TTEC - NASDAQ

Welcome to TTEC's Second Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded at the request of TTEC. I'd now like to turn it over to your host, Mr. Paul Miller, TTEC's 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. TTEC is hosting this call to discuss its second quarter financial results for the period ended June 30, 2023. Participating on today's call are Ken Tuchman, Chairman and Chief Executive Officer of TTEC; Shelly Swanback, President of TTEC and Chief Executive Officer of TTEC Engage; 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 that document. For a 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 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, adjusted EBITDA was $67 million reflecting our continued investments, non-GAAP EPS was $0.55 per share and we closed 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 are 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 experienced economy. Before Shelly 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 companies that will need to adopt the new capabilities are intrigued with the new technology, but are trending carefully. Through TTEC Digital and TTEC 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 the CX and AI for many years. 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 hyperscalers 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 take shape. We saw this coming. We've 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, the company will be able to leverage the advanced capabilities of generative AI we know from our 40 years of working with technology and the CX trenches that it's not that simple. The level of impact from AI is highly dependent on the industry serve, complexity of the customer interactions, mix of voice and digital channels, the state of clients technology platform and the balance of human and automated experience that the brand wants to deliver. Our clients are looking to us to help guide them through this new significantly more complex environment to 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 those data organized and annotated, integrate their CX, CRM and back office systems so that the data can flow freely in real time and create the optimal mix of automation and human interaction to provide compelling experiences that will engage customers and build lasting brand loyalty. Through TTEC 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 hyperscalers are partnering with us to further develop the CX capabilities in their platform. Through TTEC 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 in TTEC. We've launched several initiatives to help our clients accelerate their efforts, while avoiding costly mistakes. For example, we've created the TTEC 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 are delivering strategy workshops to help organizations align around priorities and build actionable roadmaps with define proof of value. We're 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 interactions, the radical response times and high compute costs. And we're executing client facing pilots to activate native AI functions across the hyperscaler platforms with knowledge management, language translation, automated quality assurance and transcription summarization to name a few. TTEC's 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. Whether that means using voice-based routing to match an orderly Medicare buyer with a compassionate license sales consultants or simplifying the desktop to free up times for a busy frontline associates. We see this new phase of AI-enabled CX is a great opportunity for our business and it's core to our values and mission. Now moving on to our outlook into our second half of the year. CX 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 will continue to be agile to respond to their evolving needs. While some competitors in the industry are occupied with integration activities, I'm 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 brands 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 pandemics 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'll successfully navigate the dynamic macro-economic environment in the months to come. I'll 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 Engage and Digital businesses as we continue to focus on providing quality outcomes for our clients, exceptional experiences for their customers and rewarding careers for employees. Before I dive into our results, I'd like to echo Ken's thoughts on AI. The buzz around generative AI certainly advanced discussions around automation and analytics based solutions that have been in the market for some time. And while generative AI is making the possibility of AI more visible and real for our clients, it's also covering a need for strong fundamentals that 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 train knowledge workers operating on their front lines. As Ken mentioned earlier, there's a lot of excitement in the market, but also a lot of complexity. With the AI readiness tools we've built, we're helping our clients understand their current capabilities and create a practical go forward plan. Let me share a quick representative example. With one of our existing client, a medical device manufacturer we use our AI Readiness Assessment to evaluate and build a roadmap and to use generative AI into their CCaaS platform. Now we're working with the client to help define their entire strategy and broader CX technology suite. So while it's still early, we're actively building solutions across the CX AI value chain that combines 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 in resilient vertical and leading responsible adoption of AI with our knowledge workers. This quarter we closed 16 new logos in our Engage business and four of them included offshore services. Increasingly, we're being chosen for our deep vertical expertise and technology-enabled solutions that are industry specific. 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 venture will be servicing U.S.-based customers with associates outside of the U.S. The client chose TTEC because of our deep understanding of the complexities and nuances of the property and casualty industry and also for our proven nearshore delivery model. In health care we closed business across the value chain. In the Payer segment, we were selected for our license 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 operations. Running their schedule nerve center will provide us with deep insights across their customer facing operations. When we combine that with real time frontline knowledge with our deep payer expertise we'll 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 on 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 has delivered 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've launched six new locations in five new countries, including India, Colombia, Honduras, Egypt and South Africa, and our offshore backlog continues to grow. In addition, we're ramping our at-home platform in Puerto Rico with a community of highly skilled knowledge workers to support our healthcare and financial services licensed program. Offshore revenue represents approximately 32% of our Engage second quarter revenue. We expect continued momentum into the second half of the year with new locations that will expand our Asian language capabilities. Now onto TTEC Digital where the advanced capabilities of generative AI are accelerating the need for companies to migrate their CCaaS and CRM systems to the cloud. Clients are 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, TTEC Digital's delivering value to companies wherever they are on their CX transformation journey, whether it's designing and CX strategy, migrating CX technology to the cloud, establishing involving a data foundation or engineering to enable AI initiatives TTEC Digital has the deepest and broadest expertise across the entire CX technology ecosystem. Now, let me share some TTEC Digital highlights and examples from the quarter. New key client wins and expansions were diversified across the public sector, automotive, banking and healthcare verticals, including numerous CX transformation projects that combined our consulting, solution accelerators and analytics capabilities with partner platforms from Microsoft, AWS, Google, Genesys for Cisco. For a cybersecurity brand, we were chosen to help modernize the customer experience by combining a 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 includes CCaaS, CRM and the rollout of a new customer data architecture. When complete this integrated AI-enabled platform will increase conversion rates and productivity for over 1,500 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 strategies and roadmap to modernize and re-imagine the citizen experience. In TTEC Digital we continue to accelerate our pace with offshore delivery and are exceeding our expansion goal for our global integrated delivery model. So overall, we're pleased with our progress across the business in the second quarter. As we looked at the back half of the year, our sales funnel and backlog are healthy. In particular we're experiencing strong demand for our offshore locations at Engage and in Digital we're 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's consumer demand patterns are evolving. In Engage, we anticipate continued strength in our resilient verticals healthcare, banking, financial services and insurance and the public sector. However, we expect continued softness in hypergrowth as we've discussed before. Additionally, some of our clients are taking a cautious approach with regards to the forecast for seasonal volumes 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 volume 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. However, 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, we'll 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 plans and will skillfully manage what is under our control in the months ahead. Before I close I'm thrilled to welcome Laura Butler to TTEC as our Chief People Officer. Laura returns to TTEC after leading human capital at several top tier B2B technology companies. Across our business, our people remain our differentiator and Laura will be driving our AI-enabled people strategy at this pivotal moment in the CX Industries evolution. On behalf of our team of approximately 64,000 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, Shelly and good morning. I will 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 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. 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 results. 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. Adjusted 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 8.4% of revenue compared to $61 million or 10.1% in the prior year. And EPS was $0.55 compared to $0.93 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, strength in our CX technology, professional services and 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 highlights 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 in our resilient verticals remains strong, offsetting the anticipated decline in our hypergrowth 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, strategic expansion in new offshore delivery locations and integration-related costs associated with the Faneuil asset acquisition. Turning to our second quarter new business activities. We added 19 new client relationships with strength from our healthcare vertical, followed by public sector and financial services. While the initial average deal size is smaller, their profiles are conducive for a increased scale next year. Our Engage embedded base performance remained strong, as demonstrated by our last 12-month 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 represents approximately 32% of our Engage second quarter revenue. In our Digital segment, demand was solid, the partnerships with the CX hyperscalers represent the main catalyst to our growth. Clients continue to recognize TTEC 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 our Genesys practice. Digital total backlog represents 84% of the midpoint of our segment revenue guidance. TTEC's 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 2023 revenue of $118 million, an increase of 3.1% 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 5.2% 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 with increased renewals of existing on-premise infrastructure, we continue to be well positioned to support the growing backlog of cloud migrations. We currently expect the 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 in 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 with 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 developments. These investments are delivering solid recurring revenue and professional services growth among our strategic technologic partnerships. Our Engage segment reported second quarter 2023 revenue of $483 million, a decrease of 1.3% on a constant currency basis over the prior year. As mentioned, our revenue performance reflects continued solid demand in a more resilient verticals, including healthcare, financial services and public sector, which grew organically by 5.5% in the second quarter of 2023. Direct-to-consumer centric verticals including tech and retail are largely represented in our hypergrowth sector and experienced the largest year-over-year revenue decline of 21.5%. On a full year basis, the hypergrowth sector represents approximately 15% of Engage revenues. In the second quarter operating income was $36 million or 7.4% 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 continue to rationalize cost that grows the business and strengthen the foundation of an agile cost structure. We also continue to optimize our cost structure in our traditional footprint, while strategically investing in our geographic expansion, which is essential to our success next year and beyond. I will now share our 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 3.2% of revenue for the second quarter 2023 compared to $19 million or 3.2% in the prior year period. We continue to prioritize investments in IT infrastructure and security and accelerate our geographic expansion efforts. As of June 30, 2023 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, primarily related to capital distributions and acquisition related investments, partially offset by positive cash flow generation TTEC paid $0.52 per share or $24.6 million semiannual dividend on April 20, 2023 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 organizations 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 hence translating into longer deal cycles. Consequently, the pipeline conversion to backlog has been slower than usual for this time of the year and the deal size is 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 in comparison 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 volumes and delayed decision expected from some clients for the remainder of the year. Please reference our commentary in the Business Outlook section towards second quarter 2023 earnings press release to obtain our expectations for the third quarter and full year 2023 performance at a 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, who more than ever are turning to us as a trusted partner. Although near-term visibility is still cloudy, the long-term outlook remains intact. As Ken and Shelly 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, intense and human interactions in order to retain customers. With our comprehensive set of integrated offerings, TTEC 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.

[Operator Instructions] Our first question comes from the line of Bryan Bergin of TD Cowen. Your line is now open.

Hi. Good morning. Thank you. Wanted to start here first on some of the client behavior that you highlighted. I'm 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, Bryan. It's. Ken. How are you? I would say that it's more of a cautionary move than anything else. I think that clients as one could expect are lacking their own visibility. And so in some cases they are delaying locking in on their forecast. The good news is that we have in the Engage side of the business over 96% of our forecast is locked and in the next couple of weeks, I would say, we'll have much clearer visibility because they will 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 past when people are moving into times where their own forecast or visibility is a bit nebulous and then what they do is they come back and they say, how quickly can you add. 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, I don't see that as 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 follow-up here. So the 2023 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 that's accelerating?

Let me start with -- we're 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's nothing more aggressive than that and what we shared initially. And we're entering the back end of the year with a 84% backlog for our Digital business which is stronger than expected and ahead of last year as well. So we feel very solid -- we feel very good with the professional services, in particular the recurring revenue stream line that is growing in the back end of the year.

And then the second part of your question regarding Cisco, what we would tell you is that, yes, we do believe that that does in fact recover and it will probably be down overall close to 10%. But the good news is that our other practices are growing 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 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 was 25% of the Digital business?

Yes. Cisco is 25% of our Digital business this year.

Okay, got it. And then, obviously you've highlighted a lot of interest in generative AI. I guess has that driven more pipeline growth and pilot activity in Digital. I know you've highlighted maybe some decisions are getting delayed, but I'm just curious, is it driving more interest, more pilots, more pipeline. And then I guess the derivative of that as you said that you kind of have to go to cloud before you do generative AI. So is it generating more just kind of cloud migration?

Hi, Mike. This is Shelly. Absolutely. I say a couple of things. First is, we have a number of pilots conversations underway, both with our Digital clients and our Engage clients, a lot of interest in. One of the use cases are going to make the most sense from a CX perspective for generative AI. Having said that those pilots are obviously in early days. But I think one of the things that all of the discussion and buzz, if you will around generative AI has created is also a lot of good conversations with our clients about getting to the cloud. You might have heard earlier we mentioned that we're going to do twice as many cloud migrations in the second half as the first half. Companies are also -- we're also having a lot more conversations about other non-generative AI if you will, that sort of AI use cases that we've been doing for the 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 high cycle in generative AI come down a bit, meaning that we're getting to a bit more practical conversations around working with pilot, what are the use cases, how do we deal with some of the learnings that we have in these early pilots around, which large language models make most sense for which use cases, some of the things around response times, cost profiles, et cetera.

Very good. All right. Thanks very much.

Thank you.

Thank you. Our next question comes from the line of George Sutton of 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 not uncommon that when service organizations are in the midst of mergers, et cetera, that in many cases that creates opportunity for other service providers that are not in the midst of those types of integrations 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 along with probably others will benefit off of that. So I wanted to be diplomatic, they're all great companies and the good news is that we're dealing with a TAM that's ever expanding with well in excess of $400 billion of TAM just on the outsource on the Engage side of the business. When you look at the overall size and scale there's plenty of business to go around, especially as the market consolidates, which we view as a really 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 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, I think that it will ultimately prove to be a net benefit as work gets rebalanced.

Thank you. That's very diplomatic, you might pick the Secretary of State. My follow-up is on the hyperscaler discussion. When we talk about AI, obviously the hyperscalers are going to be very important, and I think most would define that they're being three of those being Microsoft, AWS and Google. But you also are obviously interfacing with Fortune 500 company. So I just want to make sure I understood is, is your hyperscaler work helping bring their opportunities to the Fortune 500? Or are you working with the hyperscalers 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 their very large enterprise, mega enterprise customers. And we're very appreciative of that. And so we're there to help them either close 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 hyperscalers with everything from -- I don't want necessarily use the word, strategy, but where they need to be going in this space to also physically helping from a code standpoint, et cetera. And 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 you'll see that we're going to continue to be leaning in and it's our intention to capitalize off of generative AI and make it a very significant positive for our overall business.

Great stuff. Thanks, Ken.

Thank you.

[Operator Instructions] 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? Would that start to look fairly similar to the second half of this year? Can you give us some qualitative commentary going out a bit further?

Yes. So a couple things Maggie. First thing is, one of the factors in terms of the smaller deal sizes just a factor of you probably heard me mentioned some of the examples from this quarter and even last quarter. Some of the new clients that we're bringing into our roster are first-time outsourcers. And so we're starting with smaller projects to start. And what I'm excited about is, some of the new logos that we've landed this year, the growth potential for them going into next year. Having said that, we're not ready to comment on 2024 yet just given the macro environment that we're all dealing with. The other thing is -- I mean, I guess, the other thing I would just tell you is the other factor is five of the six this quarter, a large majority of our new logos last quarter are all offshore, and so that has an impact on deal size as well. But we're excited about that. I mean, our offshore pipeline, our pipeline is now more than 60% offshore, two-thirds of that coming from our new locations. So excited about the progress we're making in terms of building out our footprint.

So just to build on that a little bit. Ken we all know that you've all been through this before, and you referenced kind of clients setting expectations for volumes, lower and then oftentimes will come back to you. And there is a 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 impact of your increasingly global footprint on that process?

Well, I mean I think this is really the heart of our business, right, Maggie is 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 you see we are very accustomed to having a seasonal ramp in Q4 for retailers for health care 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 locking in their forecast.

Thank you. Nice quarter.

Thank you.

We have our next question from the line of Joseph Vafi of Canaccord. Your line is now open.

Hi, everyone, good morning. Nice results. Just one on AI. Well, first of all, Ken, I thought in your opening comments on AI were really good and some of the best I've heard out of management teams over the last couple of quarters. But maybe you could dig a little bit into the cost side of using this technology. Everyone seems to focus on how great it is, but obviously there is a cost impact in using it versus other solutions? And what you've seen so far there? And then maybe I'll have a quick follow-up.

Hi, Joe. You're -- I think you're asking actually a fantastic question. And I think that unfortunately it's a very difficult question to give you a really straight answer, due to the fact that 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 there's 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 cost will come down fairly significantly. So what that translates to is people who are going to be using large language models, they're going to have to use models that are in most cases private models, which means that they are limiting the overall scale of the model, so that A, 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 that they consume ton of compute. And consequently, when you look at the cost and you compare it to traditional IVR technology, which is not as good by the way, it's hard to justify. When one area might be a few pennies and the other could be $0.85 for what could be accomplished with an IVR. My point in saying all this 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 settle down. We're seeing clients starting to get much more realistic about what their plans are, how they plan on attempting 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 that's going to be going on for a while. And believe it or not, I actually think the hyperscalers, once that as well because they're building out their infrastructure waiting for their NVIDIA boxes to come, Google's building out their new chipset that in many ways competes with NVIDIA's chipset for their GPUs. And so what I would just simply say to you 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 can actually give you a very accurate answer on where that's settling down. But suffice to say where 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 realistic approach of where we insert AI and where we intentionally don't insert AI, because the compute cost will be too high. So I'm sorry for rambling on. I hope that's somewhat helpful. But I think it's a great question and I think if you asked that question midpoint next year, we're going to be able to give you a much more specific answer.

That was great and that was good color. And then just really quickly, I know you mentioned maybe -- you mentioned travel is potentially a little bit soft moving forward. It seems a little surprising given 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 Shelly answer the second part. This is really part of our own belief and forecasting that there has been a pinched POS effect to travel due to the pandemic. And that we believed 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's -- again, it's a mixed bag. I think if you listen to the airlines that are actually saying that they're predicting domestic travel is already falling off, reservations 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, Shelly.

No, I think you said it well. I mean, our travels are growing very strong, it's exactly what you said, Ken just looking at back half of year. And I think by the way, one of the things we heard from those clients is because customers are not booking things as much is much of the answers that you assumed, they have a little bit -- they have more real-time demand, little bit less visibility into the coming quarters. And so there's a dynamic there as well.

That makes sense. Thanks a lot guys.

Thank you.

Thank you. Our last question comes from the line of Cassie Chan of Bank of America. Your line is now open.

Hi, guys. First, I just wanted to ask about, I think you guys mentioned that 32% offshore metric for Engage. What 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 metric or a longer-term target for this metrics, 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 momentum? Thank you.

Let me just start answering your question about the mix and the trajectory of our offshore revenue and I'll let Shelly give more color about what we're doing as a company for extending that growth. So right now, our focus is going to be at 32% full year basis and we have seen our offshore portfolio growing by 10% year-over-year and that's really where we're focused is maintaining that 10% and above percent growth rate for our offshore revenue. And as Shelly mentioned, we had a strong quarter with logos probably oriented with offshore and we feel very confident that our backlog is growing in the right direction to improve that mix next year.

Yes. Just I guess in terms of locations. Cassie, the ones that I mentioned earlier, in terms of our nearshore locations in places like Colombia and Honduras, right? We see a lot of opportunity to scale those as well as what we're doing in Africa, whether it's Cairo, South Africa, we'll be entering some new countries, more to come on that very soon. And then you 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 India, so really pleased. As I said earlier, two-thirds of our offshore pipeline right now is coming from these new locations. Having said that, we continue to grow in the Philippines as well. But really we're pleased with our progress on these new locations and 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 think about sequential growth in the fourth quarter versus the third quarter implied by your guide, I don't know, maybe I don't have this right. I'm seeing like nearly 40% in quarter-over-quarter growth in the fourth quarter like adjusted EBITDA in 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 efficiencies. Could you just elaborate a little bit more about what you guys have going on, especially that's going to impact the back half of the year? Thank you.

Yes. Let me first address the sequential growth between Q3 and Q4. If you look at our Engage right now per our guidance, we're going to be up $50 million between Q3 and Q4, which is less than what we've done last year. And therefore that trend in Engage is very much in line with our history, which is also aligned with the seasonal business that as you know that we're adding. And for the 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 migrations scheduled 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 no, I would say, I don't see it more aggressive than what we've done in the past. And in terms of the margin expansion that you're referring to, I think for Engage, as you know in Q4 with our seasonal volume there is naturally an uptick in our margin from there. And I think for Digital it is really the results of the revenue mix and seeing the growth in our professional services in the back end of the year, that is really helping to mix.

Thank you.

Thank you.