TTEC Holdings, Inc. Q3 FY2025 earnings call

• Continued to strengthen foundation and make investments to seed future growth. - Expanded AI-enabled CX Solutions with a hybrid strategy. - Nurtured relationships with existing clients with vertical-specific solutions. - Deepened collaborative relationships with leading hyperscalers. - Discussed the transformation in the CX industry fueled by Gen AI. - Highlighted Engage's efforts in attracting new clients, growing embedded base, and evolving with AI tools. - Outlined Digital's remix of professional and managed services, signing new clients, and specific deals like working with a leading multinational bank and a world's largest airline. - Progress on outcome-based solutions for clients.

In the 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. In the 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.

• Engage revenue continues to track towards the high end of the guidance range. Maintaining full year guidance for adjusted EBITDA and operating income but forecasting results to come in towards the lower end of the range. - Digital is maintaining full year guidance but at the lower end of guidance range due to remix factors.

• Significant gap between AI investments and measurable CX business outcomes, creating clumsy, inflexible and impersonal customer experiences. - 82% of consumers feel CX experiences are inconvenient and inconsistent, 60% report quality of interactions has deteriorated, almost 75% believe AI is making it worse. - Challenges in achieving sustainable and scalable results with AI requiring a modern data state, reengineered processes, etc. - Market shift impacting Digital's revenue with temporary pressure on recurring revenue and professional services.

Q: 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?

A: 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.

Q: George Sutton: 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?

A: Kenneth Tuchman: 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.

Q: Margaret Nolan: 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?

A: Kenneth Tuchman: 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.

Q: Margaret Nolan: 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?

A: Kenneth Tuchman: 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.

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

A: Kenneth Tuchman: 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.

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

A: Kenneth Tuchman: 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.

Q: 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?

A: Kenneth Wagers: 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.

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

A: Kenneth Tuchman: 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.

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

A: Kenneth Tuchman: 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.