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 customer experience (“CX”) outsourcing partner for marquee and high-growth brands and public sector clients. The Company designs, builds, and operates technology-enabled customer experiences across live interaction channels and provides data-driven digital solutions to help clients improve customer satisfaction and loyalty, increase customer revenue and profitability, and optimize overall cost to serve. As of March 31, 2025, TTEC served approximately 700 clients across targeted industry verticals including financial services, healthcare, public sector, communications, technology, media, entertainment, travel and hospitality, automotive and retail. TTEC operates and reports its financial results of operations through two business segments. • TTEC Digital is one of the largest CX technology and service providers and is focused 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 (“AWS”), 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 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 across the world. Tailored to meet industry-specific business needs, this segment delivers data-driven omnichannel customer care, customer acquisition, growth, and retention services, tech support, fraud mitigation and back-office solutions. The segment’s technology-enabled delivery model covers the entire solution lifecycle including associate recruitment, onboarding, training, delivery, workforce management and quality assurance. TTEC pursues its CX market leadership through strategic collaboration across TTEC Digital and TTEC Engage. Together, TTEC’s ability to deliver comprehensive and transformational customer experience solutions to its clients is a marketplace differentiator, including integrated CX technology and service solution, go-to-market strategies, and innovative offerings. During 2025, 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 50,000 customer care associates, technologists, and CX professionals. Our revenue for first quarter 2025 was $534.2 million, of which approximately $108.0 million, or 20.2% was generated from our TTEC Digital segment and $426.2 million, or 79.8%, was generated from our TTEC Engage segment. To advance our competitive position in a rapidly changing market and to provide our clients with modernized CX technology and service solutions, 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 CX product and service capabilities, increase our global client base and industry expertise, expand our geographic footprint to the needs of our global clientele, and further scale our integrated solutions within and between our TTEC Digital and TTEC Engage segments. 28 Table of Contents Financial Highlights In the first quarter of 2025, our revenue decreased $42.4 million, or 7.4%, to $534.2 million over the same period in 2024 including a decrease of $6.0 million, or 1.0%, due to foreign currency fluctuations. The decrease in revenue was comprised of a $4.0 million, or 3.6%, decrease for TTEC Digital and a decrease of $38.4 million, or 8.3%, for TTEC Engage. Our first quarter 2025 income (loss) from operations increased $1.5 million, or 6.6%, to $24.2 million or 4.5% of revenue, compared to $22.7 million or 3.9% of revenue in the first quarter of 2024. The increase in operating income margin is due to several factors across both segments. The TTEC Digital operating margin increased 2.5% over the same period last year primarily due to lower employee-related costs and improved utilization. The TTEC Engage operating margin increased 0.1% over the same period last year due to improved operational performance partially offset by lower revenue and higher restructuring and impairment expenses. Income (loss) from operations in the first quarter of 2025 and 2024 included $2.8 million and $0.4 million of restructuring charges and asset impairments, respectively. Our offshore customer experience centers spanning 15 countries serve clients based in the U.S. and in other countries with 24,000 workstations, representing 82% of our global delivery capability. Revenue for our TTEC Engage segment provided in these offshore locations represented 34% of our revenue for the first quarter of 2025, as compared to 32% of our revenue for the corresponding period in 2024. Our seat utilization is defined as the total number of utilized workstations compared to the total number of available production workstations. As of March 31, 2025, the total production workstations for our TTEC Engage segment was 29,140, a net decrease of 1,600 workstations over the same period last year, with an overall capacity utilization 71% versus 76% in the prior year period, The decline was primarily driven by decreased seat reservations in the Philippines and U.S., partially offset by footprint increases in other geographies. 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. Recent Developments As previously disclosed in the Company’s press release of September 30, 2024, 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 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 (“Non-Binding Proposal”). Mr. 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 Non-Binding Proposal is conditioned on, among other things, the receipt of financing for the transaction, the negotiation and execution of a definitive agreement, 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 the Company’s executive management. On April 1, 2025 the Special Committee issued a press release reporting that it has completed its review of the Non-Binding Proposal and its preliminary valuation analysis of the Company and remains ready to consider and engage with Mr. Tuchman with respect to a definitive transaction proposal. Smaller Reporting Company Status We are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Although, as a smaller reporting company, we are eligible to provide scaled disclosures in our filings with the SEC, the Company elected not to avail itself of this relief in this Quarterly Report on Form 10-Q and will continue to provide the same level of disclosures as in its most recent fiscal periods. The Company may re-evaluate this decision at a later date. 29 Table of Contents 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, 2024. Results of Operations Three months ended March 31, 2025 compared to three months ended March 31, 2024 The tables included in the following sections are presented to facilitate an understanding of Management’s Discussion and Analysis of Financial Condition and Results of Operations and present certain information by segment for the three months ended March 31, 2025 and 2024 (amounts in thousands). All intercompany transactions between the reported segments for the periods presented have been eliminated. TTEC Digital ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ ​ ​ ​ ​ ​ ​ 2025 2024 $ Change % Change ​ Revenue ​ $ 108,040 ​ $ 112,031 ​ $ (3,991) (3.6) % ​ Operating Income ​ 5,864 ​ 3,288 ​ 2,576 78.3 % ​ Operating Margin ​ 5.4 % 2.9 % ​ ​ ​ ​ ​ ​ ​ 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 2.8% year over year. The operating income increase was primarily related to lower employee related costs and improved utilization. Operating income as a percentage of revenue increased to 5.4% in the first quarter of 2025 as compared to 2.9% in the prior period. Included in operating income was amortization expense related to acquired intangibles of $3.7 million and $4.3 million for the quarters ended March 31, 2025 and 2024, respectively. TTEC Engage ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ ​ ​ ​ ​ ​ ​ 2025 2024 $ Change % Change ​ Revenue ​ $ 426,188 ​ $ 464,607 ​ $ (38,419) (8.3) % ​ Operating Income ​ 18,325 ​ 19,423 ​ (1,098) (5.7) % ​ Operating Margin ​ 4.3 % 4.2 % ​ ​ ​ ​ ​ ​ ​ 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. 30 Table of Contents The operating income decrease was primarily attributable to lower revenue and higher restructuring and impairment expenses, partially offset by improved operational performance. Operating income as a percentage of revenue increased to 4.3% in the first quarter of 2025 as compared to 4.2% in the prior period. Included in operating income was amortization expense related to acquired intangibles of $4.1 million and $4.1 million for the quarters ended March 31, 2025 and 2024, respectively. Interest Income (Expense) For the three months ended March 31, 2025 interest income increased to $4.6 million from $1.0 million in the same period in 2024 due to interest income on an aged VAT receivable. Interest expense decreased to $19.8 million during 2025 from $21.1 million during 2024 due to the termination of the Company’s accounts receivable factoring agreement. Other Income (Expense) For the three months ended March 31, 2025 Other income (expense), net increased to income of $3.6 million from income of $0.2 million during the prior year quarter. Included in the three months ended March 31, 2025 was a $3.9 million gain related to a recovery of an aged VAT receivable. Included in the three months ended March 31, 2024 was a $1.2 million gain related to the fair value adjustments of contingent consideration for the Faneuil acquisition and ($0.8) million of expense related to a write-off of an aged VAT receivable (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 March 31, 2025 was 74.2%. This compares to an effective tax rate of 82.3% for the comparable period of 2024. The effective tax rate for the three months ended March 31, 2025 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 first quarter of 2025 was 37.9%. Liquidity and Capital Resources Our principal sources of liquidity are our cash generated from operations, our cash and cash equivalents, and borrowings under our Credit Facility. During the three months ended March 31, 2025, we generated operating cash flows of $21.6 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 interest rate fluctuations associated with our variable rate debt. The following discussion highlights our cash flow activities during the three months ended March 31, 2025 and 2024. 31 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 $85.1 million and $85.0 million as of March 31, 2025 and December 31, 2024, respectively. We reinvest our cash flows to grow our client base, expand our infrastructure, invest in research and development, make strategic acquisitions and to pay dividends. Cash Flows from Operating Activities For the three months ended March 31, 2025 and 2024, net cash flows (used in) provided by operating activities was $21.6 million and $(15.6) million, respectively. The increase is primarily due to a $14.1 million increase in net cash income from operations and a $23.1 million increase in net working capital. Cash Flows from Investing Activities For the three months ended March 31, 2025 and 2024, net cash flows used in investing activities was $5.3 million and $13.4 million, respectively. The decrease was due to a $8.0 million decrease in capital expenditures as we rephased our timing of capital expenditures. Cash Flows from Financing Activities For the three months ended March 31, 2025 and 2024, net cash flows used in financing activities was $13.7 million and $46.5 million, respectively. The change in net cash flows from 2024 to 2025 was primarily due to a $31.0 million net change in the line of credit. Free Cash Flow Free cash flow (see “Presentation of Non-GAAP Measurements” below for the definition of free cash flow) increased for the three months ended March 31, 2025 compared to the three months ended March 31, 2024 primarily due to an increase in net cash from operations and working capital. Free cash flow was $16.2 million and ($29.1) million for the three months ended March 31, 2025 and 2024, 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 March 31, ​ 2025 2024 ​ Net cash (used in) provided by operating activities ​ ​ $ 21,592 ​ $ (15,629) ​ Less: Purchases of property, plant and equipment ​ ​ 5,406 ​ 13,473 ​ Free cash flow ​ ​ $ 16,186 ​ $ (29,102) ​ ​ 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 2024 Form 10-K filing on February 27, 2025 through the filing of this report. 32 Table of Contents Future Capital Requirements We expect total capital expenditures in 2025 to be between 2.2% and 2.4% of revenue. Approximately 51% of these expected capital expenditures are to support growth in our business and 49% relate to the maintenance for existing assets. The anticipated level of 2025 capital expenditures is primarily driven by facility refreshes and maintenance, site optimizations, IT network modernization and PC refreshes, digital product development and ongoing site expansions/new sites but not at the same level as the prior year. 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 three months ended March 31, 2025 and 2024, one of our clients represented more than 10% of our total revenue. Our five largest clients, collectively, accounted for 31.2% and 35.7% of our consolidated revenue for the three months ended March 31, 2025 and 2024, respectively. We have had long-term relationships with our top five TTEC Engage clients, ranging from 7 to 25 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.