Welcome to TTEC's Fourth Quarter and Full Year 2022 Earnings Conference Call. I would like to remind all parties that you will be in a listen-only mode until the question-and-answer session. This call is being recorded at the request of TTEC. I would now like to turn the call over to Paul Miller, TTEC's Senior Vice President, Treasurer and Investor Relations Officer. Thank you, sir. You may begin.

Good morning, and thank you for joining us today. TTEC is hosting this call to discuss its fourth quarter and full year 2022 financial results for the period ended December 31, 2022. Participating on today's call are Ken Tuchman, Chairman and Chief Executive Officer of TTEC; Shelly Swanback, Chief Executive Officer of TTEC Engage and President of TTEC; and Dustin Semach, Chief Financial Officer of TTEC. Yesterday, TTEC issued a press release announcing its financial results. While this call will reflect items discussed within that document, for complete information about our financial performance, we also encourage you to read our 2022 annual report on Form 10-K, which we anticipate will be filed at market close today. Before we begin, I want to remind you that matters discussed on today's call may include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward-looking statements reflect our opinion as of the date of this call, and we undertake no obligation to revise this information as a result of new developments that may occur. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our annual report on Form 10-K. A replay of this conference call will be available on our website under the Investor Relations section. I will now turn the call over to Ken.

Thank you, Paul. Good morning, everyone, and thank you for joining us today. We ended 2022 with solid execution and financial results despite the increased uncertainties surrounding the global macroeconomic environment, our performance reflects our broad and diverse base of global clients, our expertise across strategic verticals and our full range of digital CX technology, AI and service capabilities. For the full year of 2022, bookings were $762 million. Revenue increased 9.4% to $2.44 billion on a constant currency basis. Adjusted EBITDA was $326.6 million or 13.4% of revenue. In addition, last year, we enhanced our public sector vertical with a meaningful acquisition. We publicly launched our strategic partnership with Google, deepened our partnership with each of our core strategic CX technology partners, including the largest hyperscalers, we strengthened our first-mover advantage in AI with strategic investments in new offerings and several new client wins. We expanded our client base by winning 93 new logos and we grew our delivery footprint with three new offshore geographies. And we were recognized as a CX leader by all four major analyst firms. In addition, we were named by Forbes as one of America's best large employers for the third consecutive year. And lastly, we marked our 40th anniversary as a pioneer, a global leader and an innovator in customer experience. I'm pleased with our accomplishments in 2022, despite the fact that our financial performance was tempered by the increased macroeconomic headwinds that emerged in the second half of last year. As we look ahead, some clients in select verticals continue to have reduced visibility into their short to midterm outlook. And therefore, at this point in time, we believe it's prudent to approach 2023 guidance conservatively. Having said that, I could not be more excited about our strength in global leadership team…

Thank you, Ken, and good morning, everyone. As Ken mentioned in his opening statement, we delivered a strong fourth quarter. Our solid performance was possible due to our trusted and long-standing partnerships with our clients and the passion, hard work and contributions of our amazing 69,000 teammates across the globe. Like Ken, I'm very enthusiastic about the relevance of our CX solutions and the market demand for the outcomes we deliver. Clients across industries continue to be focused on the importance of a great customer experience. We're well positioned to help them apply the most relevant talent, technology and AI solutions for their business. Shifting now to our Engage business. The weakening macroeconomic environment is creating a few specific short-term challenges. The uncertainty in this economic environment is affecting the short and midterm outlooks for some of our clients, subsequently impacting our visibility. We're responding to their needs by remaining agile. While we have continued strength of resilient verticals like public sector, financial services and health care, we are experiencing weakness in our hyper growth sector. Unfortunately, several of our hyper growth clients have been impacted by the post-pandemic renormalization. In the short term, the decline in this sector is putting pressure on our margins. We're confident that we'll successfully navigate these pressures while we continue to make investments in technology, infrastructure, our global footprint and M&A integration. This will give us momentum as we exit 2023 and head into 2024. Now let me share our Engage initiatives that will add velocity to our growth engine, improve our margin profile and set the company up for long-term success. We're accelerating our efforts to expand our delivery and language footprint. In 2022, we added three new geographies to our operational footprint that now spans more than 20 countries. In 2023, we…

Thank you, Shelly, and good morning. We appreciate everyone taking the time to join us today. I'll start with a review of our fourth quarter and full year 2022 results before providing you context on our 2023 guidance. Turning to our bookings. Despite the dynamic environment, our go-to-market teams delivered a solid year. In the fourth quarter of 2022, bookings were $197 million compared to $206 million in the prior year period, resulting in full year bookings of $762 million, an increase from $751 million in the prior year. Bookings in our Digital segment were particularly strong, increasing 10% in the fourth quarter over the prior year period and 23% in 2022. The business signings were predominantly driven by demand for our Genesis and Microsoft CX technology solutions, in addition to Amazon Connect and Cisco, many of which are large multiyear CX transformational engagements. While our sales cycles have extended, our enterprise and public sector clients continue to recognize the long-term benefits for modernizing and digitally enhancing their CX ecosystem. In our Engage segment, there was solid demand for our core offerings in the fourth quarter and full year of 2022. Bookings were well diversified across our key industries, with particular strength in financial services, health care, automotive and travel and hospitality, as well as across our expanded geographic footprint, including continued momentum in our EMEA region, which had bookings growth 60% in the fourth quarter and 40% in 2022. We added 22 new client relationships in the fourth quarter and 93 for the full year 2022. This represents an increase of 13% over the prior year full period. Due to recent acquisitions, our Digital revenue as a percentage of our overall revenue has increased. Due to the nature of the business, Digital bookings reflect a higher mix of non-recurring…

Thanks, Dustin. As we open up the call, we ask that you limit your questions to one at a time. Operator, you may open the line.

Thank you so much. It seems like the revenue guidance is perhaps a wider band than we've seen in the past. Could you elaborate on some of your assumptions there? And what would get us to the high end versus the low end of the guidance?

Hey, Maggie. This is Dustin speaking. I'm going to take that first and let Ken and Shelly comment afterwards. So a couple of comments, Maggie, as we discussed in the first half of 2022, we kind of indicated that there was emerging headwinds in the second half, and we're seeing that now persist and, to some degree, even continued weakness in the beginning of first half of 2023, and it's really reflecting that uncertainty in our outlook. So in the assumptions that we have right now relative to what will get us to the high end of that range, is how this hyper growth sector performs in the full year. And to give you some context, if you think about hyper growth where it's at, you take a decline in that business, the rest of the business right now, when you talk about resilient and verticals like financial services, health care, et cetera, they're growing right now in roughly 7% growth versus the hyper growth business that's in the decline. So it's really about we need to continue to execute in the resilient verticals that we've discussed. And then if hyper growth kind of comes back and doesn't decline to the degree that we expected to at this point in time, then we'll see it kind of guide up to the higher end of the range.

Hi, Maggie. It's Ken Tuchman. Good morning. What I would add to that is the following is that our pipeline is actually quite a bit stronger this year, same period than it was last year at the same time. That said, being through now five recessions I want to be realistic about will we see the same level of conversions that we were seeing, let's just say, same time last year? And with clients all expressing visibility issues across the globe we really just want to take a conservative approach. We would rather guide conservatively and have the potential to exceed then let our investors down. And so we're taking this conservative approach and we feel, like I said, very confident in our business and where it's going. We're very excited about the current pipeline that we have. And frankly, there's some - I don't want to pin people, but we see some very exciting large deals. And unfortunately, during a cloudy time like this from a macroeconomic standpoint, sometimes clients take a bit longer to make a decision, sometimes they change the overall commitment of how large they're going to commit to in some of these large new deals, et cetera. And so we just felt that it was prudent to take this conservative approach.

Thanks, Ken. That makes sense. And then when you think about those large deals that might be building, is there any kind of incremental demand for maybe more of an offshore component within those deals. I know you've added a couple of locations. And then would there be any impact from that kind of incorporated into your revenue or your guidance?

Absolutely. So I don't want to speak for Shelley, but what I would just tell you is the following. Our focus for 2023 goes without saying it's all about execution. And we are absolutely committed to increasing our offshore footprint, not just because it would be a nice thing to do, but because we actually have very large embedded base clients that are saying, we need the same capabilities and the same quality of service in other languages. And so we are fast tracking bringing online Asian languages, fast tracking, bringing on more European languages, et cetera, in the markets that we're entering. So to answer your question, there will be more offshore business coming on, as a matter of fact, our pipeline has a significant amount of offshore business. And there's a huge focus on that because we realize that, that by us increasing our offshore percentages that, that really is what will help us on the Engage side drive a higher margin. Shelly, do you want to add anything to that?

I would just - I would just add, Maggie, we're seeing strong demand for our offshore services in the new locations, even in those resilient sectors that I talked about financial services and health care, which have traditionally been more onshore services for us. But as we open up and expand our locations and really capitalize on the great performance, particularly in health care that we had over the open enrollment season last fall, we're seeing good demand in new interest from our clients in some of those new offshore locations. And of course, we're, as Ken said, very focused on this and not just with our embedded base, but for new client prospects as well.

Thank you, all.

Thank you.

Thank you. Next question is from the line of Mike Latimore of Northland Capital Markets. Your line is now open.

Great. Good morning. Just a question on the Digital division. It looks like you're expecting some solid improvement in that business throughout the year, both in terms of revenue growth and margins. I guess, can you just provide a little bit more detail on kind of what would drive that improvement?

Yes. I mean I think one thing important to note is that the practices outside of Cisco, Dustin has been talking about Cisco for a while in terms of growing through that business there and getting that back to growth. The other practices are growing 10-plus percent. And I think we're excited about the pipeline and the momentum that we have with our partners across those other platforms. Certainly, as Dave joined the team and the relationship he brings with both partners and clients, we're expecting accelerated go-to-market execution throughout the year.

Got it. Okay. And then the hyper growth category with Engage, what percent of revenue is that – what percent of Engage revenue is that?

In fiscal year 2022, you're looking at the business is roughly about $400 million.

All right. Great, thank you.

Thank you.

Thank you. Next question is from the line of George Sutton of Craig-Hallum. Your line is now open.

Thank you. Ken, I'm wondering if you could address the AI opportunity as you see it and where you're involved, specifically relative to AI? And any go-to-market details beyond that would be helpful.

Good morning, George. I'll - you're asking a great question, and I'm going to - I'm trying to think of how to give a short answer, but what I'll start out by saying is the following. On the Engage side, there is tremendous opportunity for us to be working with many of our partners on the training of AI. I think there's a big misconception in the marketplace with all the hype around ChatGPT that it's going to be - have a real positive impact on areas like customer service when, in fact, it actually is going to have very little impact because it's a horizontal AI product, which means that it grabs its information from crawling the web reading edit - reading Wikipedia et cetera. And consequently, there's a lot of misinformation within all those different vessels of information. So the future of AI as it will be used in the customer experience space is really with what we call vertical AI. And that's where we're actually working with our clients as well as working with the AI providers, which would be in many cases - in most cases, the hyperscalers, narrowing that information so that it's put in a vertical format and consequently, when questions are asked, whether it'd be for a chatbot, a voicebot, et cetera, that you're getting every single time an accurate answer and not something that's rather in the Bizarro [ph] category as many people have been playing with ChatGPT and experiencing. So we see opportunity and where we have opportunity, and we are currently executing on opportunity and everywhere from data annotation to AI training to also in all the actual implementation of the AI and then integrating that into the CCaaS platforms, the omnichannel platforms, et cetera. It's quite a heavy lift. There's quite a bit of - we're very early days with not only where the technology is, but also where clients are. And so there's a lot of proof of concepts, a lot of experimentation going on, and we're really grateful that the hyperscalers have chosen to partner with us in a very significant way and that they obviously have a very large pipeline, and we're there to service that pipeline as well as our embedded base clients on Engage. So across the board, we see significant opportunity in this area. We also see some exciting opportunities over time in how we actually price and how we can move to much more of an outcomes-based set of pricing when we're introducing this type of technology, which we believe has the potential to drive significantly higher margins versus our classic way that we do business today. So hopefully, that's helpful. I don't want to suck up all the oxygen on the call.

That's great. Just one other question. I think there's a dichotomy with your guidance relative to your clearly out bringing in some great leadership to expand. I know your plans to expand to a much larger company. Can you just give us a sense of how that growth is going to come? Is it predominantly organic and the team you're building sort of what - just give us some sense of that dichotomy that I don't think the market appreciates.

I would say that it is going to be predominantly organic. We feel really comfortable with where we are in the marketplace and the amount of business. And if we just look at year-over-year pipeline and we look at how our conversions are going right now, et cetera, we feel very confident that we can get to where we ultimately have been communicating to the Street. We brought Shelly in, we brought Dave in, and we actually brought in a myriad of other very senior leaders that have all come on board over the last, let's just say, 12 months. And their entire focus is execution to double the business and double it in the shortest period of time possible while significantly increasing our margins. And I have absolutely no doubt that we have the right team. There is a reason why we brought Shelly in intentionally did not bring in a BPO type person. We wanted somebody that understood technology, understood technology implementation. We wanted somebody that understood digital and we wanted somebody to understood very large scale. Shelly with her experience of basically being one of the key people and building Accenture Digital from zero to $20 billion has that experience, understands those capabilities. It allows her to partner very closely with Dave Seybold, who also has a multibillion-dollar experience on the digital side as well. And so consequently, it's really allowing me now to spend much more of my time on strategy, on vision, on potential future M&A, as well as on partnerships with these large technology players at a very senior level and then helping on the acquisition of large clients. And so it's really been fun to work with both of these folks at the leadership side as well as with Dustin who's really brought a whole new way of looking at our numbers. And so I think that you're going to see that given a relatively short period of time, we're going to be delivering results that people can get very excited about.

Thanks, Ken.

Thank you.

Thank you. Next question is from the line of Vincent Colicchio of Barrington Research. Your line is now open.

Yes. Ken, Curious, are you seeing meaningful consolidation opportunities? And if so, to what extent are they baked into the 2023 outlook?

Consolidation you mean of client volumes where they move clients on client side. There is certainly a lot of talk about that amongst clients. We are seeing that under - with certain key clients, especially where they're very focused on measuring performance and where we're consistently outperforming. And so we see that as a real opportunity. In the past, you've heard me speak about the captive opportunities that we're focused on, which would be companies that have never outsourced and have very large outsourcing - excuse me, very large organizations internally. Some of these organizations internally that have never outsourced, believe it or not, are spending in excess of $1 billion. And so we're very focused on that as well. I think that what - one of the things that is really important for the Street to understand is that we saw this self-made if you want to call it, recession coming quite some time ago. And we've really been very intentional on focusing on verticals that we think are going to have the least amount of impact as the economy potentially slows down. And so what I would just simply say to you is that the verticals that we're focusing on all have extremely large captives. So not only do we have the benefit of the consolidation where they're going with fewer players, which we think is a good thing, not a bad thing. But in addition to that, what we're also seeing is that they're peeling off more business that's internal and moving it to a partner such as TTEC. We think that's a trend that we're going to see over the next 5-plus years. And again, not to sound like a broken record, but there's still $300 million just on the Engage side that has not been outsourced. And we think that, that will become a leaky - kind of a leaky tire, so to speak, where it will be leaking more and more business to the marketplace because the bottom line is that we feel very confident we can demonstrate that we can do it better, we can do it faster, and we can do it at a lower overall cost with a higher total value delivered. And that's our value proposition. And then when we couple that with technology capabilities, that adds even more capability to turbo charge the relationship and to offer something that we think is unique in the marketplace. Go ahead...

Well, I might just add, just in terms of - our top 10 clients actually provided a lot of our growth in 2022, and we see that continuing into 2023 and in particular, some of these were there, as you said, consolidating, we're performing well and they're getting excited, and we see demand for our new offshore locations to add to the services that we're providing those clients. I think also we're very focused in those resilient sectors that Ken mentioned, particularly financial services and health care in terms of helping those clients that haven't outsourced before and that typically ends up being kind of a mix of onshore and offshore services. And so we're seeing a lot more demand in those sectors, which is why we're very, very focused on them.

And one for you, Dustin, if I can. What is your assumption for the guidance for hyper growth? Do you expect it to stabilize in the second half or further deteriorate? What are you thinking?

Yes. The expectation is that it will be stabilized kind of second half is going to come down in the first half, stabilized in the second half. And then ideally, going back to Maggie's original question, but momentum and then as we go into 2024.

Okay. Thank you.

It really just to be clear, really a continuation of kind of impacts that we had in 2022 because hyper growth continued to grow in 2022. If you go back to the second half, we talked about it being muted and so it came down, but still grew and then that now has created a downstream impact into '23. And just the only other point, Vince, I'll fall on to Shelley's comment. To give you an idea in terms of - just to put a pin on the consolidation is that our top 10 grew roughly 4%, and that's including the decline in pandemic related volumes in 2022, and you're looking at a number for 2020 in the neighborhood of 14%, 15% for - excluding the pandemics. That gives you a sense in terms of how we're consolidating at least particularly where we play with large enterprise customers, where we have significant scale.

Thank you.

Thank you. Next question is from the line of Joseph Vafi of Canaccord. Your line is now open.

Hey, guys. Good morning. Just maybe a question on cross-sell in 2023. Are you looking at cross-sell between your two divisions any differently? I mean it feels like Digital has got a kind of a wider opportunity with cloud migration, emergence of AI potential to maybe move into adjacencies outside of CX and that business gets more strategic inside enterprises potentially be able to drag along more CX volumes? Just how are you looking at that overall dynamic here this year? Thanks.

Well, I think there's two things. The first thing I would just say just within our digital business, certainly, if you look at practices like our AWS practice to starting to see opportunities to be on just helping our clients with AWS Connect, right? The services that sort of surround that part of their platform. And so we're starting to see - we're starting to do some work and expand those services within that practice. I think more broadly in terms of cross-selling Digital and Engage. This is one of the reasons I'm really excited to have Dave on the team. And we're being very thoughtful about those opportunities. And absolutely, we have enterprise clients that we serve from an Engage perspective. And as they began to modernize their technology platforms in the CX arena, those are opportunities for us. And in fact, Dave and I are working on some of those together as we speak. And so I do think that will be an opportunity. We're obviously very focused on the opportunities that Digital this idea of the distinct opportunities inside Digital and Engage as well.

Thank you.

Thank you. Next question is from the line of Cassie Chan of Bank of America. Your line is now open.

Hey, guys. I just wanted to ask, what are you guys baking in for your 2023 outlook in terms of your onshore and offshore delivery mix, as well as some attrition metrics around that. And for your offshore, I know you guys talked about continuing to build out your offshore geographies. I know you added three more. I think you guys said and grew 60% in 2022. Are you expecting a similar pace in 2023? And is this like replacing some of your onshore delivery centers? Thank you.

I'll start. So the 60% was a reference to growing our delivery footprint inside of Digital, and we definitely will continue to scale that footprint. Certainly, on the Engage side, where we plan to add four to five new geographies this year. And those will - as we sell into that demand and open those geographies, we expect the pace of that - those offshore services to increase throughout the year. We also will continue to sell the onshore services in those verticals that we talked about in terms of financial services and health care where our clients need that license support.

And then just as a follow-on, Cassie, the question. As we talked about before, this year was a little bit impacted our mix relative to just the acquisition of Faneuil, which was all within the U.S. in the public sector. And so this year is roughly obviously, this year being fiscal year '22 or last year was roughly 70-30, and we plan to shift the mix by about three points this year, and they continue to accelerate in 2021 and beyond. And then your comment coming back to your point on attrition, while we're not giving out specific attrition metrics, partly due to the efforts across 2022, as well as I would say improving labor markets, we do expect attrition to improve within 2023 across both our offshore and domestic footprints.

Okay. Got it. And I also wanted to add on free cash flow. I know you pointed out a few things in the quarter specifically, for example the DSOs. Are these onetime in nature? And anything about free cash flow expectations for 2023? Thank you.

It's a great question. Yes. So our free cash flow was impacted by onetime items that we discussed earlier. Going forward, I would say the one major impact is going to continue as the step up. It's also affecting EPS, it's a step-up in interest payments, be our variable facilities. You're going from roughly mid-$30 million interest expense in 2022, stepping up into the mid-70s in 2023. And so if you think about this prior year, it's roughly $50 million in cash flow next year, we're expecting it to double in land around $100 million.

Thank you.

You're welcome.

Thank you. Next question is from the line of Bryan Bergin of Cowen. Your line is now open.

This is Jared Levine on for Bryan. First question for Dustin. I think you mentioned upcoming new disclosures on vertical performance planned for this year. We heard the color for the hyper growth vertical. But can you give us a sense or some more insight on the growth assumptions for the other key vertical cohorts embedded within the calendar '23 outlook?

Yes. So I would say, going back to right now, what we're at this point, talking about as you look at hyper growth, I said roughly $400 million to specific numbers, roughly 380 is coming down to roughly $300 million in fiscal year 2023 and then the rest of the remaining verticals are growing at 7%. And there's a variety of outcomes within them. I would say, strength within financial services and health care predominantly and then strong performance still in public sector and as well as automotive, but slightly behind, I would say, financial services and health care. And we'll give you more color kind of going forward in terms of specific growth rates. The attention of that statement was more going forward in Q1 and beyond. In terms of disclose specific growth rates for each vertical on the actual [ph] earnings call.

Great. Great. Follow-up on offshoring. Just looking to see if we can get any sense around the numbers. Like to what extent is offshoring affecting revenue and helping to offset margin pressure. Any way you can frame that quantitatively within the outlook this year?

So again, if you think about the metrics that we touched on back to Cassie's question, when you think about the 70-30 mix, and you think about our guidance next year or this year and for fiscal year '23 and you think of it as a 73.67 [ph] and 10 points of margin differential in the gross margin, that's kind of up the puts and takes, if you will, in terms of ups and downs relative to it because the expectation is still net expand, right, relative to it.

Okay. Thank you.

So it's relatively minor, but then 10 is over time to continue to mix it and then continue to have an outsized impact as we move forward, exiting '23 and into '24.

Thanks.

Thank you. Last question is from the line of James Faucette of Morgan Stanley. Your line is now open.

Hey, guys. This is Jonathan on for James. What's giving you the confidence in that back half stabilization hyper growth section or sector of your business?

Well, we have - I mean, first of all, we have a couple of clients in that hyper growth sector that are definitely growing and interested in our offshore - expanding offshore footprint. And so we see growth opportunities in that portfolio despite the unfortunate - unfortunately, some of those clients with this post-pandemic normalization, having softer demand. So we have a pipeline of opportunities with some of the clients in that hyper growth sector. And as Dustin said, we're also expecting our clients outside the hyper growth sector to grow in the mid-single digits. A - Dustin Semach So Jonathan, just a follow-up on that point. Keep in mind that, again, a lot of the churn we had within our hyper sector happened in the second half of the year. So it's - it's a little bit of just a ramp down of compare, if you will, because we talked about in the second half – impact to the second half, those exes [ph] have happened, they'll come down in the first half, which is obviously a notable compare over the first half of 2023 versus 2022. And so again, that's around the stabilization. Just keep in mind, too, that within hyper growth, this is largely around growth services and customer care, and it's not really related to content moderation. So it's more of a statement around the rebase lining of the economy in 2023, the post-pandemic normalization and then having a platform to grow off of, expecting that, again, the macroeconomic weakness will alleviate in the second half.

Thanks for that clarity, Dustin. And a follow-up, how are you thinking about the M&A environment and your capacity to acquire?

I think that right now we're really focused on execution and really trying to understand where values are going to be. So the truth of the matter is we have a solid pipeline of potential M&A. That said, I think that it's safe to say that we're going to be very fiscally responsible and mind our balance sheet. And so what I would just say to you is that although M&A is something that is absolutely going to continue to be part of our strategy, our future strategy, we think that it's prudent for us to wait a little bit and try to see where the valuations come in on some of the targets that we're looking at. I think that any of the M&A that we would be doing would be much more geared towards the strategic side in areas that would be benefiting more of the Digital business. But what I would just simply say to you is that we're going to - right now, our team is very focused on execution and on organic growth.

Thanks for that, Ken.

Thank you for your questions. That is all the time we have today. I will now turn the call back to Paul Miller.

Yes. Thank you, everyone, for joining us today. This concludes our call. Thank you.

This concludes TTEC's fourth quarter and full year 2022 earnings conference call. You may disconnect at this time.