TTEC Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. TTEC provides customer-experience technology and managed services through TTEC Digital and TTEC Engage. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
- Revenue: $539.2 million, up 24.8% from $432.2 million. Foreign currency contributed approximately $7.1 million to the increase.
- Profitability: Operating income was $73.4 million, up 80.3%; operating margin improved to 13.6% from 9.4%. Net income was $55.0 million, versus $24.7 million; net income attributable to TTEC stockholders was $50.4 million, or $1.06 diluted per share, versus $21.5 million, or $0.46.
- Segments: Engage revenue rose 34.1% to $475.6 million and operating income rose 127.3% to $69.2 million; operating margin expanded to 14.6% from 8.6%. Digital revenue fell 18.0% to $63.6 million and operating income fell 59.0% to $4.2 million; margin contracted to 6.6% from 13.2%.
- Cash flow: Operating cash flow was $69.8 million, compared with $62.2 million. Capital expenditures were $11.6 million, versus $16.8 million. Company-reported free cash flow, a non-GAAP measure, was $58.2 million, versus $45.4 million.
- Cash and liquidity: Cash and cash equivalents were $144.2 million at quarter-end, compared with $132.9 million at year-end; an additional $16.0 million was restricted cash. Current assets were $663.9 million and current liabilities $402.9 million.
- Debt: Credit Facility borrowings were $339.0 million, down from $385.0 million at December 31, 2020. The company reported approximately $855 million of remaining borrowing capacity at quarter-end, subject to covenant calculations. Average borrowing interest was approximately 1.1% annually in Q1.
- Other metrics: Effective tax rate was 22.5%, versus 29.2%. TTEC declared a $0.43-per-share dividend ($20.1 million total), unpaid at quarter-end.
Material changes and notable items
- Engage growth reflected increased client programs, including pandemic-related surge work, and a $6.0 million increase in operating income from COVID-19 relief grants. Management also cited revenue mix and improved profitability. Some programs subsequently shifted toward more traditional work.
- Digital was affected by reduced revenue from a large multi-year government contract and the exit of legacy facility-based training. Excluding that government contract, Digital revenue increased 23% year over year, according to management; cloud and systems integration activity, including acquisitions, grew.
- Q1 operating results included $3.9 million of restructuring charges and asset impairment losses. The income statement reports $0.4 million of restructuring charges and $3.5 million of impairment losses; management described approximately $3.0 million of facility-related restructuring and impairment charges in Engage.
- Interest expense decreased to $1.8 million from $9.6 million, partly because the prior-year period included a charge related to the future purchase of Motif’s remaining interest, finalized in Q2 2020. Other expense was $0.8 million, versus other income of $3.4 million, including fair-value expense on acquisition-related contingent consideration.
- On March 25, TTEC amended its Credit Facility, increasing commitments by $300 million to a maximum aggregate $1.2 billion and setting a February 2024 maturity. The amendment includes maximum net leverage and minimum interest coverage covenants; TTEC reported compliance at March 31.
- On April 8, after quarter-end, TTEC acquired Avtex for $490 million in cash, less customary escrow amounts. It used operating cash and Credit Facility borrowings; approximately $500 million was drawn in early April to fund the purchase. This is a material post-quarter event.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. TTEC expected 2021 capital expenditures of 3.1%–3.3% of revenue, with approximately 60% for growth and 40% for maintenance. Management said available cash, operating cash generation, and credit availability should meet expected operating and capital needs for at least 12 months, while noting this could be affected by acquisitions, financing access, or borrowing costs.
- Management reported no material adverse operational or financial impact from COVID-19 through March 31, 2021, but cautioned that continued outbreaks, lockdowns, weather-related power or internet interruptions, and uncertainty in clients’ buying decisions could affect service delivery and results.
- Client concentration increased: one financial-services client represented 15.7% of Q1 revenue, versus 2.9% a year earlier; the five largest clients represented 41.8%, versus 36.0%. Management notes that client volumes can change and contracts may not be renewed or renewed on comparable terms.
- Other disclosed exposures include competition and execution of the digital strategy, hiring and retention, acquisition integration, cybersecurity and service continuity, international operations, foreign-exchange and variable-rate debt risks, and changing regulatory requirements. A 100-basis-point interest-rate increase would add approximately $1.0 million of annual interest per $100 million borrowed, based on the filing’s estimate.
- Expected future contingent consideration for Voice Foundry acquisitions was $18.9 million at March 31. The company disclosed ongoing U.S. and Philippine tax examinations, but management did not expect their resolution to materially affect the financial statements. Management also reported no material adverse effect expected from current legal proceedings, subject to the filing’s stated limitations.
- COVID-19-related delivery arrangements remain relevant: approximately 80% of employees moved to work-from-home arrangements in early Q2 2020. Engage center utilization was 64%, versus 73% a year earlier, partly due to social-distancing protocols; management reported utilization above 127% after adjusting for reduced available seats and counting client-paid seats.
Important facts for investors to verify
- Whether Engage’s surge-related volumes and $6.0 million of relief-grant benefit are sustainable, and how client program mix affects margins.
- The duration and replacement economics of the large government contract decline in Digital, alongside reported cloud and systems-integration growth.
- Avtex’s integration, earnings contribution, purchase accounting, and the effect of the roughly $500 million incremental borrowing on leverage, interest expense, and covenant headroom.
- Client concentration and renewal exposure, particularly the client contributing 15.7% of quarterly revenue and the top five contributing 41.8%.
- Cash generation and liquidity after the Avtex transaction, including the distinction between reported free cash flow and cash available after debt service, dividends, and acquisitions.
- Potential effects of COVID-19 disruption, foreign-exchange movements, interest-rate changes, and tax or legal matters on future results.