What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-06 compared with 2024-08-08 · 85 added, 70 removed, 106 unchanged (59% of the section changed)

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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.

As of September 30, 2024, TTEC served approximately 750 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.

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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 Digital serves clients across enterprise and small and medium-sized 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.

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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.

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 51,600 customer care associates, technologists, and CX professionals.

Our revenue for third quarter 2024 was $529.4 million, approximately $115.7 million, or 22% of which came from our TTEC Digital segment and $413.8 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.

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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.

In the third quarter of 2024, our revenue decreased $73.5 million, or 12.2%, to $529.4 million over the same period in 2023 including a decrease of $0.5 million, or 0.1%, due to foreign currency fluctuations.

The decrease in revenue was comprised of a $17.6 million, or 13.2%, decrease for TTEC Digital and a decrease of $55.9 million, or 11.9%, 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.

Our third quarter 2024 income from operations decreased $12.5 million, or 49.2%, to $12.9 million or 2.4% of revenue, compared to $25.4 million or 4.2% of revenue in the third 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.

The TTEC Digital operating income decreased 37.3% over the same period last year primarily due to lower revenue from one-time on-premise related revenue and additional investment in talent as we continue to diversify our offerings.

The TTEC Engage operating income decreased 59.8% over the same period last year due to lower revenue, ongoing start-up costs for a large public sector contract launched earlier in the year and investment in talent as part of this transition year, partially offset by improved operational performance.

Income (loss) from operations in the third quarter of 2024 and 2023 included $5.7 million and $5.5 million of restructuring charges and asset impairments, respectively.

Our offshore customer experience centers spanning 13 countries serve clients based in the U.S.

and in other countries with 23,400 workstations, representing 78% 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.

Revenue for our TTEC Engage segment provided in these offshore locations represented 35% of our revenue for the third 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.

As of September 30, 2024, the total production workstations for our TTEC Engage segment was 30,200, a net decrease of 1,400 workstations over the same period last year, with an overall capacity utilization 70% 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.

Recent Developments

As previously disclosed, the Company’s Board of Directors has established a special committee consisting of independent directors (the “Special Committee”) to evaluate the unsolicited, preliminary, non-binding proposal letter, dated September 27, 2024, from TTEC founder, Chairman and Chief Executive Officer Kenneth Tuchman, to take the Company private at a proposed purchase price of $6.85 per share to the Company’s other shareholders.

Tuchman beneficially owns approximately 58% of the Company’s common stock.

As set forth in Amendment No.

3 to Schedule 13D filed with the SEC by Mr.

Tuchman and certain entities affiliated with Mr.

Tuchman on September 30, 2024, the proposal is conditioned on, among other things, the receipt of financing for the transaction, the negotiation and execution of a definitive agreement, as well as approval and recommendation of the proposal by the Special Committee and approval by holders of a majority of the shares of the Company’s common stock not owned by Mr.

Tuchman, his affiliates, and company executive management.

The Special Committee with its own advisors will evaluate the proposal and determine the appropriate course of action and process.

Recently Issued Accounting Pronouncements

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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.

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.

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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).

Three months ended September 30, 2024 compared to three months ended September 30, 2023

All intercompany 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 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.

Three Months Ended June 30,

The decrease in revenue for the TTEC Digital segment was driven by the non-recurring and large one-time on-premise related revenue in the prior year.

The remaining TTEC Digital portfolio was up 5.9% year over year mostly due to an increase in recurring revenue.

The operating income decrease was primarily related to lower revenue and investment in talent to support the expansion of our new and existing offerings.

Operating income as a percentage of revenue decreased to 6.5% in the third quarter of 2024 as compared to 8.9% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $4.1 million and $4.3 million for the quarters ended September 30, 2024 and 2023, respectively.

Three Months Ended September 30,

Operating Income (loss)

Operating Margin

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.

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 large onshore enterprise clients due to clients’ continued conservative cost management by moderating the level of customer support to address cost pressures.

The operating income (loss) change was primarily attributable to lower revenue, launch of a new large public contract and investment in talent, partially offset by operational performance improvement.

As a result, operating income (loss) as a percentage of revenue decreased to 1.3% in the third quarter of 2024 as compared to 2.9% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $4.1 million and $4.6 million for the quarters ended September 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.

For the three months ended September 30, 2024 interest income decreased to $0.3 million from $1.3 million in the same period in 2023 due to a lower balance of international cash resulting from repatriated cash during 2024.

Interest expense increased to $21.7 million during 2024 from $20.3 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.

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, 2024 Other income (expense), net decreased to expense of $1.0 million from income of $0.7 million during the prior year quarter.

Included in the three months ended September 30, 2024 was a $0.5 million gain related to the fair value adjustment of contingent consideration for the Faneuil acquisition (see Part I.

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

The effective tax rate for the three months ended June 30, 2024 was (22.3)%.

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.

The effective tax rate for the three months ended September 30, 2024 was (98.1)%.

This compares to an effective tax rate of 74.7% 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).

The effective tax rate for the three months ended September 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, and the impact of valuation allowances in the United States and several other jurisdictions.

After Non-GAAP adjustments, the Company’s normalized tax rate for the third quarter of 2024 was 58.5%.

Nine months ended September 30, 2024 compared to nine months ended September 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 nine months ended September 30, 2024 and 2023 (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 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.

Six Months Ended June 30,

The decrease in revenue for the TTEC Digital segment was driven by lower one-time on-premise related revenue and professional services revenue.

It was partially offset by an increase of 8.7% in recurring revenue.

The operating income decrease is primarily attributable to the lower revenue and investment in talent to support the diversification of our offerings.

Operating income as a percentage of revenue decreased to 4.9% for the nine months ended September 30, 2024 as compared to 5.4% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $12.7 million and $13.0 million for the nine months ended September 30, 2024 and 2023, respectively.

Nine Months Ended September 30,

Operating Income (loss)

Operating Margin

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.

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 large onshore 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 and lower revenue.

As a result, operating income (loss) as a percentage of revenue decreased to (15.9)% for the nine months ended September 30, 2024 as compared to 5.5% in the prior period.

Included in operating income was amortization expense related to acquired intangibles of $12.3 million and $14.0 million for the nine months ended September 30, 2024 and 2023, respectively.

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.

For the nine months ended September 30, 2024 interest income decreased to $1.7 million from $3.6 million in the same period in 2023 due to a lower balance of international cash resulting from repatriated cash during 2024.

Interest expense increased to $63.2 million during 2024 from $56.7 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.

The effective tax rate for the six months ended June 30, 2024 was (23.5)%.

For the nine months ended September 30, 2024 Other income (expense), net increased to net income of $1.0 million from net expense of $2.2 million during the prior year period.

Included in the nine months ended September 30, 2024 was a $1.5 million gain related to the fair value adjustment of contingent consideration for the Faneuil acquisition.

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.

The effective tax rate for the nine months ended September 30, 2024 was (26.4)%.

This compared to an effective tax rate of 42.2% 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.

The effective tax rate for the nine months ended September 30, 2024 is primarily driven by the distribution of income between the U.S.

After $46.9 million of Non-GAAP adjustments, the Company’s normalized tax rate for 2024 was 33.1%.

After Non-GAAP adjustments, the Company’s normalized tax rate for 2024 was 41.0%.

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.

During the nine months ended September 30, 2024, we generated operating cash flows of $(57.7) million.

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.

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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.

The following discussion highlights our cash flow activities during the nine months ended September 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.

Our cash and cash equivalents totaled $96.9 million and $172.7 million as of September 30, 2024 and December 31, 2023, respectively.

The decline from 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.

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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.

For the nine months ended September 30, 2024 and 2023, net cash flows (used in)/provided by operating activities was $(57.7) million and $113.2 million, respectively.

The decrease is primarily due to a $67.9 million decrease in net cash income from operations and a $103.0 million decrease in net working capital.

The termination of the AR factoring arrangement, effective in the third quarter of 2024, had a significant impact to our working capital conversion in the quarter.

The termination of the AR credit facility negatively impacted our cash flows by $(81.8) million for the three months ended September 30, 2024 and $(101.2) million for the nine months ended September 30, 2024.

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.

For the nine months ended September 30, 2024 and 2023, net cash flows used in investing activities was $36.3 million and $54.5 million, respectively.

The decrease was due to a $18.3 million decrease in capital expenditures as we had less need for computers and completed our site expansion in new geographies.

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.

For the nine months ended September 30, 2024 and 2023, net cash flows provided by/(used in) financing activities was $14.8 million and $(71.5) million, respectively.

The change in net cash flows from 2023 to 2024 was primarily due to a $26.0 million net change in the line of credit, $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.

Free cash flow (see “Presentation of Non-GAAP Measurements” below for the definition of free cash flow) decreased for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to a decrease in net cash from operations and a decrease in working capital.

Free cash flow was $(94.2) million and $58.5 million for the nine months ended September 30, 2024 and 2023, respectively.

The normalized free cash flow would have been $(18.4) million for the three months ended September 30, 2024 based on the reasons mentioned above.

Presentation of Non-GAAP Measurements

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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,

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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Approximately 80% of these expected capital expenditures are to support growth in our business and 20% 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 anticipated level of 2024 capital expenditures is primarily driven by site expansions, new builds in emerging geographies, 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.

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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.

During the nine months ended September 30, 2024 and 2023, one of our clients represented more than 10% of our total revenue.

Our five largest clients, collectively, accounted for 31.5% and 34.5% of our consolidated revenue for the three months ended September 30, 2024 and 2023, respectively and 32.6% and 35.1% of our consolidated revenue for the nine months ended September 30, 2024 and 2023, respectively.

We have had long-term relationships with our top five TTEC Engage clients, ranging from 5 to 25 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