Welcome to TTEC's Third Quarter 2024 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, and you may begin.

Good morning, and thank you for joining us today. TTEC is hosting this call to discuss its third quarter results for the period ended September 30, 2024. Participating on today's call are Ken Tuchman, Chairman and Chief Executive Officer of TTEC; Kenny Wagers, Chief Financial Officer of TTEC; and Shelly Swanback, Chief Executive Officer of TTEC Engage. Yesterday, TTEC issued a press release announcing its financial results. While this call will reflect items discussed within that document, for complete information about our financial performance, we also encourage you to read our third quarter 2024 quarterly report on Form 10-Q. Before we begin, I want to remind you that matters discussed on today's call may include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward-looking statements reflect our opinions 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-K. Before we proceed, I want to mention that our call today will not address any questions about Mr. Tuchman's September 27, 2024, proposal to the company's Board of Directors to take TTEC private. As the company shared in the press release on September 30, the Board formed a special committee of independent directors to consider Mr. Tuchman's proposal. And the committee in consultation with independent legal and financial advisers is evaluating and considering that proposal. 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. As shared in prior quarters, 2024 is a transitional year for TTEC. Across the company, we remain focused on our 4 priorities: winning new clients and continuing to execute our diversification strategy, enhancing our portfolio of AI-enabled CX solutions, improving our operational agility and strengthening our financial performance. In the third quarter of 2024, revenue was $529 million, and non-GAAP adjusted EBITDA was $50 million. The dynamics of the CX industry and the macroeconomic environment continue to create headwinds as select clients delayed decision-making and/or focused on near-term cost savings. The uncertainties around the election and the Fed's monetary policies have added to this wait-and-see mindset. Despite these market realities, our teams continue to close new business. CX remains a high priority as we engage in productive CX conversations with current and potential new clients. We believe these initiatives will normalize over the course of the next 6 months and lead to a more attractive demand environment. We recently held one of our regularly scheduled client advisory Board meetings, which included CX operational and technology-focused leaders from many of our largest clients. The conversations highlighted their business priorities and focus areas, as they navigate the current environment and set their priorities for 2025. Let me share a few recurring themes. Clients are weighing the promise of AI against the necessary work required in their systems, data architecture and CX infrastructure to realize the full benefits. Pilots are delivering encouraging results; however, expense, accuracy, data protection and organizational readiness concerns continue to be top of mind. A more integrated and holistic view of CX processes and technology stack are a priority. Regardless of their current landscape, clients are looking for ways to get more value from their CX investments. They're focused on…

Thank you, Ken, and good morning. I will start with a review of our third quarter financial results before discussing our full-year 2024 financial outlook. In my discussion of the third quarter financial results, reference to revenue is on a GAAP basis, while EBITDA, operating income and earnings per share are on a non-GAAP adjusted basis. A full reconciliation of our GAAP to non-GAAP results is included in the tables attached to our earnings press release. Turning to our consolidated third quarter 2024 financial results. Revenue was $529 million, a decrease of 12.2% over the prior year period and relatively unchanged sequentially. Adjusted EBITDA was $50 million or 9.5% of revenue, a decrease from $64 million or 10.6% of revenue in the prior year period and an increase from $46 million or 8.7% of revenue in the prior quarter. EPS was $0.11 compared to $0.48 in the prior year period and $0.14 in the prior quarter. Foreign exchange had a nominal impact on revenue in the third quarter over the prior year period, while positively impacting adjusted EBITDA by $2 million, primarily in our Engage segment. At the company level, we delivered the third quarter within our performance expectations. In our Digital segment, our recurring managed service offerings continue to deliver double-digit revenue growth. However, for the reasons mentioned by Ken, our professional services revenue was negatively impacted by the unanticipated delays in closing select larger deals. In our Engage segment, topline performance met our expectations and was relatively in line with the prior quarter. We are encouraged by the improved profitability in both our Digital and Engage segments, reflecting the early benefits from our profit optimization initiatives. Turning to our third quarter 2024 segment results. Our Digital segment's third quarter 2024 revenue was $116 million, down 13.2% over the…

Thanks, Kenny. I want to remind everyone that our call today will not address any questions about Mr. Tuchman's proposal to take TTEC private. As we open up the call, we ask that you limit your questions to 1 or 2 at a time. Operator, you may open the line.

[Operator Instructions] Our first question comes from Mike Latimore of Northland Capital Markets.

All right. Great. I just had a couple of questions on the Digital business. Your guidance seems to imply a nice acceleration in the fourth quarter here. So I guess -- and potentially even like getting to double-digit growth year-over-year. What kind of gives you confidence that could occur? Is there -- are some of these deals that didn't close going to close? Like what's driving that?

Mike, it's Kenny. Yes. Look, we are bullish, obviously, on Digital. We've been bullish all year from an outlook perspective. Our Q3 -- when you get closer towards the end of the year, obviously, when we have our Q3 results, we have Q4 sitting in front of us. We did have some deals slide from 3, and Dave is very confident in those deals closing in Q4 or Q1. It gets a little tricky at the end of the year with these big consulting engagements on whether or not they close to the magic date of December 31 versus January 1. So the trajectory, as you alluded to, we do feel confident in over the longer next 2 to 3 quarters based on where we're at with bookings and where we're at with our backlog.

So assuming you do even hit the lower end of the Digital guidance, you get back to growth, is that something that maybe is sustainable where we could see kind of that business growing year-over-year going forward?

Yes, Mike, I mean, we do. Absolutely. There's a lot of mix involved with product sales versus the consulting business. And so -- we are in, obviously, 2025 planning season right now. And so as we work through the practices, as we work through a lot of the upside that we see in 2025 with the new practices and the tailwinds that we have, we just have to obviously also work through the product sales falling off. And so that gives us a mixed result at the top line, but the health of the business that we have going forward, we're very confident in.

I think in particular, Mike, as we continue on our initiatives for diversifying the business inside of Digital with the new partners that we've talked about, I think we're very bullish on all the AI projects starting. And Ken mentioned earlier that 75% of our deals are coming from existing clients. We like that because that helps -- that's a good indicator that we can have multiple projects with existing clients. Obviously, those deals typically are faster to close. So I think that all in a positive trajectory as well. And if you look at our pipeline, it continues to be healthy. In fact, we have more opportunities coming into the top of the funnel and really, really healthy deals that we're working on with our partners. So I think overall positive. But like Kenny said, this time of the year is always tricky, right? Q4 was a big one for us last year in terms of closing deals and where Dave and team are really focused on getting everything over the line that we can here in Q4.

Yes. I think -- Mike, I think we should point out the fact, as I said in my script, that clients in general have been focused on cost in 2024. And so in many cases, they've been kicking the can on projects. You read about this through all the different IT services companies, et cetera. I think where we feel more confident just is as we get into 2025, as interest rates start to come down, as we -- as all this political stuff is hopefully behind us, et cetera, that there'll be a much more focused mindset on launching larger projects, et cetera. And so that's where we see things starting to accelerate is next year, et cetera, based on just the feedback that we're hearing from clients that their budgets are a bit constrained, and therefore, they've been delaying projects and kicking the can a bit. But that said, they can only kick the can for so long until they have no choice but to start to adapt to this new technology, or unfortunately, they can't stay competitive.

Our next question comes from Maggie Nolan of William Blair.

It's Kate Kronstein on for Maggie. I had a question about healthcare payer clients that were a weak spot last quarter. Can you touch a little bit on what you're seeing in this client cohort this quarter?

Yes. Well, last quarter, we talked about a lot of our payer clients just making some decisions relative to saving money, right, the cost pressures that they have and staffing differently for our seasonal ramp, which is Q4 and into Q1 a bit. And so I'd say no change there. I mean, things have played out this quarter, and we see Q4 similar to what we talked about last quarter. I mean, they're continuing to face a lot of cost pressure in the healthcare industry. And so they're making choices in terms of cutting costs. And now the good news is there's lots of conversations that we're having about starting to think about using offshore talent, offshore resources, some technology, things that have typically been a little bit off limits, if you will, from a healthcare payer perspective. And so those are early conversations. But I expect that we'll continue to have those conversations here through the end of the year and into next year and see some proof of concepts underway in the next couple of quarters.

Okay. Great. And then one final question. On the cost-saving initiatives, do you guys still expect that those will provide roughly $30 million in savings in 2025? Or has that expectation changed at all?

No. As we mentioned last quarter, $10 million of in-year savings in 2024 and annualized savings of $30 million in 2025. And we've executed well on that to our internal numbers coming out of Q2 into the Q3 results. And so we do expect that those numbers to manifest in 2025.

[Operator Instructions] Our next question comes from the line of Cassie Chan from Bank of America.

Are you also expecting a longer ramp-up period for these as well? And you mentioned some macro issues that they're concerned about. Can you just elaborate a little bit more about that? And why you expect that -- why you wouldn't expect that to persist? And maybe are those coming up in other client conversations that you're having as well, not just the new, early one?

Cassie, we didn't hear the beginning part of your question, sorry about that. You might have been on mute. Can you just repeat your question?

Yes. So I just wanted to ask a little bit about the select client delay projects and implementations that you guys had mentioned. So the first part is just, are you sort of expecting a longer ramp-up period for those as well even after they closed in fourth quarter or first quarter of next year? And you mentioned some macro issues that they're concerned about. So what are those? Are you hearing those in other client conversations as well?

Okay. Well, so let me just take it in each business segment. On the Engage side, as we've been talking about for some time, in the last couple of quarters, very pleased with being on target to bring on a dozen or so new meaningful client relationships. They are starting small in terms of the ramp. And part of that is also because many of them are leveraging our new offshore geographies. And so I'd say no change really there. It's just kind of more of the same in terms of getting those client launches right and then scaling as we go. Some of -- a couple of those new clients that we've brought in on the Engage side, we're already expanding the services that we're providing for them. So I'd say that's pretty much the same as what we've described over the last couple of quarters. On the Digital side, Ken's comments and Kenny's comments were really around some delays in some of those projects going forward. And so that's not necessarily meant to be a delay in terms of ramping and doing the projects, just a delay in getting them started. And so again, we're really focused on getting those deals closed here in Q4 so that we can start them here at the latter half of this year and early into next year.

Okay. That's helpful. And then I guess the higher tax rate, the 40% to 46%, just talk a little bit more about that. Is that also the right way that we should think about in terms of 2025 modeling purposes? And is 4Q kind of a good jumping off point that we should think about in terms of at least the first half of '25, understanding that you're not obviously providing formal guidance right now?

Thanks for the caveat at the end. Yes. The normalized tax rate, what I said in the call is exactly where we see over the next couple of quarters. And so to your point, with the deferred tax asset or with the valuation allowance that we had in the previous quarter, it's just really a mix issue between our pretax income in the U.S. versus our income in the rest of the world and what that effective tax rate is. And so, again, not giving guidance on to what we're looking at into the future just yet for 2025. But that's where we're at in our Q3 results, and we anticipate relatively the same in Q4.

Our next question comes from Joe Vafi of Canaccord.

This is Will Johnston on for Joe. Nice to see the strong growth in new geos this quarter. Do you mind just giving us a sense for your offshore investment program in 2025? And do you think you could potentially accelerate this program given the demand dynamic this quarter?

Will, I would say this. I think the commentary throughout the year that we've had about our geo expansion in 2024 still holds. We're very happy with how those geos are performing. I think I've said it since the first quarter that I got here earlier this year is the investments that were made in '22 and in '23 to set the company up for the offshore diversification in those products and those services and offerings that now we provide in the marketplace, because the customer demand is in that space on an offshore basis and new lines of business. We've executed well on it this year. The groundwork is there. You see our CapEx spend for the quarter, as we're starting to trend down on that because we've made the investment. So I would just say how we have performed offshore this year is going to be the continuation of 2025. It is -- the diversification is definitely one of our top 4 priorities, as Ken mentioned earlier. And so you will see more of that offshoring into 2025 because that's where the demand is at, that's what the customers are asking us for, for various reasons. And so we're meeting them with great products and great services in offshore environment.

Great. And are you seeing any changing dynamics in kind of the cadence of scaling smaller deal sizes offshore?

Do you want to take it? Yes.

I don't know if I'd say any changes. I think just -- obviously, offshore programs -- offshore -- the revenues scale from offshore services scale faster than onshore, that's the first thing we've talked about over the last couple of quarters. But we have -- it sort of just varies on the client. We have some clients that want to start with 50 agents to start with and some hundreds. So it's just -- it really is sort of client-dependent. What I would just say is lots still continue to have lots of interest in our new geographies, as Kenny said, particularly Latin America, Africa. And we have a couple of clients in the -- our banking, financial services and insurance sector where we're already expanding in terms of the lines of business that we're supporting them. So I'd say sort of the dynamics continue similar to what we've been talking about the last quarter or 2.

Our last question is from Jonathan Lee of Guggenheim.

Tremendous to see the uptick in offshore here, and thanks for the color there so far. But to clarify, are further investments needed to ramp offshore revenue? And are you seeing any existing onshore customers maybe think about moving some of their volumes offshore?

Yes, I'll take the investments first, and then, I'll let Shelly take the second half of your question. What I would say is the footprint has been laid, right? We are in the countries, and in the Tier 1, Tier 2 cities that we are very happy with, right? The customers want to be in the cities that we expanded into over the last 2 years. And so from an investment standpoint, I would tell you at this point, now that the foundation is laid, the facilities are there, the human capital, infrastructure is in those companies, if you will, to support growth and scale, any investment would be specific to new revenue and growth on a customer-by-customer basis, i.e., internally, Jonathan, I would say we can go across the parking lot in South Africa or Rwanda because we're expanding beyond the building that we currently have. So I would say it's a good matching of revenue and expense from an investment standpoint, all based on new clients growing with us in the footprint that we have.

Yes. I mean, I guess maybe what I would just add, Jonathan, is as we've talked about previously, right, we have a good percentage of our work that is with regulated -- in the regulated industries, which has to stay onshore, so that hasn't changed. I would say, though, some of our clients were being very proactive about being able to serve them offshore for work that might have been previously done onshore. But so far, we're still seeing that the offshore work that we're winning and doing with our clients is not instead of the work that we're doing onshore, it's in addition. Now, those dynamics, we'll see how those play out. Again, we're being very proactive with our clients, so where we think onshore work can be done offshore, that's how it will be higher profitable work for us. We're being very thoughtful about that.

Appreciate that. And secondly, can you share more color on the velocity of debt reduction you'd expect in the coming quarters? And maybe some of the drivers of your ability to pay that down just given where cash flow is today versus some of the investments needed to drive some of your expansion?

Yes, Jonathan, I don't know if I can expand much more than what's in the press release or what's out there, right? We are committed to debt reduction, as you see our profitability increase, as you see, our free cash flow from operations increase. We had the asset sale. You saw the disclosure on the dividend. And so, as we've been talking over the previous quarters during this transition year, we are focused on debt reduction, we are focused on our capital structure, and it is those input metrics, if you will, that we will continue to double down on to continue to drive down those ratios to the levels that we would be happy with over the coming quarters.

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