Welcome everyone to TTEC's Second Quarter 2024 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 and you may begin.

Good morning and thank you for joining us today. TTEC is hosting this call to discuss its second quarter results for the period ended June 30, 2024. Participating on today's call are Ken Tuchman, Chairman and Chief Executive Officer of TTEC and Shelly Swanback, President of TTEC and Chief Executive Officer; Kenny Wagers 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 of our financial performance, we also encourage you to read our second quarter 2024 orderly reports on Form 10-Q. Before we begin, I want to remind you that matters discussed in 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 intonation as a result of new developments that they 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 2023 Annual Report on Form 10-K. A replay of this conference call will be available on our website on the Investor Relations. I will now turn the call over to Ken.

Good morning and thank you for joining us today. On our earnings call earlier this year, we shared that 2024 would be a year of transition and evolution for TTEC. As we scale our diversification strategy and our cost optimization initiatives, the macroeconomic environment continues to create headwinds for our Engage business, while our digital business continues to deliver solid results. Let me start with our second quarter results. Revenue was $534 million and on a non-GAAP basis, our adjusted EBITDA was $46 million. It's important to call out that this quarter. We recorded a goodwill Impairment on the Engage business, triggered by a decline in our market capitalization. This non-cash charge materially impacts our GAAP results, as detailed in our press release and Kenny will discuss shortly. Now let me share an update on the Engage business. Despite the current economic -- excuse me, despite the current dynamic macroeconomic environment, we're encouraged by our continued momentum with new large enterprise client wins. These new clients are core to our strategy to diversify our engage client portfolio across industries where we're currently underpenetrated and where we see solid opportunity for growth. As with all new clients, our recent wins in e-commerce, retail, media and property and casualty insurance will take the customary time to scale. These new enterprise clients have the potential to grow into top clients in the near term based on their historical spend in the CX outsourcing industry. However, as we look to the second half of the year, due to the weaker economic outlook, the demand from our embedded base is not shaping up as originally forecasted. This is especially pronounced in our largest sector, healthcare. For almost 2 decades, we've had reliable forecast and consistent seasonal growth with our healthcare payer clients. This year, the…

Good morning, everyone. As Ken mentioned, we're in the midst of a transition year, navigating headwinds in the macroeconomic environment and making progress as we execute on our overall diversification strategy. I'll start by discussing the current factors impacting the performance of the Engage business. First, some of our embedded base clients have revised their volume forecast for the second half of the year. The decline is especially prominent in our biggest vertical, healthcare. Several of our healthcare payer clients are reacting to increased budget pressure and have made recent decisions which are impacting our seasonal volumes. In addition, one of our healthcare clients decided to delay a large growth initiative. Second, challenges in a large public sector program caused by external factors, including a delay in the client system conversion, will create a short-term drag on our profitability and delay the full program ramp. We're working with our clients through these issues and expect to get back to the anticipated financial profile entering next year. And third, we exited some underperforming client programs that in the short term will impact the top line but ultimately improve our profitability. Moving on to progress updates, diversifying our Engage business. While the market remains competitive, we're winning new enterprise clients and expanding with new solutions for our embedded base. As we continue to diversify our client portfolio, our primary focus is on opportunities where we can successfully deliver a quality solution and programs that have the potential to scale and grow profitably. This quarter, our strategic wins with enterprise clients include a large financial services institution and a multinational home improvement manufacturer and retailer. We're on track this year to add a dozen new enterprise clients, diversified across our core verticals as well as emerging verticals like retail, e-commerce, media and technology.…

Thank you, Shelly and good morning. I will start with a review of our second quarter financial results before providing context in our updated full year 2024 financial outlook. In my discussion on the second 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. Turning to our second quarter 2024 financial results. On a consolidated basis for the second quarter of 2024 compared to the prior year period. Revenue was $534 million compared to $600 million, a decrease of 11% adjusted EBITDA was $46 million or 8.7% of revenue compared to $67 million or 11.2%. Operating income was $30 million or 5.5% of revenue compared to $51 million or 8.4%. And EPS was $0.14 compared to $0.55. Foreign exchange had a negative $1.8 million impact on revenue in the second quarter over the prior year period while positively impacting operating income by $0.8 million, primarily in our Engage segment. In our Digital business, we delivered upon our second quarter plan supported by CX demand from clients across multiple industries. In our TTEC Engage business, our performance was at the low end of our range of our expectations with challenges in the public sector program already discussed by Shelly and lower bookings due to the factors already covered by Ken. Turning to our second quarter 2024 segment results. Our Digital segment second quarter 2024 revenue was $116 million. While it represents a decrease of 1% over the prior year period, digital revenue grew quarter-over-quarter by approximately 4%, reflecting the backlog conversion of our strong bookings. Recurring managed services which represents 60% of Digital's revenue continues…

Thanks, Ken. As we open the call, we ask that you limit your questions to 1 or 2 at the time. Operator, you may open the line.

[Operator Instructions] Our first question comes from the line of George Sutton of Craig-Hallum.

Kenny, I'm wondering how much of this, would you credit to AI in some way, shape or form, in terms of not necessarily AI impacting the inbounds that you're getting yet but just really a crowding out of the focus for companies moving forward with other initiatives that might have positively impacted your business?

To be frank, I think very little to none. I think that every -- we talk to our clients on almost a daily basis. We know the initiatives that they're focused on, etcetera. Many of them are still just trying to get to the cloud, let alone to just modernize their overall digital capabilities. And the ones that are working on AI, I would argue that it's for the most part, it's in an experimentation stage in most cases. So no, I do not think that, that's it. I think that just overall, the verticals we have served for so many years really are unfortunately experiencing some of the macro headwinds of the consumer becoming cautious and slowing down. And I think that, that will become more obvious as many of these very large enterprises start to report in their future quarters.

One question for Kenny. You're kind of drawing a little bit of a line in the sand, that the second quarter will be the peak of the headwinds in the Engage business. Just help us understand the comfort you have in that statement sort of what backs that up.

Yes, George. I would say Shelly covered a lot of that in her script. We've just got a lot of good tailwinds around operational rigor. A lot of the actions that we took in Q3, that I mentioned that are worth $10 million in-year savings. And as we exit 2024 into '25, north of $30 million. Those are in play. And so from an operational, from a margin expansion, from an operating leverage standpoint, we feel really good with what we've accomplished and we're not done yet. Shelly also mentioned, we brought in some industry veterans on the delivery and operational side and they continue to drive value as they onboard at TTEC. So from a cost, from an operational, from a leverage standpoint, we just got a lot of tailwinds that we feel confident in. On the revenue side, a little more choppy. We discussed that but as seasonality throughout 2024 picks up into Q3 into Q4 and as our bookings and backlog and what we see with the new enterprise clients that we've signed this year, we feel relatively confident in that trend going forward.

Our next question comes from the line of Maggie Nolan from William Blair.

Can you comment a little bit on whether or not you're seeing a competitive pricing environment impacting the Engage segment?

Maggie, well, I think no doubt there's -- it's a competitive environment out there. What I would just say is probably, in particular, for companies who are looking at a willingness to trade off quality for price. And so of course, we handle those situations one-off as needed. What I would just tell you is the enterprise, the dozen new enterprise clients that we're bringing on, we feel really good about the work that we're going to do for these clients, the commercial structure with them and we expect that book of business to be accretive to our core business. So we feel good from that perspective. But no doubt, it's a competitive pricing environment, particularly, again, companies that are -- got those budget constraints and might be willing to trade off quality for price.

Okay. And then on those several new enterprise clients, it's great to hear you say that those have potential to become top clients in the future. were those competitive wins or competitive displacements? And overall, how do you feel about your positioning in the market and your ability to take market share?

Yes, absolutely. They were competitive wins, right and displacing partners, I think, in every single case. So we feel really good about that. It's a combination of what were our vertical expertise and also, our expanded geographic footprint that we've been talking about for the last many quarters. And let me just maybe emphasize again. Some of these wins are in what we call our core verticals, things that we've got good vertical expertise, healthcare BFSI, some of our biggest practices. But also excitingly, new verticals. A large e-commerce platform, a couple of new clients in the retail sector. We've got some good work that we're doing with some of the luxury brands as an example in retail, a new win in media, new opportunities in our pipeline in the tech vertical. And so we're really serious about diversifying our business and I think we feel good about the breadth of these wins. And absolutely, they were competitive.

Our next question comes from Mike Latimore of Northland Capital Markets.

In the Digital business, you mentioned there were some project delays. Can you just elaborate on that a little bit? What caused that -- what technology are?

No particular technology. Mike, these weren't delayed because of us per se. These are just delays in the client being ready to start programs. Deals that we had won in previous quarters and just delay in getting them started. And therefore, there's a slight delay in revenue recognition. But these programs are all underway at this point.

Was it macro related? They just needed to find the budget to move forward or?

I'm sorry. Say your question again.

Yes, it was macro-related.

No, I think these were just specific -- these are a couple of specific client situations.

Okay. Got it. And then I know you don't give quarterly guidance but on the digital side, does the guidance imply kind of exiting the year at 10% or so growth there?

Yes. Obviously, we don't give the quarterly guidance. But I would say that we are exiting 2024. Again, we're still working on 2025 and we're not going to comment on 2025 yet but you're in the range.

Okay. And then on Engage, were new logo bookings as expected? Or were they a little late as well?

Well, no. This is what we're talking about these new enterprise clients that we're winning. Mike, this is where we're really excited about this. And so this is yes, as expected, I suppose, in terms of winning new clients. What I would just tell you is clients are -- these programs always start a bit small and this is what you keep hearing us talk about is really excited about the new client wins that we have, recognizing and this is not a new phenomenon, by the way. These programs take time to scale, right? Clients start small. Small amount of agents in Engage. And then we scale from there. And so we have launched several of those in Q2, several more in Q3 and more here in Q4. So this is part of where we're saying we see these making a more material contribution to the top line in 2025.

Mike, this is Ken. I want to just point out something that maybe we haven't made very clear. We have a very strategic focus on winning a significant amount of new client logos. And there's multiple reasons behind that. One, we're not satisfied with the diversification across the board of all the different verticals that we serve, that we feel that we need more business in each of the verticals. And therefore, we feel really good about the fact that when many others aren't actually winning a lot of new logos, we feel like we're doing -- we're on track and we are winning the logos. What we're feeling and what we're talking about and as it relates to the revenue, is that several of our clients of embedded base clients are just not providing the growth that they've historically provided. And so it's why there is such a focus on us winning new logos. New client logos, excuse me, across various different verticals, including verticals that maybe are not as impacted by some of the macroeconomic trends. So I just want to stress that it's a bit of a seesaw that our embedded clients are still in good shape. But they're not -- they don't have the same, in some cases, fourth quarter push that they typically do, going into their seasonality. And therefore, we've made the strategic decision to really put the pedal to the metal in acquiring net new clients. And I can tell you that we've actually are, in fact, winning net new clients. The bummer is, is that to take these clients and get them bedded down and launched, it's always historically taken to reach full ramp anywhere between 12 and 18 months. And we're on track with many of them have literally -- some of them have just launched the last 2 weeks as an example. And so, we'll see the benefits from those launches in the quarters to come.

Our next question comes from the line of Joe Vafi of Canaccord.

This is Pallav Saini on for Joe. First, can you give us an update on what you're seeing on the vendor consolidation front? Is it still playing out the way you expected? Or is it not much of a factor going forward, you think?

I assume your question is really more related to the Engage business. Vendor consolidation, is that what you were asking about?

Yes.

Okay. Great. Yes, absolutely. I'd say a couple of things. We certainly -- some of our competitive wins actually have come from situations where companies have decided to consolidate their vendor network and consider new partners at the same time, just based on what they're looking for relative to quality delivery capabilities and the like. And so we do see that playing out. On the other side, we see some clients. We know some of our opportunities are actually situations where some work is being done in-house. Captive operation, if you will and those are new opportunities for us as well. One of the things that is probably worth emphasizing is this dozen new enterprise client logos. And we're focused, we keep saying -- we keep focusing on these dozen new clients because they're the ones that we think can scale and become top 20 clients with only one exception. All of them are leveraging our new offshore footprint.

Got it. And on the softness in the healthcare vertical this year. Is there any way these headwinds could persist next year as well? Or are you very confident in this being largely limited to this year?

This is Ken. So as it relates to the payer market, all I can simply say is the following. It's common knowledge that all the healthcare payers are experiencing increased claims, due to post-COVID. And those, as you can imagine, there was a 2-year period where people didn't actually go to the hospital, didn't get cancer treatment, etcetera. And consequently, when they did ultimately go, their situation was more extreme and therefore, the claims have come in at much higher rates, etcetera. And so consequently, the entire healthcare industry right now is very budget-constrained and is very focused on getting through this, this what I'd call this claim cycle, so to speak. Additionally, there's been some changes in reimbursements from the federal government and I think that's another challenge that they're facing. I'm very confident that they'll work through this. These are some of the largest companies in the world, etcetera and they are extremely well run. And I think that this is just a temporary measure on their behalf. But obviously, I can't speak for the whole industry, other than to just simply say that I think this is a moment in time. And we've been doing business in this sector now for over 20 years. And this is the first time that we've ever experienced anything to this extent with this particular vertical.

Our next question comes from Cassie Chan of Bank of America.

I just wanted to follow up on that question. So I guess, just to be really clear, what's causing the incremental decline relative to like 3 months ago when you gave the full year guidance? It sounds like it's healthcare, public sector as well, continues to have some delays, financial services. I guess, collectively, how much are you expecting those verticals to decline in 2024? And on the flip side, are there any verticals that you're expecting to grow maybe a little faster or in line as expected?

Yes. Well, for your first question, Cassie, the change in our guidance was based on the 2 factors that we talked about, healthcare and the public sector clients that we mentioned. So yes, that's exactly what we're saying in terms of what's changed since our last earnings call. With regards to areas that we see growth coming. Again, it's these new clients that we're adding across verticals, a couple of financial services, as I mentioned; a new win in healthcare and a couple of new clients in e-commerce in retail; one in media; and a number of opportunities that we have in our pipeline right now for those verticals as well as the tech vertical. And so that's where we're going to continue to focus is with bringing on new clients in these that we think can grow. And then secondly, of course, we're also expanding with our embedded base clients. Two of our largest financial services clients, we just recently signed new work, new lines of business, as we like to say, new work types with those clients and those will be launching at the later part of this year.

Okay, that's helpful. And I guess as a follow-up. So it looks like you're cutting your full year EPS guide a lot more than your revenue and margin guide. Can you just talk about some of the factors there your ability to protect the bottom line of top line softness and some of the incremental actions that you're taking. Because you guys have continuously been doing cost optimization actions and initiatives. So just anything incremental that you're taking there would be helpful.

Cassie, this is Kenny. The incremental actions are -- we talked earlier in the year, we took some actions coming out of Q4 2023. But the real actions are what Shelly and I discussed in our prepared remarks. As we looked at our margins, as we looked at our operational leverage and as we looked at our delivery operations around the world, it is those actions that we took at the end of Q2 into Q3 that give us that $10 million of in-year savings, with a run rate of $30 million plus going into next year. So it's that leverage that we're creating in the Engage business. Just to get us back to the right ratios, the right operating structure. When we've done -- the geo expansion that we've done over the last 2 years as we look to optimize that footprint, especially with all the new business that Shelly articulated, most of those, if not all but one I think of our enterprise clients are now in our offshore locations. It takes a couple of cycles to make sure that we match those revenue and expenses as we continue to grow. It's a great problem to have as we expand but we continue to optimize in those areas going forward into the year. And so that's why you're seeing some good leverage and some margin improvement on the bottom.

And we'll continue to have a lot of focus on just tightening up operations across the board. Client program by client program, obviously, stay focused on good quality delivery for our clients. And I mentioned that we've brought on a few new leaders recently in various parts of our business that we are really confident, are going to help accelerate our efforts.

Our next question comes from Vincent Colicchio of Barrington Research.

Yes. I'm curious, the -- Shelly, the exits of underperforming client programs, is that largely cleaned up? Or maybe see more of that in the back half of the year?

Largely played out. We just -- I mean it was a couple of specific client situations where their needs and what they wanted from the services and what they want to pay for it and what we could deliver for them and just we collectively decided that wasn't a match. And so those have played out. Those programs will ramp out through the back half of the year. Right now -- our focus right now is delivering great service for our clients and tightening up our operations, being able to take those profit improvement actions that Kenny and I have discussed and winning new business with our existing clients and bringing on these new clients that we're excited about.

And could you give us a sense for your offshore investment program in '25? Will you potentially accelerate the program given the demand dynamic?

I'm sorry, that -- will we expand the what?

Offshore next year.

Offshore next year. Oh, absolutely. Absolutely. The scale of our offshore and geographic expansion, absolutely. One of the things that I mentioned earlier is we're going to continue to expand in the locations that we've recently entered in the last couple of years, simply for one reason. We see a lot of client demands, right? South Africa is probably one of the biggest highlights in terms of launching some really large clients that we expect to scale there. So that's first up in terms of expansion. And again, we continue to see really good client demand for our new geographic footprint. So we're leaning into that.

Our last question is from Jonathan Lee of Guggenheim Securities.

Can you provide any incremental detail around what unfolded in public sector over the course of the quarter...

Jonathan, can you up just a little bit? We can't hear you, sorry.

Is this any better?

That's much better. Appreciate it.

Can you provide any incremental detail around what unfolded in public sector over the course of the quarter? And what's contemplated there in your outlook for the remainder of the year?

We don't share a lot of specific client details, of course. I would just tell you, this is a large public sector program. It's a multiyear contract and we're providing a number of services to the client. We also have to -- they also have some other vendors involved that are providing some technology. And there's been some delays outside of our control that do impact our operations here in the short term and we're working through them with the client as we speak. But given the current challenges, getting to a full program launch and just some of the early challenges with a technology conversion, again, not one that we're doing has the impact for this year. But I'm confident we're going to get through those. We expect that we'll have the program economics as originally expected, we'll get there by the end of the year and be in better shape for 2025. It's limited to one specific client program, Jonathan. It's not a broad thing across our public sector business.

Got it. And as a follow-up, you talked about wanting to win new logos but you've also highlighted the competitive pricing environment. And how are you looking to protect contract profitability there? And can you help us unpack the margin dynamics with new clients, especially as those relationships mature?

Again, I mean we're obviously having to -- all of these wins are competitive wins. But we're leveraging our new offshore expanded footprint. So feel really good about the work that we're going to do for these clients and the margin profile is accretive to our core business. And so we're winning and we're really excited about what they're going to bring to our business. That's really across -- I mean that's across, again, these wins are across industries, right? They're not focused with just one sort of client and these are big enterprises where we think many of these clients can become top 20 clients here over the coming years.

Yes. And as I've said in previous calls, there's many clients out there that are rebalancing their business and in some cases, it's not because they're dissatisfied. It's just due to the consolidation that's taken place. They don't want to have all their eggs in 1 or 2 baskets. And so consequently, they may be started out where they had their eggs and 4 baskets and through consolidation, it turned into 2. And now they're looking for some other reliable partners that can give -- help them with a balanced portfolio. So what I would say is that there's still plenty of business out there to be had by all. And even though it's a competitive environment, there's certain business that, frankly, we're focused on and there's other business that we go out of our way not to be focused on. And allow other competitors that think that they can figure out a way to do a good job and make money. And like I said, it's a very large total addressable market, etcetera. So in many ways, we can be very targeted and very specific with the type of business that we know that we can execute well and consistently perform as the number one provider in the partner network.

Thank you for the questions. That is all the time we have today. This concludes TTEC's second quarter 2024 earnings conference call. You may disconnect at this time.