build, 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, among others. ● Professional Services: Our management consulting practices deliver customer experience strategy, analytics, process optimization, and system integration, among others. TTEC Engage provides the digitally enabled CX managed services to support our clients’ end-to-end customer interaction delivery at scale. The segment delivers omnichannel customer care, technology support, order fulfillment, customer acquisition, growth, and retention services with industry specialization and distinctive CX capabilities for hypergrowth brands. TTEC Engage also delivers digitally enabled back office and industry specific specialty services including AI operations, and fraud management services. ● Customer Acquisition, Growth, and Retention 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 we believe increase the quantity and quality of leads and customers. ● Customer Care, Technology Support, and Order Fulfillment Services: Our customer care, technology support, and order fulfillment 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. ● Digitally enabled back office and specialty services: Our digital AI operations, and fraud detection and prevention services provide clients with data tagging and annotation capabilities to train and enable AI platforms, community content moderation, and compliance to meet client content standards, and proactive fraud solutions to assist our clients in the detection and prevention of fraud. Based on our clients’ preference, we provide our services on an integrated cross-business segment and/or on a discrete basis. 30 Table of Contents 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 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 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 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 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, 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. 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 fluctuation 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 is 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 31 Table of Contents 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 September 30, 2023 compared to three 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 three months ended September 30, 2023 and 2022 (amounts in thousands). All inter-company transactions between the reported segments for the periods presented have been eliminated. TTEC Digital ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ ​ ​ ​ ​ ​ ​ 2023 2022 $ Change % Change ​ Revenue ​ $ 133,252 ​ $ 116,173 ​ $ 17,079 14.7 % ​ Operating Income ​ 11,925 ​ 8,015 ​ 3,910 48.8 % ​ Operating Margin ​ 8.9 % 6.9 % ​ ​ ​ ​ ​ ​ ​ 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. TTEC Engage ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ ​ ​ ​ ​ ​ ​ 2023 2022 $ Change % Change ​ Revenue ​ $ 469,704 ​ $ 476,280 ​ $ (6,576) (1.4) % ​ Operating Income ​ 13,463 ​ 27,589 ​ (14,126) (51.2) % ​ Operating Margin ​ 2.9 % 5.8 % ​ ​ ​ ​ ​ ​ ​ 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 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 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. 32 Table of Contents 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. Item 1. Financial Statements, Note 2 to the Consolidated Financial Statements). 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. Income Taxes 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 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 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. TTEC Digital ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ ​ ​ ​ ​ ​ 2023 2022 $ Change % Change ​ Revenue ​ $ 367,764 ​ $ 342,020 ​ $ 25,744 7.5 % ​ Operating Income ​ 19,864 ​ 24,971 ​ (5,107) (20.5) % ​ Operating Margin ​ 5.4 % 7.3 % ​ ​ ​ ​ ​ ​ ​ 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, 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. TTEC Engage ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ ​ ​ ​ ​ ​ 2023 2022 $ Change % Change ​ Revenue ​ $ 1,468,872 ​ $ 1,443,409 ​ $ 25,463 1.8 % ​ Operating Income ​ 81,233 ​ 94,827 ​ (13,594) (14.3) % ​ Operating Margin ​ 5.5 % 6.6 % ​ ​ ​ ​ ​ ​ ​ 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. 33 Table of Contents 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 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 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. Income Taxes 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 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 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 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. 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. To mitigate these risks, we enter into foreign exchange forward and option contracts through our cash flow hedging program. Please refer to Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk, Foreign Currency Risk, for further discussion. 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. 34 Table of Contents Cash and Cash Equivalents 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. 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 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 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 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 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 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. 35 Table of Contents The following table reconciles net cash provided by operating activities to free cash flow for our consolidated results (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ 2023 2022 2023 2022 ​ Net cash (used in) provided by operating activities ​ $ (31,718) ​ $ 27,542 ​ $ 113,231 ​ $ 118,813 ​ Less: Purchases of property, plant and equipment ​ 21,768 ​ 28,774 ​ 54,722 ​ 64,564 ​ Free cash flow ​ $ (53,486) ​ $ (1,232) ​ $ 58,509 ​ $ 54,249 ​ ​ 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 2022 Form 10-K filing on February 28, 2023 through the filing of this report. Future Capital Requirements We expect total capital expenditures in 2023 to be between 3.0% and 3.2% of revenue. Approximately 65% of these expected capital expenditures are to support growth in our business and 35% relate to the maintenance for existing assets. The anticipated level of 2023 capital expenditures is primarily driven by new client contracts and the corresponding requirements for additional customer experience 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 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. 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 2023 and 2025, but many 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. 36 Table of Contents