Business context and reporting period
TTEC Holdings, Inc. (formerly TeleTech) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. It provides technology-enabled customer experience services through four segments: Customer Management Services (CMS), Customer Growth Services (CGS), Customer Technology Services (CTS), and Customer Strategy Services (CSS). Unless noted otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $353.4 | $305.1 | $691.7 | $617.5 |
| Operating income | $21.6 | $16.2 | $48.1 | $34.0 |
| Operating margin | 6.1% | 5.3% | 7.0% | 5.5% |
| Net income attributable to TTEC stockholders | $14.7 | $11.6 | $33.9 | $22.8 |
| Diluted EPS | $0.32 | $0.24 | $0.73 | $0.47 |
| Net cash from operating activities | — | $125.5 | $55.0 | |
| Free cash flow (non-GAAP) | — | $95.9 | $27.3 |
At June 30, 2017, cash and cash equivalents were $77.9, current assets $449.7, and current liabilities $199.3. Credit-facility borrowings were $257.0, versus $217.3 at year-end 2016; total debt was $273.3 and debt to total capitalization was 40.9%. Remaining borrowing capacity under the facility was approximately $385.0, and the company reported compliance with its covenants. The $900.0 revolving facility matures in February 2021.
Material changes and operating developments
- Q2 revenue increased 15.8%; management attributed growth to the Atelka and Connextions acquisitions and organic CMS growth. Foreign exchange reduced reported Q2 revenue by $2.1; on management’s adjusted basis, revenue grew 16.5%.
- CMS revenue rose 26.4% in Q2 and 18.2% for the first half, with acquisition-related growth and improved operating margins. Other segments were mixed: Q2 CGS revenue fell 12.2%, CTS fell 6.8%, and CSS fell 4.9%.
- Operating income benefited from higher CMS volume, acquisitions, improved utilization and expense rationalization; Q2 results included $3.6 of Connextions restructuring and integration charges.
- On April 3, TTEC acquired Connextions for an estimated net purchase price of $77.7, subject to final valuation and adjustments. The acquisition added approximately 2,000 employees and increased CMS goodwill and intangible assets.
- TTEC recorded a $3.2 loss on a business unit held for sale. It sold its Technology Solutions Group on June 30 for $0.25 upfront plus contingent royalties; a $0.03 gain was recorded.
- H1 investing cash outflow was $110.3, principally reflecting the acquisition. TTEC repurchased $18.3 of stock and paid $10.1 of shareholder dividends in the first half.
Outlook, risks and other notable items
- No specific revenue or earnings guidance is provided. Management said cash from operations, existing cash and available credit should cover expected operating and capital needs for the next 12 months. Expected 2017 capital expenditures were approximately 4.6% of revenue.
- Overall workstation utilization was 76%, below management’s stated target range of 80%–90%. Management expects continued demand for offshore delivery, while noting some clients face regulatory pressure to move services onshore.
- The effective tax rate was 9.2% in Q2 and 16.3% for H1, compared with 19.1% and 23.4%, respectively, in 2016. Tax holidays and discrete benefits reduced the 2017 rates; absent specified benefits, management estimated the Q2 rate at 23.4% and H1 rate at 22.3%.
- Interest-rate exposure increased after the $15 interest-rate swap expired in June with no replacement. Management estimated that a 100-basis-point rate increase would add $1.0 of quarterly interest expense per $100.0 of borrowings.
- Foreign-exchange exposure remains material despite hedging; the company reported $359.4 notional of cash-flow hedge contracts and a net derivative liability of $32.5 at June 30.
- Client concentration, contract renewals, competition, international operations, foreign currency, staffing, cybersecurity and acquisition integration are among the cited business risks. The five largest clients represented 34.4% of H1 revenue; one client represented 9.6%.
- Disclosure controls were deemed ineffective because previously identified material weaknesses in internal control over financial reporting continued at June 30. Management said remediation actions were underway and that the weaknesses had not caused material errors in the reported statements.
- Management stated that ordinary-course legal proceedings, apart from matters specifically reserved, were not expected to have a material adverse effect; it could not reasonably estimate possible losses for some matters. No material changes to the prior annual report’s risk factors were reported.
Key facts for investors to verify
- How much of CMS growth and margin improvement is organic versus acquisition-related, and how Connextions integration and center closures progress.
- Whether workstation utilization improves toward the 80%–90% target and whether weaker CGS and CTS revenue stabilizes.
- Cash conversion and working-capital sustainability after the unusually strong H1 operating cash flow, alongside acquisition spending, repurchases and dividends.
- Borrowing levels, covenant headroom, variable-rate exposure and the effect of the expired interest-rate hedge.
- Final purchase accounting for Connextions and proceeds or further charges associated with held-for-sale businesses.
- Progress in remediating the material weaknesses and restoring effective disclosure controls.