TTEC - NASDAQ

Welcome to TTEC's Third Quarter 2021 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 Bob Belknapp, TTEC's Group Vice President, Corporate Finance. Thank you, sir, and you may begin.

Good morning, and thank you for joining us today. TTEC is hosting this call to discuss its third quarter results for the period ended September 30, 2025. Participating on today's call are Ken Tuchman, Chairman and Chief Executive Officer of TTEC; and Kenny Wagers, Chief Financial Officer of TTEC. Yesterday, TTEC issued a press release announcing its financial results. While this call will reflect items discussed in that document. For complete information about our financial performance, we also encourage you to read our quarterly report on Form 10-Q for the period ended on September 30, 2025. Before we begin, I want to remind you that matters discussed on today's call may include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward-looking statements reflect our opinions as of the dates call and we undertake no obligation to update 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 2024 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, Bob. Good morning, and thank you for joining us today. This quarter, we continued to strengthen our foundation while also making investments to seed our future growth. In the third quarter of 2025, revenue was $519 million. Adjusted EBITDA was $43 million, and we reduced our net debt by $119 million from the prior year period. . Across both business segments, we continue to expand our AI-enabled CX Solutions with a hybrid strategy that blends the best of technology and human cognition and empathy while also attracting new clients in new industries where seamless and personalized CX is driving brand differentiation and growth. We also nurtured our relationships with our existing clients with vertical-specific solutions enabled by data analytics and AI. And lastly, we deepened our unique collaborative relationships with the leading hyperscalers who partner with us to drive innovation forward with their massive investments in AI and the related infrastructure. Clearly, a significant transformation is underway in the CX industry, fueled by the remarkable conversational ability of Gen AI, new use cases are emerging every day that have the potential to revolutionize the quality and efficiency of customer interactions. As a company dedicated to simplifying the complex world of CX and AI by providing every capability of business needs to transform we couldn't be more excited. However, if you open any major business publication today, it's hard to avoid the news stories about early adopters. We're seeing a significant gap between our AI investments and measurable CX business outcomes. In addition to delivering disappointing returns, these initiatives are creating customer experiences that are clumsy, inflexible and impersonal. In many cases, it feels like Groundhog Day, recreating the decades agony inflicted by the static interactive voice response systems of the past, also known as voice jail. Recent data validates this discouraging and costly trend. According to the CX Industry Trade Association, CTW, currently 82% of consumers feel CX experiences are inconvenient and inconsistent. 60% of them report that the quality of interactions has deteriorated, and almost 75% believe AI is making it worse. It goes without saying that these negative experiences are costing businesses, customer loyalty and hurting their bottom line. Our decades of frontline CX experience and fluency across all hyperscalers and CX technology platforms reveal a simple truth. While technology mastery is table stakes, AI's toughest challenges aren't technical succeeding in the AI age requires an agile, consultative mindset, a willingness to take thoughtful risk and the ability to embrace change. Here's why. To start, AI isn't simply a new technology to plug into an old stack, it's a fundamental pivot in how organizations operate. Companies that don't shift their mindset will struggle to build AI native workflows and teams. To achieve sustainable and scalable results, companies must have a solid foundation in place, and most are just getting started. Change of this magnitude is a heavy lift and requires a modern data state, processes to clean and curate data reengineered processes and documented best practices, seamless front to back office technology integration and an inspired and rigorous change management protocol. While this shift won't happen overnight, every initiative needs to be part of a thoughtful, flexible and interconnected strategy. This comprehensive approach mirrors the successful client-focused engagements we're currently implementing with some of our clients. In addition, to make this dramatic pivot and avoid costly mistakes, companies need to work with partners who have deep CX domain expertise, partners like us who have been operating in the CX trenches for decades and know how to limit risk. While generalists may be proficient in installing features and functions, they don't have the specialized knowledge of how the entire CX ecosystem works together. Without big picture and practical understanding of all the specific value levers, they aren't able to optimize associate workflows efficiently or architect seamless journeys that support customers where, when and how they want to interact. Everyday, we're enabling clients to work and think differently. We're helping them use data, AI and integrated systems to create journeys that effortlessly harmonize automation and human interaction. Is this hybrid balance that underpins every piece of software we write, every journey we orchestrate, every associate we train and most importantly, every client we serve? While early days, let me share how this philosophy beginning to play out across our business. We'll start with TTEC Engage. This quarter, we continued to attract new clients, grow our business with our embedded base and introduce new AI-enabled solutions. Year-to-date, we've added 11 new significant clients to our roster, including 4 this quarter, with an encouraging pipeline moving forward. We continue to expand our vertical expertise, attracting premium customer-focused brands across all our verticals. Over the last 7 quarters, we've signed 19 new large enterprise clients that are expected to add over $50 million of in-year revenue with substantial growth potential into 2026 and beyond. Our embedded base growth continues to accelerate as many of our key accounts begin to take advantage of the full range of our capabilities, including revenue generation, tech support, back office, trust and safety, to name a few. Year-to-date, contracted revenues in these areas exceed 150% of what was awarded all of last year. This growth is a result of healthy strategic relationships better performance, innovation, industry thought leadership and reduced client churn. Across TTEC Engage, we continue to evolve using AI tools across every business function. For our associates, this focus translates into desktop automation, knowledge retrieval, simulated learning and AI-assisted coaching to name a few. We've deployed AI in over 110 programs, with more than 65 clients and almost 100% of our new client pitches include our core AI associate augmentation tools. We're seeing impressive results on the front line with scalable performance improvements and we expect to see even more upside in the future. As expected, our engaged third quarter profitability was down compared to the prior year. This short-term dip was the result of significant investment this quarter to continue to set ourselves up for success in 2026. In addition to investing ahead of our fourth quarter seasonal ramp, we've made meaningful investments expanding our executive leadership team, growing our prioritized offshore delivery locations and boosting funding for several key innovations and technology initiatives. When we combine these investments, with our ongoing operational improvement programs, we're confident that we'll deliver year-over-year growth in the fourth quarter and for the year overall. Now let's turn to TTEC Digital, where we continue to remix our professional and managed services to meet the evolving needs and priorities of our clients. Our deep collaborative partnerships with the hyperscalers continue to position us squarely on the front lines of innovation. These industry giants are partnering with us to codevelop the essential features for a modern contact center, turning our shared vision into tomorrow's market reality. While I mentioned before that AI's toughest challenges aren't technical, an agile, integrated technology stack is nonnegotiable requirement. To that end, this quarter, the TTEC Digital team signed 20 new meaningful clients and expanded our portfolio of services with many of our existing clients. Clients are tapping into our expertise to help them optimize their current technology infrastructure and design their road map for the future. Instead of replacing core systems, we're helping clients optimize what they have by layering AI capabilities onto existing environments to drive targeted outcomes. Although these initial engagements in some cases are often smaller at the beginning than our traditional CCaaS implementations, they're highly strategic and play to our strengths in consulting, journey orchestration, analytics and systems integration. These programs frequently expand into multiphase engagements and generate recurring managed service opportunities. Now let me highlight some of the exciting deals from the quarter. For an existing client, a leading multinational bank, we're using AI to optimize both their front and back office operations. We completed their CCaaS migration last year. We're now layering in AI capabilities to transform voice and chat experiences into conversational agents with targeted handoffs to live associates for more complex interactions. This hybrid AI-powered solution improves the experience for both the customer and the associate with real-time transcription and analytics, allowing for direct customer interaction without a traditional IDR. In addition, the platform provides seamless automation of back-office tasks such as client research, fraud analysis and data entry, thus proving efficiency and accuracy. Our next example, is one of the world's largest airlines. We were selected to partner with their chosen hyperscaler to improve CX and reduce our case handle time by almost 1/3. When complete, we will have redesigned client's customer interaction platform and activated the full suite of AI capabilities. The result will be a dramatically improved customer and associate experience that will also drive increased profitability and operational efficiency for this world-class airline. . Now I'd like to turn to our progress implementing outcome-based solutions for our clients. For more than a decade, CX technology and service firms have been seeking ways to redefine the commercial delivery model away from FTE and production hours to outcome-based metrics like containment, handle time, first contact resolution and customer satisfaction to name a few. This approach has been appealing to visionary clients who understand the true value of total costs delivered and are willing to build a strategic partnership required to bring it to life. This quarter, through a unified methodology that knits fstrategy, technology, implementation and frontline operations together, we've come closer than ever before to an approach that can deliver guaranteed outcomes for certain qualified clients. For example, we're currently working with a financial services client who is seeking an end-to-end customer experience platform that combines technology and highly trained CX professionals. The holistic solution will blend AI agents and human associates with an integrated management and support model. Because we'll be teaming with the client on all facets of the solution, we're able to model improvements in operating efficiency and customer engagement metrics. The team is actively calling the plan based on initial data, and we're confident that working closely with our clients, we will achieve dependable, mutually beneficial results. In closing, I'd like to take a moment to reflect on our journey over the past few years. Our company has been going through a transition. Over the past 18 months, we've brought in several experienced leaders to help us rebuild our foundation and executed course corrections to set up and take advantage of all that AI has to offer today and into the future. Some might say that it's been a messy process. But today, we're in a materially better position than we were back in early 2024. While the numbers don't reflect the growing momentum in the business, we're confident that we're well on our way to returning to our historic growth rates and margins. We've developed a valuable portfolio of digital first CX capabilities, pioneered enviable collaborative relationships with the leading CX technology players, nurtured trusted partnerships with marquee brands across the globe and built a workforce made up of some of the most talented and passionate CX technologists, strategists and operators in the world. With a strategic approach that is purpose-built for each individual client, we're putting all these assets to work with a clear focus on delivering the outcomes our clients need most. Every organization today faces an immediate mandate to transform and we're well positioned and ready to provide the expertise necessary to lead our clients towards their goals. On behalf of the Board of Directors and our dedicated and talented teams across the globe, thank you for your continued support. And now I'll hand the call over to Kenny.

Thank you, Ken, and good morning. I will start with a review of our third quarter 2025 financial results before discussing our full year 2025 financial outlook. In my discussion of the third quarter financial results, reference to revenue is on a GAAP basis, while EBITDA, operating income and earnings per share are on a 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 results. On a consolidated basis for the third quarter of 2025 compared to the prior year period, revenue was $519 million compared to $529 million, a decrease of 1.9%. Adjusted EBITDA was $43 million or 8.4% of revenue compared to $50 million or 9.5%. Operating income was $29 million or 5.6% of revenue compared to $34 million or 6.4%, and EPS was $0.12 compared to $0.11. Foreign exchange had a positive $2 million impact on revenue in the third quarter over the prior year period, primarily in our Engage segment, while having a nominal impact on adjusted EBITDA and operating income. Turning to our third quarter 2025 segment results. In our Engage segment, third quarter revenue decreased 4% over the prior year period to $397 million. Operating income was $17 million or 4.3% of revenue compared to $20 million or 4.8% of revenue in the prior year. The Engage segment's third quarter financial results were in line with our expectations. As discussed in my second quarter earnings comments, we forecasted lower third quarter Engage profitability compared to the prior year due to upfront expenses related to ramping certain key clients and fourth quarter seasonal health care volumes. These expenses included recruiting and training costs, license fees and technology that are delivering higher revenue and profitability in the fourth quarter and into the first quarter of next year. Overall, the 2025 Engage revenue continues to track to the high end of our full year guidance due to further expansion into new lines of business within our embedded base and the extension of a large public sector program through the first 3 quarters of 2025. We also continue to focus on profit optimization, including actions taken to further align our cost structure and improved operating efficiencies, driving increased profitability despite the year-over-year revenue decline. Although this quarter was impacted by the incremental spend that I mentioned, we are confident that the fourth quarter will reflect EBITDA and operating income growth for both the quarter and second half of 2025 compared to the prior year. Over the past year, we have meaningfully repositioned our Engage segment to better serve our new and existing global clientele, while also advancing our operational effectiveness. We have enhanced our AI and analytics capabilities, expanded our geographic delivery footprint and improved our leadership talent. Our embedded base is growing well above the prior year, as Ken mentioned. And our enterprise new logo signings continue to expand with material revenue contributions this year, both of which are anticipated to return the segment to top line growth in 2026. As a result, we remain confident in our ability to further improve our profitability in both absolute and relative terms. We will prudently continue to focus on our strategic initiatives and investments in the areas mentioned to return the company to its historical revenue growth and margins. The Engage backlog is $1.66 billion or 102% of our 2025 revenue guidance at the midpoint of the range, up from 99% for the same period of 2024. The Engage last 12-month revenue retention rate is 89%, flat to prior year but reflects a 95% retention rate when adjusted for the revenue related to the financial services and public sector clients discussed in our quarters. While the last 12-month retention rate continues to improve, the third quarter on a stand-alone basis reflects an adjusted revenue retention rate of 98% on top of the 97% for the second quarter, further supporting the return to historical levels of Engage top line growth. Moving on to our Digital segment. Third quarter revenue was $122 million, an increase of 5.4% over the prior year. Operating income was $12 million or 9.5% of revenue compared to $14 million or 12.5% of revenue for the same period last year. Digital's third quarter 2025 revenue benefited from a $15 million year-over-year increase in product resales related to on-premise clients. This revenue, while generally decreasing as clients migrate to the cloud, delivers lower margins accounting for a portion of the decline in operating income. Excluding the resales, revenue was $103 million, representing a decrease of 7.9% over the prior year with operating income at 9.9% of revenue. Recurring revenue declined 9.8% in the quarter compared to the prior year, primarily due to the reduction in managed services related to a premise contact center solution that moved to end-of-life status in July of this year. As Ken stated, our business is rapidly evolving and shifting from point solutions related to contact center technology to fully optimizing existing environments through AI-led consulting, journey orchestration and data and analytics services. With this shift, our recurring revenue that is reliant on CenterPoint solutions is decreasing while our diversified partnerships with hyperscalers and our other practices reflect revenue growth. The timing of this remix, however, is putting temporary pressure on revenue. Excluding product resales, recurring managed services represented approximately 67% of Digital's third quarter revenue, which is slightly lower than 68% for the same period last year. The market shift is also impacting professional services as front-end consulting engagements related to migrations of contact center solutions to the cloud have declined. As a result, professional services revenue decreased 4% in the quarter compared to the prior year. Despite the lower revenue, we proactively manage resource capacity by increasing utilization by approximately 10 basis points over the prior year. This resulted in a 7.6% increase in professional services operating income dollars, representing a 330 basis point margin improvement. Excluding our 2 legacy CCaaS partners, Professional Services grew 23.3% in the quarter compared to prior year, reflecting the momentum we are seeing with our expanded CX technology partner network. Furthermore, these AI-enabled offerings and solutions that drive enterprise-wide digital transformations are at higher margins with operating income increasing 88% year-over-year, far outpacing the revenue growth. Although we need to navigate through this market change and scale these dynamic partnerships, we believe the engagements will drive higher client retention and profitability in the long term. Our digital backlog is $444 million or 95% of our 2025 revenue guidance at the midpoint of the range, up from 92% of the same period last year. Before I discuss other financial metrics, I want to address the term extension of our credit facility. Our improved profitability and cash flow generation over the past year, along with significant year-over-year debt reduction drove this outcome. TTEC's executive leadership team and Board of Directors value the support from our long-standing banking partners. I will now share other third quarter 2025 metrics before discussing our outlook. Free cash flow was a negative $10 million in the third quarter of 2025 compared to a negative $100 million in the prior year, which as previously stated was impacted by the discontinuation of the accounts receivable factoring facility. If excluded, normalized free cash flow was a negative $18 million. The year-over-year improvement of $8 million after normalizing the prior year is due to an additional $13 million of cash flow from operations less an increase in capital expenditures of $5 million. Year-to-date, our deliberate actions to improve profitability and working capital management are evident in our cash flow from operations and free cash flow of $119 million and $92 million, respectively. In the third quarter 2025, capital expenditures were $14 million or 2.7% of revenue, compared to $9 million or 1.7% in the prior year. The higher end quarter spend was primarily due to the timing of real estate expansion and facility maintenance, along with IT spend related to health care seasonal ramps. On a year-to-date basis, capital expenditures totaled $26 million or 1.7% of revenue compared to $36 million or 2.2% of revenue for the prior year. As of September 30, 2025, cash was $73 million with $886 million of debt, primarily representing borrowings under our recently amended $1.05 billion revolving credit facility. The net debt position of $813 million represents a year-over-year decrease of $119 million as we continue to focus on cash flow generation and deleveraging. We ended the third quarter 2025 with a net leverage ratio as defined under the credit facility of 3.46x compared to 4.49x at the end of the same period last year. Our normalized tax rate was 53.7% in the third quarter of 2025 compared to 58.5% in the prior year. The tax rate is primarily due to the jurisdictional mix of pretax income where foreign taxable income cannot be offset by U.S. tax losses. The impact of the U.S. valuation allowance recorded against the U.S. pretax losses will continue to impact the normalized tax rate in future quarters. I will now provide some context with regards to our full year 2025 financial outlook. As discussed, Engage revenue continues to track towards the high end of the guidance range. This is driven by the strong continued growth in our embedded base and our enterprise new logos, which are contributing meaningful revenue this year. Revenue was also positively impacted by foreign exchange movement versus our original 2025 guidance at the beginning of the year. Relating to the Engage adjusted EBITDA and operating income, we are maintaining our full year guidance but are forecasting results to come in towards the lower end of the guidance range. Contrary to the revenue impact, the foreign exchange movements negatively impacted our profitability, increasing non-U.S. cost when converting them to U.S. dollars, accounting for more than the spread between our mid- and low-end range. Despite this headwind, I want to reiterate that we expect Engage to deliver solid bottom line growth sequentially and year-over-year in the fourth quarter and overall for the second half of the year. This is driven by the ongoing profit improvements we have demonstrated throughout the first half of the year as well as higher fourth quarter health care business and growth in key clients. In our Digital segment, we are navigating the market dynamics and have positioned ourselves to deliver continued transformational CX technology and service solutions. We have the partner network, the experienced talent, the in-depth knowledge and the AI-enabled solutions to be the partner of choice in this new demand environment. We are maintaining our full year guidance, however, at the lower end of guidance range due to remix factors discussed. Please reference our commentary in the Business Outlook section of our third quarter 2025 earnings press release to obtain our expectations for our reiterated 2025 full year guidance at the consolidated and segment levels. In closing, our third quarter and year-to-date results demonstrate our commitment to improve our operating and financial performance. Although we are proud of what we have accomplished over the past year, as Ken stated, we still have more work to do to return to our historical growth rates and profitability metrics. We will not be satisfied until we get there, but we believe we have set the necessary foundation and are on the right path to achieve this in the near term. We will not waver in our commitment and every action we take is with this goal in mind. I will now turn the call back to Bob.

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

[Operator Instructions] Our first question comes from George Sutton of Craig-Hallum.

I wanted to better understand the front-loaded expenses you discussed relative to the health care opportunity. We're obviously in the midst of a very disruptive Medicare Advantage AEP and ACA, OEP. Can you just walk through the significance of your role there? And what these investments bring you? .

George. Look, for us, I can't talk to the larger picture of health care. Maybe Ken can. I'll let him comment after me. I would just tell you that John Abou and the team and Engage this year has really done a good job with our Healthcare segment, and has really done a good job shoring up that business and growing that business and putting us in a really good position so that we can have this strong fourth quarter that we've alluded to all intents and purposes, the investments that we made in Q3 that I highlighted in my comments are about seeing double-digit growth in our health care seasonal business year-over-year. And so we're happy with those investments. And the key to those investments is, they shouldn't just last in Q4, right? When we take care of the client in Q4 and when we take care of the health care customers in their peak seasons, it really gives a very good business relationship going forward. And so not only do we see these investments paying off in Q4, but we see that with more steady work and growth from them into Q1 and into the balance of 2026. So that's what it means for TTEC specifically. Ken, I don't know if you want to comment on George's general question in the market.

I would second everything that Kenny just said. The bottom line is, is that not only are we growing the fourth quarter health care business, but more importantly, where we focused is on adding more what we would call long-term recurring business within the health care sector. So in other words, historically, we've had very significant seasonal ramps and then they start to fall off towards the end of first quarter. We will continue to have those peak ramps, but the difference is that we've negotiated multiple health care contracts where there'll be continuing revenue throughout the year, maintaining the base level of employees to service both front and back office requirements of these large health care payer organizations. I hope that helps to your question.

No, that's great. So Ken, you also mentioned the AI experiences can be pretty negative if they're done just sort of as a sideline. And you mentioned the integration and sort of the broader inclusion of AI into the experiences with clients. Can you talk about what is the net economic scenario look like for you when someone is looking more holistic and adding in AI. Is that a positive net economic outcome for you as that evolves?

We believe that AI overall is going to be a very positive economic impact on multiple fronts. Number one, our digital business, I would say the majority of projects that they're now winning all include AI development. So from a digital standpoint, we absolutely see growth in that area. From an Engage standpoint, where we see the real opportunity is that by coupling AI with the human factor, we believe that what that allows us to do is to get to much more of a total value delivered solution. What we mean by that is instead of just simply pricing on a time and materials basis, it gives us the opportunity to actually price on an overall basis. And in doing so, we believe that we will be able to drive significantly better margin over the long term. And the reason for that is because if we can focus on continuing to reduce our labor component and labor cost and couple that with AI, that gives us certainly more margin impact by outcome-based pricing. So we already are starting to enter into some of those contracts as we speak, where we're happy to price on a per transaction basis as well as on a total where we're looking at the clients' total budget and making commitments to the impact that we can have on their budget. So for us, we're not run away from AI. We're incorporating it with into everything we're doing, whether it be how we operate internally or how we face the customer. The whole point that we -- that I was trying to make in my script and that I can't impress upon enough, is that the technology of AI right now where people have tried to over-rotate and basically replace entirely a customer service associate. It's just flat out not working for the average customer. Customers when they're dealing with complex medical issues, complex finance issues, they need to speak to a human being. Now where AI comes in is on all the more transactional types of issues, where human being really isn't adding a ton of value. And instead of AI is simply answering questions that are not dealing with the problems that they might be incurring with their mortgage or with their checking account, et cetera. And the last point is -- I'm sorry for waxing on this point, but I just really want to make a point about this is, we're using AI throughout our operations to make us significantly more efficient. And we believe that in 2026 that we will begin to see far better efficiencies in our quality assurance, in all of our learning and development and how we're using AI to build all of our learnings as well as all other aspects of our operations. So the goal is not only to streamline our operations and continue to reduce our cost to deliver, but it's also to be able to enhance the agent and the associates' capabilities as far as our ability to be able to make them smarter, to be able to make them deliver more accurate answers and to make them more efficient. So sorry for waxing on for so long. But we really are very excited by all the various different applications that we've been able to turn on. And our plan in 2026 with our clients' permission is to continue to keep adding more and more of these types of capabilities to become that much more efficacious on each and every interaction that we have.

Our next question will be from Maggie Nolan of William Blair.

Given the shift that you talked about into AI consulting, can you talk about whether you have the sales and delivery head count that you need to make the pivot? Or how are you going to balance the investments that is potentially on the horizon?

Yes. It's Ken. So today, right now, we have approximately -- don't hold me to this exact number post call, we can get you the exact number, but close to 1,700 full-time engineers, all of which are background now in AI, all of which are involved in some aspect of AI within the company. So to answer your question, we feel very confident that we have the skill sets to do so. And that's proven by the fact of how deep our relationships are with our hyperscalers and the work that they're bringing us into and asking us to perform on their clients' behalf as well as joint selling with them, et cetera. We probably have right now, I feel very confident somewhere in the neighborhood of about 125 AI projects -- paid for projects that are underway as we speak by clients in our digital group. And that does not even count the amount of AI projects that are taking place on the Engage side. So we're -- AI is definitely in our blood. And I think we've really mastered at this stage of the game with AI, where we can be using it and where it can be reliable and where there's danger in using it and where there is risk of it actually creating a poor experience. And I think that's one of the main reasons why clients are looking to us because not only do we have the ability to integrate into all their CCaaS systems, which is extremely important, and we believe we have more expertise across the CCaaS channel of all the different various different CCaaS partners that are out there than virtually any other company out there. And to -- in order for AI to work properly, at minimum, you have to be able to integrate with all of these different CCaaS systems. Obviously, where it gets more complicated than what we really are specializing in is how to then integrate it with all the different client subsystems. We have clients that have anywhere between 85 and 200 systems. And that's what creates long-term opportunity for us is our ability to integrate into all those various different subsystems. So that AI can actually access the data and be able to either assist the agent or assist the customer. There was 2 parts to your question, and that was the first part. Could you repeat the second part? I'm sorry.

Yes. You've covered a good portion of it. So it was about the shift, how that impacts sales and delivery? And then how you'll be able to balance the investment on the horizon? But it feels as though maybe a lot of that investment has been made. Do you feel like you have the capabilities already intact?

No. Absolutely, 100%, we have the capabilities intact. And any time, Maggie offline, we would be thrilled to actually get into real-life client examples of the types of work that we're being brought into. We're doing right now complex projects in the genomics area, where we're building out modern data states with genomic so that we can create presentation layers to doctors as well as the patients that they can actually understand after doing the genomics test we're doing a myriad of very complex projects in the area of taking advantage of AI. And like I said, we would be happy to not only take you through some of the projects, but even give you the client names, which I can't do in a public setting like this.

Okay. Maybe one follow-up, one different topic. Can you just expand upon or you or Kenny, the ability to further improve free cash flow, particularly given some of the revenue dynamics you're experiencing?

Sure, Kenny, do you want to start with that? .

Yes, Maggie, look, as we talked about over the last couple of quarters, our number one -- One of our number one objective, obviously, on the financial side is debt reduction. And as we look at our free cash flow conversion, and as we look at the use of that cash, that's what we've been doing and that's what we've been executing on. As a matter of fact, that was one of the big impetuses of us getting the extension that we just announced as well. And so as we look at free cash flow generation into the future, it's a balance of all those things, right? It's a balance of improvement in the net working capital that you've seen over the last couple of quarters. It's managing our CapEx. And it's also looking at and improving the ultimate gross margins that fall down to the EBITDA dollars that really are the genesis of your free cash flow. And so we've got that outlook. But again, we're balancing especially in this quarter as we alluded to, we're balancing that with investments as well, right? We -- Ken alluded to, there's always this push and pull about build versus buy in AI. We've got a ton of engineers like Ken talked about on the digital side specifically, but also in the Engage business as we build AI tooling for the BPO customer, right? Some we're building in-house, some were acquiring in a pay-as-you-go right now. And so we've got to balance that because the market is dynamic right now, and we need to continue to be a leader on the AI side, not just in digital, but also in Engage because every single client, every single interaction is about the ability to leverage AI next to the humans that we have. And so we'll continue to balance the investments going forward, but we're happy with where the free cash flow generation has gotten over the last couple of quarters. And we'll really get into that a little more when we do our 2026 planning that we'll discuss the outcome of in the next quarter.

And Maggie, just one other point I want to add on to Kenny's thought. As we said in our script, in 2025, we made significant investments in building a myriad of AI capabilities and tools, they're built, they're operational. So I want to just stress to you. For example, we have a real-time translation product. That's our product that we built the code set for overlaid on top of -- that takes advantage of all the language models that are out there, which means that we can compete in language translation at a fraction of the cost of other people that are having to purchase third-party language translation capabilities, which are just now coming to market. And not to sound like a salesperson, but one of the larger health care companies in the world just did a bake-off of 25 different language translation products, and they scored our #1 in capability over the other products that were available. We've built agent assist tools that listen to interactions, whether they be chat or voice, and instantly are assisting the agent with the next best action. We've built a myriad of analytics tools that give our clients real-time information on exactly what's taking place day-to-day of what are the top inquiries that are taking place about a product offering or about a recall, et cetera. I could go on and on and on. But that's part of the investments that we've been making and that we'll continue to make, but we feel like we've got a really good head start on the base level of AI capabilities that we can implement immediately on behalf of any of our existing or new clients that are coming on board.

Our next question comes from Vincent Colicchio of Barrington Research. .

Yes, Ken, what verticals aside from at Engage aside from health care, do you feel most optimistic about in the coming quarters?

Well, financial services, we feel really good about a lot of stuff happening in the fintech area. So that certainly is one area. Government or public sector, et cetera, as you can imagine, with the administration and everything that's going on. What I would say is that they are more pro, let's just say, outsourcing than probably they ever have been as they continue to cut people on the payroll. So we feel good about that. In the automotive sector, especially on the digital side, we're seeing really exciting opportunity in that area as well. Our travel business is growing extremely well right now, which we're excited about. And that's growing on a not just North American basis, but global basis. And then retail, which is an area that, frankly, we have underinvested in from a sales and marketing standpoint, and now we've stepped up that investment and we're seeing some really good results and really strong pipeline in that area as well. So I'd say those are the primary areas that we're focused on and that we're winning deals and that we see a long-term opportunity.

And are you seeing an increase in prospects that have not outsourced in the past, which would suggest an expanding TAM?

It's a good question. And I want to give you an accurate answer. There's no question that we have recently -- for example, we just won, a deal, I can't really be very specific that has very significant opportunity with a company that's 100% captive in, let's call it, the health care space and in the testing space. And they are now -- this is their first entree into outsourcing. And if all goes well, there is a very deep well of additional opportunity. So -- but I don't think that anecdotally is enough for me to give you a definitive answer. I think that all companies are under intense cost pressure due to tariffs, et cetera. And so I think that, as I've said on previous calls, there is a slow leak of business coming from captives. And I know that there's this wall of worry about how AI is going to replace every human, et cetera. A, we don't buy it; and b, I can't stress enough, there's $300 billion of internal captive spend that has not yet been outsourced. So regardless of the impact that AI may or may not have, there is still so much business out there that has not yet been outsourced that we feel very confident as does Gartner and as to the other third-party analysts that have recently put out reports saying that over the next 36 months, there will be 1.7 million customer service associates added to the payrolls of whether it be companies or outsourcers due to the demand and the need. I can't stress enough, as we go more digital, and as more and more people take advantage of digital, that just simply creates more and more customer interactions of interactions that are not taking place in a retail type environment -- a physical retail environment. And instead of that physical retail environment shifts to a digital environment, there is more need for support to be able to resolve issues and how people assisting them with their large capital expenditures, or financial issues, or medical issues, et cetera.

Our last question will be from Jonathan Lee of Guggenheim Securities.

I want to focus on resale here. Is that revenue went off in nature? Or rather -- and if so, does that set up for a sequential decline 4Q for digital revenue? Or do you expect that third-party resale revenue to lead to larger, more profitable engagements near term? .

Yes, Jonathan. Look, our resale volumes are -- those product sales are tough to forecast because by definition, they're one-off. But we always with the customer breadth that we have in digital and with so many engagements on that side, we end up counting on them. They happen every quarter. They'll continue to happen. We've got a couple teed up for Q4. So specifically, we've not -- we don't count on them in the forecasting process as we move forward, but they are a product of the digital business that we have based on our managed services engagements and professional services engagements. And so we take them when they come. But by definition, they aren't recurring.

Yes. And I would just add, Kenny, to that, and that is that the Digital has 1,000 clients, and they have a significant amount of clients that are in the public sector, many states, as an example, as well as federal clients. These clients tend to be slower or let's just say, more behind on the technology curve of fully shifting to the cloud. And that's the part that's so complicated because they'll reach out to us and say 2025 is the year that we're going to move all of this to the cloud and we need your help with that. And then we'll say, "You know what, our budget just got cut. So we're going to delay moving to the cloud. But now what we need to do is add XY

Got it. So then how do you think about the path to Digital ex third-party pivoting to growth?

I'm sorry -- I'm not sure maybe you could phrase your question differently. I'm not sure I fully understand the question. I'm sorry.

Is there a path to the digital business ex the third-party resale revenue actually growing year-on-year organically from here?

Oh, 100%. Yes. It's all about our remix. It's all about the remix that we're doing right now in professional services. It's all about the types of business that we're winning right now. And our goal is that in the second half of 2026, we are -- our goal is to get the digital business back to a net positive growth because of the remix. But the part that's been hard for us to predict is really just the percentage of decline of what I'll just call the legacy old versus all the new and the projects that are ramping up on the actual remix. So yes, there is -- I can't stress enough with this AI revolution that's out there, there is going to be no exaggeration, a 10-year tailwind of opportunity with clients. And I also can't stress enough that there is way too much type of people believing that all you have to do is add water and AI, you can turn on AI. This is not like mixing a cup of cocoa with boiling water, this requires a lot of groundwork before you can get to the supposed AI Nirvana. And I'd say that a high percentage of the Fortune 1000, and I don't think this is even a slight exaggeration, their systems are nowhere near ready to be able to take advantage of what AI can actually do. They don't have a modern data state. They need help there that unto itself is a very significant lift and a big project. In many cases, most of their applications are not yet in the cloud. And if they are, they're still integrated, that requires a heavy lift and a lot of work. And so the AI part in many ways is the easy part. It's all of their current infrastructure and legacy software, et cetera, that is just not ready for AI to be able to seamlessly integrate with, et cetera. And so I think what you're going to see is, exactly what we're seeing is that clients are dipping their toe in the water with AI. They're not dipping their leg or their whole body into the water. And they're basically starting to experiment with different pieces of it to see what impact it can have on helping them drive more efficiency, et cetera. And so this is a process that we're confident that we can capitalize off of.