TTEC Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context
TTEC provides customer-experience technology and services through two segments: TTEC Digital, which delivers technology and professional services, and TTEC Engage, which operates customer care, acquisition, and fraud-prevention services. The company reported approximately 56,200 employees and operations across multiple regions.
Financial results and liquidity
- Q3 revenue: $493.0, up 24.6% year over year. TTEC Engage revenue rose 31.4% to $416.4; TTEC Digital revenue fell 2.6% to $76.6.
- Q3 operating income: $53.4, up 105.5%; operating margin was 10.8%, versus 6.6% a year earlier. Segment margins were 17.0% for Digital and 9.7% for Engage.
- Q3 earnings: Net income was $24.1 and net income attributable to TTEC stockholders was $21.4, or $0.45 per diluted share, compared with $18.1 and $0.39, respectively, in Q3 2019. Other expense included a $17.4 loss from deconsolidating two foreign subsidiaries.
- Nine-month results: Revenue was $1,378.3, up 16.6%; operating income was $143.1, versus $80.9; net income attributable to TTEC stockholders was $74.2, versus $48.9.
- Cash flow: Operating cash flow was $186.8 for the first nine months, versus $184.4. Capital expenditures were $47.8; free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $139.0, versus $140.0.
- Balance sheet and debt: Cash and cash equivalents were $135.3 at September 30, versus $82.4 at December 31, 2019. Line-of-credit borrowings were $325.0, versus $290.0; reported remaining borrowing capacity was approximately $570.0, and the company stated it was in compliance with its covenants. Current assets were $632.4 and current liabilities $404.1.
- Other metrics: Total assets were $1,477.0 and total liabilities $937.8. The Q3 effective tax rate was 25.9%, versus 20.6%; the nine-month rate was 26.5%, versus 27.0%.
Material changes versus comparable periods
- Q3 growth was led by Engage, including the FCR acquisition and increased client volumes associated with COVID-19. Engage operating margin increased to 9.7% from 4.5%.
- Digital Q3 revenue declined, reflecting reductions in legacy facility-based training and Middle East consulting, partly offset by cloud growth and acquisitions. Digital operating margin improved to 17.0% from 14.9%.
- Nine-month results included $82.2 of revenue from acquired businesses. Acquisitions during 2020 included Serendebyte and the U.S. and U.K. phase of Voice Foundry; the company expected to close the Australian and ASEAN phase in early November.
- Q3 2020 other expense was $18.7, compared with other income of $2.7 in Q3 2019, primarily due to the $17.4 subsidiary deconsolidation loss. Nine-month other expense included a $19.9 loss from deconsolidating three subsidiaries, partly offset by a $4.4 contingent-consideration benefit.
Outlook, management commentary, and risks
- Management said COVID-19 had not materially adversely affected operating or financial results through September 30, 2020. It reported that COVID-related surge volumes contributed approximately 11% of year-to-date revenue and expected the positive trend to continue for the remainder of 2020, while emphasizing uncertainty beyond 2020.
- More than 43,000 employees—about 80% of the workforce—were transitioned to work from home in March and April. Management was reviewing its real-estate footprint and anticipated clients could use a more diverse mix of work-from-home and physical delivery.
- The company estimated 2020 capital expenditures of $58–$62, with approximately 70% for growth and 30% for maintenance. Management believed cash, operating cash flow, and available credit would cover expected operating and capital requirements for at least 12 months.
- Risks include renewed COVID-19 restrictions, client demand and payment risks, costs and capacity constraints from distancing measures, hiring and retention challenges, cybersecurity and compliance risks associated with remote work, client concentration, foreign-exchange and variable-rate debt exposure, and acquisition integration.
- One client represented 11.8% of nine-month revenue, compared with 3.4% a year earlier. The five largest clients accounted for 39.1% of nine-month revenue, versus 36.9%.
- Other notable items: restructuring charges were $2.6 for the first nine months; impairment losses were $1.6. The company recorded a $1.7 liability for an uncertain tax position in Q3. It reported no material adverse effect expected from current legal proceedings, except as specifically reserved.
Important facts for investors to verify
- Whether COVID-related surge demand persists and how renewed restrictions affect client volumes, delivery capacity, costs, and margins.
- Whether reported growth and profitability are sustainable after separating acquired revenue, surge programs, and unusual items such as subsidiary dissolution losses and contingent-consideration adjustments.
- Debt usage, borrowing availability, covenant compliance, interest-rate exposure, and the company’s ability to fund acquisitions, capital spending, and dividends.
- Client concentration and renewal terms, including exposure to industries affected by the pandemic and the 11.8% revenue contribution from one client.
- Final purchase-price allocations and performance-based contingent payments for Voice Foundry and other acquisitions, and the related integration and goodwill risks.