Q3 2020 TTEC Holdings Inc Earnings Call

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Thank you for standing by the conference will begin momentarily until such time, you will hear music. Thank you as we continue to stand by.

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Yes.

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Welcome to <unk> second quarter.

22020 earnings conference call I would like to remind all parties that he will be in listen only mode until the question and answer session. This call is being recorded at the request of detail.

I would like to turn the call over to Paul Miller.

Senior Vice President Treasurer, Investor Relations Officer. Thank you Sir you may begin.

Thank you after Sir.

Operator, and good morning, everyone. Thank you for joining.

Two tickets hosting this call to discuss its third quarter earnings results for the period ended September Thirtyth 2020 participating on today's call are Ken Tuchman, Our chairman and Chief Executive Officer, and Regina Paolillo, our chief financial and administrative officer yesterday to Tech issued a press release announcing its financial results. While this call will reflect items discussed.

US within those documents for complete information about our financial performance. We also encourage you to read our third quarter 2020 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 but.

Surely from those expected and described today for a more detailed description of our risk factors. Please review our 2019 annual report on form 10-K, and our third quarter 2020 quarterly report on form 10-Q.

A replay of this conference call will be available on our website under the Investor Relations section.

I'll now turn the call over to Ken Tuchman, Gtx, Chairman and Chief Executive Officer, Ken.

Thanks, Paul and welcome to our growing base of global investors its been a hectic week here in the U.S. given the elections I am pleased you could join us today.

I'm happy to share with you that we have once again delivered record results in the third quarter.

We are increasing our market share by adding differentiated customer experience as a service offerings, expanding our channel partnerships and completing strategic and accretive acquisitions.

We continue to execute against our growth strategy.

To win a meaningful share of on demand work from home.

On demand a work from home opportunities and third I'll highlight how the record size of our pipeline feeds growth.

Further capitalizing on these sustainable trends.

This underscores our continued momentum going into the fourth quarter and beyond.

Our world was already rapidly transforming to a more digitized and virtualized and direct to consumer future.

Some has been underscored by this rapid paradigm shift we.

We are delighted with the continued diversity and high quality nature of our bookings across new and existing commercial and government clients. We're seeing larger average deal sizes and compressed sales cycles that have been contributing to our outperformance.

Another important contributing factor is that consumers are waking up to the inherent constraints in inconveniences of doing business in person.

Customer won't mobility has been dramatically curtailed by the current environment.

Wired for large corporations and governments to seamlessly engage with their consumers and citizens at scale.

Here are few recent examples of competitive wins illustrating why clients are choosing t. tech to execute the most progressive industry, leading customer and employee experiences.

Abilities and.

In less than two weeks, we rolled out over 100 flexible at home Humana, five associates and an optimal mix that created employee efficiencies and prepared the client for volume spikes. After just 90 days with double the capacity across chat and voice channels and now have entered into a multi year <unk>.

Sure.

We also recently partnered with citizens bank to enable a cloud based omnichannel conversational messaging solution.

Sales and service spanking conversations will be available via asynchronous SMS messaging Facebook messenger Apple business chat.

Google business message and live video chat in real time, our cloud solution census, customer intent, then analyzes and routes customers to the appropriate digital or human associate we also manage associate workload understand the conversational sentiment and via our machine learning.

Uncover trending topics.

The solution has improved capacity utilization and optimized interactions by rapidly deploying AI enabled conversational messaging.

Further it is allowed customer service associates to triple the number of customers handled concurrently the solution dramatically reduces voice volume.

Routing lower complexity voice interactions the messaging.

The clincher to all of this is that we continue to see improve customer satisfaction scores.

The current crisis has created a structural shift.

That is the latest in a long line of catalyst, adding to an already large and growing CX technology and services addressable market.

When the dust finally settles, we expect a third or more of the global customer engagement workforce truly historically interacted with customer face to face or in a brick and mortar engagement centers kept permanently shifted to work.

Two virtual work from home environments to.

[noise] to capitalize on this momentum our three main focuses are to continue growing within our embedded base of iconic clients to further penetrate higher growth geography's like EMEA.

And to increase our success within our key growth vertical.

R C X as a service platform is the key enabler that underpins all these main growth vectors.

Platform that enable the remote worker with a suite of hyper automation tools and other and other high margin high growth offerings, such as fraud detection and prevention.

We will continue to further enhance our direct to go to market motion with our technology enabled strategic channel partnerships and high growth platform acquisitions. Our channel partnerships are an exciting and evolving part of our strategy, creating tremendous synergy by adding industry, leading snicks applications inditex.

Humana Fi cloud platform.

Our recent acquisition of voice foundry positions Keytech at the center of Amazon's, leading AAMC ecosystem.

Apartments, I've never been more proud of our 50000 plus T Tech team members for their hard work and dedication during this unprecedented in incredibly challenging time.

This is allowed us to successfully serve our clients execute on our vision and deliver record third quarter financial results. Despite the headwinds related to the pandemic and social unrest.

We're also grateful for the continued support of our shareholders Regina will now cover the key financial highlights to the quarter as well as share updated guidance for the full year. Thank you.

Thanks, Ken Good morning, everyone and hope you and your families and colleagues in good health.

Year to date bookings grew 28% to $471 million over the prior year period positioning us to exceed $600 million in 2020 and setting the stage for anticipated continued organic growth in 2021.

In the third quarter, we added 14, new client relationships closed 12, multisegment engagements and continue to see larger average size transactions.

Across the business, we saw favorable shift.

Towards renewed longer term business as usual activity representing over 92% of our bookings.

Of accumulated other comprehensive income balances from the plan dissolution of a foreign subsidiary.

Ah reported tax rate in the third quarter of 2020 was 25, 9%.

Compared to 26% in the prior year the.

The increase is primarily due to a combination of jurisdictional mix with a higher portion of U S. Based taxable income and the recording of a tax contingency reserve are normalised tax rate was $18, 3% a reduction compared to the prior year's 21.1% primarily related to.

Two federal tax credits, we now estimate are normalized tax rate in the range of 21% to 24% down from our previous range of 24% to 27%.

The remainder of my comments or on a non-GAAP basis, which exclude restructure an impairment expenses a full reconciliation of our gap to non-GAAP numbers is included in the tables attached to our press release.

On a consolidated basis revenue increased 24, 6% of which $17 2% was organic.

Adjusted EBITDA increased 67, 2% to $77.2 million or $15, 7% of revenue compared to 11.7%.

And the prior year.

Operating income increased $112, 4% to 55 6 million, representing an 11.3% margin of significantly from six 6% in a year ago quarter.

Earnings per share increased 125% to 90.

And the third quarter more than doubling from 40 and the prior year.

Foreign exchange had a positive impact of $2 million and 830000 on revenue in operating income respectively, primarily impacting are engaged segment.

Our strong top line growth is primarily attributable to increase volumes across are expanding commercial and government clientele increased contribution from our higher growth higher margin offerings any acquisitions of SCR surrender bite and voice Soundary.

Acquisitions.

Cash flow from operations significantly increased in the third quarter of 2000 $20 million to $81.5 million compared to $63.1 million in the prior year, a 29% increase.

The improvement is attributable to increased profitability and tightly managed working capital. The DSO was 63 days in the third quarter of 2020 compared to 73 days in the prior year quarter and 71 days sequentially.

Capital expenditures were $15.9 million or 3.2% of revenue compared.

Compared to $16 million or 4.1% of revenue in the prior year.

We continue to focus on the improvement in our fixed asset utilization input and and in particular, our facility and technology assets, leading to a 90 basis point improvement in our capital expenditure as a percentage of revenue.

In the third quarter the board of directors approved a 40 cents.

Semi annual dividend per share or $18.7 million, which was paid on October 29, 2020 20020.

The dividend represents a 25% increase over the October 2009 dividend turning to our third quarter 2020 segment results, which are presented on a non-GAAP basis digital revenue was $76.6 million in the third quarter compared to $78.6 million in the prior year adjusted EBITDA.

2.4 million an increase of 48.9%.

Just did EBITDA of 282.1 million an increase of 34.9%.

And adjusted earnings per share of $2.96, an increase of 56.7%.

To obtain our fourth quarter of 2020 mix of revenue operating income adjusted EBITDA in EPS at the consolidated and segment level. Please refer to our commentary and the business outlook section of the third quarter of 2020 earnings press release.

We will formerly provide detailed 2021 guidance in conjunction with our year end earnings call given our full year 2020 bookings are estimated at over $600 million and a high percentage of our third and fourth quarter bookings are multi year in nature, we estimate or engage business will grow in the 5% to 7% range and our digital business.

Hello, Hey, we can hear you, okay, sorry about that I'm not sure what happened. So can you walk through some of your key partnerships Amazon Pega Liveperson as examples and you mentioned that there's much more to come on this front Im just curious if you can give us a picture of what the future profile of.

Of additional customers or partners might look like and you also mentioned that it was a big differentiator for you relative to a.

Competitors can you just talk through that in terms of that differentiator.

The second part of your question as to why does this differentiate us or help us it's really very simple.

We have always believed that our business is about customer experience driving deeper engagement with our clients, helping our clients grow and find net new customers and helping keep their customers safe via fraud prevention and fraud detection and so everything that we do in order to enable that to take place.

This really requires technology.

And that technology that we put together is there to serve two purposes. One is to enable our associates. So that they can be more intelligent more agile more facile. So that they can support the customer and a better more frictionless way and the other is to support our clients customers. So that they can interface in a much.

More modern way, we think that that is the future of our overall business and it's why we're leaning so heavily on the tech side of our business.

Critical that we have brand investors and like humans that can interact with customers, but it's also equally critical that we have a way of helping our clients journey map the best possible journeys.

And making these interactions that.

That their clients that their customers have as seamless and it's frictionless as possible we cannot do that if we're only providing the infrastructure and the labor labor component. We believe that it's gotta be an end to end set of solutions and we think thats highly disruptive in the marketplace.

Super one other thing if I could ah quarter ago, I sense to concern. Despite a large pipeline of opportunities that you felt like some of those opportunities where temporary in nature.

My sense today is you've got a larger pipeline and you've got a much better sense of a longer duration set of opportunities coming from that and I believe virgina pointed to 92% of those bookings.

As an example, I make hearing that correctly to me that's the significant change we've seen in the last quarter.

Yeah, I would say that we have stabilized our entire client base as it relates to not only shifting them at home, but helping them with their search volumes et cetera.

And we've added.

Multiple new logos.

Some of which came on with the concept of can you help us out temporarily or concept was very simple of course, we're going to help you out temporarily but we're also going to provide technology and that technology is hopefully going to become a hook to turn it into a long term reoccurring relationship we've successfully done that with major banks with government institutions et cetera.

And so consequently, our third quarter bookings.

So it's a combination of large corporations virtually every one of our clients have large captives. So let's start out with that and their spending in many cases billions multiple billions of dollars per year on their captains.

We actually have a thesis that you know at some point, we'll get into more discussion with our investors about but we believe that when you look at the overall the global Tam.

Theres about 300 billion right now that is that is tied up in in our clients' captives. We think that our clients are come to the conclusion that they're not as good at this is we are and we think that over time more and more of that captive marketplace is going to peel off.

And be partnered with somebody like a t. tech.

To do things and more and more people are going to continue to get food to go and dine in their own home more and more people are going to have their groceries serve to their curbside more and more people are not going to visit their doctor, but they're going to do with Teladoc type experience I could go on and on and on all that feeds more opportunity for us.

Yeah definitely.

Great and then on it.

In terms of the topic digitization that can be a lot of different things, but.

In terms of kind of messaging volumes.

And demand for messaging technology, I guess can you talk a little bit about what you're seeing there how many of your brand ambassadors are increasingly focused on messaging and just kind of.

From Avanci Maria William Blair, Sir you may begin.

Hey, Thanks for taking my questions and there was a really really good quarter really fall bookings, though.

Graduations I want to follow up on George's question, a little bit here on the partnership's, Ken I guess I'd love to understand how you think they obviously provide you a differentiated solution, which obviously then allows you to sell but but but but how do you think about the revenue benefit as you look at the next partnership.

You know how do you think about go to market. These parts your letter sent them more nuances in those and and are any of them incentivized to sell teletech.

So.

They are definitely incentivized to sell a car T Tech digital and we're really in many of these cases were the key partner for CX transformation to these companies. So we're working proactively with these companies are on a you know on deals where we.

Can bring significant insight and capabilities.

To that particular deal that maybe was not sourced by our sales force, but in fact was sourced by their sales force and I think that's the crux of what we're really trying to get at is that this is opening up doors are.

Into relationships that maybe would have taken us a much longer to get to a or maybe we never even would have had the opportunity to get to at all we have successfully done. This for many many years with our key partnership with Cisco, It's been very beneficial ER and why.

We are basically replicating that set of capabilities with all the appropriate Chinese walls et cetera, with with other with other partners. So.

You know what I would say to you is these are not press release relationships. We have active channel partner managers that are working with these companies. Our sales force is working with these companies. Their sales force is working with our company and we have one common goal and that is.

As to when the deal.

And so.

That is it's pure and simple that is what we're focused on doing we're only going with technologies that we actually believe in and that we know can provide the best possible solution and that can help our clients lower their overall cost to serve well simultaneously driving a better now.

Promoter score and at the end of the day, that's what our clients care about they want the most they weren't really three things right. One is they want the best experience for their customer.

Two is they want it to be the most efficient as possible and at the lowest overall cost to serve and that's what we're really driving for with these with these relationships. We're still very early days I want to just stress that I mean, you know we've been building digital over the last call that decade.

With the spending hundreds of millions of dollars in acquisitions et cetera, but we're really very early days on our on our journey and we're going to continue to keep you know.

Focusing on not only channel partnerships, but on future acquisitions that are that make sense and that are tuck ins and that are of that are additive to our overall strategy.

Got it got it one more sort of maybe strategic question for you is today, there's obviously, a really nice flywheel between digital and engage in to try to gauge and then engage can get optimized but digital but there's a part where there is let's say use.

Usage cannibalization, especially with the messaging the activity you may have a number of people supporting a call center function and then that's going to get reduced because you're gonna go to Chad message, Bob AI Optimizes, all the rest of it.

As you think about that and you think about the leavers there one obviously the higher gross margin, but do you think you have the ability to kind of raise price in the digital side.

You go through that sort of potential transition I'm talking 510 years down the road because it's so early not matter like in maturity sort of how do we think about that love to get some thoughts on how you're thinking about that thank you. Yeah. So two things. That's a great question first of all believe it or not we hope that it creates cannibalization.

That has been our focus Regina will tell you that when she came on over 10 years ago. I told her that was one of our main goals was to create cannibalization of the engage business, but here's the thing. That's that's that's what that is maybe a little [noise] excuse me counter intuitive.

Every time, we go to a fortune 500 company and we show them a more efficient way of serving their volumes.

Even though it might take 20 or 30% of their volumes out or their costs down et cetera, as fast as we take those volumes out they level them back off by giving us more business. Because if you were them wouldn't you want your business to go to wherever it's the most efficient and cost effective so we had zero fear.

Of our engage business being cannibalized by technology I want to stress that zero fear. There is so much business out there as far as how big the total addressable market is that if every single client we were able to show them, a 30% cost benefit.

Et cetera, they can easily give us 30% more business without even blinking anime.

A high percentage of our clients you know maybe we have 10, maybe we have 20% and in some cases, we might have 40%, but it's rare that we have 100% of their volume. So I want to just put that if there's a fear there I want to put that to rest now let's get to your your bigger question about margins.

There's no question that over time, as we get better and better at using these AI tools. These machine learning tools. These hyper automation tools et cetera, we're building our own internal confidence of what we can achieve.

And based on that confidence, we're getting to the point where over time, our goal will be to change our pricing model in a pretty significant way.

And that would allow us to lean in more and start to instead of engage being for example, a time and material shop. It could become more of almost a subscription type capability, where we're charging on a per customer basis.

And were were partner more deeply partnered with the customer that's going to take time, that's going to require very significant data analytics and actuarial tables et cetera, which we're starting to build all that et cetera, but the point is is that absolutely. We believe that there's an opportunity to drive more margin not only.

On the on the technology side, but also on the engage side.

But right now what we're focused on is getting all these core per all these core practices built making sure that we have the geo geographic diversity, meaning that we're able to provide these capabilities across the globe.

And then we can start to really shift our pricing model.

Got it no that's really really helpful. Thanks, guys. Congrats thank you.

Our next question is from James Faucette of Morgan Stanley Sir you may begin.

Great. Thank you and thank you very much Ken I wanted to.

Touch on really quickly on your comments around success in converting surge customers and contracts to longer term engagements.

I guess my question is as as we transition that weren't to the longer term nature of of the agreements et cetera, How do you think about.

The relative revenue potential versus what you're getting from them and the surge is does it go up does it go down is the same just wondering how we should think about the revenue contribution from from those customers Regina you want to answer that question.

Yeah, I would say that the major theme. There is that you know that certainly has us as confident as we are is signed agreements with certain you know.

Governments in particular states and financial service.

Clients, who now have agreements with US you know into next.

Next year the bulk of next year. So those are signed agreements and you know in that in the third quarter and it continued into this quarter that you know now or have us with backlog around activities that were doing that are either yes.

In some places will stay and you know significant due to the pandemic, but also in most cases that we have now processed.

New lines of business for the stage in new lines of business for banks that will become the income that now in part that is cap the stuff that's being outsourced because of the challenge of getting it to the level of virtualization and Digitization.

And now you know in particular, you know a good amount of it being a you know committed to kind of more permanent at home.

The other piece I would say Ken spoke on and that is in some of your commercials in other areas that the behaviors of the consuming public have changed and they haven't just changed temporarily they've changed forever more and there too we have agreements that have committed to a additional volumes to.

Way, we would have a normal you know 345 year contract.

Food delivery would be a good example, there we we continue to take a add new logos in that space.

Yeah that makes sense and then when.

When you look at when you look at your overall margins and margin structurally light clearly like this quarter was the.

Really really good.

Talking about some additional points of leverage there how are you thinking about like the margin trajectory is that is that I guess, increasing along with with annual revenue and engagement and booking outlook.

Outlook are or how should we think about that on a go forward.

Yeah, I mean, I'll bring it back to a time that I've made repeatedly let's in background first so you know we grew our revenue year to date about a 196 million.

We grew our EBITDA margin 300 basis points or three percentage points.

That's really one point of improvement for every $65 million of revenue.

You know I have said a number of times right that for every 50 to 75 million of improvement in revenue and you can count on aster, almost a point of margin improvement.

So you know we're kind of in the mid point of that you know 50 to 75 at 63.

And so it's no different than what we saw you know I mean, they have a very tenured management team you know there's been through many seasons and the reality of it is there is you know significant.

What I would say fixed cost that sit in our Cogs and sooner as shannay.

And you know there is just huge leverage as we add volumes to the top line in terms of taking those fixed costs and getting lower and lower as a percentage of revenue now in fairness I will say that you know travel, which is typically a point and a half of our revenue is down and so that.

That's why I would say you know we're in the mid point of that 50 to 75 million of incremental revenue at the 65, giving us another point, but you know we feel that at these volumes theres nothing in there that is you know there's nothing that we know that's going to drive.

A different behavior. The other thing I'll just caution on is as we get through our yearend. We are working on the investments that we will continue to make to you know accelerate the top line. So you heard me in my comments talk about 15% to 25% in digital in five to seven engage we're not without our thoughts that.

Could we take market share that's organic of 10% and engaged but you know that will require some investments in terms in terms of more sales resource more marketing on maybe accelerating you know, where we're obviously moving very well with Europe, it's contributing nicely.

But you know do we think about lighting up other regions earlier, so we're going through that thinking at this point then you can count on us to separate those investments from the underlying margins, but it's it's really just the the model has you know I'm, just really really very opportunistic.

Expansion on a more volume.

Got it and last quick question, how should we think about capital allocation, particularly given.

What you would you may be seeing from an M&A opportunity perspective versus capital returns.

Well.

Yeah, so that hasn't changed a as well obviously, we have a dividend and we're going to continue to drive early returns.

For our shareholders, but aside from that it's you know a balance between organic and inorganic investment in expanding the business and so you know you have heard can say this a couple of times, we internal to T. Jack the way, we think about this now a is that.

M&A is not a nice to have it's a half to half I would actually say, let's say corporate development investments is a is a have to have in the sense that we will continue to think about you know the investment in partnerships versus the investment in M&A, but you know you should continue to expect us to be a you know.

Oh very aggressive we're we're not going to do a deal just to do a deal but you know we've got a good track record now you know over 10 years of acquisitions and we've honed our internal disciplines around that in terms of front end integration and middle and back in.

You know, we're going to continue to prioritize I'm glad to see the cash flow the free cash flow. The operating cash flow you know, what you're only going to help us to sun those in a very efficiently.

Let me just add onto that real quickly I think the other thing that I want to stress is that.

The partnerships and the acquisitions that we will be doing or have already done as well as the internal R&D work that we're doing it's all about platforming ahead.

Ahead of time, so that when clients look to us as providing a solution a technology based solution that digital solution et cetera that we can demonstrate to them that we can be.

Basically launched them in the shortest possible period of time with the least amount of risk at scale. We believe that that is absolutely critical to our success and so the reason why we tend to win these very kind of transformative deals like we like we did with.

You know have done with the government over and over and over again et cetera is because we were able to demonstrate to them. What we can do in a matter of weeks or the largest systems integrators in the world need a year plus to do and so I can't stress to you that that is absolutely a big part of our investment thesis no.

Not only from an acquisition standpoint, but investing capital internally internally to pre build our platforms. So that we can show our clients that we can turn them on quickly and get them into the marketplace with these new set of capabilities that they're they're looking for right now clients are focused on what the urgent.

Not what's important and consequently, they need solutions that are going to have impact on their business in weeks or in less than 90 days, they're not focused right now on solutions that are going to take them three years or five years, which is what the traditional systems integrators are focused on you know how do they do.

A year's worth of consulting and then a year's worth of preparation and then two to three years worth of implementation et cetera. Our goal is to get to a recurring revenue ability with the client off of our technology off of our SaaS capabilities and off of our engage capabilities as fast as humanly possible.

So I just want to stress that that it's all going to make more and more sense as we roll out more capabilities on the technology side to the marketplace.

Thank you. Our next question is from Joseph Vafi of Canaccord, Sir you may begin.

Hi, everyone. Good morning, Great results, just a couple of quick ones first.

On on the bookings numbers, maybe drill down a little bit and to.

Digital bookings and what you're seeing in.

In in that market segment, now, obviously I think you engage segment there's.

Maybe a bit of a bit of a sense of urgency there by clients to have capability I'm wondering if you're seeing that that in the digital side as well or kind of compare and contrast, the demand environment there and.

And then just a follow up maybe for Regina.

On work from home moving forward and implications for Capex. Thanks, a lot.

Yeah. So I'll start out and then maybe Regina can can pick up from where I leave off so.

So what we're seeing on the digital side is our pipeline is really growing quite nicely on what I would call a transformative type deals.

But what we're also seeing at the same time is that on the larger more transformative deals.

We're also seeing clients, saying that they want to get more focused on that when they have more visibility to.

To Cove, it to the pandemic and so I'm sure you're hearing this through with a lot of others, but on the very large clients I'm talking about you know, let's just call. It. The you know the fortune 100 type clients. They are all very focused on US you know building plans for them et cetera that really can try.

Since form their business.

And in some cases, there start times have been delayed due to the fact that their focus has been on more tactical things like getting them up and running on at home et cetera. So on one hand, the pipeline is building nicely.

And we're very excited about it I would say that on some of the deals. The actual start of the execution is a bit delayed and the cans been kicked a little bit which is understandable when we do channel checks with many of the others on the large deal front, they're seeing the exact same thing so instead what.

Our clients are focused on and what many the new deals are focused on is more of the incremental things that instantaneously allow them to get at home.

Tools further at home agents and so on and so forth.

Regina do you want to add to that yeah, I just want to add that you know I think if you look at the digital bookings, which were over 42 million grew over 11% in the quarter you know there's a good half of those bookings which continue.

ER to extend our wallet share on the omni channel in large companies. So you know these are very very large companies with whom we are.

You know working divisionally, well working in certain areas or certain countries, but they have a huge opportunity to you know continue to and be additive to the growth of the business in particular.

As we continue to get our sea legs on making our discrete offerings in the intelligent automation on area on a much bigger part of the business as Ken was alluding to will take a couple of years. So one just you know probably 20 $22 million as existing clients who are.

I'm kind of just continuing to add licenses, if you will and components of the increase in components of their business, you know extending that omni channel globally and throughout the entire business.

The last thing I would say as you know we really shouldn't be.

Last on the market that one of the main reasons that we are winning engage is the conversation that we can have not just about getting folks from home or dealing with.

You know fast growing volumes, but ultimately well getting that done you know as task. One you know into you know the T. tech ecosystem to be processed that most of our deals today have you know initial pilots then.

Orient significant in terms of the economics for digital right now, but once those pilots are laid in and the outcomes are understood.

They will be calm right by themselves a significant a pipeline for digital so you know some of this is just timing, but I will tell you that watch been you know very impressive is that when you reflect on why we won.

We are winning because we have that virtualization that work from home that ability to hire and train and get on these volumes vary.

Very quickly.

But the second thing is that we're committing to these clients that we are doing these three and five year contracts.

Going to be further enhance.

Enhancing the environments in which they run their customer experience I think that's an important point.

On the work from home.

You know I have to be honest with you right that you said, it's a day by day and I don't think about this only for the associates I think about this for our entire 56000 employee base.

You know and I you know certainly a it's a hard one to call, but please understand that from you know the end of February we have been working on a program a phase one two and three relative to the reshaping of our real estate facilities portfolio and it's almost like you know capacity utilization is.

A metric of the pass at this point as we go through this period.

But I will tell you that the demonstration of our work in that area to refine our real estate portfolio has given us.

Gone from about 7.8% of our revenue in real estate to 5.3. So we're on it we're working it it's not something we work on our own we work with our clients.

And as Ken has said before you know we feel that when all said and done we could have as much as 50% of our engage business being done for an at home and you know the key here now is to kind of call the sites that not so much in phase one and phase two but the phase three sites that we might end up.

Out of our portfolio and or actually expand.

You know theres more conversations with clients and more observations of you know what our competitors are doing and so on.

Thanks for joining Ken helpful. Thank you.

Our next question is from Bryan Bergin of Cowen Sir you may begin.

Hi, good morning, Thank you.

Wanted to ask here about some of the moving pieces in digital and really how we should be thinking about the timing and the level of trough revenue in the digital segment.

I understand that in the large government contract is still expected to contribute I think moderately here in Fourq, you and then and I know you've got some of the other factors with planned consulting exits and the product declines.

I'm curious if you could give us a little bit clarity on where you get to that base level and then are there sizable opportunities here in that pipeline that can backfill at a faster rate some of these declines.

Yes. So first of all you should know that a few years ago, we had very little cross selling going on between engage and digital and today.

We're roughly seeing almost 30% of the deals or.

So to speak that are taking advantage now of both.

Our goal, obviously is to get that 30% to 60%. So I just want to point that out that we're making really good progress on providing what we call. The one she tech approach.

Two our embedded base as well as to new prospects and we think that that's going to have a.

The significant impact.

In the future to come.

What I would what I would just simply tell you is that we are working firing on all cylinders and highly focused on you know selling as many big deals as we can to replace some of the government Oh.

Work that was you know that we had for <unk> for two years and that's come to an end with the sensors coming to an end.

And I feel very confident that we will hit our growth targets.

And that you know that ultimately it will all this will be behind us.

Because the majority of all the new business that we're winning on the digital side as all long term recurring revenue long term beyond two years, meaning meeting its three year five year contracts et cetera, Virginia, you want to add to that.

Yeah, I mean, I think we're coming into that trough right that there's two trucks going on one is we're going to exit. This a short term government contract. The other is that where you know we have a disruptive model were moving from what has been an on prem.

You know a delivery model, which has a different revenue kinda and expense profile at least in terms of recognition until you know a cloud and so I think we're coming into those quarters and that is why we've really tried to help to continue to talk about you know the underlying base business.

This which you know is you know somewhere around 200 210 coming off of this year will be the base revenue and we continue to believe that we can grow that base you know, 15% to 25% I mean, we had 11% you know increase year over year in Q3 bookings, we have significant pipeline for.

Kinda Q4 in Q1 at around 400 million you know, we see an increasingly in very impressive a healthy pipeline from the Amazon connect acquisition, we did.

You know a good part of that 400 million is a a pipeline for Cisco Webex cc. It remains healthy and you know I just I want to point out that probably the most compelling data point is that we've we've got 110 million of digital bookings in the period ended September thirtyth.

52, which.

It's an annual contract value for multi year recurring revenue agreements. So do you take that 52 million on our 200 base because that's what it relates to right. You know that is you know a 25% growth rate. So this is this business has a combination of a Korean nonrecurring.

Professional services or nonrecurring or cloud.

Services, our recurring three to five year take or pay so 52 million of that 110 is recurring revenue is the annual contract right.

For for that and you know by itself, it's 25% of the base. So we are going to have a couple of quarters here, where as you know from a top line point of view. It may appear that we're not getting the momentum that we are and again you can count on us to bring the transparency to that.

You know not just this year, but you know as we go forward.

And so you know 2021 is a challenging year from the tip of the iceberg looking at our overall revenue versus the prior year, but when you look at the underlying business. The go forward business. The business that we're very excited to in that 10 talks about getting to 500 million in the next couple of years through a combination of or.

Organic and inorganic growth.

You know, we're still feeling pretty good about that.

Okay, that's very helpful.

And then you called out here that obviously the pandemic has changed the company materially from one year ago does it change the way you're thinking about medium term growth and margin potential in the aggregate.

Yeah, you know I mean, and again I made the comments I really like to get through the year, our fourth quarter bookings are very important to the next year.

You know understand where our backlog is you know in a couple of other things and be able to give formal guidance, but I do think that for the next.

You know year, or so that 15% to 25% and digital is is is is is right I'll get to the margins and the same.

You'll note in the script, I said, 5% to 7% on engage which as you know already different from <unk> kinda.

Three to five that we've been saying.

And you know, we'll be able to share more from a margin point of view you know there's a yeah. We feel we've always felt like getting in that let's see EBITDA of 14% to 16% was kind of mid terms, meaning in the next 18 to kind of 24 months, we got there a lot sooner.

Our because of the volumes that we got to and in that you know there are some things that we have not been doing we've been you know not chat traveling I would say while in Q2, we pulled back discretionary spend we never right. We never had any layoffs right.

We're going to always keep our head count in line with our backlog and pipeline, but it wasn't like T. Chek had you know a ah Ah any material level of exiting people at all and so what you're seeing in Q3 and Q4 are what I would say norm.

<unk> expenses with the exception of some travel and as I said earlier travels about a point and a half of our topline and we're probably about you know.

33 basis points of cost on revenue right. Now. So you know we will over time have to put that back in but we are not without our optimization of our corporate services inclusive of IP and so we feel that we have within a point or so.

Of margin very good opportunity to continue to see.

No.

Into next year.

Margins at or about this level before which right we make any decisions to further invest in additional sales and marketing go to market right. So again, we'll we'll pull these pieces out and share with you Len in early next March we give a guidance.

Guidance, but we're not thinking that we were hitting a you know 14% to 15% EBITDA. This year and we're going back to 12 and a half to 13 I promise you that.

Okay. Thank you.

Great speakers. Our last question is from decent Gopher Berg of Bank of America, Sir you may begin.

Hey, This is Cathy health, Jason Thanks for squeezing me in guys. So I guess I wanted to shift back to talk a little bit about engage obviously based on your guidance you expect it to remain pretty elevated there for Q.

When do you expect it to slow and potentially return a p. cobot level. Then what do you think it's sort of the maybe medium term sustainable growth rate and then the engagement. Thank you.

Yeah, I mean, I guess Oh go ahead, Kent Plano No. No go ahead, I mean, I don't I don't see it slowing or I think this is not about cobot anymore, but go ahead Regina no.

No no yeah, I was just going to say the same thing and then just reiterate what I said earlier, if you look at our Q4 bookings 92% of those bookings were BBU bookings. If you look at the agreement of the covert work that we had previously and now it's really the underlying nature of its unemployment work its prepaid cards, it's fraud detection and prevention its cons.

Actually I think these are now been signed up as longer term contracts. So you know.

We always have churn if you will on our base you know probably 8% to 12% I would say as the $460 million of bookings that we have year to date, maybe 30 are not going to continue our relative to the pandemic and are not going to continue but that's a small number.

In the Grand scheme of things on our billion six inch.

Engage business, especially when you know you take into consideration that were always planning in 8% to 12% churn of our existing revenue you know for a variety of reasons.

Got it that makes sense and you talked a little bit before about you know like the broad geographic reach you guys had you guys are doing a little bit more work in looking at that a little closer I mean is there anything you can share about when she argued that you're trying to penetrate deeper in or are you pretty happy with your make no.

Yeah, again, I'll just repeat what I just.

I repeat what I said earlier right I mean, we've we've got a huge presence in the U.S. North America. A couple of years ago. We started to see Europe. Europe is now you know really really growing and so we expect to go deeper there make more investment there and you know we.

We do have small team in Asia Pac and in Latin America, but those would be ones that you know depending on how the you know the cards, we play into next year.

No, we could or could not accelerate but really our focus right. Now is to go long in Europe. We're having success, we're going to build on that success and when I say youre up I'm really talking about client acquisition. Although obviously, we will provide a delivery throughout Europe to make sure that we.

Great all the languages.

Got it thanks, guys congrats on the quarter.

Thank you.

Thank you from operators that are those.

Thank you.

This concludes.

He teck's third quarter 2020 earnings conference call you may disconnect. Thank.

Thank you.

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