TTEC Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results; comparisons are with the corresponding 2020 periods. TTEC provides customer-experience technology and managed services through TTEC Digital and TTEC Engage.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $554.8m | $453.1m | $1,094.0m | $885.3m |
| Operating income | $65.8m | $49.0m | $139.3m | $89.7m |
| Operating margin | 11.9% | 10.8% | 12.7% | 10.1% |
| Net income | $52.4m | $33.5m | $107.4m | $58.2m |
| Net income attributable to TTEC stockholders | $47.4m | $31.3m | $97.8m | $52.9m |
| Diluted EPS | $1.00 | $0.67 | $2.06 | $1.13 |
| Operating cash flow | $63.1m | $43.1m | $132.8m | $105.3m |
| Free cash flow (non-GAAP) | $51.0m | $28.0m | $109.2m | $73.4m |
- Segments, Q2: Digital revenue rose 40.0% to $108.0m, while operating income fell 33.5% to $9.6m and margin declined to 8.9%. Engage revenue increased 18.8% to $446.8m; operating income rose 62.7% to $56.3m and margin expanded to 12.6%.
- Liquidity and debt, June 30: Cash and cash equivalents were $174.7m ($185.1m including restricted cash). Current assets were $707.1m and current liabilities $410.2m. Credit-facility borrowings were $834.0m, up from $385.0m at year-end 2020; remaining borrowing capacity was approximately $360m. The company reported compliance with facility covenants.
- Cash uses: Six-month investing cash outflow was $505.3m, including $481.7m of net acquisition cash outlays. Financing cash inflow was $400.5m. Capital expenditures were $23.6m, and shareholder dividends paid were $20.1m.
Material changes and notable items
- Q2 revenue grew 22.4% year over year, including a $10.4m favorable foreign-exchange effect. Six-month revenue increased 23.6%.
- On April 8, 2021, TTEC acquired Avtex for approximately $500m cash, funded with operating cash and credit-facility borrowing. Avtex contributed to Digital; the preliminary purchase accounting included $370.9m goodwill and $123.8m customer relationships. Acquired businesses contributed $68.7m revenue and $5.2m net income during the first half, including $6.2m acquired-intangible amortization.
- Engage’s improvement reflected higher client-program volumes, including pandemic-related work, improved revenue mix, $8.0m of COVID-19-related grant income for the first half, and lower healthcare costs in Q2. The filing says some pandemic work was shifting to more traditional activity.
- Digital’s operating-income decline reflected a reduction in a large multiyear government contract and higher acquisition-related amortization. Excluding that contract, Digital revenue increased 107% in Q2 and 64% for the first half, according to management.
- Six-month effective tax rate was 20.3%, down from 26.7%; management cites international tax holidays and income mix among the drivers. The Q2 rate was 17.8%, versus 24.8%.
Outlook, risks, and contingencies
- Management expects 2021 capital expenditures of 2.9%–3.1% of revenue, approximately 60% for growth and 40% for maintenance. It stated that cash, operating cash flow, and available credit should cover expected operating and capital needs for at least 12 months.
- The filing does not provide specific revenue or earnings guidance. Management cautions that results may be affected by pandemic developments, client purchasing decisions, remote-work and delivery-site disruptions, staffing and wage pressures, acquisition integration, foreign exchange, and variable interest rates.
- On July 2, 2021, after quarter-end, Avtex and some of its clients were affected by a ransomware attack involving Kaseya software. TTEC reported that other TTEC systems and client-support environments were not affected, and Avtex returned to full operating capacity by July 3. The company cautioned that further costs, claims, penalties, litigation, or business losses could emerge.
- Customer concentration warrants attention: one financial-services client contributed 14.2% of first-half revenue, versus 8.3% a year earlier. The five largest clients accounted for 39.0% of first-half revenue. Some large-client contracts expire between 2021 and 2023.
- Credit-facility covenants include a maximum net leverage ratio of 3.50 to 1.00 and minimum interest coverage of 2.50 to 1.00; the facility matures February 14, 2024. A 100-basis-point rate increase would add about $1.0m annual interest expense per $100m borrowed, per the filing.
- Management said current legal proceedings, other than amounts specifically reserved, are not expected to have a material adverse effect, while noting that possible losses for some matters cannot be reasonably estimated. Expected future contingent acquisition consideration was $9.5m at June 30.
Key investor verification points
- Assess Avtex integration, the final purchase-price allocation, acquired-asset amortization, and returns relative to the substantial acquisition borrowing.
- Track Digital margins and the government-contract decline against cloud-platform and systems-integration growth; distinguish organic growth from acquisition contribution.
- Evaluate the durability of Engage’s growth and margins, including the effect of pandemic-related programs, grants, lower healthcare costs, and client program completions.
- Monitor debt, covenant headroom, interest-rate exposure, cash conversion, and whether stated capital-expenditure expectations remain appropriate.
- Seek updates on the Avtex ransomware incident, possible downstream costs or client impacts, and the company’s cybersecurity controls.
- Monitor reliance on the 14.2% revenue client and renewal or expiration outcomes for major contracts.