On the Road: TTEC Holdings


      While it has been a very challenging time for all of us during the COVID-19 pandemic, it has been a surprisingly fruitful time to be a stock market analyst. Access to the management teams of our holdings and of companies in our research pipeline has never been better. This resulted from a combination of improved management availability (because most executives were working from home), and the emergence of effective video collaboration software.

      While many of us miss the experience of visiting management teams when we are on the road, we have adapted to on-line interviewing. In the case of TTEC Holdings (“TTEC”), Pembroke’s initial investment was made in November 2019, just before COVID-19. Since that time, we have had numerous management meetings which have enhanced our understanding of the business opportunity.

      What does TTEC do?

      TTEC is a customer experience (“CX”) technology and services company that is in the early innings of a transformative shift away from providing labour-intensive voice solutions for customer service (i.e. call centres) to digital cloud-based omnichannel CX products. TTEC has built its digital technology segment revenues to more than 20% of total revenue and we expect this high-margin, highly persistent segment, to continue growing at 15–20% annually in the next few years.

      TTEC’s core Engage product, which includes the traditional call centre offering, performed very well during the pandemic and proved out the importance of high-quality customer support services. Large enterprises and governments alike depended on TTEC’s expertise to react to the new environment. The result is that this seemingly less exciting, legacy segment, now has an improving growth profile.

      We have followed the CX industry for over 20 years and were very familiar with the management team at TTEC. The founder, Ken Tuchman, was a pioneer in the outsourced CX industry. He started the business in 1982 and still owns over 60% of the equity.

      The initial growth phase of the CX industry was spurred by the desire of many consumer-facing companies (e.g. airlines, banks) to outsource their call centres from high-cost jurisdictions to low-cost states within the US. Eventually, operations also moved to lower-cost countries, such as the Philippines.

      A rush to outsource created a big initial tailwind for the CX industry. Several companies, including TTEC, went public in the mid-90s. While the underlying economics of the businesses were solid, we were cautious on the industry at the time because the premise of the industry was largely based on simple labour arbitrage and had low barriers to entry. The injection of significant capital into the industry led to price competition and disappointing returns.

      During the intervening time, we stayed in touch with the management team at TTEC as we were always intrigued by the CEO’s vision, resilience, and entrepreneurial spirit. Members of Pembroke’s investment team met with him many times in various forums.

      By maintaining our relationship with him and his team, we were fortunate enough to revisit the stock at an important inflection point. The industry was transforming itself to become more technology-enabled, and TTEC’s shares offered an attractive combination of growth and value because most investors were still viewing the company through the traditional labour-intensive call centre prism.

      What led us to make an investment?

      1. An appreciation of the fast-growing digital CX solutions
      2. A strong tailwind for the outsourced CX industry driven by the growth of e-commerce and the emergence of customer service intensive businesses such as Peloton
      3. Strong free cash flow generation that had enabled the company to substantially shrink its share base over several years, thus increasing the company’s per share earnings potential
      4. TTEC’s improved profile on Wall Street following a secondary offering, which also created an entry point for us

      How has it played out?

      TTEC has produced very strong results since the shares were purchased, and the shares have begun rerating to reflect the business’s current and future growth prospects. Despite headwinds for some of the company’s key customers, TTEC was a net beneficiary from COVID-19 due to growth in e-commerce (i.e. the challenges of service and fulfilment) and a surge in work helping governments implement various programs.

      TTEC’s success during the pandemic has accelerated interest in outsourced CX, and the company’s pipeline has never been more robust. TTEC also made an important acquisition which has broadened its digital tool set.

      Despite the rise in the share price since purchase, TTEC remains reasonably valued and offers the possibility of a “double play” from earnings growth and valuation expansion. Pembroke does not believe investors are adequately valuing the company’s persistency, free cash flow, and growth prospects.

      Because TTEC generates high returns on capital and generates significant free cash flow, it does not need outside capital to implement its business plan. Therefore, the expected growth in earnings and free cash flow should benefit current shareholders. The CEO is a large shareholder and draws minimal compensation from the company, so he has a great long-term interest in maximizing shareholder value. We have plans to go and visit him again now that we are heading back “on the road”.




      Back to Top of Page


      Other Articles Of Interest


      This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.