TTEC Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the same periods of 2020 unless noted. Amounts are in U.S. dollars and rounded to millions except per-share data. TTEC provides customer-experience technology and managed services through TTEC Digital and TTEC Engage.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $566.7 | $493.0 | $1,660.7 | $1,378.3 |
| Operating income | $26.0 | $53.4 | $165.3 | $143.1 |
| Net income attributable to TTEC stockholders | $14.4 | $21.4 | $112.2 | $74.2 |
| Diluted EPS | $0.30 | $0.45 | $2.37 | $1.58 |
| Operating cash flow | $42.2 | $81.5 | $175.1 | $186.8 |
| Free cash flow, non-GAAP | $25.0 | $65.6 | $134.3 | $139.0 |
- Q3 revenue increased 15.0%, while operating income fell 51.1%; operating margin declined to 4.6% from 10.8%. Net income attributable to TTEC stockholders decreased 32.4%.
- Nine-month revenue increased 20.5% and operating income increased 15.5%. Net income attributable to TTEC stockholders rose about 51%.
- Q3 TTEC Digital revenue was $124.1 million, up 62.1%, with operating income of $8.7 million and a 7.0% margin, down from 17.0%. TTEC Engage revenue was $442.6 million, up 6.3%, with operating income of $17.4 million and a 3.9% margin, down from 9.7%.
Liquidity, debt and capital
- At September 30, cash and cash equivalents were $148.9 million; current assets were $734.0 million and current liabilities $484.1 million.
- Credit Facility borrowings were $805.0 million, compared with $385.0 million at December 31, 2020. The increase primarily funded the Avtex acquisition. Remaining borrowing capacity was approximately $390 million; TTEC reported compliance with its covenants. The facility matures February 2024.
- Nine-month investing cash outflow was $522.5 million, including $481.7 million of acquisitions and $40.8 million of capital expenditures. Financing cash inflow was $362.5 million, largely reflecting increased credit-facility borrowings.
- Management said operating cash, cash on hand and available credit should cover expected operating and capital needs for at least the next 12 months. 2021 capital expenditures were projected at 2.8%–3.0% of revenue; no specific revenue or earnings guidance was provided.
Material changes and unusual items
- TTEC acquired Avtex in April 2021 for approximately $500 million in cash, funded with operating cash and credit-facility borrowings. Avtex contributed to TTEC Digital; preliminary purchase accounting included $375.7 million of goodwill. Acquired businesses contributed $130.4 million of revenue and $9.9 million of net income for the first nine months, including $11.8 million of acquired-intangible amortization.
- A September 12 ransomware incident disrupted TTEC Engage client-support operations. TTEC reported $19.3 million of incident-related costs for the quarter, restored client-facing systems by September 17, and said it had returned to service with all clients. It expects additional cybersecurity investments during Q4 2021 through Q2 2022, but had not estimated their cost.
- TTEC Digital growth reflected cloud services and acquisitions, partly offset by a declining large multi-year government contract. The company said Digital revenue excluding that contract rose 126% year over year in Q3.
- The 2020 comparison included a $17.4 million Q3 expense from deconsolidating two foreign subsidiaries. This affected other income/expense, not operating income.
- Nine-month comprehensive income attributable to TTEC stockholders was $89.8 million, down from $86.2 million? The filing reports $89.8 million for 2021 and $86.2 million for 2020; 2021 included significant foreign-currency and derivative-related losses in other comprehensive income.
Management commentary, risks and contingencies
- Management said COVID-19 had not materially adversely affected results through September 30, 2021, but warned that infection surges, lockdowns and work-from-home infrastructure disruptions could affect service delivery.
- Cybersecurity and privacy risks are heightened by the incident, including potential regulatory action, fines, litigation, client claims, reputational damage and disputes over insurance coverage. TTEC also disclosed a separate July 2021 ransomware attack affecting Avtex and some of its clients; it reported restoring Avtex’s operating environment.
- Client concentration is material: one financial-services client generated 13.3% of nine-month revenue. The five largest clients accounted for 38.1% of nine-month revenue. Management noted contracts may be terminated or not renewed.
- Variable-rate debt exposes TTEC to interest-rate risk; management estimated a 100-basis-point increase would add about $1 million in annual interest per $100 million borrowed. Foreign-currency exposure is partly hedged but not fully eliminated.
- Management said current legal proceedings, other than amounts specifically reserved, were not expected to have a material adverse effect, while noting ultimate outcomes and possible losses could not always be estimated.
Important facts for investors to verify
- Whether Engage margins recover after the cyber incident, and the eventual cybersecurity investment, insurance and claim costs.
- Avtex’s realized growth and profitability, integration progress, and the assumptions supporting preliminary goodwill and intangible valuations.
- Debt repayment capacity, covenant headroom and sensitivity to interest rates, given the higher borrowing balance.
- Operating cash generation and working-capital trends, as nine-month operating cash flow and free cash flow were below the prior-year levels.
- Retention and renewal of major clients, including the financial-services client contributing 13.3% of nine-month revenue.