Earnings Call Transcript - TTEC Q1 2020

Operator, Operator

Thank you for standing by, and welcome to TTEC's First Quarter 2020 Earnings Conference Call. I would like to remind all parties that you will be in a listen-only mode until the question-and-answer session. This call is being recorded at the request of TTEC. I would now like to turn the call over to Paul Miller, TTEC's Senior Vice President Treasurer and Investor Relations Officer. Thank you, sir. You may begin.

Paul Miller, Senior Vice President Treasurer and Investor Relations Officer

Good morning and thank you for joining us today. TTEC is hosting this call to discuss its first quarter financial results for the period ended March 31, 2020. Participating on today's call are Ken Tuchman, our Chairman and Chief Executive Officer; and Regina Paolillo, our Chief Financial and Administrative Officer. Yesterday, TTEC issued a press release announcing its financial results. While this call will reflect items discussed within that document, for complete information about our financial performance, we also encourage you to read our first quarter 2020 quarterly report on Form 10-Q. 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 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 2019 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 Tuchman, TTEC's Chairman and Chief Executive Officer.

Ken Tuchman, Chairman and Chief Executive Officer

Thanks Paul, and good morning to everyone. Before I speak to our first quarter 2020 results and near-term outlook, I'd like to provide some broad context on the impact of COVID-19 on our business, as well as outline our proactive response to support our people and the resiliency we're providing for our clients and their valued customers. It is without question that we're living through an extraordinary crisis, one that has an enormous impact on every aspect of our lives. The immediate effect of the COVID-19 global pandemic, the loss of lives and the restraint on workforce mobility will have a pervasive lasting impact on how we as individuals and businesses engage with one another. The speed and magnitude of which we are reshaping our focus and ways of working to serve a growing list of client needs as this pandemic has evolved is astounding. Our top priority, as we navigate this pandemic is the health and safety of our people, our clients and our shareholders. Starting in mid-March, government officials around the world implemented drastic measures. In a matter of weeks, all TTEC operating centers were impacted by various restrictions. Our many years of experience in providing advanced at-home capabilities globally have served us extremely well in our response efforts. At this point, TTEC Engage has migrated 80% of our own employees to productive, secure work-from-home environments. Our TTEC Digital has provided expert-level business continuity support, technically enabling nearly 50,000 of our clients' employees with best-in-class, highly reliable at-home technology and resources. Within the first few weeks of April, we were serving an increasing volume of interactions, supporting new and existing financial services, healthcare and government clients. These organizations are providing essential services to citizens and businesses that are helping change the trajectory of this pandemic, stabilizing the economy and getting the world back to work. We acted swiftly in establishing plans to preserve our financial health across a wide spectrum of scenarios. These plans include measured adjustments to our cost structure and capital expenditures to ensure we maintain healthy cash flows, working capital and liquidity. Before the onset of COVID-19, our business execution and financial momentum were tracking nicely ahead of plan. We are pleased with the first quarter revenue growth of 9.6% and non-GAAP operating income growth of 21.4%. Bookings totaled $87 million for the quarter. Our operating cash flow was a strong $62 million and our revenue backlog is up. Of course, for the time being COVID-19 has necessitated an abrupt shift in mindset. Navigating the customer experience impact of this global pandemic has required three core capabilities: enabling and managing a highly distributed workforce, dynamically digitizing interactions to accommodate a dramatic spike in volumes, and expertise in crisis management. Our CX expertise and market-leading digital solutions has enabled us to reliably implement at-home and other virtual technologies necessary to maintain our clients' business continuity while workforces are confined at home. The speed and scale at which we have now implemented these solutions is reflective of our long history of successfully supporting governments and enterprises through many previous unfortunate catastrophic events. Managing in times of crisis requires unique protocols that are core to TTEC's DNA. Over the past 37 years, we have regularly supported first responder organizations, government entities and other blue-chip commercial enterprises with large-scale disaster, response and relief efforts. Given the nature of the work, we do for clients and the expansive delivery footprint we manage, we have a dedicated cross-functional team of highly agile disaster response experts in a constant state of readiness for implementing our predefined protocols. I'm proud of what our teams have accomplished in the wake of this crisis in an incredibly compressed time frame. Our clients credit our experience, differentiated technology and proactive early engagement as the factors enabling our ability to exceed their expectations after being blindsided and crippled by COVID-19. Let me quickly share some client testimonials. From our largest healthcare client, you have the highest percentage of associates working amongst the Philippine sites. Thank you for your strong execution and planning. From a diverse medical device manufacturer, thank you for helping us protect and serve our people and enabling us to serve our patients. We should all be proud of the work this project has accomplished. From a blue-chip computing client, we moved to remote work on Tuesday and there have been zero problems with anything TTEC related across the board. We went from a couple of thousand people in the office to a couple of thousand people on the VPN in one day. I expected a lot of problems and failures and there have been few, but our TTEC support has been the shining star through this transition. With all my many worries, TTEC has not been one of them. To sum it up, the early weeks of this pandemic, we successfully accomplished the shift to at-home and dynamically increased the percentage of digitally served interactions within our existing client base. Our focus in more recent weeks has been on extending our capabilities to the many government commercial and health-related organizations tasked with essential services supporting citizens, businesses, customers, and patients. Our teams are working tirelessly to stand up and support the surge in volumes these entities are experiencing while navigating unique supply chain challenges imposed by COVID-19. TTEC's scaled, tenured and technology-rich customer experience platform is uniquely positioned to support these essential service providers. We have already signed and are executing a significant volume of COVID-19 programs. Let me provide some context. We've simplified and streamlined the implementation of our cloud-based omnichannel platform, scaled our on-demand at-home resources, remote technology and comprehensive cybersecurity capacity. We continue to add digital and virtual-based technologies to assist our clients in maneuvering through time-sensitive volumes while offering them rapid deployment, highly reliable and secure systems availability and professional frontline support. These capabilities are accomplished via our newly launched T-Now offering. The speed and scalability of this cloud-based Humanify at-home solution provides organizations with everything that it takes to stand up and operate just-in-time omnichannel contact centers including the people, training, technology, and processes. For example, for a large financial institution, we leveraged our agile Humanify Connect cloud platform plus our virtual at-home technology and thousands of TTEC associates to provide customer care and fraud services. For a government client that is processing unemployment benefits, TTEC Digital increased associate productivity through implementing our digital messaging solutions leading to a 33% increase in concurrent interactions handled. Without this effective digitization, wait times and abandoned interactions would have quadrupled. Also, as Global 1000 organizations and large government entities continue to manage through the peak of COVID-19 and eventually find their path to a pandemic-informed new normal, TTEC will continue to play a meaningful role in helping clients establish strategies, priorities and actions related to the varying stages in the crisis: post-crisis, back to work and business-as-usual customer experience initiatives. The bottom line is that we're well positioned to win market share both in and out of the current crisis. We see significant opportunity ahead both as we consider our short-term COVID-19 surge volumes and longer-term as we convert pent-up demand related to the adoption of cloud, omnichannel, intelligent automation and digitization technologies. Our COVID-19 response offerings and rapid shift to at-home have added important new client relationships further advancing our growth opportunity. We fully acknowledge that we are not immune to the near-term disruptions and lingering uncertainties of COVID-19. Our withdrawal of 2020 financial guidance in late March is not related to our near-term or longer-term prospects, but rather it's effectively gauging the understanding, timing, and pace of getting back to a normal operating environment. Nearly every aspect of the market is under stress as we continue to be faced with widespread government-imposed restrictions. These constraints are creating multiple operational challenges that are outside of our control including the global supply chain related to various hardware and safety equipment needs. These restrictions and constraints have negatively impacted our business and have decimated the demand in certain client verticals we serve. For all of these reasons, it is not currently possible to predict exactly when the virus will subside, if there will be subsequent waves or how and when and at what pace the reopening of the economy will occur. We've responded to these uncertainties utilizing the various levers of our financial model that affords us. Most noteworthy we've taken advantage of our variable cost base by cutting discretionary spending across the board. And we've achieved additional liquidity through a partial drawdown on our revolving credit facility to increase cash reserves. I remain highly optimistic about the path ahead. If COVID-19 has proven anything, it is the degree to which our society already operates virtually. As such, the compelling global market forces related to enterprise demand for digital transformation, cloud migration and intelligent automation are now more imperative than ever and should accelerate post-crisis. Our reputation, innovation and leadership in CX technology and services provides the necessary ingredients to accelerate our growth and margin potential as the world recovers from this historic global pandemic and finds its new normal. Our strategic initiatives have not changed. We are relentless in our pursuit to bring the market-differentiated CX-as-a-service offerings, increase our market share, execute strategic and accretive acquisitions, expand our channel partnerships, and leverage profitable growth which should translate into increased shareholder value. The strong fundamentals of our business, well-capitalized balance sheet and overall financial profile remain intact. Normalizing for COVID-19, we are a platform that enjoys high single-digit revenue growth and high recurring revenue streams in both digital and engage as demonstrated by our expanding profit margins and significant free cash flow over many quarters. We have successfully pivoted to a COVID-19 way of working and have garnered an important share of related surge volumes. While these engagements are likely to be shorter term in nature, they offer a financial bridge back to a more normalized environment that will remain far more virtual which as I've demonstrated is highly conducive to our core set of digital solutions. Until then, we'll control what is in front of us and continue to boast a strong balance sheet and liquidity profile. In closing, I'm both proud and humbled at the dedication, endurance, and ingenuity I have witnessed in working with our TTEC team as we journey through this extraordinary global pandemic. I am reminded of the ironic nature of crisis and its power to impart both devastating loss and the very best of humanity. Our success in navigating this COVID-19 pandemic is testament to the humanity and resiliency of our people. On behalf of our executive team and our Board of Directors, I want to personally thank each and every one of our nearly 50,000 team members across the globe for your hard work, unwavering positivity and relentless passion for client services during these extremely stressful times. We thank all of our shareholders for your continued support. We look forward to updating you on our progress in the months ahead. And Regina will now cover the key financial highlights to the quarter. Regina, you're on mute.

Regina Paolillo, Chief Financial and Administrative Officer

Thank you, Ken, and good morning, everyone. I'll start by expressing my empathy for all those who are impacted by this crisis and deep gratitude to the incredible people for supporting TTEC, our clients and the communities in which we operate. Ahead of my comments on our first quarter financial results and outlook, I'll provide a view of the impact of COVID-19 and the actions we are taking to preserve the financial strength and health of our company. The in-hand value of our diverse portfolio of marquee clients, the resilience and agility of our business model, and the strength of our balance sheet and cash flow, carries even greater importance during uncertain times. While the near term business environment has changed dramatically, we continue to view the long-term fundamentals of our business and the value proposition we provide as exceptionally durable. COVID-19 presents meaningful short-term and longer-term client opportunities that we are aggressively pursuing, proving our relevance in both prospering and challenging times. In the next few quarters, we see a combination of tailwinds and headwinds. Our tailwinds include a strong first quarter and abundance of COVID-19 surge work and early adjustments to improve our cost structure, working capital and liquidity. The surge work is within our government, healthcare, financial services, e-commerce and food delivery verticals. While short-term in nature, it will help bridge our financial performance. We are closing significant volumes of this work but are early in ramping and executing, making it difficult to judge its exact scale and duration. Regarding our cost structure, working capital and liquidity, we are taking several meaningful actions to preserve our financial health. First, we identified immediate areas to lower costs; including reducing or eliminating discretionary compensation, professional services, temporary workers, travel, real estate facilities and nonessential investment initiatives. Second, we are prepared to methodically consolidate, streamline and rationalize certain operations and functions, if circumstances warrant such action. And third, out of an abundance of caution, we proactively strengthen our liquidity and financial flexibility by drawing down an additional portion of the company's revolving credit facility for the purpose of building cash reserves in addition to intensely managing working capital. In terms of headwinds, we estimate that our backlog will be adversely impacted by declines in our automotive, travel, hospitality and retail verticals, as these organizations are significantly affected by COVID-19. We also assume that some of the new business volume we originally anticipated to be signed in 2020 is at risk. Automotive comprises approximately 12% of our anticipated 2020 revenue. Travel and hospitality and retail each comprise about 3%. Given the strong bookings in auto in the second half of 2019, including a material win in the fourth quarter, replacing an incumbent provider, we currently estimate our auto vertical will grow year-over-year. In travel, hospitality and retail, we are currently experiencing a 15% drop in volumes. We are somewhat insulated, given the reliance some of these clients have on the enterprise communication-based technology we provide. In our 2020 planning, we assumed we would yield additional revenue from in-year bookings related to incremental initiatives with existing and new clients. Our clients are heads down, adapting to the execution challenges imposed by a rapid work-from-home and surge volumes and financial uncertainty. As a result, pipeline conversion on business-as-usual initiatives is unpredictable. Lastly, in terms of headwinds, as we adjust to working in an at-home mode, there is an impact on the productivity of our teams and incremental costs. Looking at our first quarter 2020 results, we continued to over-perform on revenue, operating income, adjusted EBITDA and EPS, despite the COVID-19 headwinds in the second half of March. We did experience a decline in bookings. We closed $87 million of new business in the first quarter versus $132 million in the same period last year. Excluding the one-time government contract, bookings were $84 million in the first quarter of 2020 versus $114 million in the first quarter of 2019. We had approximately $28 million of bookings verbally committed, but for which signing was delayed due to COVID-19, some of which has already closed in the second quarter. In Engage, bookings were primarily within our healthcare, financial services and technology verticals. We continue to sign meaningful new business in our high-margin high-growth offerings. Our Digital bookings were across consulting, cloud and systems integration, including both existing and new logos and our pipeline for messaging and automation offerings is progressing and began converting with approximately $2 million in the first quarter. We expect the impact of COVID-19 to provide heightened interest in our at-home automation, messaging, fraud and growth offerings. On a GAAP basis, we recorded a 9.6% year-over-year increase in revenue to $432.2 million, of which 2.9% was organic. While we swiftly moved 80% of our employees to work from home, we estimate this transition affected the Engage March revenue by approximately $11 million or 2.8 percentage points of revenue growth. Excluding the COVID-19 impact, the Engage organic growth would have been 12.4%. Operating income was $40.7 million, or 9.4% of revenue, compared to 8.1% in the prior year. Restructuring charges were $1.2 million this quarter. FX impacted revenue by a negative $1.4 million, primarily Engage. The FX impact on operating income was negligible. GAAP earnings per share was $0.46 in the first quarter, up from $0.41 in the prior year. The remainder of my comments are on a non-GAAP basis which exclude restructuring and impairment expenses. A full reconciliation of our GAAP to non-GAAP numbers is included in the tables attached to our press release. On a consolidated basis, adjusted EBITDA increased 15.8% to $63.6 million or 14.7% of revenue versus 13.9% in the prior year. Operating income increased 21.4% to $41.9 million or 9.7% of revenue, versus 8.8% in the prior year. And earnings per share increased 25.5% to $0.64 in the first quarter, compared to $0.51 in the prior year. Both our Digital and Engage segments contributed to top and bottom-line improvement. As mentioned, we took precautionary measures to increase our cash reserves by advancing additional funds under our revolving credit facility. At the end of the first quarter 2020, total cash was $520.4 million with $700 million borrowed under our $900 million facility. The company is in full compliance under its credit facility which expires in February of 2024. Our total net debt position at March 31st 2020 was $195.2 million, compared to $173.6 million in the prior year quarter and $225.1 million sequentially. Cash flow from operations was $62.2 million versus $80 million in the prior year. The decrease is attributable to a $14.4 million increase in net cash income from operations offset by a $32.2 million negative change in working capital. The change in working capital is primarily due to the timing of payroll and the payout of 2019's variable incentive compensation. DSO was 66 days in the first quarter of 2020, compared to 76 days in the prior year quarter and unchanged sequentially. Capital expenditures were $16.8 million or 3.9% of revenue, in the first quarter, compared to $13.2 million or 3.4% of revenue in the prior year. The increase is attributable to the continued build of our cloud platform and our site diversification primarily in Europe and India. Consistent with our actions to sustain a strong financial position we have reduced our planned capital expenditure for 2020 from approximately $65 million to $40 million. Our reported tax rate in the first quarter of 2020 was 29.2% compared to 26.7% in the prior year. The increase is primarily due to a higher mix of U.S. income. Our normalized tax rate was 23.2% compared to 24.7% in the prior year. We anticipate the 2020 full year tax rate to be between 22% and 25%. Capacity utilization was 73% in the first quarter of 2020 compared to 75% in the prior year period and 74% sequentially. Decrease in utilization is related to planned reductions in seasonal healthcare work and an increase in seats related to sites operating less than one year, both of which are in the process of being optimized. Turning to our first quarter 2020 segment results which are presented on a non-GAAP basis, digital revenue was $77.6 million in the first quarter 2020, an increase of 17.8% over the prior year. 15.5% was organic growth. Adjusted EBITDA increased 35.7% to $15.3 million or 19.7% of revenue versus 17.1% in the prior year. And operating income increased 37.7% to $11.2 million or 14.4% of revenue, an increase from 12.3% in the prior year. Our CX cloud subscription-based revenue was $43 million in the first quarter, increasing 80% versus the same period last year. Excluding the shorter-term government contract, cloud revenue grew 46%. Systems integration revenue was slightly under $12 million, up approximately 4% over the prior year and included $2.5 million of contribution from our new messaging and automation offerings. The lower growth in systems integration is a function of delays attributable to COVID-19. The delays are twofold. A prioritization in transitioning our clients' employees to work at home in March was impacting the build-out of the new technology. And the slowdown in the conversion of large enterprise-level deals, consistent with industry trends. To some extent this delayed volume is being replaced by COVID-19-related programs which are shorter term and less complex requiring minimal systems integration. For the full year 2020, excluding the shorter-term government contract and businesses that we are exiting, we continue to estimate year-over-year growth in Digital. We estimate our cloud and systems integration revenue excluding the shorter-term government contract to grow in line with our previously stated mid-term target of plus 20% and 15% respectively. In our Engage segment, revenue was $354.7 million in the first quarter 2020, an increase of 8% over the prior year. Excluding FX, the acquisition of FCR and ASC 606 revenue grew 1%. As previously mentioned, the Engage revenue was temporarily impacted in the second half of March by approximately $11 million or 3.4 percentage points of growth when our sites were subject to lockdown. Excluding this impact, the Engage organic growth would have been over 4%. Highlights in the quarter include the continued growth in our high-growth high-margin offerings which collectively grew over 35%, including but not limited to the acquisition of FCR. Adjusted EBITDA increased 10.6% to $48.3 million or 13.6% of revenue, versus 13.3% in the prior year. And operating income increased 16.4% to $30.8 million or 8.7% of revenue, an increase from 8.1% in the prior year. Our bottom-line improvement reflects increased top-line scale, improved vertical and offering mix and lower operating SG&A and depreciation expense to revenue ratios. As indicated earlier for Engage, 2020 full year, we anticipate declines in our travel, hospitality and retail verticals and lower-than-expected net new revenue from 2020 business-as-usual bookings, offset by the annualization of the FCR acquisition and shorter-term surge work in our government, healthcare, financial services, e-commerce and food delivery portfolios. These are challenging times in so many ways. Staying safe and getting the world back to a healthier place, initiating and executing the many programs supporting essential services for patient citizens, customers and businesses, leading and managing in an intensely emotional and unpredictable time and maintaining our resilience, no matter how long it takes the world to find its way back to a new normal. While the uncertainty of COVID-19 in a way defies the logic of guidance, we are well reminded in navigating this crisis how very essential effective communication is. In balancing the challenge of not being able to provide highly reliable guidance while continuing to effectively communicate we offer the following comments regarding our 2020 financial performance. Our performance in the first quarter and second quarter-to-date reflects continued strength in the fundamentals of our business and financial profile namely our total addressable market is significant in and out of crisis. Our differentiated solutions and operational expertise enable us to win market share. Our strong cash flow and balance sheet are a source of significant growth capital when the economy is expanding and a source of security when it contracts. We have a strong working capital position including $500 million of cash. As of March 31st, our total 2020 backlog was $1.62 billion, despite a $24 million negative impact from changes in FX rates since the beginning of the year. Currently we have modest exposure to verticals challenged by COVID-19 and have a healthy pipeline of surge work within critical verticals. We anticipate a slowdown in the conversion of non-COVID-19 business until our clients and prospects have stabilized their operating environments and have greater financial certainty. We expect the short-term nature of surge work to provide a financial bridge for the second and third quarters; the slower conversion of our business-as-usual pipeline will negatively impact our fourth quarter. In summary at this moment and in balancing the tailwinds and headwinds previously described, we believe the current consensus model for TTEC for the remaining quarters and full-year provides a relatively balanced view of a likely 2020 financial performance for TTEC. We expect to have a much better view by the time we report our second quarter results. I'll now turn the call back to Paul.

Paul Miller, Senior Vice President Treasurer and Investor Relations Officer

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

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question is from George Sutton of Craig-Hallum. Your line is now open.

George Sutton, Analyst

Thank you. Guys, I know it's been a 24x7 effort for pretty much the entire team for much of the quarter, so congrats on the results. I'm going to limit my question to one, but I'm going to make it somewhat multipart and I'm going to address it to Ken. Ken, as you think through the long-term flexibility that is being sort of enabled by all of these changes, I wondered if you could speak to geographies, work-at-home options as you see them in the future, staffing levels and how that might change over time? And are you bidding differently on work given some of these changes?

Ken Tuchman, Chairman and Chief Executive Officer

Good morning, George. That's a multipart question for sure. So, I guess what I would say to you is that in the short-term, all of the deals that we've been winning, as well as that we will be implementing in the future post-COVID, I'd say for the most part are taking into consideration a significant mix of at-home and then futuristically when we get back to some new normal, a higher percentage of bricks-and-mortar. We're not there yet. Frankly, we don't actually know when we'll be there because different countries have different predictions on when they're going to open up. And when they do open up, it will be more or less probably a 50% opening with significant social distancing. And then for how long that's going to last we don't know. So for now, what we've done is, we've prepared our entire business to operate virtually worldwide. And over time we believe that there's going to be more of a geographic dispersion of our clients' requirements so that they can withstand any form of future set of issues. And, therefore, as we've mentioned in previous calls, we're expanding our global footprint fairly aggressively in the near-term, and we'll take advantage of that new footprint once we can get back to a new normal so to speak of life. But for now, everything that we're doing is solely focused on having the most advanced at-home infrastructure with the highest standards of quality and protocol. And we've been very fortunate that we've been able to move in excess of 40,000 frontline agents to their home and are processing interactions as though they were operating in a bricks-and-mortar environment. I hope I answered your question. I know that it was multipart. Are we bidding differently? I would say what's different about our bids is that they now include much more digital content, and we are integrating technology into every deal to counterbalance the significant surges we are experiencing in certain sectors. This includes providing conversational messaging capabilities through machine learning and AI, implementing robotic process automation in our clients' back-end systems to enhance efficiency, which was a key reason for our acquisition of Serendebyte, and revamping their entire omni-channel capabilities. A significant percentage of our deals now feature an upfront digital technology component to manage high-demand volumes and reduce service costs. This is one of our main differences. There are also temporary variations in how we bid due to business and labor costs, particularly in the United States with current regulations. Therefore, we must ensure our pay is competitive to attract the best talent for these roles.

George Sutton, Analyst

Thank you very much.

Operator, Operator

Thank you. And our next question is from the line of Mike Latimore of Northland Capital Markets. Your line is now open.

Mike Latimore, Analyst

Thank you. Congratulations on the strong results there. I just wanted to focus a little bit on the cloud and consulting part of your business. Can you talk a little bit more about what you're seeing in terms of bookings and pipeline there? Are things tracking as expected overall? Are you seeing the puts and takes canceling each other out? So things are tracking as expected? Just a little more color on pipeline and bookings for cloud consulting would be great.

Ken Tuchman, Chairman and Chief Executive Officer

Yeah. I mean, what I would say is, I'll just repeat a little bit about what Regina said. We had a lot of very significant deals in the pipeline, and those deals are still very active. But I would say that many of them are being pushed due to the fact that these large clients are focusing on their crisis at hand versus very significant transformation projects. That said, many of those clients have come to us and asked us to add at-home technology ahead of their major transformation projects, as well as embedded base clients have asked us to help them quickly move to at-home. And as we mentioned in our script, we've moved on the Digital side over 50,000 agents from their bricks-and-mortar to at-home. As it relates to the future, what I would say to you is that we think that there is going to be a little bit of a lag as people kind of again assess their business, their priorities and figure this out of the larger deals. That said, there is a fair amount of activity focused on automation, focused on what we can do with our robotic process automation and our messaging capabilities. And so we're putting a lot of energy into that. You can imagine that if you're a large corporation and you have large captives of your own, you’re looking for ways to automate and add new channels of capabilities whether that be messaging capabilities, chat capabilities, self-service capabilities, et cetera. And so, we're really putting a huge part of our focus in those areas. Overall, we feel really good about the business. And we feel like long-term that the business will produce everything that we have consistently stated as it relates to growth rates both top and bottom line. We're going to continue to expand the capabilities of the Digital business, so that we can truly be a one-stop shop for all of our clients' customer experience, customer engagement and customer growth needs.

Regina Paolillo, Chief Financial and Administrative Officer

The only thing I would add to that Mike is that we do have a very healthy Q2, Q3 pipeline. I think collectively, it's just under $250 million. And it is more and more filled with Webex CCE deals as well as some traditional HCS. We actually went into production on a small Webex CCE deal this week. And so we're confident that the deals are there. And that they will be converted. I would also say that the inroads that we've made further into government, not just federal but state and local, and the downstream opportunity to be in those organizations in a bigger way and having them see early on the positive impact of not only our omnichannel, but the applications that we bring to the table in terms of messaging and automation, that those should be organizations that even add more to that pipeline. The challenge we have given the enterprise-level magnitude that we deal with in the large governments is just the timing in which folks will kind of finalize those decisions and can be focused on those very significant initiatives.

Mike Latimore, Analyst

Okay, great. Thanks so much. Good luck.

Operator, Operator

Thank you. And our next question is from the line of Maggie Nolan of William Blair. Your line is now open.

Maggie Nolan, Analyst

Good morning. So you're at 80% work from home. I'm curious about the dynamics both in the March quarter. Was that downside there primarily driven by constraints on the supply side as you move towards that 80% work from home and an inability to meet demand, or was the downside primarily due to volume spikes? And then how do you expect that kind of supply and demand dynamic to play out in the coming quarters given that you're at 80% now, and any efforts to move higher than that?

Ken Tuchman, Chairman and Chief Executive Officer

Hi, it's Ken. We're feeling optimistic about the second quarter. We believe that the bookings we've achieved so far this quarter will compensate for the shortfall from last quarter. Bookings have been strong, and what's unique about them is that we are able to execute more quickly due to the nature of these bookings. The uncertainty we want to be transparent about is what happens after this surge and what the new normal will look like, as well as when it will occur. Currently, there is a significant amount of surge opportunity business available. We're experiencing a lot of demand right now. I hope this addresses your question, but I wouldn't be overly worried about the bookings from the first quarter, and I think we'll be fine in the second quarter.

Regina Paolillo, Chief Financial and Administrative Officer

I think the other thing Ken, Maggie, is that please don't read that 80% at-home means we're 80% productive.

Ken Tuchman, Chairman and Chief Executive Officer

Yes.

Regina Paolillo, Chief Financial and Administrative Officer

We still have sites that are open. We have work where our clients for security and other reasons did not feel comfortable having at home. We have appropriately distanced people in those sites. We deep clean. So safety is utmost important, but there are many other associates who are still working but in-site.

Ken Tuchman, Chairman and Chief Executive Officer

Let me clarify the 80% figure so it's not misinterpreted. In North America, we are currently operating at 95% to 98% capacity from home, and this number may be even higher as we continue to find ways to bring more people online. The Philippines is the area most affected in reaching that 98% capacity due to various reasons, including local infrastructure and housing conditions. However, our business in North America is thriving. For every dollar we generate in North America, specifically in the United States and Canada, it significantly exceeds the revenue we are missing from the Philippines. Therefore, do not infer from this call that our revenues are going to decrease by 20%, as that is not the situation at all. Our revenues remain strong, and I want to emphasize that we are optimistic about the second quarter.

Maggie Nolan, Analyst

Got it. Thank you.

Ken Tuchman, Chairman and Chief Executive Officer

Did I answer your question Maggie, or is there...

Maggie Nolan, Analyst

Yes. That was helpful. Thank you. And then as we think about the full year, can you provide a little granularity about kind of how to think about Engage versus Digital in the context of that higher-level guidance that you put out there both on the revenue side, but also on the margin side and understanding some of the different levers within those businesses to protect the margins in those businesses? Thank you.

Regina Paolillo, Chief Financial and Administrative Officer

Yes. Given the surge in our strong backlog, we have not seen any deterioration. The backlog did decline by approximately $24 million due to changes in foreign currencies against the USD. It's important to note that since the beginning of the year, the currency fluctuations have resulted in this $24 million negative impact. However, considering our surge work, robust backlog, and recent acquisitions—though modest compared to Serendebyte but more significant for FCR—I believe the consensus model reflects a fair outlook regarding our potential. I foresee more opportunities for improvement in our bottom line, especially since we have proactively taken actions that we will maintain until we are confident in our recovery. These early moves will help safeguard our EBITDA and operating income. I can discuss this in more detail offline or address any specific questions you have. I also mentioned our strategic components in the Digital business, and we remain optimistic that our cloud-based segment will see growth of over 20%, possibly between 20% and 25%. While our systems integration was at 4% in the first quarter, we expect it to reach over 15% by the end of the year, in line with our mid-term guidance.

Maggie Nolan, Analyst

Thanks, Regina.

Operator, Operator

Thank you. And the next question is from the line of Bryan Bergin of Cowen. Your line is now open.

Bryan Bergin, Analyst

Hi. Good morning. Thank you. I wanted to ask on cost flexibility first. Can you give us a sense of the potential cost reductions you can take out of the operations currently? And then maybe longer term, is it changing your strategy around cost structure and the operating footprint in Engage too?

Regina Paolillo, Chief Financial and Administrative Officer

First, I'd like to mention that we have a plan in place to potentially reduce costs by $100 million if necessary in an extreme situation. We're prepared to implement this plan when required. Regarding discretionary spending, nearly $50 million in expenses are linked to our financial performance and will naturally adjust. With our extensive experience in the heritage business of Engage over the past 37 years, we are adept at aligning our costs with our top-line volumes. In terms of the long-term impact of these actions, it's less about the future but more related to our three-year plan. As we've discussed, we aim for margins in the mid to high EBITDA percentage and NOI above 10%. The improvements in EBITDA in the first quarter for both Engage and Digital are supported by various initiatives we've undertaken to achieve our targeted cost structure. Many efforts are underway at TTEC beyond the effects of COVID-19 to ensure we reach a high-teen EBITDA margin and a double-digit NOI margin.

Ken Tuchman, Chairman and Chief Executive Officer

Yes. To address Regina's question about potential changes in our model that could affect costs, I want to emphasize that we are exploring a significantly different approach. We are moving towards a more distributed model that seamlessly integrates at-home services with physical locations. Rather than being strictly one or the other, we will soon introduce a unique hybrid model that offers both options. This transition to the new normal will enable us to provide our clients with enhanced flexibility, greater agility, and an improved cost structure. While we are currently addressing immediate needs, we are actively evaluating every aspect of our business. Our operations in Hyderabad have made a strong start, and we are dedicating substantial effort to innovation in that region to further streamline our organization and increase automation. I am very confident we will achieve a cost-effective structure, and neither Regina nor I have concerns about our capacity to reduce costs on the significant initiatives we already have underway.

Bryan Bergin, Analyst

Okay. That's helpful. And then on some of these short-term client agreements, understanding the volumes are down in some verticals, I'm curious if you're also seeing notable pricing concessions and more favorable payment terms as well. And if so what type of duration are some of these short-term agreements?

Ken Tuchman, Chairman and Chief Executive Officer

The answer is no. We are – we have always been the high-quality provider. We do not play a price gain. We offer a fair price for the highest value delivered, and we do not see price concessions. Actually, I would say we see the opposite right now because companies right now are looking for companies that can deliver and they were so let down and hurt when this crisis hit by very significant interruptions in service and we had virtually no interruptions. We continued all the way through the crisis, transition from bricks-and-mortar to at-home in a way where we're not leaving any of our clients high and dry. And that consequently created a spike in surge volume where clients were actually adding to our volumes because they felt that we could reliably deliver upon them. So A, we are – to answer your question we are not compromising on price; B, our clients are understanding that the labor markets, even though there is a huge amount of unemployment at record proportions, the fact of the matter is, is that the CARES Act and the unemployment program that's currently in place is affording employees the ability to earn a very generous short-term income through July. And our clients are cognizant of that and want to ensure that we're not competing with that temporary benefit which incents people in some ways to not go back to work until July. So what I would say to you is we are – we feel very comfortable with the surge work that we're doing. Very comfortable that we'll be able to maintain profitability on the surge work and so that's not an issue at all. As it relates to the length of these surge contracts, it's a great question and I don't have a precise answer because some of them are six months, some of them are rolling 90 days, and there's – it's too early for them to determine whether they're going to roll past that 90 days and add on, whether they're going to reduce or whether they're not going to have a need. And in some cases, we are helping them with their own captives that they've not been able to bring back fully up, et cetera. Mind you, when you think about it, a lot of these major Fortune 100 companies had very significant captives offshore, very significant. There are certain banks as an example that might have had 10,000 to 25,000 people just in one country. Those people in most cases are not working, and they had to transfer that volume to other locations and use partners to be able to help them with that. So, what I would say to you is the surge volume is short-term in nature. However, we're very confident that a percentage of this – a good percentage of this surge volume that we're winning is from net new logos and net new clients, and our goal is to bed that down and turn it into longer-term relationships. And when it's appropriate we will be focused in marketing to that – in that area.

Bryan Bergin, Analyst

Thanks.

Operator, Operator

Thank you. And the next question is from the line of Jason Kupferberg of Bank of America. Your line is now open.

Unidentified Analyst, Analyst

This is Kathy on for Jason. Thanks for taking my question. First I just wanted to clarify. I know you guys formally withdrew your 2020 guidance. But I think on the last quarter you introduced the three-year guide with the revenue growth in the range of 6% to 8%, margins of 10% to 12% EBITDA, 14% to 16%. Do you think that's still going to remain intact despite the COVID-19 crisis and everything? Thanks.

Regina Paolillo, Chief Financial and Administrative Officer

I think it's really hard to update our three-year guidance at this point. That said, as we've talked internally, if anything, it's potentially delayed a – Ken, you're on – it's potentially delayed a half year or so, so, again, very strong pipeline for both businesses, very strong opportunity in the TAM. We're seeing very good adoption and if anything, we may be delayed but have two levers, right? One, these new offerings and the adoption of those; we also see that the market is likely to have a want and demand and acceleration of the conversion that was going to be done as we've gone through this pandemic. And then last but not least, the – excuse me. And last but not least, the inorganic activity that we can deploy making up for some of the lost time, apologies for the background noise.

Unidentified Analyst, Analyst

Yes, no problem. And just one other question, so just thinking about sort of organic revenue growth for 2Q. It sounds like you exited that March quarter – sorry you guys had like modestly positive growth in 1Q. What sort of revenue run rate did you exit that March quarter like coming into that April time? And any of the scenario analysis you guys ran like could this turn negative in the next couple of quarters? I'm just looking back sort of thinking in the 2008, 2009 financial crisis, you guys did see a pretty significant revenue impact. So thinking could we see that this time around as well, and sort of the differences in the business between then and now? Obviously, you have Digital now, but. Thank you.

Regina Paolillo, Chief Financial and Administrative Officer

Yes. Look, I think if you reflect on my comments about the relevancy of the consensus model to our internal views and then the backlog that I described, we don't necessarily see like incremental level of fall off from that run rate, right? But it is – it's not for me to say whether there's going to be a second wave. It's not for me to say right when there is going to be a – when we can be more mobile when we get back to work as normal. If for example this gets extend or if we have another wave, clearly there will be an impact on consumer spend. So I’d rather at this point not project into next year but feel given the reliable backlog, given the surge work and the pipelines that we have that while we believe we'll be down from our original guidance, the midpoint was $1.765 billion, where the analysts have us at this point I think is a very balanced view.

Unidentified Analyst, Analyst

Thanks for answering my question.

Operator, Operator

Thank you. And our final question is from the line of Josh Vogel of Sidoti. Your line is now open.

Josh Vogel, Analyst

Good morning. Thank you. So, in thinking about the opportunity for share gains, could you just share some insight as to whether you think it could come mostly from buying that other vendors handle or maybe even a greater percentage of taking clients in-house volume because they don't necessarily have the flexibility or agility to go remote or virtual?

Ken Tuchman, Chairman and Chief Executive Officer

I believe the opportunities we have are substantial. The good news is that there is a considerable amount of business out there because major corporations realize that the only way to survive is to virtualize their operations. Our e-tailing clients are thriving, and those focused on logistics in a virtual environment are experiencing record volumes and significant growth. The businesses facing challenges are the ones that depend on in-person interactions, especially with the current lockdowns. However, all of them recognize that this new normal has permanently altered consumer habits. For instance, my wife, who never thought she would use grocery delivery services, now relies on them. Services like Uber and Amazon have introduced people to the instant economy, prompting a greater acceptance of virtual solutions. Every company that incorporates virtual options needs customer experience capabilities, whether in banking, insurance, retail, healthcare, or government. They all understand the necessity to virtualize, allowing them to leverage our digital and engagement capabilities. We believe that as we move forward, this presents a positive opportunity for us to grow. We will take some market share from competitors with less robust infrastructures, and we also see potential in attracting new clients, particularly those who realize that a mix of internal operations and partnering with TTEC would have been more beneficial.

Josh Vogel, Analyst

Thank you for the insight there. And just one last one, one prior comment when you're discussing the potential for the hybrid model in this new normal and I was curious what maybe the margin profile, if you could give any thoughts on what the margin profile of the Engage business could look like if we see that structural change with half the workforce working at home or remote and maybe there's less reliance on the brick-and-mortar footprint? And is there an opportunity maybe to pare that brick-and-mortar footprint down a little bit and maybe given how well things are going in North America, maybe move some of that volume back to the U.S.? Thank you.

Ken Tuchman, Chairman and Chief Executive Officer

I believe we are definitely going to observe a trend of businesses shifting, in some instances from offshore to nearshore, and in others from nearshore to onshore. Some clients may have felt a bit uncertain and possibly overcompensated by allocating too much business to a specific country. Regarding real estate, it's evident that we own a substantial amount of property, and we fully plan to rationalize and restructure our locations to ensure better social distancing measures are in place permanently. All of our sites, both those currently operational and those still open, have been adhering to necessary protocols, including social distancing, real-time temperature checks, and nightly fogging with antibacterial treatments. However, we will also assess our overall reduction in real estate as we transition to more at-home working arrangements. There remains considerable uncertainty about what percentage of clients ultimately will be comfortable with at-home work. Therefore, it is too early for us to make significant changes to our real estate, but we are evaluating these factors on a global scale. Additionally, there are certain countries where at-home work may not be as feasible, particularly offshore.

Josh Vogel, Analyst

All right. Got it. Thank you, and hope you both are doing well and stay safe.

Ken Tuchman, Chairman and Chief Executive Officer

Thank you and same to you. We appreciate it.

Operator, Operator

Thank you for your question. That is all the time we have today. I will now turn the call back to Paul Miller. Thank you.

Paul Miller, Senior Vice President Treasurer and Investor Relations Officer

Yes, we're concluded. You can close the line. Thank you.

Ken Tuchman, Chairman and Chief Executive Officer

Thank you everybody.

Operator, Operator

Thank you. And this concludes TTEC's first quarter 2020 earnings conference call. You may disconnect at this time.