Welcome to TTEC's Third Quarter 2023 Earnings Conference Call. [Operator Instructions] 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 third quarter financial results for the period ended September 30, 2023. 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 Francois Bourret, Interim 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 third quarter 2023 quarterly report on Form 10-Q. 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 2022 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.

Good morning, and thank you for joining us today. This quarter, we continued to focus on delivering high-value CX outcomes for our clients and seamless technology-enabled experiences for their customers. In this current challenging environment, I am proud that our global team delivered on our Q3 forecast and that we have met or exceeded overall expectations each quarter year-to-date. Turning now to our third quarter consolidated results. Revenue was $603 million. On a non-GAAP basis, adjusted EBITDA was $64 million, operating income was $47 million and EPS was $0.48. There is no question that businesses are operating in a state of unprecedented and accelerating change. The macroeconomic factors that we have been discussing for the last several quarters are unfortunately now playing out. Contributing factors include higher interest rates that are expected to last longer, ongoing inflation above target rates, labor strengths in multiple industries, looming student loan payments, inconsistent consumer spending habits, and geopolitical unrest. With all this uncertainty, it's no surprise that businesses and consumer confidence is beginning to fade and overall sentiment continues to decline. Every day, it's getting harder for businesses to predict and rely on their traditional indicators to plan for the future. While the economy may not technically be in a recession, many of our clients are now operating as though we are. Given all these factors, we're updating our outlook for Q4 and guidance for the full year. Clients are scrutinizing the dollars they spend. They're focusing their attention and resources on initiatives that are urgent, essential, and will have an immediate and predictable financial benefit on their business. The impact on us is mixed. For some of our clients, this mindset is delaying decision-making or driving last-minute unexpected changes in forecast as they prepare for future headwinds. Conversely, for other clients, these…

Thanks, Ken, and good morning, everyone. We're pleased with our performance year-to-date, but let me begin my comments by addressing the impact of the dynamic macroeconomic environment and our change in full-year guidance. This quarter, a few of our engaged clients made sudden changes to their forecast due to their business conditions. Those actions will unfortunately impact our fourth quarter and full-year results. And while Digital exceeded Q3 guidance, delayed client decisions will impact their Q4 revenue. Not surprisingly, market uncertainty was a theme in our recent client advisory meeting. While they couldn't speak to individual clients daily, hearing our voices together amplified several things. CX remains a priority. However, in this climate, clients are carefully focusing their investments on initiatives with an immediate financial payoff. Cost pressures are challenging clients to do things very differently. Clients will lean into partners like us who have the skills, tools, and experience to guide them as the landscape continues to evolve. They value our ability to provide a variety of nearshore and offshore locations, CX technology solutions and practical services that will rapidly impact their bottom line. Generative AI continues to generate interest. While clients are excited about the potential, they're seeking proven use cases before they move forward with full force. This is especially true in regulated and complex industries. And as Ken mentioned earlier, we're making good progress on our AI strategy that we outlined last quarter. We're actively partnering with clients in both TTEC Digital and TTEC Engage to better understand how to responsibly and affordably scale what we're learning from successful pilots. We currently have dozens of projects in flight. For example, this quarter, we collaborated with an auto OEM in Europe on a conversational AI effort. We captured and analyzed intents to define optimal routing strategies in…

Thank you, Shelly, and good morning. I will start by addressing our third quarter financial results before sharing additional context into our updated fourth quarter and full-year 2023 financial outlook. In my discussion on the third quarter financial results, reference to revenue is on a GAAP basis, while EBITDA, operating income, and earnings per share are on a non-GAAP adjusted basis. A full reconciliation of our GAAP to non-GAAP results is included in the tables attached to our earnings press release. TTEC's consolidated third quarter financial results are in line with our previously provided guidance. Our Digital segment exceeded expectations, while our Engage segment faced some softness around specific areas that will also impact our fourth quarter outlook. For our third quarter consolidated financial results, revenue was $603 million compared to $592 million in the prior year period, representing 0.8% growth on a constant currency basis. Adjusted EBITDA was $64 million or 10.6% of revenue compared to $68.5 million or 11.6% in the prior year. Operating income was $47 million or 7.8% of revenue compared to $50 million or 8.5% in the prior year. And EPS was $0.48 compared to $0.68 in the prior year. In the third quarter, foreign exchange movement over the prior year period positively impacted revenue by $6 million, and negatively impacted operating income by $1 million. The year-over-year decrease in operating and EBITDA margins was primarily a function of lower Engage revenue driven by sudden changes in client demand, creating temporary stranded costs. On the other hand, we continue to rationalize and optimize resources to maintain an agile cost structure. Turning to our third quarter segment performance. Digital financial performance was above our forecast for the quarter. Our Digital segment reported third quarter 2023 revenue of $133 million, an increase of 14.7% over the prior…

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

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is coming from the line of Maggie Nolan of William Blair.

The first question I wanted to ask about was can you just help us understand what's going on with the seasonal revenue a little bit more granularly? Are there any outright cancellations of contracts from clients that are impacting the fourth quarter? Or what other factors can help us understand these 2 segments that are usually a little bit more countercyclical?

Maggie, thanks for the question. Yes. There's 2 pieces to this, really. First, from a healthcare perspective for our seasonal revenue, we had a few opportunities that didn't materialize as we expected in the last couple of months just because our clients decided to lower their overall staffing levels for the season due to their budget pressures. We performed really well here. So we've maintained or increased our wallet share with these clients. We just had expected more growth in the healthcare season. And then, the second piece of it is we typically have supported the federal emergency management agency with disaster relief, and I guess, fortunately, there hasn't been as much need for that this year. So that -- we don't expect that work to come through for the remainder of the year.

And just Maggie, one additional point to this, just to be clear, on the seasonal work in healthcare, revenue year-over-year is not declining. So I just want to make sure like is this, curious, just less than our expected growth and is the reason why we have a change in our Q4 forecast?

That's helpful context. And then on adjusted EBITDA on your margin profile in general, can you kind of help us get an understanding of some of the dynamics that you spoke about in the fourth quarter, some of the rebalancing that you'll do, and focus on costs that you'll do? What that means preliminarily for how you're thinking about 2024, just kind of directionally as we compare it to 2023 and consider some of the initiatives that you just outlined?

Maggie, this is Francois. It's a good question. So if you look at our margin in the fourth quarter, the first piece I would say is the seasonal work that Shelly mentioned is highly accretive in the fourth quarter. Therefore, it's short term in nature, and that's something that as we move forward, we'll continue. And the second piece of our margin that had an impact to our margin is the stranded cost that we mentioned earlier and which is also we're seeing short term in nature. So as we look next year in a normalized standpoint from a margin standpoint, like it would be more aligned with the EBITDA margin we had previously shared for this year.

Next question, it comes from the line of Mike Latimore of Northland Capital Markets.

On the gross margin in the quarter, down sequentially year-over-year. How should we think about that trending in the fourth quarter?

So when you look at our margin quarter-over-quarter, I think there's 2 dynamics, you have the Engage situation that we just talked about, that is more impacted by the seasonal work, and for Digital, it's simply I think was more of revenue mix in the third quarter, where we had this onetime product that impacted margin. But as we move forward, you're going to notice the margin improving by 200 basis points between Q3 and Q4 for Digital, where 25% of that is related to the improved revenue mix. And the second piece of that will be the continuous cost optimization that we've been engaging in Digital.

Okay. And then can you think -- you talked about, I think, being significant bookings in Digital in the fourth quarter. I think you said 70 potential deals from like that. Can you just -- it sounds pretty strong, can you think that up with the comp and also that you've had some slowdown as well, maybe just think those 2 separate comments up? And what use cases are you seeing coming into these bookings?

Yes, Mike, I think a couple of things. First, I think the dynamic environment that everybody has been talking about, right? Clients have definitely been scrutinizing their initiatives and trying to sort out overall budgets for this year and into next year, and that played a part in some delays in our bookings in Q3, which obviously has the impact in Q4. The good news, I would say, is that a number of those opportunities that we had in Digital that we expected to close in Q3 have now moved forward. So we're encouraged by the strong start in bookings here in October, beginning of this quarter, and happy with our pipeline. And what I would just say is, again, lots of clients have lots of interest in AI from our benchmarking survey and our workshops. That's driving a lot of client conversations, and just the same dynamics we've been talking about people needing to move their technologies to the cloud so they can take advantage of these new tools.

Do you have any particular vendors, suppliers stand out in those bookings? I think you talked about Genesys earlier, but anyone that really kind of jump up?

No. I mean I think we're seeing demand across the board.

Yes. That's for sure. I mean whether it be our Microsoft practice, which is we see a lot of demand, a lot of opportunity on the CRM side or whether it be AWS. We're excited about Cisco's new capabilities that they just announced a week or so ago. And so, yes, I think -- I would say across the board as well as we're introducing new partners that are in high demand right now as well. So I would say that it's pretty much evenly across the board. And more and more people are realizing that their technology stack is frankly outdated. And if they want to take advantage of a modern CCaaS capability, modern omnichannel capability, they're going to have no choice but to move to the cloud, and with only 15% of enterprises in the cloud, we see that as a significant opportunity for years to come.

Our next question is coming from the line of George Sutton of Craig-Hallum.

Ken, you said something very interesting in your script and that is that some of your customers are acting as if they're in a recession. And I'm wondering if you could just give us a sense of how broad that statement is. And what does that statement tell us for 2024?

George, look, here's what I would say. We were just discussing this prior to taking these questions. Because I'm old, I've been through several recession cycles. And what we see in each recession cycle is a period in time where clients begin to realize that the probability is higher than not. And therefore, they -- as I mentioned in the last quarter call, they begin preparing for the worst and hoping for the best. I think that this is a very unique economic situation right now in that I think that people don't fully understand what's going to happen due to all the factors that I laid out, whether it be our interest rate is going to go up another 25 or 50 basis points, but more importantly, how long are they going to stay up. I could go on and on and on. And so consequently, what I would say is that we're in that classic cycle just like we were when we entered the pandemic, where there's about a 90- to 120-day period of time where clients are getting their bearing. And when they do that, they tend to slow down, become more introspective, try to figure out what is actually going to take place in the economy. That's exactly what happened with the pandemic. And then when things cleared and they understood what the new normal was, they frankly got right back to business. I think we're in that exact same situation right now. I think that a high percentage of the marketplace overstaffed because of the pandemic and all the stimulus money that was out there. And I think that now they are trying to shed a lot of that cost structure for lack of a better term. I'm speaking about the clients. I'm not speaking…

That's great, Ken. And I would let you know you are young relative to our presidential candidates if that's helpful. So you made the statement that the offshore pipeline was up 50%. I just want to make sure we fully understand your readiness to take on that kind of growth and what that means for the broader business opportunity.

So we're definitely ready. And Shelly has made it one of her highest priorities to get these additional offshore markets open so that our clients can have diversification. And so we're live and operating in all these other new markets that we've mentioned, whether it be South Africa, whether it be Honduras, whether it be Thailand. We've got Malaysia that's just now coming online. We're expanding further into Latin America and expanding our Mexico operations. I could go on. I'm sure I'm missing countries. We're live in Egypt. We're expanding in Colombia, et cetera. And so yes, we are -- we have -- we are absolutely ready. We've got all the management in place in all these different regions, and we're absolutely launching new business in these new markets.

And it's resonating with our clients. That's why you see our pipeline, whether it's a pursuit of new logos or expansion with our existing clients, really across the board.

Our next question is coming from the line of Bryan Bergin of TD Cowen.

It's actually Jared on for Bryan today. In terms of offshoring, any sense on the headwinds to engage growth year-on-year in 3Q related to existing clients moving from onshore resources to offshore resources? And then is this headwind to growth anticipated in increase in FY '24 relative to FY '23?

No. Actually, that hasn't really been a headwind for us. I mean, I would say so far, most of our conversations with our existing clients really are about expansion, new lines of business, additional volumes of the work we're doing today and just diversifying the footprint in places that we do that work. So that wasn't a material -- hasn't been a material headwind for Q3 or for this year. And I think, again -- I think -- we're also excited just about the new logos in our pipeline because of our new offshore locations that we can now offer.

Got it. And then do the volume forecast being provided by clients now appear to be conservative. I know last quarter, you mentioned you thought there were certain client cohorts that the volume forecasts were pretty conservative. But any kind of change in view on the volume forecast that are being provided now by clients?

Well, I would just sort of point back to what Ken was speaking about earlier. I mean, I think certainly, our clients are being -- I guess, they are being conservative in their forecast based on budget pressures. We have some -- we always have some variability where clients are too conservative and then come back and decide that they need more volumes. But as Ken said, I think everyone is preparing for the worst, if you will, looking at what their demand might look like for the next quarter, and no, not really a whole lot more to say there from that. And I would say some of them are conservative, will come back, and they're all being very careful right now.

And if I could sneak in one more quickly, what's your revenue visibility to the midpoint of the guide currently? I don't think I heard that.

So what we've done for this -- the guidance that is currently in the press release is on a full-year basis. And instead of trying to be over accurate in the -- with the midpoint, we've just narrowed the range for the full year.

And for our next question, it comes from the line of Vincent Colicchio of Barrington Research.

Yes. I'm curious how hypergrowth performed in the quarter relative to plan and sort of what level we're at now with that business?

Yes. So hypergrowth has really played out as we expected. At the beginning of the year, we talked about it coming down to about $300 million, and that's where we expect we'll end the year. As Francois said, from a Q4 perspective, obviously, hypergrowth year-over-year played a material -- with a material factor in what -- in our guidance for Q4. And is there anything else you want to add, Francois? Just no changes really there.

Just a bit more color on the impact on our Q4 year-over-year. So the $48 million revenue decline, $40 million coming from hypergrowth and the balance is really the seasonal work that Shelly talked earlier. So those are really the 2 items that -- and again, the hypergrowth is aligned to our expectation. And ultimately, we were hopeful that the healthcare season would bring us in line with last year.

And how would you characterize pricing and clients in terms of -- no pun intended, looking for better terms?

I'd say -- I mean, I'd say pretty steady. I mean it continues to be competitive. Obviously, I think our conversations are a lot around really reducing any impediments for adding new partners, right, for getting started and that tends to be more about the conversation than new pricing or new terms per se.

For our next question, it comes from the line of Cassie Chan of Bank of America.

So I guess I just wanted to ask, if we sort of look forward into 2024, are you expecting 4Q to kind of be the trough and then maybe sort of a sequential improvement throughout 2024 given certain temporary headwinds that you're expecting to abate and maybe some improvement you're seeing in other parts of the business?

Cassie, it's Francois. So as you know, and consistent with prior year, we do not provide guidance about 2024. And even now with the lack of visibility we have with the macroeconomic environment, it would be premature to give you any insight into Q1 and 2024 holistically.

All right. And then in terms of the healthcare, public sector, and financial services verticals, you said that grew organically, I think, 7%. What are you guys anticipating for 4Q for that? And just remind us again for telecom, how big is this sector or vertical for you guys? And what are you expecting for that to grow in 4Q?

Yes. So the first -- for first to your question on the 3 verticals, yes, Francois did say that they grew 7% in Q3, and they will grow low-single digits for the rest of the year. And we feel good about those verticals. We continue to have good opportunities in our pipeline for all 3 of those verticals. We also have a large client that will go live in pub sec at the beginning of next year.

And on the telco, just adding a bit, so you asked what is the size of the telco, and we are holistic in our portfolio. On a full-year basis, obviously, depending on the quarter, it will range between 10% and 15%. And right now, we're seeing our telco vertical being relatively stable year-over-year and for the reason already mentioned by Ken.

Our next question is coming from the line of Joseph Vafi of Canaccord.

Maybe switching away from the macro for a second. There have been a couple of really big mergers in the sector. Just wondering what you're seeing as a result of those mergers? And then a quick follow-up.

Yes. I mean, I think we definitely have some client opportunities that are a result of our clients wanting to diversify their partner network. And I think we'll -- I'm hopeful we're going to continue to see more of those because of our offshore expansion -- offshore and nearshore expansion because now we have more options to offer our clients. And we have those locations open now, and we're ready to go. So definitely seeing some opportunities in our pipeline that we're working on currently.

Okay. That's great. And then I know you mentioned doubling the Hyderabad headcount. Is there any specific technologies or specific -- anything functional area, verticals or something that you're seeing demand from to double that staff?

Well, it's really across the board. I mean -- and just for -- to be sure it was clear, that's for our Digital business. And so the great news is we're expanding -- Dave is expanding that team really to support all of our partner practices, probably to varying degrees, depending on the work, but it's not for one particular partner. We also have offshore capabilities in our analytics practice as an example. So this is going to be a major strategic focus for Dave going forward as well, and we're making great progress there. We're excited about that.

Thank you for your questions. That is all the time we have today. This concludes TTEC's Third Quarter and 2023 Earnings Conference Call. You may disconnect at this time.