TTEC Holdings, Inc.

Welcome to T-TECH's third quarter 2024 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's Senior Vice President, Treasurer, and Investor Relations Officer. Thank you, sir, and you may begin.

Good morning, and thank you for joining us today. T-TECH is hosting this call to discuss its third quarter results for the period ended September 30, 2024. Participating on today's call are Ken Tuckman, Chairman and Chief Executive Officer of T-TECH, Kenny Wagers, Chief Financial Officer of T-TECH, and Shelley Swanback, Chief Executive Officer of T-TECH Engage. 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 2024 quarterly report on Form 10-Q. Before we begin, I want to remind you that matters discussed on today's call may include forward-looking statements related to our operating performance, financial goals, and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward-looking statements reflect our opinions as of the date of this call, and we undertake no obligation to revise this information as a result of new developments that may occur. Forward-looking statements are subject to various risks, uncertainties, and other factors that could cause our actual results to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our 2023 Annual Report on Form 10-K. Before we proceed, I want to mention that our call today will not address any questions about Mr. Tuchman's September 27, 2024 proposal to the company's board of directors to take T-TECH private. As the company shared in the press release on September 30th, the board formed a special committee of independent directors to consider Mr. Tuchman's proposal, and the committee, in consultation with independent legal and financial advisors, is evaluating and considering that proposal. A replay of this conference call will be available on our website under the investor relations section. I will now turn the call over to Ken.

Good morning, and thank you for joining us today. As shared in prior quarters, 2024 is a transitional year for T-TECH. Across the company, we remain focused on our four priorities, winning new clients and continuing to execute our diversification strategy, enhancing our portfolio of AI-enabled CX solutions, improving our operational agility, and strengthening our financial performance. In the third quarter of 2024, revenue was $529 million, and non-GAAP adjusted EBITDA was $50 million. The dynamics of the CX industry and the macroeconomic environment continue to create headwinds as select clients delay decision-making and or focus on near-term cost savings. The uncertainties around the election and the Fed's monetary policies have added to this wait-and-see mindset. Despite these market realities, our teams continue to close new business. CX remains a high priority as we engage in productive CX conversations with current and potential new clients. We believe these initiatives will normalize over the course of the next six months and lead to a more attractive demand environment. We recently held one of our regularly scheduled client advisory board meetings. which included CX operational and technology-focused leaders from many of our largest clients. The conversations highlighted their business priorities and focus areas as they navigate the current environment and set their priorities for 2025. Let me share a few recurring themes. Clients are weighing the promise of AI against the necessary work required in their systems, data architecture, and CX infrastructure to realize the full benefits. Pilots are delivering encouraging results. However, expense, accuracy, data protection, and organizational readiness concerns continue to be top of mind. A more integrated and holistic view of CX processes and technology stack are a priority. Regardless of their current landscape, clients are looking for ways to get more value from their CX investments. They're focused on activating new AI-enabled capabilities, as well as building tighter integrations between their contact center, CRM, and analytics platforms. With limited near-term budget increases, clients are pursuing savings to invest in future innovation. This approach will increase operating efficiencies, improve the quality of the customer experience, and strengthen the brand differentiation. I deeply value these in-person discussions with our advisory board, and appreciate hearing what is top of mind for these CX executives and their companies. As the market continues to evolve, these discussions help validate our innovation agenda as well as uncover new growth opportunities for both of our business segments. Now let's discuss T-TECH Engage. Despite the current wait-and-see mindset in some pockets of the market, we continue to win new clients and expand our relationship and our embedded base. we are on track to meet our goal of a dozen new meaningful client relationships by year-end. These wins are strategic and diversified across industries including financial services, healthcare, and retail. As we've shared before, we're keenly focused on winning new clients that will scale profitably as we leverage our expanded geographic footprint. In addition, we continue to make progress selling new work types into our embedded base. This new business includes AI-enabled solutions for back office, revenue generation, fraud prevention, learning and knowledge services, as well as work in new lines of business within several of our vertical portfolios. For example, in fourth quarter of 2023, we launched a loan origination support program with a leading digital financial services brand. Based on our strong performance, the account has grown to hundreds of associates delivering five different work types, including care, quality, tech support, knowledge, and workforce management as a service. Another example includes a recent win with a long-term healthcare client. This exciting new opportunity extends our footprint into the provider market with patient access and back-office support services. Increasingly, our new and existing business opportunities are offshore and leverage our expanded geographic footprint. The headcount in our new geographies has scaled 43% from the second to third quarter of this year. In addition, more than 60% of the annual contract value of our five new client wins this quarter will be delivered offshore. While we're excited about this trend, it is important to note that the deal size of our offshore contracts are initially smaller, As illustrated in previous examples, these relationships have the potential to grow as we introduce new work types into the account. Our focus on innovation continues to be a priority with an emphasis on practical use cases and applications. Our product and engineering teams have built a deep understanding of the evolving AI landscape for CX and have prioritized our roadmap based on what solutions are ready today and what will be potentially viable in the future. Above all, we're focused on delivering solutions that can be implemented successfully and will return a positive ROI for our clients and our business. Let me share a few examples. The ability to process call and digital transcripts at scale using AI is fueling operational efficiencies and revenue growth opportunities for our clients. Insights gleaned from real-time customer interactions are delivering benefits across multiple industries. These benefits include improving coaching effectiveness in e-commerce, identifying customer journey pain points in luxury retail, and accelerating sales in automotive. We anticipate the impact from these insights will continue to grow as pilot programs move into production with our clients. We're also making progress with voice and digital language translation as the quality of these AI-enhanced services rapidly evolves and improves. We're developing native language translation tools to meet our clients' practical use cases and cost requirements and see language translation as a substantial area of future opportunity. Now let me switch gears to T-TECH Digital, where we create value at the intersection of contact center, CRM, AI, and analytics underpinned with software engineering and led with consulting. As the CX technology landscape continues to evolve, clients are leaning into our deep CX expertise to help them navigate their path forward. Here are a few highlights. We're on pace to close more than 60 new strategic clients in 2024. These clients typically begin their relationship with us in one specific CX solution and have the potential to expand with adjacent services. More than 75% of our bookings last quarter were with existing clients who were choosing us for additional CX solutions. Year-to-date through September, the total number of clients with revenues greater than $1 million continues to grow, and our recurring revenue has increased quarter-over-quarter and year-over-year. While we've made progress, we also faced some headwinds in the second half of the quarter with delayed decision-making by clients on several of our larger deals. our digital professional services revenue, was lower than expected in the third quarter. As many of our current clients complete their contact center cloud migrations, they're considering the next CRM, contact center, or AI investment. As I mentioned earlier, while clients are enthusiastic about the potential of AI, they must address data and organizational readiness before they commit to full-scale rollouts. To provide clients with a low-risk environment to test learn, and deploy their AI solutions, we built a technology innovation environment we call Sandcastle CX. And when combined with our technology management approach called Surround CX, we're providing innovation and continuous technology optimization so clients can easily create, change, tailor, and evolve their cloud-based AI CX platforms over time. This year, approximately 45% of our top 100 clients have deployed well-defined AI projects with us. These projects are yielding positive results and are making the case for full-scale implementations. Our ability to help clients integrate their myriad of technology solutions and activate relevant AI capabilities continues to set T-TECH Digital apart. For example, we closed an exciting new opportunity with a professional services firm using our enterprise knowledge engineering and content intelligence solutions. This three-year CX engagement includes a comprehensive overall and reclassification of all the client's unstructured data so it can be used for various CX and AI applications. For a global technology integrator, we modernized their CRM systems and created a data-driven sales optimization solution that serves 1,700 sales executives in 62 countries, With a 92% adoption rate, the program has delivered over 150,000 new sales opportunities with substantial increases in data accuracy and win rates. And with a large media and entertainment client, we're in the midst of a multi-phase transformation in which we're migrating over 4,000 on-premise contact center associates to a cloud platform. Once that phase is complete, We will be launching several AI capabilities, including self-service bots, agent assist, and analytics. These are just a few of the many AI-enabled transformation initiatives underway. Through our ongoing partner diversification strategy, we've added new capabilities to our portfolio of CX solutions. We're excited about the growth in these new partnerships and are now selling and implementing projects with all of the leading CX technology platforms. Before I hand it over to Kenny, I'd like to recognize and thank Shelley Swanback for her many contributions to the company over the past two years. As we previously shared, Shelley has made a personal decision to leave T-TECH at the end of this year for health reasons. She will be missed, and we wish her all the best as she takes a well-deserved break. Supporting a smooth transition, I'd like to formally welcome John Abu to our company as president of T-TECH Engage. A 27-year industry veteran and proven leader in the BPO space, John joined us several months ago and is already making a material impact. A great cultural fit, John brings both growth and operational expertise to his role, leading our engage, go-to-market, and operational teams. In conclusion, while taking more time than expected, we're prudently working through various challenges during this transition year. We are executing against our top strategic priorities while also taking the necessary cost reductions and profit improvement actions to strengthen our balance sheet and return the company to long-term revenue growth and increased profitability. As a management team, we're focused on our path forward and are actively executing on our strategy and improvement initiatives. On behalf of the Board of Directors, our leadership team, and our employees around the world, we look forward to continuing to share our progress in the quarters to come. I will now turn the call over to Kenney.

Thank you, Ken, and good morning. I will start with a review of our third quarter financial results before discussing our full year 2024 financial outlook. In my discussion of the third quarter financial results, reference to revenue is on a gap basis, while EBITDA, operating income, and earnings per share are on a non-gap adjusted basis. A full reconciliation of our gap to non-gap results is included in the tables attached to our earnings press release. Turning to our consolidated third quarter 2024 financial results. Revenue was $529 million, a decrease of 12.2% over the prior year period and relatively unchanged sequentially. Adjusted EBITDA was $50 million or 9.5% of revenue, a decrease from $64 million or 10.6% of revenue in the prior year period and an increase from $46 million or 8.7% of revenue in the prior quarter. EPS was 11 cents compared to 48 cents in the prior year period and 14 cents in the prior quarter. Foreign exchange had a nominal impact on revenue in the third quarter over the prior year period, while positively impacting adjusted EBITDA by 2 million, primarily in our engaged segment. At the company level, we delivered the third quarter within our performance expectations. In our digital segment, our recurring managed service offerings continue to deliver double-digit revenue growth. However, for the reasons mentioned by Ken, our professional services revenue was negatively impacted by the unanticipated delays in closing select larger deals. In our engaged segment, top-line performance met our expectations and was relatively in line with the prior quarter. We are encouraged by the improved profitability in both our digital and engaged segments, reflecting the early benefits from our profit optimization initiatives. Turning to our third quarter 2024 segment results. Our digital segment's third quarter 2024 revenue was $116 million, down 13.2% over the prior year period and relatively unchanged sequentially. The year-over-year results are a difficult comparison as the reduction primarily relates to a large one-time on-premise product sale in the prior year period for one of our existing clients. As previously communicated for our 2024 outlook, the one-time on-premise related revenue is declining overall as more clients migrate to cloud-based CX delivery, partially offset by the growth in recurring revenue related to cloud infrastructure. T-TECH Digital professional services and recurring revenue together increased by 5.9% year-over-year in the third quarter. We continue to deliver solid results in our recurring managed services offerings, which increased 12.9% year-over-year and 4.2% sequentially. Managed services represented approximately 65% of Digital's total revenue in the third quarter of 2024 compared to 51% in the prior year period. We are pleased with the demand for our CCAS managed services solutions. Related to our CX professional services offerings, revenue declined over the prior year and sequentially by 6.4% and 5.1% respectively. As shared, select clients unexpectedly delayed the timing of larger engagements, which impacted the third quarter and is adding pressure to our fourth quarter outlook. While we continue to view this dynamic as temporary, the trend could take a few quarters before normalizing, as it is influenced by many macro factors. Digital's third quarter 2024 operating income was $14 million, or 12.5% of revenue. This compares to $19 million, or 14.5% in the prior year period, and $15 million, or 12.8% in the prior quarter. While we had a healthier revenue mix than the prior year, it was offset by the lower revenue previously mentioned and the investment in talent to support our continuous effort to diversify our offerings for 2025. Digital's backlog for the full year is $446 million, or 92% of our 2024 revenue guidance at the midpoint, in line with the prior year. We are encouraged by digital's overall strong pipeline that has been growing in terms of the number of deals, but has reduced in average deal size due to the growing number of pilot projects attached to AI initiatives. Our engaged segment revenue was $414 million in the third quarter of 2024, down 11.9% over the prior year period and relatively unchanged sequentially. Operating income was $20 million, or 4.8% of revenue, compared to $28 million, or 5.9% of revenue in the prior year. Sequentially, operating income increased 35%, with an approximate 130 basis point improvement as a percentage of revenue. Overall, we are encouraged by our engaged segment's sequential performance, and most importantly, the increase in profitability. This is primarily a function of our efforts to transition through the headwinds shared earlier this year and executing upon our profit optimization initiatives without impacting our delivery quality. We are more effectively managing our operations and overall cost structure by further enabling technology and improving our processes. We also strengthen our leadership team with tenured industry hires to continue accelerating our efforts and advancing our performance in key areas. Consistent with our messaging last quarter, the quality of Engage opportunities remains strong, and we are seeing encouraging signs based on clients' discussions around CX delivery strategies. However, clients are prioritizing initiatives that will yield cost savings near term and postponing new program investments into next year. Engage's last 12-month revenue retention rate was 85% compared to 96% in the prior year. The decline is primarily explained by the revenue reduction from one large client in financial services mentioned earlier this year and declines in our seasonal health care volumes, primarily due to changes by clients to moderate the level of customer support to address cost pressures. I will now share other third quarter 2024 metrics before discussing our outlook. Free cash flow in the third quarter of 2024 was a negative 100 million compared to a negative 53 million in the prior year. The decline was primarily related to the impact of the accounts receivable factoring facility discontinuation previously communicated when we announced the latest amendment to our credit agreement. This discontinuation negatively impacted our cash flow and by $82 million for the three months ended September 30, 2024, and by $101 million for the nine months ended September 30, 2024. Normalized free cash flow in the third quarter of 2024 was a negative $19 million and positive $7 million year-to-date. The year-over-year improvement reflects improved working capital conversion and lower capital expenditures partially offset by lower profitability. Capital expenditures were $9 million or 1.7% of revenue for the third quarter 2024 compared to $22 million or 3.6% in the prior year with most expenses related to our geographic expansion. Our normalized tax rate was 58.3% in the third quarter of 2024 compared to 20.5% in the prior year. The increase is primarily a function of the ongoing impact of the U.S. valuation allowance recorded during the second quarter, whereby the benefits of the future tax credits from the U.S. pre-tax losses couldn't be recognized. In addition, there were several profitable foreign jurisdictions where the income tax expense was driven higher. As a result, we ended up with a low global pre-tax income in relation to the net positive tax expense for which the U.S. tax loss couldn't be offset. As of September 30, 2024, cash was $97 million with $1.028 billion of debt, primarily representing borrowings under our $1.2 billion credit facility. Partially offset by positive cash flow from operations, net debt increased $116 million over the prior year, largely due to higher interest expense and the discontinuation of our accounts receivable factoring facility last quarter. We ended the quarter with a net debt to EBITDA ratio of 4.49 times, in line with our internal forecasts. Looking forward, we anticipate our net debt and leverage to decline in the fourth quarter and into next year due to the positive cash flow from operations, prudent capital allocation, proceeds from assets held for sale, including a large real estate asset that was not used in operations as disclosed in our Form 8K filing, and disciplined working capital management. Lower anticipated interest rates will also support our free cash flow and debt reduction efforts. Further, on November 4, 2024, T-TECH's Board of Directors suspended the company's semiannual dividend as part of its ongoing shift to prioritize debt reduction. Turning to our outlook and closing remarks. At the company level, we are reiterating full-year 2024 guidance, but expect revenue and profitability to be towards the lower end of the ranges provided last quarter. At the segment level, the appropriate contribution adjustments are made to reflect our third quarter actual results and updated fourth quarter forecast. For T-TECH, on a consolidated basis, the midpoint of our guidance range is unchanged and with revenue at 2.235 billion and EBITDA at 209 million or 9.3%. In our digital business, we are forecasting revenue in EBITDA of 483 million and 66 million or 13.8% at the midpoint of our updated guidance range, down from 490 million and 73 million or 15% respectively. This is below our prior guidance range primarily impacted by the previously mentioned revenue moderation, and our professional service offerings. In our Engage business, we are forecasting revenue and EBITDA of $1.752 billion and $142 million, or 8.1% at the midpoint of our updated guidance range, up from $1.745 billion and $135 million, or 7.8% respectively. This is slightly above the midpoint of our prior guidance range. Please reference our commentary in the business outlook section of our third quarter 2024 earnings press release for our expectations for our 2024 full year guidance at the consolidated and segment level. In closing, we are achieving many of our key objectives that we set forth during this transitional year. In T-TECH Digital, we are diversifying our CX technology partnerships and broadening our expertise and capabilities across contact center, CRM, AI, and analytics solutions, and remain confident in the long-term market demand for our CX technology and service capabilities. In T-TECH Engage, we are winning and launching new client programs across our expanded geographic footprint, working through the previously mentioned headwinds, and executing upon our profit optimization initiatives. As we transition to 2025, we remain focused on our strategic priorities and resolute in our ability to return T-TECH to long-term organic growth and increased profitability. I will now turn the call back to Paul.

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

Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press star and then the number one. Please unmute your phone and record your name and company name clearly when prompted. Your name and company name are required to introduce your question. To cancel your request, please press star and then the number two. Our first question comes from Mike Lattimore of Northland Capital Market. Your line is now open.

All right, great. Good morning. I just had a couple questions on the digital business. You know, your guidance seems to imply a nice acceleration in the fourth quarter here. So I guess, and potentially even like getting to double-digit growth year over year, what kind of gives you confidence that could occur Are some of these deals that didn't close going to close? What's driving them? Hey, Mike.

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

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

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

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

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

Great. Thanks very much.

Thank you.

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

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

Yeah. Hi there. Well, last quarter we talked about a lot of our payer clients just making some decisions relative to saving money, right, the cost pressures that they have, and staffing differently for our seasonal ramp, which is Q4 and into Q1 a bit. And so... I'd say no change there. I mean, things have played out this quarter and with CQ4 similar to what we talked about last quarter. I mean, they're continuing to face a lot of cost pressure in the healthcare industry. And so, you know, they're making choices in terms of cutting costs. And now the good news is there's lots of conversations that we're having about starting to think about using offshore talent, offshore resources, some technology to things that have typically been a little bit off limits, if you will, from a healthcare payer perspective. And so those are early conversations, but I expect that we'll continue to have those conversations here through the end of the year and into next year and see some proof of concepts underway in the next couple quarters.

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

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

Okay, great. Thank you both.

Thank you.

Thank you. Once again, to all participants, if you would like to ask a question, please press star and then the number one. Record your name and company name clearly once prompted. And to cancel your request, please press star and then the number two. One moment, please. Once again, to ask a question, please press star and then the number one. Our next question comes from the line of Cassie Chen. Your line is now open from Bank of America.

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

I couldn't hear the beginning part of your question. Sorry about that. You might have been on mute. Can you just repeat your question?

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

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

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

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

Okay, that's helpful. Thank you. Thank you. Our next question comes from Joe Baffi of Kenna Corridor. The line is now open.

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

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

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

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

Great.

Thanks.

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

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

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

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

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

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

Thanks for that.

Thank you for your questions. That is all the time we have today. This concludes today's Detects a third quarter 2024 earnings conference call. You may disconnect at this time.