TTEC Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts below are in U.S. dollars; financial statement amounts originally reported in thousands are converted to millions where shown.
Business context
TTEC provides customer-experience technology and services through TTEC Digital and TTEC Engage. In Q3, Digital generated 22% of revenue and Engage 78%. The company reported approximately 64,400 employees operating across 20 countries.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $603.0M | $592.5M | $1,836.6M | $1,785.4M |
| Income from operations | $25.4M | $35.6M | $101.1M | $119.8M |
| Operating margin | 4.2% | 6.0% | 5.5% | 6.7% |
| Net income attributable to TTEC shareholders | $(1.5)M | $22.2M | $18.3M | $80.9M |
| Diluted earnings per share | $(0.03) | $0.47 | $0.39 | $1.71 |
| Net cash from operating activities | $(31.7)M | $27.5M | $113.2M | $118.8M |
Q3 revenue rose 1.8% year over year, including a $6.0M benefit from foreign currency. Q3 cost of services increased to $479.7M from $450.5M. Interest expense increased to $20.3M from $10.6M in the quarter. The reported effective tax rate was 74.7% for Q3 and 42.2% for the nine-month period, versus 15.2% and 17.7%, respectively, in 2022.
Segments and changes versus prior year
- TTEC Digital: Q3 revenue increased 14.7% to $133.3M and operating income increased 48.8% to $11.9M; margin expanded to 8.9% from 6.9%. Management cited recurring revenue growth, one-time product sales, offshore delivery and lower overhead. For the nine months, revenue grew 7.5% to $367.8M, but operating income fell 20.5% to $19.9M amid investment and restructuring costs.
- TTEC Engage: Q3 revenue declined 1.4% to $469.7M and operating income fell 51.2% to $13.5M; margin declined to 2.9% from 5.8%. Program completions, ramp and training costs, geographic expansion, and restructuring and impairment charges weighed on results. Nine-month revenue grew 1.8% to $1,468.9M, while operating income declined 14.3% to $81.2M.
- Consolidated Q3 operating income declined 28.7%, while shareholder-attributable results moved from profit to loss. Management attributed the deterioration to segment-level cost pressures and sharply higher interest expense.
Cash, debt and liquidity
- Cash and cash equivalents were $151.6M at September 30, 2023, compared with $153.4M at December 31, 2022. Total assets were $2,168.2M and stockholders’ equity was $603.2M.
- Credit-facility borrowings were $964.0M, versus $960.0M at year-end 2022. The facility is a $1.5B floating-rate revolving facility maturing November 2026; Q3 borrowings averaged 6.9%. Remaining borrowing capacity was approximately $215M, subject to covenant calculations. TTEC reported compliance with covenants.
- Nine-month operating cash flow was $113.2M, down from $118.8M. Capital expenditures were $54.7M, producing company-defined free cash flow of $58.5M versus $54.2M. Cash used in financing was $71.5M, including dividends, noncontrolling-interest payments and acquisition-related contingent payments.
- Management said cash, operating cash generation and available credit should meet expected operating and capital needs for the next 12 months, while cautioning that restricted capital access or higher borrowing costs could adversely affect the business.
Outlook, risks and unusual items
- No specific revenue or earnings forecast is provided in the filing. TTEC expected 2023 capital expenditures of 3.0%–3.2% of revenue, approximately 65% for growth and 35% for maintenance.
- Q3 included $1.4M of restructuring charges and $4.1M of impairment losses. The nine-month totals were $4.9M and $11.1M, respectively. The nine-month results also included a $7.3M net insurance reimbursement related to a cybersecurity incident.
- FCR’s remaining 30% interest was acquired in 2023 for $22.4M after the minority holder exercised put rights; the final payment was made in April. Faneuil contingent consideration and related fair-value adjustments also affected reported other income and expense.
- One automotive client accounted for 10.1% of nine-month revenue. The five largest clients together generated 35.1% of nine-month revenue. Management identifies client concentration, contract renewals, labor availability and cost, competition, technology and AI adoption, cybersecurity, international operations, foreign exchange, and variable-rate debt as risks.
- The company reported ongoing tax audits in several jurisdictions and ordinary-course legal proceedings; management said currently known matters were not expected to have a material adverse effect. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Engage margins and operating income stabilize after program completions, ramp costs and expansion investments.
- Whether operating cash flow and free cash flow recover, particularly given Q3 operating cash outflow and working-capital movements.
- Debt levels, borrowing availability, floating-rate exposure and the impact of elevated interest expense on earnings and liquidity.
- Client concentration and renewal outcomes, including the large automotive client and contracts expiring from 2023 through 2025.
- Assumptions behind the tax rate and deferred-tax-asset recoverability, as well as the eventual outcomes of tax audits and legal matters.
- Potential further impairment, restructuring, contingent-consideration or cybersecurity-related costs and recoveries.