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spk01: Welcome to T-TECH's fourth quarter in full year 2022 earnings conference call. I would like to remind all parties that you will be in the 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.
spk10: Good morning, and thank you for joining us today. T-TECH is hosting this call to discuss its fourth quarter and full year 2022 financial results for the period ended December 31, 2022. Participating on today's call are Ken Tuchman, Chairman and Chief Executive Officer of T-TECH, Shelley Swanback, Chief Executive Officer of T-TECH Engage and President of T-TECH, and Dustin Simak, Chief Financial Officer 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 2022 Annual Report on Form 10-K, which we anticipate will be filed at market close today. 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 or actual result to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our 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.
spk05: Thank you, Paul. Good morning, everyone, and thank you for joining us today. We ended 2022 with solid execution and financial results, despite the increased uncertainty surrounding the global macroeconomic environment. Our performance reflects our broad and diverse base of global clients, our expertise across strategic verticals, and our full range of digital CX technology, AI, and service capabilities. For the full year of 2022, bookings were $762 million. Revenue increased 9.4% to $2.44 billion on a constant currency basis. Adjusted EBITDA was $326.6 million, or 13.4% of revenue. In addition, last year, we enhanced our public sector vertical with a meaningful acquisition. We publicly launched our strategic partnership with Google. We deepened our partnership with each of our core strategic CX technology partners, including the largest hyperscalers. We strengthened our first mover advantage in AI with strategic investments and new offerings and several new client wins. We expanded our client base by winning 93 new logos. And we grew our delivery footprint with three new offshore geographies. we were recognized as a CX leader by all four major analyst firms. In addition, we were named by Forbes as one of America's best large employers for the third consecutive year. And lastly, we marked our 40th anniversary as a pioneer, a global leader, and an innovator in customer experience. I'm pleased with our accomplishments in 2022. Despite the fact that our financial performance was tempered by the increased macroeconomic headwinds, that emerged in the second half of last year. As we look ahead, some clients in select verticals continue to have reduced visibility into their short to midterm outlook. And therefore, at this point in time, we believe it's prudent to approach 2023 guidance conservatively. Having said that, I could not be more excited about our strengthened global leadership team and our differentiated platform. I'm confident in our ability to deliver significantly higher revenue growth and margins as we exit this current macroeconomic environment. And now, let's move to our views on the market. In any economy, an exceptional customer experience sets the most admired brands apart. Happy customers are loyal. They spend more money and become active promoters of their favorite brands. In an uncertain economy, Keeping these loyal customers is paramount. Yet, at the same time, businesses are challenged to do more with less. Our outcomes-based solutions are more critical than ever in this environment. Over the past decade, we've set up our company to capitalize on three game-changing megatrends. From legacy giants to digitally native startups, these trends will be altering the face of every industry across the globe. We've been preparing for this inflection point and we're well positioned to capitalize on the opportunity ahead of us. So let me begin. Trend number one, the CX move to the cloud is no longer an option. It's an imperative. Currently only about 20% of large enterprises have completed their CX migration to the cloud. As the largest pure play CX technology and services player in the world, we're helping these companies use the modern capabilities enabled by the cloud to create customer experiences across every touch point that are personalized, effortless, and differentiated. Our T-TECH digital business has implemented some of the most complex enterprise CX cloud migrations at scale across every major platform. We're well positioned to capitalize on the remaining 80% of large businesses and governments still operating on outdated on-premise legacy platforms. These digital transformation initiatives are complicated and will provide us with technology and managed service opportunities for many years to come. Trend number two, the world's leading brands are moving from reactive customer support to proactive customer experiences. Smart brands no longer are waiting for their customers to reach out when something goes wrong. They're using advanced analytics to anticipate the future needs of their customers. with proactive outreach and next best actions. With our investments in predictive digital capabilities that enable customer acquisition, growth and retention, we're delivering strong results for our clients in multiple industries, including healthcare, financial services and automotive. Trend number three, AI is redefining the role of the frontline associates, creating a new class of knowledge workers. Whether a customer is reaching out about a complex issue or a highly charged emotional moment of truth, they expect a skilled, compassionate human to be on the other side. AI has the potential to turn these frontline knowledge workers into super agents by augmenting their skills with real-time insights and next best actions. These capabilities accelerate speed to proficiency, create new career pathways, deliver the best possible business outcomes, and will create higher margin opportunities for T-tech. These three trends are putting pressure on companies across the globe to find a partner so that they can move quickly and with confidence. For the past 40 years, we've led the market by helping our clients understand how new digital technologies fit into their CX ecosystem. While technology has always been fundamental to our solutions for clients, we've provided a steady hand to separate the helpful from the hype. From the earliest IVRs to today's latest developments with AI, our focus has always been delighting customers and helping our clients grow. Our two distinct but connected business segments enable us to deliver differentiated results in this new phase of AI-driven CX innovation. Today, T-TECH Digital is the largest pure play CX technology and services player in the world. We have the data scientists, the CX consultants, the CX technology expertise across all leading platforms. Our clients look to us given our deep experience with complex implementations and our strategic partnerships with the hyperscalers and the premier CCaaS players. Complementing T-TECH Digital is our T-TECH Engage business, which handles millions of last mile customer interactions on behalf of the world's leading brands. Our teams of knowledge workers, conversational designers, data curators, and analytic experts deliver experiences that consistently delight our clients and wow their customers. And when we combine the capabilities of these two business segments, we're uniquely positioned to build and deliver proprietary CX solutions on top of Microsoft and OpenAI's ChatGPT, Google CCAI, and Amazon's Lambda. We believe... This not only helps us support the world's leading brands more effectively with AI machine learning, but it also serves as a moat relative to the rest of our competitors. As Google, Genesis, Microsoft, Cisco, and AWS develop market applications for new technologies like generative AI, they are collaborating with us for our frontline knowledge and our CX technology domain expertise. Together, we're investing in solution development, go-to-market strategies, and delivery models for this new generation of customer experience. Human discernment and compassion will play a key role in building trust as these new AI functions are integrated into CX solutions. Like many digital innovations before, these new capabilities will augment our frontline knowledge workers. Now I'd like to share our thoughts on 2023. With a strong foundation and an agile mindset, we have the resilient and have persevered through the economic cycles, global pandemics, and natural disasters. We know that these events are cyclical and working as a team. We have demonstrated time and again that we have the determination, tenacity, and long-term track record and vision to come out stronger on the other side. I'm more confident than ever about our path forward with Shelly Swarmback and Dave Siebold by my side. Together, we're actively navigating the current environment and doubling down on our priorities that will build momentum as we progress through the year. From the very beginning, we've aspired to build something truly unique in the industry, a single end-to-end resource for premium CX technology, AI, and service to power the most customer-centric brands on the planet. And today we are as excited as ever. And with that, I'll hand the call over to Shelly.
spk08: Thank you, Ken, and good morning, everyone. As Ken mentioned in his opening statement, we delivered a strong fourth quarter. Our solid performance was possible due to our trusted and longstanding partnerships with our clients and the passion, hard work, and contributions of our amazing 69,000 teammates across the globe. Like Ken, I'm very enthusiastic about the relevance of our CX solutions and the market demand for the outcomes we deliver. Clients across industries continue to be focused on the importance of a great customer experience. We're well positioned to help them apply the most relevant talent, technology, and AI solutions for their business. Shifting now to our engaged business, the weakening macroeconomic environment is creating a few specific short-term challenges. The uncertainty in this economic environment is affecting the short and midterm outlooks for some of our clients, subsequently impacting our visibility. We're responding to their needs by remaining agile. While we have continued strength and resilient verticals like public sector, financial services, and healthcare, we are experiencing weakness in our hypergrowth sector. Unfortunately, several of our hypergrowth clients have been impacted by the post-pandemic renormalization. In the short term, the decline in the sector is putting pressure on our margins. We're confident that we'll successfully navigate these pressures while we continue to make investments in technology, infrastructure, our global footprint, and M&A integration. This will give us momentum as we exit 2023 and head into 2024. Now, let me share our Engage initiatives that will add velocity to our growth engine, improve our margin profile, and set the company up for long-term success. We're accelerating our efforts to expand our delivery and language footprint. In 2022, we added three new geographies to our operational footprint that now spans more than 20 countries. In 2023, we plan to add new language capabilities and thousands of new associates in Latin America, EMEA, Asia, and Africa, where we're seeing increasing demand from both current clients and prospects. Additionally, we're moving quickly and have a qualified pipeline for offshore delivery that has increased over the same time last year. We expect this momentum to continue to build. We are building our talent base with highly skilled knowledge workers to support more complex interactions, a place where we are uniquely qualified. As we help our clients migrate simple interactions to non-voice channels, the demand for more highly trained and experienced knowledge workers is growing. AI-based tools are enabling us to find, train, and onboard these knowledge workers with speed. Initiatives like our FlexEX platform are offering knowledge workers more flexibility with their schedule while allowing us to better match supply with the ebbs and flows of demand. We're leaning into resilient verticals where we offer differentiated solutions. The specialized nature of the work and licensing requirements in healthcare, financial services, and public sector provide us with a competitive advantage. Our domain expertise and proven best practices in these verticals are enabling us to attract new companies as well as expand our embedded base. In healthcare in 2022, we implemented 14 open enrollment programs for 10 clients, and we were consistently the top performer. As we build on the trust earned from these successful client programs, we will sell new asynchronous offshore services delivered at a higher margin. In financial services, we continue to expand our business with new logos and grow our embedded base with additional claims, collections, fraud, and back office services. We're also growing in property and casualty and now support three out of five of the industry leaders in this category. In this highly competitive marketplace, we're partnering with insurers to use analytics as a differentiator with just-in-time estimates and hyper-personalized offers. In public sector, we continue to scale as we complete the integration of the public sector assets we acquired last year. For example, our work with New York Metro tolling and transportation authorities is well underway with an anticipated go-live date in 2024. This comprehensive contract includes CX technology, account management, customer support, and back office services. And more broadly, we're focusing our go-to-market on opportunities to help companies reduce costs by taking advantage of our expanding global footprint and scaling our trust and safety and AI operations solutions. I'm particularly excited about helping our clients harness the power of AI with expanded services and data annotation and curation supported by our skilled knowledge workers. Now we'll move on to our key tech digital segment. Given the rapid pace of CS technology innovation, companies are looking for a partner with the breadth and depth to design, build, operate, and also manage their digital transformation. These technology consulting and long-term managed service contracts fall right in our sweet spot. is the only pure CX technology partner that also manages millions of customer interactions every day. We deliver value and customer insight that no one else can. And it's so great to have Dave Siebold on our team. With his deep partner and client relationships and strong track record of growing global businesses at scale, Dave brings extensive cloud and CX expertise to the business at a pivotal time. He's already making an impact with our people, our clients, and our partners. Dave and his team are accelerating progress on our digital priorities. First, capturing the growth opportunity to help clients with their CX cloud migration, AI, and large digital transformation initiatives enabled by our strategic partnerships with Genesis, Microsoft, AWS, Cisco, and Google. We continue to be chosen by these partners for complex and first-of-a-kind CX engagements, including generative AI. Next, Continuing to scale our offshore delivery platform to strengthen our margin profile. Last year, we successfully grew our offshore footprint by 60% and we have plans underway to further scale in 2023. And finally, continuing to build and scale our IP-based software that we directly embed in our solutions and also sell across the hyperscalers marketplaces. I'll wrap up our segment discussion with a few thoughts about the exciting progress being made in AI. Discussion around AI has been happening for some time. What's different now is that practical business benefits are within reach. Having worked with clients to take advantage of previous AI and technology innovation cycles before, it's clear that technology is only one part of the equation in terms of delivering tangible business results. We're uniquely positioned to capture the opportunity because of our combination of deep CX domain expertise, CX technology services at scale, and our experience delivering frontline customer engagement. In conclusion, we're managing for today while we continue to strengthen the foundation for our future. We're viewing 2023 as a year focused on disciplined and agile execution as we continue to drive towards diversification across clients, geographies, languages, and solutions to optimize our revenue mix and further strengthen our margin profile. Our outlook for T-TECH in 2023 is low single-digit growth with tempered margins driven by our engaged segments performance being impacted with the points I mentioned earlier. With our focused strategy, prudent investments, and strengthened leadership team, we expect margins and growth to accelerate in 2024 and beyond. And I look forward to sharing our progress as we continue to deliver best-in-class solutions for our clients, growth opportunities for our employees, and returns for our shareholders. And now I will turn the call over to Dustin.
spk09: Thank you, Shelly, and good morning. We appreciate everyone taking the time to join us today. I'll start with a review of our fourth quarter and full year 2022 results. before providing you context on our 2023 guidance. Turning to our bookings. Despite the dynamic environment, our go-to-market teams delivered a solid year. In the fourth quarter of 2022, bookings were 197 million compared to 206 million in the prior year period, resulting in full-year bookings of 762 million, an increase from 751 million in the prior year. Bookings in our digital segment were particularly strong, increasing 10% in the fourth quarter over the prior year period, and 23% in 2022. The business signings were predominantly driven by demand for our Genesis and Microsoft CX technology solutions, in addition to Amazon Connect and Cisco, many of which are large multi-year CX transformational engagements. While our sales cycles have extended, our enterprise and public sector clients continue to recognize the long-term benefits from modernizing and digitally enhancing their CX ecosystems. In our engaged segment, there was solid demand for our core offerings in the fourth quarter and full year of 2022. Bookings were well diversified across our key industries, with particular strength in financial services, healthcare, automotive, and travel and hospitality, as well as across our expanded geographic footprint, including continued momentum in our EMEA region, which had bookings growth 60% in the fourth quarter and 40% in 2022. We added 22 new client relationships in the fourth quarter and 93 for the full year 2022. This represents an increase of 13% over the prior year full period. Due to recent acquisitions, our digital revenue as a percentage of our overall revenue has increased. Due to the nature of the business, digital bookings reflect a higher mix of non-recurring services relative to Engage. As a result, moving forward, we will begin giving color on each individual segment's performance rather than discussing bookings at the overall T-TECH level. For Engage's performance, we will give color in each vertical, and for Digital's performance, we'll give color by offering. I will share our 2023 backlog details in my closing remarks. In my discussion on the fourth quarter and full year 2022 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. The full reconciliation of our GAAP to non-GAAP results is included in the tables attached to our earnings press release. My references to the term on a like-for-like basis describes our revenue growth, excluding the impact of foreign exchange translation and treating acquisitions as if we've owned them in the prior year period. As mentioned, we are pleased with our fourth quarter financial performance, especially when considering the headwinds that both Ken and Shelley highlighted earlier. On a consolidated basis in the fourth quarter of 2022, revenue was $658.3 million, an increase of 7.5%, On a like-for-like basis, excluding the impact of pandemic-related volumes, revenue grew 4.7%. Organic growth was 2% on a constant currency basis. Adjusted EBITDA was 84.8 million, or 12.9% of revenue, compared to 84.1 million, or 13.7% in the prior year. Operating income was 69.9 million, or 10.6% of revenue, compared to 68.3 million, or 11.2% in the prior year. And lastly, EPS was $0.89 compared to $1.08 in the prior year. The strengthening of the US dollar had a $12.6 million negative impact on revenue in the fourth quarter over the prior year period, while benefiting operating income by a positive $4.5 million, primarily within our engaged segment. Our fourth quarter year-over-year top-line performance primarily reflects the contribution from the April 2022 FANUEL asset acquisition in our engaged segment, as well as increased CX technology services in our digital segment, driven by an increasing adoption of cloud CX technologies. Turning to our operating and EBITDA margins, the year-over-year decrease is primarily a function of integration-related costs associated with the FANUEL asset acquisition, leadership and engineering talent acquisitions, growth-oriented investments, including the strategic build-out in our offshore delivery centers, and the reduction in higher margin pandemic-related volumes compared to the prior year period. Moving forward, we will no longer report the impact from pandemic-related volumes, given its modest remaining impact. However, for consistency, we felt it was important to share through the end of fiscal year 22. On a consolidated basis for the full year 2022, revenue was $2.44 billion, an increase of 7.5% and 8.3% on a like-for-like basis, excluding the impact of pandemic-related volumes. Organic growth was 1.6% on a constant currency basis. Just as EBITDA was 326.6 million, or 13.4% of revenue, compared to 354.4 million, or 15.6% in the prior year. Operating income was 248.5 million, or 10.2% of revenue, compared to $286.2 million, or 12.6% in the prior year. And lastly, EPS was $3.68, compared to $4.62 in the prior year. The strengthening of the U.S. dollar in 2022 had a $42.4 million negative impact on revenue, while positively impacting operating income by $13.9 million, primarily within our engaged segment. Our full year top line growth was primarily driven by the engaged FANU asset acquisition in April of 2022 and digital's aptX acquisition in April of 2021, alongside increased business across our core offerings from new and existing clients. The full year bottom line decline is driven predominantly by the same reasons mentioned for the fourth quarter. Turning now to our fourth quarter and full year 2022 segment results. Digital segment revenue increased 4.2% to $123.4 million in the fourth quarter of 2022 of the prior year period, all organic. Operating income was $16.5 million, or 13.3% of revenue, compared to $20.2 million, or 17.1% of revenue, in the prior year period. Our fourth quarter revenue growth is a function of increased cloud and systems integration services across our Tier 1 CX tech partner platforms slightly offset by lower year-over-year product sales and on-premise managed services as more clients moved to the cloud. Our combined recurring cloud and managed services revenue grew 4.5% in the fourth quarter of 2022 over the prior year period, representing 54% of digital's total revenue. And our reoccurring systems integration revenue grew 18%, representing 27% of total revenue. Decline in operating margins reflect incremental investment in CX leadership and engineering talent sales and marketing, and product and technology developments. On a full year basis, digital's 2022 revenue increased 13.9% to 471.5 million over the prior year period, of which 1.7% was organic on a constant currency basis. Operating income was 63.5 million, or 13.5% of revenue, compared to 59.6 million, or 14.4% in the prior year period. Full-year revenue primarily benefited from AptX acquisition. Operating margins were impacted by the reasons noted in the fourth quarter in addition to acquisition-related integration costs. Our cloud and managed services revenue grew 15% in 2022 over the prior year period, representing 54% of digital's total revenue. And our systems integration revenue grew 20%, representing 27% of total revenue. Moving to Engage. Our engaged segment reported fourth quarter 2022 revenue of $534.9 million, an increase of 8.3 percent over the prior year, 4.6 percent on a like-for-like basis, excluding the impact of pandemic-related volumes. Organic growth was 1.3 percent on a constant currency basis. On a full-year basis, revenue increased 6.1 percent to $1.97 billion, 9.7 percent on a like-for-like basis, excluding the impact of pandemic-related volumes. Organic growth was 1.6% on a constant currency basis. The FANUEL asset acquisition was the primary contributor to growth in the quarter and the full year, alongside increased volumes across our virtual and digital delivery capabilities, contribution from our EMEA region, and select verticals, including healthcare and financial services, excluding the pandemic-related volumes. Our embedded base performance remains strong, as demonstrated by Engage's last 12-month revenue retention rate of 97%, Excluding pandemic-related volumes, Engage's revenue retention rate was 105%. In the fourth quarter, operating income was 53.4 million, or 10% of revenue, compared to 48.1, or 9.7%. On a full-year basis, operating income was 185.1 million, or 9.4% of revenue, compared to 226.6 million, or 12.2%. Our Engage operating margins reflect the impacts highlighted in my earlier comments. I will now share other 2022 measures before moving to our outlook. As of December 31, 2022, cash was $153.4 million with $963.6 million of debt, of which $960 million represented borrowings under our $1.5 billion credit facility. Net debt increased to $171.3 million, to $810.2 million, year-over-year primarily related to acquisition-related investments associated with a FANU asset acquisition and capital distributions, partially offset by cash flow generation. Cash flow from operations was $137 million in 2022 compared to $251.3 million in the prior year. The reduction in cash flow from operations was primarily a function of lower profitability, higher interest payments, and a DSO of 58 days in the fourth quarter compared to 54 days in the prior year period. Capital expenditures were 84 million or 3.4% of revenue for the full year of 2022 compared to 60.4 or 2.7% in the prior year. The increase is driven by investments in IT security and infrastructure and our accelerated geographic expansion efforts. Our full year normalized tax rate was 23% in 2022 versus 21.3% in the prior year. Increase is primarily related to change in tax regulation related to PESA, a special economic zone within the Philippines jurisdictional mix of income, and a reduction in select international tax benefits. In the fourth quarter of 2022, T-TECH paid a $0.52 per share dividend, or $24.6 million. On February 23rd of 2023, the Board declared the next semiannual dividend of $0.52 per share payable on April 20th of 2023 to shareholders of record as of March 31st of 2023. Turning to our 2023 outlook, I'm going to provide some context supporting our guidance. First, our outlook reflects the impacts Shelley discussed earlier, including continued uncertainty due to further weakening macroeconomic environment that we first signaled in the second half of 2022, and we expect to persist in the first half of 2023, affecting select verticals. While we are seeing strength in resilient verticals like financial services, healthcare, and public sector, this is being offset by continued weakness in our hyper growth sector. We expect that growth will ramp in the second half of 2023, driven by recovery in the previously mentioned impacted engaged verticals, and continued go-to-market execution throughout the year. Digital's growth will accelerate in fiscal year 23, driven by increased adoption of CX cloud technologies, muted by a continued turnaround within our Cisco practice, and macro-driven LinkedIn sales cycles. We are continuing to make investments to further globalize our delivery and language footprint, complete the integration of recent acquisitions, strengthen our executive leadership team, and enhance our infrastructure and technology landscape. Continued investments coupled with impacts in our hyper-growth sector is putting pressure on our margins in fiscal year 23. Last, we enter 2023 with total revenue backlog of $2.211 billion, 87% of our full year guidance at the midpoint. Now turning to the midpoint of our 2023 guidance as outlined in greater detail in our fourth quarter and full year 2022 earnings press release. Gap revenue of $2.5 billion, an increase of the prior year of 2.3%. Adjusted EBITDA of $300 million, a decrease of 8.2% over the prior year and 12% of revenue compared to 13.4% in the prior year. Non-GAAP operating income of $231 million, a decrease of 6.9% over the prior year, and 9.3% of revenue compared to 10.2% in the prior year. Non-GAAP earnings per share of $2.54, a decrease of 31% over the prior year. The EPS decline is driven predominantly by the interest rate hikes across 2022 and anticipated interest rate hikes in 2023 that will impact our variable interest rate. Other relevant guidance metrics include capital expenditures between 3.4 and 3.6 percent of revenue, of which 65 percent is growth-oriented, a full-year effective tax rate between 22 and 24 percent, and a diluted share count between 47.3 and 47.5 million. Please reference our commentary in the business outlook section to our fourth quarter and full-year 2022 earnings press release to obtain our expectations for first quarter and full-year 2023 performance at the consolidated and segment level. In closing, we are confident we will successfully navigate the dynamic environment ahead of us, position the company for accelerated growth as we exit the year. We are excited about our future, supported by our 40-year track record of delivering innovation and value-driven CX outcomes for our clients, strong executive leadership team, and an unmatched CX technology and services platform. I will now turn the call back to Paul.
spk10: Thanks, Dustin. As we open up the call, we ask that you limit your questions to one at a time. Operator, you may open the line.
spk01: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star and then one. Please unmute your phone and record your name and company name clearly when prompted. To cancel your request, press star and then two. Our first question is from the line of Maggie Nolan of William Blair. Your line is now open.
spk07: Thank you so much. It seems like the revenue guidance is perhaps a wider band than we've seen in the past. Could you elaborate on some of your assumptions there and what would get us to the high end versus the low end of the guidance?
spk09: Hey, Maggie. This is Dustin speaking. I'll go ahead and take that first and let Ken and Shelley comment afterwards. So a couple comments, Maggie. As we discussed in the first half of 2022, it kind of indicated that there was, you know, emerging headwinds in the second half. And we're seeing that now persist and to some degree even continue weakness in the beginning of first half of 2023. And it's really reflecting that uncertainty in our outlook. So, in the assumptions that we have right now relative to what will get us to the higher of that range, is how this hypergrowth sector performs in the full year. And to give you some context, if you think about hypergrowth where it's at, you take a decline in that business, the rest of the business right now, and you talk about resilient verticals like financial services, healthcare, etc., they're growing right now at roughly 7% growth versus the hypergrowth business that's in a decline. So it's really about we need to continue to execute in the resilient verticals that we And then if hypergrowth kind of comes back and doesn't decline to the degree that we expect it to at this point in time, then we'll see it kind of guide up to the higher end of the range.
spk05: Hi, Maggie. It's Ken Tuchman. Good morning. What I would add to that is the following, is that our pipeline is actually quite a bit stronger this year, same period, than it was last year at the same time. That said, being through now five recessions, I want to be realistic about will we see the same level of conversions that we were seeing, let's just say, same time last year. And with clients all expressing visibility issues across the globe, we really just want to take a conservative approach. We would rather guide conservatively and have the potential to exceed than let our investors down. And so we're taking this conservative approach. And we feel, like I said, very confident in our business and where it's going. We're very excited about the current pipeline that we have. And frankly, I don't want to pimp people, but we see some very exciting large deals. And unfortunately, during a cloudy time like this from a macroeconomic standpoint, sometimes clients take a bit longer to make a decision. Sometimes they change the overall commitment of how large they're going to commit to in some of these large new deals, et cetera. And so we just felt that it was prudent to take this conservative approach.
spk07: Thanks, Ken. That makes sense. And then when you think about those large deals that might be building, is there any kind of incremental demand for maybe more of an offshore component within those deals? I know you've added a couple of locations. And then would there be any impact from that, you know, kind of incorporated into your revenue or your guidance?
spk05: Absolutely. So, you know, I don't want to speak for Shelley, but what I would just tell you is the following. Our focus for 2023, it goes without saying, is all about execution. And we are absolutely committed to increasing our offshore footprint, not just because it would be a nice thing to do, but because we actually have very large embedded-based clients that are saying, we need the same capabilities and the same quality of service to in other regions, in other languages. And so we are fast tracking, bringing online Asian languages, fast tracking, bringing on more European languages, et cetera, in the markets that we're entering. So to answer your question, there will be more offshore business coming on. As a matter of fact, our pipeline has a significant amount of offshore business. And there's a huge focus on that because we realize that by us increasing our offshore business, that that really is what will help us on the engaged side drive a higher margin. Shelly, you want to add anything to that?
spk08: I would just add, Maggie, we're seeing strong demand for our offshore services in the new locations, even in those resilient sectors that I talked about, financial services and healthcare, which have traditionally been more onshore services for us. But as we open up and expand our locations and really capitalize on the great performance, particularly in healthcare that we had over the open enrollment season last fall, we're seeing good demand and new interest from our clients in some of those new offshore locations. And of course, we're, as Ken said, very focused on this, and not just with our embedded base, but for new client prospects as well. Thank you all.
spk05: Thank you.
spk01: Thank you. Next question is from the line of Mike Lattimore of North End Capital Markets. Your line is now open.
spk11: Yeah, great. Good morning. Just a question on the digital division. It looks like you're expecting some solid improvement in that business throughout the year, both in terms of revenue growth and margins. I guess, can you just provide a little bit more detail on kind of what would drive that improvement?
spk08: Yeah, I think one thing important to note is that the practices outside of Cisco, Dustin has been talking about Cisco for a while in terms of growing through that business there and getting that back to growth. The other practices are growing 10-plus percent, and I think we're excited about the pipeline and the momentum that we have with our partners across those other platforms. Certainly as Dave's joined the team and the relationships he brings with both partners and clients, We're expecting accelerated go-to-market execution throughout the year.
spk11: Okay. And then the hyper-growth category with Engage, what percent of revenue is that, or what percent of Engage revenue is that?
spk09: In fiscal year 2022, you're looking at a business that's roughly about $400 million.
spk12: All right. Great. Thank you.
spk05: Thank you.
spk01: Thank you. Next question is from the line of George Sutton of Craig Hallam. Your line is now open.
spk04: Thank you. Ken, I'm wondering if you could address the AI opportunity as you see it and where you're involved specifically relative to AI and any go-to-market details beyond that would be helpful.
spk05: Good morning, George. You're asking a great question, and I'm trying to think of how to give a short answer, but what I'll start out by saying is the following. On the engaged side, there is tremendous opportunity for us to be working with many of our partners on the training of AI. I think there's a big misconception in the marketplace with all the hype around chat GPT that it's going to have a real positive impact on... on areas like customer service, when in fact it actually is going to have very little impact because it's a horizontal AI product, which means that it grabs its information from crawling the web, reading Reddit, reading Wikipedia, et cetera. And consequently, there's a lot of misinformation within all those different vessels of information. So the future of AI as it will be used in the customer experience space is really with what we call vertical AI. And that's where we're actually working with our clients as well as working with the AI providers, which would be in many cases, in most cases, the hyperscalers, in narrowing that information so that it's put in a vertical format and consequently when questions are asked, whether it be for a chatbot, a voicebot, et cetera, that you're getting every single time an accurate answer and not something that's rather in the bizarro category as many people have been playing with ChatGPT and experiencing. So we see opportunity and where we have opportunity and we are currently executing on opportunity in everywhere from data annotation to AI training to also in all the actual implementation of the AI and then integrating that into the CCaaS platforms, the omnichannel platforms, et cetera. It's quite a heavy lift. There's quite a bit of, we're very early days with not only where the technology is, but also where clients are. And so there's a lot of proof of concepts, a lot of experimentation going on. And we're really grateful that the hyperscalers have chosen to partner with us in a very significant way and they obviously have a very large pipeline and we're there to service that pipeline as well as our embedded base clients at Engage. So across the board, we see significant opportunity in this area. We also see some exciting opportunities over time in how we actually price and how we can move to much more of an outcomes-based set of pricing when we're introducing this type of technology. which we believe has the potential to drive significantly higher margins versus our classic way that we do business today. So hopefully that's helpful. I don't want to suck up all the oxygen on the call.
spk04: That's great. Just one other question. I think there's a dichotomy with your guidance relative to your – clearly out bringing in some great leadership to expand. I know your plans to expand to a much larger company. Can you just give us a sense of how that growth is going to come? Is it predominantly organic and the team you're building? Just give us some sense of that dichotomy that I don't think the market appreciates.
spk05: I would say that it is going to be predominantly organic. We feel really comfortable with where we are in the marketplace and the amount of business. And if we just look at year-over-year pipeline and we look at how our conversions are going right now, et cetera, we feel very confident that we can get to where we ultimately have been communicating to the street. We brought Shelly in, we brought Dave in, and we actually brought in a myriad of other very senior leaders that have all come on board over the last, let's just say, 12 months. And their entire focus is execution to double the business and double it in the shortest period of time possible while significantly increasing our margins. And I have absolutely no doubt that we have the right team. There is a reason why we brought Shelly in. Intentionally did not bring in a BPO-type person. We wanted somebody that understood the technology, understood technology implementation. We wanted somebody that understood digital, and we wanted somebody that understood very large scale. Shelly, with her experience of being one of the key people in building Accenture Digital from $0 to $20 billion, has that experience, understands those capabilities. It allows her to partner very closely with Dave Siebold, who also has multi-billion dollar experience on the digital side as well. And so consequently, it's really allowing me now to spend much more of my time on strategy, on vision, on potential future M&A, as well as on partnerships with these large technology players at a very senior level, and then helping the acquisition of large clients. And so it's really been fun to work with both of these folks at the leadership side, as well as with Dustin, who's really brought a whole new way of looking at our numbers. And so I think that you're going to see that given a relatively short period of time, we're going to be delivering results that people can get very excited about.
spk04: So thanks, Ken.
spk05: Thank you.
spk01: Thank you. Next question is from the line of Vincent Colocchio of Barrington Research. Your line is now open.
spk02: Yes, Ken, curious, are you seeing meaningful consolidation opportunities? And if so, to what extent are they baked into the 2023 outlook?
spk05: Consolidation, you mean of client volumes where they're moving? Yes, yes, clients, on client side. There is certainly a lot of talk about that amongst clients today. We are seeing that with certain key clients, especially where they're very focused on measuring performance and where we're consistently outperforming. And so we see that as a real opportunity. In the past, you've heard me speak about the captive opportunities that we're focused on, which would be companies that have never outsourced and have very large organizations internally. Some of these organizations internally that have never outsourced, believe it or not, are spending in excess of a billion dollars. And so we're very focused on that as well. I think that one of the things that is really important for the street to understand is that we saw this self-made, if you want to call it, recession coming quite some time ago. And we've really been very intentional about on focusing on verticals that we think are going to have the least amount of impact as the economy potentially slows down. And so what I would just simply say to you is that the verticals that we're focusing on all have extremely large captives. So not only do we have the benefit of the consolidation where they're going with fewer players, which we think is a good thing, not a bad thing, But in addition to that, what we're also seeing is that they're peeling off more business that's internal and moving it to a partner such as T-Tech. We think that's a trend that we're going to see over the next five plus years. Again, not to sound like a broken record, but there's still $300 billion just on the engaged side that has not been outsourced. And we think that that will become a leaky, kind of a leaky tire, so to speak, where it'll be leaking more and more business to the marketplace. Because the bottom line is that we feel very confident we can demonstrate that we can do it better, we can do it faster, and we can do it at a lower overall cost with a higher total value delivered. And that's our value proposition. And then when we couple that with technology capabilities, that adds even more capability to turbocharge the relationship and to offer something that we think is unique in the marketplace.
spk08: Thanks.
spk05: Sorry. Go ahead.
spk08: Well, I might just add, just in terms of our top 10 clients actually provided a lot of our growth in 2022, and we see that continuing into 2023. And in particular, some of these were there, as you said, consolidating. We're performing well, and they're getting excited, and we see demand for our new offshore locations to add to the services that we're providing those clients. I think also we're very focused in those resilient sectors that Ken mentioned, particularly financial services and healthcare, in terms of helping those clients that haven't outsourced before. And that typically ends up being kind of a mix of onshore and offshore services. And so we're seeing a lot more demand in those sectors, which is why we're very, very focused on them.
spk02: And one for you, Dustin, if I can. What is your assumption, per the guidance, for hypergrowth? Do you expect it to stabilize in the second half or further deteriorate? What are you thinking?
spk09: Yeah, the expectation is that it will be stabilized kind of second half. It's going to come down in the first half, stabilize in the second half, and then, you know, ideally, going back to Maggie's original question, the momentum as we go into 2024. Okay. Thank you. It's really just to be clear, it's really a continuation of kind of impacts that we had in 2022. You know, because hyper growths continue to grow in 2022. If you go back to the second half, we talked about it being muted. And so it came down, but still grew. And then that now has created a downstream impact into 23. And just the only other point that I'll fall on to Shelly's comment, to give you an idea in terms of just to put a pin on the consolidation, is that our top 10 grew roughly 4%. And that's including the decline in pandemic-related volumes in 2022. And you're looking, you know, at a number for 2022 in the neighborhood of 14, 15%, you know, for excluding the pandemics. That gives you a sense in terms of how we're consolidating, at least particularly when we play with large enterprise customers where we have significant scale. Thank you.
spk01: Thank you. Next question is from the line of Joseph Vaffey of Canaccord. Your line is now open.
spk13: Hey guys, good morning. There's maybe a question on cross-sell in 2023. Are you looking at cross-sell between your two divisions any differently? I mean, it feels like digital's got a kind of a wider opportunity with cloud migration, emergence of AI, potential to maybe move into adjacencies outside of CX. and as that business gets more strategic inside enterprises, potentially be able to drag along more CX volumes. How are you looking at that overall dynamic here this year? Thanks.
spk08: I think there are 2 things. The first thing I would just say, within our digital business, certainly if you look at practices like our AWS practice, starting to see opportunities to be on just helping our clients with AWS Connect, the services that sort of surround that part of their platform. And so we are starting to see, we are starting to do some work and expand those services within that practice. I think more broadly in terms of cross selling digital and engaged, this is one of the reasons I'm really excited to have Dave on the team. And we are being very thoughtful about those opportunities, and absolutely, We have enterprise clients that we serve from an engaged perspective. And as they begin to modernize their technology platforms in the CX arena, those are opportunities for us. And in fact, Dave and I are working on some of those together as we speak. And so I do think that will be an opportunity. We're obviously very focused on the opportunities that digital, this idea of the distinct opportunities inside digital engage as well.
spk13: Thank you.
spk01: Thank you. Next question is from the line of Cassie Chan of Bank of America. Your line is now open.
spk06: Hey, guys. I just wanted to ask, what are you guys baking in for your 2023 outlook in terms of your onshore and offshore delivery mix, as well as some attrition metrics around that? And for your offshore, I know you guys talked about continuing to build out your you know, offshore geographies, and you added three more, I think you guys said, and grew 60% in 2022. Are you expecting a similar pace in 2023? And is this like replacing some of your onshore delivery centers? Thank you.
spk08: I'll start. So the 60% was a reference to growing our delivery footprint inside of digital, and we definitely will continue to scale that footprint. Certainly on the Engage side, we plan to add four to five new geographies this year. And those will, as we sell into that demand and open those geographies, we expect the pace of those offshore services to increase throughout the year. We also will continue to sell the onshore services in those verticals that we talked about in terms of financial services and healthcare where our clients need that licensed support.
spk09: And then just as a follow-on, Cassie, the question, as we talked about before, This year was a little bit impacted our mix relative to just the acquisition of FANUL, which was all within the U.S., within the public sector. And so this year is roughly, you know, this year being fiscal year 22, or last year was roughly 70-30, and we plan to shift the mix by about three points this year. And they continue, you know, to accelerate in 2024 and beyond. And then your comment, coming back to your point on attrition, while we are not giving out specific attrition metrics, you know, partly due to the efforts across 2022 as well as, I would say, improving labor markets, we do expect attrition to improve within 2023 across both our offshore and domestic footprints.
spk06: Okay, got it. And also wanted to ask on free cash flow, I know you pointed out a few things in the quarter specifically, for example, the DSOs. Are these one time in nature and anything about free cash flow expectations for 2023? Thank you.
spk09: It's a great question. Yeah, so our free cash flow was impacted by one-time items that we discussed earlier. Going forward, I would say the one major impact that's going to continue is the step-up. It's also affecting EPS, the step-up in interest payments. Those are variable facilities. You're going from roughly mid-$30 million interest expense in 2022 to stepping up into the mid-$70s in 2023. And so if you think about this prior year as roughly $50 million in cash flow, next year we're expecting it to double and land around $100 million.
spk01: Thank you.
spk09: You're welcome.
spk01: Thank you. Next question is from the line of Brian Bergen of Cowen. Your line is now open.
spk12: Hi, thanks. This is Zach Aisman on for Brian. First question for Dustin. I think you mentioned upcoming new disclosures on vertical performance plan for this year. We heard the color for the hyper growth vertical, but can you give us a sense or some more insight on the growth assumptions for the other key vertical cohorts embedded within the calendar 23 outlook?
spk09: Yeah, so I would say going back to right now, what we're at this point talking about, if you look at hypergrowth, it's, you know, I said roughly 400 million. This specific number is roughly 380. It's coming down to roughly $300 million in fiscal year 2023. And then the rest of the remaining verticals are growing at 7%. And there's a variety of outcomes within them. I would say strength within financial services and healthcare predominantly. And then, you know, strong performance still in public sector and as well as automotive, but slightly, you know, behind, I would say, financial services and healthcare. And we'll give you more color kind of going forward in terms of specific growth rates. The intention of that statement was more going forward in Q1 and beyond. In terms of we'll be disclosing specific growth rates for each vertical on the actual earnings call.
spk12: Great, great. Follow-up on offshoring. Just looking... to see if we can get any sense around the numbers. Like, to what extent is offshoring affecting revenue and helping to offset margin pressure? Any way you can frame that quantitatively within the outlet this year?
spk09: So, again, if you think about the metrics that we touched, going back to Cassie's question, you think about the 70-30 mix, and you think about our guidance next year or this year for fiscal year 23, and you think of it as a 73-67 and 10 points of margin differential in the gross margin, that's kind of the up that puts and takes, if you will, in terms of ups and downs relative to it, because the expectation is still net expansion, right, relative to it. Okay, thank you. So it's relatively minor, but the intent is over time to continue to mix it And then it will continue to have an outsized impact as we move forward, exiting 23 and into 24. Thanks.
spk01: Thank you. Last question is from the line of James Fawcett of Morgan Stanley. Your line is now open.
spk03: Hey, guys. This is Jonathan for James. What's giving you the confidence in that back half stabilization, hyper growth sector of your business?
spk08: Well, we have a, I mean, first of all, we have a couple of clients in that hyper growth sector that are definitely growing and interested in our offshore, expanding offshore footprint. And so, you know, we see growth opportunities in that portfolio despite, you know, the unfortunate, unfortunately, some of those clients, you know, with this post-pandemic normalization having softer demand. So we have a pipeline of opportunities with some of the clients in that hyper growth sector. And as Dustin said, We're also expecting our clients outside the hypergrowth sector to grow in the mid-single digits.
spk09: So Jonathan, just to follow up on that point, keep in mind that again a lot of the churn we had within our hypergrowth sector happened in the second half of the year. So it's a little bit of just a ramp down and compare, if you will, because we talked about in the second half, the impact of the second half. Those exits have happened. They'll come down in the first half, which is obviously a notable compare over the first half of 2023 versus 2022. And so, again, that's around the stabilization. Just keep in mind, too, that within hypergrowth, this is largely around growth services and customer care, and it's not really related to content moderation. So it's more of a statement around the re-baselining of the economy in 2023, the post-pandemic normalization, and then having a platform to grow off of expecting that, again, the macroeconomic weakness will alleviate in the second half.
spk03: Thanks for that clarity, Dustin. And follow-up, how are you thinking about the M&A environment and your capacity to acquire?
spk05: I think that right now we're really focused on execution and really trying to understand where values are going to be. So the truth of the matter is we have a solid pipeline of potential M&A. That said, I think that it's safe to say that we are going to be very fiscally responsible and mind our balance sheet. And so what I would just say to you is that although M&A is something that is absolutely going to continue to be part of our strategy, our future strategy, we think that it's prudent for us to wait a little bit and try to see where the valuations come in on some of the targets that we're looking at. I think that any of the M&A that we would be doing would be much more geared towards the strategic side and areas that would be benefiting more of the digital business. But what I would just simply say to you is that we're going to Right now, our team is very focused on execution and on organic growth.
spk03: Thanks, Ryan, Ken.
spk01: Thank you for your questions. That is all the time we have today. I will now turn the call back to Paul Miller.
spk10: Thank you, everyone, for joining us today. This concludes our call. Thank you.
spk01: This concludes T-TECH's fourth quarter and full year 2022 earnings conference call. You may disconnect at this time.
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