TTEC Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results are compared with the corresponding 2018 periods. Unless stated otherwise, financial amounts below are in U.S. dollars, millions.
Business context and reporting changes
TTEC provides customer-experience technology and services globally, with approximately 48,000 employees. Beginning in Q2 2019, it reorganized reporting into two segments: TTEC Digital, which provides consulting and technology solutions, and TTEC Engage, which operates customer care, customer acquisition, and fraud-prevention services. Management said the reporting change does not materially affect financial results.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $392.5 | $349.9 | $786.9 | $725.1 |
| Operating income | $22.9 | $13.5 | $55.0 | $38.4 |
| Operating margin | 5.8% | 3.9% | 7.0% | 5.3% |
| Net income attributable to TTEC stockholders | $11.8 | $5.5 | $30.8 | $10.1 |
| Diluted EPS | $0.25 | $0.12 | $0.66 | $0.22 |
| Operating cash flow | Not stated separately in the filing summary | Not stated separately in the filing summary | $121.3 | $104.7 |
| Free cash flow | $26.1 | $27.9 | $92.8 | $87.8 |
Q2 revenue increased 12.2%; six-month revenue rose 8.5%. Q2 operating income increased 69.4%, and six-month operating income increased 43.0%. The filing attributes the improvement primarily to revenue growth and segment performance, partly offset by impairments and other items. Free cash flow is a company-defined non-GAAP measure, calculated as operating cash flow less capital expenditures.
Segments and material comparisons
- TTEC Digital: Q2 revenue was $78.5 million, up 49.6%, and operating income was $7.7 million, up 14.0%; margin declined to 9.8% from 12.9%, mainly reflecting a $2.0 million impairment. Six-month revenue rose 40.8% to $144.4 million; operating income rose 27.7% to $15.5 million.
- TTEC Engage: Q2 revenue was $314.0 million, up 5.6%, and operating income was $15.2 million, up 125.0%; margin increased to 4.8% from 2.3%. Six-month revenue rose 3.2% to $642.5 million; operating income rose 50.0% to $39.5 million.
- Management cited growth in cloud and systems integration, new and expanded client programs, pricing increases, lower healthcare costs, and improved healthcare and auto client profitability. Results also reflected currency movements, program completions, and the prior-year ASC 606 revenue-adoption impact.
Liquidity, debt, and balance sheet
- At June 30, cash and cash equivalents were $75.5 million; cash, cash equivalents, and restricted cash totaled $86.9 million. Total assets were $1.179 billion and stockholders’ equity was $390.6 million.
- Accounts receivable was $323.8 million and total current liabilities were $322.9 million. The company factored $36.9 million of receivables under a facility permitting up to $75 million at a time.
- Credit-facility borrowings were $228.0 million, down from $282.0 million at year-end 2018. The revolving facility has a $900 million commitment, matures in February 2024, and had approximately $510 million of remaining borrowing capacity. TTEC reported covenant compliance.
- Operating lease liabilities totaled $157.1 million and finance lease liabilities $18.6 million. Adoption of the new lease standard added substantial lease assets and liabilities to the balance sheet.
- Six-month capital expenditures were $28.4 million. Management forecast 2019 capital expenditures of $60–$65 million and said available cash, operating cash flow, and credit capacity should cover expected needs for the next 12 months.
Outlook, risks, and unusual items
- The filing gives no specific revenue or earnings guidance. Management expects continued demand for offshore delivery, while noting that some clients may face pressure to move services onshore. It plans to selectively expand offshore capacity and maintain U.S. capacity.
- Q2 included a $2.4 million benefit from reducing contingent consideration related to the SCS acquisition to zero, and approximately $2.5 million of restructuring and impairment charges combined. The six-month effective tax rate was 30.3%, compared with 18.4%; management said it would have been 24.7% excluding specified valuation-allowance and other tax items.
- Foreign-exchange exposure, variable-rate debt, client concentration, demand forecasting and capacity utilization, staffing, cybersecurity, service continuity, and strategy execution are among the disclosed risks. A 100-basis-point increase in Prime or LIBOR would add an estimated $1.0 million of annual interest expense per $100 million of borrowings.
- The five largest clients represented 37.4% of Q2 revenue and 36.7% of six-month revenue; no individual client exceeded 10% of six-month revenue. Sears-related pre-petition receivables were $2.5 million at quarter-end; TTEC signed a new contract with the successor business in April 2019.
- Tax authorities were examining several jurisdictions, including a disputed initial Philippines tax deficiency finding. Management did not expect resolution of the disclosed audits or current legal proceedings to materially affect the financial statements. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Digital’s rapid growth can continue and whether its margin recovers after the consulting-component impairment.
- How much of the improvement in cash flow and earnings is sustainable versus working-capital timing, currency effects, contract-volume payments, and nonrecurring items.
- Client renewals and concentration exposure, including the status and collectability of Sears-related receivables.
- Capital-spending execution against the $60–$65 million 2019 forecast, lease commitments, and remaining credit capacity under covenant requirements.
- Resolution of the Philippines tax matter and other tax audits, and whether valuation allowances or tax rates change further.