TTEC Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2024

There are 9 speakers on the call.

Operator

Welcome everyone to TTEC Second Quarter 2024 Earnings Conference Call.

Operator

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.

Speaker 1

Good morning, and thank you for joining us today. Teetek is hosting this call to discuss its 2nd quarter results for the period ended June 30, 2024. Participating on today's call are Ken Tuchman, Chairman and Chief Executive Officer of TTEC Shelly Swanback, President of TTEC and Chief Executive Officer of Investor Day and 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 about our financial performance, we also encourage you to read our Q2 2024 quarterly report on Form 10Q.

Speaker 1

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 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 2023 Annual Report on Form 10 ks. A replay of this conference call will be available on our website under Investor Relations.

Speaker 1

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 2nd quarter results.

Speaker 1

Revenue was $534,000,000 and on a non GAAP basis, our adjusted EBITDA was $46,000,000 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 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 engaged client portfolio across industries where we're currently under penetrated and where we see solid opportunity for growth.

Speaker 1

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.

Speaker 1

This year, the healthcare industry is facing extreme cost increases, which are creating significant budget pressures. As a result, while some clients are still finalizing their seasonal ramps, we expect significantly lower volumes this year than we have previously experienced. Given the overall environment, we've taken additional and significant actions to improve our cost structure without impacting our ability to continue deliver quality outcomes for our clients and their customers. Due to these headwinds in Engage, we have updated our financial outlook for the full year 2024 to better reflect the current balance of the challenges and the opportunities. Kenny will share the specific details shortly.

Speaker 1

Now on to TTEC Digital. As we've diversified our CX Technology segment, we've evolved from being a leading expert dedicated exclusively to CCaaS to a multidimensional CX transformation partner with a broad portfolio of contact center capability contact center CRM, AI and analytics solutions. We've doubled the number of our partners in our technology ecosystem this year and now have the full stack of CX capabilities to propel our business ahead into 2025 beyond. Today, our core advantage in TTEC Digital is the depth of our expertise in every aspect of the CX technology stack and our ability to integrate the disparate platforms into a cohesive, seamless CX operating system, including the latest in AI. Our teams are executing on more than 100 plus AI enabled projects with specific business cases around increased efficiencies, revenue growth and improved customer experience.

Speaker 1

Looking ahead, the CX marketplace continues to be compelling and we remain excited about our position as a leading and trusted partner for AI enabled CX technology and services. We continue to attract new clients, be recognized as the best place to work and acknowledges the industry innovator by trade analyst and media. Despite our progress, it goes without saying that I'm disappointed with our financial results and our revised outlook for the remainder of the year. As we move into 2025, I'm confident that our diversification initiatives will yield stronger financial performance with a broader client base, more offshore revenue and expanded client solutions and a deeper partner ecosystem. And now, I'll turn the call over to Shelly.

Speaker 2

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 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 based clients have revised their volume forecast for the second half of the year. The decline is especially prominent in our biggest vertical, healthcare.

Speaker 2

Several of our health care payer clients are reacting to increased budget pressure and have made recent decisions which are impacting our seasonal volumes. In addition, one of our health care clients decided to delay a large growth initiative. 2nd, 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.

Speaker 2

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.

Speaker 2

While these programs initially start small, they provide the opportunity for scale in the future. We expect several of our new clients to become top 20 clients in the future. We continue to see strong demand in our new geographies with anchor clients driving growth in several regions. This quarter, we began ramping a major healthcare client in South Africa and a financial services brand in Egypt. With strong client demand and more than half of our pipeline comprised of offshore opportunities, we continue to expand in these regions.

Speaker 2

Our banking, financial services and insurance practice is healthy and performing well. We're diversifying with our embedded base and have recently won new lines of business that will ramp up later this year with 2 of our largest clients. For example, with one of these clients, we're expanding our work to include back office services. Regarding new enterprise BFSI clients, we have recently launched 2 and we'll launch 2 more in Q3. We're focused on scaling these new programs as well as pursuing expansion opportunities.

Speaker 2

For example, with the new offshore client we launched late Q4 last year, we have added 5 new solutions, including care, workforce management, tech support, knowledge management and quality assurance. In our healthcare vertical, we have some early momentum, diversifying our solutions and expanding our reach from member experience to patient experience, targeting the provider landscape. We have several late stage opportunities with provider organizations to support them with our offshore footprint, spanning a wide range of solutions, including patient credentialing, claims and clinical nurse support. Across industries, we continue to make progress in a number of areas tied to the practical use of AI. Through a combination of technology partnerships and our own internal engineering teams, we're applying AI across the entire employee lifecycle.

Speaker 2

For example, we're seeing good results leveraging AI to accelerate curriculum design and increase training effectiveness, which helps to reduce ramp times and increase speed to proficiency. Our private LOM called Let Me Know, which is built on Google technology, is now being deployed in several client environments, including our travel and public sector verticals. In addition, we're using AI enhanced voice translation to extend the reach of our optimized geographic footprint as we create digital multilingual hubs. Moving on to an update on our cost optimization initiatives. We recently executed on several programs that will deliver approximately $10,000,000 of in year savings and annualized savings of at least $30,000,000 starting in 2025.

Speaker 2

With a guiding principle of maintaining our high quality delivery standards, we're implementing new ways of working using technology and improved processes to transform our delivery cost structure across the enterprise. We have also recently strengthened our leadership team with tenured industry hires to accelerate our efforts and advance our performance in key areas. Now, I'll switch gears to TTEC Digital. While the demand environment is somewhat tempered, our value proposition continues to resonate with clients. As Ken mentioned, our expansion of solutions and partnerships beyond CCaaS to adjacencies like CRM, AI and analytics is enabling us to broaden our impact with new and existing clients and will fuel the momentum in our professional services growth.

Speaker 2

As we continue to expand our partner ecosystem, we expect several of our new emerging partnerships to play a more meaningful role starting in 2025. Our pipeline remains strong and we're on pace to close 60 new clients this year. Additionally, close to 80% of digital bookings this past quarter were with existing clients and the number of clients that we bill more than $1,000,000 annually is continuing to grow. Let me share a couple of client examples. After helping a global mobility company optimize its CCaaS platform, we're now unlocking actionable insights from based conversational intelligence to clarify and act on drivers of call intents, volume spikes and the effectiveness of their automations.

Speaker 2

For healthcare payer, we're building on their cloud migration to integrate AI enabled knowledge assist and call summarization to improve the effectiveness of their clinical care support advocates. And for our luxury retail brand, we're creating a unified desktop leveraging AI that combines interaction history and profile data so their customer concierge team can proactively provide personalized white glove support. These are just three examples of more than 100 AI technology implementations with clients that are underway. Our clients are looking to us for practical applications of AI, and we're currently building solutions for more than 40% of our top 100 clients. The hyperscalers and leading CX technology providers play a key role in our CX ecosystem.

Speaker 2

Working as strategic partners, we're helping them optimize their development roadmaps, build pipeline and deliver complex implementations. Because of our deep CF technology and operational expertise, clients are depending on us to help them eliminate silos within their organization. We bridge the gap between technology partners, business functions and operating groups in order to simplify the associate and customer experience. In the same way we connect the dots for our clients, we're facilitating collaboration with tech partners to deliver the best outcomes for our shared clients. In conclusion, while we're disappointed in our financial results, we continue to make progress on our diversification strategy.

Speaker 2

We're growing our geographic footprint, winning new business, expanding our solutions and partnerships. In addition, we're taking the necessary cost and margin improvement actions to strengthen our financial profile in order to return to overall revenue growth and a normalized EBITDA run rate. As a management team, we're confident in our path forward and resolute in executing on our strategy and improvement initiatives. On behalf of our Board, leadership and our employees around the world, we look forward to continuing to share our progress in the quarters to come. Kenny, over to you to share our 2nd quarter financial results and updated full year outlook.

Speaker 3

Thank you, Shelly, and good morning. I will start with a review of our Q2 financial results before providing context in our updated full year 2024 financial outlook. In my discussion on the Q2 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 Q2 2024 financial results.

Speaker 3

On a consolidated basis for the Q2 of 2024 compared to the prior year period, Revenue was $534,000,000 compared to $600,000,000 a decrease of 11%. Adjusted EBITDA was 40 $6,000,000 or 8.7 percent of revenue compared to $67,000,000 or 11.2%. Operating income was $30,000,000 or 5.5 percent of revenue compared to $51,000,000 or 8.4 percent and EPS was $0.14 compared to $0.55 Foreign exchange had a negative $1,800,000 impact on revenue in the Q2 over the prior year period, while positively impacting operating income by $800,000 primarily in our Engage segment. In our digital business, we delivered upon our 2nd quarter plan supported by CX demand from clients across multiple industries. In our TTEC Engage business, our performance was at the low end of a 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.

Speaker 3

Turning to our Q2 2024 segment results. Our Digital segment's 2nd quarter 2024 revenue was 116,000,000 dollars 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 to deliver solid growth, increasing nearly 8% year over year and 6% sequentially. The strongest contribution continues to come from our CCaaS practices. Due to the tail of softer bookings in 2023, professional services revenue declined from the prior year, but is up 11% from the Q1 of 2024, driven by the recent quarters improved bookings.

Speaker 3

As previously communicated, the one time on premise related revenue is declining as demand is shifting to cloud migration, resulting in an 8% year over year revenue decline in the first half of twenty twenty four. Operating income was $15,000,000 or 12.8 percent of revenue in the Q2 of 2024, relatively unchanged over the prior year in both absolute and relative terms. The temporary lower revenue contribution was offset by reduced SG and A from the prior year. Digital's backlog the full year is $415,000,000 or 85 percent of our 2024 revenue guidance at the midpoint, in line with the prior year. The strong backlog and pipeline continue to demonstrate the importance of TTEC Digital CX technology and service solutions to our clients.

Speaker 3

Our Engage segment revenue decreased 13.5 percent to $418,000,000 in the Q2 of 2024 over the prior year period. Operating income was $15,000,000 or 3.5 percent of revenue compared to $36,000,000 or 7.4 percent of revenue in the prior year. Our Q2 performance was at the low end of the range of our expectations due to the challenges with the public sector program mentioned earlier and softer revenue. I will address the impact of the public sector program for the balance of the year and the segment's outlook in my closing remarks. Regarding Engage's pipeline, the quality of opportunities remain strong and while we see encouraging signs based on clients' discussion around CX delivery strategies, near term clients continue to prioritize initiatives that will yield cost savings in year and postpone new investments or more meaningful CX transformations to 2025.

Speaker 3

Engage's last 12 month revenue retention rate was 89 percent compared to 96% in the prior year. The decline is primarily explained by the prior year revenue reduction in our hypergrowth portfolio and the impact from 1 large client in financial services exiting one of their lines of business supported by TTEC previously mentioned. We are doubling down our efforts with measurable actions to strengthen our foundation and increase the company's profitability. This includes initiatives to improve our operating efficiencies at the client program level in addition to broader actions to align our corporate cost structure with forecasted revenue to become more agile and efficient by changing the way we work. The related restructuring charge in the second quarter is associated with this plan, largely completed in the Q3.

Speaker 3

These actions are anticipated to reduce our operating costs by approximately 30,000,000 on an annualized end of year exit rate benefiting both gross and operating margins.

Speaker 1

Before I

Speaker 3

discuss other financial metrics, I will address the non cash goodwill impairment charge and the related tax adjustment recorded in the 2nd quarter. In ordinary course, we performed goodwill impairment analyses in accordance with GAAP on an annual basis or more frequently if indicators of impairment exist. During our Q2, we performed a quantitative goodwill impairment analysis triggered by the decline in our market capitalization. Based on this analysis, which reflects upon financial projections and market based metrics, the fair value of our Engage reporting unit decreased below its carrying value and as such resulted in $196,000,000 non cash pre tax impairment charge. Our digital reporting units fair value remains excess of the respective book values and are not impacted by the impairment.

Speaker 3

The Engage impairment resulted in a deferred tax asset of 38,000,000 dollars which was subsequently included in a valuation allowance recorded for tax assets, creating a net incremental 46,000,000 income tax charge recorded during the Q2. Please refer to our Form 10Q for more details on the impairment and related tax impact. While impactful from a GAAP reporting perspective, the impairment and the tax valuation allowance were a non cash expense and do not impact our strategy and capabilities or the value of our CX solutions. These charges are normalized in our non GAAP reconciliation calculations. I will now share other Q2 2024 metrics before discussing our outlook.

Speaker 3

Free cash flow was $35,000,000 in the Q2 of 2024 compared to $77,000,000 in the prior year. The year over year variance is the result of lower profitability and working capital conversion. Capital expenditures were $14,000,000 or 2.7 percent of revenue for the Q2 of 2024 compared to $19,000,000 or 3.2% in the prior year with most expenses related to our geographic expansion. Our normalized tax rate was 33.7 percent in the Q2 of 2024 compared to 22.3% in the prior year. The increase is primarily a function of lower pretax income and jurisdiction mix.

Speaker 3

As of June 30, 2024, cash was $80,000,000 with $933,000,000 of debt, of which $930,000,000 represented borrowings under our amended $1,200,000,000 credit facility. Net debt increased $49,000,000 over the prior year to $853,000,000 primarily associated with geographic expansion investments, higher interest expense and capital distributions, partially offset by positive cash flow from operations. We ended the quarter with a net debt to EBITDA ratio of 3.8 times. As discussed last quarter, beyond returning the company to sustainable long term organic growth, Shelly and I are taking prudent actions to improve our cash flow and strengthen our balance sheet. These actions start with a continuous cost improvement initiatives, reprioritization of our capital allocation strategy and optimization of our working capital.

Speaker 3

We also took additional measures to increase our financial flexibility under our current credit facility. Turning to our updated outlook in my closing remarks. You may recall that we moved to providing guidance on an annual basis during this transition period with directional commentary for each quarter as viewed appropriate. Last quarter's commentary pertaining to the 2nd quarter outlook remains accurate. We still see the Q2 as the transition of our engaged performance in 2024 as we 1, work through the peak of our previously mentioned headwinds in our business and 2, further execute upon meaningful cost optimization initiatives, which are well underway in the Q3.

Speaker 3

However, the lower demand environment continues to have a larger impact on our Engage revenue trend for the remainder of the year. The Engage revenue is now expected to decline from 8% to 12% at the midpoint of the updated guidance range. As a result, we are revisiting the company's full year guidance on both the top and bottom line due to the revised engaged outlook. That said, we continue to build a healthier 2024 exit rate to the engaged business as operations in the public sector program normalize. The changes in guidance for digital are minimal with delays to launch some projects impacting the top line, offset by stronger execution that increases our profitability expectations from an EBITDA margin of 14.5 percent to 15% at the midpoint of our guidance.

Speaker 3

Please reference our commentary in the business outlook section of our Q2 2024 earnings press release to obtain our expectations for our updated 2024 full year guidance at the consolidated and segment level. In closing, we met many of our transitional year objectives in the first half of twenty twenty four, while continuing to navigate a dynamic demand environment. In TTEC Digital, the acceleration of new partnerships continues to strengthen and diversify an already strong foundation and is noticeable with our sequential growth quarter over quarter. In TTEC Engage, we are ramping new enterprise client programs across our CX technology enabled solutions and expanded geographic footprint while working through select near term headwinds and executing upon our profit optimization initiatives. We remain committed to returning the Engage segment and TTEC as a whole to long term organic growth and increased profitability.

Speaker 3

I will now turn the call back to Paul.

Speaker 1

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

Operator

Thank you. We will now begin the question and answer session. Our first question comes from the line of George Sutton of Craig Hallum. Sir, your line is now open.

Speaker 3

Thank you. Ken, 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 inbound 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?

Speaker 1

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. And 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.

Speaker 1

So, no, I do not think that that's it. I think that just overall, the verticals that 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'll become more obvious as many of these very large enterprises start to report in their future quarters.

Speaker 3

One question for Kenny. You're kind of drawing a little bit of a line in the sand that the Q2 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.

Speaker 3

A lot of the actions that we took in Q3 that I mentioned that are worth $10,000,000 in year savings. And as we exit 2024 into 20 20 5, north of $30,000,000 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.

Speaker 3

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. Got you. Thank you.

Operator

Thank you. Our next question comes from the line of Maggie Nolan from William Blair. Your line is now open.

Speaker 4

Hi, thank you. Can you comment

Speaker 2

a little bit on whether or

Speaker 4

not you're seeing a competitive pricing environment impacting the Engage segment?

Speaker 2

Good morning, Maggie. Well, I think no doubt there's a 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.

Speaker 2

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.

Speaker 4

Okay. Thank you. 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?

Speaker 2

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 we 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 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.

Speaker 2

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.

Speaker 4

Okay. Thank you for that detail.

Operator

Thank you. Our next question comes from Mike Latimore of Northland Capital Markets. Your line is now open.

Speaker 5

Great. Thanks a lot. On the digital business, you mentioned there were some project delays. Can you just elaborate on that

Speaker 3

a little

Speaker 5

bit? What caused that? What technology you're in?

Speaker 2

No particular technology, Mike. These weren't delays because of us per se. These were 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.

Speaker 5

Okay. So was it macro related? They just needed to find the budget to move forward or?

Speaker 2

I'm sorry, say your question again?

Speaker 3

Yes,

Speaker 1

if it was macro related.

Speaker 2

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

Speaker 5

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?

Speaker 3

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.

Speaker 5

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

Speaker 2

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 the guess 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.

Speaker 2

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.

Speaker 1

Hey, Mike, this is Ken. How are you doing? 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.

Speaker 1

1, 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 based 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 4th quarter push that they in acquiring net new clients.

Speaker 1

And I in acquiring net new clients. And I can tell you that we factually are in fact winning net new clients. The bummer 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 18 months. And we're on track with many of them have literally some of them have just launched in the last 2 weeks as an example. And so we'll see the benefits from those launches in the quarters to come.

Speaker 5

Got it. It makes sense. Thanks.

Speaker 1

Thank you.

Operator

Thank you. Our next question comes from the line of Joe Baffi of Canaccord. Your line is now open.

Speaker 6

Good morning. This is Balazsani on for Joe. Thanks for taking my questions. 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?

Speaker 6

Or is it not much of a factor going forward, do you think?

Speaker 2

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

Speaker 6

Yes. Yes.

Speaker 2

Okay, great. Yes, absolutely. I see 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.

Speaker 2

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 that 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.

Speaker 6

Got it. Thank you. 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? Thank you.

Speaker 1

This is Ken. Hi. So as it relates to the payer market, all I can simply say is the following. Common knowledge that all of 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.

Speaker 1

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, what I'd call this claim cycle, so to speak. Additionally, there's been some changes in reimbursements from the federal government, 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.

Speaker 1

And they are extremely well run. And I think that this is just a temporary measure on their behalf. And 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.

Speaker 6

That's very helpful. Thanks, Ken.

Operator

Thank you. Our next question comes from Kathy Chen of Bank of America. Your line is now

Speaker 4

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 continue 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?

Speaker 2

Yes. Well, for your first question, Cassie, the change in our guidance was based on the two 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 them financial services as I mentioned, a new one 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 increase that we think can grow.

Speaker 2

And then secondly, of course, we're also expanding with our embedded base clients. 2 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.

Speaker 4

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, 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.

Speaker 4

So just anything incremental that you're taking there would be helpful. Thank you.

Speaker 3

Hey, Tassie, 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 in at the end of Q2 into Q3 that give us that $10,000,000 of in year savings with a run rate of $30,000,000 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.

Speaker 3

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.

Speaker 2

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.

Speaker 4

Okay. Thanks, guys.

Operator

Our next question comes from Vincent Colicchio of Barrington Research. Sir, your line is now open.

Speaker 7

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

Speaker 2

Largely played out. I mean, we just it was a couple of specific client situations where their needs and what they wanted from the services and what they wanted to pay for it and what we could deliver for them. It 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.

Speaker 2

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.

Speaker 7

And could you give us a sense for your offshore investment program in 2025? Will you potentially accelerate the program given the demand dynamic?

Speaker 2

I'm sorry, will we expand the what?

Speaker 1

Offshore next year.

Speaker 2

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?

Speaker 2

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.

Speaker 7

Thank you.

Operator

Thank you. Our last question is from Jonathan Lee of Guggenheim Securities. Your line is now open.

Speaker 8

Great. Thanks for taking our question. Can you provide any incremental detail around what unfolded in public sector over the course of the quarter? Jonathan, can you

Speaker 3

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

Speaker 8

Hey, is this any better?

Speaker 1

That's much better. Much better.

Speaker 8

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?

Speaker 2

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.

Speaker 2

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 client program, Jonathan. It's not a broad thing across our public sector business.

Speaker 8

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 unpack the margin dynamics with new clients, especially as those relationships mature?

Speaker 2

Again, we're I mean, we're obviously having to all of these wins are competitive wins, but we're leveraging our new offshore expanded footprint. 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.

Speaker 1

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 maybe started out where they had their eggs in 4 baskets and through consolidation it turned into 2.

Speaker 1

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 is 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.

Speaker 8

Tremendous. Thanks very much.

Speaker 1

Thank you.

Operator

Thank you for your questions. That is all the time we have today. This concludes TTEC's Q2 2024 Earnings Conference Call. You may disconnect at this time.

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Earnings Conference Call
TTEC Q2 2024
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