TTEC Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Executive Summary Founded in 1982, TTEC is a global CX outsourcing partner for marquee and disruptive brands and public sector clients. The Company designs, builds, and operates technology-enabled customer experiences across digital and live interaction channels to help clients increase customer loyalty, revenue, and profitability. By combining digital solutions with data-driven service capabilities, we help clients improve their customer satisfaction while lowering their total cost to serve. As of June 30, 2024, TTEC served approximately 740 clients across targeted industry verticals including financial services, healthcare, public sector, telecom, technology, media, travel and hospitality, automotive and retail. TTEC operates through two business segments. • TTEC Digital is one of the largest CX technology providers and is focused exclusively on the intersection of Contact Center as a Service (CCaaS), Customer Relationship Management (“CRM”), and Artificial Intelligence (AI) and Analytics. A professional services organization comprised of software engineers, systems architects, data scientists and CX strategists, this segment creates and implements strategic CX transformation roadmaps; sells, operates, and provides managed services for cloud platforms and premise based CX technologies including Amazon Web Services, Cisco, Genesys, Google, and Microsoft; and creates proprietary IP to support industry specific and custom client needs. TTEC Digital serves clients across Enterprise and Small & Medium Sized (“SMB”) business segments and has a dedicated unit with government technology certifications serving the public sector. • TTEC Engage provides the digitally enabled CX operational and managed services to support large, complex enterprise clients’ end-to-end customer interactions at scale. Tailored to meet industry-specific and business needs, this segment delivers data-driven omnichannel customer care, customer acquisition, growth, and retention services, tech support, trust and safety and back-office solutions. The segment’s technology-enabled delivery model covers the entire associate lifecycle including recruitment, onboarding, training, delivery, workforce management and quality assurance. TTEC demonstrates its market leadership through strategic collaboration across TTEC Digital and TTEC Engage when there is client demand and fit for our integrated solutions. This partnership is central to our ability to deliver comprehensive and transformational customer experience solutions to our clients, including integrated delivery, go-to-market and innovation for truly differentiated, market leading CX solutions. During 2024, the TTEC global operating platform delivered onshore, nearshore, and offshore services in 22 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, South Africa, Thailand, and the United Kingdom with the help of approximately 54,000 consultants, technologists, and CX professionals. Our revenue for second quarter 2024 was $534.1 million, approximately $116.4 million, or 22% of which came from our TTEC Digital segment and $417.7 million, or 78%, of 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. 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. 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 approximately 740 diverse clients globally, including many of the world’s iconic brands, Fortune 1000 companies, government agencies, and disruptive growth companies. 32 Table of Contents Financial Highlights In the second quarter of 2024, our revenue decreased $66.3 million, or 11%, to $534.1 million over the same period in 2023 including a decrease of $1.8 million, or 0.3%, due to foreign currency fluctuations. The decrease in revenue was comprised of a $1.2 million, or 1.0%, decrease for TTEC Digital and a decrease of $65.1 million, or 13.5%, for TTEC Engage. Our second quarter 2024 income (loss) from operations decreased $255.7 million, or 817.0%, to $(224.4) million or (42.0)% of revenue, compared to $31.3 million or 5.2% of revenue in the second quarter of 2023. The decrease in operating income is due to several factors across both segments. The TTEC Digital operating income decreased 16% over the same period last year primarily due to higher impairment expenses and delays with launching new projects partially offset by a change in the revenue mix. The TTEC Engage operating income decreased 1,054.4% over the same period last year due to impairment of Goodwill, higher restructuring charges, lower revenue, negative change to our revenue mix and launch of a new large public contract. Income (loss) from operations in the second quarter of 2024 and 2023 included $241.8 million and $4.1 million of restructuring charges and asset impairments, respectively. Our offshore customer experience centers spanning twelve countries serve clients based in the U.S. and in other countries with 22,900 workstations, representing 74% of our global delivery capability. Revenue for our TTEC Engage segment provided in these offshore locations represented 33% of our revenue for the second quarter of 2024, as compared to 32% of our revenue for the corresponding period in 2023. 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, 2024, the total production workstations for our TTEC Engage segment was 31,000, a net decrease of 1,900 workstations over the same period last year, with an overall capacity utilization 72% in line with the prior year period. 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. 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 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, 2023. 33 Table of Contents Results of Operations Three months ended June 30, 2024 compared to three months ended June 30, 2023 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, 2024 and 2023 (amounts in thousands). All intercompany transactions between the reported segments for the periods presented have been eliminated. TTEC Digital ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended June 30, ​ ​ ​ ​ ​ ​ ​ 2024 2023 $ Change % Change ​ Revenue ​ $ 116,368 ​ $ 117,585 ​ $ (1,217) (1.0) % ​ Operating Income ​ 6,008 ​ 7,154 ​ (1,146) (16.0) % ​ Operating Margin ​ 5.2 % 6.1 % ​ ​ ​ ​ ​ ​ ​ The decrease in revenue for the TTEC Digital segment was driven by the reduction in professional services due to the temporary lower bookings in the prior year partially offset by the 8% growth in recurring revenue. The operating income decrease was primarily related to asset impairment partially offset by the positive change in the revenue mix. Operating income as a percentage of revenue decreased to 5.2% in the second quarter of 2024 as compared to 6.1% in the prior period. Included in operating income was amortization expense related to acquired intangibles of $4.3 million and $4.3 million for the quarters ended June 30, 2024 and 2023, respectively. TTEC Engage ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended June 30, ​ ​ ​ ​ ​ ​ ​ 2024 2023 $ Change % Change ​ Revenue ​ $ 417,717 ​ $ 482,809 ​ $ (65,092) (13.5) % ​ Operating Income (loss) ​ (230,421) ​ 24,144 ​ (254,565) (1,054.4) % ​ Operating Margin ​ (55.2) % 5.0 % ​ ​ ​ ​ ​ ​ ​ The decrease in revenue for the TTEC Engage segment is explained by a long tenured client exiting a large line of business supported by TTEC, lower demand from select enterprise clients due to clients’ continued conservative management of discretionary spending influenced by a challenging macro-economic environment and delays attributable to launching new and larger awarded contracts. The operating income (loss) change was primarily attributable to a goodwill impairment charge, higher restructuring charges, of which $4.7 million related to a specific cost optimization program, lower revenue, negative change in the revenue mix, and the launch of a new large public contract. As a result, operating income (loss) as a percentage of revenue decreased to (55.2)% in the second quarter of 2024 as compared to 5.0% in the prior period. Included in operating income was amortization expense related to acquired intangibles of $4.1 million and $4.7 million for the quarters ended June 30, 2024 and 2023, respectively. Interest Income (Expense) For the three months ended June 30, 2024 interest income decreased to $0.4 million from $1.1 million in the same period in 2023 due to a lower balance of international cash resulting from repatriated cash at the end of the first quarter of 2024. Interest expense increased to $20.4 million during 2024 from $19.0 million during 2023 due to higher interest rates. Other Income (Expense) For the three months ended June 30, 2024 Other income (expense), net increased to income of $1.8 million from expense of $3.6 million during the prior year quarter. Included in the three months ended June 30, 2024 was a $0.8 million gain related to recovery of a social security tax credit related to 2008-2012. 34 Table of Contents 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. Item 1. Financial Statements, Note 2 to the Consolidated Financial Statements). Income Taxes The effective tax rate for the three months ended June 30, 2024 was (22.3)%. This compares to an effective tax rate of 61.9% for the comparable period of 2023. The effective tax rate for the three months ended June 30, 2024 is primarily driven by the distribution of income between the U.S. and international tax jurisdictions, earnings in international jurisdictions currently under an income tax holiday, an impairment charge, and the impact of valuation allowances in the United States and several other jurisdictions. After $50.7 million of Non-GAAP adjustments, the Company’s normalized tax rate for the second quarter of 2024 was 33.7%. Six months ended June 30, 2024 compared to six months ended June 30, 2023 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, 2024 and 2023 (in thousands). All intercompany transactions between the reported segments for the periods presented have been eliminated. TTEC Digital ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Six Months Ended June 30, ​ ​ ​ ​ ​ ​ ​ 2024 2023 $ Change % Change ​ Revenue ​ $ 228,399 ​ $ 234,512 ​ $ (6,113) (2.6) % ​ Operating Income ​ 9,296 ​ 7,939 ​ 1,357 17.1 % ​ Operating Margin ​ 4.1 % 3.4 % ​ ​ ​ ​ ​ ​ ​ The decrease in revenue for the TTEC Digital segment was driven by decreases in professional services impacted by the lower bookings from 2023. The operating income increase is primarily attributable to lower restructuring and impairment charges. Operating income as a percentage of revenue increased to 4.1% for the six months ended June 30, 2024 as compared to 3.4% in the prior period. Included in operating income was amortization expense related to acquired intangibles of $8.7 million and $8.7 million for the six months ended June 30, 2024 and 2023, respectively. TTEC Engage ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Six Months Ended June 30, ​ ​ ​ ​ ​ ​ ​ 2024 2023 $ Change % Change ​ Revenue ​ $ 882,324 ​ $ 999,168 ​ $ (116,844) (11.7) % ​ Operating Income (loss) ​ (210,998) ​ 67,770 ​ (278,768) (411.3) % ​ Operating Margin ​ (23.9) % 6.8 % ​ ​ ​ ​ ​ ​ ​ The decrease in revenue for the TTEC Engage segment is explained by a long tenured client exiting a large line of business supported by TTEC, lower demand from select enterprise clients due to clients’ continued conservative management of discretionary spending influenced by a challenging macro-economic environment and delays attributable to launching new and larger awarded contracts. The operating income (loss) change was primarily attributable to a goodwill impairment charge, higher restructuring charges, lower revenue and negative change in the revenue mix. As a result, operating income (loss) as a percentage of revenue decreased to (23.9)% for the six months ended June 30, 2024 as compared to 6.8% in the prior period. Included in operating income was amortization expense related to acquired intangibles of $8.2 million and $9.3 million for the six months ended June 30, 2024 and 2023, respectively. 35 Table of Contents Interest Income (Expense) For the six months ended June 30, 2024 interest income decreased to $1.4 million from $2.3 million in the same period in 2023 due to a lower balance of international cash resulting from repatriated cash at the end of the first quarter of 2024. Interest expense increased to $41.5 million during 2024 from $36.4 million during 2023 due to higher interest rates. Other Income (Expense) For the six months ended June 30, 2024 Other income (expense), net increased to net income of $2.0 million from net expense of $2.9 million during the prior year period. Included in the six months ended June 30, 2024 was a $1.0 million gain related to the fair value adjustment of a contingent consideration accrual. 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. Income Taxes The effective tax rate for the six months ended June 30, 2024 was (23.5)%. This compared to an effective tax rate of 36.2% for the comparable period of 2023. The effective tax rate for the six months ended June 30, 2024 is primarily driven by the distribution of income between the U.S. and international tax jurisdictions, earnings in international jurisdictions currently under an income tax holiday, an impairment charge, and the impact of valuation allowances in the United States and several other jurisdictions. After $46.9 million of Non-GAAP adjustments, the Company’s normalized tax rate for 2024 was 33.1%. 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, 2024, we generated positive operating cash flows of $33.6 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 six months ended June 30, 2024 and 2023. 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 $79.8 million and $172.7 million as of June 30, 2024 and December 31, 2023, respectively. The decline with the prior year is explained by the change in our APB 23 policy that allowed the Company to repatriate international cash and reduce the credit line. We diversify the holdings of such cash and cash equivalents considering the financial condition and stability of the counterparty institutions. 36 Table of Contents 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 six months ended June 30, 2024 and 2023, net cash flows provided by operating activities was $33.6 million and $144.9 million, respectively. The decrease is primarily due to a $48.4 million decrease in net cash income from operations and a $62.9 million decrease in net working capital. Cash Flows from Investing Activities For the six months ended June 30, 2024 and 2023, net cash flows used in investing activities was $27.6 million and $32.9 million, respectively. The decrease was due to a $5.3 million decrease in capital expenditures. Cash Flows from Financing Activities For the six months ended June 30, 2024 and 2023, net cash flows used in financing activities was $75.7 million and $115.0 million, respectively. The change in net cash flows from 2023 to 2024 was primarily due to a ($20.0) million net change in the line of credit offset by $37.7 million related to payments of contingent consideration and $21.7 million of incremental dividends paid during 2023. Free Cash Flow 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, 2024 compared to the six months ended June 30, 2023 primarily due to a decrease in net cash from operations and a decrease in working capital. Free cash flow was $6.0 million and $112.0 million for the six months ended June 30, 2024 and 2023, 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 (used in) provided by operating activities to free cash flow for our consolidated results (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended June 30, ​ Six Months Ended June 30, ​ 2024 2023 2024 2023 ​ Net cash provided by operating activities ​ $ 49,274 ​ $ 95,891 ​ $ 33,645 ​ $ 144,949 ​ Less: Purchases of property, plant and equipment ​ 14,209 ​ 19,285 ​ 27,682 ​ 32,954 ​ Free cash flow ​ $ 35,065 ​ $ 76,606 ​ $ 5,963 ​ $ 111,995 ​ ​ 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 2023 Form 10-K filing on February 29, 2024 through the filing of this report. 37 Table of Contents Future Capital Requirements We expect total capital expenditures in 2024 to be between 2.5% and 2.7% 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 2024 capital expenditures is primarily driven by site expansions, new builds in emerging geographies, enhancements and modernization to our technological infrastructure and ongoing digital integration and product development. 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 six months ended June 30, 2024 and 2023, one of our clients represented more than 10% of our total revenue. Our five largest clients, collectively, accounted for 31.7% and 36.3% of our consolidated revenue for the three months ended June 30, 2024 and 2023, respectively and 33.8% and 35.4% of our consolidated revenue for the six months ended June 30, 2024 and 2023, respectively. We have had long-term relationships with our top five TTEC Engage clients, ranging from 7 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 of the contracts with our five largest clients expire between 2025 and 2027, 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.