Welcome to TTEC’s Fourth Quarter and Full Year 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 Mr. Paul Miller, TTEC’s Senior Vice President, Treasurer and Investor Relations Officer. Thank you, sir. You may begin..

Good morning and thank you for joining us today. TTEC is hosting this call to discuss its fourth quarter and full year financial results for the period ended December 31, 2021. Participating on today’s call are Ken Tuchman, our Chairman and Chief Executive Officer; and Dustin Semach, our Chief Financial Officer.

Yesterday, TTEC issued a press release announcing its financial results. Before we begin, I want to remind you that matters discussed on today’s call include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management’s current beliefs and assumptions.

Please note that these forward-looking statements reflect our opinions as of the date of this call and we undertake no obligation to revise this information as a result of new developments, which may occur.

Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those expected and described today.

For a more detailed description of our risk factors, please review our most recently filed quarterly report on Form 10-Q and our Form 10-K, which we expect to file in the next couple of days. A replay of this conference call will be available on our website under the Investor Relations section. I will now turn the call over to Ken Tuchman..

Thanks, Paul and good morning everyone. 2021 was another record year for TTEC. In addition to delivering strong performance across our key financial and operational metrics, we made significant progress expanding our CX technology capabilities. Today, TTEC is the largest global pure-play CX technology partner in the market.

Our end-to-end ecosystem is enabling growth in commerce for some of the most customer-centric and innovative brands and governments across the globe. I am excited to share many highlights from the year. I will start with our record 2021 financial results. Bookings increased 14% to $751 million. Revenue increased 17% to $2.27 billion.

Adjusted EBITDA increased 17% to $354 million. And non-GAAP EPS increased 21% to $4.62 per share. Our ability to consistently outperform our goal is the result of our strategic vision and steadfast execution.

Over the past decade, we continuously advanced our industry leadership position with meaningful investments in CX leadership, technology and capabilities. In the last 3 years, our revenue has grown 50% and our EPS has grown 200%, a solid demonstration that our strategy is working. And there is plenty more to come.

With so much opportunity in the market, we will continue to judiciously increase our investment, to increase our rate, including expanding our sales and marketing, executive leadership, product and offering innovation and client delivery footprint. Before I dive into our growth strategy, I’d like to recap our progress over the past 3 years.

I will start with our digital business. Over the course of the last 3 years, we have grown our digital revenue by 73%. We acquired and integrated three proven leading-edge CX technology companies, Avtec, Serendebyte and VoiceFoundry. We have established TTEC as the largest strategic partner with the most noteworthy CX enterprise technology players.

We have advanced our proprietary CX IP with digital engineering solutions that simplify interaction, accelerate deployments and integrate complex platforms. We have created a highly scalable, profitable new revenue stream, selling our proprietary IP on digital marketplaces.

We have significantly increased our total addressable market with a set of differentiated outcome-based mid-market solutions. And we have continued to expand our deep bench of certified full-stack technology engineers and CX architects. We have a robust client base.

Over the last 3 years, we have increased the number of significant clients 150% from 300 clients to now over 750 clients in the last 3 years. Bookings from new logos increased 63% per annum, integrated deals increased 37% per annum, and hypergrowth client revenue grew 44% per annum.

Combining the breadth and depth of our client relationships with our new logo acquisitions has and will continue to enable significant growth in our bookings, backlog and revenue. Our progress over the past 3 years has been acknowledged in the CX leadership rankings of industry analysts at Gartner, Forrester, Everest and IDC.

In addition, we continue to be cited as an employer of choice across the globe, including recognition by Forbes as one of America’s best large employers. Over the last 3 years, we have truly transformed our business. We established ourselves as the world’s leader in customer and employee experience.

Our portfolio of CX technologies, enabled solutions, client and partner relationships, CX expertise, IP and footprint will undoubtedly serve us well as we enter the next phase of profitable growth. With the current CX TAM estimated at $640 billion, TTEC serves only a sliver of the market.

Given our differentiated platform and market momentum, it makes sense to smartly invest now to gain market share. Let me provide some context. Consumers have unequivocally crossed the threshold into a digital world that provides a new and better ways to work, play, learn and connect.

Regardless of the channel, product, service or brand they choose, consumers expect every interaction to be seamless, effortless and personalized. Their embrace everything digital has accelerated the pace of CX virtualization. At the same time, the need for compassionate human intervention has also grown.

Technology can only go so far when it comes to successfully sensing and responding to human needs. Those brands that figure out how to harness the power of technology and combine it with human empathy at scale will be the winners.

New entrants into the CX market like large IT solution providers view their world through a technology lens, not a customer-focused lens. TTEC CX obsession is grounded in decades of experience working in the frontline, managing hundreds of millions of customer interactions.

We know what delights or frustrate the customer by persona, intent and channel. We know the experiences that build customer loyalty or destroy it. And most importantly, we know how to blend technology and humanity to build customer value strategically at scale.

Let me share a relevant example from this quarter’s bookings, a highly capitalized fin-tech for the vision of building a digital-first company with customer centricity as their true north. They were on a fast track with a priority to deliver exceptional CX. After an extensive market review, they chose our 1 TTEC solution.

We were selected based on the breadth of our CX technology, operational capabilities and deep financial service credentials and proven ability to move quickly and scale rapidly as their business accelerates and grows. With these tailwinds as a backdrop, we have evolved our growth pillars to take advantage of the vast market opportunity.

The first is technology innovation and differentiated IP. Through our own IP development and targeted acquisitions over the past decade, TTEC has grown into the largest pure-play CX technology provider in the world. Let me dimensionalize the size and scale and exclusive focus on CX at TTEC Digital for you.

Today, we deliver and deployed thousands of complex CX technology projects every year. We built sophisticated data lakes, integrate massive CRM systems, develop complex automation algorithms, architect seamless self-service applications and create next-gen functionality with our proprietary IP.

We hold and manage hundreds of thousands of SaaS licenses that route billions of omnichannel interactions on a daily basis. We operate a dynamic learning environment for our global team of full stack engineers to enable them to earn hundreds of certifications across the most attractive CX technology platforms.

And as a result, we have continually been recognized as Partner of the Year by some of the largest global enterprise CX tech players in the marketplace. Now, let me unpack our TTEC Digital Home business model. We operate four centers of excellence that are interconnected to our proprietary experience 360 methodology.

It is our approach to combining strategic consulting and digital engineering to deliver lasting customer and employee experience transformation. Our experienced strategy team uses design thinking and voice of the customer techniques to build transformational roadmaps both at the company level and within key operating units.

These highly strategic projects typically yield material follow-on revenue for both our Digital and Engage business units. Our intelligence and insight teams, which we call digital experience, focuses on data, AI and CRM to help companies capture, manage, analyze and act on customer data.

Over the past 2 years, we have combined our IP with the leading global digital platforms to deliver transformational results for thousands of clients, our omni-channel team which we call interaction experience build omni-channel engagement hub in the cloud to enable intelligent predictive interactions across the entire customer journey.

We are the largest go-to partner for cloud migrations for several of the global enterprise CCaaS tech giants. And finally, our experienced innovation team pushes beyond existing new platforms to create package proprietary SaaS-based offerings that address gaps in the CX technology ecosystem.

Our IP is utilized by hundreds of clients through our partners’ marketplace, enables seamless interactions across hundreds of thousands of endpoints. Our four-pronged TTEC digital model enables us to help companies achieve their growth objectives with a strategic vision and an actionable roadmap.

Our land-and-expand approach provides us with a sphere of influence that broadens from single to standalone projects to long-term full scale transformations. Our clients choose to grow with us, because we continually deliver the results that matter most to them, increased revenue, profitability and customer loyalty.

A prime example of the power of this approach is our work with a leading medical device provider. Our relationship began when they purchased our packaged IP on a technology marketplace. They were seeking tools to help them move from a disconnected contact center to a streamlined health advocate hub.

They quickly realized that they required far more than a single application. To create transformational change that was vital to their future, they needed a comprehensive strategy and a roadmap that only a CX expert like TTEC Digital could deliver.

Working together, we have delivered measurable improvements in their speed-to-market, ability to scale and employee productivity and customer loyalty. It’s important to note that our leading edge CX technology ecosystem also powers every one of our Engage programs.

For example, we are using AI to recruit higher and train CX ambassadors, advanced analytics to deliver proactive and predictive routing, and automation to drive frontline processes and optimization.

Focused on what is coming next, our dedicated Engage innovation team is working on CX 3.0, with investments in R&D initiatives around 5G, IoT and the immersive web. Now on to pillar number two, our deep verticalization.

As the customer journey becomes more personalized than complex, the need to tailor interactions by industry has become critical, whether customers researching options for a mortgage on their mobile phone, checking for the results of their recent blood test on their laptop or scheduling a service appointment through their smart card dashboard, they expect the experience to be personalized, relevant and simple.

For decades, we have been fine-tuning our industry expertise across both legacy and hyper growth verticals. This includes financial services and fin-tech, healthcare and health tech, retail and e-commerce, automotive and mobility, public sector and smart cities among others.

From offer development to technology solution design to ongoing CX operations, we have aligned every facet of our go-to-market and delivery around the needs and requirements of the end customers of these verticals.

In December, we took another step on our verticalization strategy when we announced an agreement with [Technical Difficulty] citizen experience platform and smart city assets of Faneuil. The acquisition is expected to drive significant growth in the $19 billion TAM for tech-enabled citizen engagement solutions.

Our third pillar is diversification, which creates multiple vectors to enable consistent growth and mitigate concentration risk. Through organic initiatives, partnerships and acquisitions, we are diversifying our client mix, industry focus, tech partners, capabilities and geographic expansion.

For example, we are growing in emerging markets with skilled resources for both Digital and Engage, building new technology partnerships to enable next-gen functionality and enhancing capabilities for thriving mid-market segment. Our fourth pillar, strategic and accretive M&A is driven across three key areas.

We will pursue acquisitions that align with our strategic pillars and are accretive to our profitable growth profile and provide an attractive delivery footprint. We have a robust pipeline, and I look forward to sharing our progress in the months ahead.

Our fifth pillar is maintaining a strong financial profile, with profitable growth and record cash flow. Despite lingering global pandemic, economic challenges and climate threats of historic proportions, we have consistently delivered strong top line growth and execution of our key financial priorities.

Time and again, we have demonstrated unwavering resilience by keeping and even exceeding our commitments to our shareholders, clients and employees. As TTEC approaches our 40th anniversary later this year, we are well-positioned to accelerate our next steps phase of growth.

The world is now fully entrenched in the experienced economy and the ability to deliver amazing, personalized, effortless CX will define success for every brand and government. As our continued strong performance demonstrates, industry leaders across the globes are choosing TTEC as their virtual engine to power their customer experience.

TTEC has always been guided by the belief when we live our core values, we create our business value. Our determination to make a difference for our people, the communities in which we live, our planet at large is hardwired into everything we do. Yesterday, we released our first comprehensive ESG report.

I encourage you to take the time to review and experience the way in which we are building a thoughtful, caring, responsible company. With a mission and vision to bring humanity back to business and a TTEC family of over 65,000 people operating on six continents, building exceptional engagement is a must.

In closing, on behalf of our board, our management and our employees across the globe, thank you for your continued support, I could not be prouder of our progress and more excited about our future. Now I will hand it over to Dustin..

existing client program expansions and new lines of business, a growing demand for our virtual individual delivery capabilities, significant volume increases in our automotive, travel, healthcare, retail and technology industries as we further verticalize our operating model, and expertise and growing contributions from the investments we made in our EMEA and hyper growth platforms.

This was partially offset by pandemic-related work that reduced in its intensity during the second half of 2021. Our full year revenue retention rate for Engage was 110% in 2021, relatively unchanged from the prior year period.

Our Engage profit margin is benefiting from top line scale and increase of revenue in our higher-margin verticals and offerings and continued efficiency in our asset utilization, leading to lower depreciation expense as a percentage of revenue.

Margin pressures reflect the previously mentioned rationale for the total company, impacting our Engage segment. We are pleased about the tailwinds benefiting our Engage business and continue to estimate revenue to grow well above industry averages in the 7% to 9% range over the longer term.

I will now share other 2021 measures before discussing our outlook. At year-end, cash was $158 million at $797 million of debt, of which, $791 million represented borrowings under our recently upsized $1.5 billion credit facility.

Net debt increased by $376 million to $639 million year-over-year, primarily related to acquisition-related investments and capital distributions, partially offset by strong cash flow generation. Cash flow from operations was $251 million in 2021 compared to $272 million in the prior year period.

While cash flow benefited from increased profitability and record low DSO of 54 days in the fourth quarter down from 61% in the prior year period, the net decline in operating cash flow is due to the repayment of the deferred taxes and the loss of an in-year benefit associated with the CARES Act as well as higher bonus-related payments associated with the prior year.

Capital expenditures were $60 million or 2.7% of revenue for the full year 2021 compared to $60 million or 3.1% in the prior year.

The decrease as a percentage of revenue is primarily due to our focus on the improvement in our fixed asset utilization, in particular, our facility and technology assets helped by growth of our at-home platform where we have continuously demonstrated leading capabilities.

Our full year normalized tax rate was 21.3% in 2021 versus 22.5% in the prior year. The reduction is primarily related to a beneficial jurisdictional mix of income and the benefit of various tax credits. We anticipate our forward tax rate in the range of 21% to 23%.

The – in the fourth quarter of 2021, TTEC paid a $0.47 per share dividend or $22 million. On February 24, 2022, the Board declared the next semiannual dividend of $0.50 per share, payable on April 20, 2022 to shareholders of record as of March 31, 2022.

This dividend represents a 6.4% increase over the October 2021 dividend and 16.3% over the April 2021 dividend.

We remain committed to our capital distributions to shareholders through a semiannual dividend aligning with our long-term capital management plan to execute upon our strategic priorities related to market leadership and investment in organic and inorganic growth while providing returns to our shareholders. Turning to our 2022 outlook.

I am first going to provide some context supporting our updated guidance and then move into our financial estimates. The overall demand environment continues to be strong across both our Digital and Engage segments.

And as a result, we are investing an incremental $50 million in sales, marketing and product innovation in 2022 to capitalize on the market opportunity ahead of us. Many of these investments will be made to accelerate our verticalization and diversification strategies that Ken detailed earlier.

We diversified our geographic delivery footprint across 2021, and we will look to bring those markets to scale and continue to expand in additional markets across 2022 to continue to mitigate a challenging U.S. labor market in both Engage and Digital.

Growth will ramp across 2022, primarily in the second half as we continue to convert remaining pandemic-related volumes into long-term work and yield incremental bookings from our investments made in the fourth quarter of ‘21.

While these investments will temper margin in the short term, they will set us up for long-term margin expansion in 2023 and beyond.

In fiscal year ‘22, we will continue to accelerate the momentum we have across our digital business as we capitalize on larger CX transformation deals and the transition to the cloud as well as supporting Sysco’s renewed focus on its new cloud platforms.

We expect the acquisition of certain Faneuil assets to close prior to the end of the first quarter of 2022. We entered 2022 with a total revenue backlog including Faneuil of $2.22 billion to 14.1% higher than 2021.

Our 2022 sales pipeline at the start of the year, including Faneuil is $2.04 billion, up 13% over the prior year and adjusting out pandemic-related pipeline is up 32% on the prior year.

Now turning to the midpoint of our ‘22 guidance, including Faneuil assets, as outlined in greater detail on our fourth quarter and full year ‘21 earnings press release.

GAAP revenue of $2.590 billion, an increase over the prior year of 14%, non-GAAP adjusted EBITDA of $380 million, an increase of 7.3% over the prior year and 14.7% of revenue compared to 15.6% in the prior year. Non-GAAP operating income of $311 million, an increase of 8.8% over the prior year and 12% of revenue compared to 12.6% in the prior year.

Non-GAAP earnings per share of $4.83 an increase of 5% over the prior year. EPS growth is muted relative to operating income improvement due to anticipated step-up in our overall interest expense. Other relevant guidance metrics include capital expenditures between 2.9% and 3.1% of revenue, of which, approximately 65% is growth-oriented.

A full year effective tax rate between 21% and 23%, as I noted earlier, and a diluted share count between $47.4 million and $47.8 million.

Please reference our commentary in the business outlook section to our fourth quarter and full year 2021 earnings press release to obtain our expectations for first quarter and full year 2022 performance at the consolidated and segment level. Before I close, we anticipate filing our 2021 Form 10-K within the next couple of days.

The timing of the function of finalizing documentation and disclosures relating to the acquisition of Avtex, and we do not anticipate any changes relative to our financial results.

In closing, TTEC delivered another strong year in 2021 and we could not be more appreciative of the innovation, talent and commitment from our global diverse employee base. We look forward to delivering another strong year in 2022. I will now turn it back to Paul..

Thanks, Dustin. As we open up the call, we ask that you limit your questions to one at a time. Operator, you may now open the line..

Thank you. [Operator Instructions] Our first question is coming from the line of Maggie Nolan of William Blair. Your line is open..

Thanks. Hi, Ken. Hi, Dustin. I’m curious if you can give us a little bit more color on kind of the growth cadence for Engage.

And as you think about over the course of the year, is really the conversion of some of that surge revenue into long-term revenue, what’s going to get you to the high end of the guidance range?.

Absolutely. We are – as I said in my script, my comments, we’re just seeing record bookings. And as you know, Maggie, this is a business that is progressive in that it takes anywhere from 9 to 14 months to fully roll out large wins, etcetera, just due to the scale, the size, etcetera. So that is – you’re 100% correct..

And just to follow on to Ken’s comments, Maggie, what I would tell you is that a couple of things. First is, in the press release, we actually laid out very detailed guidance specifically for Q1 across both Engage and Digital.

And what you’ll see there is you’re going to continue to see a step down relative to the pandemic volumes coming down in Q1 and then it stepped up in kind of across the next Q2, Q3 and Q4 into double-digit growth once we head into the second half. And particularly with the contribution of Faneuil, you’ll see that accelerate even further..

Okay, thanks.

And then on the adjusted EBITDA guidance, I mean is this kind of the normalized level that we should expect? What are some of the puts and takes here? And what’s kind of on a segment level basis, kind of a normalized level we should expect these segments to operate at?.

So Maggie, going back to the couple of comments I made earlier, we’re making an increased step-up in investments. As noted in the fourth quarter of 2021, particularly in sales and marketing.

And for 2022, we’re stepping up that investment roughly $50 million across a number of areas that generally sales and marketing, so think of it as feet on the street, you have product and innovation, we’re doing offering development both with Engage as well as Digital.

And then think about geographic expansion, not just with Engage in terms of opening up new locations that Ken has already mentioned, but also think about offshore delivery footprint that we have in Digital as well and then as well as integration related to the Turnpike integration.

And so I think that what you’re going to see is, as I mentioned earlier, tempered margins in the short-term, but then that margin at will continue to expand in 2023 and beyond. And while we haven’t given long-term growth rates, we don’t see anything stopping us from continuing to expand margins at this point in time..

And it’s no secret that our internal goal is to double the business in a very short order of time and half the time that it took us previously.

We stated before that we were going to double the business in 5 years, and therefore, what we’re doing is we’re putting all the necessary investments in place, bringing in all the necessary leadership so that we can go to $5 billion and beyond.

And so I think that it will be very obvious with future announcements coming out, etcetera, as to how we’re going to achieve that..

Okay, guys. Thank you both..

Thank you..

Thank you..

Thank you. Our next question is coming from the line of George Sutton of Craig-Hallum. Your line is open..

Thank you. Ken, I know you’re not investing $50 million willingly. You’re doing it because you see a great opportunity.

So I wanted to go to that new logo growth that you saw of 63% and really try to understand how that’s driving your thought process in terms of making these investments because I see that as the future growth of the business?.

Hi, George. Good morning. I think that when you just look at the sheer increase in number of logo wins that we’re garnering on a monthly basis, and when you look at the fact that in my comments that we’ve gone from 300 total clients to now 750 active clients. The core point is that 80% of our organic growth comes from our embedded base.

And by more than doubling our client base, it ensures that we’re going to continue to see strong growth from our embedded base of clients who continue to be the gift to keep on giving. If you also think about the fact that we’ve talked about the TAM of $640 billion estimated, $640 billion. And then of that $640 billion, $300 billion is captive.

And so more and more of the clients that we are winning have very large captive operations. And what we’re seeing is that they are continually letting the air out of the tires and transitioning more of their captive business to us as a partner.

And so consequently, we feel very strongly about the embedded base, what we can get out of the embedded base not only on the Engage side but on the digital side. We’re seeing incredible cross-selling taking place from Engage to Digital and from Digital to Engage.

And then the last point that I want to make is that the majority of the competitors that are in the Engage space, their primary focus is providing labor augmentation and utilizing client systems. Clients are looking for something far more far more than that.

They are looking for complete transformational capabilities across all aspects of their customer-facing technology.

And we believe that we’re the only company that has the level of experience, the depth, the breadth to be able to actually take on those types of projects versus just simply providing them the labor in nearshore, offshore and onshore market. So what I just want to stress to you is that there is a reason why we’re winning all these logos.

There is a reason why we’re seeing such strong bookings, and it really has to do with the value proposition that we’re delivering to clients right now. And all this has really been accelerated because of the pandemic. Every one of these clients have realized that they are not digital enough if they weren’t born digital to begin with.

They are not virtual enough and consequently, really have a very strong push to be able to be competitive with the digital – with companies that were born digital, if you see what I’m getting at. That said, our hyper growth business unit is also growing extremely fast.

And we’re winning a ton of foreign digital companies in the e-commerce area, the fin-tech area, the crypto area, etcetera. So all facets right now, all the verticals we feel very strongly right now about..

And if I could just ask one other thing relative to your guidance, which is encouraged the revenue guidance is encouraging and suggestive of your enthusiasm, but you’re touching a ton of different industries.

I’m just curious if you could give us a big picture of personal thesis in terms of what you’re seeing from an economic outlook perspective?.

Well, obviously, these are really complex times, whether it be what’s taking place in Russia and Ukraine along with the pandemic that hopefully is winding down. But what I would say is that we’re seeing in our automotive space, the doubling down to EV is a huge opportunity for us. We have probably 65% of the automotive logos in the United States.

And so we’re seeing real opportunity there, just as you saw probably this morning some of the announcements that were made by one of the largest automotive makers. So automotive is very strong. Public sector is strong. Financial services, is very strong.

Primarily on the financial services side, I think a lot of that has to do with the captive point that I made that a lot of these large institutions are, in fact, seeing that maybe it makes sense for them to be partnering more.

Fin-tech, the new fin-tech players that are coming up, whether it be in the the money transfer type businesses, etcetera, are very strong. Obviously, we’re seeing a huge push for travel. People are dying to get out, etcetera. We tend to – although we have good business in the travel sector.

We’re really trying to focus on areas that we think are going to be more stable through the various different economic cycles that we may or may not enter into.

And though as much as we’re excited by travel we are also cognizant of the fact that travel is going to be directly tied to the economy, I am just trying to think of where else are we seeing strength, just to give you a little bit more illumination.

Do you want to add anything to that, Dustin?.

The other thing I would say is as part of – one of the things that Ken detailed earlier, George, was around diversification. And one of the intents there, and we talked about, we do have the expertise across a number of verticals. But I would say one of the main focuses in 2022 for that exact reason is to continue to diversify.

So you don’t have to ebb and flow to a very specific vertical or a specific offering relative to kind of coming out of the learnings from the pandemic.

And so part of what you’ll see across this year, beyond areas like hyper growth and areas that we do see a significant momentum, we’re continuing to diversify more broadly to make sure that we capture growth, but also deliver growth consistently, despite being type of economic challenge, but kind of come down the path..

Perfect. Thanks, guys..

Thank you..

Thank you. Our next question is coming from the line of Mike Latimore of Northland Capital Markets. Your line is open..

Great. Thank you. Congratulations on the strong year there.

In terms of the book gains in the fourth quarter, can you give a little more color on how much or what percent were combined Digital, Engage deal?.

Dustin, do you want to take that?.

Yes, sure. So we had seven deals overall. If I remember correct at the top of my head, is roughly $74 million worth of bookings in the fourth quarter associated with that. Mike, and then we had $202 million for the full year, right, demonstrating we continue to see acceleration in this area.

I think particularly as we’ve integrated Avtex and brought them into the fold as well.

And now their digital capabilities are more diversified across Genesis, AWS as well as Microsoft, our ability to cross-sell has increased dramatically, I would say, across both segments, and we’re really excited about not just the size of the deals, but also the complexity of the deals that we’re doing right now today, and this will be another growth driver as we head into 2022..

Great..

And that’s what Ken referenced is like the one TTEC solution as well. When we say multi-segment, you can kind of use those terms interchangeably..

Got it. Great.

And then on the Faneuil acquisition, can you talk a little bit about what you’re getting with that acquisition? And then what’s their kind of revenue run rate?.

Ken, do you want to take the....

I’ll start and then maybe Dustin can follow on. So what we’re picking up is assets that are focused on everything from transportation, tolling, mobility-type services to congestion management services. We think that there is going to be a big push in large cities, whether it be to eliminate traffic or eliminate pollution, etcetera, to control traffic.

And so although I’m not going to mention contract names, what I would just simply say is that we’re picking up some of the largest contracts of the largest cities in the country in some of these areas.

So, whether it would be rapid transit trains, whether it would be subways or whether it would be automotive entering into a city during a peak period of time, the tolling that’s obtained to tollways on highways, etcetera. So, that’s clearly a big focus in the public sector area. We have been in the public sector area for a very long time.

And we are really very focused going forward on smart cities. We think that smart cities in the past were just kind of hype due to the fact of lack of low-latency technology and with 5G and IoT, we think it’s absolutely going to be the future. It’s going to play a lot into the future of EVs, a lot into the future of autonomous vehicles, etcetera.

And we want to be front and center working with the Federal government and working with states and local municipalities in this area. So, that’s really a big push.

And then the second area is, as you know, we have a very significant healthcare business, and we are picking up a significant amount of the larger healthcare exchanges that are doing extremely well.

Dustin, do you want to take it from there?.

Yes, sure. And so just to answer the question directly around revenue run rate. We expect the contribution from Faneuil to be somewhere in the neighborhood from a revenue perspective of $102 million to $109 million. And again, we are targeting acquisition to close sometime around the end of Q1..

Got it.

So, that’s $102 million for basically nine months?.

You got it..

Okay. Great. Thank you..

Thanks Mike..

Thank you. Our next question is coming from the line of Bryan Bergin of Cowen. Your line is open..

Hi guys. Good morning. Thank you. I want to start on margins.

So, the $50 million growth investments, just want to be clear, is that all front loaded in 1Q and 2Q? And then can you give us a sense of how the rundown of some of that higher-margin COVID work is impacting the EBITDA margin? Looking at the ramp, it would seem to imply you are going to exit 2022 17%, 18%? And then Dustin, just help us, how are you thinking about the embedded gross margin in that margin outlook?.

Yes, sure. So, a couple of great questions. And I will start with saying that around the investments themselves, we have been ramping them across 2021. And then we stepped up and increase that investment materially in Q4, Bryan, ahead of the – just naturally, as you think about sales planning kind of getting ahead of our 2022 cycle.

And that investment will step up materially in Q1 and Q2. But keep in mind, it’s going to have a consistent run rate as you go through the year and kind of a higher exit run rate through 2020, kind of heading into 2023.

So, it will be predominantly in the first half, which is why if you look at the margin outlook, it’s a little more depressed in the first half versus the second half, and you will see a yield in the second half and then beyond.

So, when you move into – does that answer that question there before I shift to talking about the pandemic-related margin?.

Yes..

Okay. So as you think about the pandemic-related volumes, right, there is a step-up related to gross margin on that, and we have talked about that in the past where that particular work at that point in time just commanded higher pricing power associated with the urge and the immediacy of the work that was going on in that we booked in 2020.

As you think about the run rate coming down in Q1, we talked about the first half of 2021, we really benefited from that pandemic work extending.

And then it began to ramp down and accelerate ramp down across Q3, Q4, and that will continue in the first half and largely stabilize or go away at that point kind of in the first half, which is why you see, again, the margin – a little bit of margin compression as well as some of the growth rates moved in the first half of the year.

And to give you a sense, in Q4, it’s roughly about $40 million of downward pressure from those volumes year-over-year relative to Q4, which was a high Q4 and Q1 of 2020 and 2021.

And what you see as a result of that is when you think about the relative scale of that work, the percentage of overall mix, you see a point or two points of downward pressure on the overall gross margin.

And what you are going to see as a result of that and I want to make this clear, is as we are shifting the mix offshore and improving our overall U.S. mix, think of excluding the pandemic work, you will see that kind of net off in terms of longer term. And – but you will see that happen really in the second half of 2022..

Okay.

Anything around the wage inflation that’s different that that’s harder to manage, or are you comfortable with where your contracts are as it relates to coal and things like that?.

Yes. No, that’s a great question.

What I – I am sorry, Ken you want to go first?.

No, go ahead. Go ahead, Dustin..

Yes. So, what I would tell you, Bryan, is that again, wage inflation is nothing new at this point. And we have done – I would say the team has done a really good job across ‘21 as a relation to see it in our results, kind of the way that we laid out 2021 and delivered on it. we have been managing wage inflation throughout all of 2021.

And we do expect inflation to continue to tick up in 2022. But I think the narrative has changed with our customers. And we are working through those issues together. And so far, we have been successfully been able to work through it challenging and we expect to be able to work through in 2022 as well..

And I think that wage inflation as much as it has the potential to put pressure on margins. It also opens up the door for us to get more focused on providing digital capabilities that, in fact, can help our clients lower their costs.

And so we are seeing real opportunity there where we can demonstrate very quickly the impact that we can have on low-hanging fruit where there is potential for self-help type capabilities as well as using a lot of our machine learning AI type capabilities.

And then secondly, there is also a significant opportunity to get clients who have resisted any form of best shoring, near-shoring and off-shoring and it opens up the opportunity for us to have a diligent discussions about a proper hybrid mix to help them control their costs.

But all-in-all, I would say that, our clients are experiencing the higher wages internally in their own captives, and they are definitely sympathetic to the need for us to continue to raise our rates to adjust for whatever the labor – whatever lies ahead in the labor markets, etcetera. So hopefully, that answers your question..

Yes. Ken, thank you. That was very helpful. Just one quick follow-up to Dustin also you mentioned about Avtec.

What’s the expected contribution in 2022, the inorganic component?.

Really, what you are going to see is the wrap effect, Bryan, over the first quarter, right, roughly $40 million. So, if you think about the growth rate that we outlined for digital overall, about half of that is inorganic and half of it is organic..

Okay. Great. Thank you guys very much..

Thank you. Our next question is coming from the line of Joseph Vafi of Canaccord. Your line is open..

Hey guys, good morning, nice results. I wanted to circle back, Ken to some of your comments on most of the growth is going to be coming from existing customers.

And you lay out for us maybe once again, kind of how perhaps some of your delivery and KPIs match up to some of the captives or a broad brush of what they see in their own captives in terms of performance versus what you can provide them as they hopefully continue to shift more work to you? And then I have a follow-up..

Yes. So first, thanks, it’s a great question. So first of all, we have historically been able to at minimum meet and in many cases, exceed our clients’ KPIs, their internal KPIs and their Net Promoter Score, they measure us with great detail on a constant and ongoing basis.

Second of all, our clients, for the most part, have legacy bricks-and-mortar type contact centers. And in many cases, those bricks-and-mortar contact centers are put in what I would just classify as NFL-type cities. So consequently, they are struggling significantly to find the amount of labor that they need to properly stack those facilities.

Secondly, they are having problems getting people to go back to the office. And so we have always had a business that is one part bricks-and-mortar, but also we have had a significant virtual business with our at-home business. It was nothing new to us. And that’s why we had such ease in being able to shift 60,000 employees to their home so rapidly.

And so what I would say to you is that I think that as our clients are beginning to come to the conclusion that going forward, the new normal is not necessarily going to be to shift all these people back to their embedded bricks-and-mortar.

It really positions us well because of the technology that we have because of how we were there for them when they weren’t able to on their own shift to at-home, etcetera.

So, we think our belief is, and we are seeing it just with the wins that we are winning that we are going to continue to see more and more focus on these large captives and them starting to move more of their volumes over to us and to a professional partner.

I think that at the end of the day, what they are also seeing is that we can provide them with a lot more diversity in our scale and our ability to find the talent, not only just in the United States, but across the globe. And that is proving to be something that’s very beneficial right now.

I can’t tell you how many clients, and I am sure you have experienced this yourself as a consumer, where you are calling into some of these contact centers of big brands and your wait times are incredibly long. And that’s not because they are trying to cut cost. It’s because their captives are so understaffed and so here in lines, obviously.

Did I answer your question, Joe?.

Yes, you did. Thanks Ken. And then just one more quick follow-up there.

Given labor shortages, given kind of where businesses are going and kind of thinking a little bit more out of the box, is outcomes-based pricing more on the table now than it has been as a way to solve some of these problems for customers given the capabilities you have and understanding their business models?.

So, that’s clearly a focus of ours for ‘22 and beyond. And we are seeing the opportunity for more and more outcome-based pricing is where clients are getting more serious about letting us inject digital capabilities.

So, the more digital capabilities that we can interject, the more control that we can have over the types of interactions that we are handling, what we can automate, what we can’t automate, what we are confident the hit rate is going to be on self-service technology, etcetera, the more comfortable we feel to provide more of an outcomes-based model.

So clearly, that’s a focus of ours.

And we think that this is a journey and that it’s going to take multiple years to really have a meaningful amount of business that is fully tied to either a subscription or to an outcome full said, we have been in the outcome-based pricing side of the business for decades and have a substantial amount of our business where a portion of the business has outcome related fees.

We see opportunities where with certain accounts where the entire payment comes off of the actual outcome. And we are clearly heading in that direction. We just think it’s going to take some time because it’s a whole new way to price some of these types of projects..

Thanks Ken. Thanks Dustin. Congrats on all the progress..

Thank you very much..

Yes. Thank you..

Thank you. The next question will be from Jason Kupferberg of Bank of America. Your line is now open..

Hi guys. This is Jason on for – Cassie on for Jason. Thanks for taking my question. First, I just wanted to ask about free cash flow conversion for 2022.

How should we think about it as a percentage of EBITDA, as a percentage of net income for the next fiscal year? I know you guys called out a couple of one-time items in 2021, but just wanted to know how to think about it going forward? Thank you..

Hey Cassie, this is Dustin speaking. So, thank you. It’s a great question. So, a couple of things I would tell you is the one-time items really related to that CARES, as I mentioned earlier, the CARES Act, we see that as normalizing in fiscal year 2022.

And so what you will see is – I would say free cash flow as a conversion related to EBITDA in roughly in that 70% range. We are not going to have – those one-time items are not going to recur and you will see it more normalize going forward..

Okay. That’s perfect.

And second, I just wanted to kind of like confirm, did you guys see any macro-related impacts on the business in 1Q, whether that’s pressure to volumes from Omicron or Russia-Ukraine exposure, whether by headcount or client mix, I just wanted to be very clear on that?.

I am not aware of any volume decreases in first quarter due to any of those related items, if anything, maybe we are seeing the opposite of that.

Dustin?.

Yes, Cassie, it’s a great question again. And what I would tell you is, just to be clear, no issues related to the Ukraine and Russian conflict. And also, I would say that we feel really good about where we are heading into this quarter.

And so far, all indications speak to strength, and we are really excited about kind of delivering on our Q1 guidance..

Alright. Thanks guys..

Thank you..

Thank you. Our next question will be from James Faucette of Morgan Stanley. Your line is now open..

Great. Thanks a lot. Two quick questions for me. First, it obviously can you have a long history of being very successful in doing acquisitions, etcetera. You have done some recently.

How are you thinking about – and I think you indicated that you have some in the pipeline, what are the change in valuations, if anything, how has that impacted your thinking? And can you also give some color on what you are trying to do directionally or strategically as you are looking at potential acquisition targets right now?.

Well, first of all, I think if you look at our acquisition history, we have always been, I think very focused on making sure that acquisitions are accretive not only strategically, but financially. And we tend to not be the one that’s paying the crazy valuation that then wakes up six months later and realizes what did I just do.

We are very growth focused. We are very profit focused. The top and bottom line focus is very important to us, and we are very focused that it’s aligned with our strategy.

As far as valuations compressing, I think we all know this, you have been around for some time that, unfortunately, from a buyer standpoint, sellers tend to have a bit of an overhang on their belief of what their business is worth and that usually takes 6 months to 12 months until they ultimately – as the market settles and until they ultimately realize that what it was is no longer now.

But what I would just simply say to you is that, we are very cognizant of the valuations and how they are changing. We are going to continue to be very responsible and stewards of our balance sheet and making sure that we don’t do something stupid or that we regret.

We are also not going to bet the company type transactions, because those tend to not work out, if you know what I mean. And so consequently, I think that what you are going to see is that there is going to be more focus on geographic expansion and more focus in investing in our digital business.

We are absolutely confident that we can get our digital business to $1 billion. We are absolutely confident that, that scale gives us a lot of other benefits. And we are absolutely confident that in the not-too-distant future, we can see that division being a comfortable rule of 40, which is where we want it to be.

We are also confident that that the marketplace is consolidating on the Engage side and that we are in a really good position as being the high-end provider in the marketplace. We believe we are a go-to shop for people who are really looking for true quality.

They are looking for a company that has total transparency, and we feel very good about our position in the marketplace as well as the backdrop of just how much demand that is out there. There is tons of demand out there, not just for us, but for the entire marketplace..

Got it. And then a follow-up question as it relates to kind of the coming year and just your planning overall. You talked a little bit about moving some of the sourcing to different geographies and in different locations, etcetera, to take advantage of the opportunities.

How should we think about what you need to do from a rate of headcount hiring in order to achieve your objectives for this year? And are there any particular hurdles or considerations that we should keep in mind as you go down that path?.

Look, it’s no secret that on the tech side, hiring qualified technologist is a challenge for everybody. It doesn’t matter who they are, etcetera. We think we have a leg up because of our culture. I don’t say that just to sound proud, etcetera, but it’s public what our culture is.

And we think that we have got a culture that is a culture that is – that helps us attract and retain talent. So, what I would say to you is, on the tech side, attracting the amount of talent that we need to keep up with the growth of the deals that we are selling is no question a talent – a challenge. But we are up to that challenge.

And it’s why we are continuing to expand our geographic reach, so that we have more markets to be able to dip into to be able to acquire that tech talent that we are looking for. On the Engage side, we feel like we have got a solid machine for being able to find the talent that we need on the front line.

That said, we absolutely feel like we need to be in more markets to provide near-shore and offshore and best shore type capabilities. That obviously helps our margin.

And so I think you are going to see more and more focused going into that area, more and more significant wins in that area, which gives us more margin coverage, more gross margin coverage, etcetera.

So, the – what I would say is it’s going to be very interesting to see what happens with the tech market going forward as Ukraine and Russia and some of these other markets potentially get set down from a place to recruit tech talent. The good news is we have no – no assets in those areas.

We are not focused in that area, and we are not recruiting from those markets. The bad news is that potentially will create a bit of a vacuum in my opinion, across the entire tech sector as people rejigger to move talent from one market to another market.

Again, that said, we feel like we have got a good strategy of where to find our tech talent, and we are going to do everything we can to continue to keep adding all of the developers that we need for our projects, for our clients..

That’s great Ken. I appreciate the comments this morning..

All the best..

Thank you for your questions. So, that is all the time we have today. I will now turn the call back to Paul Miller.

Thank you, everyone, for your participation. This concludes our earnings call. Have a great day. Thank you..

This concludes TTEC’s fourth quarter and full year 2021 earnings conference call. You may now disconnect at this time..