TTEC - NASDAQ

Welcome to TTEC's First Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded at the request of TTEC. I would now like to turn the call over to Paul Miller, TTEC's Senior Vice President, Treasurer and Investor Relations Officer. Thank you, sir. You may begin.

Good morning and thank you for joining us today. TTEC is hosting this call to discuss its first quarter financial results for the period ended March 31, 2023. Participating on today's call are Ken Tuchman, Chairman and Chief Executive Officer of TTEC; Shelly Swanback, Chief Executive Officer of TTEC Engage and President of TTEC; and Francois Bourret, Interim Chief Financial Officer of TTEC. Yesterday, TTEC issued a press release announcing its financial results. While this call will reflect items discussed within the document, for complete information about our financial performance, we also encourage you to read our first 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 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 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.

Thanks, Paul, and good morning, everyone. We appreciate you joining us today. We're off to a strong start in 2023 with a beat on both top and bottom line. Revenue increased 8.6% to $633 million on a constant currency basis. Adjusted EBITDA was $83 million or 13.1% of revenue, and non-GAAP EPS was $0.78 per share. As the CX technology and services landscape grows more complex, our clients are trusting us to manage their current CX needs while also seeking guidance for the future. Our full range of AI-enabled CX technology, managed services and operational capabilities has the breadth and depth to deliver strategic benefits to our clients right now while also preparing them for what's on the horizon. Demand for our solutions remain strong as CX executives are caught in a balancing act between the efficiencies of digitization and the empathy of human conversations. With our domain expertise in both CX technology and operations, our business is well positioned to meet this challenge with tailored programs that optimize both digital and human interactions. The 3 trends that I shared last quarter remain relevant and timely. The move to the cloud for CX technology continues. The focus on evolving from reactive support to proactive experiences remains mission-critical, and the advancements in digital CX and AI are accelerating. Given the current focus on AI, my comments today will center on the developments happening at the intersection of customer experience and artificial intelligence. We've been integrating AI technology into our CX offerings for some time. With the current buzz surrounding All Things AI, we plan to share details on our approach to AI with you more frequently. We have many examples of solutions that are delivering high-value outcomes leveraging AI, including using the analytics to simplify and personalize customer journeys, bots to facilitate training, automation to augment associate efficiency and predictive models to support intelligent routing. Also, across verticals, we're customizing these solutions to address industry-specific business challenges. Recent advancements in generative AI have opened up a wealth of new CX use cases, including exciting new ways to dramatically improve the customer experience. It is early days. And as with any disruptive technology, it's important to separate the helpful from the hype. To gain the full benefit of AI, brands need to have their systems, data processes and teams prepared and aligned. We're working with our clients to help them assess their readiness across capabilities, such as mix of voice and digital interactions, depth of understanding of their current customer journeys, quality, accuracy and completeness of their existing knowledge bases, effectiveness of their current automation tools and the level of integration across their enterprise technologies. Above all else, we're helping our clients maintain a customer-first mindset. We know that there is no margin for error in customer experience. Simplicity, accuracy and trust makes the difference between a loyal customer advocate and a vocal detractor across the customer life cycle. Advances in [Aon] present tremendous opportunities, but getting it right is not easy. Success requires deep technology integration experience, vertical expertise and organizational agility. TTEC is uniquely positioned to harness the full potential of AI capabilities for CX by leveraging the synergy between our 2 business segments. Through TTEC Engage, we provide digitally-enabled infrastructure operational delivery, quality assurance, workforce management and an amazing employee experience. Our firsthand knowledge from direct interactions with millions of customers on behalf of our clients and expertise from our associates operating on the front lines provides the insight and experiences to differentiate our clients' brands. Through TTEC Digital, we design, build, integrate and operate all the core technologies required to power CX, including CXaaS, CRM, AI and analytics platforms. Unlike some of our competitors who are tempting to offer point solutions, we have the capability to seamlessly integrate all elements of the CX ecosystem, giving us a significant advantage in delivering comprehensive and cohesive solutions to our client. The result of this world-class offering is increased revenue per customer, reduce total cost to serve and the highest level of customer satisfaction and loyalty. TTEC Digital is a pure-play $500 million CX technology and services business that generates revenue through professional services, managed services, software and proprietary IP. With an unparalleled set of credentials and references, we have deep strategic partnerships with the leading technology players and employ the most experienced CX data scientists, cloud engineers and consultants in the market. We're leveraging our cross-functional domain expertise from Digital and Engage through our AI center of excellence for customer experience. This diverse team of technologists and operational delivery experts are combining last-mile customer engagement with the latest in digital innovation to expand our solutions, drive thought leadership and develop the AI guardrails necessary for clients to protect their businesses and customers. These guardrails are especially important as we see increasing pressure from government agencies and regulators as the risk around security, privacy and intellectual property becomes better understood. We're using AI to streamline workloads and speed up processes through the automation of binary transactions and interactions. Additionally, one of our top priorities is leveraging AI to enhance the capabilities of our knowledge workers, who are focused on complex and mission-critical interactions for our clients. By improving efficiency and simplifying repetitive tasks, we're freeing up time for our employees to listen and respond to customers during emotionally charged moments of truth. This genuine human connection is what ultimately builds trust, loyalty, revenue growth and ongoing affinity with a brand. Now I'd like to share a few thoughts on M&A and specifically consolidation among some of our Engage competitors. As you know, M&A has been and will continue to be an important pillar for shareholder value creation at TTEC. That said, we don't believe in building scale for scale's sake. M&A must ultimately create tangible value for our clients. We remain committed to M&A that helps differentiate our solutions for clients and accelerate the execution of our business strategy. Our M&A strategy will continue to be focused on both Digital and Engage acquisitions to help accelerate vertical solutions through incremental capabilities, new geographies and additional clients. In closing, I'd like to reiterate my confidence in our business. Our management team is executing. Our clients continue to rely on us as a strategic partner. Our CX engineers are developing new and relevant solutions for the market, and our frontline teams are delivering exceptional CSAT scores across the globe. We're operating on a strong foundation, and I remain excited about the future. And now I'll hand it off to Shelly.

Thanks, Ken, and good morning, everyone. We're pleased with our first quarter performance across both of our TTEC Engage and TTEC Digital business segments. Our strong performance on revenue and profitability is a result of our disciplined and agile execution. We acquired 20 new clients across the business and have a strong and growing pipeline. I'll begin my review of the quarter with some highlights from our TTEC Engage business. First quarter growth was driven by engagements in resilient verticals where our work is mission-critical and also complex. Revenue from our top 10 clients continue to grow. Our strong relationships and delivery track record with these top clients are enabling us to expand our business with them through new solutions and offshore delivery. In addition, we're seeing a growing number of first-time outsourcers in our new client wins and pipeline. In health care, we had a robust close to the year. This strong performance extended seasonal revenue beyond expectations for several programs into the first quarter. Our depth of knowledge and proven expertise with complex licensed work is driving growth with very large national payer clients and also with regional brands. Beyond our payer segment, we're also seeing increasing momentum in clinical and provider services, which include higher-margin offshore, data management and back-office programs. New deals this quarter included initiatives in provider data management, consumer-directed health and also durable and medical equipment. In addition, our domain expertise across the breadth of the CX health care member journey was recognized by the global research firm, Everest, who noted TTEC as a market value leader in health care BPO CXM. With consumers in the driver seat demanding improved health care experiences, our CX transformation expertise is in high demand. Now on to our BFSI vertical, where historically, many companies have been hesitant to consider digital channels and nearshore or offshore options for their customer experience support. Increasingly, we're helping both existing and new clients use new delivery and support models, including these nearshore and offshore locations. For example, this quarter, we expanded into a new line of business with one of our insurtech clients by implementing human-powered data annotation to process claims offshore. And with growing a national focus on improving the citizen experience, our public sector practice is in a unique position to capitalize on opportunities across federal, state and local government agencies. Our Engage and Digital teams are working to combine citizen experience consulting, systems integration, managed services and operational excellence, all backed by our FedRAMP and StateRAMP certifications. Another client highlight from the first quarter is the consultative approach we're taking with a long-tenure client in the tech space. We're beginning to work with them to deploy generative AI to leverage their full library of product knowledge across thousands of different product SKUs in order to provide our associates with more accurate and timely answers than ever before. We're executing well on our plans to expand our footprint with new geographies and languages. Client demand continues to accelerate with growing offshore pipeline and 5 of our 7 new logos for the quarter, including offshore services. For example, one of our offshore wins was with a first-time outsourcer, a growing business whose primary focus is on reducing the carbon footprint in the U.S. by partnering with major retailers to reuse and recycle electronics. Now I'll move on to our TTEC Digital segment. Similar to Engage, our Digital segment delivered value to our clients and partners with strong first quarter performance. We're capitalizing on the demand from clients who are migrating to the cloud and also from clients who are delaying their cloud migrations but want to get more from their existing CX technology. Our growth in professional services this quarter was driven by projects from both types of clients. These professional services create high-value outcomes for our clients and are strategic for us because they deliver higher margins, expand our scope of influence and open the door to new areas for growth with anchor clients. Key wins for cloud migrations this quarter included clients in banking, insurance and also public sector. Our recurring revenue also continues to grow with a focus on providing ongoing managed services as the volume and pace of features and functions increase on literally every CX platform. We're helping our clients absorb and take advantage of these changes to optimize their customer experiences. For existing clients who aren't ready to migrate to the cloud, we're extending our managed services relationships and leveraging our professional services to help them optimize their current technology. It's rewarding to see our technology partners recognize TTEC Digital significance in the market. This quarter, we won several prestigious awards, including Contact Center Innovation from AWS and North American Partner of the Year from Genesys. To meet demand and strengthen our profit margins, we continue to expand our cost to optimize global delivery model. This quarter, we opened our new flagship engineering center in Hyderabad, India. By midyear, 1/3 of our engineering talent will be operating out of tech hubs in India and the Philippines with more locations to come in the near future. Not surprisingly, AI has emerged as a top priority for our clients. In my discussions during our Client Advisory Board session last week, generative AI was a key topic. Our clients are optimistic about the transformation capabilities yet measured in their plans. They're looking for us to help them understand the requirements and risks that must be addressed in order to be successful. In fact, many companies don't yet have the foundational elements or CX expertise needed. This is where we come in. We're helping clients across the AI spectrum from making tech platform decisions to executing new AI initiatives, to improving their existing AI efforts for a bigger impact. For example, this quarter, we worked with a financial services company to improve the effectiveness of their conversational messaging. Their first implementation lacked a sophisticated analysis of speech patterns and was routing interactions to the wrong channels. Our team came in and strengthened the predictive models with a deeper understanding of language and intent to properly route interactions and improve customer experience. As Ken mentioned, we continue to expand our AI offerings to help our clients take advantage of the new capabilities enabled by generative AI. For example, we've enhanced our CX AI readiness assessment and road map to help clients understand their current ability to use AI and shape their go-forward initiative. We recognize the importance of safeguarding our clients' data and minimizing the inherent risks of using emerging technologies. A key to successful generative AI efforts will require the use of private large language models. We're helping clients safely implement these private large language models with an expert team to customize the platform and train the proprietary data sets. The progress in AI is advancing quickly. Our team is staying ahead with latest innovations and tools and solutions, and I look forward to sharing our progress with you in the months to come. Overall, our strong first quarter performance is a great start to the year. As we move into the second quarter, we're laser-focused on execution, maintaining an agile cost structure and executing on the strategic investments we have underway. We'll provide further updates on our full year outlook when we share our second quarter results. Across both our Digital and Engage businesses, our employees are at the heart of everything we do. Every day, I'm inspired by the talent, dedication and energy of almost 65,000 employees that make up our TTEC family. We're deeply committed to our inclusive environment that inspires our employees to do their best for our clients every single day. We're very proud to have been named #17 on the Forbes list of Top 500 Employers for Diversity. To learn more about our full range of ESG programs, I invite you to read our recently published ESG report. On behalf of our Board and our teams operating across the globe, thank you for your continued support. Now let me introduce you to Francois Bourret, our Interim CFO, who has been with our company over the past 7 years, serving in multiple financial roles and most recently as our Global Controller. Francois, over to you.

Thank you, Shelly, and good morning. I'm excited to be here today and share additional details on our first quarter financial results and provide more insight into our second quarter and full year 2023 outlook. In my discussion on the first quarter 2023 financial results, reference to revenue is on a GAAP basis, while EBITDA, operating income and earnings per share are on non-GAAP adjusted basis. The full reconciliation of our GAAP to non-GAAP results is included in the tables attached to our earnings press release. Over the prior year period, our non-GAAP reporting is also adjusted for gains or losses for foreign exchange included in the other income that impacts EBITDA and EPS calculations. The press release includes the adjusted reconciliation for 2022 to reflect the same. My references to the term on a like-for-like basis describe our revenue growth excluding the impact of foreign exchange translation and treating acquisitions as we own them in the prior year period. Turning to our first quarter financial results. Revenue was $632 million, an increase of 8.6% on a constant currency basis. On a like-for-like basis, growth was 1.4%. Adjusted EBITDA was $83 million or 13.1% of revenue compared to $84 million or 14.3% in the prior year. Operating income was $61 million or 9.6% of revenue compared to $67 million or 11.4% in the prior year, and EPS was $0.78 compared to $1.06 in the prior year. The strengthening of our U.S. dollar had a $6 million negative impact on revenue in the first quarter of the prior year period while benefiting operating income by a positive $2 million primarily in our Engage segment. We are pleased with our execution and financial results for the first quarter. The overall performance relative to our guidance was primarily attributable to extended seasonal health care demand that carried over from the prior year, driving stronger volumes. We also benefited from stronger demand in our digital and recurring business. On a year-over-year basis, top line growth primarily reflects the contribution from increased CX technology professional services in our digital segment, the April 2022 Faneuil asset acquisition and seasonal volumes in our Engage segment. It was partially offset by the anticipated reduction in volumes from our hypergrowth portfolio. Turning to our operating and EBITDA margins. The year-over-year moderate decrease is a function of integration-related costs associated with the Faneuil asset acquisition, near-term margin pressure related to the revenue mix and growth-oriented investments, including among other things, strategic expansion in new offshore delivery locations. Turning to our first quarter new business activities. We added 20 new client relationships and are meaningful business from our enterprise and public sector embedded base clients. Engage embedded base performance remained strong as demonstrated by Engage through last 12-month revenue retention rate of 97%. Sequentially, backlog grew 2.4% quarter-over-quarter, inclusive of our offshore backlog increasing by 5% year-over-year. Accordingly, Engage backlog represents 97% of the midpoint of our segment revenue guidance and is supported by a healthy pipeline for the remainder of the year. In our Digital segment, despite elongated sales cycle, demand was solid as clients continue to recognize the long-term benefits from modernizing their CX ecosystems. For the full year, our Digital recurring backlog increased by 4% over the same period last year mainly driven by our Genesys practice. Our professional services backlog is also up, increasing 35% over the same period at last year. Digital total backlog represents 72% of the midpoint of our segment revenue guidance. For TTEC overall, we ended the quarter with a full year 2023 revenue backlog of $2.3 billion, representing 92% of the midpoint of our revenue guidance. Our pipeline for the next 6 months is $1.4 million, which is well diversified across all verticals with particular strength in financial services, health care, technology and public services. Turning now to our first quarter segment results. Our Digital segment reported first quarter 2023 revenue of $117 million, an increase of 5.5% on a constant currency basis over the prior year period. Operating income was $11 million or 9% of revenue compared to $14 million or 12.4% of revenue in the prior year period. Our first quarter revenue growth reflects momentum in the professional services and recurring revenue across our emerging CX tech partner platforms. As previously mentioned, this was partially offset by the revenue reduction in the Cisco practice. Our recurring revenue grew 2.4% in the first quarter of 2023 over the prior year period, representing 55% of Digital total revenue. Our professional services revenue, which has a high attachment rate for the additional expansion in upgrade services, grew 14%, representing 37.1% of total revenue. The decline in operating margins reflect incremental investment in CX leadership and engineering talent, sales and marketing and technology development. Our Engage segment reported first quarter 2023 revenue of $560 million, an increase of 9.3% on a constant currency basis over the prior year or 0.5% on a like-for-like basis. The Faneuil asset acquisition was the primary contributor to growth in the quarter alongside increased volumes across services and certain verticals, most notably health care. Revenue growth was partially offset by the previously mentioned reduction in volumes from our hypergrowth portfolio. Excluding hypergrowth clients, our Engage like-for-like growth was 3.3%. Health care, financial services and public sector continued to show resilient and solid demand against this macro environment. These verticals are forecasted to grow organically by approximately 6% in the full year. As previously mentioned, the hypergrowth sector is cyclical in nature and more dependent on discretionary spending. As a result, our clients in this portfolio, especially those in nonresilient verticals are experiencing lower revenue. In the first quarter, operating income was $50 million or 9.7% of revenue compared to $53 million or 11.2% in the prior year. Our Engage operating margin reflects the items mentioned in my earlier comments. We also continue to rationalize our brick-and-mortar global footprint as we maintain a strong work-from-home presence, especially onshore. I will now share other first quarter 2023 measures before discussing our outlook. Cash flow from operations increased to $49 million in the first quarter of 2023 compared to $14 million in the prior year period. The increase was primarily a function of working capital management with DSO improving 3 days to 58 days. Capital expenditures were $14 million or 2.2% of revenue for the first quarter 2023 compared to $17 million or 2.8% in the prior year period. While we continue to invest in IT infrastructure and are accelerating our geographic expansion efforts, the reduction is explained by the completion of large projects in 2022. Our first quarter 2023 normalized tax rate was 26% versus 21.2% in the prior year. The increase is primarily related to the impact of changes in validation of allowances, jurisdictional mix of income and reduction in certain federal tax credits. As of March 31, 2023, cash was $151 million with $933 million of debt, of which $930 million represented borrowings under our $1.5 billion credit facility. Year-over-year, net debt increased by $131 million to $782 million primarily related to acquisition-related investments and capital distribution, partially offset by positive cash flow generation. In the first quarter 2023, TTEC Board declared the next semiannual dividend of $0.52 per share or $24.6 million, which was paid on April 20, 2023, to shareholders of record as of March 31, 2023. Turning to our 2023 outlook. We are pleased with our first quarter performance and strong client demand as evidenced by our growing backlog. That said, given the macroeconomic uncertainties, we remain prudent and believe it is too early to change our full year outlook. We remain focused on our execution and business fundamentals and if current trends continue, we are confident we will deliver revenue and profit above the midpoint of our guidance range. Please reference our commentary in the business outlook and section to our first quarter 2023 earnings press release to updating our expectations for the second quarter and full year 2023 performance at a consolidated and segment level. In closing, we continue to make investments to further globalize our delivery and language footprint, complete the integration of recent acquisitions and enhance our infrastructure and technology landscape. We also continue to maintain an agile constructure, prioritizing our investments and discretionary spend with the changing landscape. We remain keenly focused on executing our strategic priorities, and we look forward to providing an update on our full year outlook when we announce our second quarter earnings in early August. I will now turn the call back to Paul.

Thanks, Francois. [Operator Instructions] Operator, you may now open the line.

[Operator Instructions] Our first question is from the line of George Sutton of Craig-Hallum.

Nice results, guys. Ken and Shelly, I really appreciate the discussion on AI. Certainly, the #1 question that I get from clients is what the impacts are? Ken, I just want to make sure I heard correctly. I think you're saying, at least for now, we see an increased revenue per customer. We see a reduced cost to serve as a result of AI. Am I hearing that correctly?

Yes. Well, the other thing that I think what we're saying is that over time, we believe that AI leads to higher profitability because in areas where we can reduce labor costs, that obviously gives us more -- that much more margin opportunity. And it's why we've been leaning into AI for the past several years and readying the company so that we can take advantage of these technologies. It's also why we've made such a massive investment in digital so that we can integrate to all the various different CX systems that exist out there, which is one of the absolute highest priorities if some of them wants to take advantage of AI. You have to have a skill set of being able to integrate to all of the various different systems.

Next question is from the line of Maggie Nolan of William Blair.

I'm hoping you can expand a little bit more on the hypergrowth segment and just the long-term opportunity that you see there kind of despite near-term dynamics.

I'll start out and let Shelly take it from there. Look, the hypergrowth segment is really driven, for the most part, by the consumer. And as you -- it's no secret that many of these e-commerce businesses, et cetera, being affected right now as we move into this post-COVID environment, et cetera. So what I would say to you is that I think that there's a bit of a double-whammy effect between the post-COVID event of people being able to get out and shop in a more historical way that they did in bricks-and-mortar as well as the consumer, although being strong, really starting to shift to more of what I would classify as necessity-type items. Shelly?

Yes. And I would just say more near term, Maggie, it's playing -- our hypergrowth business is playing out as we talked about last quarter. So -- and I would tell you, we're starting to see some green shoots in terms of pipeline. We do have some opportunities from a hypergrowth perspective in our pipeline.

And then, obviously, it was a nice quarter for revenue. I understand completely that it's too early to remove any sort of conservatism from the outlook. But how are you thinking about costs going forward from here, particularly if you do start to see a little bit of an acceleration in revenue?

Well, I think, first of all, as I said in our prepared remarks, right, maintaining an agile cost structure is really important for us, and we'll continue to stay focused on that. We're also focused on executing on the investments that we've been talking about. And we're executing well on those plans. So we'll continue to be agile in adjusting to the environment ahead. Francois, anything to add?

Yes. Just to add quickly, as we mentioned in the last call, one thing that was key for us this year is building on these investments that we're making to position us well for the next year and this year as well. And so we're considering this investment. Obviously, we're monitoring holistically the macroeconomic environment. But at this point, we are -- keep doing what we said we're going to be doing, focusing on execution and making this investment will make a difference for TTEC.

My follow-up to that would be any sort of variation in the cost structure on a quarter-by-quarter basis that we should keep in mind for the purposes of margins?

Outside of the normal seasonality that you've seen in our business at this point.

Next question is from the line of Bryan Bergin of TD Cowen.

So I wanted to just ask on the outlook here. So 1Q is a pretty notable beat across all the metrics. Your commentary clearly does suggest some prudence here, but I just did want to ask about whether you've seen any changes worth calling out in sales cycles or the volume commitments across the various cohorts over the last 3 months or if it's really to stabilized and gone according to plan.

I'd say overall stabilized and going according to plan, Bryan. As I said, in the Digital business, it's interesting because we have some clients who are moving forward full steam ahead with our cloud migrations and others that we're helping them make the most out of the technology that they have already. So I think good news is we can serve each of those types of clients. On the Engage side, just too soon to understand what the environment in the back half of the year might mean in terms of consumer demand, and therefore, demand from our clients. But so far, we feel well positioned. As Francois said, pipeline is strong. And so -- and our backlog is growing as well. So nothing in particular to call out.

Yes. And I would say, not to contradict anything that Shelly just said is, for me, personally, I'm a bit surprised on the positive side in that, I would say that demand is stronger than what I thought it was going to be, that our pipeline is significantly better than I thought it was going to be. And as it relates to closing cycles, on the Engage side, I'd say that they're pretty -- they're very typical, and we're not seeing the kicking of the can that you tend to see when one is anticipating economy slowing down. So I think right now, we're very, very happy with where we're at, but I think that we're also realists. This is probably the fifth recession that I've been through. And we believe that it's smart just to be cautious, and we would rather surprise on the upside versus on the downside. So I hope that's helpful. But what I would say to you is that not only did we feel very good about how we performed in the quarter, we feel very good about how our sales and marketing organization performed.

And I'd say also just a lot of growing demand for our offshore locations and capabilities. And I think that's very positive. A substantial part of our pipeline is for offshore services. And so really, really pleased about how that's developing.

Yes. And it's one of our commitments to The Street that we're going to put the pedal to the metal on bringing on as much offshore business as possible so that we can drive the margin profile to a higher overall margin. So I'm really pleased that Shelly and her team are very focused on executing on that. And it's -- I would say it's going as planned.

Okay. It's all good to hear. Makes complete sense on the prudence here. My follow-up is kind of on the head count and the operations. So can you kind of give us a sense how headcount has progressed since 4Q across Digital and Engage and how you're expecting workforce levels in each segment to trend here over the course of the balance of the year?

Well, I can start. I'll give a couple comments here and then, Francois, turn it to you. First thing is, keep in mind, in our Engage business, we have a lot of seasonality, right? So we have seasonality there. And the Digital business, we continue to grow our cost-effective global delivery model. So that was my comment earlier around by the first -- by halfway through the year, Bryan, we expect that actually 30% to 40% of our engineering talent will come from our India and Philippines locations. So we have a big focus there, partly just to be able to meet the growing demand from clients and also just from a margin profile perspective. Francois, anything you'd like to add?

No. I would just say like it's important for -- specifically for the Engage business to understand holistically the seasonality, how it can fluctuate your head count and how the geo mix can influence your headcount. But right now, we're seeing our offshore head count growing at a faster pace than onshore headcount, supported by the pipeline that we have and the backlog as well that we've seen growing offshore. So...

Next question is from the line of Mike Latimore of Northland Capital Markets.

Congrats on the strong start to the year here. The Digital guidance sort of implies improving growth rates in the second half. Can you talk a little bit about kind of just the key drivers to kind of see accelerating growth in the Digital business?

Yes. So the accelerated growth in there -- with Digital for the back end of the year is really going to come from our professional services. We really have good momentum right now throughout some of our practices, especially Microsoft, AWS. This is really where we see the strength of our backlog coming from the back end of the year. So very -- we're feeling very good for the back end of the year for Digital right now.

Got it. And then what should we use as a tax rate for the year?

The guidance we're providing is between 24% and 26%.

Next question is from the line of Joe Vafi of Canaccord.

This is Pallav Saini on for Joe. I was wondering if you can touch on your pipeline for cross-sell opportunities between your Digital and Engage businesses. Maybe provide an update on some of the opportunities, Shelly, you mentioned you're working on the Q4 call.

Absolutely. Well, I'd say, overall, as Francois said, our pipeline continues to grow. We're pleased with that. Diversified certainly across industry verticals would be the first point. Secondly, we have a number of opportunities where we're working together across our TTEC Digital and TTEC Engage teams primarily in opportunities where clients want to take advantage of technology, right, whether it's about enabling our knowledge workers and associates that are serving our clients and/or where we're using the technology capabilities to just improve the agent experience. And so I would say no numbers to share in particular, but I would say that's an area that's developing nicely for us as well.

Next question is from the line of Cassie Chan from Bank of America.

So first, I just wanted to ask about revenues. I guess, how should we think about organic constant currency revenue growth progression throughout the year versus the 1.4% in 1Q? I think, typically, in terms of seasonality, 1Q is the lowest in terms of dollars and sequential growth. But now like the 2Q guide is supposed to be a little bit softer than 1Q. So is that kind of reflecting the trough in 2Q and then accelerate in 3Q, 4Q?

Just to start about the variance quarter-to-quarter. So Q1 is typically a strong quarter for us because this is where we get the flow-through from the seasonal work that starts in Q4 from the prior year. Therefore, for us, the reason we were significantly above the guidance for Q1 is that we had very strong health care volume coming through. Also on the hypergrowth, the softness in revenue already communicated didn't materialize as fast as we thought. So a very strong Q1 from that standpoint. As you move forward in terms of the growth rate for the remaining of the year, our guidance right now is giving you a Digital -- on a like-for-like basis, meaning constant currency if there is any acquisition like in Engage. But Digital right now is at 8%, and you have -- sorry, Digital at 8% and Engage right now, the midpoint of our guidance is at minus 1.4%. But bear in mind that the Q1 results is really putting us in a good position right now.

Okay. And then for the full year, I just wanted to make sure I have all the pieces in place there. So I think -- are you guys still expecting about $300 million from the hypergrowth clients in 2023? And I believe you guys said that health care, financial services and public sector are now expected to grow about 6% for the full year of '23. I believe it was 7% before. I just wanted to clarify that as well as sort of ask what's driving the softer outlook?

Yes. Those numbers are still accurate.

Yes. I think, Cassie, what I would say is hypergrowth, yes, still in the $300 million range. And I think last time, we said 5% to 7% growth across the other verticals. And so that continues to be our outlook at the moment.

Our last question is from the line of James Faucette of Morgan Stanley.

It's Jonathan on for James. Can you talk through your target delivery mix as it relates to onshore versus offshore outside of engineering talent as you continue to work through your offshore expansion? And then how should we be thinking about the revenue implications of that shift given some of the pricing dynamics between onshore and offshore delivery?

Well, as it relates to revenue dynamics, I really don't think that there is any type of a negative impact due to the fact that all the offshore work that Shelly is talking about that we have been pursuing is all net-new business that we're bringing on. There's very little shift of the embedded base to offshore. And there's good reason behind that. Because we have some significant specialty in health care with thousands and thousands of licensed insurance agents and significant specialty in financial services with also licensed requirements and a lot of -- a fair bit of public service in federal, that business typically, for the most part, has no choice but to stay onshore. It's all the net-new business that we're bringing on right now that we're placing in our offshore facilities. And as to what our goals are of Engage onshore versus offshore, I think over time, the goal will be somewhere where we have a balanced portfolio of 50% on and 50% offshore. And we feel very confident that we will achieve that based on the speed at which we're opening new locations and the speed at which clients are taking up that capacity and asking to move to these new geographies and new locations. Do you want to add anything?

No, I think that's right. And I mean, I think really pleased with how the client demand that we're seeing and how our pipeline is developing for our existing, but in particular, for the new offshore locations that we're opening up. And I think Jonathan, as we talked about last time, right, we will get to that 50-50 mix or that balanced portfolio over time here. This year, we're certainly looking to expand our offshore by a couple of percentage points. And so that's what we're working on every day.

Got it. And I know it's relatively early days in your offshore expansion, but can you talk through hiring trends you're seeing in some of your newer geographies?

So far, we're very pleased. And it's -- a lot of that has to do with the locations that we're picking and where we're going, but we are experiencing no difficulty whatsoever in filling the roles as we open up these new sites. So, so far, we feel extremely confident about the hiring abilities. And frankly, it's one of the many reasons why we decided to start to add all these different geographies is because we wanted to have far more diversification and wanted to be able to have much more certainty that we can hire at a much faster rate, et cetera. And it's absolutely proving to be the case.

And of course, we're going into markets where the -- where we think the talent market is strong, right? So, so far, so good, going well.

That is all the time we have today. I will now turn the call back to Paul Miller.

Thank you, everyone, for joining us today. This concludes our first quarter earnings call. Thank you.