TTEC Holdings Inc (TTEC) 2008 Q3 法說會逐字稿

Good morning. Welcome to the TeleTech third quarter 2008 earnings conference call. (OPERATOR INSTRUCTIONS) This call is being recorded at the request of TeleTech. I would now like to turn the call over to Karen Breen, Teletech's Treasurer and VP of investor relations. Thank you. You may begin.

Thank you. Good morning. Thanks for joining us today. My name is Karen Breen, Treasurer and VP of Investor relations. TeleTech is hosting this call to discuss results for its results for the third quarter ending September 30, 2008. Participanting today will be Ken Tuchman, our Chairman and CEO and John Troka, our Chief Financial Officer. Yesterday Teletech issued a press release announcing our third quarter 2008 results and also filed our quarterly report on Form 10-Q with the SEC. This call will reflect items discussed within that press release and form 10Q and Teletech management will make reference to them this morning.

We encourage all listeners today to read our quarterly reports on Form 10-Q.,Before we begin I want to remind you of our disclosure regarding foward-looking statements, Matters discussed on today's conference call may include foward-looking statements relating to our operating performance, financial goals, business outlook and future plans and developments which are based on managements current beliefs and assumptions, such statements are subject to various risks, uncertainties and other factors that may cause our actual results, performance and achievements to differ materially from those described. Such factors include but are not limited to reliance on a few major clients, the risk associated with lower profitability from or the loss of one or more significant clients, risks associated with achieving the companies 2008 business outlook, execution risks associated with expanding capacity in a timely manner to meet demand, and the possibility of additional asset impairments and/or restructuring charges. A replay of this conference call will be available on our web site through November 19th, 2008.

I will now turn the call other to Ken Tuchman our chairman and Cheif Executive Officer.

Thank you, Karen. Good morning to everyone joining us on today's call. I would like to take a few moments to review our financial results and balance sheet metrics and then provide an update on the current business climate. After that, John will discuss our third quarter performance in more detail. I am pleased with the quality of our third quarter financial results from both an earnings and cash flow perspective given these turbulent economic times. Our third quarter revenue increased to a record $349 million with revenue in our BPO segment growing by 5.7% over the year ago quarter and 9.5% YTD. Sequentially, our third quarter revenue would have been higher by $5 million had the US dollar not strengthened so dramatically relative to currencies of many of our foreign subsidiaries.

Our income from operations continued to show steady and meaningful improvement with third quarter operating margin increasing to 9.3% excluding unusual charges. This was a 90 basis point improvement over the 8.4% we reported in the year ago quarter. Our growing offshore footprint and improving workstation utilization across a 24 hour period has enabled us to report increased profitability year-over-year, since 2005. Our GAAP earnings increased 45% to $0.29 per share from $0.20 in the year ago quarter. Excluding items which John will discuss momentarily, non-GAAP earnings for the 2008 third quarter grew 20% to $0.30 per share compared to $0.25 in the year ago quarter.

In the midst of this global credit crisis, we have one of the strongest and most defensive balance sheets in the industry. The flexibility of our capital structure, consistency of our cash flow, strong current ratio, and low debt to equity is increasingly becoming a key competitive differentiator for both current and perspective clients. We generated $66 million of cash flow from operations in the quarter. And $125 million YTD. After subtracting capital expenditure, free cash flow was a record $51 million in the quarter and $74 million YTD. At the end of September, we had $123 million in cash, and are in a net positive cash position.

Our solid cash from operations continues to fund the majority of organic growth and our share repurchase program. It is also enabled us to invest in new and innovative capabilities to further distance TeleTech from weaker financially constrained competitors. Our return on invested capital was 29% this quarter which we believe is one of the highest of any infrastructure BPO based companies and more than double our ROIC at the end of 2005. Let me now turn to the current business climate. During the third quarter, we signed an estimated $70 million of new revenue primarily as a result of growth with existing clients. While the pace of new wins was right on track, we fell short on the level of wins with new clients. Internally, we had targeted $140 million of business wins in the third quarter, and we attribute the short fall entirely to a lack of internal resources dedicated to bringing on business of new clients.

The current economic climate is driving many of the global 1,000 to move an increasing amount of their insource business processes to outsourcing providers, and we have not focused enough on selling into these opportunities. As a result, we have missed out on wins that were recently in the marketplace. This is an issue that is within our control, and we are confident it can be corrected. The aggressive expansion of our sales organization is currently my highest priority. We have begun filling key sales positions this quarter and are actively working to complete several new hires over the coming months.

Looking ahead to our fourth quarter, there are three factors that will impact our top line performance. First, we believe softer volumes with existing clients primarily in logistics, retail, transportation, and travel and leisure industries will more than offset the ramp of new business wins in fourth quarter. Second, over the past several years, we have experienced significantly higher seasonal revenue during the fourth quarter due to increased Holiday and other business requirements of our clients. At this time, our clients are not projecting the significant increase in seasonal support needs for fourth quarter 2008.

Finally, significant strengthening of the US dollar relative to currencies of certain foreign subsidiaries such as Australia, Brazil, Canada, the Philippines, New Zealand, Spain and United Kingdom has reduced our expectations for sequentially revenue growth in the fourth quarter between $20 and $30 million. In summary, we expect that our fourth quarter revenue would have been flat sequentially at $349 million if the effects of foreign currency were excluded. While the factors I just discussed are leading to a near term compression of revenue growth our profitability continues to improve and the macro drivers of our industry have not changed.

We are very encouraged by the number of new deals entering our pipeline and with the discussions we are engaged in with global sea level executives and by their strong commitment to increase out sourcing and acquire more market at cost competitive capabilities. Many of our clients in the Global 1000 have expressed limited visibility for the coming quarter and this in turn affects our visibility as well. As in the past, we plan to provide an update on our 2009 business outlook when with we release our fourth quarter results.

Let me now turn the call over to John, after which I will make a few closing remarks.

Thank you, Ken. Good morning. I would like to like to provide some additional detail on our third quarter financial results. As outlined in yesterdays press release and form 10Q, we reported record third quarter revenue of $349 million an increase of 4% over the third quarter last year. Our revenue this quarter would have been higher by $5 million, had it not been for the translation impact of the strengthening US dollar, relative to the functional currency ofcertain foreign subsidiaries. Our offshore capacity continues to expand with 4500 BPO workstations added YTD, and now represents more than 60% of our total delivery capability.

Our ability to deploy this many global workstations reenforces the rapid scale ability of our worldwide delivery platform. Our gross margin this quarter increased 100 basis points to 27.6% compared to the year ago period. This increase was due primarily to the continued ramp of our offshore business. Our SG&A increased to $51.2 million or 14.7% of revenue, up from 14% in the year ago quarter. This increase was primarily due to $2.1 million of final expenses, from the completed equity compensation review and restatement of our historical financial statements. Excluding these expenses, SG&A would have been 49.1 million or 14.1% of revenue which is consistent with the year ago period.

Our third quarter GAAP operating margin was 7.8%, up from 6.9% in the year ago quarter. Excluding restructuring impairment and restated related charges, totaling $5.1 million, our operating margin was 9.3%. This is an increase of 90 basis points from the 8.4% operating margin in the third quarter of 2007, which also excludes unusual charges. Our third quarter results also included $3 million of equity compensation expense or about $0.03 per share. This compares to $3.5 million or approximately $0.03 per share in the year ago quarter.

Excluding this expense, and the unusual charges I just described, our third quarter 2008 operating margin was 10.1%. GAAP EPS for the third quarter increased 45% to $0.29 compared to $0.20 in the year ago quarter. Excluding the asset impairment restructuring and final restatement related expenses, along with an unusual tax benefit our non-GAAP EPS was $0.30 an increase of 20% over non-GAAP EPS of $0.25 in the year ago period. Our effective tax rate for the quarter was 20.3%, this rate was positively impacted by a $2.9 million reduction in our deferred valuation allowance for our UK entity. We were able to reduce this allowance based on continuing profit improvement from the launch of new client programs, and aggressive cost improvement efforts in this country. We continue to believe that our future effective tax rate will range between 30% and 33%.

Turning now to our balance sheet. We ended with $123 million in cash and a debt to equity of 29.5%. This ratio was up slightly from prior periods merely due to the 75 million in share repurchases we completed in the third quarter which reduced our stockholders equity. Our current ratio is 2.4 times and the strength of our balance sheet provides us with plenty of liquidity to fund our continued growth. Our DSOs were 66 days in the third quarter, down significantly from 70 days in the previous quarter and unchanged from DSOs in the year ago quarter. We continue to proactively manage cash collections, to enhance our working capital and free cash flows. Capital expenditures for the third quarter were $15.3 million, the majority of these expenditures related to the addition of nearly 1900 BPO workstations primarily in Mexico and South Africa.

We also continue to invest in the expansion of our information technology, and platforms. We expect to add approximately 1200 BPO workstations during the fourth quarter, bringing our total additions for the year to approximately 5700 workstations. We believe total capital expenditures for 2008 will now range between $60 and $65 million. We generated record fee cash flow of $50.7 million during the quarter, up 40% compared to the $36.3 million during the third quarter 2007. We have ample liquidity to fund our operations, given our $123 million of cash and $110 million of borrowing capacity under our credit facility. We continue to effectively manage our working capital and FX exposures to enhance our liquidity and protect our profitability given the current financial market volatility. In summary, TeleTech is a company built for long term sustainability, and we believe that our prestigious client base, strong balance sheet and global footprint will enable us to continue our leadership in this dynamic environment.

With that I will turn the call back over to Ken.

Thank you, John. In conclusion, 2008 will certainly go down as an extraordinary year, which presented exceptional challenge for both TeleTech and our clients. Our businesses performed well in light of significant market volatility. We will continue to provide superior results for our clients while maintaining a strict pricing and profit discipline. As in the past, we will continue to conservatively manage our balance sheet, liquidity and capital deployment needs. It is during these difficult times that the true staying power of a company is revealed and I firmly believe that our solid balance sheet will enable TeleTech to both maintain and build upon its leading industry position in the coming years. That belief is reaffirmed by the significant amount of stock we acquired in the third quarter. We completed $75 million in share repurchase and plan to continue this program in the coming months. Now , to open the call to your questions thank

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Josh Vogel with Sidoti and Company

Good morning and thank you. Ken just on your last comments their about the share repurchases, I was just curious how many were bougth back duringthe last quarter and what was the price paid.

We purchased 4.8 million shares, and I believe the average price was around $15.50 per share.

Okay, great. and now outside of the peso what other currencies are you currently hedging against?

Josh this is John, the other currencies we are hedged against are obviously the Phillipine peso you mentioned, the Candian dollar, the Argentinian peso and the Mexican peso.

And Philippine.

And the Philippine peso is our primary hedge is in the Philippines.

Okay. Nothing else against the Euro?

Yeah, a very small amount in Euro. We have a program that is in Great Britain or contract in Great Britain that is done in Spain as well that is paid in Euro. We have a mix there, but that's a very small amount.

We also have a small hedging for the Aussie, the Kiwi etcetera.

Okay. Great. Now, I know you're not discussing '09 and I am not trying to really get a feel of what you want to do on the top line there, but if I am doing my math right, over the last five quarters you signed over $430 million in new business and I was just curious how much of this business you see contributing to the top line in '09?

Well, again, as we have said in the past, the business that is being signed most of it right now is going through unusually long ramp periods due to the complexity of the business. The average ramp of a new specialist is in the nine week time frame. So, many of these awards are taking 9 - 12 months plus just to get to the majority of their ramp. So to answer your question, the business that we saw, the first two quarters of the five quarters that you mentioned, we will definitely fully appreciate and realize in 2009.

Okay. And just to confirm that was about 200 million in Qs 3 and 4 of last year?

Yes, approximately.

Just lastly of the new business that has been signed over the last five quarters has any of it been canceled or curtailed?

I would say a small percentage of it has been maybe curtailed, some of it a little bit of it has been delayed. But for the most part, the majority of it is, has been kept in tact. We have had some business which was rather unusual with a client that was very satisfied that after we finished launching them in one region made a decision that they wanted them moved all the way across the world to another region. So, we didn't lose any business, we just simply moved them from one offshore location to another offshore location, and that clearly delayed the rest of their overall ramping. That's now all done and behind us and now we can continue to bring on more business from that client.

Okay. Great. Well, thank you very much.

Thank you.

Thank you. Our next question comes from Mr. Bob Evans from Craig-Hallum Capital.

Good morning everyone.

Morning.

First, maybe John or Ken can you talk about SG&A? It was up sequentially Q2 versus Q3 a decent amount if I am looking at it right. I am just wondering if there's reason for that or trying to get an understanding of what trend might bethere.

There's a couple of reason, Bob. This is John. In the second quarter we to our update to our various insurance reserves based on actuarial studies. So there's some benefit from that particular update in the second quarter number which reduced second warder. Our equity compensation expense for the third quarter is higher, the grant we did in the third quarter for both certain employees. and our board members, their annual grant under their plan. So that drove some of it, and then there was a change in the third quarter relative to our incentive compensation plan between the second and the third which increased our cost in the third quarter.

Can you elaborate on the change in incentive compensation?

Yeah, I mean literally it was the original plan on incentive compensation that was put in place, and it was, and in a situation where it wasn't funding and so there was nothing in the second quarter that plan was modified by our compensation committee and therefore, there was funding that occurred in the third quarter.

Okay. Should -- looking at Q4 should we perhaps see SG&A down some given that some of these events appeared to people on Q3 specific?

Yeah, again we will go through the semiannual process on our actuarial studies and to the extent, that that indicates we should reduce it, I don't expect to see any reduction, the equity comp will be consistent and again, the incentive comp should be consistent.

Okay. Also, Ken can you comment a little more on the sales force you referenced that earlier in terms of trying to get new business, did something change there where you maybe lost a couple of people or can you elaborate in terms of what happened there?

Sure. Really, what has happened is that we have had a maniacal focus on our embedded base, and frankly, did not have enough overall focus on what we internally call new logo sales, and so the embedded base was doing pretty well in generating a fair amount of business quarter-over-quarter. But, the reality is that we weren't out and still are not fully out in front of the whole market, benefiting from the amount of opportunity that are out there. So we have been adding dedicated sales people that their soul focus is only to bring on new accounts in the global 1,000. And the fact of the matter is that we messed up, and we are apologetic and not happy about it. But we probably should have had several more people, sales people focused in this area. We have the budget dollars for it and we are actively recruiting as well as we have already brought on several people. The good news is at that this this something that is very correctable and I think the management has a track record here when we say we are going to do something we do it and it will bring these people on, and make sure that we are fully invited to every single dance and are participating in every single opportunity that exists.

Now, from an opportunity standpoint, I mean how would you characterize the, the pipeline of potential opportunities from an industry standpoint and maybe compare that to you know, how it was a year ago.

You know, we, we continue to believe that the opportunities out there are getting better. We are seeing them, we believe they're bigger. We believe that there is much more willingness of companies that either A historically have chosen not to out source, to out source as well as B we believe that there is much more opportunity from client that is are out sourcing that now want to out source substantially more, and see what we are seeing as this continued theme that we started talking about well over a year ago of consolidation and the fact of the matter is that I would say a high percentage of our growth that took, is taking place thus far in 2008 is all related to vendor consolidation. Our clients are saying they want to do business with one to three vendors world wide, and they are very concerned about some of the smaller vendors, whether it be their financial situation, whether it be just their lack of scale, lack of technology, and consequently we think there's a lot of opportunity out there and we are seeing it in our pipeline. We are having very productive meetings with several global 500 company CEOs, and we believe that those meeting will lead to meaningful business that has the potential of being material in 2009.

Okay. And as it relates to 2009 you are not giving specific guidance but if I kind of you know doryx my math in the envelope, I meant, is 80 you know we look at it and say you have a chance to do maybe 80 to 100 basis points of operating margin improvement given where currency trends are and so forth, because you have some benefits as well. Is that Can you give some color, is that in the right ball park.

Think that is something that we can continue to do.

Okay. Okay, and final question as it relates to the buy back, you know, you have got 25 million left on the authorization. Assuming the valuation is in the range that you brought back or lower should we expect the company to continue to buy back as you are getting to '09?

Yeah, I can't speak for the board. We have a board meeting in December but what I can tell you is that in the past they have been very supportive of looking at what is the most [acreative] thing our company can do. And at this point in time, betting on something that we know and believe in, that is trading as inexpensively as we are, has been somewhat of a no brainer. And so I think it is safe so to say that our board will, will come to a similar conclusion this time around and will give us more authorization. But we will approach that in the December time frame, and if we get approval then we will certainly announce that and put it throughout.

Okay. Thanks for taking my questions.

Thank you.

Thank you. Our next question comes from Shlomo Rosenbaum from Stifel Nicolaus and company.

Hi. Thank you for taking my questions. First, I want to talk a little more about the operational aspects of what happens when you have some business that is sort of falling off as you are ramping up some other business in the context of the margin improvement comments that we just made. I would have thought that if you are having some head winds where the business and volumes are not materializing that it would be much harder for you guys to improve your margins going forward and realistically, you know, having flat mar I margins is probably a good outcome and I want to ask you what you thought about that.

With well, I am not sure I fully understand the question. Let me repeat what I think you said. I think what I heard you say that if you have some client that is are experiencing volume reductions, wouldn't that create a situation where it would be more difficult to increase your margins. Is that what I heard you say?

In the context of as you have to replace that revenue, you are ramping up other business, and usually their, that business is a business that is falling off is usually higher margin, the business that is ramping up is usually lower margin.

Yeah, but I think that what, what is taking place is that a lot of the business that is experienced volume reductions is in Canada and the US, and/or Australia. And the business that is fact we are winning is business that is going offshore, and therefore, what that is doing is taking business that was not performing at levels that we would like in the first place and, you know, as we back fill new business, it is better operating business offshore.

This is John. With that I mean the key obviously is as that business comes off, in those end country markets and we have talked about this before, I mean our strategy is to strength the footprint that we have in those countrys and continue to increase our global footprint. So we are taking costs out of the business at the same time we are ramping it down. So, with the higher margins in the offshore, the reduction of cost on the inshore locations we are getting that.

In addition to that, our workstation turn is going up, and we have told all of you that one of the most profitable things we can do is drive higher utility out of an existing working workstation so it was at 1.2 it is now at 1.3 which means we have picked up a full hour and that is very important to us. Our goal is to continue to add an hour every year. So we believe that will continue to drive more profitability. It also means we don't have to necessarily build as many overall workstations which drives our ROI fee up as we get better overall utilization.

Okay. Let me just follow up on a similar vain though on CapEx, if the revenue growth in general is slow given what's going on in the economy I would expect that since characterized the CapEx is 75% to 80% growth CapEx that the capital intensity of the business should decline but given the context of you are talking about moving out of some geographies into other geographies, is that a fair assumption if the revenue is not growing or do you just, basically say you are going to be taking, taking down some workstations, building other workstations the capital intensity remains the same. Is that clear, question.

This is John. I mean we would anticipate that our CapEx would moderate a bit as we go forward for a couple of reasons. One we do have to build workstations in new markets offshore. We will have that on going need. Some of the movement in the migration that we are seeing, though, however, is from first example Asia back into the Philippines where we have quite a bit of capacity and the great news again, this is how we are increasing turns, it is going into that existing capacity because it is a different time zone. So we are seeing a bit of that, which will help us relative to our future capital requirements, but we will continue to be looking for new markets in South Africa, we launched our first center. We have increased its size and now we are looking to build another facility in Spouth Africa to again continue to take these offshore revenue opportunities, and for 2009, we will be looking for another new market because it is important that we continue to identify those and build them out as the Philippines for us is becoming quite large and quite significant and at some point in time we are going to have to you know, put the growth in new locations.

Expect the moderate a little bit but not as much as you would think in commensurate with the revenue not growing the same way?

I guess --

We haven't given the revenue growth is going to be yet at this point. So right now our plan is that we are going to continue to keep billing workstations and we tend to not build them and sit on them. We are focused on just in time and so I think you will see if in fact revenues pull back slightly because of the economy or because of client volumes then naturally we will slow down our build out, but at this point in time we think there are more deals to be won and we think there's more capacity that needs to be built so that we can continue to bring on these large clients.

one last one on liquidity. How much cash and availability do you guys believe that you need? In other words, how far are you comfortable if the board was authorized in term of operations that you need to maintain in terms of liquidity.

I think some of what we would look for and we did look at this obviously in light of what was going on in the markets is at least a quarters worth of operating cash or access to that type of money. Our biggest expense is payroll and that's the one we need to make sure we can fund on an on going basis.

But I think if you look at the fact we generated net free cash flow of over $51 million or so in net cash, I think it is safe to say that regardless of what the board authorizes there will be plenty of cash to be able to more than fulfill the authorization and that most likely would not even utilize all of the free cash flow when you think about how stock purchase plan is executed, the time in which it is done, and the amount we can acquire based on our overall trading volume. That's not something that we are concerned about, and we believe it is one of the best aspectsover our business and how it is operating as it relates to the amount of net cash it kicks up to the bottom line.

Thanks a lot.

Thank you.

Thank you. Our next question comes from Murray Erinson from Janco Partners

Thanks, good morning. I was wondering if you talked a little bit about gross margins, you talked about the outsourcing business and how that has been moving things directionally. If you look out the next couple of quarters can you talk about what you are seeing there?

Is that another way of asking pricing or I'm not sure I understand the question.

My understanding was that the offshore portion of the business was helping the gross margins and I am just trying to understand the mix given the kind of shifts you are seeing in the spending with some of the customer, how that should impact gross margins near term.

Yeah, what I would tell you is that if you look at the last two year trend of our business, somewhere between 85% and 90% of our business has been growing primarily offshore. So, that obviously explains one of the main reasons why our margins have lifted, why our EBITDA and net operating margin continues to expand. We see no slowdown in that trend at this point in time. As a matter of fact, we think there's an acceleration to that trend right now, just due to the fact tat more and more of these Global 1000 companies are coming to an epiphany that the way their going to make it through 2009 and 2010 is by substantially reducing their costs, and if they are heavily dependent upon large amounts of human capital that would happen through engaging an out sourcing partner.

Perfect that helps, I had another question about the working capital side of the business, if you could maybe help me understand a little bit what some of the moving parts were this quarter as they contributed to free cash flow and maybe what that typically looks like in a fourth quarter for you.

I mean relative to working capital I mean in light of what was going on, I mean we are getting real aggressive in managing our working capital both on the collection side to make sure our receivables are coming down and also on the payable side making sure we are paying in the appropriate time frames. You know, the other thing that plays heavily into the change in working capital is payroll periods and when they fall and so to the extent that we have a payroll right at the end of a quarter that has a large bearing on our working capital. We don't anticipate that we are going see any significant reduction in our working capital, our ability to manage it in the fourth quarter.

Okay. Thank you very much.

Thank you.

Thank you. Our last question today comes from Howard Smith from First Analysts.

Yes, good morning. Thank you for taking my question. It looks like the international VPO utilization at the mature sites open more than a year, is down year-over-year, and I would wondering if you could discuss that and can your, is your sales investment for the new business sales people targeted at these more international VPO or is it across the board and then I have a follow up?

On the sales side I will answer the first part of the question and John will answer the second part. On the sales side we are increasing sales across the globe, in Europe, Asia, and North America, as for the, the international segment, I am going to let John explain to you the variances that you are seeing.

Relative to that capacity, Howard, I mean the reason that that utilization is decreasing in the international segment is we are seeing a good migration again to our offshore locations, so we are serving those particular clients in some of our offshore locations. Obviously we can't close all of the capacity until, you know, we get a large amount of the client out of any given facility, but that is something that we are constantly managing and will continue to be managing as we move forward and more of this work is being transitioned again into other locations. So that is why it is down a little bit.

Okay. And then this is more of a technical l question. The $20 to $30 million of currency impact, do you expect to feel in the fourth quarter could you break that out wean the two operating segments?

Howard, I don't have that at this point in time. I mean we will take a look at that and we can get back to you with that, but I don't have it broken between the various operating segments.

Okay. Thank you.

Thank you.

Thank you. That will conclude today's call, we appreciate everyone atenning. We will speak to you soon. thank you, this concludes the con for example call. All parties may disconnect at this time.