Q4 2023 TTEC Holdings Inc Earnings Call

Participants

Paul Miller; SVP, Treasurer & IR; TTEC Holdings, Inc.

Ken Tuchman; Chairman & CEO; TTEC Holdings, Inc.

Shelly Swanback; President, CEO, TTEC Engage; TTEC Holdings, Inc.

Francois Bourret; Interim CFO; TTEC Holdings, Inc.

George Sutton; Analyst; Craig-Hallum Capital Group LLC

Maggie Nolan; Analyst; William Blair

Mike Latimore; Analyst; Northland Capital Markets

Kathy Chan; Analyst; Bank of America

Vincent Colicchio; Analyst; Barrington Research

Presentation

Operator

Welcome to TTEC fourth-quarter and full-year 2023 earnings conference call. (Operator Instructions)
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

Good morning, and thank you for joining us today.
Vitec is hosting this call to discuss its fourth quarter and full year financial results for the period ended December 31, 2023.
Participating on today's call are Ken Tuchman, Chairman and Chief Executive Officer of Ditech, Kelly's one back President of TiTech and Chief Executive Officer of TiTech date and France, one of Blue Ray and from senior Accounting Officer.
Yesterday, TeleTech issued a pressing financial results followed, although results if reflect items that are discussed in that document for complete information about our financial performance. We also encourage you to review our 2023 Annual Report on Form 10 K.
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 opinion as to the date of this call, and we undertake no obligation to revise this information as a result of new developments which may occur forward. Forward-looking statements are subject to various risks, uncertainties and other factors. It could cause actual results to differ materially from those expected in the slides today.
For a more detailed description of our risk factors, please review our 2023 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 Tim.

Ken Tuchman

Good morning, and thank you for joining us today. 2023 was a dynamic year to say the least of the past several quarters, we've been discussing the challenges posed by the macroeconomic environment on businesses across industries and geographies as the strategic CX technology and services partner for many of these large and complex enterprises. The market dynamics in the second half of the year moderated our performance in 2023. For the year, revenue was $2.46 billion. Adjusted EBITDA was $272 million or 11% of revenue, and adjusted EPS was $2.18 per share.
In 2023, we had some bright spots as we made progress diversifying our business with several new clients, geographies and offerings. We grew our client base with approximately 100 meaningful new relationships in TTEC Digital and TTEC Engage. We completed a strategic phase of geographic expansion with several new offshore locations and laid the groundwork to scale and roll out new operations in many new countries. This year, we added multiple new offerings to our portfolio, including expanded and continue the growing ecosystem of AI enabled solutions for TiTech, engage and T. tech digital. We built on up on our premier partner status with our leading CX technology and hyperscaler partners.
And we continue to be recognized as the best employer by Forbes Magazine for the third consecutive year as we move to 2024. The macroeconomic environment continues to be fluid with even further headwinds arising both domestically and abroad. Over a third of the global economy is officially in recession, with an even larger percentage trending in that direction.
While we're seeing momentum with new client wins across both business segments, we expect these incremental headwinds to persist and continue to necessitate a conservative outlook for 2024. Our view on 2024 reflects the current economic backdrop and three very specific challenges in our Engage segment that are putting pressure on our outlook for both revenue and margin.
The first challenge relates to a conservative client mindset to meet short-term budget constraints. Some clients are driving their forecasts lower and in many cases, changing their forecast horizon from 90 days to month to month until they get better visibility. In turn, these actions are reducing our visibility and impacting our revenue forecast.
Second challenge is isolated to a large long-term client. One of our tenured clients recently informed us that they plan to exit one of their many lines of business that we have supported for multiple years. While relationship remains very strong with this client and we continue to service their customers across several other business lines of the discontinuation of this one line of business will have an impact on our top and bottom line in 2020 for 15.
The last challenge is one of timing, a topic that we've discussed in our past conference calls in the last half of 2023, several new prospects delayed decision making due to lack of visibility and spending constraints. Consequently, our bookings levels were significantly lower than in the past quarters. As we turn the corner into 2020 for several of these opportunities closed and became wins, the combination of delayed client signings from second half of 2023, along with the time that it takes to fully ramp.
These clients is creating a lag effect in 2024. That delays normalized revenue run rate and margins to offset these challenges. We're laser focused on execution with a keen eye towards margin optimization across TiTech, AI, enabling is enabling us to rewire our business and unlock innovation in everything that we do. Every client pitch every solution. Every process provides an opportunity to improve with AI capabilities, woven.
And now let me share an update on our TiTech Engage priorities due to our growing client demand we're scaling our new offshore geographies and driving improved profitability. We've established anchor clients in each of the new geos and thus far as demand is robust, we expect margins will improve as we drive more volume into these offshore locations.
Next, we're helping our clients pursue the right AI strategy that balances human AI driven experiences are practical and data-driven approach to integrating AI is focused on delivering efficiencies without sacrificing empathy and quality.
We're integrating these modern tools and our operations to automate administrative tasks, personalized and accelerate associated training and unlock valuable insights across the customer lifecycle. We've moved into full production with several clients. And while still early days, the improvements in customer associate experiences are compelling. And last, we've accelerated our margin optimization IT initiatives that will yield efficiencies going forward. Shelly will expand further on our initiatives.
Shifting gears to T. tech digital, our deep and differentiated partnerships with all the premier CX technology players hyperscalers as it has established us as the leading CX transformation partner operating at the intersection of CCASCRM. and AI. with complex technology implementations across the globe.
Clients are embracing us as a trusted partner that understands the practical application and the economics of a I guess, looking for us excuse me, they're looking to us for our experience, designing, building and operating sophisticated CX platforms that integrate into their existing digital ecosystem and deliver meaningful ROI with our differentiated approach and T. tech digital, we achieved record bookings in the fourth quarter and expect this momentum to continue through 2024. For 2025 and beyond, we expect to deliver double digit growth.
We're successfully increasing the percentage of professional services and recurring managed services that deliver higher growth and margins. Our offerings lead to more transformational deals that take advantage of our full suite of CX solutions. These engagements are a critical enabler of our growth. We're confident that our go-forward plan for TiTech will pave the way for significantly improved results as we exit 2024 setting us up for renewed growth and improved profitability in 2025 and beyond.
Now transitioning to our capital deployment strategy. We have always tried to optimize our capital structure for the benefit of our shareholders, whether it be M&A, share buybacks or dividend to maximize shareholder value given the current environment.
Earlier this week, our Board made the decision to prioritize our capital initiatives and debt reduction associated with strategic acquisitions. The decision was based on the continuous economic headwinds, persistently high interest rates, which we expected to begin to normalize by now and the desire to reduce reduce our debt in order to continue investing in the future has revised the dividend and is in line with our stock price and the dividend yield typical for our industry and the broader market. This reprioritization of our capital allocation will allow us to continue to invest in growth, increase the flexibility with our capital structure, accelerate value creation and continued expansion of our ecosystem and AI solutions.
Before I close, I'm thrilled to welcome Kenny wagers to TiTech. She officially begins his role as Chief Financial Officer today, Kenny's finance and operational experience includes complex operational transformations and execute significant cost asset optimization initiatives. His career spans almost three decades and includes leadership roles in large Fortune 500 corporations, including UPS and Amazon as well as venture-backed startups. I'd like to personally thank France will operate for his contribution as interim CFO. He will continue to be a valuable member of our executive leadership team as TI Tech's Chief Accounting Officer.
In closing, I'm disappointed in our 2024 outlook.
It does not reflect the standard to which we hold ourselves accountable.
Please know that you have my full commitment along with the rest of Teck's leadership and our Board of Directors. We've navigated change multiple times before and have always come through stronger. I'll continue to be inspired by the dedication of our employees across the globe and grateful to our growing and valued client base. We look forward to sharing our progress throughout the year. And now I'll hand it off to Shelley.

Shelly Swanback

Thank you, Ken, and good morning. As Ken just described, 2023 was a year of challenges and also some notable wins over the past 12 months, we made continued progress with our diversification across clients, geographies and solutions. However, our disappointing outlook for 2024 reflects three specific challenges, primarily impacting our Engage segment.
First, our revenue is being impacted by the carry forward from 2023 of conservative volume forecast and budget constraints at our embedded base clients as well as the shift to more offshore delivery. In this environment, our clients are more frequently adjusting their volume forecasts, which is impacting our visibility. Next one of our large clients recently informed us of their plans to exit one of our lines of business, which will impact our revenue.
Our relationship with this client remains extremely strong as we continue to support them across many other lines of their business. And lastly, the delayed client signings for both the second half of 2023 and early 2024 are impacting our 2024 outlook.
The typical lag effect between signing and full ramp of new opportunities is delaying normalized revenue and margins given the short term challenges impacting the top line and eight were rebalancing our fixed and variable cost structure we have a rigorous focus on fine-tuning operational delivery across every aspect of our business. However, in the near term, our fixed cost structure will be higher as a percentage of revenue we're confident these fixed costs will realign with revenue, and we will get back to positive growth in 2025, delivering double digit EBITDA.
I echo Kevin's sentiments about our disappointing 2024 outlook, and I stand by his confidence in our path forward.
In 2023, we demonstrated progress on our diversification strategy, and we're well positioned to build on that momentum.
Now let me discuss the progress with each of our business units. Starting with ENGAGE. Our investments in geographic expansion and AI enabled solutions are paying off with recent new wins. These expanded capabilities are helping us meet our clients' most pressing CX demands, including a shift from onshore delivery to more cost-effective, nearshore and offshore geographies, a desire to consolidate and move away from smaller regional players and diversify from the large players and a need for an innovative AI-enabled approach that is scalable and also economically viable so far in the first quarter, we won several new strategic growth accounts that are multi geo and have the potential to scale well beyond the initial scope of our work. While these new clients will take time to fully ramp.
We're already pursuing additional growth opportunities with these clients. Overall, our engaged pipeline remains strong and includes many similar large opportunities with new clients that have complex requirements and diverse geographic needs. The pipeline also has several cross-sell opportunities, including our managed services and AI enabled solutions at our embedded base clients. Over a third of our sales pipeline is now made up of deals with annual contract values over $10 million. In addition, our offshore pipeline has grown more than 35% year over year and represents over 50% of our total pipeline. Given client demand, we will continue to invest and scale additional new geographies and are on track to deliver approximately 35% of our revenue offshore by the end of the year.
One new deal highlighting the benefits of our diversified geographic approach is our recent win in financial services. Our relationship with this client began with TTEC Digital and implementing a new global CX technology platform. We expanded our services to include a comprehensive workforce optimization model and offshore delivery.
We're now ramping frontline delivery with financial ambassadors as well as back-office compliance teams across multiple geographies for the clients. We're starting in Latin America with plans to begin work in A-Pac this summer. While our business has a long sales cycle. We're encouraged by the number of active opportunities with new prospects who have the potential to grow into strategic growth accounts, fueling our client diversification strategy.
Now onto the topic of AI. Clearly, this is a focus for all clients in the current environment. While many of our clients have completed proof-of-concepts and many cases, the commercial viability of scaling these solutions is still unclear. Our ecosystem of AI enabled services is helping to eliminate the noise with a focus on augmenting associate productivity. We're currently operating about 50 client programs involving close to 10,000 AI enabled associates over 20% of our total associate population. We expect this percentage to continue to scale over the months and years ahead.
Our ecosystem of AI solutions and engage includes language enhancements, generative learning, knowledge management and conversational intelligence to name a few clients are keenly focused on a differentiated and impactful AI approach. We plan to keep expanding our ecosystem by introducing new AI solutions as they mature. We believe that we are well positioned to continue to innovate and meet client demands.
Wrapping up Engage, while our outlook is disappointing, because of the challenges we noted earlier, we're encouraged by our progress and the demand for our new geos continues to grow. We're winning with new strategic growth accounts, and we are leaving AI into all client engagement.
Moving on to future digital. In the fourth quarter of 2023, we saw client decision making accelerate, and we delivered record bookings for the quarter this year. The team is off to a strong start in the first quarter with continued bookings traction and a growing revenue backlog. This momentum gives us confidence that outside of our Cisco business, we will deliver strong double digit revenue growth in both professional services and recurring managed services.
Our bookings momentum is broad-based across the sales pipeline and includes a very healthy mix of transformational deals and exciting follow-on opportunities with current clients. Our focus on cross-selling our full suite of capabilities to expand our impact at existing clients is delivering results more than half of our current pipeline is made up of follow-on opportunities with existing clients and these opportunities move faster through our sales process.
Follow-on opportunities include helping our clients expand the scope and scale of their CX Cloud platforms and unlocking the power of AI and analytics, our work with a high end travel company as one example of the differentiated value of TTX digital focus on client business impact, we were chosen to help redefine their end to end customer experience across the entire customer journey. Our team started by building a strategic roadmap that identified and align to their CX priorities.
We then prioritized migrating their contact center technology to the cloud, consolidated all of their customer data into state-of-the-art CRM platform and simplified the associate experience by integrating all of the systems into a single pane of glass. So early results include a double digit increase in both sales and service handle times and a notable increase in sales conversion. Our work with this client is a great example of how TiTech digital is improving customer experiences at the intersection of CKSBRM. and AI. and analytics to take full advantage of our momentum and demand for TTEC Digital Solutions.
In the markets, we're increasing our investments and partnerships, AI, product innovation, sales and talent to drive further growth in closing across all of TiTech, we're laser focused on margin optimization as well as diversification of our clients, partnerships, solutions, geographic delivery. We're committed to improving cost efficiency in the business as an ongoing discipline, ensuring our competitiveness rather than viewing it as a onetime optimization effort.
I stand by Ken's confidence in our team and our path forward with strong fundamentals in place, including trusted new and tenured client relationships, a differentiated portfolio of proven CX solutions and a committed and dedicated team. We're well positioned to overcome the current dynamics, and I look forward to sharing our progress in the quarters to come. And now I'll hand it over to François.

Francois Bourret

Thank you, Shelley, and good morning. I will start with a review of our fourth quarter and full year 2023 results before providing context into our 2024 financial outlook and my discussion on the fourth quarter and full year financial results. Reference to reference to revenue is on a GAAP basis, while EBITDA operating income and earnings per share are on a non-GAAP adjusted basis, a full reconciliation of our GAAP to non-GAAP results is included in the tables attached to our earnings press release for fourth quarter financial performance was in line with in line with our expectations on a consolidated basis revenue exceeded our guidance.
Operating income and EBITDA margins would have ended in the high end of our guidance range. If it wasn't for a $7.3 million unforeseen one-time costs for employee related to health care expenses. As a result, profit margin ended near the low end of the range.
While this negatively impacted both segments, I will provide details in my Engage segment review, given its larger impacts that business unit on a consolidated basis for the fourth quarter of 2023 compared to prior year period, revenue was $626 million compared to $658 million, a decrease of 4.9%. Adjusted EBITDA was $68 million or 9.2% of revenue compared to $87 million or 13.1%. Operating income was $42 million or six points, 6.7% of revenue compared to $70 million or 10.6% and EPS was $0.37 compared to $0.91.
Foreign exchange had a $6 million positive impact on revenue in the fourth quarter over the prior year period, while negatively impacting operating income by $2 million, primarily in our Engage segment on a consolidated basis for the full year 2023 compared to the prior year period, revenue was $2.46 billion compared to two point $44 billion, an increase of 0.8% and decrease of 1.1%.
Organic operating income was $200 million or 8.1% of revenue compared to $249 million or 10.2% in the prior year. Adjusted EBITDA was $272 million or 11% of revenue compared to $320 million or 13.1% and EPS was $2.18 compared to $3.59 in the prior year. Foreign exchange had a $4 million positive impact on revenue, while negatively impacting operating income by $2 million, primarily in our Engage segment.
Turning to our fourth quarter and full year 2023 segment results in our digital segment, the fourth quarter revenue was $119 million, a decrease of 2.1% over the prior year period. Being digital revenue, excluding our Cisco practice, grew 7.1% in the fourth quarter. Operating operating income was $18 million or 14.8% of revenue, in line with the prior year period. Normalized for the $1 million additional healthcare expense, digital operating income was 15.6% of revenue in the fourth quarter. Digital delivered a solid performance relative to our expectations on both top and bottom lines. In addition, and as mentioned by Ken digital exceeded our bookings forecast for the quarter in part attributable to prior quarter's delayed engagements closing into Q4. Professional services bookings were particularly strong with high demand across most of our six consulting practices.
Recurring managed services bookings were also strong in the quarter. Digital backlog increased to 343 million or 69% of our 2024 guidance at the midpoint, an improvement from 65% in the prior year. On a full year basis, digital 2023 revenue increased 5% to $487 million over the prior year period. Operating income was $62 million or 12.8% of revenue, compared to $65 million or 13.9% in the prior year period. Full year 2023 revenue benefited from strength in most of our CX technology practice areas. Recurring managed services and professional services revenues both grew 2% over the prior year. Recurring managed services continues to represent approximately 55% of digital total revenue. If we exclude the Cisco practice over the same period, the digital segment grew 9.6%. The modest operating margin pressure on a full year basis was a function of revenue, revenue, mix and investment in CX leadership and engine and engineering talent. We are encouraged by the revenue mix of opportunities and increased number of clients modernizing their CX technology infrastructure, including adoption of cloud-based technologies.
We are pleased.
We're also pleased with the continued digital bookings momentum in the new year. Our Engage segment revenue decreased 5.5% to $507 million in the fourth quarter of 2023 over the prior year period, operating income was $24 million or 4.8% of revenue, compared to $52 million or 9.7% of revenue in the prior year period. Engage fourth-quarter revenue exceeded our guidance due to stronger volume than anticipated in the financial services and telco verticals. As I mentioned, our Engage segment operating income margin was on the lower end of our guidance range, primarily due to an unprecedented high level of employee related healthcare claims, take a self-insured in the United States and face in a limited number of high-cost claims in December. It impacted us by approximately two times the normal level, so do not expect this situation to reoccur in future years.
These unforeseen costs decrease the Engage operating income by $6.3 million in the fourth quarter. Excluding the non-operational increase in healthcare costs, engaged operating profit margin was 6%, beating the high end of our guidance of guidance range. On a full year basis, Engage 2023 revenue was $1.98 billion, relatively unchanged over the prior year period. Operating income was up $138 million or 7% of revenue compared to $184 million or 9.3% in the prior year period. Faneuil acquisition as this annual asset acquisition in April 2022 contributed 2.3% of inorganic revenue growth in 2023, offset by volume pressures in the second half of the year for the reasons previously discussed the Engage segment, the demand environment was softer than initially anticipated in the second half of 2023, primarily driven by clients' conservative views and lower projected 2024 budget.
While we are seeing some positive signs of recovery, the timing difference between near term volume reductions and the time to launch new programs is temporarily putting downward pressure on revenue. The Engage backlog for the next 12 months is $1.71 billion or 94% of our 2024 revenue guidance at the midpoint of the range, relatively unchanged over the prior year. Engaged Last 12 months revenue retention rate is 95% compared to 97% in the prior year. I will now share other 2023 metrics before discussing our outlook deck paid of $0.52 per share or $24.7 million, semi-annual dividend on October 31st, 2023. On February 27th, 2024, the Board declared the next and the next semiannual dividend of $0.06 per share or 2.9 million payable on April 30th, 2024, to shareholders of record as of April third, 2020, for a Board of Directors' decision to reduce the dividend reflects a prudent shift to prioritize our capital deployment towards continued investments in sustainable growth initiatives. In addition to debt reduction associated with strategic acquisitions, we have also taken other measures to increase our financial flexibility under amended credit facility, in addition to taking other meaningful actions to improve our cash flow, including margin optimization initiatives, which I will discuss shortly in my outlook remarks.
As of December 31st, 2023, cash was $173 million with $999 million of debt, of which $995 million represented borrowings under our recently amended $1.3 billion credit facility. Net debt increased year over year by $16 million to $827 million. Stronger free cash flow of $77 million in comparison to $53 million in the prior year was more than offset by acquisition related investments and capital distributions. Cash flow from operations increased to $145 million in 2023 compared to $137 million in the prior year. A function of stronger working capital cash conversion, offset by the lower profitability in large part due to $39 million higher interest expense over the prior year.
Capital expenditures were 68 million or 2.8% of revenue for the full year 2023 compared to $84 million or 2.4% in the prior year. The decrease is primarily related to reduced level of IT infrastructure investments despite our accelerated geographic expansion efforts, our full year normalized tax rate was 22.7% in 2023, relatively unchanged from 22.8% in the prior year, primarily a function of jurisdictional mix of income transitioning to our 2024 outlook.
I will now provide some context supporting our financial guidance as can outline our Engage segment faces three specific challenges impacting our 2024 financial forecast. Most notably, a long-tenured clients will be exiting a line of their business, supported by GTH, which negatively impacts Engage 2024 revenue and represents approximately half of the 8% revenue reduction. In addition to continuing his conservative mindset and budget constraints from Celtic enterprise clients primarily explains the remaining 2024 revenue reduction, especially in the first half of the year. The revenue decline and timing to rightsize the cost structure while balancing the support needed to ramp revenue in the second half of the year explains a 220 basis point margin compression in 2024.
As mentioned, are engaged margin optimization initiatives are meaningful and designed to transform the way we work it targets select areas of our business and adds 130 basis points to our 2024 margin. It said during this transition year the EBITDA margin percentage will not fully reflect the annualized contribution from these margin optimization initiatives. As revenue growth, the margin improvement efforts are anticipated to contribute to a more impactful margin run rate in 2025.
In our Digital business, we expect solid performance throughout the year are high margin, professional services and recurring managed services are expected to grow by 11% in 2024, driven by the high demand for cloud migration and CX technology. However, the onetime on-premise related revenue that averaged approximately 10% of digital revenue in recent years is anticipated to naturally decline by approximately 50% in 2024, putting pressure on digital overall revenue growth, while the shift in the revenue mix will improve Digital's profit margins over the long term in 2024, it will be offset by the continuous investment in talent as well as sales and marketing to maintain double-digit growth in 2025 and beyond accuracy across each of our practices.
Turning to the midpoint of our 2024 guidance, as outlined in greater detail in our fourth quarter and full year 2023 earnings press release. Gaap revenue of $2.32 billion, a decrease over the prior year sorry, GAAP revenue of $2.32 billion, a decrease over the prior year of 5.8%, adjusted EBITDA of $237 million, a decrease of 12.7% over the prior year and 10.2% of revenue compared to 11% in the prior year. Non-GAAP operating income of $172 million, a decrease of 14.4% over the prior year and 7.4% of revenue compared to 8.1% in the prior year. Non-GAAP earnings per share of $1.51, a decrease of 30.8% over the prior year. Other relevant guidance metrics include capital expenditures between 2.7% and 2.8% of revenue, of which approximately 55% is growth oriented the full year a full year effective tax rate between 23% and 25%.
Please reference our commentary in the business outlook section of our fourth quarter and full year 2023 earnings press release to obtain our expectations for the first and full year 2024 performance at the consolidated and segment level. In closing, we ended 2023 in line with expectations, but the recent dynamic in the Engage segment are caught causing a reduction in our 2024 revenue and margin outlook.
We are confident in our go-forward plan that focuses on growth and margin improvement with a series of initiatives in motion to support both as digital transformation continues to be a top priority for our clients. We are encouraged by the growing momentum with TTEC Digital. As we move forward, we will navigate the dynamic environment to position the Company to exit 2024 with a view towards long-term profitable growth.
I will now turn the call back to Paul.

Paul Miller

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

Question and Answer Session

Operator

(Operator Instructions)
George Sutton, Craig-Hallum.

George Sutton

Thank you.
And Ken, you mentioned that you believe that one-third of the global economies are in a recession today. And I know you've expressed a similar belief for the U in effect being in recession. I would say the general narrative has been that we may be moving into a soft landing scenario. So I wanted to we can get a better picture of sort of your macro view as it pertains to your guidance and the expectation that you'll exit 24 in May better place.

Ken Tuchman

Hi, George. Good morning. When you ask my macro view, I'm not sure I'm understanding the question. I'm not an economist. So I want to make sure that I'm qualified to answer your question. So do you want to just give you a little bit more color on your question?
So that I can be more accurate.
So there's obviously a macro view that is built into your guidance, and it includes the scenarios that we're seeing where your clients are moving from 90 day visibility to month to month, you are seeing volume reductions at some clients. I'm curious how much of that is macro in your view and when does that lift?
Yes.
I mean, I think that what we're seeing I think the whole industry is seeing, I think is very simply that clients are operating and acting in a very conservative fashion. You can see that with everything from the cost optimization programs that they've announced to the layoffs that they've announced, et cetera. And so consequently, I think that that many, many clients for many, many industries are seeing lower growth and they're basically doing everything they can to trying to anticipate what's in front of them.
And I think that they don't necessarily know whether or not we're going to have a soft landing or whether things are just slowing down for a period of a period of time. I would agree that the in the US that the consumer still is acting somewhat resilient. But what we're seeing is that the consumer is becoming a much, much more conservative in their purchase decisioning. It's already showing up and what types of retail stores that they're going to versus where they were shopping at, et cetera, due to things like food prices being higher due to the fact that their rent are at a much higher level than they've been as a percentage of their income, et cetera. S
o all in all, I think that we feel that that the US hopefully can skate through this while a big chunk of the Western Western Europe and other parts of the world are already in an actual recession arm. So our goal and our hope is that we will get through 2024 and we'll be right back to seeing growth in 2025. But then interest rates will have moderated by then, I think the Feds will feel that inflation has come down a bit.
And I think the good news is what we're seeing is that clients are absolutely doing what they feel is necessary and critical, which is one of the reasons why our digital business is showing good signs of growth right now because so many clients who want to take advantage of any form of a I realize that they now have to move off their bare metal systems and into the cloud. And so that's an example of where we win when a client it has no choice to do something. They're doing it. And consequently, as we've said on several conference calls, prior to this call, on a high percentage of large enterprises do not have their contact center technology in the cloud as it relates to C. cap and therefore, we're benefiting from it.
So sorry, for the very long winded answer, but are we believe that that right now, clients are no longer is, let's say, confused as they were in the second half. We're seeing decision making taking place. That said, we're seeing from the time that we get a verbal commitment to the time that a contract to sign is absolutely elongated. And again, is really kind of very typical of what we experienced in in environments where where clients felt that they were going into a recession or where clients felt like they needed to tighten their belt.
They ultimately go through and sign the contracts. But I'm just simply telling you it's not like during COVID where there was an absolute sense of urgency and where we were getting contracts signed in 90 days and 120 days, et cetera. And so therefore, not only is the sales cycle elongated, but from the time of the verbal award to the time of the actual signing is taking a bit longer, I have no doubt that this is a temporary situation. We've experienced this before.
We've been through multiple recessionary cycles.
And so I'm very confident that this will this will lift and show path and that we feel we will be right back on track in 2025.
But we want to be conservative.
We want to be realistic about what it is that we're seeing.

George Sutton

Just a quick follow-up for Shelley from you talked about the proof of concept stage moving forward with a number of your clients. And you mentioned 50 programs and 10,000 associates affected by the AI. programs. So I'm not totally clear what you meant by that. I wondered if you could just explain that a little bit.

Shelly Swanback

Yes, good morning. George. So client 50 client programs, meaning we have various kinds of we're using various types of applications of AI at client. So example, think of it as a personal assistant to help agents access information to do their job better generative learning in terms of using some of these new technologies to change the way that we train associates, language enhancements, language neutralization sorts of technologies.
And so we have a number of these programs underway at clients. We typically start with a proof-of-concept or a smaller number of agents to test out the technology in their environment, how it works, you don't learn how to train the agents better to use those technologies and then scale from there. And so it's impacting about 10,000 agents across those 50 client programs. And we expect that over time, we'll have 100% of our agents that will be enabled with these various AI technologies.
What I would say relative just more generally around AI. As you know, we really see our clients right now leaning into the agent augmentation sorts of use cases, the kinds of things that I just talked about because the business case for them is compelling. And we actually have a set of tools that we're developing and testing and continuing to scale ourselves.
And we see compelling results. In one case, we saw 17% productivity increase from new agents by just giving them know it easier access to knowledge, if you will, sort of a personal assistant to help them find the information they need to do their job. Hopefully that answers your questions for.

George Sutton

Thank you.

Shelly Swanback

Thank you.

Operator

Maggie Nolan, William Blair.

George Sutton

Hi, everyone. This is Ken Cron signed on for Maggie Nolan. I was curious, are there any green shoots with clients that you guys are seeing that gives you hope that you can possibly hit the higher end of the guidance range?
Yes.

Shelly Swanback

So let me let me start from first of all, as we said in the digital practice, we've got really good bookings momentum and traction. Right now. We mentioned that over 50% of the opportunities in our pipeline right now are with existing customers and and I think this is important for two reasons.
One just demonstrates that as we expand our capabilities and the solutions that we can offer clients, you know, not only just helping them migrate their technology to the cloud, but then expanding the use of that technology, adding AI, not just doing CCA., but getting into CRM, it gives us an opportunity to do more with our existing clients. And it's also important because those opportunities tend to move through our sales process more quickly. So that gives us good confidence in our digital business.
On the Engage side. I mentioned this idea that we've got a couple of early wins here this year. We're calling them strategic growth accounts. And what does that mean? Will these are clients where we're starting, you know, initial scope of work maybe in the $10 million a year range, but area, but clients where we know we can expand our relationship.
Ken mentioned that it's taking time from a verbal win to a contract for launching new services. One of the things that I'm pleased about is with some of these new clients of ours, we're literally just in the early stages of launching the work that they've contracted. And we're already talking to them about new opportunities to be able to support them in other lines of business and then other scopes of work.

Maggie Nolan

Okay, great. Thank you. So that was helpful. And then just one follow-up, if I may. Are you guys able to provide any detail on the line of business that the long-term client discontinued and the general margin profile of this service?

Ken Tuchman

No. I mean, when we're not in a position to share anything about this client situation. What I can just tell you is this was this was a business decision they made based on their business factors. It didn't have anything to do with us. We just happened to be the main provider for them in this line of business, which is why it's having such an impact on our business.

Maggie Nolan

Okay, great.
Thank you.
Thank you.

Operator

Mike Latimore, Northland Capital Markets.

Mike Latimore

Sounds pretty healthy there, or are we back to sort of normal sales cycles now or it's just a little bit aways to go? And then it also sounds like, Tom, just the need for AI is driving a lot of the demand here. I just want to clarify that.

Ken Tuchman

I think we are definitely I think the sales cycle is is normalized, but I think it's normalized most likely by the my previous comments, which is that there is so much of the C cast space that is not yet in the cloud. And a lot of our clients have technology that, frankly is hitting end of life. And so consequently, that is really lighting a fire of ticket to move them to the cloud. And that's why we feel confident that that our business Donnelley our pipeline, not only did we have record bookings in Q4. We feel very strongly about first quarter, and we feel that with this will persist and that 2020 25 will we will see double digit growth as well as a profit margin. So yes, we feel very confident in the space as it relates to AI.
So I would say yes.

Shelly Swanback

A I would say of all of our clients are talking to us about AI. But at the end of the day before they can even get to a I really properly take advantage of AI, they really need to have their capabilities in the cloud. So I think that A., I might be one of the motivators just in general, but I also think the fact that they're receiving notices of end of life across a myriad of manufacturers that they're no longer going to support the platform that they were on guidance and then I guess staying on the topic and they I think there's been a general concern last couple of weeks at least that I could alone would benefit your digital business. Might have a industry impact in terms of just slowing interaction volumes to the contact center. And by a I mean, like virtual agents, not necessarily agent augmentation, but then kind of what's your general view on AI. longer-term as it might have, you know, what kind of effect, particularly very virtual agents that have on the Engage business?
What I would say is that we're embracing a I we view it as a very we view it as a positive to a change. We view it as a huge opportunity. I can't stress enough that at the end of the day, the market are they engaged marketplace for the most part is consolidated. There's roughly speaking five tier one providers that are in the marketplace and at the end of the day, all five of us are included in almost every major opportunity that's out there. On what AI. affords all of us, the entire industry is an opportunity to show our clients a way to increase quality and lower overall cost to serve.
Why does that matter? It matters? Because when you have a $400 billion TAM of which only $100 billion has been outsourced, even with interactions that potentially become partially self automated because there are more or less transactions, not interactions. The fact of the matter is there is more our more more TAM and more opportunity out there than the top five competitors combined could ever handle.
And I think we're I still feel very confident that the captive operations are beginning to realize that A., they're not that good at doing this business is become way too complicated, way too sophisticated and requiring more and more geographies more and more technologies and advanced processes. And so consequently, and it's our belief that that embedded base is going to continue to be the gift that keeps on giving as they begin to look for ways to reduce their employee count and drive better productivity. So do I think that it's going to have an impact on very low end transactions?
Yes, but that's not a space that we're focused on our business is not providing what your bank balances or when will my product arrive or whatever. That's that's just not the type of work that we're focusing on. The work that we're focusing on is work that that typically is assisting our clients in acquiring, growing and retaining their customer base and building a level of trust. And I think that you can only take a chat bot so far before it actually becomes disruptive in our long term customers relationship.
And I can tell you that when we have our meetings with our client advisory board and to achieve every single client that we have says that they are only interested in using AI in a selective way. And that they are very conscious of the fact that if they were to oversell served, that would have a negative impact on their business. So that's my way of saying that I think that it will have a positive impact. I think it will drive more clients to wanting to work with companies that know how to work with these technologies. And it's our goal and our hope to benefit from it.
Got it.
Got it makes sense.
Joseph Vafi of Canaccord. Your line is no.
Hey, guys.
Good morning.
Thanks for all the color. Maybe we could circle back. Just one more on AI here and going back. Shelley, I know you said that the the the agent augmentation application in one instance, I think you said drove 17% efficiencies, just which is great. I'm just trying to get a feel for how to you know, that level of efficiency using an AI, co-pilot or whatever you want to call it, how is that going to affect economics with clients on a per transaction or contract basis? Do you see sharing some of those savings with the client? Or how does that play out in?
Well, yes, yes. And just a clarification from the 17% was actually time to proficiency, meaning getting new new agents up to speed and being able to be proficient at answering questions and doing their job. And having said that, I think, you know, will there's there's there will definitely first of all, I would say that one of the reasons that we're winning these new clients right now is because of the AI tools that we're bringing to augment our agents. So I think this is absolutely something that's resonating with our clients and in some cases on because in all cases, there will be an opportunity pass on some of the economics to our clients, but also for ourselves, right in terms of time to proficiency in being able to keep agents engaged. And there's there were lower attrition. All of those things have we'll have a bottom line impact for us and also for our clients.
So that's helpful. And then maybe just kind of switching gears around global delivery. I know you really worked hard on that and made a lot of progress in 23. How do we know as clients are onboarding this year? I mean, you know, and looking at volumes and you know, there and end up and the drive to, you know, take costs down. How how how are you seeing China volume dynamics onshore versus offshore new accounts where they're ramping, you know, maybe moving volumes around globally with existing? Just kind of some color around those dynamics would be helpful. Thanks a lot, guys.
I think so first thing I would just say is our expanded geographic footprint, you know, absolutely strategic to our growth and profitability going forward and absolutely resonating with our existing clients, but in particular, helping us with these new client wins. But I'm encouraged by that. The wins that we've closed early this year and the ones we have in the pipeline, as Ken said, they're taking taking a bit longer than we'd like but I'm very encouraged by that. And most all of our client wins right now are multi geo. So leveraging our both our offshore and nearshore locations driven by these these new expansion geographies that we've talked about over the last 12 months.
Now as clients move into some of these new geographies, you know, they start with a pilot or sort of a contained effort to start with and then we scale from there. And so that's why this lag effect that we're talking about in terms of scaling some of this work in these new offshore geographies is making an impact for 2024. But I would tell you lots of interest in Latin America, lots of interest in Africa, in particular on and you know also, we're as we've talked about, getting into the Asian language space more and more as well. And so we're excited about the demand that we've seen for our clients across all of those areas around the globe.
Joe, I also want to just remind you as a backdrop that because we do a lot of complex financial services work that requires licensing as well as a lot of health care work that requires licensing that work has no risk of going offshore as it legally cannot. So and then on top of that, we do quite a bit of public sector and federal work, and that work also cannot go offshore. So what I would say is the good news is that our sales energies and our sales efforts are very focused on winning offshore business. Therefore, we're seeking out clients that have that have the interest and the need to offshore up. But the good news about the embedded base is that for the most part on it, it's very solid, so to speak, because of the nature of the licensing and of just the legal requirements of so to speak.
Right.
Thanks, Ken.
Thanks, Shelley.

Operator

Kathy Chan, Bank of America.

Kathy Chan

You guys. Thanks for taking my question. I just wanted to touch on offshore again a little bit more. I know you guys mentioned that you're expecting it to increase to about 35% of revenues by year end 24. What is it exiting 2023 right now? Is it going to be a more of a gradual increase? And can you just comment anything about kind of the size and those engagements now, are they is there any difference that you're seeing now in the pipeline versus before?
Thanks.
This was just started.
So we exited 2023 with about 30% of our revenue being coming from offshore. And as you stated, we're going to increase it to 35%. And when you look at ultimately the dynamic of our offshore revenue. That's where we're seeing growth next year expected to grow 5% year over year. So this is truly where we're seeing momentum right now in our top line and demand. And that's been really accelerating with our expanded footprint that we have now in multiple with multiple new geographies.
Got it.
And can you just talk about some vertical dynamic where you're expecting in 24? I know you called out financial services and telcos, our help for foreign gauge, but if any other color around, you know, what you're expecting to maybe do a little bit better. Are you expecting these dynamics to continue for one Q1 2014?
Yes, let me let me maybe focus on where we see new client win opportunities. I would tell you that we have several new very exciting prospects on in our BFSI sector. So financial services. We also have a couple of exciting wins that we'll be contracting here soon.
In the healthcare space, we will be at full ramp with our new client and pub sec in our New York State Metro by the end of Q1 we also have a couple of very exciting pub sec deals. And then outside of those verticals, we have one of our wins here early this year is actually with a global retailer. So that is a space we're seeing more and more and also in travel, I would I would pull I would say we have a number of existing clients in the travel sector where we see growth opportunities. So those are the ones that come to mind. First, Kathy?
Yes.
Vincent Colicchio, Barrington Research.

Vincent Colicchio

Your line is now open because of your German killer show you to what extent do you think some of the noise and confusion, if you will, around the impact of AI having an effect on demand because I tell it you're well.
I mean, I think what I would tell you is our clients want to talk to us about that, right? Because we're helping them sort out the noise and understand where they can really practically apply these AI solutions and get business benefits. So that's driven a lot of demand in the digital side. And as I said, every opportunity and engage. We're talking to our clients about where to apply AI, particularly with this, these use cases around a change mutation. So I think for us, it's driving a lot of great client conversation, lots of demand, as Ken said, every opportunity, every prospect, every pitch we're talking about AI, whether it's a digital opportunity to engage opportunities and let me let me though, let's say a couple of things.

Ken Tuchman

Number one, it's really imperative to understand that because we have a digital division that has a very unique skill set of working with every single major hyperscaler in a very deep way and in a partnering way down to the point where we're very involved in consulting with these hyperscalers, helping them with the product development, et cetera. On top of that, all the major SI cash providers where we have literally thousands of engineers that are our engineers that do absolutely nothing, but integrate to their systems. The fact of the matter is is that we can have an intelligent conversation with our clients about what it takes to actually bring in AI and to take advantage of it as well as understanding what are the best use cases that actually make the most sense.
I wanted to clarify something based on your question. If your question is is AI. having an impact on volumes. The answer is absolutely positively, not NoMa, no matter what there was a bunch of uproar about a client that put out a top, not our client, but a company that put out a press release having, um, you know, of real success with AI and how it was reducing their customer service associates. This is a company that is way behind the times. And when you go look at the AI. that they're using, which is online and very easy to validate, it is nothing more than the knowledge base system, virtually every client that we have already has a knowledge base system.
And therefore, it goes without saying if a client didn't have a knowledge-based system on their own. They're on the web on the Internet. Then of course, you be taking a lot more voice interactions than than than one who already has one. So what I would say to you is do we think that it will impact volumes? We absolutely think that will impact interaction volumes. And but we what we believe is more importantly is that it will enhance more of the complex interactions and allow our associates to get up to speed quicker, be more accurate with the information, I have much more understanding of wind to cross-sell win to upsell and have much better data on where the clients' mindset is so that they can serve the client in a much more sophisticated fashion.
And look, this is like every hype cycle, it's going to take years before clients are going to be able to truly take advantage of a I so I hope I answered your question. Happy to take any of these or any other questions about this offline, if you have more questions here.
That was very good color. Thank you for that. And then No. one one one other, are you seeing increased pressure on pricing or terms currently?
Well, it's no doubt it's a competitive environment on the Engage side and some but this is why we're still meeting with leading with AI enabled associates, our new geographic footprints and done, we feel good about our competitiveness.
Okay.
Thank you.

Kathy Chan

Thank you.

Ken Tuchman

Thank you for your questions. That is all the time we have today.

Operator

This concludes Ditech's Fourth Quarter and Full Year 2023 earnings conference call. You may disconnect at this time.