TTEC Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. TTEC provides customer-experience technology and managed services through TTEC Digital and TTEC Engage. Figures are unaudited; dollar amounts are in millions unless otherwise noted.
Financial highlights
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $588.7 | $539.2 | +9.2% |
| Operating income | $48.3 | $73.4 | -34.2% |
| Operating margin | 8.2% | 13.6% | -5.4 percentage points |
| Net income | $38.0 | $55.0 | -31.0% |
| Net income attributable to TTEC stockholders | $33.4 | $50.4 | -33.7% |
| Diluted earnings per share | $0.71 | $1.06 | Down $0.35 |
| Operating cash flow | $13.7 | $69.8 | Down $56.1 |
| Capital expenditures | $16.7 | $11.6 | Up $5.1 |
| Free cash flow (non-GAAP) | $(3.0) | $58.2 | Down $61.2 |
Revenue, segment performance and margins
- TTEC Digital revenue was $113.6 million, up 78.6%, driven primarily by the Avtex acquisition and growth in cloud platform and systems integration. Operating income rose 51.0% to $6.3 million, while its margin declined to 5.6% from 6.6%, reflecting higher acquired-intangible amortization.
- TTEC Engage revenue was $475.1 million, down 0.1%. Operating income fell 39.4% to $42.0 million, and margin declined to 8.8% from 14.6%.
- Management attributed Engage’s lower operating income to the ramp-up of new programs, a revenue mix shift away from COVID-related surge work, higher sales and marketing expense, and $3.8 million of costs related to the 2021 cybersecurity incident.
- Consolidated revenue growth included a $5.2 million adverse foreign-currency impact. Cost of services, SG&A and depreciation and amortization increased year over year.
Cash, debt and liquidity
- Cash and cash equivalents were $156.8 million at March 31, 2022, versus $158.2 million at December 31, 2021. Cash, cash equivalents and restricted cash totaled $172.2 million.
- Operating cash flow was $13.7 million; management cited a $39.7 million reduction in net working capital as a primary reason for the decline from the prior-year quarter. Capital spending exceeded operating cash flow, producing negative free cash flow.
- Credit Facility borrowings were $803.0 million, up from $791.0 million at year-end. Remaining borrowing capacity was approximately $525 million; TTEC reported compliance with all covenants. Average borrowing interest was approximately 1.3% in Q1.
- Management said cash, operating cash generation and available credit should meet expected operating and capital needs for at least the next 12 months, while warning that restricted capital access or higher borrowing costs could adversely affect the business.
- The quarterly dividend declared was $0.50 per share; $23.5 million was declared but unpaid at quarter-end. No shareholder dividends were paid in the quarter.
Material changes, outlook and notable items
- Avtex, acquired in April 2021, contributed $53.4 million in revenue and $2.8 million in net income in Q1 2022.
- On April 1, 2022, after quarter-end, TTEC acquired certain Faneuil public-sector citizen-experience contracts for $142.3 million, subject to customary holdbacks, contingent payments and adjustments. Purchase accounting was incomplete at filing, and the filing does not provide pro forma revenue or earnings for this acquisition.
- TTEC expects 2022 capital expenditures of 2.9%–3.1% of revenue, approximately 65% for growth and 35% for maintenance. The filing does not provide a full-year revenue or earnings forecast.
- Remaining performance obligations were $310.0 million, expected to be delivered and recognized within the next three years; timing depends in part on customer consumption.
- The September 2021 ransomware incident temporarily disrupted Engage operations. TTEC said client-facing systems were restored within five days and it had no indication that financial reporting accuracy was affected. It anticipated at least $6 million of additional cybersecurity investment in 2022 and beyond. In Q1 2022, it was served with lawsuits alleging data-privacy failures; potential claims and insurance coverage remain risks.
- Other risks highlighted include inflation and labor pressures, employee recruitment and retention, client program changes, technology and cybersecurity dependence, foreign-exchange and floating-rate debt exposure, and the Russia-Ukraine conflict’s possible effect on European operations, including Poland and Bulgaria.
- One automotive client represented 10.4% of Q1 revenue. The five largest clients together represented 37.0% of revenue, versus 41.8% in Q1 2021. Management notes that client volumes and contract renewals can change.
- The effective tax rate was 17.6%, compared with 22.5% a year earlier; management cited jurisdictional earnings mix and tax benefits. Its stated normalized Q1 2022 tax rate was 21.5%.
Important facts for investors to verify
- Whether Engage margins recover as new programs ramp and the revenue mix evolves away from pandemic-related work.
- Whether working-capital movements normalize and operating cash flow covers capital expenditures and shareholder distributions.
- Debt levels, interest expense and covenant headroom as floating-rate borrowing costs change.
- Integration and financial contribution of Avtex, and the finalized purchase accounting and performance of the Faneuil assets.
- Cybersecurity remediation spending, litigation exposure, regulatory outcomes and insurance coverage related to the 2021 incident.
- Client concentration, renewal terms and changes in customer demand, alongside the impact of labor, inflation, foreign exchange and geopolitical risks.