TTEC Holdings Inc (TTEC) 2011 Q1 法說會逐字稿

Welcome to the TeleTech first quarter 2011 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 TeleTech. I would now like to turn the call over to Karen Brean, TeleTech's Vice President of Investor Relations. Thank you, ma'am. You may begin.

Thank you and good morning to everyone joining us today. TeleTech is hosting this call to discuss its first quarter 2011 results ended March 31. Participating on our call today will be Ken Tuchman our Chairman and Chief Executive Officer, and John Troka, our Chief Financial Officer. Yesterday we issued a press releasing our financial results for the first quarter and also filed our quarterly report on form 10-Q with the SEC.

This call will reflect items discussed within those documents and we will make reference to them on the call today. We encourage out listeners to read our quarterly report on Form 10-Q. Before we begin I want to remind you of our disclosure regarding certain forward-looking statements. Matters discussed on today's conference call may include statements relating to our operating performance, financial goals and business outlook which are based on management's current beliefs and expectations. Please note that these forward-looking statements reflect our opinions only as of the date of this call and we undertake no obligation to revise this information as a result of new data that may become available.

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 profitability from or loss of one or more significant client relationships, execution risks associated with ramping new business or integrating acquired companies, and the possibility of additional assets, impairments, and/or restructuring charges. For a more detailed discussion of our risk factors please review our SEC filings along with our form 10-K. A replay of this conference call will be available on our website through May 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 would like to review our results for the first quarter and then provide an update on our continued progress and furthering our capabilities around optimizing the customer experience. After that John Troka will discuss our financial results in more detail. First quarter revenue was $281 million, up 3.5% from $272 million in the first quarter last year. Keep in mind that the year-ago period included $19 million of census revenue. Additionally, the fourth quarter 2010 included $10 million in seasonal revenue.

We have fully replaced the loss of these revenues with the ramp of new business. Our pace of new business wins continues to be strong with $100 million of annualized new business signed in the first quarter, including seven new logos. This is the fourth quarter in a row we have signed between $80 million and $100 million in incremental wins and we are quite pleased with both the growth and continued conversion of our sales pipeline. TeleTech strategy continues to be fueled by our ongoing investment in revenue, product and clients diversification.

In a fiercely competitive global marketplace, and with customers increased willingness to tell the world their opinion, clients recognize the critical importance of delivering an exceptional high quality experience in order to both retain and grow their customer base. Our ability to serve as both an independent strategic advisor and an experienced implementation partner is unique and enables us to truly transform the customer experience and ensure superior outcomes for our clients and their customers.

Turning now to our operating performance. First quarter operating margins excluding unusual items, was 8%. Non-GAAP earnings per share was $0.29. We remain in a very strong financial position ending the quarter with $190 million in cash and $106 million of net cash after subtracting outstanding debt. During the first quarter we announced a definitive agreement to acquire the integrated context solutions business unit of eLoyalty.

We believe this acquisition is on track to close in the second quarter and is expected to be immediately accretive to earnings upon close. ICS has a 20 year track record in consulting, systems integration, application development and over set of large complex customer management solutions across both cloud and premise based environments. With a blue chip client base the division's revenue in 2010 was in excess of $54 million and characterized by long-term reoccurring revenue streams.

The acquisition of ICS furthers TeleTech's revenue diversification efforts into greater consultative and technology based offerings that optimize the customer experience. Specifically, it will expand TeleTech's existing suite of cloud-based with an end to end capability that spans both fully managed and hosted customer management environments. ICS will also benefit from leveraging TeleTech's extensive global IP-based infrastructure. The combination of Peppers & Rogers Group independent consultative strengths, ICS's technological expertise, and TeleTech's operational excellence, each with more than 20 year operating history, will give us an unparalleled ability to bring strategy, technology and execution together to seamlessly deliver a truly transformative customer experience.

Furthermore, it will double our client base to more than 150 clients, and as in the past we believe our embedded base will be a strong contributor to future growth. Peppers and Rogers enables us to start with the design of a transformative customer centered strategy. Their management consulting expertise raises our profile in the boardroom and provides clients with the insight, road map and business case they need to increase lifetime customer value. Once the strategy is finalized we will leverage our proprietary technology and human capital capabilities to deliver increased revenue, higher customer satisfaction and ultimately greater customer advocacy.

Our revenue generation capabilities enable our clients to penetrate fragmented hard to reach markets in local small business and government and education markets. We manage 8,000 customized electronic store fronts and generate billions of dollars in revenues for our clients. The foundation of these outcomes is driven by our proprietary suite of robust data analytic tools which apply sophisticated segmentation strategies, lifetime value modeling and electronic track marketing in order to maximize revenue and brand loyalty.

The hundreds of millions of dollars we've invested over the past six years in our on demand capabilities enables us to deliver best in class IP-based solutions. Our offerings modernize delivery with a 360 degree view across the front, back office to ensure high reliability, multi-channel access and an exceptional customer experience. Furthermore, our proprietary tools for recruitment and training ensure that we're providing value where it matters most on the front lines with the customers. Our delivery of a fully integrated end to end technology based solution continues to expand and we see the demand for these services continuing to grow.

This brings me to our financial outlook. As reiterated in our press release, we expect revenue growth will be, excuse me, we expect revenue growth of 5% to 6% in 2011. And full year operating margin, excluding any unusual charges, to range between 8.5% and 9.5%. Keep in mind these numbers do not reflect the pending ICS acquisition. We'll update our outlook after the acquisition is closed and in conjunction with our second quarter earnings announcement.

Longer term, we will continue to invest in product development and technology centered solutions that both expand our offerings and drive efficiencies across our global workforce. We believe our continued expansion of higher value, fully integrated solutions that optimize the customer experience will enable us to grow revenue from 2010 to 2014 at a compounded annual growth rate between 9% and 10%. And we believe our revenue from higher margin services will increase to approximately 25% of total revenues by 2014. Furthermore, we expect operating margins to range between 11% and 12% by 2014. As we have articulated on previous calls, we believe future growth will be fueled by our continued investment in innovation, revenue, product and client diversification along with sales and marketing.

Longer term, our comprehensive integrated solutions will continue to differentiate TeleTech with existing and prospective clients. In summary we have an unparalleled solution set, an experienced and engaged management team, and with more than half a billion in available liquidity with a financial wherewithal to control our destiny, fund our growth and deliver positive returns for our clients, their customers and our shareholders. With that I will turn the call over to John after which I will make a few closing remarks.

Thank you, Ken and good morning. Let me take a few minutes this morning to provide some additional insight into our first quarter results. Revenue for the first quarter was $281 million, up 3.5% from $272 million in the year-ago quarter and consistent with the fourth quarter of 2010. First quarter revenue for the North American BPO segment was $192 million compared to $208 million in the year-ago quarter and $198 million in the fourth quarter.

As Ken mentioned, year-ago quarter included $19 million of census revenue and we had approximately $10 million of seasonal revenue in the fourth quarter. We continue to see the benefit from our increased pace of new business wins as the underlying growth in the North American segment demonstrates. Revenue for the international BPO segment in the first quarter grew 9% sequentially to $90 million compared to $82 million in the fourth quarter and $64 million in the year-ago quarter. This is related to the growth in international client programs and the acquisition of PRG whose results are included in this segment.

Looking at our gross margin, our first quarter gross margin was 29.1%, up from 28.3% in the year-ago quarter and 27.7% in the previous quarter. Gross margin in the North American BPO segment was 30.6% in the first quarter, up 20 basis points from the year-ago quarter and 70 basis points from the previous quarter. The international BPO segment gross margin was 25.9% compared to 21.6% in the year-ago quarter and 22.1% in the previous quarter.

Improvements in our gross margin are due to certain programs signed in the latter half of 2010 completing our launch phase as well as improved capacity utilization across our global infrastructure. These improvements have been offset in part by mandatory wage increases effective at the start of the new year in certain of our foreign operations. Turning now to SG&A, our first quarter SG&A was $47.8 million or 17% of revenue. This compares to 16% of revenue in the year-ago period and 15% of revenue in the previous quarter.

Excluding equity compensation expense of $3.8 million in the quarter our SG&A as a percent of revenue was 15.7%. The increase in our SG&A, as a percent of revenue, is primarily related to the full quarter impact of PRG on our consolidated results. PRG as higher ratio of SG&A cost to revenue than our core business. In addition, the increased SG&A reflects higher incentive and equity based compensation expense along with a higher payroll taxes we typically see in the first quarter of every year.

Our first quarter GAAP operating income was $21.5 million or 7.6% of revenue. Adding back approximately $1 million of restructuring and impairment costs our first quarter non-GAAP operating margin was 8% of revenue. As for our segments, our North American BPO segment reported non-GAAP operating margin of 9.4% in the first quarter compared to 10.2% in the year-ago quarter. The International BPO segment generated a non-GAAP operating margin of 4.9% versus a negative operating margin of 0.6% in the year-ago quarter.

Continued improvement in this segments profitability reflects the ongoing efforts of our management team to improve program pricing and operating efficiencies. Our effective tax rate in the first quarter was 46.4%. Adjusted for two non-returning items, our normalized tax rate for the first quarter was 18.8%. This normalized rate compares to our 2010 normalized tax rate of 19.3%. The one time items include a $9 million incremental expense related to the Canadian revenue agency's decision against our request for relief from double taxation as we disclosed in our 2010 form 10-K.

The second item is an anticipated $2.9 million tax benefit expected from the positive resolution of a long outstanding US tax claim. We believe our full year 2011 normalized effective tax rate will range between 20% and 23%. Finally, our first quarter GAAP earnings-per-share was $0.18. Adjusting for the impact of the restructuring and impairment charges, as well as the tax items just discussed, our fully diluted earns per share was $0.29.

Focusing now on our cash flow and liquidity. We continue to be very pleased with our generation of strong cash flow. Our cash flow from operations was $24.6 million for the first quarter. After our capital expenditures, free cash flow was $20.7 million. We ended the first quarter with $189.7 million in cash, $79.5 million borrowed on our credit facility, and $3.9 million of other debt.

As mentioned on our previous earnings call, the increased borrowings on our credit facility are related to the expiration of certain tax regulations which allowed for the short-term tax free repatriation of International cash. At the end of the first quarter our total debt-to-capital ratio was 16% and our current ratio was three times. Looking at our DSOs, as we stated during our fourth quarter call, we expected our DSOs to improve from the 77 days we reported at year-end. Our first quarter DSOs were 72 days, and excluding PRG, DSOs were 69 days. Certain Middle Eastern clients customarily have longer payment terms.

Our first quarter capital expenditures were $3.9 million compared to $6.6 million dollars in the year-ago quarter. We continue to invest in the maintenance and enhancement of our industry-leading infrastructure and proprietary suite of technology enabled offerings. We expect our 2011 capital expenditures to be approximately $40 million. Finally, as discussed on previous calls, in addition to strategic acquisitions we continue to strongly believe that one of the best uses of our available capital is our share buy-back program.

During the first quarter we continued to actively repurchase our shares buying 1.6 million shares for $34 million. As of March 31 we had approximately $62 million remaining for future share repurchases under our current board authorization. In summary, we are pleased with our start to the new year and we are confident in our ability to deliver on both the 2011 and longer-term financial goals that Ken highlighted earlier. Our management team and global workforce are fully committed and engaged in achieving the goals we have set. Thank you and with that I will now turn the call back over to Ken.

Thank you, John. Our strategy is entirely focused on targeting those clients that view the customer experience as a brand differentiator. We will continue to deliver outcomes that drive lifetime customer value via increased revenue, loyalty, satisfaction and retention. And that ultimately drives strong returns to our clients, their customers and our shareholders. I look forward to sharing our progress with you in the coming quarters. Thank you.

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

Thank you. (Operator Instructions). And we will go with our first question which will be from Tobey Sommer of SunTrust. Your line is open.

Thank you. Ken, during your, the Analyst Day recently you mentioned that a pretty large percentage of new business wins last year was sole sourced. I was wondering if you could update us for the persistence of that trend in your first quarter new and existing client signings. Thanks.

Thanks, Tobey. I'm just looking real quickly to see if I, I should have been more prepared for that question. I apologize. Let me just see if I can somewhat answer that. I think that to the best of my knowledge I can only see one deal that I'm aware of in the first quarter that was sole sourced.

And so what I would like to do is get back to you just because I need to look at all the different clients signings and analyze, but there is one that comes to mind that was sole sourced. Again that's not our focus. We're not targeting that. It's just something that we're seeing on clients that are really trying to have an end to end type of a capability and so it's just been a nice outcome thus far that we've experienced.

Right. In terms of diversification were the new signings in the first quarter consistent with that effort to win new logos in new industries?

Yes, I would say so. I think we're making good progress in financial services. We're continuing to win new business in the high technology area. We are continuing to expand in the transport automotive area. So yes, I would say so. I think that we're very pleased with the number of, or the quantity of the new names and I think something that is probably not necessarily totally obvious but our business historically has always grown from our embedded base.

And with the recent acquisitions that we've done we've been able to obviously acquire a significant amount of additional global 1,000 logos. And so consequently what we're excited about is that this gives us an opportunity to provide our entire offering to these additional logos that we have acquired. So I think that we will see some growth from our embedded base in the future as we have an opportunity to market to them and to show them what we can actually offer them.

Thank you very much.

Thank you.

Thank you. Our next question will come from Mike Malouf of Craig-Hallum Capital Group. Your line is open.

Thanks a lot, guys. Its nice to see such a strong win rate of $100 million and I just had a question with regards to that. What -- how is pricing on those contracts and is pricing becoming a competitive factor or is it more execution with that?

I think it's pretty much the same that it's been for quite some time. There's probably a third of the business in the marketplace, to maybe even 40% of the business in the marketplace, that you just flat out don't even want to get involved in pricing discussions because all the customer is focused on is what they think is the lowest absolute price. And so we tend to just not put any energy into those types of accounts.

Those are not companies that really are serious about improving the customer experience. Those are companies that are typically failing in the net promoter score area and so we just think that other companies would be better off with that business. Then I would say the remaining business, 60%, that we are, let's just say focusing on, it's a little bit of a mixed bag. There is a percentage of people that are just absolutely passionate about a solution that they are confidence that we can deliver and frankly pricing is not high on the topic of discussion.

And then there's, of that 60% I would say that there's probably a percentage of them that still want to try to get as fair of a deal as possible, which we respect. What I would just simply say to you is there is a $400 billion marketplace and we're going to maintain our margin and grow our business by picking our targets and not by trying to win business at all costs. And I think that for us we think it that's what fits our Company's profile and, there ever, we're not really very challenged when it comes to dealing with pricing issues. And when we are challenged, if its something that we think that the client is being not reasonable so to speak, then we just walk away.

Okay. And are you, how long do you think it will take, and I know you talked about this at the Analyst Day about getting some synergistic effects already, but how long do you think it will take before you really start to hit that synergy with regards to the acquisitions as far as cross-selling goes?

Well, we're already cross, we're already working closely with Peppers & Rogers and we're seeing some very interesting opportunities. We're also capitalizing off of a lot of their IP. They have a tremendous amount of IP from their one-to-one marketing group. So I would say that's already taking place.

That said, I think its only realistic that you don't get full stride of everybody knowing everybody and having good relationships for probably six to nine months. So we're a good three months into it. So I would say within the next three to, let's just say six months, I'm confident that all the necessary aspects of making sure that people understand Peppers & Roger' capabilities, that the product management work that we're working on together, et cetera, will all be done, it will be clear and our clients will be aware of their capabilities.

Now naturally the ICS transaction is not yet closed. So I would love to tell you we have a head start on that, but we don't other than the fact that we have done our due diligence and we're very comfortable with the due diligence that we've done and we understand what the opportunities are and I would say that the same will hold true there as well. Six to nine months and we'll achieve benefit. So for the most part we'll see all the synergies and all the integration and all the benefits all in this calendar year so that we're going into 2012 with these companies fully integrated and part of the overall family.

Great. Thanks a lot.

Thank you.

Thank you. Our next response will be from Ashwin Shirvaikar of Citigroup. Your line is open.

Hi. This is Phil Stiller on for Ashwin. I just wanted to ask a question regarding the weakening dollar that we have seen recently. If the current rates hold can you describe what impact the dollar would have on both your revenue and cost structure for the remainder of the year?

Yes. This is John. I mean relative to the weakening dollar, we take all the currency forecasts into effect when we actually provide our guidance so the numbers that we have put out there and the targets that we have in the marketplace today reflect what we believe will occur with the US dollar going forward. So we have factored that in.

Okay. That's great. And then just regarding the operating margin guidance. You have the fairly narrow range in terms of revenue guidance but the margin guidance is still fairly wide. Can you describe what factors would cause you to be either at the high end or low end of the margin guidance range for the year?

When the revenue comes out.

Yes. I mean some of it is the timing of the revenue. Some is the geographic location of the revenue. As we go through the year, depending on where clients are looking to have their work solution, that will drive our margin as well. And so it's a variety of factors that play into that. But, again, geography is going to be the largest one.

Okay. Great. Thank you.

Thank you.

Thank you. Our next response is from Robert Riggs of William Blair & Company. Your line is open.

This is actually Keane McCarthy for Robert Riggs. Good morning and thanks for taking my question. Ken, just a quick one. As you continue to build out the business around the technology enabled solutions, the professional services, and the [redgen] activities, have you seen any notable changes with respect to the duration of the sales cycle?

I wouldn't say so. Not at this point. I mean I think it's a great question and I think that, ask us that in a couple more quarters and maybe I will have something that's quantifiable. I would say it's too early of days to attribute any of these acquisitions to having a compression effect or elongation. But our expectation is that it will stay the same that it is.

Okay. Fair enough. Thank you.

Thank you.

Thank you. Our final question will come from Howard Smith of First Analysis. Your line is open.

Yes. Thank you. Good morning. Congratulations particularly on the strong business signings. I wanted to concentrate for a moment on the existing base of business and ask you to give some color on the volume you're seeing and consistency of that volume ability to hit their forecasts they're giving you, et cetera. And if there's any differences by vertical if you could highlight that.

Yes, Howard. It's John. I mean relative to the volumes that we're seeing, what I would tell you is that for the time of the year obviously looking year-over-year at the same periods I mean the volumes we're seeing are consistent. We obviously see the decrease as we come out of our seasonal work. But from a client perspective we're not seeing necessarily huge increases year-over-year, likewise, we're not seeing significant decreases. And I would say that holds across most verticals as we go into the summer months here.

Okay. Thank you.

Sure.

Thank you.

This concludes the TeleTech first quarter 2011 earnings conference call. You may disconnect at this time.