TTEC Holdings, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. TTEC provides global customer-experience services and technology through four segments: Customer Management Services (CMS), Customer Growth Services (CGS), Customer Technology Services (CTS), and Customer Strategy Services (CSS). Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Revenue | $375.2 million | $338.3 million | Up 10.9%; excluding the $12.5 million ASC 606 adoption impact, up 7.2%. |
| Operating income | $24.9 million | $26.5 million | Down 5.8%; operating margin was 6.6% versus 7.8%. |
| Net income | $5.9 million | $20.2 million | Net income attributable to TTEC stockholders was $4.6 million versus $19.2 million. |
| Diluted EPS | $0.10 | $0.42 | Dividends declared were $0.27 per share versus $0.22. |
| Operating cash flow | $67.4 million | $74.9 million | Free cash flow, a non-GAAP measure, was $59.9 million versus $62.9 million. |
Reported Q1 2018 results reflect adoption of ASC 606 using the modified retrospective method; prior-year results were not restated. The company reported that ASC 606 increased Q1 2018 revenue by $12.5 million and net income by $4.5 million compared with amounts calculated without adoption. The company also recorded a $10.0 million net reduction to opening retained earnings upon adoption.
Segments and material year-over-year changes
- CMS: Revenue rose 16.1% to $292.6 million, primarily reflecting acquisitions, ASC 606, and foreign exchange, partly offset by completed programs. Operating income fell 11.6% to $18.2 million; margin declined to 6.2% from 8.2%. Management cited restructuring and impairment charges and planned strategy, product, marketing, and sales investments.
- CGS: Revenue declined 3.3% to $32.5 million; operating income fell 42.7% to $1.4 million. New program launches and a facility exit affected results.
- CTS: Revenue declined 1.4% to $35.2 million, while operating income increased 58.5% to $4.8 million; margin rose to 13.8% from 8.6%, primarily on growth in higher-margin cloud business.
- CSS: Revenue fell 11.8% to $14.9 million; operating income increased 17.6% to $0.5 million. Management attributed lower revenue to a refocus of learning and performance services.
Financial position and liquidity
- Cash and equivalents were $81.6 million at March 31, up from $74.4 million at year-end. Current assets were $517.7 million and current liabilities $224.9 million.
- Credit-facility borrowings were $302.5 million, down from $344.0 million at year-end. The $1.2 billion revolving facility matures in 2021; remaining borrowing capacity was approximately $425 million. TTEC reported compliance with its covenants and stated liquidity would be sufficient for expected needs over the next 12 months.
- Q1 operating, investing, and financing cash flows were $67.4 million provided, $10.1 million used, and $46.1 million used, respectively. Capital expenditures were $7.5 million.
- Total assets were $1.035 billion and stockholders’ equity was $345.2 million at quarter-end. Total liabilities were $689.6 million.
Management commentary, outlook, and risks
- Management expects 2018 capital expenditures of approximately 3.8% of revenue, with about 70% intended to support growth. It said planned Q1 investments should decline as a share of revenue and become accretive to operating margin over the remainder of the year; no full-year revenue or earnings guidance was provided.
- Overall workstation utilization was 77%, down from 78% a year earlier and below TTEC’s stated 80%–90% internal target. Management intends to selectively expand offshore capacity while maintaining U.S. capacity.
- A $15.6 million CaféX investment and bridge loan were fully impaired after a planned intellectual-property sale did not proceed, the company’s strategy shifted, its external bank loan went into default, and additional funding options were lacking. Q1 other expense also included a $0.7 million bargain-purchase gain and $0.8 million in royalty proceeds from a prior divestiture.
- TTEC acquired Motif in 2017 and recorded a $29.8 million liability for the mandatory purchase of the remaining 30% interest. On April 30, 2018, after quarter-end, it agreed to acquire Strategic Communications Services for £4.4 million, with potential earn-outs of up to £3.0 million.
- One healthcare client represented 11.3% of Q1 revenue; the five largest clients together represented 36.4%. The company cautioned that client losses, contract renewals, competition, economic conditions, cybersecurity, international operations, foreign exchange, interest rates, staffing, and acquisition integration could affect results. It reported no material changes to the risk factors in its 2017 Form 10-K.
- The effective tax rate was 26.2%, versus 21.1% a year earlier. TTEC said its assessment of the 2017 U.S. tax law remained subject to further analysis and guidance. The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Separate underlying revenue and margin trends from ASC 606 effects, acquisitions, foreign exchange, and program completions.
- Track whether planned investments and new program launches translate into improved operating margins, particularly in CMS and CGS, and whether utilization recovers.
- Monitor cash generation, variable-rate debt costs, covenant headroom, and the funding implications of the Motif buyout and post-quarter SCS acquisition.
- Assess the CaféX impairment and client concentration, including renewal and volume risks for major accounts.
- Review future tax-rate effects and the final accounting outcomes for ASC 606, the 2017 tax-law provisions, and the SCS acquisition.