Q4 2021 TTEC Holdings Inc Earnings Call
Thank you for standing by the conference will begin momentarily.
Till such time, you will hear music. Thank you and please continue to standby.
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Yes.
Yes.
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Welcome to <unk> fourth quarter, and full year 2021 earnings conference call.
Would like to remind all parties 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. Chek I would now like to turn the call over to Mr. Paul Miller, <unk> Senior Vice President Treasurer, and Investor Relations Officer. Thank you Sir you may begin.
Good morning, and thank you for joining US today <unk> is hosting this call to discuss its fourth quarter and full year financial results for the period ended December 31, 2021 participating on today's call are Ken Tuchman, Our chairman and Chief Executive Officer, and Doug <unk>, Our Chief Financial Officer yesterday too.
<unk> issued a press release announcing its financial results before we begin I want to remind you that matters discussed on today's call include forward looking statements related to our operating performance financial goals and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward looking statements reflect our opinions as of the date of this call and we undertake.
Make no obligation to revise this information as a result of new developments, which 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.
More detailed description of our risk factors. Please review our most recently filed quarterly report on Form 10-Q , and our Form 10-K , which we expect to file in the next couple of days 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 Tuchman.
Thanks, Paul and good morning, everyone.
2021 was another record year for <unk> Tec.
In addition to delivering strong performance across our key financial and operational metrics, we made significant progress expanding our CX technology capabilities.
Today <unk> is the largest global pure play two X technology partner in the market.
And and ecosystem, enabling growth in commerce for some of the most customer centric and innovative brands and governments across the globe.
I am excited to share many highlights from the year.
Start with our record 2021 financial results bookings.
<unk> increased 14% to $751 million.
Revenue increased 17% to $2 $2 7 billion.
Adjusted EBITDA increased 17% to $364 million and non-GAAP EPS increased 21% to $4 62 per share.
Our ability to consistently outperform our goal is the result of our strategic vision and steadfast execution.
Over the past decade, we've continuously advanced our industry leadership position with meaningful investments in CX.
Leadership technology and capabilities.
In the last three years, our revenue has grown 50% and our EPS has grown 200% a solid demonstration that our strategy is working.
And there is plenty more to come with so much up with so much opportunity in the market. We will continue to judiciously to judiciously increase our investment to increase our great, including expanding our sales and marketing executive leadership product and offering innovation and client delivery footprint.
Before I dive into our growth strategy.
To recap our progress over the past three years.
Start with our digital business.
Over the course of the last three years, we have grown our digital revenue by 73%.
We acquired and integrated three proven leading edge CX technology company Avtex surrender bite and voice foundry, we've established <unk> as the largest strategic partner with the most noteworthy six enterprise technology players.
We have advanced our proprietary CX IP with digital engineering solutions that simplify interaction accelerate deployment and integrate complex platforms.
We have created a highly scalable profitable new revenue streams, selling our proprietary IP on digital marketplaces.
We have significantly increased our total addressable market with a set of differentiated outcome based mid market solutions and we have continued to expand our deep bench of certified full stack technology engineers and CX architects.
We have a robust client base over the last three years, we've increased the number of significant clients a 150% from 300 client to now over 750 clients in the last three years.
Bookings from new logos increased 63% per annum.
Integrated deals increased 37% per annum and hyper hyper growth client revenue grew 44% per annum.
Binding the breadth and depth of our client relationships with our new logo acquisitions.
And we'll continue to enable significant growth in our bookings backlog and revenue.
Our progress over the past three years has been acknowledged in the CX leadership rankings of industry analyst at Gartner Forrester Everest and IDC. In addition, we continue to be to be cited as an employer of choice across the globe, including recognition by Forbes as one of the <unk>.
Because best large employers.
Over the last three years, we have truly transformed our business, we established ourselves as the world's leader in customer and employee experience our portfolio of CX technologies enabled solutions client and partner relationships CX expertise IAP and footprint will undoubtedly serve us well as we enter the next.
Stage of profitable growth.
With the current CX Tam estimated at 640 billion.
<unk> serves only a sliver of the market.
Given our differentiated platform and market momentum it makes sense to smartly invest now to gain market share.
Let me provide some context.
Consumers have unequivocally crossed the threshold into a digital world that provides a new and better ways to work play learn and connect regardless of the channel product service or brand. They choose consumers expect every interaction to be seamless effortless and personalized.
They are embraced everything digital has accelerated the pace of CX virtualization at the same time the need for compassionate human intervention has also grown technology can only go so far when it comes to successfully sensing and responding to human needs those brands that figure out how to.
Harnessed the power of technology, and combining it with human empathy at scale will be the winners.
New entrants into the CX market like large IP solution providers view their world through a technology lens not a customer focused lens <unk> CX obsession is grounded and decades of experience working in the frontline managing hundreds of millions of customer interactions, we know with delight or faster.
The customer by persona intent and channel, we know the experiences that build customer loyalty or destroy it and most importantly, we know how to blend technology in humanity to build customer value strategically at scale.
Let me share a relevant example from this quarter's bookings.
Highly capitalized fintech.
With a vision of building a digital first company with customer Centricity, because theyre true north.
We're on a fast track with a priority to deliver exceptional CX.
After an extensive market review they chose our <unk> solution. We were selected based on the breadth of our CX technology operational capabilities and deep financial service credentials and proven ability to move quickly and scale rapidly as their business accelerates and grows.
With these tier ones as a backdrop, we've evolved our growth pillars to take advantage of the vast market opportunity.
The first is technology innovation and differentiated IP.
Through our own IP development and targeted acquisitions over the past decade, <unk> has grown into the largest pure play CX technology provider in the World, Let me Dimensionalize the size and scale and exclusive focus on <unk> at T Chek digital for Ya.
Today.
Deliver and deploy thousands of complex CX technology projects every year, we build sophisticated data lakes integrate massive CRM system develop complex automation algorithms architects seamless self service applications and create nexgen functionality with our proprietary IP.
We hold to manage hundreds of thousands of SaaS licenses that Ralph billions of Omnichannel interactions on a daily basis, we operated dynamic learning environment for our global team of full stack engineers to enable them to earn hundreds of certifications across the most attractive CX technology platforms.
And as a result, we have continually been recognized this partner of the year by some of the largest global enterprise CX Tech players in the marketplace.
Now, let me unpack our <unk>.
Digital business model, we operate four centers of excellence that are interconnected through our proprietary experienced $3 16 methodology.
It is our approach to combining strategic consulting and digital engineering to deliver lasting customer and employee experience transformation.
Our experienced strategy team uses design thinking and voice of the customer techniques to build transformational roadmaps both at the company level and within key operating units. These highly strategic projects typically yield material follow on revenue for both our digital and engage business units.
Our intelligence and insights teams, which we call digital experience focuses on data AI and CRM to help companies capture manage analyze and act on customer data over the past two years, we've combined our IP with a leading global digital platforms to deliver tranche transformational results.
The clients.
Our omnichannel team, which we call interaction experience build omnichannel engagement hub in the cloud to enable intelligent predictive interactions across the entire customer journey, where the largest go to partner for cloud migrations for several of the global Enterprise <unk> Tech Giants.
And finally, our experience innovation team pushes beyond existing new platforms to create package proprietary SaaS based offerings that address gaps in the CX technology ecosystem. Our IP is utilized by one hundreds of clients through our partners marketplace enables seamless interactions across hundreds of thousands of endpoints.
Our four pronged protect digital model enables us to help companies achieve their growth objectives with a strategic vision and actionable roadmap our land and expand approach provides us with the spirit of influence that broadens from single to Standalone projects to long term full scale transforming.
<unk>.
Our clients choose to grow with us because we continually deliver the results that matter most to them.
Increased revenue profitability and customer loyalty.
Prime example of the power of this approach work with a leading medical device provider. Our relationship began when they purchased our packaged IP on a technology marketplace. They were seeking tools to help them move from a disconnected contact center to a streamlined health advocate hub they quickly realized that they required.
Far more than a single application to create transformational change that was vital to their future. They needed a comprehensive strategy and the roadmap that only a CX expert like tech digital could deliver working together, we've delivered measurable improvements in their speed to market ability to scale and employee productivity and customer loyalty.
It's important to note that our leading edge CX technology ecosystem also powers every one of our engage programs. For example, we're using AI to recruit hire and train CX ambassadors advanced analytics to deliver proactive and predictive routing and automation to drive frontline processes and optimization.
<unk>.
Focused on what is coming next our dedicated engage innovation team is working on <unk> three point out with investments in R&D initiatives around <unk> Iot and the immersive web.
Now on to pillar number two our deep vertical location.
As the customer journey becomes more personalized and complex the need to tailor interactions by industry has become critical.
There are customers researching options for a mortgage on their mobile phone checking for the results of their recent blood test on their laptop or scheduling a service appointment through their smart car dashboard. They expect the experience can be personalized relevant and simple.
For decades, we've been fine tuning our industry expertise across both legacy and hyper growth verticals. This include financial services, and Fintech healthcare and health Tech retail and e-commerce , automotive and mobility public sector and smart cities among others.
From offer development to technology solution designed to ongoing <unk> operations. We've aligned every facet of our go to market and delivery around the needs and requirements of the end customers of these verticals.
In December we took another step on our verticals on a vertical <unk> strategy, when we announced an agreement.
Sector citizen experience platform and smart city assets of Daniel.
The acquisition is expected to drive significant growth in the $19 billion Tam.
Tam for Tech enabled citizen engagement solutions.
Our third pillar is diversification.
Which creates multiple vectors to enable consistent growth and mitigate concentration risk through organic.
Eric initiatives partnerships and acquisitions, we're diversifying our client mix industry focus Tech partners capabilities and geographic expansion. For example, we're growing in emerging markets with skilled resources for both digital and engage building new technology partnerships to enable nexgen functionality and enhance.
<unk> capabilities for thriving mid market segment.
Our fourth pillar strategic and accretive M&A is driven across three key areas, we will pursue acquisitions that align with our strategic pillars and are accretive to our profitable growth profile and providing attractive delivery footprint, we have a robust pipeline and I look forward to sharing our progress in the <unk>.
<unk> ahead.
Our fifth pillar is maintain maintaining a strong financial profile with profitable growth and record cash flow. Despite lingering global pandemic economic challenges and climate threats of historic proportions, we've consistently delivered strong topline growth and execution of our key financial priorities time and again.
We have demonstrated unwavering resilience by keeping an even exceeding our commitments to our shareholders clients and employees.
<unk> approaches our 40th anniversary later this year.
Well positioned to accelerate our next steps.
Phase of growth.
World is now fully entrenched in the experience economy, and the ability to delivery to deliver amazing personalized effortless CX will define success for every brand and government.
As our continued strong performance demonstrates industry leaders across the globe are choosing <unk> as their virtual engine to power their customer experience.
<unk> has always been guided by the belief when we live our core values, we create our business value our determination to make a difference for our people the communities in which we live our planet at large is hardwired into everything we do yesterday, we released our first comprehensive ESG report I encourage you to take the time to review and <unk>.
<unk> the way in which we are building a thoughtful carrying responsible company with a mission and vision to bring humanity back to business and the <unk> family of over 65000 people operating on six continents building exceptional engagement is a must.
Closing on behalf of our board, our management and our employees across the globe. Thank you for your continued support I could not be prouder of our progress and more excited about our future now I'll hand, it over to Dustin.
Thank you Ken and good morning, everyone I'll start with a review of our fourth quarter and full year 2021 results before giving you some context on our 2022 guidance.
As highlighted by Ken we had another exceptional year, we exceeded our expectations across key financial metrics, including bookings revenue adjusted EBITDA and non-GAAP operating income and EPS.
Our performance continues to demonstrate the importance of our marketplace differentiation and providing integrated end to end CX solutions, we continue to be well positioned for strong profitable growth in 2022 and beyond.
Our sales teams delivered another strong year of new bookings are fourth quarter bookings increased 10% to $206 million over the prior year period, resulting in record full year signings of $751 million.
14% year over year.
Bookings growth was most prominent our digital segment, increasing 91% in the fourth quarter of the prior year period, and 53% in 2021, driven by strong demand for our Genesis Amazon connect and Microsoft <unk> solutions among others.
Our engage segment also had strong demand across our core customer care and customer acquisition services in both segments, our bookings were well diversified across large enterprises mid market and hyper growth clients.
Our new logo acquisition motion continues to accelerate with 30, new logos in the fourth quarter and 82 for the full year. This represents an increase of 50% over the prior year full year period.
We sold seven multi segment deals in the fourth quarter totaling $74 million and 32 for the full year totaling $202 million.
From a vertical perspective, we built upon our diverse industry expertise in healthcare financial services, automotive TMT and travel and hospitality as these further vertical lies operational delivery platforms and our go to market strategy.
We have entered 2022 with a strong backlog and pipeline, which I will share with you shortly.
In my discussion on the fourth quarter and full year 2021 results referenced the revenue is on a GAAP basis, while EBITDA operating income and earnings per share on a non-GAAP basis.
A full reconciliation of our GAAP to non-GAAP results is included in the tables attached to our earnings press release.
On a consolidated basis in the fourth quarter of 2021 revenue increased seven 2% to $612 million adjusted EBITDA decreased eight 9% to $84 million or 13, 7% of revenue compared to 16, 2% in the prior year.
Operating income decreased seven 5% to $68 million or 11, 2% of revenue compared to 12, 9% in the prior year.
EPS decreased 11, 3% to $1 eight compared to $1 22 last year.
And foreign exchange had a negative $1 $9 million impact on revenue and a positive $2 $6 million impact on operating income.
Our fourth quarter year over year top line performance reflects increased business as usual volumes and a contribution from the <unk> acquisition. This was partially offset by the anticipated reduction in pandemic related volumes in the prior year period, now being replaced with longer term embedded base and new client engagements and our engage segment and the successful completion.
With a large government contract in our digital segment in the prior year.
Revenue highlights include many of the same drivers that I outlined in our bookings composition. In addition to a 28% increase in revenue from EMEA and a 15% increase from a hyper growth sector.
Our fourth quarter margin continues to benefit from top line scale, and an increased mix of higher margin verticals and offerings and offshore delivery.
The year over year margin contraction is due to increased investments in the fourth quarter related to sales and marketing product and engineering talent.
It and security infrastructure and geographic expansion as well as a large anticipated reduction of higher margin pandemic related work and the completion of a large government contract in the prior year periods.
For the full year 2021 on a consolidated basis revenue increased 16, 6% to $7 billion exceeding our guidance of which seven 7% was organic growth.
Adjusting for the large short term government contract in 2020 revenue growth rate would have been 22, 2% and organic growth would have been 12, 7%.
Adjusted EBITDA increased 16, 6% to a record $354 million or 15, 6% of revenue flat compared to the prior year period.
Operating income increased 18% to 286 million or 12, 6% of revenue compared to 12, 4% over the prior year.
EPS increased 28% to $1 62, compared to $3 <unk> last year.
Foreign exchange had a positive $18 7 million and $3 $7 million impact on revenue and operating income respectively, primarily affecting our engage segment.
The enablers of our full year top line growth are primarily attributable to increased volumes across our expanded suite of offerings vertical focuses geographic footprint and the <unk> acquisition.
<unk> full year bottom line growth reflects scale increased higher margin verticals and offerings as well as lower depreciation expense as a percent of revenue partially offset by the items are already noted in the fourth quarter.
Turning now to our fourth quarter and full year 2021 segment results.
Our digital segment revenue increased 56, 4% to $118 million in the fourth quarter of 2021 over the prior year period.
Operating income was $20 million or 17, 1% of revenue compared to $10 million or 13, 1% of revenue in the prior year period.
The performance improvement was due to the revenue contribution from our higher margin Genesis and Amazon connect Omnichannel cloud solutions, our Microsoft practice in our digital IP offerings.
IRA omnichannel product sales to support our clients <unk> infrastructure investments and a onetime $3 4 million increase to revenue and operating income related to a purchase accounting adjustment associated with the <unk> acquisition.
Our recurring cloud and managed services revenue grew 39% in the fourth quarter of 2021 over the prior year period, representing 54%.
Digital is total revenue.
Our reoccurring systems integration revenue grew 74% representing 24% of total revenue.
On a full year basis digital 2021 revenue increased 34, 9% to $414 million over the prior year period.
Operating income was $60 million or 14, 4% of revenue compared to $54 million or 17, 5% in the prior year period.
Revenue primarily benefited for the reasons noted in the fourth quarter, partially offset by the completion of a large government contract in late 2020.
The margin decline was associated with government contract, whereby we continue to invest in our technology infrastructure.
<unk> leadership and engineering talent.
As well as sales and marketing on initial lower revenue base in 2021.
Our cloud and managed services revenue grew 9% over the prior year period, representing 54% Digital's total revenue and our.
Systems integration revenue grew 92%, representing a 26% of our total revenue.
We continue to estimate digital's revenue to grow in the 15% to 25% range over the longer term enabled by growing addressable market for CX technology solutions, which is increasing demand for our highly scalable best in breed CX ecosystem.
Increase recurring revenue from multiyear client engagement and strong fourth quarter and full year digital bookings on a growing sales pipeline.
Our engage segment reported.
Fourth quarter, 2021 revenue of $494 million compared to $495 million in the prior year.
Operating income was $48 million or $9 99, 7% of revenue compared to $64 million or 12, 9%.
On a full year basis revenue increased 13, 2% to $1 86, excuse me 1.86 billion all organic growth.
Operating income increased 22% to 227 million or 12, 2% of revenue compared to 11, 5% in the prior year.
Engage organic revenue growth highlights include existing client program expansions and new lines of business, a growing demand for our virtual into digital delivery capabilities.
<unk> volume increases in our automotive travel healthcare retail and technology industries as we further vertical wise, our operating model and expertise and growing contributions from the investments we made in our EMEA and hyper growth platforms.
This was partially offset by pandemic related work that reduces intensity during the second half of 2021.
Our full year revenue retention rate for engage was 110% in 2021 relatively unchanged in the prior year period.
Our engaged profit margin is benefiting from top line scale and increased percentage of revenue in our higher margin verticals and offerings and continued efficiency and our asset utilization leading to lower depreciation expense as a percentage of revenue.
Margin pressures reflect the previously mentioned rationale for the total company Impac.
Impacting our engage segment.
We are pleased about the tailwind benefiting our engage business and continue to estimate revenue to grow well above industry averages in the 7% to 9% range over the longer term.
I will now share other 2021 measures before discussing our outlook at.
At year end cash was $158 million and $797 million of debt of which 791 million represented borrowings under our recently Upsized $1 5 billion credit facility.
Net debt increased by $376 million to $639 million year over year, primarily related to acquisition related investments and capital distributions, partially offset by strong cash flow generation.
Cash flow from operations was $251 million in 2020 , one compared to 272 million in the prior year period.
While cash flow benefited from increased profitability and record low DSO of 54 days in the fourth quarter down from 61 in the prior year period. The net decline in operating cash flow was due to the repayment of the deferred taxes and the loss of an in year benefit associated with the cares act as well as higher bonus related payments.
Associated with the prior year.
Capital expenditures were $60 million or two 7% of revenue for the full year 2021.
Fair to $60 million or three 1% in the prior year. The decrease as a percentage of revenue is primarily due to our focus on the improvement in our fixed asset utilization in particular, our facilities and technology assets helped by growth of our at home platform, where we have continuously demonstrated leading capabilities.
Our full year normalized tax rate was 21, 3% in 2021 versus 22, 5% in the prior year. The reduction is primarily related to a beneficial jurisdictional mix of income and the benefit of various tax credits, we anticipate our forward tax rate in the range of 21% to 23%.
In the fourth quarter of 2021, <unk> paid a <unk> 47 per share dividend R $22 million on February 24th of 2022. The board declared the next semiannual dividend of <unk> 50 per share payable on April 20th of 2022 to shareholders of record as of March 31 of 2022. This dividend represents a six four.
5% increase over the October 2021 dividend and a 16, 3% over the April 2021 dividend.
We remain committed to our capital distributions to shareholders through a semiannual dividend aligning with our long term capital management plan.
Upon our strategic priorities related to market leadership and investment in organic and inorganic growth, while providing returns to our shareholders.
Turning to our 2020 is your outlook.
Im first going to provide some context supporting our updated guidance and then move into our financial estimates.
The overall demand environment continues to be strong across both our digital and engage segments and as a result, we are investing an incremental $50 million sales marketing and product innovation in 2020 to capitalize on the market opportunity ahead of us.
Many of these investments will be made to accelerate our virtualization diversification strategies.
Ken detailed earlier.
We diversified our geographic delivery footprint across 2021, and we'll look to bring those markets to scale and continue to expand to additional markets across 2022 to continue to mitigate the challenging U S labor market and both engage and digital.
Growth will ramp across 2022, primarily in the second half as we continue to convert remaining pandemic related volumes into long term work and yield incremental bookings from our investments made in the fourth quarter of 'twenty one.
While these investments with simple margins the short term they will set us up for long term margin expansion in 2023 and beyond.
In fiscal year 'twenty, two we will continue to accelerate the momentum we have across our digital business as we capitalize on our larger CX transformation deals and a transition to the cloud as well as supporting Cisco's renewed focus on its new cloud platforms.
We expect the acquisition of certain Fanueil asses to close prior to the end of the first quarter of 2022.
We entered 2022 with a total revenue backlog, including Daniel.
222 billion.
<unk> thousand 14, 1% higher than 2021.
Our 2022 sales pipeline to start of the year, including Spaniel is 2.04 billion up 13% over the prior year and adjusting out pandemic related pipeline is up 32% for the prior year.
Now turning to the midpoint of our 'twenty two guidance, including Fanueil assets as outlined in greater detail on our fourth quarter and full year 'twenty One earnings press release.
GAAP revenue of $2 $5 nine zero billion, an increase over the prior year, a 14% non-GAAP adjusted EBITDA of $380 million, an increase of seven 3% over the prior year and 14, 7% of revenue compared to 15, 6% in the prior year non.
non-GAAP operating income of $311 million, an increase of eight 8% over the prior year and 12% of revenue compared to 12, 6% in the prior year.
non-GAAP earnings per share of $4 eight <unk>, an increase of 5% over the prior year.
Yes, Bruce is muted relative to operating income improvement due to the anticipated step up in our overall interest expense.
Other relevant guidance metrics include capital expenditures between $2, 91% of revenue of which approximately 65% is growth oriented.
A full year effective tax rate between 21, and 23% as I noted earlier and a diluted share count between $47 four and $47 8 million. Please reference our commentary on the business outlook section to our fourth quarter and full year 'twenty One earnings press release to obtain our expectations for first quarter and full year 2022 performance at the consolidated and segment.
Level before I close we anticipate filing our 2021 Form 10-K within the next couple of days. The timing is a function of finalizing documentation disclosures relating to the acquisition of Opex and we do not anticipate any changes relative to our financial results.
Closing <unk> delivered another strong year in 2021, and we cannot be more appreciative of the innovation talent and commitment from our global diverse employee base.
We look forward to delivering another strong year in 2022, I will now turn it back to Paul.
Thanks, Don as we open up the call. We ask that you limit your questions to one at a time operator, you may now open the lines.
Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star followed by the number one please make sure. Your line is muted and record your name after the prompt to cancel your request. Please press star two.
Our first question is coming from the line of Maggie Nolan of William Blair. Your line is open.
Thank you Hi, Ken Hi, Jeff.
I'm curious if you can give us a little bit more color on that.
Growth cadence for engage and.
As you think about over the course of the year.
It's really the conversion of some of that revenue into long term revenue what can I get you to the high end of the guidance range.
Absolutely.
We are as I said.
Said in my script my comments.
We're just seeing record bookings and as you know margin. This is a business that is progressive and that it takes anywhere from nine to 14 months to fully rollout large wins et cetera, just due to the scale the size.
Et cetera.
That is.
Youre, 100% correct.
And then just to follow on to Ken's comments, Maggie what I would tell you is that.
Things first is in the press release, we actually lay out very detailed guidance specifically for Q1 across both engage and digital and what Youll see there is youre going to continue to see a step down relative to the pandemic volumes coming down in Q1, and then step up and kind of across next Q2, Q3, and Q4 into double digit growth once we head into <unk>.
The second half and particularly with the contribution of annual Youll see that accelerate even further.
Okay. Thanks, and then on the adjusted EBITDA guidance.
Kind of the normalized level that we should expect what are some of the quick can take year end.
What kind of on a segment level.
It's kind of a normalized level, we should expect this segment to operate that.
So Maggie going back to that a couple of comments I made earlier, we're making an increased step up in investments as noted in the fourth quarter of 2021, particularly in sales and marketing for 2022 were stepping up that investment roughly $50 million across a number of areas that generally sales and marketing.
If it is feet on the street product innovation, we're doing offering development, both with engaged as well as digital and then think about geographic expansion and not just with engage in terms of opening up new locations that Ken has already mentioned, but also think about offshore delivery footprint that we have in digital as well.
And then as well as the integration related to the Turnpike integration and so I think that what youre going to see is as I mentioned earlier tempered margins in the short term, but then that margin expansion will continue to expand in 2023 and beyond and while we haven't given a long term growth rates, we don't see anything stopping us from continuing to expand margins at this point in time.
And it's no secret that our internal goal is to double the business in a very short order of time in half the time that it took us.
Previously we stated before that we were going to double the business.
In five years.
And therefore, what we're doing is we're putting all the necessary investments in place, bringing in all of the necessary leadership. So that we can go to $5 billion and beyond.
And so I think that it'll be very obvious with future announcements coming out et cetera.
As to how we're how we're going to achieve that.
Very good thank you Bob.
Thank you.
Thank you. Our next question is coming from the line of George Sutton of Craig Hallum. Your line is open.
Thank you Ken I know you are not investing $50 million.
Willingly youre doing it because we see a great opportunity so.
I wanted to go to that new logo growth that you saw a 63% and really try to understand how that's driving your thought process in terms of making these investments because I see that as the future growth of the business.
Hi, George Good morning I.
I think that when you just look at the sheer increase in number of logo wins that we are.
We're garnering on.
Monthly basis, and when you look at the fact that in my comments that we've gone from 300 total clients now 750 active clients.
The core point is is that 80% of our organic growth comes from our embedded base and by more than doubling our client base. It ensures that we're going to continue to see strong growth from our embedded base of clients, who continue to be the gift that keeps on giving.
You also think about the fact that we've talked about the Tam of $640 billion estimated at 640 billion ended up at 640 billion $300 billion its captive.
So more and more of our clients that we are women have very large captive operations and what we're seeing is is that they are continually letting the air out of the tires and transitioning more of our captive business two to us as a partner and so consequently, we feel very strongly.
About the embedded base, what we can get out of the embedded base not only on the engage side, but on the digital side, we're seeing incredible cross selling taking place from.
<unk> engaged the digital and from digital to engage and then the last point that I want to make is that the.
Good evening.
The majority of the competitors that are able to engage space. Their primary focus is providing labor augmentation of utilizing their clients utilizing clients systems clients are looking for something far more.
Far more than that Theyre looking for complete transformational capabilities across all aspects all aspects of their customer facing technology and we believe that we're the only company that has the level of experience the depth and breadth to be able to actually take on those types of projects.
Just simply providing them with labor and near shore offshore and onshore market.
So what I just want to stress to you is that there is a reason why were winning all of these logos. There is a reason why we're seeing such strong bookings and it really has to do with the value proposition that we're delivering.
Clients right now and all of this has really been accelerated because of the pandemic every one of these clients have realized they're not digital at all if they werent born digital could begin with theyre not virtual enough.
And consequently, really have a very strong push to be able to be competitive with the digital with companies that were born digital and see what im getting that set our hyper growth business unit is also growing extremely fast and we're winning a ton of born digital companies in the E Commerce area, the Fintech area that crypto area.
Is that correct. So all facets right now all the verticals et cetera, we feel very strongly right now about.
And if I could just ask one other thing relative to your guidance, which is encourage either revenue guidance is encouraging and suggestive of your enthusiasm, but youre touching a ton of different industries I'm. Just curious if you could give us a big picture personal thesis in terms of what youre seeing from an economic outlook perspective.
[laughter].
Obviously.
These are really complex times, whether it be what's taking place in.
And in Russia, and Ukraine, along with the pandemic that hopefully is winding down but what I would say is that we are.
In our automotive space, the doubling down to EV is a huge opportunity for us.
You have probably 65% of the automotive logos.
The United States.
So we're seeing real opportunity there.
As you saw probably this morning, some of the announcements that were made by one of the largest automotive.
Makers.
So automotive is very strong.
Public sector is strong financial services is very strong.
Primarily on the financial services side, I think a lot of that has to do with the captive point that I've made that a lot of these large institutions are in fact screening that maybe it makes sense for them to be partnering more.
Fintech the new Fintech players that are coming up whether it be in the money transfer type businesses et cetera are very strong obviously, we're seeing a huge push for travel people are dying to get out.
Et cetera.
We tend to do although we have good business in the travel sector. We're really trying to focus on areas that we think are going to be more stable through the various different economic cycles that we may or may not enter into and go as much as we're excited by travel. We're also cognizant of the fact that.
Travel is going to be directly tied to the economy.
I'm just trying to think of where else are we seeing.
Strength.
Give you a little bit more illumination do you want to add anything to that Dustin.
The other thing I would say as part of one of the things that Ken detailed earlier George was around diversification and one of the intense there and we've talked about we do have expertise across a number of verticals, but I would say one of the main focuses in 2022 for that exact reason is to continue to diversify so you want to.
The ebb and flow with a very specific vertical or specific offering.
Relative to what you're kind of coming out of the learnings from the pandemic and the Sip.
Part of what you're seeing across this year beyond areas like hyper growth in areas that we do see <unk>.
Significant momentum.
We're continuing to diversify more broadly just make sure that we capture growth, but also deliver growth consistently.
Despite any type of economic challenge to kind of come down to that.
Thanks, guys.
Thank you.
Thank you. Our next question is coming from the line of Mike Latimore of Northland Capital markets. Your line is open.
Great. Thank you congratulations on the strong year there.
In terms of the bookings in the fourth quarter can you give a little more color on how.
How much or what percent were combined digital engage deal.
Justin you want to take that.
Yes, sure. So we had seven deals overall, if I remember correctly top of my head is roughly $74 million worth of bookings in the fourth quarter associated with that Mike.
Mike and then we had $202 million for the full year right demonstrating we continue to see acceleration in this area I think particularly as we've integrated app tax and brought them into the fold as well and now their digital capabilities, a more diversified across Jones's AWS as well as Microsoft our ability to cross sells increased dramatically I would say across both segments and we're really excited.
About not just the size of the deals but also the complexity of the deals that we're doing right now today and this will be another growth driver as we head into 2022.
Great.
And that's what's been referenced as like the <unk> solution as well when we say multi segment you can kind of use those terms interchangeably.
Got it got it great and then the Fanueil acquisition can you talk a little bit about what you're getting with that acquisition and then what kind of revenue run rate.
Ken do you want to take the I'll start I'll start it off.
I'll start and then maybe Dustin can follow on.
So we're picking up is.
Assets that are focused on everything from.
Transportation.
Calling mobility type services to congestion management services, we think that there is going to be a big push in large cities.
Whether it be to eliminate traffic or eliminate pollution et cetera to control traffic.
So although I'm not going to mentioned contract names, what I would just simply say is that.
We're picking up some of our largest contracts of the largest cities.
And in the country and some of these areas.
Whether it be.
Rapid transit.
Training.
Whether it be subways or whether it be automotive entering into a city during the peak period of time the tolling.
That's obtained to toll ways on highways et cetera. So that's that's clearly a big focus in the public sector area. We've been in the public sector area for a very long time.
And we're really very focused going forward on smart cities, we think that smart cities in the past, we're just kind of hype.
Due to the fact of lack of low latency technology and with <unk> and Iot, We think it's absolutely going to be the future. It's going to play a lot into the future even a lot into the future of autonomous vehicles et cetera, and we want to be front and center.
Working with the federal government and working with.
Statements in.
And local municipalities.
In this area so thats really.
Our big push and then the second area is as you know.
We have a very significant health care business.
And we're picking up a significant amount of the larger health care exchanges that are doing extremely well.
Justin do you want to take it from there.
Yes, sure and so just to answer the question directly around revenue run rates, we expect the contribution from Daniel to be somewhere in neighborhood from a revenue perspective of $102 million to $109 million.
Again, we're targeting acquisition to close sometime around the end of Q1.
Got it so thats 102 for basically nine months.
You got it.
Okay, great. Thank you.
Thanks Mark.
Thank you.
Our next question is coming from the line of Bryan Bergin of Cowen Your line is open.
Hi, guys. Good morning, Thank you.
Start on margin so the $50 million of growth investments I just want to be clear is that all front loaded in <unk> and <unk> and then can you give us a sense of how the rundown of some of that higher margin Covid work is impacting the EBITDA margin looking at the ramp it would seem to imply youre going to exit 2022.
17, 18%.
And that doesn't just help us how are you thinking about the embedded gross margin in that margin outlook.
Yes, sure so great question.
<unk> and I'll start with saying that around the investments themselves. We have been ramping them across 2021, and then we stepped up and increase that investment materially.
In Q4, Brian ahead of just naturally as you think about sales planning and kind of getting ahead of our 2022 cycle and that investment will step up materially in $2000 in Q1, and Q2, but keep in mind is going to have a consistent run rate as you go through the year.
And kind of a higher exit run rate through 2020 kind of heading into 2023. So it will be predominantly in the first half which is why if you look at the margin outlook, it's a little more depressed in the first half versus the second half and Youll see a yield in the second half and beyond.
So when you're moving too is that does that answer that question there before I shift to talking about the pandemic related margin.
Yes.
Okay. So as you think about the became the pandemic related volumes right. There is a step up related to gross margin with that and we've talked about that in the past where that particular work at that point in time, just commanded higher pricing power associated with urge the immediacy of the work that was going on in that we booked in 2020 'twenty as you think about the run.
Right coming down in Q1, we talked about the first half of 2021 really benefited from that pandemic work extending and then it began to ramp down and accelerated ramp down across Q3, Q4 and that will continue in the first half and largely stabilize or go away at that point kind of in the first half of which is why you see again the margin a little bit of margin compression as well as some of the growth rates.
<unk> in the first half of the year and.
And to give you a sense Q4, it's roughly about $40 million of downward pressure from those volumes year over year relative to Q4, which was which was a high Q4 in Q1 of 2000 22021.
And what you see as a result of that is when you. When you think about the relative scale of that work the percentage of overall mix you see a point or two of downward pressure on the overall gross margin and what youre going to see as a result of that and I want to make this clear is that we're shifting the mix offshore and improving our overall U S mix thinking excluding abandonment work.
We'll see that kind of net off in terms of longer term and.
But you will see that happen really in the second half of 2022.
Okay anything around the wage inflation, that's that's different that's harder to manage or are you comfortable with where your contracts are as it relates to coal and things like that.
Yes, no that's a great question.
I'm sorry, I can't go first Greg go ahead, Dustin good cohort.
Yes, so what I would tell you Brian is that again wage inflation is nothing new at this point.
And we've done I would say the team has done a really good job across 21 as it relates you can see it in our results and kind of the way that we laid out 2021 and delivered on it we've been managing wage inflation throughout all of 2021, and we do expect inflation to continue to tick up in 2022.
I think the narrative has changed with our customers and and we are working through those issues together and so far we have been successfully been able to work through it challenging and we expect it to be able to work through in 2022 as well.
And I think that wage inflation.
As much as it has the potential to put pressure on margins. It also opens up the door for us to.
Get more focused on providing.
Digital capabilities that in fact can help our clients lower their costs.
And so we're seeing real opportunity there, where we can demonstrate very quickly the impact that we can have a low hanging fruit where theirs.
There is potential for.
For self help tech capabilities.
As well as using a lot of our machine learning AI type capabilities and then secondly, there is also a significant.
<unk> opportunity to get clients, who have resisted any form of best shoring near shoring and offshoring and it opens up the opportunity for us to have intelligent discussions about a proper hybrid mix.
To help them control their costs, but all in all I would say that our clients are experiencing.
Higher wages internally in their own captives and they are.
They are definitely sympathetic to the need for us to continue to raise our rates to adjust for.
Whatever the labor whatever lies ahead.
Markets et cetera.
So hopefully that answers your question.
Yes. Thank you that was very helpful.
One quick follow up too.
Doesn't help you mentioned about <unk>.
What's the expected contribution in 2022, the inorganic component.
Really what youre going to see is the wrap effect Brian of the first quarter right roughly $40 million. If you think about the growth rate that we outlined for digital overall behalf, that's organic and half of that's organic.
Okay, great. Thank you guys very much.
Thank you.
Our next.
Thank you. Our next question is coming from the line of Joseph <unk> of Canaccord. Your line is open.
Hey, guys. Good morning, Nice results I wanted to circle back Canada.
Some of your comments on most of the growth is going to be coming from existing customer then you lay out for us maybe.
And maybe once again and kind of how.
Perhaps some of your delivery kpis match up to some of the captives or.
Broad brush.
No.
What there.
They see it.
In their own captive.
In terms of performance versus what you can provide.
As they hopefully continue to shift more work for you and then I'll have a follow up.
Yes.
Thanks, That's a great question so first of all.
We have historically been able to.
At a minimum meet and in many cases exceed our client's kpis their internal kpis and their net promoter score they measure us.
Great detail on a constant and ongoing basis.
Of all our clients for the most part.
Have legacy bricks and mortar.
Type contact centers and in many cases, those bricks and mortar contact centers are put in what I would just classify as.
NFL type cities. So consequently, theyre struggling significantly to find the amount of labor that they need to properly staff. Those facilities. Secondly, they are having problems getting people go to go back to the office.
And so we have always had a business that is one part bricks and mortar, but also we've had a significant virtual business with our at home business. It was nothing new to us and Thats why we had such fees in being able to shift 60000 employees to their homes so rapidly.
And so what I would say to you is that I think that as our clients are beginning to come to conclusion that.
<unk> for the new normal is not necessarily going to be shipped to all these people back to their embedded bricks and mortar it really positions us well because of the technology that we have because how we were there for them when they werent able to on their own shift to.
Two at home.
Et cetera. So we think our belief is and we're seeing it just with the wins that we're winning that we're going to continue to see.
More and more focus of these large captive.
Starting to move more of their volumes over.
To us.
Two.
Professional partner.
I think that.
At the end of the day, what Theyre also seeing is that we can provide them with a lot more diversity.
And our scale and our ability to find the find the talent not only just in United States, but across the globe and that is proving to be something thats very very beneficial right now.
I can't tell you, how many clients and I'm sure you've experienced this yourself as a consumer where you're calling into somebody's contact centers of big brands and your wait times are incredibly long and thats not because they are trying to comp it because their captive there so understaffed.
And so here in lines obviously.
Hello did I answer your question, Joe Yes, you did thanks Ken.
And then just one more quick follow up there.
On.
Given the labor shortages, given kind of where businesses are going in.
Kind of.
Thinking a little bit more out of the box is outcomes based pricing more on the table now than it has been.
The way too.
Solve some of these problems for customers given the.
The capabilities you have an understanding their business models.
So that's clearly a focus of ours for 'twenty, two and beyond and we're we're seeing the opportunity for more and more outcome based pricing is where clients are getting more serious about letting us injected you it'll capabilities.
So the more digital capabilities that we can interject more control that we can have over.
The types of interactions that we're handling what we can automate what we can't automate what we are confident to hit rate's going to be on self service technology et cetera. The more comfortable we feel to provide more of an outcomes based model. So clearly that's a focus of ours.
And we think that this is a journey and then it's going to take multiple years to really have a meaningful amount of business that is fully tied to either subscription or to an outcome.
Paul.
Said, we've been in the outcome based pricing side of the business for decades and have a substantial amount of our business, where a portion of the business has outcome related.
B.
We see opportunities where with certain accounts, where the entire.
Payment as it comes off of the actual outcome and we're clearly heading in that direction. We just think it's going to take some time, because it's a whole it's a whole new way to price some of these types of projects.
Sure. Thanks, Ken Thanks Duston.
Congrats on all the progress.
Thank you very much yes. Thank you.
Thank you. The next question will be from Jason Kupferberg of Bank of America. Your line is now open.
Hey, guys. This is Jason on for Kathy Kathy on for Jason Thanks for taking my question.
First I just wanted to ask about free cash flow conversion for 2022, how should we think about it at the EBITDA as a percentage of net income.
For the next fiscal year I know you guys called out a couple of onetime items in 2021, but just wanted to know how to think about it going forward. Thank you.
Hey, guys. This is Dustin speaking so thank you. It's great question. So a couple of things I would tell you is the one time items really related to the carriers as I mentioned earlier, the cares Act and we see that is normalizing in fiscal year 2022.
So what youll see is.
Frequency I would say free cash flow conversion related to.
EBITDA and roughly in that 70% range.
Got it we're not going to have those one time items are not going to recur and youll see a more normalized going forward.
Okay, that's perfect and second I, just wanted to kind of like concern did you guys see any macro related impact to the business I wasn't clear whether that pressure to volumes, but Oh, my God are Russia, Ukraine exposure, either by head count or client mix.
Just wanted to be very clear on that.
Okay.
I am not aware of any.
Any volume decreases.
In the first quarter due to any of those those related items, if anything maybe were seeing the opposite of that.
Yes, it's great question again, and what I would tell you is just to be clear no issues related to the Ukraine, and Russia and complex.
And also I would say that we feel really good about where we are heading into this quarter.
So far all indications speak to strengthen and we're really excited about delivering on our Q1 guidance.
Alright, thanks, guys.
Thank you.
Thank you our next question will be from James.
Morgan Stanley Your line is now open.
Great. Thanks, a lot two two quick question from me.
First.
It obviously can you have a long history of being very successful in doing acquisitions et cetera, you've done. Some recently how are you thinking about and I think you indicated that you have some in the pipeline.
What is the change in valuations if anything how has that impacted your thinking.
Can you also give some color on what youre trying to do directionally or strategically as youre looking at potential acquisition targets right now.
Well first of all I think if you look at our acquisition history.
We have always been I think very focused on making sure that acquisitions.
Are accretive not only strategically but financially.
And.
We tend to not be.
The one that paying the crazy evaluation that then wakes up six months later and realizes whether they just do.
We're very well.
We're very growth focused we're very.
We're very profit focused to top and bottom line focus is very important to us and we're very focused that it's aligned with our strategy.
As far as valuations compressing.
I think we all know this you've been around for some time that.
Unfortunately.
From a buyer standpoint sellers tend to have a bit of.
Of an overhang.
On their belief of what their business is worth.
That usually takes six to 12 months until they ultimately so as the market settles and until they ultimately realize that what was no longer now.
What I would just simply say to you is is that.
We are very cognizant of.
The valuations and how they are changing we're going to continue to be very responsible stewards of our balance sheet and making sure that we don't do something stupid.
We regret.
Also not going to bet the company type transactions.
Transactions.
<unk>.
Because those tend to not to work out if you know what I mean.
And so consequently, I think what youre going to see is that there's going to be more focused in geographic expansion and more focus and.
Nothing in our in our digital business we are at.
Absolutely confident that we can get our digital business to $1 billion, we're absolutely confident that that that scale.
It gives us a lot of other benefits.
We're absolutely confident that in the not too distant future, we can see that division do.
A comfortable rule of 40, which is where we want it to be.
We're also confident that.
That the marketplaces consolidating on the engage side and that we're in a really good position as being the high end.
Provider in the marketplace. We believe Wouldnt go to shop for people, who are really looking for true quality, they're looking for a company that has total transparency.
And we feel very good about our position in the marketplace.
The backdrop of just how much demand is out there there is tons of demand out there not just for us but for the entire marketplace.
Got it and then.
Follow up question as it relates to kind of the coming year and just your Youre planning overall, you talked a little bit about moving.
Some of the sourcing to different geographies in different locations et cetera to take advantage of the opportunities.
How should we think about what you need to do from a rate of head count hiring in order to achieve your objectives for this year.
Are there any particular.
Hurdles or considerations that we should keep in mind as you as you go down that path.
Look it's no secret that on the tech side hiring qualified.
Technologists is.
It is a challenge for everybody it doesn't matter who they are.
Et cetera, we think we have a leg up because of our culture.
I don't I don't say that just to.
Sound proud et cetera, but it's public what our culture is and we think that we've got a culture that is culture.
Culture that has that helps us attract.
And retain top talent, so what I would say to you is.
On the tech side, attracting the amount of talent that we need to keep up with the growth of the deals that we are selling is no question of talent challenge, but we're up for that challenge and it's why we're continuing to expand our geographic reach so that we have more markets to be able to dip into to be able to acquire that.
That tech talent that we're looking for.
On the engage side, we feel like we've got a solid machine for being able to.
Find the talent that we need on the frontline.
That said, we absolutely feel like we need to.
Being more markets to provide nearshore and offshore and best sure type capabilities.
That obviously helps our margin.
And and.
And so I think youre going to see.
More and more focus going into the into that area more and more significant wins in that area, which gives us more margin coverage more gross margin coverage.
Et cetera. So.
The.
What I would say, it's going to be very interesting to see what happens with the tech market going forward.
As.
Ukraine, and Russia, and some of these other markets.
Potentially get shut down.
From a place to recruit tech talent. The good news is we have no.
We have no assets in those areas.
Not focused in that area.
And we're not recruiting from those markets.
The bad news is that potentially will create a bit of a vacuum in my opinion across the entire tech sector.
As people re jigger to move talent from one market to another market again that said, we feel like we've got a good strategy of where to find our tech talent and.
We're going to do everything we can to continue to keep adding all of the good developers.
That we need for our projects.
For our clients.
Okay. That's great I appreciate the comments this morning.
All the best.
Thank you for your question. So that is all the time we have today.
I will now turn the call back to Paul Miller.
Yes.
Thank you everyone for your participation.
Concludes our earnings call have a great day.
Thank you.
Yes.
This concludes <unk> fourth quarter and full year.
Only one earnings conference call you May now disconnect at this time.