TTEC Holdings, Inc. (NASDAQ:TTEC) Q1 2024 Earnings Call Transcript

TTEC Holdings, Inc. (NASDAQ:TTEC) Q1 2024 Earnings Call Transcript May 10, 2024

TTEC Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome everyone to TTEC’s First Quarter 2024 Earnings Conference Call. [Operator Instructions] This call is being recorded at the request of TTEC. I would now like to turn the call over to Paul Miller, TTEC’s Senior Vice President, Treasurer and Investor Relations Officer. Thank you, sir and you may begin.

Paul Miller: Good morning and thank you for joining us today. TTEC is hosting this call to discuss its first quarter results for the period ended March 31, 2024. Participating on today’s call are Ken Tuchman, Chairman and Chief Executive Officer of TTEC; Shelly Swanback, President of TTEC and Chief Executive Officer of TTEC Engage; and Kenny Wagers CFO of TTEC. Yesterday, TTEC issued a press release announcing its financial results. While this call will reflect items discussed within that document, for complete information about our financial performance, we also encourage you to read our first quarter 2024 quarterly report on Form 10-Q. Before we begin, I want to remind you that matters discussed on today’s call may include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management’s current beliefs and assumptions.

Please note that these forward-looking statements reflect our opinion as of the date of this call, and we undertake no obligation to revise this information as a result of new developments, which may occur. Forward-looking statements are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our 2023 annual report on Form 10-K. A replay of this conference call will be available on our website under the Investor Relations section. I will now turn the call over to Ken.

Ken Tuchman: Good morning, everyone, and thank you for joining us today. We started the year focused on the strategic priorities that we outlined last quarter. Our first quarter 2024 revenue was $577 million. On a non-GAAP basis, our adjusted EBITDA was $55 million and adjusted EPS was $0.27. We met our first quarter objectives while navigating a fluid demand environment and continue to make progress on our diversification strategy that has three focus areas, including: one, attracting new clients, we established new relationships with over two dozen accounts, several of which are large enterprises that present strong long-term growth opportunities. Two, we expanded our geographic footprint and increased offshore mix. We continue to scale with new and existing client programs across our growing geographic footprint and three, collaborative partnerships and innovative solutions.

We strengthened our partnerships with the hyperscalers and CX technology players, and we launched several new AI-enabled solutions in TTEC Digital and TTEC Engage. Looking at our two business segments, TTEC Digital is gaining momentum with consecutive quarters of strong bookings and pipeline. In TTEC Engage, we have two dynamics currently impacting our results. First, while we’re encouraged by the number and quality of the new enterprise clients we’re winning, they do take time to yield. Second, while we’re pleased with the new clients, some of our embedded base volumes are down. We’re making progress managing through these challenges in TTEC Engage, and management believes as previously communicated, that TTEC Engage and the company overall will be back to positive growth in 2025, delivering double-digit EBITDA margins.

I’d like to now transition to my perspective on the current state of the industry. It’s no secret that the customer experience space is in the midst of dramatic change. As a pioneer and leader in this industry, we’ve experienced and thrived through every evolution. Since we started this business 40 years ago, I was told that every innovation was going to eliminate or have an impact on the industry. First, it was voice mail, then e-mail, then interactive voice response. Next, it was the dawn of the Internet, the proliferation of smartphones and apps and then the migration to the cloud. Each evolution has created more opportunity. Today, it’s no different. With the advent of generative AI and all of the type, some analysts and pundits are predicting a negative impact on the industry.

Instead, new pockets of opportunity are emerging and diversifying the space. New work types like content moderation, data annotation, fraud mitigation are creating new growth opportunities for businesses like ours. These didn’t exist in any material way 10 years ago. I want to remind you that the total addressable market for just contact center services is well over $400 billion. Lately, however, it feels like Wall Street believes the industry is on its last legs and has written it off. If you speak with any one of my competitive peers, our clients or any CX industry analysts they will tell you the same thing. This space is not going away. It is consolidating, bifurcating and evolving and creating new opportunities for the industry. This future is already in motion.

And we see three interaction categories emerging simple repetitive tasks like making a basic reservation, checking on delivery status and setting up appointments are already being automated. Activities that require in the moment, human interaction like bank tellers, fast food drive-through, cashiers, building receptionists are now happening via virtual kiosks, these on-screen contacts are being staffed with friendly and cost-effective resources based thousands of miles away in many cases. And when it comes to high-value, high-risk decisions about health family, money, life events or large capital purchases, the need for skilled guidance from an empathetic and passionate human remains nonnegotiable. What is open for discussion, however, is where these trained nurses, financial advisers, health advocates and others are based.

As technology continues to improve, these interactions are being delivered virtually from anywhere on the globe. The need for human interactions is not going away. And similar to what occurred in previous technology cycles, the industry is transforming, changing shape and creating opportunities for forward-thinking technology enabled players like TTEC. We’ve consistently invested in building sophisticated technology and consulting expertise. We forge collaborative partnerships with the hyperscalers and the leading technology players with the most advanced AI, and we’ve built an enviable bench of global CX talent that includes every skill a company needs to design, build, operate, optimize and deliver seamless customer experience at scale.

Now I’ll share how this is playing out with our business segments. In TTEC Digital, our focus is on helping clients modernize their CX technology platforms to take full advantage of the new AI-enabled capabilities. Clients are choosing us because we’re CX specialists who operate at the intersection of contact center technology, CRM, analytics and AI. We’re a pure-play CX technology and services firm with solutions that are wrapped in consulting and analytics and underpinned with software engineering. We have the know-how and the talent to seamlessly integrate the full suite of CX technology required to meet our clients’ unique and evolving operating needs. We are technology agnostic. Certified AI experts, our bench of full stack engineers and data scientists continues to grow, enabling our clients to benefit from our CX best practices regardless of platform.

By the end of Q3, 100% of our TTEC Digital team will be certified on partner platforms and our own AI accreditation programs. And most importantly, we’re delivering the outcomes that clients’ value. The business segment has produced consecutive quarters of strong bookings and continues to have a growing pipeline. Management believes the team is on track to achieve our goal of double-digit top line and bottom line growth over the next few years. Now on to TTEC Engage, where our focus is on integrating technology and AI into everything we do to improve associate productivity and customer satisfaction. We’re using AI on the front line as a companion for our associates with real-time language translation intuitive generative knowledge support and post-call summarization.

Our team leaders are using AI as a coach to help them provide individualized training and curriculum enhancements. Our data scientists are providing clients with actionable insights with conversational intelligence gleaning from the next-generation quality technology across both business segments. We have hundreds of AI-enabled projects underway with many more in development. While still early days, the opportunities continue to unfold as clients embrace our services that drive higher quality outcomes at the lowest total overall cost to serve. In closing, as I mentioned earlier, TTEC and the entire industry are going through a dynamic period of evolution, which creates some volatility that is unavoidable. I speak for the Board and our entire management team that we’re taking the necessary actions during this transition year to return to long-term growth and increase profitability.

I recently returned from a trip to the Philippines. And continue to be energized by our highly motivated teams in that region and across the globe. I look forward to sharing our progress on the topics we just discussed in the quarters to come. And I’ll now turn the call over to Shelly.

Shelly Swanback: Thank you, Ken, and good morning. This quarter, we continue to make progress on the company’s strategic growth initiatives by acquiring new clients, expanding with our embedded base delivering quality services and creating innovative solutions that deliver the outcomes our clients need. Let me start with TTEC Digital, where we’re off to a solid start, delivering our second consecutive quarter of strong bookings. We continue to win exciting new business across partners, geographies and industries with companies that are in the early stages of their CX cloud migrations as well as brands that are well on their way to optimizing their CX platforms with AI. Our pipeline and backlog continue to grow with our existing clients as more and more of them are choosing to expand our relationships from individual projects, the longer and larger multiphase professional and managed service contracts.

Approximately 75% of our bookings are coming from existing clients who are seeking to achieve better customer experiences at the intersection of CXaaS, CRM, AI and analytics. Now let me share an example with the client who is a global online delivery service that TTEC Engage supports with care and workforce management services. Our TTEC Digital team has chosen to help this client leverage features in the technology they already own. We activated several AI functions in their CXaaS platform, build to help self-help solution and advanced routing approach that is providing impressive productivity gains. In the pilot phase, the solution improved CXaaS by 15%, reduced call transfers by 40% and also reduced call duration by 25%. The pilot was so successful that the client chose to expand our scope of work from three lines of business is 6.

This is just one of the many examples of how we’re expanding our client relationships by helping them get more value out of their technology and AI. As the technology environment grows more complex, we continue to innovate our project-based professional services and also our ongoing managed services. In professional services, our AI CX readiness assessment and rapid prototyping approach that we call SandCastle CX is helping clients identify and visualize areas of greatest return. These engagements provide us with a quick and easy way to get started and highlight our differentiation and ability to deliver shareholder value with more velocity than the generalist technology firms can. In managed services, our trademark surround CX approach moves beyond break fix to help our clients take advantage of our technology and consulting capabilities so that they can continuously absorb implement and also optimize the new innovations and their CX technology platforms.

We continue to invest in our TTEC Digital growth agenda to fully capitalize on the addressable market for CX technology solutions. The team remains confident in our plan for the remainder of the year. Now let’s move on to TTEC Engage, where we have forward momentum but continue to work through the three factors we described last quarter. First, I’m pleased to say that our relationship remains strong with the client who is exiting the market for one of their lines of business that we support. We’re pleased that we recently expanded our wallet share with them in another part of their operations. The new work is only a partial replacement for the work those discontinues. Second, we continue to work closely with our clients who have fluctuating volume forecast.

Right now, we’re facing the most variability and downward pressure in the telco vertical. And third, as we mentioned previously, our investments in our new geographies are attracting new business. However, because of the lag effect caused by the delayed signings in 2023 and the time it takes to ramp new client programs, our fixed cost structure is temporarily higher as a percentage of revenue. Speaking of new business, this quarter, we added 9 new clients in financial services, retail, media and technology with almost two-third of the work to be delivered offshore. One of our financial services wins is with a global bank that chose us for our domain expertise and regulated industry experience. In addition, we are also recently selected by an enterprise health care company for our unique health care center of excellence in South Africa that offers a hub of specialized capabilities and the benefits of offshore economics.

We also continue to close deals with our embedded base. Examples include expanded care services with one of our largest financial services clients, increased ad fill support for a large tech client out of Central Europe and additional trust and safety services for a longstanding strategic travel and hospitality climate. Several of our new client and embedded base wins include our non-associate-based services. These strategic services include workforce management, learning and knowledge services and conversation of business intelligence. While these deals are typically not large, their high-value deliver significant impact and cement our relevance and differentiation with our clients. Our pipeline includes several new strategic growth accounts that enterprise companies with the ability to expand.

In addition to our technology-enabled services, many of these large brands are choosing us for our vertical expertise and global scale. Now on the topic of innovation. I’m especially proud of the team working on our own generative knowledge management solution called Let Me Know that is built on Google’s Vertex AI technology. Our let me know solution was recently featured at the Google Next conference and was recognized with a Gold Stevie Award for innovation. This associate productivity solution is embedded in our TTEC Engage delivery platform and provides clients seamless access to our knowledge management services. The solution was recently deployed in help desk environment and improved average handle time by 12%. Based on those results, we’re in the process of adapting Let Me Know to vertical specific use cases, including travel and hospitality and financial services.

Let Me Know is just one example of our human-centered philosophy around AI for CX. Overall, in Engage, we have solid momentum with new business, while we work through the revenue and timing issues due to the lag effect. As our CFO, Kenny Wagers will cover shortly. We have a specific public sector client ramp impacting Q1 and Q2. We’re very enthusiastic about this large outcome-based contract, but due to client circumstances, we’re incurring delays in revenue realization and heightened start-up costs in these quarters. In conclusion, during this transitional year, our investments to accelerate our growth in TTEC Digital along with improved execution and scale in our new geographies in TTEC Engage will set us up for profitable growth in 2025 and beyond.

With our teams across the globe dedicated delivering exceptional quality experiences for our clients and their customers every day, I look forward to sharing our progress in the quarters to come. And now I’m happy to welcome our CFO, Kenny Wagers to our call. As you may remember, Kenny joined TTEC at the beginning of March and has been moving quickly as it gets to know our teams, our clients and our operations. And now, I’ll turn the call over to Kenny.

Kenny Wagers: Thank you, Shelley, and good morning. I’m excited to join TTEC as a recently appointed CFO and look forward to working with you. I will start with a review of our first quarter financial results before providing context into our reiterated full year 2024 financial outlook. In my discussion on the first quarter financial results, reference to revenue is on a GAAP basis, while EBITDA, operating income and earnings per share are on a non-GAAP adjusted basis. A full reconciliation of our GAAP to non-GAAP results is included in the tables attached to our earnings press release. Turning to our first quarter consolidated results. Revenue exceeded our guidance range, which was attributable to the strong demand in both segments.

The adjusted EBITDA contribution was in line with the midpoint of our guidance range. The lower margin percentage was primarily due to the delayed launch of the Public Sector Engage program that impacted the timing for certain costs. On a consolidated basis for the first quarter of 2024 compared to the prior year period, revenue was $577 million compared to $633 million, a decrease of 8.9%. Adjusted EBITDA was $55 million or 9.5% of revenue compared to $83 million or 13.1%. Operating income was $38 million or 6.6% of revenue compared to $61 million or 9.6%, and EPS was $0.27 compared to $78. Foreign exchange had a $1.8 million positive impact on revenue in the first quarter over the prior year period, while negatively impacting operating income by $0.5 million, primarily in our Engage segment.

If not for FX, EBITDA would have exceeded the midpoint of our first quarter guidance by $1 million. Turning to our first quarter 2024 segment results. Our digital segment’s revenue was $112 million, a decrease of 4.2% over prior year period, higher than expectations as the in-quarter bookings had a greater impact on revenue in the period. Managed services continue to deliver sequential growth quarter-over-quarter and increased by approximately 5% over the prior year, in large part attributable to our Genesys practice. Our Cisco practice was relatively flat with the same period last year and is expected to stabilize for the remainder of the year. Operating income was $9 million or 8.3% of revenue, in line with the midpoint of our guidance.

This compares to 9% of revenue in the prior year, primarily due to the different revenue mix in the quarter. On the back of record bookings in the fourth quarter of last year, Digital had another strong first quarter of bookings to start the year. Our clients continue to invest in their CX ecosystem and our unique capabilities remain in demand. This acceleration in digital backlog demonstrates TTEC Digital’s consulting an engineering expertise across an expanded suite of best-in-class CX technology and service solutions. Digital’s backlog increased to $399 million or 80% of our 2024 revenue guidance at the midpoint, a favorable comparison to 75% in the prior year. Our Engage segment revenue decreased 10% to $465 million in the first quarter of 2024 over the prior year period.

Revenue exceeded our guidance range due to higher-than-anticipated seasonal volumes. Operating income was $29 million or 6.2% of revenue compared to $50 million or 9.7% of revenue in the prior year. While, our Engage segment’s adjusted EBITDA margin improved sequentially by 180 bps, it came in at the lower end of our first quarter guidance range. This was primarily a function of the timing impact from one new large program delay that Shelly discussed. The margin improvement in the second half of the year anticipates the normalization of operations from the line of business exited by one of our large clients, impact from the cost optimization effort discussed last quarter and the benefits from economies of scale as new programs move into production and leverage our new geographies.

The quality of the opportunities in the Engage pipeline continues to improve. Our Engage backlog for the next 12 months is $1.76 billion or 96.5% of our 2024 revenue guidance at the midpoint of the range compared to 97% in the prior year. Engage’s last 12-month revenue retention rate was 92% compared to 97% in the prior year. The decline is mostly explained by the prior year revenue reduction in our hypergrowth portfolio and the first quarter impact from one large client exiting their line of business supported by TTEC. I will now share other first quarter 2024 metrics before discussing our outlook. Free cash flow was a negative $29 million in the first quarter of 2024 compared to a positive $35 million in the prior year. The year-over-year variance is the result of lower profitability, a onetime tax payment related to international cash repatriation and lower working capital conversion that will normalize in the next quarters.

Capital expenditures were $13 million or 2.3% of revenue for the first quarter of 2024 compared to $14 million or 2.2% in the prior year. Our normalized tax rate was 32.7% in the first quarter of 2024 compared to 26% in the prior year. The increase is primarily a function of lower pre-tax income and jurisdiction mix. It is expected to normalize over the year to be at the midpoint of our guidance. As of March 31, 2024, cash was $92 million with $957 million of debt of which $953 million represents borrowings under our $1.3 billion credit facility. Net debt increased year-over-year by $83 million to $865 million, primarily associated with final acquisition-related payments, geographic expansion investments and higher interest expense, partially offset by positive cash flow from operations.

We ended the quarter with a net debt-to-EBITDA ratio of 3.6 in compliance under our credit facility. As discussed last quarter, beyond returning the company to sustainable long-term organic growth, we are also taking prudent actions to improve our cash flow and balance sheet strength, including profit margin expansion initiatives, capital allocation reprioritization and cash and working capital optimization inclusive of cash repatriation strategies of foreign earnings to the U.S. Turning to our 2024 outlook. Our digital segment ended the first quarter at the higher end of the guidance range on both top and bottom lines with another quarter of strong bookings. It adds to an already solid foundation for the remainder of the year despite the continuous elongated sales cycle noted across the industry.

The Engage segment has recently been successful with winning enterprise deals, but these larger deals take more time to launch and meet production and profitability levels. Therefore, this creates less predictability in our quarterly revenue and impacts near-term margin percentages due to underlying fixed costs. The demand environment also remains fluid as client conservatism still impacts budgeting and volume awards. While our business has a long sales cycle, we are encouraged by the number of active opportunities with new prospects who have the potential to expand into strategic growth accounts, fueling our client diversification strategy. That said, we are resolute in our commitment to build back our Engage profit margin profile in the second half of this year and beyond.

As we continue to rebalance our fixed and variable cost structure, we are moving forward with a set of actions to strengthen our margin optimization efforts and are confident in achieving our full year outlook and delivering double-digit EBITDA margins in 2025. I want to convey a change that during the balance of this transitional period, I’m moving to provide guidance only on an annual basis with directional commentary provided each quarter as viewed appropriate. As a result, please reference our commentary in the Business Outlook section of our first quarter 2024 earnings press release to obtain our expectations for our reiterated 2024 full year guidance at the consolidated and segment level. In closing, the start of the year was in-line with our expectations.

As we navigate the current landscape, balance our focus on continuous CX innovation and long-term growth initiatives while advancing our operational and financial rigor. We maintain our conviction that the delivery of quality customer experience is a business imperative, a brand differentiator and a strategic driver of profitable growth. I want to convey our confidence in the fundamental attractiveness of the CX market opportunity and our differentiated technology and service capabilities across digital and Engage. And our commitment to execute and deliver long-term value to our clients, employees and shareholders. We look forward to providing an update on our full year outlook when we announce our second quarter earnings results in early August.

I will now turn the call back to Paul.

Paul Miller: Thanks, Kenny. [Operator Instructions] Operator, you can open the line.

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Q&A Session

Operator: Thank you, sir. [Operator Instructions] Our first question comes from the line of George Sutton of Craig-Hallum. Sir, your line is now open.

George Sutton: Thank you. I’m curious how you thought about guidance relative to – the stock has been quite weak. The market effectively giving you permission to lower guidance if necessary. So really wanted to test your conviction and thought process relative to the maintenance of the guide, which feels somewhat heroic.

Kenny Wagers: Yes. Thanks for the question. First of all, I would tell you, it’s my preference in managing through this environment, through this transitional year that we’re having in 2024 for TTEC. and from what we see and from the improvements that we’re making with our cost optimization efforts and what we’re working on to rebalance our fixed and variable cost going forward. We just reaffirm where we’re going to land for the full year. And so that’s where we see the business moving as of today.

George Sutton: Okay. Great. And a question for Ken. You mentioned that AI is creating new pockets of opportunity and specifically mentioned content moderation and data annotation not areas that you’ve necessarily to my knowledge, been focused on. Can you talk about are those areas you’re planning to build out to take advantage of these market changes?

Ken Tuchman: Yes. We’ve always done certain aspects of content moderation and data annotation. The difference is that we’ve never been focused on what I would call the moderation of violent video and the type of stuff that we think causes emotional trauma for our employees. And so with AI, what it brings us is because of the training of AI because of the tagging of AI, etcetera, it creates new opportunities. And my whole point in my comments on – just on these new areas was just simply to say that as one door potentially narrows many new doors open, which is what AI we believe, is doing for us. It’s allowing us to take advantage of areas that we never, frankly, previously were not even available to us. and it’s also opening our clients’ minds to new things that we could be doing for them that historically they never even were considering outsourcing.

So what I would say to you is that, again, the whole point in my commentary was to just simply say that as Wall Street is known to do, they tend to over rotate both directions. Whether it be to the positive or whether it be to the negative. And I was simply just simply trying to say that the height that’s behind the AI and the pundits that are declaring that this is going to have this massively negative impact. What I would just simply say is that for those of us who are highly technology enabled and who have all the right partnerships with all the AI players and have been working on this not as of 6 months ago, but for years, we feel like we’ve got a head start to be able to help our clients take advantage of these technologies as well as create new service offerings that take advantage of the technologies, the AI type technology.

So overall, it’s – we believe that we’re a bit misunderstood. We believe the whole industry is a bit misunderstood. And you know what, unfortunately, we’ve been here before we’ll get through this and we’ll be bigger and better and stronger in the long run.

George Sutton: Perfect. Thanks, guys.

Ken Tuchman: Thanks, George.

Operator: Thank you. Our next question is from the line of Maggie Nolan of William Blair. Your line is open.

Unidentified Analyst: Hi, good morning. This is Jesse Wilson on from Maggie Nolan. Thanks for taking our question. And it’s nice to hear from you, Kenny. So I guess to start, similar to the first question on the call. The press release mentioned anticipated headwinds you expected to see in the first half year – can you just comment on if those have been better, worse or the same as expected from last quarter?

Kenny Wagers: Hey, Jesse, good morning. The headwinds that we talk about is what was in Shelly’s script and what I described as we moved out of the end of 2023 with the lag effect of those – that customer base that we’re working from – and as the timing impact of the program delay that we articulated about our public sector clients. The headwinds are where we expected them to be. And that is where we are pivoting from as we move into the second half of this year that also supports the reiteration of our full year guidance. Shelley, I don’t know if you want to support anything else on that?

Shelly Swanback: No. I mean we’re – the cube client that I had mentioned, where we’ve got some delays in terms of full revenue ramp and some extra start-up costs here – it’s a large multiyear program. We’re very excited about it. It’s an outcome-oriented contracts, unfortunately, a complex situation and some client circumstances that are causing some delays here. But we’re working through that. We expect to have that sorted out here in Q2 and ramping through at full ramp into Q3 and Q4. I think it’s more broadly speaking, Jesse, we talked last quarter, just about our client volume forecast and our embedded base, and I mentioned earlier that we see some volumes down with some of those clients. But we’re also seeing some of the clients, particularly in like financial services that took a cautious outlook at the beginning of the year beginning to change our forecast for the better.