Q2 2023 TTEC Holdings Inc Earnings Call
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Okay.
Welcome to <unk> second quarter 2023 earnings conference call Electrum mind, all parties that you will be in listen only mode until the question and answer session. This call is being recorded at the request of <unk> now like to turn it over to your host Mr. Paul Miller <unk>.
Senior Vice President Treasurer, and Investor Relations Officer. Thank you Sir you may begin the call.
Good morning, and thank you for joining us today <unk> is hosting this call to discuss its second quarter financial results for the period ended June 32023 participating on today's call are Ken Tuchman, <unk>, Chairman and Chief Executive Officer of <unk> <unk>.
<unk> President of <unk>, and Chief Executive Officer of <unk> engage and Francois Blu ray interim Chief financial officer of <unk>.
Yesterday <unk> issued a press release announcing its financial results. While this call will reflect items discussed within that document for complete information about our financial performance. We also encourage you to read our second quarter 2023 quarterly report on Form 10-Q, which we anticipate filing in the coming business days.
Before we begin I want to remind you that matters discussed on today's call may include forward looking statements related to our operating performance financial goals and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward looking statements reflect our opinion as of the date of this call and we undertake no obligation to revise this.
Information as a result of new developments that may occur forward looking statements are subject to various risks uncertainties and other factors that could cause our actual results to differ materially from those expected and described today for a more detailed description of our risk factors. Please review our 2022 annual report on form.
<unk> 10-K, a replay of this conference call will be available on our website under the Investor Relations section I will now turn the call over to Ken.
Good morning, and thank you for joining us today this quarter, we executed on our plans and exceeded the midpoint of our second quarter guidance revenue was $600 million adjust.
Adjusted EBITDA was $67 million, reflecting our continued investments non-GAAP EPS was <unk> 55 per share.
And we COVID-19, new logos across the digital and engage business segments.
We continue to make significant progress this quarter by staying laser focused on delivering high value outcomes for our clients across the globe. Our vertical specific CX solutions that combine modern technologies advanced analytics and exceptional operational delivery, our differentiated and in demand.
Working side by side with our portfolio of marquee clients and the leading CX technology partners. We continue to provide the transformational solutions and deep expertise needed to succeed in a rapidly evolving experience economy.
Before Charlie goes into details of the quarter I wanted to share our perspective on the evolution of AI and CX. The hype cycle around generative AI is in full swing. The tech industry is in rapid innovation mode, creating both excitement and noise with a myriad of new solutions. In contrast, the company that will need to.
The new capabilities are intrigued with the new technology, but are treading carefully.
<unk> digital and <unk> engage we're well positioned and excited by the opportunity to help both our clients and technology partners navigate this period of accelerated change as a tech forward customer experience pioneer we've been capitalizing on the intersection of CX and AI for many years over.
Over the past decade, we've assembled the most comprehensive and advanced suite of CX technology and analytical capabilities in the market.
Deep differentiated partnerships with the Hyperscale and enriched it with decades of frontline CX operational knowledge at scale.
Today this value proposition puts us in a unique position to help our clients understand evaluate design and execute successfully as this new wave of AI enabled CX innovation takes shape.
We saw this coming we have been preparing for the market potential and we're excited to monetize the opportunity on our journey to double the size of our business in the years ahead.
It is tempting to believe that with the flip of a switch a company will be able to leverage the advanced capabilities of generative AI.
We know from our 40 years of working with technology in the CX trenches that it's not that simple the level of impact from AI is highly dependent on the industry served complexity of the customer interactions mix of voice and digital channels.
Date of clients technology platform, and the balance of human and automated experience with the brand wants to deliver.
Our clients are looking to us to help guide them through this new significantly more complex environment.
Unlock the promise of generative AI in the context of the overall customer experience companies will need to migrate their systems to the cloud get their data organized at annotated integrate their CX CRM and back office systems. So that the data can flow freely in real time and create the opt.
<unk> mix of automation and human interaction to provide compelling experiences that will engage customers and build lasting brand loyalty through T. Tech digital we employ thousands of full stack engineers, CX consultants and data scientists, who know how to apply the new technology for CX use cases better than anyone.
As a result, the leading hyper scaler or partnering with us to further develop the CX capabilities and their platforms through T. Tech engage we know how to balance the efficiency of technology with empathy of humanity to deliver personalized services and sales experiences at scale.
When we combine the breadth and depth of these two market leading businesses. There is no company better suited for success in this innovation cycle and Chi Tak.
We've launched several initiatives to help our clients accelerate their efforts, while avoiding costly mistakes.
For example, we've created the <unk> readiness assessment for AI.
To provide a framework for evaluating the technology processes and talent required to capture value from the use of AI for CX.
We're delivering strategy workshops to help organizations align around priorities and build actionable roadmaps with defined proof of value.
Using our internal innovation lab to test the most recent releases of generative AI and large language model capabilities across technology platforms.
We're finding many areas that require serious consideration around accuracy of interaction erratic response times and high compute costs.
And we're executing client facing pilot to activate native AI functions across the Hyperscale platforms with knowledge management language translation automated quality assurance and transcription summarization to name a few.
<unk> purpose has always been to bring humanity to the customer experience by consistently delivering the highest quality interaction at the lowest overall cost to serve.
That means using voice based routing to match and elderly Medicare buyer with a compassionate license sales consultant or simplifying the desktop to free up time for our busy frontline associates. We see this new phase of AI enabled CX is a great opportunity for our business and is core to our values and mission.
Now moving on to our outlook into our second half of the year.
Dx continues to be a top business and board level imperative and our ability to help clients increase revenue reduce costs and drive customer loyalty remains a high priority in any economy.
At the same time customer behavior is in a state of flux in the current environment discretionary spend is unpredictable and differ significantly based on income brackets.
In addition, many customers are waiting to make purchases closer to their point of need.
These behaviors are clouding visibility and demand forecast for some of our clients and consequently may impact us as well, we're staying close to our clients and we will continue to be agile to respond to their evolving needs.
While some competitors in the industry are occupied with integration activities I am delighted that our attention remains exclusively on providing value to our clients with our singular focus on delivering exceptional technology enabled customer experiences across every interaction channel.
We continue to grow with our existing clients, while adding new marquee brand store global roster.
We're proud of our enduring relationship with our clients today. The average tenure of our top 25 clients is over 11 years and our revenue with our top 10 clients continues to grow we've worked hard to earn our clients' trust and truly value. These long term partnerships that have endured extreme economic cycles global pandemic.
And natural disasters.
As we continue to execute on our strategic initiatives to capture the opportunity with the next wave of CX transformation I remain excited about our business and confident that we will successfully navigate the dynamic macroeconomic environment in the months to come I will now turn the call over to Shelly to share more about our progress and results.
Thanks, Ken and good morning, everyone. We delivered solid second quarter results across both our engaged in digital businesses as we continue to focus on providing quality outcomes for our clients exceptional experiences for their customers and rewarding careers for our employees.
Before I get into our results I'd like to Echo <unk> thoughts on AI.
Buzz around generative AI is certainly advanced discussions around automation and analytics based solutions that have been in the market for some time.
And while generous AI is making the possibility of AI more visible and real for our clients. It's also in covering our need for strong fundamentals, but today. Many large enterprises are missing.
This gap in client readiness and expertise is creating an exciting growth opportunity for us.
To take full advantage of the power of generative AI, we're actively engaging with our clients on their need for a modern cloud infrastructure highly curated and reliable data and trained knowledge workers operating on their frontline.
As Ken mentioned earlier Theres, a lot of excitement in the market.
Also a lot of complexity.
With the AI readiness told we felt we're helping our clients understand their current capabilities and create a practical go forward plans. Let me share a quick representative example, with one of our existing clients and medical device manufacturer, we use our AI readiness assessment to evaluate and build the roadmap synthes generated AI into their <unk> platform now we're working with them.
Client to help define their entire seeing strategy and broader CX technology suite.
So while it's still early we're actively building solutions across the CX AI value chain that combine the latest technology with our CX optimization services to unlock innovation, while also delivering operational efficiencies.
Now, let's review second quarter results and highlights from our engage business, where we continue to make progress on our top priorities that include accelerating expansion of our global geographic footprint and language capabilities.
Deepening our specialized end to end solutions and resilient vertical.
And leading responsible adoption of AI with our knowledge workers.
This quarter, we closed six new logos and our engage business and for them included offshore services increasingly we are being chosen for our deep vertical expertise and technology enabled solutions that are industry specific let.
Let me highlight three wins that I'm, particularly excited about.
In our banking financial services and insurance vertical we landed a large property and casualty deal with ample runway for growth. This is the first time that this insurer will be servicing U S based customers with associates outside of the U S does.
The client chose <unk> because of our deep understanding of the complexities and nuances of the property and casualty industry and also for our proven near short delivery model.
In healthcare, we closed business across the value chain in the payer segment. We were selected for our licensed member acquisition and workforce management expertise. In addition to delivering the license work will also be managing the schedules for our clients in house captive operation.
Running their scheduled nerve center will provide us with deep insights across their customer facing operations. When we combine this with real time frontline knowledge with our deep payer expertise will be in a position to deliver outcomes that our competitors can't.
On the provider side, we were chosen by a prestigious regional medical center to deliver proactive outreach to their patient community leveraging our nearshore workforce.
We're excited about the opportunities to help providers with patient engagement and close care gaps by taking on the administrative work of their highly trained medical staff.
Our focus on resilient verticals is delivering positive results with our health care financial services and public sector growing organically by more than 5% in the second quarter of 2023.
Halfway through the year, we have launched six new locations in five new countries, including India, Colombia, Honduras, Egypt, and South Africa, and our offshore backlog continues to grow and.
In addition, we're ramping our at home platform in Puerto Rico with a community of highly skilled knowledge workers to support our health care and financial services license program.
Offshore revenue represented approximately 32% of our engaged second quarter revenue we.
We expect continued momentum into the second half of the year with new locations that will expand our Asian language capabilities.
Now onto <unk> digital where the advanced capabilities of generative AI are accelerating the need for companies to migrate their seat counts and CRM systems to the cloud.
They're leaning on us for both our project based professional services, which grew 12% year over year as well as our recurring managed services, which grew by over 5% year over year.
As the largest pure play CX technology and services player in the market.
<unk> digital is delivering value to companies wherever they are on their CX transformation journey.
There is designing and CX strategy migrating CX technology to the cloud establishing involving a data foundation, our engineering to enable AI initiatives T Tech digital has the deepest and broadest expertise across the entire CX technology ecosystem.
Now, let me share some key tech digital highlight some examples from the quarter.
Key client wins and expansions, we're diversified across the public sector automotive banking and healthcare verticals, including numerous TX transformation projects that combine our consulting solution accelerators and analytics capabilities with partner platforms from Microsoft AWS, Google Genesis for Cisco.
For our cyber security brand, we were chosen to help modernize with customer experience by combining our cloud platform with native AI capabilities, including virtual agents agent assist conversational analytics and real time translation.
We expanded our relationship with a well known travel brand and are implementing a cloud based transformational initiatives that include <unk> CRM and the rollout of our new customer data architecture.
When complete this integrated AI enabled platform will increase conversion rates and productivity for over 500 sales and service agents across three continents.
And we're thrilled to have been awarded a multi year multi phase professional services contract with a massive federal government agency, we were chosen to work across multiple federal entities to design strategy and roadmap to modernize and re imagine the citizen experience.
<unk> digital we continue to accelerate our pace with offshore delivery and are exceeding our expansion goal PRC globally integrated delivery model.
So overall, we're pleased with our progress across the business in the second quarter as we look to the back half of the year. Our sales funnel backlog are healthy in particular, we are experiencing strong demand for our offshore locations and engaged and in digital we are scheduled to complete twice as many cloud migrations for the second half of the year than the first.
However, as Ken mentioned, our clients are still operating in a dynamic environment, which can impact timelines for decisions, particularly for clients, who consumer demand patterns are evolving.
And engage we anticipate continued strength in our resilient vertical healthcare banking financial services and insurance and the public sector.
However, we expect continued softness in hyper growth as we've discussed before.
Additionally, some of our clients are taking a cautious approach with regards to forecast for seasonal volume later in the year more specifically in the telecommunications and travel sectors. We continue to grow and increase wallet share with our clients, but are experiencing lighter than expected volumes in a few cases.
In digital we see strong demand, especially in the public sector and mid market, where we have unique platforms and certifications.
We also recognize that in this climate clients are carefully evaluating every investment decision. While some companies are delaying their technology modernization plan. Many are faced with end of life platform decisions that will need to be made in the next several quarters.
We are well positioned to help them migrate to the cloud.
As we move into the second half of the year will continue to take a prudent approach we're laser focused on execution, maintaining an agile cost structure and executing on the strategic investments we have underway across the business. We're confident in our plan and we'll skillfully manage what is under control in the months ahead.
Before I close I am thrilled to welcome Laura Butler to <unk> as our Chief people Officer, Laura return City Tech after leading human capital at several top tier DDB technology companies across our business our people remain our differentiator and Laura will be driving our AI enabled people strategy.
Little movement in the CX industry's evolution.
On behalf of our team of approximately 64000 employees across the globe.
Thank you for your continued support we're excited about our future and we look forward to sharing our progress in the quarters to come.
And now I will hand, it off to Francois for a review of our financials.
Thank you Shirley and good morning.
We'll start by addressing our second quarter financial results before sharing more context into our reaffirmed full year 2023 financial guidance range.
In my discussion on the second quarter of 2023 financial results referenced to revenue is on a GAAP basis, while EBITDA operating income and earnings per share our non-GAAP adjusted basis.
A full reconciliation of our GAAP to non-GAAP results is included in the tables attached to our earnings press release.
Turning to our second quarter financial result, despite continuation of macroeconomic pressures, we are pleased with our execution and financial results above the midpoint of our revenue and profit guidance range.
Revenue was $600 million compared to $604 million in the prior year all organic.
EBITDA was $67 million or 11, 2% of revenue compared to $81 million or 13, 3% in the prior year.
Operating income was $51 million or eight 4% of revenue compared to $61 million or 10, 1% in the prior year.
And EPS was <unk> 55, compared to <unk> 93 in the prior year.
In the second quarter foreign exchange movements over the prior year negatively impacted revenue by $1 2 million, while benefiting operating income by $1 4 million, representing a 25 basis point improvement to the operating income margin.
Foreign exchange, primarily impacted our engage segment.
In our digital segment strengthen our CX technology professional services and our recurring managed services exceeded the anticipated pressure in our Cisco practice, which was down in the quarter by approximately 20% year over year, primarily due to timing of certain engagements.
However, it also highlight that the remainder of our digital business, which represents 75% of digital revenue grew by more than 15% year over year in the second quarter.
In our engage segment growth and a resilient verticals remains strong offsetting the anticipated decline in our hyper growth portfolio, which is concentrated in the tech vertical the year over year decrease in operating and EBITDA margins continues to be driven by growth oriented investments, including among other items.
<unk> expansion in your offshore delivery locations and integration related costs associated with the <unk> acquisition.
Turning to our second quarter new business activity.
We added 19, new client relationships with strength from our healthcare vertical followed by public sector and financial services.
While the initial average deal sizes smaller their profiles are conducive for increased scale next year.
<unk> performance remains strong as demonstrated by our last 12 months' revenue retention rate of 96, 5%.
Engage backlog for the year represents 99% of the midpoint of our segment revenue guidance and is supported by a healthy pipeline for the remainder of the year.
Offshore revenue represented approximately 32% of our engaged second quarter revenue.
In our digital segment.
Demand was solid in the partnerships with the CX Cypress scalar is represents the main catalyst to our growth.
Clients continue to recognize T take digital as a trusted partner for both optimizing and managing their existing CX platform and executing strategic digital transformation with the design implementation and maintenance of a more modernized cloud based CX ecosystem.
For the full year, our digital recurring backlog increased by 4% over the same period last year, primarily driven by origin as his practice.
Digital total backlog represents 84% of the midpoint of our segment revenue guidance.
T takes overall pipeline for the next six months continues to be above $1 billion, which is well diversified across all verticals with strength in financial services health care technology and public services, turning now to more specifics on our second quarter segment results.
Our digital segment reported second quarter of 2023 revenue of $118 million, an increase of three 1% over the prior year on a constant currency basis.
Operating income was $15 million or 12, 5% of revenue compared to $17 million or 14, 8% of revenue in the prior year period.
Our second quarter digital revenue performance reflects my earlier remarks. In addition, our recurring revenue grew five 2% over the same period last year and is representing 56% of digital total revenue.
While year to date, we have seen a lower number of cloud migrations would increase renewals of existing on premise infrastructure with continued to be well positioned to support the growing backlog of cloud migrations.
We currently expect a number of migrations to more than double in the second half of the year.
Our professional services revenue, which has a high attachment rate for additional expansion and upgrade services grew 11, 5% representing 38, 5% of digital total revenue.
Professional service gross margins continued to improve primarily reflecting the increased utilization in our India delivery expansion, we head count increasing 26% since the beginning of the year.
Our digital overall revenue mix also contributed to a healthier margin percentage, which was more than offset by the incremental investment in our CX leadership, and engineering talent sales and marketing and technology development.
These investments are delivering solid recurring revenue and professional services growth among our strategic technology partnerships.
Our engage segment reported second quarter 2023 revenue of $483 million, a decrease of one 3% on a constant currency basis over the prior year as.
As mentioned our revenue performance reflects continued solid demand in our more resilient verticals, including healthcare financial services and public sector, which grew organically by five 5% in the second quarter of 2023.
Direct to consumer centric verticals, including taken retail are largely represented in our hyper growth sector and experienced the largest year over year revenue decline of 21, 5% on a full year basis, the hyper growth sector represents approximately 15% of engage revenue.
In the second quarter operating income was $36 million or seven 4% of revenue compared to $44 million or 9% in the prior year.
Our engage operating margin reflects the items mentioned in my earlier remarks.
We continued to rationalize cost that growth of the business and strengthened the foundation of an agile cost structure.
We also continue to optimize our cost structure and our traditional footprint, while strategically investing in our geographic expansion, which is essential to our success next year and beyond.
I will now share other second quarter 2023 measures before discussing our outlook.
Cash flow from operations increased to $96 million in the second quarter 2023, compared to $78 million in the prior year period.
The increase was primarily a function of improved net working capital, partially offset by the higher interest expenses and lower margins.
Capital expenditures were $19 million or three 2% of revenue for the second quarter of 2023 compared to $19 million or three 2% in the prior year period.
We continue to prioritize investments in it infrastructure and security and accelerate our geographic expansion efforts.
As of June 32023, cash was $115 million with $919 million of debt.
Of which $915 million represented borrowings under $1 5 billion credit facility.
Year over year net debt increased by $33 million to 804 million primary related to capital distributions and acquisition related investments, partially offset by positive cash flow generation.
GTECH paid 52 per share or $24 6 million semiannual dividend on April 22023 to shareholders of record as of March 31 2023.
Turning to our 2023 outlook.
While we are pleased with our first half of the year results. We are currently operating in a dynamic environment, where consumers and organization are taking a cautious approach with near term decisions.
This impacts our clients level of confidence, especially in forecasting seasonal volumes that are dependent on consumer purchasing behavior in the second half of the year.
In addition, before committing to larger investments to upgrade CX technology infrastructure clients are more diligent about the size scope and timing and then translating into longer deal cycles.
<unk> the pipeline conversion to backlog has been slower than usual for this time of the year and the deal size smaller on the engage side.
While some clients are being more cautious it has been more meaningful in the telco and travel verticals, where we are seeing moderated levels of growth.
Furthermore, based on the current trend of foreign exchange movements, we forecast a 40 basis point negative impact to our operating income income per isn't to our original assumptions used in our full year guidance.
This headwind will be offset by operational efficiencies.
We are reaffirming the midpoint of our guidance range, reflecting our strong results in the first half of the year and also the pressures on volume and delayed decision expected from some clients for the remainder of the year.
Please refer ends or commentary in the business outlook section towards second quarter 2023 earnings press release to update our expectations for the third quarter and full year 2023 of performance at the consolidated and segment level.
In closing, we remain keenly focused on executing upon our strategic priorities and delivering exceptional CX technology and service solutions to both our new and long tenured client relationships with more than ever are turning to us as a trusted partner.
Although near term visibility is still cloudy the long term outlook remains intact skin and Joe you mentioned in the earlier comments the proliferation of digital channels amplifies the importance of quality customer experiences and increases the number of interactions.
To compete companies no longer have a choice, but to modernize their CX platforms, while working with the right strategic partner to handle the more complex and dense and human interactions in order to retain customers.
With our comprehensive set of integrated offerings do you think is in a unique position to capture these opportunities.
With our financial outlook still in line with our guidance range, we remain focused on executing our strategic priorities. We look forward to providing an update on our full year 2023 outlook. When we announce our third quarter earnings results in early November I will now turn the call back to Paul.
Thanks Francois.
As we open up the call we ask that you limit your questions to one at the time.
Operator, you May now open the line.
Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star and then the number one please on mute your phone and record your name and your company name clearly when prompted.
England Company name all required introduced your question to cancel your request. Please press Star then the number two our first question comes from the line of Bryan Bergin of Cowen. Your line is now open.
Hi, Good morning. Thank you I wanted to start here first on some of the client behavior that you highlighted and really just trying to track now versus let's say three months ago, a lot of the commentary sounds consistent but I think the volume commentary was incremental can you speak to some of these minimum volume commitments and I wanted to clarify whether this.
Volume update is tracking in line with how actual volumes have progressed or whether this is more so just a cautionary move on the forecast and really just any magnitude any average magnitude of these volume changes.
Hi, Brian It's Tim how are you I would say that it's more of a cautionary.
And then anything else I think that clients.
As one could expect are lacking their own visibility and so in some cases, they're delaying locking in on their forecast. The good news is that we have.
And they engage side of the business over 96% of our forecast is locked and then the next couple of weeks I would say, we will have much clearer visibility because they'll have really no choice that said I do believe there's going to be a lot of last minute additions. We've seen this over the years in the <unk>.
When people are moving into times, where they or their own forecast or visibility.
And then what they do is they come back and they say how quickly can you add to that.
So.
I think overall, we're just simply we've always been a conservative company.
We're trying to be fiscally responsible in how we represent our numbers and what we see right. Now is that there are certain clients that are choosing to be.
Very conservative and are holding back on locking in their forecast et cetera, and frankly based on where we are in the economy.
See that is there anything unusual this is certainly not our first recession or potential recession rodeo that we've been through.
Okay understood and then pivoting to digital for a follow up here. So the 'twenty three outlook implies a relatively sharp second half ramp can you just talk about.
Backlog coverage there what gives you the confidence on those cloud migrations, I guess accelerating and I heard the Cisco pressure in the quarter does that recover to help the trajectory or is it more so the other practice area is accelerating.
Let me start with.
Are we looking at our digital business for the back end of the year. If you look back at the guidance. We provided at the beginning of the year. This is just in line with the same trajectory. So there is nothing more aggressive than that and what we shared initial lead we're entering the back end of the year with 84% backlog for digital business, which is stronger than expected and ahead of last year as well so we feel very.
We feel very good with the professional services and parts for nonrecurring grew streamline.
It is growing in the backend of the year.
And then the second part of your question regarding Cisco.
What we would tell you is is that.
Yes, we do believe that that does that does in fact recover and it will probably be down overall close to 10%.
But the good news is is that our other practices are growing in the in the 10% to 15% range et cetera, which is what gives us confidence in our forecast. So we're seeing very strong demand across all of the other practices.
Thanks for the added detail.
Thank you. Our next question comes from the line of Mike Latimore of Northland Capital markets. Sir Your line is now open.
Okay, great. Thanks very much.
Just wanted to clarify did you say that Cisco is 25% of the digital business.
Yes, the score is 25% of our digital business this year.
Okay got it.
And then.
Obviously, you've highlighted a lot of interest in general.
I guess has that driven.
Yes.
More pipeline growth and pilot activity in digital.
I know you've highlighted that maybe some decisions are getting delayed but I'm. Just curious this is driving more interest from highlight highlights Mark pipeline and then I guess a.
Derivative of that as you said, we need to go to cloud before you do generative AI. So.
Is it just generally more just kind of a cloud migration of interest there.
Hi.
This is Shelly absolutely I'd say a couple of things first of all we have a number of pilots conversations underway with our digital clients at our Ingalls clients a lot of interest in what are the use cases are going to make the most sense from a CX perspective, regenerative AI, having said that those pilots are obviously in early days, but I think.
One of the things that all of the discussion advice. If you will around generative AI has created is also a lot of good conversations with our clients about getting to the cloud.
It is.
Earlier, we mentioned that we're going to do to help us model migrations in the second half as the first.
Companies are also we're also having a lot more conversations about.
Non generative AI, if you will.
Use cases that we've been doing.
Last number of years and so I think it's absolutely creating more demand interesting conversations I think.
Perhaps we're starting to see a little bit of a help cycle in general and I'll come down a bit meaning that we're getting a bit more practical conversations around what's normal pilot what are the use cases, how do we deal with some of the learnings that we have an early pilot.
With <unk> large language model makes most sense for which use cases some of the things around response time.
Cost profile et cetera.
Okay, alright, thanks very much.
Thank you. Thank you.
Our next question comes from the line of George Sutton.
Craig Hallum. Your line is now open Sir.
Thank you.
Ken your results are somewhat heroic relative to your competitors and you did specifically mentioned that many of your competitors are focused on integration can you just talk about any sort of incremental opportunities those integrations and those challenges might be bringing to you.
Hi, George you're putting me in a bit of an awkward position by asking that question I would just simply say the following that.
I think it's it's not uncommon that when service organizations are in the midst of.
Mergers et cetera that.
In many cases.
That.
Rates opportunity for other service providers that are not in the midst of those types of integrations to.
To benefit there has been a number of large clients that have said that they don't want all their eggs in one basket, that's not an uncommon theme and so consequently whenever these mergers take place there is usually a reshuffling of the deck and.
We.
We along with probably others will benefit off of that so I would it be diplomatic theyre all great companies and the good news is is that we're dealing with a tam that's ever expanding with well in excess of $400 billion of.
Tim just on the outsource of all on the engage side of the business.
When you when you look at the overall size and scale there is plenty of business to go around.
Especially as the market consolidates, which we view as really a very positive thing. It takes a lot of confusion out of the market creates better pricing.
Rationalization.
Because you've got more professional executives that are making.
More professional decisions versus.
Versus smaller companies.
And so overall.
I think that through this process of the two mega mergers or whatever you want to call them that are taking place.
<unk> will ultimately prove to be a net benefit as.
Work gets rebalanced.
Thank you I was very diplomatic you might take the secretary of state.
My follow up is on the Hyperscale or discussion when we talk about AI, obviously, the hyperscale or is it going to be very important and I think most would define their being three of those being all Microsoft AWS and Google.
But you also are obviously interfacing with fortune 500 companies. So I just want to make sure I understood is is your hyperscale of work helping bring.
There are opportunities to fortune 500 or are you working with the the Hyperscale are is to help them further their AI efforts just to be clear.
We're doing both.
We're doing both so what I would say to you is is that.
We're very fortunate to have such solid relationships with our partners and so they bring us into a lot of.
They're very large.
Large enterprise Mega enterprise customers, and we're very appreciative of that and so we're there to help them.
<unk> closed the business or the business that's been closed implemented as well.
And simultaneously without getting into the details.
We're deeply involved in assisting.
Multiple hyperscale or as with everything from.
Sure.
From.
Yes.
I don't want necessarily when you use the word strategy, but.
Where they need to be going in this space too.
Two also physically helping from a code standpoint.
Etceteras, so that gives us a very strong understanding of their tools and then gives our own client base a lot of confidence in our abilities of implementation of all these new generative AI type platform. So.
I think that Youll see that were going to continue to be leaning in and it's our intention to capitalize off of generative AI and makes it a very significant positive for our overall business.
Thanks, Ken.
Thank you.
Thank you once again to ask a question. Please press star and then the number one and record your name and your company name clearly ones from J. Our next question is from Maggie Nolan of William Blair. Your line is now open.
Hi, Thank you.
You mentioned that the initial deal sizes were a bit smaller on the engage side as we think about how those are going to flow through the business. How does that set the stage for the first half of 2024 with that and start to look fairly similar to the second half of this year or can you give us some qualitative commentary coming out of that further.
Yes, so couple of things Maggie first thing is.
One of the factors in terms of the smaller deal sizes. There is just a factor of you probably.
And you mentioned some of the examples from this quarter I mean, the last quarter.
The new clients that we're bringing on to our roster are first time outsourcers.
Starting with smaller.
Smaller projects to start Adam what I'm excited about is some of the new logos that we landed this year.
The potential for them going into next year, having said that we're not ready to comment on 2024.
Just given the macro environment that we're in.
They're all dealing with.
Yes. The thing is I mean, I guess I would say I would just tell you is the.
The other factor is.
Five of the six this quarter.
The majority of our new logos last quarter.
Offshore and so that has an impact on deal sizes.
But we're excited about that.
No.
R Chop, our OXXO our pipeline our pipeline.
60% offshore at two thirds of that coming from new locations. So excited about the progress we're making in terms of building out.
So just to build on that a little bit Ken.
Ken we all know you've all been through this before and you referenced kind of clients setting expectations for volumes lower and then oftentimes they'll come back to you and kind.
Kind of a quick ramp up so can you just give a little bit more detail on how you manage for that what enables you to ramp up quickly and then the <unk>.
<unk>, you're increasingly global footprint on that process.
Well I mean, I think I think this is this is really the heart of our business right now is being able to being able to search for those seasonal capacities and I think one of the things that our clients have come to rely on us for is our ability to do that.
Having said that we're obviously staying close to our clients and trying to push for those decisions sooner versus later, but.
We're we're very accustomed to having a seasonal ramp in Q4 for retailers for health care, a number of our clients that have seasonal demand. So I think we're very confident we'll be ready for that.
And as Ken said, we'll know a lot more in the next month in the next coming weeks here in terms of.
Some of our clients walking in their forecast.
Thank you nice quarter.
Thank you we have our next question from the line of Joseph <unk> of Canaccord. Your line is now open.
Hey, everyone. Good morning nice results.
Just one on AI.
Well, Kevin I thought in your opening comments on AI.
Good and some of the best Ive heard.
To manage the change over the last couple of quarters, but maybe you could dig a little bit to the cost side of using this technology, everyone seems to focus on how great. It is but obviously theres a cost impact and using it versus other solutions and.
What you've seen so far there they're in the.
Maybe I'll have a quick follow up.
Hi, Joe.
I think youre asking actually.
Fantastic question, and I think that unfortunately, it's a very difficult question.
To give you.
Really straight answer.
Due to the fact that debt.
There is so much change taking place in the compute marketplace. What I would say to you is that I think this is going to be like everything else that you see in technology costs are starting out high because theres a shortage of Gpus.
And over time as Gpus are more of a commodity.
Type capability, that's going to take by the way.
Years, that's not going to happen in a year.
That I think that the compute costs will come down fairly significantly so what that what that translates to is.
People, who are going to be using large language models, they're going to have to use models that.
In most cases private models, which means that they are limiting the overall scale of the model. So that they can get the response time, they need and b. They can afford the cost that it takes to actually compute that interaction. So for example, there are some people that are out.
Trying to offer voice bots using machine learning AI. The problem is is that they consume.
Of compute and consequently, when you look at the cost and you compare it to traditional <unk> technology, which is not as good by the way.
It's hard to justify when some one one area it might be a few pennies in the other could be 85.
For what could be accomplished with an IV or my point in saying all of this is is that it's early days and I think that as usual with tech. The hype cycle takes time to settle down we actually are already seeing it settled down we're seeing clients starting to get much more realistic about.
What their plans are how they plan on.
<unk> to test it and use it we don't see anybody jumping into AI with their entire body. Instead, what we see is people putting their pinky toe in.
And doing proof of concepts et cetera, I think thats going to be going on for a while and believe it or not I actually think the hyperscale or want that as well because they are building out their infrastructure waiting for their nvidia boxes to come Google's building out their new chipset in many.
<unk> competes with and videos.
<unk> chipset there tpu's.
So.
What I would just simply say to you is is that I think that the pricing for.
Compute on this stuff is the cement is not even close to dry and it's going to take.
A while before I could actually give you a very accurate answer on.
Where that's settling down.
But suffice to say, we're we plan on using AI. We believe that we have applications that will be very efficient and that will be cost effective and that will generate a good economic return for us as well as for our clients and therefore, I think we're taking a very <unk>.
<unk> approach of where we insert AI and where we intentionally don't insert AI because the compute cost will be too high.
Sorry for rambling on I hope that's somewhat helpful but.
But I think it's a great question and I think if you asked that question midpoint next year, we're going be able to give you a much more specific cancer.
That was great and that was that was good color and then just really quickly I know you mentioned maybe.
And travel is potentially a little bit soft.
Moving forward it seems a little surprising given a pact airplanes are and the like and all the travel going on so just wanted to try to circle back on that commentary relative to I guess at least what I see when I'm out on the road. Thanks a lot.
Yes, let me answer the first part and I'll, let Shelley answer the second part. This is really part of our own beliefs and forecasting that there has been a pinched pose effect to travel due to the pandemic and that we believed when we when we were looking at all of this that travel.
Was going to be insane over the summer, which is proving to be exactly that and that once people.
Get this.
Travel experience out of their system et cetera, then it was our belief that going into next year that tourism type travel would fall off what we're seeing is that it.
It's again, it's a mixed bag I think if you listen to the airlines they are actually saying that they're predicting domestic travel is already falling off reservations are are dropping and so we're just being very cautious as it relates to that that said, we do have multiple travel accounts and they're actually very strong right now so.
Shelley I think you said it well.
Travel.
Our travel accounts are growing very strong.
It's exactly what you said.
Looking at the back half of the year.
And I think the way one of the thing.
One of the things we hear from those classes because customers are not bookings.
Is that.
All of our market with the answers they assume they have a little bit more real time demand a little bit less visibility into the coming quarters and that's all there is a dynamic here as well.
Okay that makes sense.
Thanks, a lot guys.
Thank you.
Last question comes from the line of Casey Chen of Bank of America. Your line is now open.
Hey, guys I just wanted to ask about I think you guys mentioned that 32% offshore.
Patrick for engage.
Are you guys, assuming this mix to be in your current outlook right now for the full year and do you guys have like a longer term that check or a longer term target for this metric specifically I think you mentioned a couple of countries newer ones like India, Colombia are there any in particular that you think will really be instrumental in getting you to the accelerating offshore rental.
Thank you.
Let me just start answering your question about the mix and the trajectory of your offshore revenue now let's show you give more color about what we're doing as a company for extending that growth. So right now our outlook is for them to be at 32% a full year basis, and we have seen our offshore portfolio growing by 10% year over year, and that's really where we're <unk>.
Focus is maintaining that tenant at both percent growth rate for offshore revenue and as Charlie mentioned, we had a strong quarter with locals oriented with offshore and we feel very conservative backlog is it's growing in the right direction too.
Prove that mix next year.
Yeah, just just.
In terms of locations Kathy the ones that I mentioned earlier in terms of our nearshore locations in places like Colombia, Honduras right, we see a lot of opportunity to scale as well as what we're doing in Africa, or whether it's Colorado, South Africa will be entering some new countries more to come on that very soon and then.
Also have a focus on Asian language support and so those are the areas that we're going to continue to focus on India actually we are seeing more demand for NDS. So.
Really pleased as I said earlier.
Two thirds of our shore pipeline.
Right now its coming from these new locations, having said that we continue to grow in the telecom well, but really.
We're pleased with our progress on these new locations and having having new options for our clients, which is a lot of what's generating the demand and interest that we're seeing.
That's helpful. And then I guess when I think about the sequential growth in the fourth quarter versus the third quarter implied by your guide.
Maybe I don't have this right.
Like nearly 40% in quarter over quarter growth in the fourth quarter like adjusted EBITDA dollars number versus about 10% sequential growth on the topline.
What's driving the significant margin acceleration that you're expecting in the fourth quarter and you mentioned you guys have some cost efficiency could you just elaborate a little bit more about what you know.
Well you guys have going on especially that's going to impact that.
Back half of the year. Thank you.
So let me first that there is a sequential growth between Q3 and Q4, if you look at our engage right now for our guidance, we're going to be up $15 million between Q3, and Q4, which is less than what we've done last year and therefore that train and engage is very much in line with our history, which is also aligned with the seasonal business that channel as you know that we're at being in for that.
Digital business as we mentioned we entered the back end of the year with a backlog of 84% we're seeing.
A higher number of migration schedule for the back end of the year. Therefore, like we have a good momentum and we just think this is in line with what we've been sharing since the beginning of the year. So there is not I would say I don't see its more aggressive than what you've done in the past and in terms of the margin expansion that you're referring to I think for engage in Q4 with our season.
Volume there is naturally an uptick in the margin from there and I think from a digital is really the results of the revenue mix and seeing the growth in our professional services in the backend of the year that is really helping the mix.
Thank you.
Thank you. Thank you.
Thank you for your questions that is all the time, we have today. This concludes <unk> second quarter and Tony Clearly three earnings conference call. You may disconnect at this time.
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