Welcome to TTEC's Fourth Quarter and Full Year 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 fourth quarter and full year financial results for the period ended December 31, 2023. 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 TTEC Engage and Francois Bourret, Interim CFO and Accounting Officer. Yesterday, TTEC issued a press release announcing its financial results. While this call will reflect items that are discussed in that document, for complete information about our financial performance, we also encourage you to read our 2023 annual report on Form 10. 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. 2023 was a dynamic year to say the least. Of the past several quarters, we've been discussing the challenges posed by the macroeconomic environment on businesses across industries and geographies. As a strategic CX technology and services partner for many of these large and complex enterprises, the market dynamics in the second half of the year moderated our performance in 2023. For the year, revenue was $2.46 billion. Adjusted EBITDA was $272 million or 11% of revenue. And adjusted EPS was $2.18 per share. In 2023, we had some bright spots as we made progress diversifying our business with several new clients, geographies and offerings. We grew our client base with approximately 100 meaningful new relationships in TTEC Digital and TTEC Engage. We completed the strategic phase of geographic expansion with several new offshore locations and laid the groundwork to scale and roll out new operations in many new countries this year. We added multiple new offerings to our portfolio, including expanded and continually growing ecosystem of AI-enabled solutions for TTEC Engage and TTEC Digital. We built on our premier partner status with our leading CX technology and hyperscaler partners and we continue to be recognized as the best employer by Forbes Magazine for the third consecutive year. As we move to 2024, the macroeconomic environment continues to be fluid, with even further headwinds arising both domestically and abroad. Over a third of the global economy is officially in recession, with an even larger percentage trending in that direction. While we are seeing momentum with new client whims across both business segments, we expect these incremental headwinds to persist and continue to necessitate a conservative outlook for 2024. Our view on 2024 reflects the current economic backdrop and three very specific…

Thank you, Ken, and good morning. As Ken just described, 2023 was a year of challenges and also some notable wins. Over the past 12 months, we made continued progress with our diversification across clients, geographies, and solutions. However, our disappointing outlook for 2024 reflects three specific challenges primarily impacting our engage segment. First, our revenue is being impacted by the carry forward from 2023 of conservative volume forecasts and budget constraints at our embedded base clients, as well as the shift to more offshore delivery. In this environment, our clients are more frequently adjusting their volume forecasts, which is impacting our visibility. Next, one of our largest clients recently informed us of their plans to exit one of their lines of business which will impact our revenue. Our relationship with this client remains extremely strong as we continue to support them across many other lines of their business. And lastly, the delayed client signings from both the second half of 2023 and early 2024 are impacting our 2024 outlook. The typical lag effect between signing and full ramp of new opportunities is delaying normalized revenue and margins. Given these short-term challenges impacting the top line of engage, we're rebalancing our fixed and variable cost structure. We have a rigorous focus on fine-tuning operational delivery across every aspect of our business. However, in the near term, our fixed cost structure will be higher as a percentage of revenue. We're confident these fixed costs will realign with revenue and we will get back to positive growth in 2025, delivering double digit EBITDA. I echo Ken's sentiments about our disappointing 2024 outlook. and I stand by his confidence in our path forward. In 2023, we demonstrated progress on our diversification strategy, and we're well-positioned to build on that momentum. Now, let me…

Thank you, Shelly, and good morning. I will start with a review of our fourth quarter and full year 2023 results before providing context into our 2024 financial outlook. In my discussion on the fourth quarter and full year 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. My full reconciliation of our GAAP to non-GAAP results is included in the tables attached to our earnings press release. The fourth quarter financial performance was in line with our expectations. On a consolidated basis, revenue exceeded our guidance. Operating income and EBITDA margins would have ended in the high end of our guidance range if it wasn't for a $7.3 million unforeseen one-time cost for employee-related health care expenses. As a result, our profit margin ended near the low end of the range. While this negatively impacted both segments, I will provide details in my Engage segment review given its larger impact of that business unit. On a consolidated basis for the fourth quarter of 2023, compared to prior year period, revenue was $626 million compared to $658 million, a decrease of 4.9%. Adjusted EBITDA was $58 million or 9.2% of revenue compared to $87 million or 13.1%. Operating income was $42 million or 6.7% of revenue compared to $70 million or 10.6%. And EPS was $0.37 compared to $0.91. Foreign exchange had a $6 million positive impact on revenue in the fourth quarter over the prior year period. While negatively impacting operating income by $2 million, primarily in our Engage segment. On a consolidated basis for the full year 2023, compared to the prior year period, revenue was $2.46 billion compared to $2.44 billion, an increase of 0.8% and a decrease of 1.1% organic. Operating…

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

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

Thank you. Ken, you mentioned that you believe that one third of the global economies are in a recession today, and I know you've expressed a similar belief for the U.S. in effect being in recession. I would say the general narrative has been that we may be moving into a soft landing scenario. So I wondered if we can get a better picture of sort of your macro view as it pertains to your guidance and the expectation that you'll exit’ 24 in a better place.

Hi George, good morning. When you ask my macro view, I'm not sure I'm understanding the question. I'm not an economist, so I want to make sure that I'm qualified to answer your question. So you want to just give me a little bit more color on your question so that I can be more accurate.

So there's obviously a macro view that is built into your guidance, and it includes the scenarios that we're seeing where clients are moving from 90 day visibility to month to month. You are seeing volume reductions in some clients. So I'm curious, how much of that is macro in your view, and when does that lift?

Yes, I mean, I think that what we're seeing, I think the whole industry is seeing, I think is very simply that clients are operating and acting in a very conservative fashion. You can see that with everything from the cost optimization programs that they've announced to the layoffs that they've announced, et cetera. And so consequently, I think that many, many clients or many, many industries are seeing lower growth, and they're basically doing everything they can to try to anticipate what's in front of them. And I think that they don't necessarily know whether or not we're going to have a soft landing or whether things are just slowing down for a period of time. I would agree that in the US, that the consumer still is acting somewhat resilient, but what we're seeing is that the consumer is becoming much more conservative in their purchase decisioning. It's already showing up in what types of retail stores that they're going to versus where they were shopping at, et cetera, due to things like food prices being higher, due to the fact that their rents are at a much higher level than they've been as a percentage of their income, et cetera. So all-in-all, I think that we feel that the US hopefully can skate through this while a big chunk of Western Europe and other parts of the world are already in an actual recession. So our goal and our hope are that we will get through 2024 and we'll be right back to seeing growth in 2025. By then, interest rates will have moderated. By then, I think the Fed will feel that inflation has come down a bit. And I think the good news is what we're seeing is that clients are absolutely doing what they…

Just a quick follow-up for Shelly. You talked about the proof-of-concept stage moving forward with a number of your clients and you mentioned 50 programs and 10, 000 associates affected by the AI programs. I'm not totally clear what you mean by that. I wondered if you could just explain that a little bit.

Yes, good morning, George. So 50 client programs, meaning we have various kinds of, we're using various types or applications of AI at clients. So example, think of it as a personal assistant to help agents access information to do their job better. Generative learning in terms of using some of these new technologies to change the way that we train associates. Language enhancement, language neutralization sorts of technologies. And so we have a number of these programs under way of clients. We typically start with a proof-of-concept or a smaller number of agents to test out the technology in their environment, see how it works, learn how to train the agents better to use those technologies and then scale from there. And so it's impacting about 10, 000 agents across those 50 client programs. And we expect that over time, we'll have 100% of our agents that will be enabled with these various AI technologies. I mean, what I would say, relative, just more generally around AI is, we really see our clients right now leaning into the agent augmentation, sorts of use cases, the kinds of things that I just talked about because the business case for them is compelling and we actually have a set of tools that we're developing and testing, and continuing to scale ourselves. And we see compelling results. In one case, we saw 17% productivity increase from new agents by just giving them easier access to knowledge, if you will, sort of a personal assistant to help them find the information they need to do their job. Hopefully that answers your questions, Richard.

Our next question comes from Margaret Nolan of William Blair.

Hi, everyone. This is Kate Kronstein on for Maggie Nolan. I was curious, are there any green shoots with clients that you guys are seeing that gives you hope that you could possibly hit the higher end of the guidance range?

Yes, so let me start. First of all, as we said in the Digital practice, we've got really good booking momentum, and traction right now. We mentioned that over 50% of the opportunities in our pipeline right now are with existing customers. And I think this is important for two reasons. One, just demonstrates that as we expand our capabilities and the solutions that we can offer clients, not only just helping them migrate their technology to the cloud, but then expanding the use of that technology, adding AI, not just doing CCaaS, but getting into CRM, it gives us an opportunity to do more with our existing clients. And it's also important because those opportunities tend to move through our sales process more quickly. So that gives us good confidence in our Digital business. On the Engage side, I mentioned this idea that we've got a couple of early wins here this year. We're calling them strategic growth accounts. And what does that mean? Well, these are clients where we're starting initial scope of work, maybe in the $10 million a year range, but clients where we know we can expand our relationship. Ken mentioned that it's taking time from a verbal win to a contract to launching these services. One of the things that I'm pleased about is, with some of these new clients of ours, we're literally just in the early stages of launching the work that they've contracted, and we're already talking to them about new opportunities to be able to support them in other lines of business and then other scopes of work.

Okay, great. Thank you, Shelly, that was helpful. And then just one follow-up, if I may, are you guys able to provide any detail on the line of business that the long-term client has continued and the general margin profile of this service?

No, I mean, we're not in a position to share anything about this client situation. What I can just tell you is, this was a business decision they made based on their business factors. It didn't have anything to do with us. We just happened to be the main provider for them in this line of business, which is why it's having such an impact on our business.

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

All right, thanks. On the Digital side of the business, sounds pretty healthy there. Are we back to sort of normal sales cycle now, or is there still a little bit of ways to go? And then it also sounds like just the need for AI is driving a lot of the demand here. I just want to clarify that.

I think we are definitely; I think the sales cycle is normalized, but I think it's normalized most likely by my previous comments, which is that there is so much of the CCaaS space that is not yet in the cloud. And a lot of our clients have technology that frankly is hitting end of life. And so consequently, that is really lighting a fire to get, to move them to the cloud. And it's why we feel confident that our business not only, our pipeline, not only did we have record bookings in fourth quarter, we feel very strongly about first quarter, and we feel that this will persist, and that 2025, we will see double digit growth as well as profit margins. So yes, we feel very confident in the space. As it relates to AI, I would say, yes. AI, all of our clients are talking to us about AI, but at the end of the day, before they can even get to AI and really properly take advantage of AI, they really need to have their capabilities in the cloud. So I think that AI might be one of the motivators just in general, but I also think the fact that they're receiving notice of end of life across a myriad of manufacturers that they're no longer going to support the platform that they were on.

Gog it. And then, I guess, staying on the topic of AI, I think there's been a general concern last couple of weeks, at least, that AI could, while it would benefit your digital business it might have an industry impact in terms of just slowing interaction volumes to the contact center. And by AI, I mean like virtual agents, not necessarily agent augmentation, but kind of what's your general view on AI longer term as it might have -- what kind of effect particularly virtual agents could have on the Engage business?

What I would say is that we're embracing AI. We view it as a very -- we view it as a positive change. We view it as a huge opportunity. I can't stress enough that at the end of the day, the market part, the Engage marketplace, for the most part, is consolidated. There's, roughly speaking, five Tier 1 providers that are in the marketplace. And at the end of the day, all five of us are included in almost every major opportunity that's out there. What AI affords all of us, the entire industry, is an opportunity to show our clients a way to increase quality and lower overall costs to serve. Why does that matter? It matters because when you have a $400 billion TAM, of which only $100 billion has been outsourced, even with interactions that potentially become partially self-automated because they're more or less transactions, not interactions, the fact of the matter is there is more TAM and more opportunity out there than the top five competitors combined could ever handle. And I think, I still feel very confident that the captive operations are beginning to realize that A, they're not that good at doing this. The businesses become way too complicated, way too sophisticated, and requiring more and more geographies, more and more technologies and advanced processes. And so consequently, it's our belief that that embedded base is going to continue to be the gift that keeps on giving as they begin to look for ways to reduce their employee count and drive better productivity. So do I think that it's going to have an impact on very low-end transactions? Yes, but that's not a space that we're focused on. Our business is not providing what your bank balance is or when will my product arrive or whatever. That's just not the type of work that we're focusing on. The work that we're focusing on is work that typically is assisting our clients in acquiring, growing, and retaining their customer base and building a level of trust. And I think that you can only take a chatbot so far before it actually becomes disruptive in a long-term customer's relationship. And I can tell you that when we have our meetings with our client advisory board to a [inaudible] every single client that we have says that they are only interested in using AI in a selective way and that they are very conscious of the fact that if they were to over-self-serve that would have a negative impact on their business. So that's my way of saying that I think that it will have a positive impact. I think it'll drive more clients to wanting to work with companies that know how to work with these technologies. And it's our goal and our hope to benefit from it.

Our next question comes from Joseph Vafi of Canaccord.

Hey, guys, good morning. Thanks for all the color. Maybe we could circle back just one more on AI here. And going back, Shelly, I know you said that the agent augmentation application in one instance, I think you said, drove 17% efficiencies, which is great, just trying to get a feel for how does that level of efficiency using an AI co-pilot or whatever you want to call it, how is that going to affect economics with clients on a maybe per transaction or contract basis? Do you see sharing some of those savings with the client? Or how does that play out mainly? And I have a follow-up.

Yes, and just a clarification, the 17% was actually time to proficiency, meaning getting new agents up to speed and being able to be proficient at answering questions and doing their job. Having said that, I think there will definitely, first of all, I would say this, one of the reasons that we're winning these new clients right now is because of the AI tools that we're bringing to augment our agents. So I think this is absolutely something that's resonating with our clients. And in some cases, I guess in all cases, there'll be an opportunity to pass on some of the economics to our clients, but also for ourselves, right? In terms of time to proficiency, being able to keep agents engaged in their work, lower attrition, all of those things will have a bottom-up line impact for us and also for our clients.

Yes, that's helpful. And then maybe just kind of switching gears around global delivery, I know you really worked hard on that and made a lot of progress in ‘23. How do we, as clients are onboarding this year, I mean and looking at volumes and there's -- and the drive to take costs down, how are you seeing kind of volume dynamics onshore versus offshore, new accounts where they're ramping maybe moving volumes around globally with existing, just kind of some color around those dynamics would be helpful. Thanks a lot, guys.

Yes, great. Well, first thing I would just say is our expanded geographic footprint absolutely strategic to our growth and profitability going forward and absolutely resonating with our existing clients, but in particular helping us with these new client wins. But I'm encouraged by the wins that we've closed early this year and the ones we have in the pipeline, as Ken said, they're taking a bit longer than we'd like, but I'm very encouraged by that. And most all of our client wins right now are multi-geo. So leveraging both our offshore and nearshore locations driven by these new expansion geographies that we've talked about over the last 12 months. Now as clients move into some of these new geographies they start with a pilot or sort of a contained effort to start with and then we scale from there. And so that's why this lag effect that we're talking about in terms of scaling some of this work in these new offshore geographies is making an impact for 2024. But I would tell you lots of interest in Latin America, lots of interest in Africa in particular. And also, we're, as we've talked about, getting into the Asian language space more and more as well. And so we're excited about the demand that we've seen for our clients across all of those areas around the globe.

Joe, I also want to just remind you as a backdrop that because we do a lot of complex financial services work that requires licensing, as well as a lot of healthcare work that requires licensing, that work has no risk of going offshore as it legally cannot. And then on top of that, we do quite a bit of public sector and federal work, and that work also cannot go offshore. So what I would say is the good news is that our sales energies and our sales efforts are very focused on winning offshore businesses, therefore we're seeking out clients that have the interest and the need to offshore. But the good news about the embedded base is that for the most part, it's very solid, so to speak, because of the nature of the licensing and of just the legal requirements, so to speak.

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

Hey, guys. Thanks for taking my question. I just wanted to touch on offshore again a little bit more. I know you guys mentioned that you're expecting it to increase to about 35% of revenues by yearend ‘24. What is it exiting 2023 right now? Is it going to be more of a gradual increase? And can you just comment anything about kind of the size of those engagements? Are they -- is there any difference that you're seeing now in the pipeline versus before? Thanks.

Yes, so just to start. So we exited 2023 with about 30% of our revenue being coming from offshore. And as you stated, we're going to increase it to 35%. When you look at, ultimately, the dynamic of offshore revenues where we're seeing growth next year expected to grow 5% year-over-year. So this is truly where we're seeing momentum right now in our top line and demand and that's been really accelerating with our extended footprint that we have now with multiple new geographies.

Got it. And can you just talk about some vertical dynamics that you're expecting in ‘24. I know you called out financial services and telco that were helpers for Engage but if any other color around what you're expecting to maybe do a little bit better or you're expecting new dynamics to continue or 1Q in ‘24. Thanks.

Yes, let me let me maybe focus on where we see new client win opportunities. I would tell you that we have several new very exciting prospects in in our BSSI sector so financial services. We also have a couple of exciting wins that will be contracting here soon in the healthcare space. We will be at full ramp with our new client in PUBSEC in New York State Metro by the end of Q1. We also have a couple of very exciting PUBSEC deals. And then outside of those verticals, one of our wins here early this year is actually with a global retailer. So that is a space where we're seeing more and more. And also in travel, I would say we have a number of existing clients in the travel sector where we see growth opportunities. So those are the ones that come to mind first, Cassie.

Our last question is from Vincent Colicchio of Barrington Research.

Yes, Ken or Shelly, to what extent do you think some of the noise and confusion, if you will, around the impact of AI having an effect on demand?

Go ahead, Shelly.

Well, I mean, I think what I would just tell you is our clients want to talk to us about that, right? Because we're helping them sort out the noise and understand where they can really practically apply these AI solutions and get business benefits. So that's driving a lot of demand in the digital side. And as I said, every opportunity in Engage, we're talking to our clients about where to apply AI, particularly with these use cases around AI augmentation. So I think for us, it's driving a lot of great client conversation, lots of demand. As Ken said, every opportunity, every prospect, every pitch, we're talking about AI, whether it's a digital opportunity or an Engage opportunity.

Let me though say a couple of things. Number one, it's really imperative to understand that because we have a digital division that has a very unique skillset of working with every single major hyperscalers in a very deep way, in a partnering way, down to the point where we're very involved in consulting with these hyperscalers helping them with their product development, et cetera. On top of that, all the major CCaaS providers where we have literally thousands of engineers that are our engineers that do absolutely nothing but integrate to their systems, the fact of the matter is that we can have an intelligent conversation with our clients about what it takes to actually bring in AI and to take advantage of it as well as understanding what are the best use cases that actually make the most sense. I wanted to clarify something based on your question. If your question is, is AI having an impact on volumes, the answer is absolutely positively not, no matter what. There was a bunch of uproar about a client that put out, not our client but a company that put out press release having a real success with AI and how it was reducing their customer service associates. This is a company that is way behind the times and when you go look at the AI that they are using which is online and very easy to validate, it is nothing more than the knowledge-based system. Virtually every client that we have already has a knowledge-based system and therefore it goes without saying if a client didn't have a knowledge-based system on the web, on the Internet, then of course you would be taking a lot more voice interactions than one who already has one. So what I would say to you is do we think that it will impact volumes? We absolutely think that it will impact interaction volumes but what we believe is more importantly is that it will enhance more of the complex interactions and allow our associates to get up to speed quicker, be more accurate with the information, have much more understanding of when to cross-sell, when to up-sell, and have much better data on where the client's mindset is so that they can serve the client in a much more sophisticated fashion. And look, this is like every hype cycle. It's going to take years before clients are going to be able to truly take advantage of AI. So, I hope I answered your question, and happy to take any other questions about this offline, if you have more questions.

Yes, that was a very good color, thank you for that. And then one other, are you seeing increased pressure on pricing or terms currently?

Well, it's no doubt it's a competitive environment on the Engage side, but this is why we're leading with AI-enabled associates, our new geographic footprint, and we feel good about our competitiveness.

Thank you for your questions. That is all the time we have today. This concludes TTEC's fourth quarter and full year 2023 earnings conference call. And we disconnect at this time.