TTEC Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
TTEC provides customer-experience technology and services globally, with approximately 48,500 employees. From Q2 2019, it reported two segments: TTEC Digital, which designs and delivers technology-enabled solutions, and TTEC Engage, which operates customer care, acquisition, and fraud-prevention services. Prior-period segment results were presented on the updated basis.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $395.5 | $364.9 | $1,182.4 | $1,090.0 |
| Operating income | $26.0 | $14.7 | $80.9 | $53.1 |
| Operating margin | 6.6% | 4.0% | 6.8% | 4.9% |
| Net income attributable to TTEC stockholders | $18.1 | $5.4 | $48.9 | $15.5 |
| Diluted EPS | $0.39 | $0.12 | $1.05 | $0.33 |
| Operating cash flow | $63.1 | $61.4 | $184.4 | $166.1 |
| Free cash flow (non-GAAP) | $47.1 | $46.4 | $140.0 | $134.3 |
Q3 revenue rose 8.4% year over year; operating income increased 77.3%. For the first nine months, revenue increased 8.5% and operating income increased 52.5%. Nine-month capital expenditures were $44.4 million, versus $31.8 million. Management expected 2019 capital expenditures of $60–$65 million.
At September 30, cash and cash equivalents were $85.5 million, with $10.3 million of restricted cash additionally included in prepaid assets. The revolving credit facility had $199.0 million outstanding, down from $282.0 million at year-end 2018; remaining borrowing capacity was approximately $575 million. The facility matures in February 2024. Third-quarter borrowings carried an average rate of 3.4%. The company reported compliance with all credit covenants. Operating lease liabilities were $167.5 million; finance lease liabilities were $18.5 million.
Total assets were $1,181.9 million and total liabilities were $794.7 million. The company declared dividends of $0.32 per share for Q3. Management said cash, operating cash generation, and available credit were expected to meet operating and capital needs for the next 12 months.
Segment performance and material changes
- TTEC Digital: Q3 revenue was $78.6 million, up 17.9%; operating income was $11.7 million, up 38.2%, and margin rose to 14.9% from 12.7%. Growth reflected cloud platform and systems integration work, including a large multiyear government contract; legacy training and Middle East activity declined.
- TTEC Engage: Q3 revenue was $316.9 million, up 6.2%; operating income was $14.3 million, up 130.7%, and margin rose to 4.5% from 2.1%. Management cited program growth, pricing, lower healthcare costs, improved profitability in selected portfolios, and favorable currency effects.
- Overall Q3 results included $0.2 million of restructuring and integration charges and no impairment losses. Nine-month results included $1.6 million of restructuring and integration charges and $3.6 million of impairment losses.
- Capacity utilization in Engage was 70% at quarter-end, down from 77% a year earlier, as the company expanded and shifted capacity to match client needs.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance was provided. Management expected continued demand for offshore delivery, while noting that some clients may face pressure to move services onshore. It planned to selectively expand offshore capacity and maintain appropriate U.S. capacity.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recognizing additional lease assets and liabilities; adoption did not affect net earnings or cash flows. The comparative 2018 balance sheet was not recast.
- Nine-month 2019 results included a $2.4 million benefit from reversing acquisition contingent consideration, a $1.4 million receivables recovery gain, a $0.7 million trademark-sale gain, and a $6.4 million volume-commitment payment benefiting Engage operating income. Nine-month 2018 included a $15.6 million impairment of an equity investment and bridge loan, among other items. The 2019 and 2018 periods also differed due to ASC 606 adoption effects.
- On October 26, 2019, after quarter-end, TTEC acquired 70% of First Call Resolution for $104.2 million in cash, with a potential earn-out of up to $10.9 million. The transaction is not reflected in September 30 balances.
- Key risks include reliance on major clients and contract renewals, labor cost and staffing pressures, competition and technology disruption, cybersecurity and service continuity, offshore concentration, foreign exchange and variable-rate debt exposure, and acquisition integration. The five largest clients represented 36.9% of nine-month revenue; no individual client exceeded 10%. The CEO beneficially owned approximately 68% of common stock.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Digital growth and Engage margin improvement are sustainable, particularly given lower workstation utilization and currency effects.
- How client volumes, renewals, and the concentration of revenue among the largest clients evolve.
- Whether planned capital spending, lease commitments, and the FCR acquisition affect cash generation, borrowing, and covenant headroom.
- How much of reported earnings improvement reflects ongoing operations versus one-time items, tax benefits, and ASC 606 comparison effects.
- Whether foreign exchange movements, labor costs, and evolving technology or regulatory requirements materially affect margins and delivery capacity.