Prepared remarks
Please continue to stand. Welcome to DTEK's second quarter 2026 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 T-TECH. I would now like to turn the call over to Bob Belknapp, DTECH Group's Vice President, Corporate Finance. Thank you, sir. You may begin.
Good morning and thank you for joining us today. T-TECH is hosting this call to discuss its second quarter 2026 results for the period ended June 30th, 2026. Participating on today's call are Ken Tuchman, Chairman and Chief Executive Officer of T-TECH and Kenny Wagers, Chief Financial Officer. Yesterday, T-TECH issued a press release announcing its financial results. While this call will reflect items discussed in that document, for complete information about our financial performance, we also encourage you to read our Form 10-Q for the period ended on June 30, 2026 and the latest 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 of the date of this call, and we undertake no obligation to update this information as a result of new developments that may occur. Forward-looking statements are subject to a variety of 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 2025 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.
Good morning and thank you for joining us today. Q2 was a challenging quarter with performance that fell short of our plan. While we're disappointed in our results, we remain confident in our path forward. We continue to execute a focused strategy to deliver measurable gains in revenue, cost efficiency, and profitability. With that operational context in mind, let me turn to our second quarter financial results. Revenue was $455 million, EBITDA was $39 million, free cash flow was $39 million, and net debt decreased $36 million. In a typical quarter, I'd spend more time on industry trends, new client wins, innovation, partner growth, and investment initiatives. While we have progress to report in all those areas, I want to focus today on the actions underway to fortify the resilience of our business. Across both T-TECH Engage and T-TECH Digital, our priorities remain clear. Continue to sharpen our go-to-market approach, reduce structural cost, and restore the business to our historic goals of growth and profitability. Let me start with our focus areas in Engage. First, we continue to improve pipeline quality and sales execution. While there is more work to do, we're seeing positive momentum with new strategic enterprise opportunities, higher growth digital services, and client wins across automotive, healthcare, retail, and travel. Second, we're partnering with clients to address financially underperforming programs through automation, offshore delivery, and operating model redesign, while maintaining a high level of service quality. In the event, however, a mutually beneficial path isn't possible, we're assisting clients with a professional transition. On the front lines, we're successfully deploying AI and automation in focused, practical ways to improve productivity, simplify workflows, and expand capacity across our operations. In parallel, we're simplifying our cost structure by streamlining operations, improving the return on vendor and partner investment, and shifting select support functions to lower-cost delivery locations. While these efforts are still underway, they're strengthening our operating model, contributing to better execution, and positioning Engage for improved performance. Now moving to T-TECH Digital, where we continue to successfully shift our CX technology and services mix towards the areas of highest client demand: designing, building, and operating CX solutions rooted in data, AI, technology, observability, and security. We're executing this shift with four priorities. Deepening our relationships with CX technology partners that are growing quickly with us; expanding strategically in EMEA and APAC regions; increasing sales coverage to better address the large number of opportunities in the market; and continuing to focus on operating the business efficiently with strong utilization and a model optimized for the best shore. Increasingly, enterprise clients are facing a set of complex technical and operational hurdles, but are lacking the specialized talent to successfully address them securely and at scale. By combining our deep technology expertise with strategic relationships across all the leading CX technology partners, we're helping them to be the best they can be, helping clients bridge this capability gap and accelerate their transformation efforts. As a result, demand for our specialized CX technology expertise continues to accelerate. This increasing market traction, paired with our disciplined execution and robust pipeline, reinforces our full year outlook: T-TECH Digital is on track to hit its revenue and profitability targets. Moving on, you may recall that earlier this year, T-TECH engaged PJT Partners, an independent financial advisor, to assist in the evaluation of various strategic and capital market alternatives. As T-TECH Digital continues to grow and demonstrate the strength of its differentiated platform, our Board of Directors has determined that the T-TECH Digital is a great opportunity and the time is right to initiate a review of strategic alternatives for T-TECH Digital. Our objective is to best position T-TECH Digital to realize its full growth potential and maximize shareholder value. During the evaluation process, it is business as usual for T-TECH. An essential consideration in this assessment is that over the long term, there will continue to be commercial collaboration and innovation between our Engage and Digital businesses. Our board has not set a definitive timeline for the completion of this review, and the outcome may take many forms, including T-TECH Digital remaining as part of T-TECH. In conclusion, I want you to know that I remain fully committed to this business. We know our progress will be measured by results, not words. I continue to be grateful to our clients, employees, partners, and shareholders for their continued support and commitment. And now I'll hand the call over to Kenny.
Thank you, Ken, and good morning. I will start with a review of our second quarter 2026 financial results before providing context into our updated full year 2026 financial outlook. In my discussion of second quarter financial results, 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. Turning to our results. On a consolidated basis for the second quarter of 2026, compared to the prior year period, revenue was $455 million compared to $525 million, a decrease of 13.3%. Adjusted EBITDA was $39 million, or 8.7% of revenue, compared to $52 million, or 10.1%. Operating income was $26 million, or 5.7% of revenue compared to $37 million, or 7.2%. And EPS was $0.03 compared to $0.22. Note that the higher normalized tax rate in the second quarter of 2026 compared to the prior year had a negative impact on EPS of $0.08, which I will address later in my comments. Foreign exchange had a nominal impact on revenue, adjusted EBITDA, and operating income in the second quarter over the prior year period. Turning to our second quarter 2026 segment results. In our Engage segment, second quarter revenue decreased 12.1% over the prior year period to $351 million. Operating income was $14 million or 3.8% of revenue compared to $18 million or 4.6% of revenue in the prior year. As stated in our first quarter commentary, we forecasted lower first half revenue for Engage compared to the prior year. This was primarily driven by planned revenue declines associated with our rationalization of a small number of underperforming clients, as well as a seasonal public sector client engagement that accounted for approximately 24% of the year-over-year revenue reduction. While these factors were anticipated and reflected in our outlook, our second quarter results were impacted by additional pressures concentrated within a small number of clients in our public sector and technology, media, and communications portfolio. We are working closely with these clients and taking appropriate actions to improve performance in the third quarter and beyond. The balance of the Engage business performed in line with our second quarter expectations. As the business returns to anticipated sequential revenue growth in the third and fourth quarters, we also remain keenly focused on preserving our profitability and cash flow generation through further operational efficiencies and cost management initiatives. Actions are already underway to drive impactful savings in the second half of this year and into 2027, which I will address further in the segment's updated outlook during my closing remarks. The Engage backlog is $1.5 billion, or 98% of our full-year 2026 updated revenue guidance at the midpoint of the range, down from 101% for the same period in 2025. The Engage last 12-month revenue retention rate is 93%, an improvement over the 88% for the same period last year. In our Digital segment, second quarter revenue was $104 million, a decrease of 8.5% over the prior year. As previously mentioned, the second quarter 2025 results included a one-time sale of IP software, which generated $4 million of revenue at 100% profit margin. Adjusting for this, the second quarter 2026 revenue decline was 4.6%. Operating income was $12 million or 11.7% of revenue compared to $18 million or 16.1% of revenue for the same period last year. Adjusting for the 2025 IP software sale, the 2025 operating income was $14 million or 13% of revenue. Digital's second quarter 2026 financial performance aligned with our targets as we execute on the market shift from traditional CCaaS engagements to end-to-end CX transformations. Excluding our two legacy CCaaS investments, our professional services grew 13% year-over-year, adding to the 15.3% growth we communicated in our first quarter results. This growth reflects the ongoing momentum we are seeing in our expanded CX Technology Partnership Network that now includes more than a dozen strategic partners. We are pleased with the double-digit growth in these practices, but need to scale more rapidly to offset the year-over-year revenue pressure in our traditional CCaaS practices. Our digital pipeline remains strong, however, the average deal sizes are smaller and take longer to close as customers evaluate their investments in these transformations. As we balance this market shift, we continue to take steps to optimize our onshore-offshore delivery mix and overall utilization to maintain profit margin expectations. Based on our progress thus far, we are reiterating our full year 2026 guidance for the Digital segment. Our digital backlog is $364 million, or 85% of our 2026 revenue guidance at the midpoint of the range, up from 83% for the same period last year. Before I address other second quarter financial metrics, I want to provide an update on our credit facility. With support from our long-term relationship banks, we obtained covenant flexibility in the second quarter and future periods to align with our performance outlook. In addition to sufficient cash on hand and positive cash flow generation, the credit facility amendment provides adequate liquidity to support our business plan and operations. We remain focused on continuing to deleverage our balance sheet as evidenced by a $58 million year-to-date net debt reduction. I will now share other second quarter 2026 metrics before discussing our updated outlook. Free cash flow was $39 million in the second quarter of 2026 compared to $86 million in the prior year. The year-over-year decline is partially explained by the collection of an aged VAT receivable of $21 million in the second quarter of 2025 and an increase in capital expenditures of $5 million in the second quarter of 2026 compared to the prior year. The increase in capital expenditures was primarily due to accelerated purchases of computer equipment and accessories to avoid imminent price increases scheduled for the second half of 2026. In the second quarter of 2026, capital expenditures were $13 million or 2.8% of revenue compared to $7 million or 1.4% in the prior year. Approximately 63% of the current quarter spend relates to growth in product development, real estate expansion, and client technology investments. Our full year capital expenditure forecast remains unchanged but was higher due to the timing in the second quarter per my previous comment. As of June 30, 2026, cash was $94 million with $861 million of debt, primarily representing borrowings under our credit facility. The net debt position of $767 million represents a year-over-year decrease of $37 million as we continue to focus on cash flow generation and debt reduction. We ended the second quarter of 2026 with a net leverage ratio as defined under our credit facility of 3.85 times. Our normalized tax rate was 82.8% in the second quarter of 2026 compared to 43.4% in the prior year. The higher tax rate is largely driven by the impact of the valuation allowance against U.S. losses, partially offset by income in foreign tax jurisdictions. The second quarter tax rate is further impacted by the lower overall pre-tax income resulting in each dollar of tax expense having a greater impact on the rate. As mentioned previously, the higher year-over-year tax rate results in a negative 8 cent impact on our non-GAAP EPS. Turning to our 2026 outlook, I will now provide some context with regards to our updated full-year financial guidance. In our Engage segment, we continue to see a growing pipeline and a diversified number of new enterprise clients and embedded-based growth. However, we are seeing an elongated sales cycle as deals are becoming more complex and evaluating the mix of technology and human interaction. The new business we have closed is producing positive results, but often starts at smaller volumes to validate outcomes before scaling to significant growth. Due to these factors and our second quarter results, we are revising our Engage full year 2026 outlook. The year-over-year Engage revenue is now expected to decline from 4.1% to 8% at the midpoint of the updated guidance range, while the adjusted EBITDA margin is moving from 10.6% to 10.1%. The updated EBITDA margin at the midpoint still reflects a 110 basis point improvement over a full year of 2025. And we expect both sequential quarter-over-quarter growth for the remainder of the year and second half growth over the prior year. In our Digital segment, we continue to execute on the market remix through our expanded partnership network, focusing on CX platform transformations through data, AI, observability, and security. Our pipeline has shifted to these new and expanding market opportunities and is growing overall. Given our first half results and our most recent outlook, we remain confident in executing against our original full year 2026 Digital guidance. For an update on our 2026 full year guidance at the consolidated and segment level, please refer to our commentary in the business outlook section of our second quarter 2026 earnings press release. In closing, our goals to deliver profitable growth, cash flow improvement, and debt reduction remain a constant. Our execution against these objectives remains intact and drives every decision we make. We are confident in our path forward and are grateful to our employees, clients, business partners, banks, and other stakeholders for their support. I'll now turn the call back to Bob.
Thanks, Kenny. As we open the call, we ask that you limit your questions to one or two at a time. Operator, you may open the line.
Questions and answers
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. And to withdraw your request, you may press star two. One moment, please. Our first question is from Georgia Sutton from Craig and Helen. Thank you. Your line is now open.
Thank you. I wonder if you could walk through the process of going out to these customers who have lower economics from your perspective and you're trying to address it through automation and offshore delivery and then an operating model transition. What's the pushback you get from that? Can you just kind of tell us how far into that process you are and give us a sense of how many customers are involved?
Good morning, George. I'm not 100% sure I'm fully understanding your question. When you say 'lower economics,' are you speaking about customers that Digital is engaging with or Engage? This is an Engage question.
This is an Engage question. George, this is Kenny. I don't know if Ken heard the question. So what we're doing at Engage, and what we always do, is look at our customer base and rationalize at a customer level and line-of-business level the profitability and what it brings from a contribution margin standpoint. And what we are engaged in right now, we're looking at roughly high single-digit clients that we're talking to about their economics. So much of it is specific to the country they're in, the facility they're in, and the ability to cover those costs outside of just what the hourly wage is and what that markup is. And so what we do is we look at that P&L, we sit down with that customer, we walk through the contract and where we see opportunities for us to improve and where we ask for them to look at adjustments to the engagement we have. And so it's collaborative. We're an open book when we get to this point with the client because we're looking for a resolution. Again, we do this consistently and constantly in Engage, but we're a little heightened right now because we're looking for flexibility on seats offshore as we continue to grow our offshore mix. And so it does have a short-term impact to our top line as we rationalize with some of these clients. We hope to get to a mutual agreement, but if we can't, then we move on from them and then open up that capacity to other clients that we have.
I understand and appreciate it. Sorry for not fully understanding your question. That is exactly right, what Kenny just described. As you know, because you followed us for so many years, we have always tried to ensure that clients are accretive to our margin goals. And right now there's even more of a focus on clients that simply aren't achieving the profit margin that we believe is fair and competitive. In the past, what we found is some clients who we could not come to a resolution with, we always do a professional transition. Ironically, in multiple cases, they ended up coming back because they found that the price they were able to achieve with the other provider wasn't actually able to deliver. So although we're not necessarily expecting that, we've seen that happen multiple times. And the good news is it's just a small portion of our business that we're focusing on to drive a margin that is not dilutive.
Okay, and then just one question relative to Digital: you suggested now is the time for looking at strategic alternatives. I'm just curious, why is now the time?
You know, the business is doing quite well, and people are really excited about all the different partners that we now have and the impact that we're having on helping them with their AI integrations, etc. With AI valuations being strong in the market, it seems like it's a good time to just check and see if there's something that would be in the benefit of all the shareholders. And so that's really our overall approach. The fact of the matter is that any deal that we would do would still stay very, very close with the T-TECH Engage business, and we would still go to market together. So it's really just a matter of trying to gauge where the market is based on other transactions that we've seen take place. We want to see if we can capture some good value for the shareholders. The board has asked us to explore this and we all agree, so this is the path we're taking for now to see if there's something that makes good sense to everybody.
Once again, to ask a question over the phone, you may press star followed by the number one. You will be prompted to record your name and to withdraw your request, you may press star two. Our next question is from Maggie Nolan from William Blair. Your line is now open.
Hi, thank you. On the Engage segment: there's a couple of clients that have had shortfalls and delays in some of the closings there. Is this concentrated in a specific vertical or client type? Is there some sort of trend that we should be picking up on here? Or do you think it's reflective of broader demand pressure? And if you could comment maybe on how the pipeline and bookings look in more detail there, that would be helpful.
Hey, Maggie, it's Ken. Good morning. I'll answer part of that question. I believe you're speaking about what was the key driver of the second quarter weakness in Engage. And as we said, that is literally tied to two clients, the majority of which is one large public sector client that is having a problem with a third party that we're not affiliated with as it relates to the technology and the infrastructure they're offering. That third party's technology is not performing as they contracted. We're doing everything we can to work it out with the client. It's a public sector client, and we hope to have this resolved very shortly. That had the single biggest impact on the quarter. The other client was a smaller portion of the impact, which combined would have allowed us to basically achieve our plan.
Yes, Maggie, I think what's key is to outline the impact to Q2 from those two clients in the public sector vertical and the telecom vertical. For us, even as we talk about adjusting guidance for Engage, we are still looking at growth and margin expansion both sequentially in Q3 and in Q4, as well as the second half of this year being up to the prior year. So that gets to your second part: we are confident in the pipeline. Our backlog is $1.5 billion or 98% of our full year. We have line of sight to the net new revenue and the contracts that we have forecasted in the second half. And so we're confident in this new guidance, and we're confident in the year-over-year comps for the balance of the year to show that trajectory going forward because of the strength of the pipeline and the backlog. From a seasonality standpoint, we continue to see the same sequential quarter growth and the same trend line that we see year over year by quarter for the Engage business specifically.
Thank you. And then on your margin commentary there, Kenny, can you help me understand the balance between how much of the margin recovery in the back half is going to be driven by converting bookings on the timeline you're anticipating versus the actions that you're taking on some of the less profitable relationships you were just talking about?
Yes, I would say it's heavily weighted towards the new business and converting bookings. Again, margin rationalization is customer-specific, tied to facilities and country P&Ls. Looking at high single-digit customers for that margin rationalization that we've identified really doesn't come close to outweighing the margin improvement and profit improvement we see in our core business and the net new revenue growth that we've had year to date and will continue to have in the back half of the year. It's heavily weighted towards the new logos and the core embedded-based business and the internal improvements we are making, including the AI technology that we're building for our agents internally and the commercial AI solutions we are also selling to clients. That technology, partnered with our agents, is really driving the margin improvement in our embedded base and is the big driver of our margin improvement in the second half of the year.
Thank you. Our next question is from Vincent Colicchio from Barrington Research. Your line is now open.
Yes, how much additional restructuring expense should investors expect before the cost structure is right-sized?
Hey Vince, this is Kenny. I would say we are constantly looking at the cost structure of the company and evolving to make sure our costs align with the top line of the business and the gross margins we're driving. From a forecast standpoint for the balance of the year, it's going to be in line with what we have experienced in the first half, because we took cost actions in 2025 that annualized into the beginning of this year. So I would tell you it is roughly on the same trajectory that it has been for the previous four to six quarters.
And has the competitive environment changed since last quarter, particularly around pricing for Engage? Also, one of your larger competitors is having some financial issues — is that having an effect?
I would tell you that the pricing environment really hasn't changed in the last four-plus quarters. What we are seeing, and we've seen this for a couple of quarters, is with new logos specifically they're starting a little smaller. They're kind of dipping their toe in because they want to see the technology we've built and the use of technology with our agents to see the outcomes they're looking for and that we are delivering. So I wouldn't say pricing pressure is any different this quarter than it has been for the last four, but deal sizes are starting off smaller. We've got to prove ourselves more in the first three to six months to then get the next stage or step function change in growing that embedded base once we win the new logo.
Thanks for all that color. This concludes DTEK's second quarter 2026 earnings conference call. You may disconnect at this time.