TTEC Holdings, Inc. — Q2 2023 Form 10-Q
Period: Three and six months ended June 30, 2023; filed August 4, 2023. Amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
TTEC provides customer-experience technology and managed services through TTEC Digital and TTEC Engage. It reported 63,900 employees operating in 23 countries. The statements are unaudited; management cautions that interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $600.4m | $604.3m | $1,233.7m | $1,193.0m |
| Operating income | $31.3m | $35.9m | $75.7m | $84.2m |
| Operating margin | 5.2% | 5.9% | 6.1% | 7.1% |
| Net income attributable to TTEC stockholders | $1.2m | $25.2m | $19.9m | $58.6m |
| Diluted EPS | $0.03 | $0.53 | $0.42 | $1.24 |
| Operating cash flow | Not stated here | Not stated here | $144.9m | $91.3m |
| Free cash flow (non-GAAP) | Not stated here | Not stated here | $112.0m | $55.5m |
Q2 cost of services was $464.7m; the filing does not present a gross-margin measure. Q2 interest expense rose to $19.0m from $6.2m, and other expense was $3.6m versus other income of $6.1m. The effective tax rate was 61.9% in Q2 and 36.2% for the half year, compared with 20.2% and 18.7%, respectively, in 2022.
At June 30, cash and cash equivalents were $114.8m, down from $153.4m at year-end; cash, cash equivalents and restricted cash totaled $165.4m. Current assets were $721.1m and current liabilities $451.2m. Credit-facility borrowings were $915.0m, down from $960.0m at year-end; the company reported approximately $265m of remaining borrowing capacity and compliance with all covenants. Q2 average borrowing interest was 6.6%. Six-month capital expenditures were $33.0m.
Material changes versus the prior comparable period
- Q2 revenue decreased 0.6%; first-half revenue increased 3.4%. Q2 operating income fell 12.8%, while first-half operating income fell 10.1%.
- In Q2, Digital revenue grew 2.8% to $117.6m, but segment operating income declined 33.5% to $7.2m (6.1% margin versus 9.4%). Engage revenue decreased 1.4% to $482.8m, and operating income declined 3.9% to $24.1m (5.0% margin versus 5.1%).
- Management attributed weaker operating performance to investment in Digital leadership, engineering, sales and product development; and, in Engage, program completions, new-program ramp costs, expansion spending and impairment. Q2 results included $4.1m of restructuring charges and asset impairments, versus $11.8m a year earlier.
- Higher interest expense and unfavorable other expense, alongside a higher effective tax rate, contributed to the sharp decline in net income. First-half operating cash flow improved, while the company reported lower investing outflows, mainly because the comparable 2022 period included the $142.4m Faneuil acquisition.
Outlook, commentary, risks and unusual items
- Management expects 2023 capital expenditures of 3.0%–3.2% of revenue, approximately 65% for growth and 35% for maintenance. It said cash generation, cash on hand and available credit should cover expected operating and capital needs over the next 12 months, while noting that restricted access to capital or higher borrowing costs could adversely affect results.
- Remaining performance obligations were $326.5m at June 30, expected to be delivered and recognized within five years; timing depends on customer consumption and contract terms. No specific revenue or earnings guidance was provided in the supplied filing text.
- One automotive client contributed 10.1% of first-half revenue. The five largest clients accounted for 35.4% of first-half revenue; some major contracts expire between 2023 and 2025. The company identifies client concentration, competition, labor availability and cost, macroeconomic and geopolitical conditions, cybersecurity, data privacy, technology-partner reliance, foreign exchange, interest rates and acquisition integration among its risks.
- A $13.8m out-of-period adjustment to other comprehensive income and deferred tax assets corrected a currency-translation tax error; management considered it immaterial to prior periods and to Q2 and first-half 2023 results. The filing also reports Faneuil-related fair-value expenses and contingent-payment changes, and insurance recoveries related to a cybersecurity incident and property damage.
- TTEC acquired the remaining 30% of First Call Resolution after a put right was exercised; the final $22.4m payment was made in April 2023. The credit facility was amended to replace LIBOR with SOFR. Management reported effective disclosure controls and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue trends and segment margins stabilize, particularly Digital profitability and Engage program completions and ramp costs.
- Whether operating cash flow and non-GAAP free cash flow remain strong after working-capital movements, capital spending and debt service.
- Debt levels, variable-rate borrowing costs, covenant headroom and the availability of the reported $265m of borrowing capacity.
- Renewal, volume and termination developments among major clients, including the automotive client and contracts expiring through 2025.
- Final amounts and timing of Faneuil contingent consideration, and whether further unusual charges, impairments or insurance recoveries arise.
- Tax-rate drivers and the treatment of the $13.8m out-of-period correction; the filing states the correction was immaterial, but investors may review the related disclosures.