Description

TTEC is one of the larger North American-focused BPO companies focused on outsourced customer experience management. TTEC is predominantly an outsourced call/contact center business, with the majority of the revenue in its core Engage segment being driven by call volumes. In addition to voice-related offerings, TTEC offers omnichannel-solutions (e.g. email, text, chat) to handle customer requests for TTEC's corporate clients. Within its Digital segment, TTEC also provides third-party enabled solutions that help clients’ in-house contact center staff manage customer interactions.

The analyst community seems to justify TTEC’s valuation by pointing to the size of the Company’s “Digital” segment revenue, but the feedback we get from conversations with people in the industry is that TTEC’s business segmentation is viewed as quite promotional as the non-voice business primarily consists of a portfolio of third-party solutions, and their non-voice offerings are not too dissimilar from those offered by peers. While TTEC management spends a lot of time on their calls talking about their Digital segment, it is worth keeping in mind that this represents <20% of revenue.

TTEC’s valuation has expanded meaningfully over the last year following a couple of +24%-25% yoy revenue growth quarters but we note that most of this appears to have been driven by acquisitions and “COVID-related” volumes, the benefit of which we would expect to moderate going forward. Among other things, this COVID work includes supporting Federal, State and local government agencies with citizen engagement throughout the pandemic, as well as COVID Contact Tracing. TTEC has also been providing support to government clients that experienced sudden spikes in inbound volumes related to unemployment benefits. Additionally, TTEC benefited from elevated volumes at many financial services clients, including insurance companies that have been overwhelmed by COVID-related coverage questions. Excluding COVID-related work and the revenue contributions from recent acquisitions, TTEC’s revenue growth appears to have been +LSD% in Q4’20 and +MSD% in Q1’21. TTEC management hopes to migrate shorter-term pandemic volumes into more recurring work and/or replace declining COVID volumes with new work, but we would expect TTEC to face moderating organic growth as COVID-related volumes decline.

TTEC on Q4’20 call: “Our top line growth is primarily attributable to increased volumes from existing clients, new clients and COVID-19 related amounts, which comprised approximately 15% of our fourth quarter revenue.”

TTEC on Q1’21 call: “You have $75 million or so of COVID stuff in Q1”

The anticipation of a moderating benefit from COVID-related work might help explain why TTEC in April acquired Avtex, a call center/digital customer experience provider. At a purchase price of ~$490mm (cash), this is TTEC’s largest acquisition to date and the Company appears to have paid a fairly full price (~16x EBITDA).

Following the recent surge in its share price, TTEC now trades at ~17x EBITDA, a sharp premium to peers SYKES (“SYKE”) and Concentrix (“CNXC”), both of which have superior revenue churn profiles in their core segments. Industry participants that we have talked to have highlighted TTEC’s annual revenue churn (8%-12%), commenting how it is quite high relative to other call center operators given the traditionally sticky customer relationships in the industry. It is our understanding that SYKE’s and CNXC’s annual churn is roughly half of TTEC’s.

 TTEC CFO: “So we always have churn, if you will, on our base, probably 8% to 12%.”…” we're always planning in 8% to 12% churn of our existing revenue for a variety of reasons.”

 Industry leader Teleperformance (TEP FP) now trades at a ~2x turn discount to TTEC despite the fact that Teleperformance has long history of superior organic growth.

We would agree that this industry is likely to continue to benefit from clients outsourcing their CXM work but TTEC now appears to trade at an overly generous valuation and an unjustified premium to peers. It is worth noting that TTEC’s founder and CEO, Kenneth Tuchman, who owns just under 60% of the Company, sold approx. 10% of his position in December 2019 in a secondary offering, at a share price ~60% lower than the current price. Valuing TTEC more closely in line with SYKE and CNXC at 8x-11x would imply downside of ~40% to 60%.

Catalyst

No hard catalyst but we would expect TTEC to re-rate lower if organic growth disappoints