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spk00: Welcome to T-TECH third quarter 2022 earnings conference call. I would like to remind all parties that you will be in a listen-only mode until the question and answer session. This call is being recorded at the request of T-TECH. I would now like to turn the call over to Paul Miller, T-TECH Senior Vice President, Treasurer, and Investor Relations Officer. Thank you, sir. You may begin.
spk11: Good morning, and thank you for joining us today. T-TECH is hosting this call to discuss its third quarter financial results for the period ended September 30th 2022. Participating on today's call are Ken Tuchman, Chairman and Chief Executive Officer of T-TECH, Dustin Simak, Chief Financial Officer of T-TECH, and Shelly Swanback, Chief Executive Officer of T-TECH Engage and President of T-TECH. Yesterday, T-TECH 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 2022 quarterly report on Form 10-Q. Before we begin, I want to remind you that matters discussed on today's call 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 2021 Annual Report on Form 10-K, as amended by our subsequent quarterly reports on Form 10-Q. 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.
spk12: Good morning, everyone, and thank you for joining us today. I'm pleased with our solid execution and our overall financial results for the third quarter. Our performance was driven by our broad and diverse base of global clients and our full range of CX strategy, analytics, technology, and operational capabilities. Let me share a few third quarter financial highlights. Bookings were $200 million, an increase of 17% over the prior year period. Revenue was $592.5 million, an increase of 7% over the prior year period on a constant currency basis, and adjusted EBITDA with $72.2 million. Our bookings this quarter reflect continued strong demand for our CX technology and services solutions. However, like most businesses across the globe, our clients are facing macroeconomic uncertainties in this highly dynamic environment. As expected, the impact across the verticals we serve has varied, In sectors that are more resilient, like healthcare, banking, automotive, and government, there is ongoing strength. In other pockets, like technology-based hypergrowth companies, we're seeing continued softness. We expect these trends to continue into the next year as our clients adapt to the evolving dynamics in the marketplace. We're working closely with each of them and will remain agile and responsive to their needs. In any economy, focusing on customer experience is critical. Satisfied customers spend more, are less costly to serve, and are easier to retain. Happy customers are active promoters for their favorite brands and help companies attract new customers in a hyper-competitive market. Our portfolio of CX solutions has always delivered the highest customer satisfaction at the lowest total overall cost to serve. In the current environment, clients are leaning into our best-in-class capabilities to modernize and optimize their CX platforms to deliver seamless customer experiences that are personalized, convenient, and better for their bottom line. We continue to accelerate our diversification strategy, and I'm pleased with our progress on several fronts, including geographic expansion with new nearshore and offshore delivery locations, for both our engaged and digital businesses, growth with new and embedded base clients across strategic verticals, deeper collaboration with strategic CX technology partners, and innovation in our comprehensive portfolio of digital CX solutions with automation and analytics at the core of our offering. The CX technology landscape continues to evolve. Through T-TECH Digital, we're integrating the entire CX technology ecosystem of contact center technology with enhanced automation and analytics to enable experiences that are predictive, seamless, and simple for customers and frontline employees. To enable these modern experiences, companies of every size must migrate to the cloud. As many on-premise platforms reach end of life, it is no longer a question of if companies will migrate to the cloud, It's simply a question of when they will. We've built a differentiated platform to help companies design, build, and implement their migration strategy effortlessly. Wherever a company is on their journey, our portfolio of PurePlay CX technologies and our experienced team of software engineers are well positioned to capitalize on the CX cloud imperative. To accelerate our digital business, We're thrilled to welcome Dave Siebold as our CEO of T-Tech Digital at the end of this month. Dave is an accomplished digital leader with decades of global experience, accelerating growth and profitability with marquee enterprises and clients and technology partners. A senior executive of IBM, Avanade, and most recently at Atos, Dave is a results-oriented leader and a strong cultural fit. I'm confident in Dave's ability to scale our T-TECH digital business and to help us unlock its full potential. I'm also pleased to promote Shelley Swambach to president of T-TECH. In addition to her role as CEO of T-TECH Engage, in the last six months, Shelley has immersed herself in all aspects of the business and has hit the ground running. She has captured the hearts and minds of our teams across the globe, and is connected with our clients as a strategic advisor at a time when they need a results-oriented partner like her. With these two dynamic leaders on my side, I will continue to set the company's strategic direction and focus on innovation, M&A, and client engagements. I'm more energized than ever about our team, our differentiated platform, and our future. With that, I'll hand it over to Shelly.
spk07: Thank you, Ken, and good morning, everyone. Our execution this quarter was solid. In this dynamic macro environment, we made progress on many initiatives across the business. We delivered over 200 million bookings and signed 18 new logos in the quarter, including six multi-segment deals. Let me start with a few updates on our engaged business. Bookings this quarter included a good mix of new logos and embedded base wins. For example, we signed a Fortune 500 financial advisory firm that is new to outsourcing. We also expanded our healthcare footprint with new insurance payers seeking our expertise managing complex programs. Today, we serve hundreds of global clients from our delivery operations in 20 countries, and we're accelerating our nearshore and offshore expansion to provide clients with even more cost-effective options for biodiversity and multilingual services. Last quarter, I mentioned that we opened three new geographies, and today I'm pleased to report that our performance in our newest nearshore location, Columbia, is exceeding our projections in terms of scale and execution. We're well-positioned to meet client demand as we expand our global work-from-home platform and open more near-shore and offshore locations. Many of our largest clients operate in regulated industries that require work to be done onshore, and we continue to be their go-to partner. Our reputation as a leader in licensed delivery enables us to manage these complicated programs with exceptional results. This quarter, we made strong progress implementing digital-plus-voice solutions for our clients Across industries, more and more clients are piloting our blended solutions, are experiencing dramatic improvements in associate productivity and customer satisfaction. Our non-voice wins are up 60% year over year. And this quarter, we welcome back Chuck Koscovich as Chief Operating Officer of Engage. Prior to returning to T-TECH, Chuck oversaw global growth and geographic expansion at leading CX providers, including TELUS International. It's great to have Chuck back on the team, driving frontline employee engagement and client satisfaction across the globe. Now let's move on to third quarter highlights from the digital side of the business. First, we won several public sector deals, including a managed services engagement with a high-profile federal agency, and most notably, a large multi-year contract spanning multiple offerings from our digital portfolio, including Amazon Connect, CRM, automation, and analytics. We gained additional momentum in healthcare with a large cross-platform cloud migration deal that will enable seamless interactions between patients and physicians across a widely distributed healthcare system. And we continue to make progress across all of our CX technology partners. Notable strength this quarter came from our work with Microsoft and Genesys. And our momentum with Cisco continues to build, in particular with our professional services practice. We look forward to announcing some exciting new growth areas with partners in the months to come. And lastly, our analytics practice experienced 37% growth this quarter, driven by cross-sell opportunities with our other practice areas. As I speak with clients across verticals, there are a few topics that are top of mind. First, every client recognizes that the talent environment has changed forever. Our clients are coming to us for our expertise in managing the new labor dynamics and our ability to reliably hire, train, retain, and, of course, inspire global frontline teams at scale. Another hot topic is the need to implement CX initiatives that deliver near-term benefits while advancing a company's long-term CX transformation. As I like to say, projects that are material enough to matter, but manageable enough to get done. This is where our design, build, and operate model, leveraging the collective capabilities in our digital-engaged businesses, is so powerful. We're making steady progress expanding our geographic footprint, accelerating our go-to-market, advancing our digital solutions, and strengthening our strategic partnerships As we navigate the near-term dynamic environment, we will remain agile and responsive to market conditions. We're very focused on execution, calibrating our investments, streamlining our cost structure, and optimizing what is under our control. Before I hand it off to Dustin, I'd like to personally welcome Dave Siebold, a trusted colleague. I look forward to working with him to unlock the best of TTAC for our clients and amazing teammates. I continue to be very inspired by the passion and commitment of every one of our 62,000 employees across the globe. And now I'll hand it off to Dustin to discuss our financials.
spk06: Thank you, Shelly. Good morning, everyone. As mentioned, we are pleased for our third quarter financial performance as we continue to navigate the ever-changing economic landscape that is impacting some of our clients and their businesses. Moving to third quarter bookings performance. Our third quarter 2022 bookings increased 17% to $200 million compared to $171 million in the prior year period. Our digital bookings, excluding product sales, increased 44% year-over-year, reflecting strong demand across our CX technology services offerings, including our Genesys, Microsoft Dynamics, Amazon Connect, and Cisco Solutions. In our Engage segment, demand was stronger across our customer care and acquisition services, geographic footprint and industry mix, with particular strength in our public sector, financial services, and healthcare verticals, all of which tend to be better insulated against macro-psychicality. Our third quarter bookings included 18 new logos representing 11 million bookings, as well as six multi-segment deals. I will address our backlog and pipeline in my outlook remarks. In my remaining discussion on the third quarter 2022 results, reference to revenue is on a gap basis, while EBITDA, operating income and earnings per share 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. We are using the term like-for-like basis to describe our revenue growth, excluding the impact of foreign exchange translation and treating acquisitions as if we've owned them in the prior periods. On a consolidated basis in the third quarter of 2022, revenue was $592.5 million an increase of 4.5% and 5.7% on a like-for-like basis, excluding the impact of pandemic-related volumes. Organic growth was relatively flat on a constant currency basis. Adjusted EBITDA was 72.2 million, or 12.2% of revenue, compared to 78.7 million, or 13.9% in the prior year. Operating income was 50.2 million, or 8.5% of revenue, compared to 59.4 million, or 10.5 percent in the prior year. And lastly, EPS was 74 cents compared to a dollar and a penny in the prior year. The continued strengthening of the U.S. dollar in the third quarter was 14.1 million headwind to revenue, but benefited operating income by a positive 3.9 million, primarily within our engaged segment. Our third quarter engaged revenue benefited from our FANU acquisition, which we acquired in early April, and increased volumes from new and existing clients. Similar to our bookings composition, our digital revenue benefited from higher recurring cloud and systems integration work, offset by lower or more normalized levels of non-core product sales. Other revenue highlights include a 146% increase in public sector, primarily attributable to FANU acquisition, a 33% increase in travel and hospitality, a 13% increase in automotive, and a 19% increase from EMEA. Turning to our operating profit, The year-over-year decrease is primarily a function of the reduction in higher margin pandemic-related volumes compared to the prior year period, integration-related costs associated with the FANU acquisition, and incremental growth-oriented investments in talent acquisitions. I will now cover our third quarter 2022 segment results. Our digital segment revenue was $117.9 million in the third quarter of 2022 compared to $124.1 million in the prior year period. Similar to our digital bookings composition, our results reflect increased revenue from our cloud and systems integration services across our Tier 1 CX tech partner platforms, offset by lower product sales. Excluding these non-core product sales, digital revenue grew 8%. We are pleased with the progress we made in our Cisco practice, returning our professional services practice back to 9% growth in the third quarter over the prior year, the first quarter of year-over-year growth since the fourth quarter of 2019. Our CX technology IP business continues to perform well, delivering 19% growth in the third quarter of the prior year period as we continue to execute against our product roadmaps and release new proprietary tools and connectors that improve our customers' time to value and enhance functionality with leading CX technologies. Our recurring cloud demand services revenue represented 54% of digital's total revenue. Our diverse systems integration services, which have a high attachment rate for supporting future upgrade and expansion engagements, represented another 29% of total revenue. Operating income was $15.9 million, or 13.5% of revenue, compared to 15.6% or 12.5% of revenue in the prior year period. The margin improvement is due to higher margin revenue mix, partially offset by incremental investments in CX leadership and engineering talent, sales and marketing, and product and technology developments. Our engaged segment third quarter 2022 revenue increased 7.2% to $474.5 million over the prior year, 8.6% growth on a like-for-like basis, excluding the impact of pandemic-related volumes. While the FANU asset acquisition was a primary contributor to growth in the quarter, we delivered meaningful volumes across industry sectors with particular strength in public sector, automotive, and travel industries. Our embedded base continues to strong performance as demonstrated by Engage's last 12 month revenue retention rate of 98%. Excluding pandemic related volumes, Engage's revenue retention was 108%. Operating income was 34.3 million or 7.2% of revenue compared to 43.8 million or 9.9% in the prior year period. Our Engage operating margin reflects the impacts highlighted in my comments on the total company results, as well as our continued build out and strategic investment in our offshore delivery centers. which we anticipate will further diversify our client services and benefit margins over the long term. I will now share some metrics related to our cash flow, liquidity, capital deployment before discussing our outlook. At quarter end, cash was $172.3 million with $959.2 million of debt, the vast majority of which represented borrowings under our $1.5 billion credit facility. Net debt increased by $124.1 million to $787 million year-over-year, primarily due to the acquisition-related investments and capital distributions, partially offset by our positive cash flow generation. Cash flow from operations was $27.5 million in the third quarter of 2022, compared to $42.2 million in the prior year. The decrease is primarily driven by decline in profit over the prior year period and timing of working capital. Capital expenditures were $28.8 million, or 4.9% of revenue for the third quarter of 2022, compared to $17.2 million, or 3% in the prior year. The increase is a function of multiple program ramps, IT investments, plan team member desktop upgrades, and facility-related renovations. Our normalized tax rate was 24.2% in the third quarter of 2022 versus 19.6% in the prior year. The increase is primarily related to the change in tax regulation related to PESA, a special economic zone within the Philippines, jurisdictional mix of income, and reduction in select international tax benefits. In September, the Board declared the next semiannual dividend of $0.52 per share, which was paid on October 26, 2022, to shareholders of record as of October 11, 2022. This dividend represented a 10.6% increase over October 2021 dividend and a 4% increase over the April 2022 dividend. We remain committed to our capital distributions to shareholders through a semi-annual dividend. Turning to our outlook, our full-year guidance remains unchanged from last year's quarter's update and continues to reflect the uncertainties surrounding the global economy. I'm going to make a few additional comments. We exited the third quarter with a 2022 revenue backlog of $2.4 billion, or 99% of the midpoint of our guidance. Our current pipeline is $2 billion, an increase of 12% over the prior year. We continued optimizing our cost structure this quarter and have implemented cost containment initiatives so we can quickly adjust to the ever-changing macro environment. Our ongoing cost containment initiatives include but are not limited to optimizing our supply chain through vendor consolidation, reducing discretionary spend, rationalizing of our non-core real estate, streamlining our GNA and overhead functions while maintaining growth-related investments made earlier in the year. Please reference our commentary in the business outlook section to our third quarter 2022 earnings press release to obtain our expectations for fourth quarter and full year 2022 performance that consolidated in segment level. In addition, the full year 2022 guidance midpoint and metrics comments that were provided during the second quarter earnings call are still applicable. In closing, we remain committed to maximizing shareholder value through continuous technology innovation, operational excellence, and long-term profitable growth. We value your interest in T-TECH and look forward to sharing our full year 2023 outlook when we announce our fourth quarter 2022 earnings results.
spk12: I will now turn the call back over to Ken. Thanks, Dustin. Before we close, I'd like to recognize and thank Regina Paolillo, who is retiring from the company after 11 years of dedicated service in various executive roles. During her tenure at T-TECH, she was a champion for our people, an advisor to our clients, a valued resource to our shareholders, and a trusted partner to me. Regina's tireless efforts have helped us build our global CX platform and position us for the next phase of growth. As we celebrate our 40th anniversary, I want to thank our incredibly talented global team of 62,000 CX ambassadors who deliver results for our clients and their customers every day. Working together, I'm confident that we're well positioned to drive profitable growth, build differentiation, and create lasting value for our clients and our shareholders for the many years to come. With the holiday season approaching, on behalf of all of us at T-TECH, best wishes for much health and happiness. We continue to be grateful for your support and look forward to sharing more exciting progress with you in the new year. I'll now turn the call over to Paul.
spk11: Thanks, Ken. As we open the call, we ask that you limit your questions to one at a time. Operator, you may open the line.
spk00: Thank you so much, Paul. We will now begin the question and answer session. If you would like to ask a question, you may press star and then number one. Please unmute your phone and record your name and company. Clearly, when prompted, your name is required to introduce your question. To withdraw your request, you may press star and then number two. One moment, please, for the first question. At this time, we have the first question coming from the line of Mike Lattermore of Northline Capital Market. Your line is now open. You may raise your question.
spk03: All right, thanks. Yeah, good morning. Congrats on a Good solid results here. Just touching on the bookings growth, I mean, that was up 17% despite the macro environment. I guess I would have thought that maybe you'd see a little bit of a slowing of bookings growth, but maybe can you talk a little bit about that, what's driving that, and how sustainable is that kind of bookings growth in this environment?
spk12: Good morning. Look, I would love to tell you with a level of incredible accuracy as to what's going to take place in the future, but I think it's a bit unrealistic just based on the marketplace that we're seeing across the globe as far as the global economy. What I would say to you is the following. We see continued strength in our healthcare vertical, continued strength in our automotive vertical, continued strength in our public sector and federal vertical. And we have been very intentional, and we've been telling the street this for quite some time, that we have deliberately diversified our business so that we can get through any form of a recession and take advantage of verticals that we feel are not as cyclical as other verticals. And so I think that that's helping. I think it's paying off. But that said... I think that as Dustin said in his comments and I said in my comments, we are seeing some other verticals like in the tech space that are not as strong. And so we are really amping up our focus in these areas where we have a very strong reputation and therefore we feel good about the bookings that we closed in third quarter. And right now the trends for fourth quarter are are looking very similar. So that said, it's very difficult at this time for me to see around the corner of what it's going to look like in 2023. But hopefully that gives you some clarity. I don't know, Shelly, if you want to add anything to that.
spk07: Well, I might just sort of reiterate. I think the mix of bookings was diverse in Q3, and that's what we see in our pipeline. We have a number of clients in the BSSI sector that are new to outsourcing. So looking at taking advantage of a mix actually of our onshore and nearshore and offshore locations. So we're pleased with that. And as Ken said, we just, you know, we've had a big focus this quarter and going into next quarter, being there for our embedded base, but also a big focus on new logos.
spk03: Great, thanks. And then just, you know, great to hear the Cisco practice is growing. Can you talk a little bit about, you know, What's the change there and what are the main factors behind that?
spk12: I believe that what's taking place is the following. Cisco made a decision about two and a half years ago that they were going to move from a premise-based product offering to a cloud-based product offering. One could argue that maybe they put the announcement out a bit premature and that chilled the practice across the globe, not only for us, but for everybody. That said, the web-based product that they announced about two and a half years ago, which was immature at the time, now has real maturity and has a substantial client base and has proven that it can scale and proven that it has the feature sets And so what we're seeing now is that there is a significant embedded Cisco base that's on what we would call the premise-based solution that is now feeling comfortable to begin their migration. And so we're very pleased with that. We think that that creates a lot of future opportunity and are hopeful that this trend is going to continue As I said in my script, it's not a matter of if CEOs and CIOs are going to move to the cloud. It's just simply a matter of when. And so consequently, we're benefiting off of that migration that's now taking place. It definitely took longer than we would have hoped. That's maybe the bad news, but the good news is that we're seeing very good activity and very strong pipeline and Cisco has been a great partner.
spk06: And just one point of clarification to follow into there is that the comment we're referencing, Mike, around the growth is around the professional services part of the business. As you can imagine, right, so we're, to Ken's point, we're doing a lot of implementation work on their new platform, but it's going to take time for the recurring portion of the managed services to kind of catch up behind that, which we'd expect to kind of give you an update on in 2023. But again, a very positive sign because it's a leading indicator of where the practice is headed.
spk03: Sure, makes sense. All right, thanks very much. Thank you.
spk00: We now have the next question from the line of George Sutton of Craig Helden. Your line is now open. You may raise your question.
spk02: Thank you. Ken, last quarter you went through some examples of customers who had pulled back in initial concerns and then came back with increased demand, understanding that the fascinating part of this is you can cut costs in the short term, but it will impact your customer happiness. Where do you think we are in that continuum as you look coming out of Q3? Are we early in the phase of people starting to make those cutbacks, or are we closer to that point where they realize they need to keep these investments in place?
spk12: Good morning, George. What I would say to you is the following. We're seeing as recently as the last 48 hours some clients that – you know, are increasing their requirements with us, which is a good thing, and asking us to add more because of their conservativeness. That said, and although I'm very positive about the business and our future and the team, et cetera, I think it's safe to say that every CEO has his hand or her hand on the trigger. And what I mean by that is that I think that they are watching with a very keen eye as to not only their business, but the trends with consumers, inflation, supply chain, et cetera. And so consequently, we have, Shelley has been working incredibly hard along with her teammates on allowing us to become dramatically more agile than we already were so that we can work closely with our clients and demonstrate to them that we have the ability to not only expand quickly but also to be able to control the cost. So that's my way of saying to you that I think that the fog is not totally cleared from our clients or the marketplace due to the fact that, you know, every week there's some new headlines. whether it's the midterms and what took place there to the CPI number that just came out 20 minutes ago or whatever, et cetera. And I think clients are more agile than ever, and I think they're kind of navigating this almost on a week-by-week basis. I think that as we go into the new year, once we're there, I do think that clients will settle down. And I think that they'll give us a much clearer picture and a much clearer forecast than they have over the last quarter, so to speak. So I know I'm not answering your question with the level of precision that I would typically like to answer, but I think that you would agree that, you know, there's just a lot of uncertainty out there in the global economy right now. I keep asking our sales leaders whether or not... I'm just curious.
spk02: Would it be possible to have Dustin clarify? Because I think this is important. You mentioned a bunch of verticals that are strong and very few verticals, really just hypergrowth, that are weak. Is there a way to size those up? Because I think that's, in part, a little bit of the answer to the question.
spk06: In terms of size them up relative to the impact or size them up in terms of the size of the verticals?
spk02: Well, if I add up healthcare, government, auto, financial services, travel versus hyper-growth tech, they're much bigger, I would think.
spk06: No, so there's a couple things right in there. He's calling out those two, but if you go back to our prior quarter, we talked about CME, right, so telco, as well as the impacts in hyper-growth. Hyper-growth by itself cuts across all those vertical industries, to give you an idea, and the size of that is roughly about $400 million in size, right, that we were expecting to grow today. You know, roughly 20% for the full year. This quarter, as an example, it's still growing, but it's growing only in the 4% range. So hypergrowth is the piece that cuts across the entire business, George, which makes it a little bit harder to sort through that. But then if you look at telco as well as the other areas, I think we're still seeing some weakness. Yeah. All right.
spk02: Thanks, guys.
spk13: Was that helpful? Yeah, absolutely.
spk00: We now have the next question coming from the line of Maggie Nolan of William Blair. The line is now open. You may raise your question.
spk14: Good morning. This is Jesse on for Maggie. Congrats on the quarter and congrats to everyone on the new roles. I had one last question on verticals and then a follow-up question. So you guys were clear about what you're seeing in terms of resiliency versus weakness, but Can you talk more about the behaviors you're seeing in these different verticals? Are you seeing cancellations? Are you seeing preference for smaller contracts? What are some of the behaviors you're seeing?
spk12: You know, I'll start and let Shelley add to it. What I would say is, no, we are not seeing cancellations. And what I would say is, as it relates to acquiring net new business, It's a mixed bag. In some cases, people are changing providers and they want to move very quickly for whatever particular reason, so that's a good thing for us. In other cases, they're working on long-term transformation plans and they're taking more time to commit to a final contract for the large deal. I would not say that it's evident, and maybe, Dustin, you have an opinion on this, that the deal sizes are getting smaller. It's actually a very good question because there were times in our past history where we did see that where clients were kind of being more incremental and et cetera. We're not seeing that right now. I would say that they're stepping in with both feet, but I don't know, Shelly,
spk07: I would just say I think it kind of goes back to what Ken said earlier. Everybody's got their finger on the trigger wanting to be agile. So there's a lot of situations where actually we've had our customers come to us and ask us if we can do things very quickly. And I think that actually plays to our strengths in terms of being able to staff up different types of work quickly. We'll remain agile and ready to respond to their needs. I think there are, as I said earlier, we have several clients who had not considered using outsource services before that we're really excited to bring on board into our client base, so I think that's exciting. And we have some others that are just having to scale different parts of their business, and so we're right there with them.
spk12: I mean, I think the one thing that we have suggested in the past that we're in a fingers crossed type mode is are more, we believe that there, well, we know that there's over 300 billion being spent just on the engaged side of the business with internal captives. We believe that a good recession causes those captives to, shall we say, wake up and smell the coffee and realize that, there is a benefit to them actually starting to partner and moving that business to a partner. And so I think that that in itself could be a net very significant positive for us. Shelly mentioned one in her script of a company that has never outsourced before that's in the Fortune 200, and now they've chosen to start that journey with us exclusively today. et cetera. So my point being that we believe that that in itself could be how you turn lemons into lemonade in a recession by getting these captives to, shall we say, pair off more of their internal operations. So thus far, I don't think that we're seeing any of those types of trends. Now, what we are seeing with certain clients, obviously, that are really being affected by Their demand is their volumes are lower, and that's why we're doing everything we can to try to continue to keep adding more and more clients to make up for any reduced volumes that we're seeing. I hope that's helpful. Got it.
spk14: Yeah, that's good context. I appreciate the thorough response. We had one follow-up on the offshore business. So you guys called out strong performance in Columbia. Are you noticing increased inbound for offshore? Just looking through the filing, it looked like offshore revenue actually declined year over year and maybe workstations as well. Can you talk about what's going on there and your expectations ahead?
spk07: Here's what I would say. First of all, Columbia we called out just simply because that's one of our newest locations. We continue to scale our business in other offshore and nearshore locations like Philippines, Mexico, India, and the like. I think we actually have a number of our bookings this quarter to help our clients diversify their geographic footprint. Some clients that we're serving onshore today that we're going to actually add offshore operations It's not instead of onshore. It's actually in addition to onshore. So I think we're going to continue to add more locations. As I said, we're going to expand some more in Latin America, and we have some other plans that we'll keep you posted here over the coming quarters.
spk06: Yeah, and this is a follow-on point to that. We recognize that it's slightly down in the quarter right now as it is. A lot of the bookings that we have over the quarter, the new geographies that we're opening up, there's a longer ramp schedule associated with bringing those geographies to scale. And based on the bookings that we've already booked already up to Q3, relative to the larger bookings that we have ramping in the Philippines, Columbia, and other locations, we fully expect to reverse that trend in a more material way in 2023 and also begin to shift the mix. And just keep in mind our mix is somewhat impacted this year as well due to the acquisition of Faneuil, which was largely domestic-related work.
spk14: Great. Thanks for taking our questions.
spk00: We now have the next question from the line of Cassie Chen of Bank of America. Your line is now open. You may raise your question.
spk08: Hey, guys. Good morning. So I just wanted to try and understand. So you guys outperformed in 3Q, but the midpoint of the 2022 outlook was unchanged. And I'm just talking about revenues here. So that implies some, you know, some incremental weakness in 4Q. Could you just walk us through the puts and takes there that are baked into the guide, any changes in your expectations in, you know, for example, like FX or the hypergrowth clients, the CME specifically that you talked about, or are there some cases that we should be aware of? Thanks.
spk06: Yeah, sure, Cassie. This is Dustin. I'll take this question. So a couple comments I'll make. One is, you know, as we mentioned, the themes that we experienced during Q2 are continuing in Q3. If you go to FX specifically, we talked about a number that was in the $30 to $40 million range. That stepped up into the mid-40s now relative to FX impact on our four-year guide. CME is about at the same level that it was beforehand, and I would say hypergrowth was a little bit weaker. When you think about weaker than it was than we kind of first anticipated in the prior quarter. When you think about the four-year guide, really what that reflects is more uncertainty than anything else. And when you think about the revenue between Q3 and Q4, there is some volatility relative to volumes in which one quarter could be a little bit higher and the next quarter could be a little bit lower. And that's really just a factor of just, you know, kind of programs and where they're at in their own life cycle. And so at this point in time, due to kind of the uncertainties and those continued trends and themes, despite the fact that we're optimistic about the bookings that we booked, et cetera, we're continuing to kind of maintain our guidance at this point in time.
spk08: Got it. That's helpful. And then just one follow-up on the digital revenues piece. I think you said it was 8% year-over-year growth X the non-core product sales. So can you just help us reconcile that with historically you had said the medium-term target for organic growth for digital was about 15% to 20% or 25%. Is that still the longer-term growth plan here? And just help us reconcile the difference between those figures. Thank you.
spk06: Yeah, absolutely. So right at this point in time, we're, we're continuing to maintain the 15 to 25% for long-term growth. Um, and again, we've called out the challenge that we've had primarily within our Cisco business, um, which is, you know, roughly 30% of our overall business, you know, just collectively. And the pressure that business is putting in overall P and L relative to growth is tampering that expectations. And so this particular quarter was, we had a very large product sale in the prior year in the third quarter, roughly to the tune of about $20 million. Um, that's impacting the growth in this quarter alone. But longer term, you know, this is why we talk about Cisco in terms of what the progress we're making there. Returning that practice back to growth in that long-term target range is required for us to hit that overall growth rate. And so we're continuing to make progress, and we'll have a better update for you in 2023. And outside of those areas, we called out other areas of strength, you know, which I would say, broadly speaking, when you think about digital as a whole, excluding Cisco, the business is performing well.
spk08: Got it. And those headwinds, for digital are probably going to persist into next quarter and, you know, beginning of next year, would you say?
spk06: Yes. Yes. So, you know, if you go back to the comment around, you know, look, they're very positive and obviously very excited about the fact that we've returned our systems implementation business, professional services business back to growth in the third quarter. And that's really a leading indicator, you know, for the ramps that we're doing. But if you think about it, that business as well as our Genesis practice are two largest areas where we have recurring revenue. It takes a while once you start ramping these programs up and transition people into these new cloud products. It takes a while for us to get to a place where the managed services and that revenue stream catches up, which we anticipate sometime in the back half of 2023.
spk08: Got it. That's helpful. Thank you.
spk06: You're very welcome.
spk00: We now have the next question coming from the line of Brian Bergen of Common. Your line is now open. You may raise your question.
spk13: Hi, thanks. This is Zach Aisman on for Brian. On client performance, understand there's an FX effect, but the top two through five cohort appears to have notably decelerated in the quarter. Can you talk about the underlying dynamics at play here and what to expect going forward?
spk06: So I'll take that question. So across the board, I would say, you know, look, one of the things we talked about earlier is around diversification in the business. You know, there may be some moderation in some of our top customers relative to growth, but we've called out to some degree in general that's reflected in our overall performance in the third quarter. I don't think there's any notable difference outside of the top one being a customer, financial services customer that we've talked about in the past, you know, relative to, you know, there being large COVID-related volumes in that customer, and those volumes continue to come down, right? You know, even this quarter particularly, we had an impact associated with COVID where You know, we're still, there's a decline of about 25 million year over year between Q3 of 21 and Q3 of 22. And so that's one of the dynamics, one of the top customers there. There's some moderation of volumes across the board. They're primarily in verticals that we talked about where we're seeing some weakness. But again, with that said, we have over 765 clients today, a very diverse customer base, and felt very positive about that, you know, kind of going into the backdrop that we're heading into.
spk13: Got it. And on T-TECH Digital, it's the second change of senior leadership in the past year or so. How might that strategy evolve and what needs to be done for stronger growth execution here?
spk12: Yeah, I'm not sure I know what you mean when you say second change. It's actually not a second change. As you know, T-TECH Digital has done a myriad of acquisitions and everything that's taken place was all planned, etc., down to and including us recruiting a top-caliber CEO that can grow the business to well in excess of a billion dollars. So what I would just simply say to you is that we couldn't be more excited with Dave joining. This is a gentleman that has incredible experience in managing these types of businesses, etc., and I have all the faith in the world that with his market-facing experience and his reputation of growing businesses double-digit, that he will do an excellent job in growing the business and taking it to new heights. So we feel, frankly, really good about the business and are going to continue to keep our focus on trying to double the business in the shortest period possible possible while also maximizing the profitability of the business. And we think all the trends in the marketplace of what's taking place with the cloud and people now understanding that customer experience is an imperative and that most companies don't have the modern technology that's required to address the needs of their customers. And therefore, we think that this business has a very long tail with a very bright future.
spk06: And the only comment to come back to that on, again, referencing a prior question, is that, again, the primary, you know, practice area that's kind of dampening growth right now is that Cisco practice, right? So that's obviously still top of mind. And, again, we're already demonstrating strength there. And then the other point that I'll call that Shelly made earlier is around this comment we made around our analytics practice. Like there's a lot of bright spots in our overall digital business, and that's another area. And what's important about that comment is that that practice, we've obviously had for quite some time, And we're really seeing this acceleration now as a result of these acquisitions and integration that we're doing there. And so there's a number of areas that we're seeing now that can become accelerants for growth going into 2023. And obviously, you know, Dave's coming on board to help, you know, kind of ignite that further. Thank you. You're very welcome.
spk00: We now have the next question coming from the line of Joseph of Canaccord. Your line is now open. You may raise your question.
spk09: Hey everyone, good morning. Nice performance here in the quarter and my congrats to everyone in their new capacities and congrats to Regina for a great run and well-deserved retirement. My question is, maybe it's just for Ken. Ken, I know you're not the low-cost provider. I know you provide a higher value service broadly and you don't really compete on price. How is that value proposition perhaps getting tweaked in the current environment, if it is, or how clients are perceiving that in the marketplace and how competitors may be trying to exploit the weakness in demand relative to some of their pricing? Thanks a lot.
spk12: Good morning. Well, first of all, as I said before, we're not seeing any client cancellations, so that itself should tell you that we're not experiencing any issues because of how we price our business. What I would just tell you is that we're very economically focused with our clients, and what we demonstrate to our clients day in and day out is the total cost to serve and the total value delivered. And so what I would just tell you is that clients are becoming increasingly far more sophisticated than they were even a couple of years ago, where a few years ago they might have focused on what was the lowest cost per hour, what was the lowest cost per minute. And what we've now shown them is that you can't measure that way. What you have to measure is off of the outcomes. And so we are providing our clients with a myriad of analytics that consistently demonstrate that we are the lowest overall cost to serve. And it's why our embedded base continues to keep growing. So, you know, a good example would be, you know, back in the day when we were talking to the street about how we were very aggressively increasing our frontline workers' wages, we were the first in the industry to really achieve very significant frontline wage increases and to be able to pass that through. What we demonstrated to our clients is that by doing so, we can hire a higher quality employee that has far better retention, that gets to proficiency at a much faster rate, that has higher quality and that ultimately creates what we call best in class first contact resolution. And so, at the end of the day, the provider that is underpaying the associate or not hiring the better quality employee, Everything from their talk times are longer to things like their first contact resolution is nowhere near as good. And ultimately, on the engaged side, as an example, it's the first contact resolution that ultimately drives the lower overall cost to serve. So, although in some cases, you know, you could say that we're, you know, that we're premium priced, at the end of the day, our clients are very sophisticated. and they are consistently looking at how we're performing against anyone else that they might be currently using, as well as constantly comparing us to their internal captives. And I'm happy to say that in the majority of cases, because they provide us with the data, we're outperforming their internal captives, let alone our other peers that are providing similar services. So I hope that answers your question. But it also goes without saying that this is why Shelley and her team are very rapidly also expanding all of the various different offshore opportunities, because our goal is to continue to add significantly more business, but in many other countries. and to be able to help our clients with that as well. And that's why Columbia has taken off and has done so well and why you will see multiple announcements in the very near future of other countries that are opening and going live in the very near future.
spk09: Great. That's good color. Thanks a lot, Ken. Much appreciated.
spk12: Thank you.
spk00: We now have the next question coming from the line of James Fawcett of Morgan Stanley. Your line is now open. You may raise your question.
spk10: Thank you very much. I wanted to ask, you know, Shelly mentioned that there is a portion of your customer base that, because of regulatory or other reasons, needs to keep things onshore. So just wondering what portion of your revenue does that represent now? And I guess really operationally, as those customers potentially face their own constraints, et cetera. How do they tend to manage the constraints that they have? You know, a lot of times we see people move offshore, et cetera, to try to reduce costs, but obviously that wouldn't be possible for them. So just trying to get a little bit of color on that part of your customer base.
spk07: Yeah, well, it's the... The regulated industries include some of the work that we do in the DSSI vertical, in the healthcare vertical, and then obviously in the public sector vertical as well, where we have our concentration of onshore resources. Like you said, James, it's not a matter of if they want to move the work offshore, they can't. It's licensed work. It tends to be more complex work. How are we managing that with them? I think we've become their go-to partner, partly because of the training programs that we've put in place and what we've been able to demonstrate in terms of being able to handle that complex work. In particular, in many of these cases, there's a lot of seasonal ramps that we have to work with the client on, and we're able to be very agile from that perspective. I think that will continue to be a strong part of our future, and we actually continue Part of our bookings this quarter in the $200 million included additional work there.
spk06: James, just to follow up on some of the number side of it, this is Dustin speaking. On BFSI, roughly 40% of the work is licensed. On healthcare, roughly 24% of the work is licensed. Those are required from a perspective on required to be onshore.
spk10: Got it. Got it. Appreciate that. In the moved offshore, a lot of times we see the result can be lower revenue or revenue per head at least, but better margins. So how should we be thinking about that impact on P&L and going forward and then how that impacts the way you're evaluating investment? Thanks.
spk06: Absolutely. So a couple things I would say. One is, again, we don't focus on transitioning work from onshore to offshore. We focus on expanding with our clients, growing our overall share of wallet, and doing that through offshore. And so far, that's the motion that we've been in, James. We haven't seen it to where we're taking programs dollar for dollar and transitioning them somewhere else, which is obviously at a much lower rate, a higher margin. And by doing that, you're kind of taking best of both worlds where you're maintaining the domestic business that we have but expanding. And for some of the reasons we just outlined, right, which is it's to some degree protected or there's a moat around it. And so we're going offshore where we can, and there's very high demand across the board. And a lot of our investment is going to the area. And to give you an idea, there's about a 10-point margin differential at the gross margin level between domestic and offshore work. And if you look at our – obviously the site we opened up in Columbia – And we mentioned three or four now. At this point, we've opened up in the past year, and we're going to continue to do that. And then the payback period in those investments is actually very quick relative to the cost of staying at the site, bringing in site leadership, and then landing a client. And we tend to do it right now today so far largely within our embedded base, right, as an anchor client into those new countries, new geos. And so far, the anchors that we've gone in with have been expansion opportunities, not, you know, what I would say transition or a mix shift. Does that help?
spk10: That does help. Thank you so much.
spk06: You're very welcome.
spk00: We now have the next question coming from . The line is now open. You may raise your question.
spk04: Yes, Ken. Curious what your offshore portion of the delivery mix is today in order of magnitude, if you don't have the exact number, and sort of if you have a target.
spk12: It's roughly around 30%, and our target is to get it to 50% in the relatively near future. We're definitely seeing that with our focus in this area that we are having success, especially as we start adding more languages, especially in the Asian area. So that's where we currently are. I mean, one of the issues is that our domestic business just keeps growing. And so that, you know, amplifies, you know, the offshore percentage. So on one hand, it's a good problem to have. On the other hand, our desire is to get that to 50%. And I would tell you that I think our sales organization is doing a great job and having a lot of success. And I think that you'll start to see that percentage from 30% move up in the quarters to come.
spk04: Thank you. And one question tied to the macro on the potential positive side, are you seeing acquisition valuations become more attractive and are you seeing wage inflation move more in your direction?
spk12: I would say that it's first of all, we definitely think that acquisition valuations will come down, but I've been to this movie multiple times. This is my fifth recession and it's like real estate. And that is that it takes the seller a while to realize that the peak of the market is not the price that they're going to get. I would estimate that we're not going to see the potential of, of, of, Valuation reductions until the earliest the end of first quarter and best case and more likely than the middle of the middle of the year and so, you know that That will clearly play into it. The other thing is is that the finance markets are locked up right now that's going to be very interesting because the private equity players are really don't have access to leverage at this point in time on deals. That will obviously clear out eventually and change in the near future, but that will also have an impact on driving valuations down. You had another question?
spk04: Yeah, wage inflation trend.
spk12: Wage inflation. I would say that I think it's too early to call. Do I think that as more and more companies announce their reductions in force, that that in itself is going to impact wages? There's no question about it. And do we expect to see more of them? Yes. We actually, you know, the ones most recently in the news, we've been anticipating. And so I guess my point in saying that is that I think that we will see less demand for higher wages probably even sooner than we'll see valuations of sellers coming down. My best guess is that we will see some real benefits, so to speak, to the global economy and the climate right after the first of the year. And that's, I, we have lots of reasons for feeling that way. But I would say that I think that that's when it's going to start to set in. I think it's when the interest rate impacts are going to have an effect on companies adding more to their workforce, et cetera, and that will obviously provide some benefits to us in the future. I think the one, though, big unknown that every CEO is trying to figure out is We've all seen steep wage increases on the front lines. It's hard to imagine that the base pays that we've moved to are now going to roll back. I think it's simply going to be easier to hire people, easier to keep them longer because they're going to have less other opportunities to move somewhere else for a bit more money, et cetera. So hopefully that's helpful.
spk04: Yes, thank you.
spk00: Our last question coming from the line of Anya Soderstrom of Sedoti. Your line is now open. You may raise your question.
spk01: Hi, thank you for taking my question. I just had a follow-up. You mentioned earlier that some of your customers changed providers. Can you talk about who those are and how did you win them over?
spk07: Well, I think, you know, won't share specific client names, but... Or competitor names. Yeah, or competitor names. I would just... Let me give you a little bit of color. Some of those examples that I mentioned were in the BFSI vertical, and also in travel and hospitality. I think that definitely was a bright spot for us here in Q3, and continued momentum going into Q4, where that's an area where we're taking share based on, not based on being the lowest price, but based on being the highest value, based on our performance. And obviously, as Ken said, our clients are quite sophisticated, so we certainly have a cost-effective solution, but we are very focused on the overall value we're providing for our clients. So it tends to be about performance, and it tends to be about our ability to work with our clients in terms of being able to ramp people quickly, and as I said earlier, in the licensed arena, certainly around our ability to handle that complex work.
spk12: I think on the digital side, though, I can add some color, and on the future calls, Dave will be able to also address this. Where we are consistently seeing, whether you want to call it defections from other competitors, et cetera, You have multiple GSIs that provide capabilities across a myriad of platforms, so to speak. None of them are as focused on CX as we are. None of them. And so consequently, we, on a fairly consistent basis, are winning significant deals where we're taking over where there's been embedded GSIs for years, not months, years, multiple years, and where they are pulling the plug on them and saying, for this CX project, we need you to take it over, we need you to fix it, to transform it, et cetera. And by the way, it's not that we're targeting these GSIs, it's just simply that the clients are not getting the speed and the capability in the CX area from these other GSIs. And so consequently, we become the beneficiary. The last point that I would make on that topic is that because we are so well positioned with the large hyperscalers, when they run into a problem where they initially gave the business to a large GSI, a global systems integrator, and the client is demonstrating that they're unhappy, they're actually coming to us and saying, we need you to step in and take this over because it's impacting our reputation as far as how this implementation was going. And so that we've been doing for years, and we continue to see those opportunities.
spk01: Thank you.
spk12: Thank you.
spk00: Thank you for your questions. That is all the time we have today. I will now turn the call back to Paul Miller.
spk05: Yeah, thank you, everybody. If you're a participation and interest in T-TECH operator, you may close the call. Thank you.
spk00: This concludes T-TECH's third quarter 2022 earnings conference call. You may now disconnect at this time.
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