TTEC Holdings, Inc. quarterly report, Q2 FY2022

Full document

TTEC Holdings, Inc. — Q2 2022 Form 10-Q

Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2022. TTEC provides customer-experience-as-a-service solutions through TTEC Digital (CX technology and consulting) and TTEC Engage (managed customer-care and related services). It reported 59,600 employees across 20 countries. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.

Financial performance and liquidity

MetricQ2 2022Q2 2021Six months 2022Six months 2021
Revenue$604.3$554.8$1,193.0$1,094.0
Operating income$35.9$65.8$84.2$139.3
Operating margin5.9%11.9%7.1%12.7%
Net income attributable to TTEC stockholders$25.2$47.4$58.6$97.8
Diluted earnings per share$0.53$1.00$1.24$2.06
  • Q2 revenue and segments: Revenue rose 8.9% year over year, including a $10.5 million adverse foreign-exchange effect. Digital revenue increased 8.0% to $116.6 million, with $10.9 million operating income; Engage revenue increased 9.1% to $487.7 million, with $25.0 million operating income.
  • Cash flow: Six-month cash from operations was $91.3 million, down from $132.8 million. Capital expenditures were $35.8 million versus $23.6 million. Company-defined free cash flow, a non-GAAP measure, was $55.5 million versus $109.2 million. Investing activities used $178.1 million, including $142.4 million for acquisitions.
  • Liquidity and debt: June 30 cash and cash equivalents were $163.2 million. Borrowings under the revolving credit facility were $930.0 million, up from $791.0 million at year-end 2021; remaining borrowing capacity was approximately $425 million. The facility matures November 2026, and TTEC reported compliance with its covenants. Current assets were $740.8 million and current liabilities $461.4 million.
  • Other balance-sheet items: Total assets were $2,165.2 million, goodwill $810.9 million, and stockholders’ equity $551.0 million at June 30, 2022. The company declared $0.50 per common share in dividends during the first half and paid $23.5 million.

Material changes versus the prior comparable period

  • Revenue growth did not translate into higher earnings: Q2 operating income fell 45.5%, and first-half operating income fell 39.5%. TTEC attributed the pressure principally to lower contribution from COVID-surge work, costs to ramp replacement programs, growth investments, acquisition-related amortization and integration costs, and impairment and restructuring charges.
  • Q2 Engage operating margin declined to 5.1% from 12.6%; Digital margin improved to 9.3% from 8.9%. For the first half, Digital revenue rose 34.1%, including Avtex acquisition contribution, while Engage revenue rose 4.4%; both segments’ operating margins declined year over year.
  • Q2 cost of services rose to $463.5 million from $400.3 million. Interest expense increased to $6.2 million from $3.4 million in Q2, reflecting higher facility utilization and interest rates.
  • First-half other income included a $2.1 million insurance recovery related to property damage. Foreign currency translation and derivative valuation contributed to a $29.4 million Q2 comprehensive loss, despite positive net income.

Outlook, commentary, risks and unusual items

  • Management said operating cash, cash balances and available credit should be sufficient for operating and capital needs over the next 12 months, while warning that restricted capital access or higher borrowing costs could adversely affect the business.
  • Expected 2022 capital expenditures were 3.0%–3.2% of revenue, approximately 65% for growth and 35% for maintenance. The filing provides no specific revenue or earnings guidance.
  • The April 2022 Faneuil asset acquisition added public-sector citizen-experience contracts. TTEC paid approximately $142.3 million in cash; preliminary purchase accounting included $76.3 million of goodwill and $61.2 million of customer relationships. Acquired businesses contributed $90.6 million of Q2 revenue and $21.1 million of net income, as reported by the company.
  • Q2 impairment losses were $9.2 million; first-half impairment losses were $10.4 million. The filing also reports Q2 restructuring charges of $2.5 million. Management identified impairments involving leasehold improvements, right-of-use assets, internally developed software and computer equipment.
  • Cybersecurity: A September 2021 ransomware incident disrupted parts of Engage, and certain data was exfiltrated or destroyed. TTEC said client-facing systems were restored within five days, it had no indication that financial reporting information was affected, and the incident had no long-term operational impact. It expected at least $6 million of cybersecurity investment in 2022 and beyond; it also disclosed data-privacy lawsuits served in the first half of 2022 and potential litigation, regulatory and reputational exposure.
  • Other risks: The filing highlights client concentration (the five largest clients accounted for 35.8% of first-half revenue), labor availability and wage costs, cybersecurity and third-party cloud reliance, foreign exchange and variable-rate debt exposure, acquisition integration, and potential effects of the Russia-Ukraine conflict on European operations. One automotive client represented 10.5% of first-half revenue.
  • TTEC reported no material adverse COVID-19 impact through June 30, 2022, but said it could not predict how clients’ post-pandemic changes would affect buying decisions and work volumes. It reported disclosure controls effective at the reasonable-assurance level and no material quarter-period change in internal control over financial reporting.

Investor verification priorities

  1. Check whether Engage program ramps, post-COVID revenue mix and utilization improvements restore margins; compare subsequent segment margins with Q2’s 5.1% Engage and 9.3% Digital.
  2. Review operating cash conversion, working-capital movements and capital spending against the first-half declines in operating cash flow and free cash flow.
  3. Track facility borrowings, interest expense, available capacity and covenant headroom as debt and borrowing costs rise.
  4. Assess Faneuil integration and final purchase-price valuations, including contingent payments and whether acquired revenue and earnings are sustained.
  5. Monitor cybersecurity remediation spending, the status and potential exposure of data-privacy lawsuits, and any regulatory or client consequences.
  6. Review client renewals and concentration, foreign-exchange hedge positions, and developments affecting TTEC’s European operations.