TTEC Holdings Inc (TTEC) 2010 Q3 法說會逐字稿

Good morning and thank you all for joining us today. This is Karen Breen, Vice President of Investor Relations. And TeleTech is hosting this call to discuss its results for the third quarter ended September 30th. Participating on today's call will be Ken Tuchman, our Chairman and CEO, and John Troka, our CFO.

Yesterday, TeleTech issued a press release announcing its financial results for the third quarter 2010 and we also filed our quarterly report on Form 10-Q. This call will reflect items discussed within that press release and Form 10-Q, and TeleTech Management will refer to it several times this morning. We encourage all listeners today to read our quarterly report on Form 10-Q.

Before we begin, I want to remind you of our disclosure regarding forward-looking statements. Matters discussed on today's conference call may include statements relating to our operating performance, financial goals, business outlook, and future plans which are based on Management's current beliefs and assumption. Please note that these forward-looking statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise this information as a result of new information that may become available after the call. Forward-looking statements are subject to various risks, uncertainties, and other factors that may cause our actual results to differ materially from those described. Such factors include, but are not limited to, reliance on several major clients, the risks associated with lower profitably from the loss of one or more significant client relationships, execution risks associated with ramping or migrating new business, and the possibility of additional asset impairments. and/or restructuring charges. For a more detailed discussion of our risk factors, please review our SEC filings along with our 2009 Annual Report on Form 10-K. A replay of this conference call will be available on our website through November 18. And I will now turn the call over to Ken Tuchman, our Chairman and CEO.

Thank you, Karen, and good morning to everyone joining us today. I'd like to start our call by reviewing our third quarter results. I will then provide an overview of our strategic borrowings for the coming quarters. After that, I'll turn the call over to John, so he can discuss our financial results in more detail.

Third quarter revenue was 271 million, compared to 282 million in the third quarter of 2009. Our offshore revenue was 123 million for the quarter, or approximately 45% of consolidated revenue. During the last three months, we were awarded an incremental $90 million of annualized new business from both new and existing clients, bringing our signing to $225 million year-to-date. We believe that our consultative approach to addressing the needs of C level executives and our significant investment in innovative technology play a significant role in clients' decisions to select our solutions. Our continuing investment in sales leadership and vertical industry coverage is paying off as well and we are encouraged by the increased momentum of our pipeline and the sales conversions as we look ahead to 2011.

Turning now to our operating performance, our operating margin was 7.4% compared to 7% in the previous quarter and 9.9% in the year ago period. On a non-GAAP basis, excluding unusual charges, operating margin was 8.9% of revenue. Earnings per share, excluding unusual items, were $0.29, compared to $0.32 in the year ago quarter.

Moving to the balance sheet, we ended the quarter with 159 million in cash and 154 million of net cash after subtracting outstanding debt. As we announced earlier this month, we replaced our $225 million credit facility with a five-year $350 million facility with increased global borrowing flexibility. The size, flexibility, and term of our new facility reflects the strength of our cash flows and balance sheet, as well as the overwhelming support of our corporate bank group and their belief in our Management Team's ability to execute. This places us in an extremely strong financial position to fund our growth requirements, to increase our share repurchase program, and to explore potential M&A opportunities.

As I mentioned in our last earnings call, major shifts are taking place on both the customer channel and technology front. Over the past decade, we transformed our delivery capabilities to capitalize on these trends and to further our industry leadership. We believe this places us at the forefront of the next wave of growth and we continue to be laser focused on the strategic priorities I discussed on our last earnings call, including, one, executing transformative solutions that harness the power of electronic and traditional commerce for clients who value and reward providers that deliver an exceptional customer experience. Two, further diversifying our revenue through innovative technology based offerings and less emphasis on labor based solutions. Three, continuing to manage the business with a keen focus on profitability through strong operating discipline. Four, increase our global sales investment and collaboration with industry leaders to accelerate revenue growth.

Let me take a few moments to reiterate how each of these priorities play into our overall strategic plan. More than two years ago, we recognized the dynamic changes happening with customer communication channels and the internet becoming globally ubiquitous. At that time, we began making significant investments in capabilities to enable companies to rearchitect their businesses and their processes to more effectively compete. Throughout the solution development cycle our industry focused subject matter experts expend a significant amount of time and resources to carefully understand our clients' businesses, market position, and strategic priorities, and to gain intimate knowledge of the customer experience with their brand. This enables us to build customized solutions aligned to specific needs and goals of every clients. This thoughtful approach to client engagement positions us as a trusted strategic advisor to clients and enables us to develop transformative solutions that optimize the service experience.

Given the rapid commoditization of products and services, clients realize that the service experience defines the brand and the brand perception determines the synergies. As a result, client requirements are increasingly complex and the marketplace is moving away from tactical solutions which merely offer lower cost offshore labor. Clients are looking for sophisticated technological driven solutions that drive operating efficiencies, meaningful intelligence, and actionable insight. Our transformative strategies and comprehensive technological solutions, combined with our commitment to operational excellence, are driving an accelerated pace of sales conversion.

Based upon our sales wins to date, which include eight new global clients and expanded business awards from more than a third of our existing client base, we've signed enough new business for 2011 to replace the nearly $80 million in revenue generated by the U.S. census in 2010. I believe that our investment efforts are gaining traction. Since our inception, investment in innovation has been a key component of TeleTech's strategy. Our vision for the future and the strength of our balance sheet has consistently allowed us to make significant investments in our solutions offerings and to continue to differentiate TeleTech within the marketplace. As we increasingly shift our focus from labor intensive solutions, we expect our technology based offerings to represent a growing percentage of our revenue and profitability going forward. This will come from the sizeable investments we've made over the last five years in our professional services, our on demand revenue generation, our data analytics, and our virtualized workforce solutions, just to name a few. This represents the seamless integration of nearly 40 proprietary technology offerings. In addition, we have a robust product roadmap to actively rollout further offerings in 2011 and beyond.

According to Gartner, 80% of the Fortune 1000 companies will buy cloud computing services in the next two years. Our on demand hosted solution leverages 100% IT based global infrastructure to deliver multichannel interaction routing, workforce optimization, quality assurance, and customized reporting on a flexible pay per use model across the globe. This provides our clients with a faster time to market and a variable cost structure that can flex to meet demand while eliminating the capital requirements and risks associated with deploying large, customized, on premise solutions. We continue to sign meaningful on demand engagements with leading global brands.

The ability to drive global commerce is critical to our clients and we continue to win business to help them do so. We process nearly four kerabytes of customer data daily to design customized and targeted campaigns to more effectively market and sell products for our clients. This has resulted in our ability to deliver more than $5 billion of annual commerce on behalf of our clients and an increasing percentage of our wins are in this area. This includes the management of more than 8,000 e-commerce micro sites, which provides our clients' customers with unique interactive experiences that drive affinity.

As competitive pressures and the wealth of information increases the need for smarter marketing and business strategies, clients desperately need data analytics. Our sophisticated technology platform and more than 15 years of experience in data analytics enable us to provide actionable recommendations for our clients, including segmenting, targeting their customer base, as well as predicting and reducing their churn. Now that the heavy lifting for the census has been completed, we have recently been awarded and have begun a data analytics program for them, given the wealth of information that was gathered during the U.S. census process.

We further strengthened our data analytics solutions through the integration of social media with the traditional support channels. In order to maximize customer value, companies must provide customers with tailored experiences that address their needs across all channels. We've been formulating our social media strategy over the past two years and our fully integrated capability allows us to analyze the vast array of information that's available about customer trends, preferences, and concerns across the web.

Shifting to TeleTech at home, our virtualized workforce solution is flexible and scalable, which delivers a turnkey--which delivers a diverse talent pool without the constraints of time, place, language, or culture. In the last couple of quarters, we've seen clients increasing the rate of adoption of this proprietary solution as they rationalize their corporate real estate investments and leverage the higher skilled agents and lower attrition and attractive economics of this offering. In addition to these investments and innovations, our solid profitability has also enabled us to continually globally invest in sales and marketing. Looking ahead to 2011, we will continue to increase our global sales investment to fuel our revenue growth going forward.

To further extend our offerings and our sales reach across the globe, we continue to forge strategic relationships. In addition to the valuable partnerships already in place, we've announced alliances with Cisco, SalesForce.com, Lithium, and now the American Banking Association, in the past two quarters.

In summary, I believe we are exactly where we want to be. We have the most innovative and comprehensive suite of products in the marketplace. Our balance sheet and our cost structure are as solid as ever. Our sales team is at full throttle. And our Management Team is 100% engaged and focused on growth and innovation. With this focus, I am confident in our ability to continue to deliver transformative strategy and solutions to our clients and to drive revenue diversification and profitable growth for our shareholders.

With that, let me turn the call over to John and after which I'll make a few closing remarks.

Thank you, Tim, and good morning. Let me take a few minutes this morning to provide some additional insight into our third quarter results. Revenue for the third quarter was $271 million, which as expected was consistent with the previous quarter and down from $282 million in the year ago quarter. Over the last two quarters our volumes have stabilized as measured by the number of calls and transactions we handle by client programs each business day. It is also important to note that while our revenues have been essentially flat the past several quarters, we have effectively replaced the revenue generated by the census program with new business and the seasonal work we typically experience in the fourth quarter. We completed the census program in August and our quarterly revenues from this program peaked in the second quarter at approximately $36 million.

Looking at our gross margin, our third quarter gross margin was 28.4%, up from 27.1% in the second quarter. Our gross margin in the year ago quarter was 30.9%. The year over year decrease is a result of lower overall revenue, a lower mix of offshore revenues, and an increase in available capacity.

Our third quarter SG&A was $40.6 million, or 15% of revenue, compared to 15.1% of revenue in the year ago quarter and 14.6% of revenue in the previous quarter. Excluding equity compensation expense of $3.4 million in the quarter, SG&A as a percent of revenue was 13.7%. We continue to aggressively manage our SG&A cost relative to our revenue. As we have discussed on previous calls, we believe the business can be effectively supported with SG&A costs in a range between 14 and 15% of revenue.

Our third quarter GAAP operating income was $20.1 million, or 7.4% of revenue. This compares to $19.1 million, or 7% of revenue, in the previous quarter. In the year ago quarter, our operating income was $28 million, or 9.9% of revenue. Adding back $3.9 million of restructuring and impairment costs, primarily related to employee severance, our third quarter non-GAAP operating margin was 8.9% of revenue. This is up 120 basis points from a comparable non-GAAP operating margin of 7.7% in the previous quarter.

We reported other income for the quarter of $7.3 million. This was driven primarily by a $5.9 million gain related to the settlement of a legal claim in an amount less than previously recorded. This claim was associated with the deconsolidated subsidiary, Newgen. Many of you may recall that TeleTech divested of Newgen in September of 2007 and we are glad to have this claim settled in a positive manner.

The remainder of other income is primarily the impact from FX translations on our balance sheet. Our effective tax rate was higher in the third quarter at 27.7% due to the pre-tax gain on the legal settlement being taxed at a 39% effective tax rate. When adjusted for nonrecurring items, including the pre-tax gain on the legal settlement, the effective tax rate was 22.4% for the third quarter and 24.3% year to date. We expect our full year reported effective tax rate will approximate 26%, or 24 to 25% when adjusted for unusual items.

Finally, our GAAP earnings per share was $0.31. Adjusting for the impact from the restructuring and impairment charges, as well as the gain from the legal settlement previously discussed, earnings per share was $0.29.

Turning now to our segments, our North American BPO segment reported an operating margin of 10.8%, down slightly from 11.8% in the previous quarter. This decline reflects the effective completion of the census program in August. The operating margin in the third quarter a year ago was 14.3%. The year-over-year decrease also reflects the completion of the census program, a lower mix of offshore revenue, and reduced capacity utilization.

Our international BPO segment significantly reduced its operating loss this quarter to $2 million from a $6 million operating loss in the previous quarter and a $2.9 million operating loss in the year ago quarter. This improvement reflects the efforts of our management team to improve program pricing and operating efficiencies, as well as rationalize underperforming capacity. Our international team continues to focus on further improvements and we expect the results of this segment to continue to improve as they successfully execute on their plan.

Focusing now on our cash flow and liquidity, we continue to be very pleased with our generation of strong cash flow. We ended the quarter with $159.2 million in cash, no borrowings on our credit facility, and $5.2 million of other debt. As a result, our total debt to capital ratio was 1.1% and our current ratio was over three times. Cash flow from operations was $45.3 million for the third quarter and $120 million year to date. After excluding capital expenditures, free cash flow was $40.2 million for the quarter and $102.5 million year to date. Our DSOs in the third quarter were consistent with the second quarter at 65 days and continue to be within our targeted range of 65 to 70 days.

Our third quarter capital expenditures were $5.1 million, compared to $4.8 million in the year ago quarter. Year-to-date we've invested $17.4 million in the maintenance and enhancement of our industry leading infrastructure and proprietary suite of technology enabled offerings. For 2010, we expect capital expenditures to range between $25 and $30 million.

We continue to strongly believe that one of the best uses of our available capital is our share buyback program. During the quarter, we continued actively repurchasing our shares, buying 828,000 shares for approximately $11 million. This brings our year-to-date purchases to 3.2 million shares for approximately $48 million. At the end of the third quarter, we had approximately $27 million remaining for future share repurchases under our current Board authorization.

As Ken mentioned earlier, in October we secured a five-year, $350 million revolving credit facility. We are very pleased with the new facility's investment grade pricing, flexible terms, improved covenant structure, and the ability to increase the borrowing capacity to $500 million. While our previous credit facility was not set to mature until September of 2011, we chose to take advantage of the attractive market conditions to secure longer term access to capital to support TeleTech's organic growth and other strategic initiatives. The new facility matures in September of 2015.

In summary, we are pleased with our continued ability to generate strong operating income and cash flow. With this foundation in place, our management team remains focused on delivering profitable revenue growth in the quarters ahead. As outlined in our press release, we are reaffirming our previous 2010 business outlook and believe that revenue will approximate $1.1 billion and operating margin, excluding unusual charges, will range between eight and 8.5%.

Thank you, and with that, I'll now turn the call back over to Ken.

Thank you, John. In conclusion, we remain committed to operational excellence and staying at the forefront of innovation through the continued expansion of our technology based offerings. As a result, we're confident in our ability to address the evolving opportunities in the marketplace and position ourselves for renewed growth. I look forward to updating you on our outlook for 2011 during our fourth quarter call in February. Thank you.

Thank you, Ken. As we open the call to your questions, we would ask that everyone limit their inquiries to just one at a time so we have the opportunity to take everyone's questions. Operator, you may now open it up to questions.

Thank you, ma'am. (Operator Instructions.) And our first question this morning comes from Howard Smith with First Analysis.

Yes, good morning, and congratulations on the results. My question is in regards to the sales traction. Mr. Bellini has been there a relatively short time. I think you said there's kind of a six-month sales cycle. So I'm curious if the strengths you're seeing you think is a result of kind of new efforts that he had instituted or if this was just stuff that was in process previously kicking in.

Hi, this is Ken. I think it's a combination of things. I think certainly Joe being here has helped. But in addition to that, I think that we had a pretty good pipeline prior to Joe coming here and a fair bit of momentum. And so, therefore, I'd love to tell you that sales cycles have compressed down to six months. That wouldn't be very accurate. But instead, I think that our product offering is getting significantly stronger, more diverse. I think that our management has never been more focused. And I think that the clients that we're talking to really need what it is that we have to offer and consequently it's creating a higher conversion rate.

And I'll--.

--And then, the last thing that I would just tell you is that from an operating standpoint we've always said that, if you're not performing in the number one position, clients aren't going to give you more business. They have other alternatives. And we are very confident that in virtually every case we're right now ranked number one, and in many cases there's a significant distance where the business is being shared with some other providers. So therefore, that helps in them giving us additional business.

All right. Thank you. I'll just call this a follow up rather than a new question. Is the implementation time that you've outlined earlier still about the same for this business you're signing, or has there been any acceleration there?

Yes, I think it's around four to six quarters. And I--we don't really see any reason for that to change. And when we say four to six quarters, we're generating revenue from the time that we sign the contract usually in a relatively short period of time, let's just say within 90 days. But it takes four to six quarters before you're fully ramped.

Great. Thank you.

Thank you.

Thank you. Our next question comes from Mike Malouf from Craig-Hallum.

Great. Thanks, guys. Yes, Ken, I was interested to get some perspective on pricing, both here in the U.S. and overseas. Are you experiencing any degradation in pricing given the competition out there, or is it starting to tighten with regards to your comment about existing clients firming up? If you'd just talk about that, it would be great. Thanks.

Great question and the answer is we are not experiencing any price degradation. As a matter of fact, to the contrary. There have been several instances where we are raising our prices, and as much as that might sound contrary to what takes place in this global recession that we're in, the reality is that we truly believe we're providing a differentiated offering, and therefore to deliver that differentiated offering in some cases has other cost components to it. Our clients understand that, and therefore they are willing to pay more as long as we're delivering more value. And so, we're very comfortable with where our pricing is and very--once again, very comfortable with our operating performance.

Great. Thanks a lot.

Thank you.

Thank you. Our next question comes from Ashwin Shirvaikar from Citigroup.

Hi. This is Phil Stiller on for Ashwin. I was just wondering, given the expanded credit facility, can you comment on the M&A landscape as it relates to what type of assets you'd be looking for and the availability of suitable targets in this environment?

Well, that's always a tricky question isn't it to answer. I would just say that we are very engaged in boiling the ocean and in looking at a variety of different opportunities. I would say that it--the areas are more in the areas that continue to position us in the upper right-hand quadrant and where clients are going to view us as adding more strategic value. So therefore, assume that they would be in areas that would be potentially in the professional services area, potentially in the technology area, and don't assume that they would be per se in the--in something that's tactical. And it goes without saying that whatever we do will be accretive.

Okay. And then, would you guys consider using the credit facility to repurchase shares as well?

Sure we would, but the good news is we're generating so much cash that right now we can't buy--it would almost be--short of us--unless we did an acquisition to get to our cash, there really isn't a way to even access the credit facility due to the amount of cash that we have at this point in time. But to answer your question, we'd be happy to use the credit facility to purchase--to repurchase stock.

Okay, great. Thank you.

Thank you. Our next question comes from Eric Boyer from Wells Fargo.

Thanks. You're running operating margin in the eight to 9% range at currently depressed utilization levels. So I was just wondering, if you were to get back to the mid-70s again for utilization, where could margins go? And related to that, how are you managing margin expansion with the investment in your technology initiatives?

Eric, it's John. I mean, relative to expanding the operating margin, you're absolutely right in that we are taking a hard look at our capacity utilization. We continue to rationalize capacity to make sure we're in the markets that are attractive to our clients and provide cost structures that are attractive. And so, with that capacity utilization expected to come up, we do expect it to drive expansion in our operating margin and believe we can return it to levels we've seen previously.

Any other questions?

Thank you. Our next question comes from Srinivas Anantha with Oppenheimer.

Yes, thank you. Ken, based on your pipeline, if I'm looking at the bookings for 4Q last year, you had a pretty strong bookings quarter. Should we expect something similar to that, and if that's the case would it be unreasonable to assume that there is going to be some type of a top line growth going into 2011? Thank you.

Again, we don't really give that type of guidance other than what I would just simply say is that we're very encouraged by the momentum that we've experienced in third quarter. We're very encouraged by the pipeline that we have in front of us. And we believe that fourth quarter could also be a nice quarter as it relates to conversions and signing. But as I've always said, we're always on the cautious side and we've always been very conservative in that sometimes these things, even though we get verbals, get delayed and we tend to not count anything until we actually have a signed, physical contract. And so, what I would just say to you is that we feel--right now from where we are we feel encouraged and we feel very good about the signings that we think will get done between now and the end of the year.

Did I answer your question? Okay, next question?

Our next question comes from Gary Krishnan from Credit Suisse.

Oh, hi. Thanks for taking my question. I guess as you look at your new business signings potential forecast what verticals do you expect to see good strong demand from? I think in the last quarter you spoke to financial services and maybe healthcare as being areas that you'd seen good demand.

Yes. I think that communication, retail, automotive, financial services, technology, those are probably the four areas that we've seen the--seen wins just in Q3. I think going forward we'll probably see more coming out of healthcare and government as well. And with our new mortgage product offering that we're just now ramping up to, et cetera, we're very confident that we're going to see quite a bit of activity in 2011 in that area.

Thank you.

Thank you.

Thank you. Our next question comes from Kevin McVeigh from Macquarie.

Great. Thank you. Ken, I just want to make sure I understood. The new business signings are about 90 million through October. Does that pull some from the fourth quarter or is that just kind of semantics there? Am I reading too much into that?

Yes. I mean--this is John.

John, can you just--.

--Yes, when you look at how we've reported, I mean, we started the year we talked about what happened in the first four months. And so, we're trying to get back on track with three months of activity to make some things comparable. So it's been trued up. But, yes, it does reflect activity in October.

Got it. And I appreciate--.

--And we'll get calendarized again in 2011 to take out that confusion.

Fantastic. And then, are you seeing any seasonality in the business in the fourth quarter given the pickup in holiday spend or anything like that around the business that's been meaningful relative to the last couple years?

Yes. As Ken indicated, I mean, retail is an area that we've seen some growth in and definitely you're seeing a pickup in the fourth quarter relative to that as we have in the past. But again, it's not a significant amount in the fourth quarter and it will bleed into the first quarter a bit.

Great. Thank you.

Thank you. Our next question comes from Josh Vogel with Sidoti and Company.

Good morning. Thank you. Just a question here on the international segment. Revenue last quarter came in stronger than what I was looking for. And I was just curious, the strength here, at least relative to Q2, which verticals were you seeing this come from? And were these programs with new clients or expansions with existing clients?

Yes. What I would tell you, Josh, is that we've obviously seen improvement across many of the verticals. Telecommunications, again, just being a large percentage of our portfolio, represented a major impact in the quarter in terms of our revenue growth, most of it with existing clients.

Yes. But we're also seeing quite a bit in the technology area, in the search area, et cetera.

Okay, thank you.

Thank you. Our final question comes from Shlomo Rosenbaum from Stifel Nicolaus.

Hi, guys. Thanks for squeezing me in here. Ken, you've done a really good job sequentially improving the international margins. And I was wondering, are--how do you feel in terms of the turnaround over there? How close are we to sustainable profitability? I know there's issues with labor, just being able to cut labor to meet demand.

So is your question a timing question, Shlomo?

Yes, it's a matter of you've really improved the losses. Should we start to see some profitability in the near future over there? I mean, how do you guys feel about that?

I think that we're--I think we're definitely getting closer. I think we've made some very significant improvements and we have I think a very thoughtful plan that we'll be executing through 2011. I think Asia Pac is doing just great. And I think I'm not telling you anything that you and all of our investors don't know. Europe is all--is sometimes somewhat of a challenge. That said, we're doing quite well in the U.K. now. And now, all of our focus is on Spain. And quite frankly, the issue in Spain has really just been that it's been a very tough market as it relates to pricing since its inception. So I don't want to sound like I'm contradicting myself. These are legacy contracts and we have been doing everything humanly possible to drive the performance up, increase the level of value that we're delivering, so that we can justify better pricing and so that Spain can basically bring the international segment home and drive more profitability.

I'm very confident that we're going to get to where we need to get to. I think this is something that we're very good at doing. And I think that it's not even considered a distraction to management at this point in time. It's just simply part of our operating and execution practice that we have in place. So, a long winded answer. Quick--I guess the summary is that we're confident that we will continue to drive improved margins in our international segment.

And just on the revenue internationally, you had a big pop sequentially. Is there a lot of contracts that kind of hit or is there a certain amount that's just the U.S. dollar has just been really weak?

I mean, some of it, Shlomo, is definitely in the currency. But again, some of it is a reflection of some of the success that we've had of late relative to pricing on some existing contracts. So we are driving more revenue on the work that we're currently doing.

Great. Thank you.

Thank you, Shlomo.

Thank you. This concludes the TeleTech Third Quarter 2010 Earnings Conference Call. You may disconnect at this time.