TTEC Holdings Inc (TTEC) 2011 Q3 法說會逐字稿

Welcome to the third-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 Breen, TeleTech's Vice President of Investor Relations. Thank you ma'am, you may begin.

Thank you and good morning. We want to welcome you for joining the call today. This is Karen Breen. And TeleTech is the hosting this call to discuss the third-quarter 2011 results ended September 30. Participating on today's call will be Ken Tuchman, our Chairman and CEO, and John Troka, our Senior Vice President of Finance.

Yesterday, TeleTech issued a press release announcing its financial results for the third quarter 2011 and also filed its quarterly report on form 10-Q with the SEC. This call will reflect items discussed in those documents and will make reference to them on the call today. We encourage all listeners to read our form 10-Q. Before we begin, I want to remind you that matters discussed on today's call may include forward-looking statements relating 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 opinions only as of the date of this call and we undertake no obligation to revise this information as a result of new information that may become available. Forward-looking statements are subject to various risks, uncertainties and other factors that could 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 the loss of 1 or more significant client relationships, execution risks associated with ramping new business or integrating acquired businesses, and the possibility of additional asset impairments and/or restructuring charges.

For a more detailed description of our risk factors, please review our most recent SEC filings along with our 2010 annual report on Form 10K. A replay of this call will be available on our website through November 17. 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 third quarter and then provide an update on the continued expansion of our business. Including our technology-enabled services. After that, John will discuss our financial results in more detail.

Third-quarter revenues was $304 million, up 12.3% from $271 million in the year ago quarter. Keep in mind that the third quarter last year included a $24 million of technology-enabled services revenue from the Census program, which as previously discussed, we substantially completed in the third quarter of 2010. Excluding the Census program, our year-over-year revenue growth on a constant currency basis was 20%. Third-quarter 2011 results also reflect the acquisition of Peppers and Rogers Group and ELOYALTY. Backing out the revenue from these acquisitions, as well as the Census program in the year ago period, our third-quarter revenue growth on a constant currency basis was approximately 10%. This is a result of solid new business wins from both new and existing clients.

Looking at the mix of revenue, approximately 20% of our third quarter revenue was generated from higher margin offerings, including technology-enabled solutions, revenue generation and professional services. This is on track with our long-term goal and up from approximately 15% of 2010 full-year total revenue. During the third quarter, we signed approximately $95 million of annualized incremental business, including the addition of 12 new logos. Driven in large part by our increasingly diversified offerings.

Our sales pipeline remains strong. Given the current economic climate and the intensified focus on growth, clients are increasingly engaging TeleTech to help them deliver a relevant technology-enabled customer experience and drive improved business performance. Our sales team is focused on clients who understand the financial benefits of our customer centric approach and appreciate the value of our fully integrated service offerings. By focusing on either an entire segment of the client's customer base or an entire product offering, we can quantify our impact on key business levers, including customer acquisition, retention, revenue growth, and net promoter score. And clearly demonstrate the value we bring to clients. This strategic approach, supported by our robust technology centric solutions, continues to differentiate TeleTech in the marketplace and drive increased business opportunities for us with both new and existing clients.

We continue to invest in sales and marketing and appointed Mark Grindeland and as our new Chief Marketing Officer at the end of August. Mark brings more than 25 years of experience in the area, having held executive leadership roles at 2 of the most respected agencies, Digitas and Wunderman. Mark spent the last 10 years focused exclusively on mobile and social media businesses. He has both founded and been the CEO of several companies and has lived and run businesses in Europe and Asia. His depth of experience and strong leadership will be a tremendous asset as we continue to refine our marketing strategy going forward.

Turning now to our operating performance. Third-quarter operating margin excluding unusual items was 9.3%. Fully diluted earnings per share increased 42% to $0.44 compared to the year ago period. Non-GAAP earnings per share, excluding unusual items, increased 21% to $0.35 over the year ago quarter. Our strong financial position enabled us to end the quarter with $170 million in cash and $37 million of net cash after subtracting outstanding debt. We are very excited about our emerging high-growth businesses and our ability to further leverage our technology solutions.

Our acquisition of Peppers and Rogers Group has further complemented our revenue diversification strategy as has the combination of ELOYALTY into our technology-based offerings. Our revenue generation business remains on target to surpass a $100 million in revenue this year. To allow shareholders to properly value the contribution of these businesses, we are currently evaluating the presentation for future financial reporting purposes. As we further diversify our recurring revenue stream, we'll explore additional strategic acquisitions. We also intend to continue to increase our R&D and product development efforts in cloud-based infrastructure and SAS-based offerings.

Our global footprint continues to advance. We are currently expanding capacity in several markets including the Philippines as well as the US, where we are experiencing an increased demand for on-source solutions. Last week we announced that Regina Paolillo is joining TeleTech as our new Chief Financial and Administrative Officer. We are very excited to have Regina join as a key member of our executive team. She will play a critical role in executing various strategic initiatives including mergers and acquisition activities. Regina has previously served in numerous executive leadership roles including CEO, CFO and COO, with Trizetto Group, General Atlantic Partners, Creditek which is a subsidiary of Genpact and Gartner, excuse me, Gartner Technology Enabled Solutions.

As we continue to diversify our revenue into greater technology-enabled solutions, Regina has the right combination of both industry and private equity experience to facilitate our ongoing strategic and operational business transformation and to deliver increased shareholder value. Both myself and our Board of Directors would like to recognize and thank John Troka for his hard work and dedication in serving as our interim Chief Financial Officer. And we look forward to his continued contributions as a senior member of the finance organization. Looking forward, I am very excited about the contributions that both Mark and Regina will bring to our senior management team. I am confident that the strength of our executive leadership will further enable us to execute against our strategic vision and longer-term business objectives.

Let me now turn to our financial outlook. As we have discussed in our second quarter call, we estimate full-year 2011 revenue will grow approximately 9% to 10% over 2010. And full-year 2011 operating margin will range between 8.7% and 9.5%, excluding unusual charges, if any. While our sales pipeline and existing client volumes are increasing, we are mindful of the challenging macroeconomic environments for all multinationals. That said, we remain well positioned to deliver a broad array of fully integrated customer focused services that enable our clients to differentiate their brand and enjoy both industry and financial leadership. We believe this will continue to drive year-over-year revenue growth, improved operating performance and solid new business wins for TeleTech. With that, I will turn the call over to John Troka, 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 third quarter results. Revenue for the third quarter was $304.2 million, up 12.3% from $271 million in the year ago quarter. I think it is important to reiterate the underlying organic growth in our consolidated revenue. Absent the benefit of acquisitions and FX, and backing out the $23.6 million in Census revenue booked in the third quarter of 2010, our organic revenue growth was 9.5% over the year ago quarter. This clearly demonstrates the strong growth we are experiencing in both new and existing client programs.

Third-quarter revenue for the North American BPO segment, which includes ELOYALTY, was $219.9 million, compared to $205 million in the year ago quarter and $200.9 million in the second quarter. As previously mentioned, the year ago period included $23.6 million of Census revenue. Revenue for the international BPO segment in the third quarter grew 27.7% year-over-year to $84.3 million. This is related to the growth in international client programs and the acquisition of PRG whose results are included in this segment.

Sequentially our consolidated revenue was reduced by $2.2 million due to the strengthening of the US dollar in the period. Based on what we know today, we expect to see a further impact to our fourth-quarter revenue due to the continued strengthening of the US dollar. However given the extreme volatility in today's foreign currency markets, it is difficult for us to accurately estimate the magnitude of this impact.

Looking at our gross margin, our third-quarter gross margin was 27.4%, down from 28.4% in the year ago quarter and a similar 28.4% in the previous quarter. Gross margin the North American BPO segment was 28.7% in the third quarter compared to 31.1% in the year ago quarter and 29.6% in the previous quarter. The year-over-year decrease reflects the absence of a higher margin, technology centric solution employed for the US Census program in the year ago quarter. This decrease was offset in part by improved operating efficiencies realized in the third quarter of 2011. The sequential decrease is primarily attributed to higher costs associated with the ramp of new programs and the migration of certain programs to more profitable locations.

The international BPO segment gross margin was 24.2% compared to 20.2% in the year ago quarter and 25.7% in the previous quarter. The year-over-year improvement is the result of strong growth in existing client programs and the benefit of certain contractual changes. The sequential decrease is due primarily to the seasonal softness in the EMEA region during the third quarter.

Turning now to SG& A, our third quarter SG&A was $43.5 million or 14.3% of revenue. This compares to 15% of revenue in the year ago period and 16.1% of revenue in the previous quarter. The decrease is primarily a result of lower variable incentive compensation expense, lower acquisition related expenses and certain profit improvement initiatives in the quarter. Excluding equity compensation expense of $3.8 million, SG&A as a percent of revenue was 13% for the quarter.

Our third quarter GAAP operating income was $26.6 million or 8.7% of revenue. Subtracting restructuring costs of $1.6 million, our third quarter non-GAAP operating margin was 9.3% of revenue. Year-over-year, non-GAAP operating income increased 17.5% from $24 million to $28.2 million. Sequentially, our non-GAAP operating income increased 10.9% from $25.4 million.

As far as segments, our North American BPO segment reported a non-GAAP operating margin of 11.1% in the third quarter, compared to 12.1% in the year ago quarter, which as previously discussed, reflects the benefits from the technology-enabled Census program. The international BPO segment generated a non-GAAP operating margin of 4.5% versus a negative operating margin of 1.3% in the year ago quarter. The continued improvement in this segment's operating performance reflects the ongoing focus of our management team on driving operating efficiencies and improved program profitability in certain international geographies.

Turning now to Taxes. Our effective tax rate in the third quarter was a negative 1.9%. We recorded 1-time net tax benefits of $6.6 million in the quarter. Excluding these benefits, our effective tax rate for the quarter on a normalized basis was 23.4%. Our tax rate will continue to fluctuate from quarter to quarter based upon our distribution of income between the US and international tax jurisdictions. We expect the full-year normalized effective tax rate will range between 21% and 22%.

Finally, our third quarter GAAP fully diluted earnings per share was $0.44. Adjusting for the impact of the restructuring charges, as well as the 1-time tax benefits just discussed, our non-GAAP fully diluted earnings per share was $0.35. Focusing now on our liquidity. We ended the third quarter with $169.8 million in cash, $130.3 million borrowed on our credit facility and $2.3 million of other debt. Keep in mind that the increased borrowings on our credit facility are related in part to the expiration of certain tax regulations which allowed for the short-term tax-free repatriation of international cash during 2010.

At the end of the quarter our total debt to capital ratio was 22.5% and our current ratio was 3.3 times. Year-to-date we generated $39.5 million of cash flow from operations and after capital expenditures generated $18.3 million of free cash flow. For the third quarter, our cash flow from operations was a use of $8.5 million. This was due to several factors including higher accounts receivable balances due to delayed client payments as well as higher deferred tax asset and net tax receivable balances.

As a result of the higher accounts receivable balance, our third quarter DSOs were 80 days. Excluding PRG, whose clients customarily have longer payment terms, third quarter DSOs were 77 days. Additionally, we experienced a 2-day increase in our third quarter DSOs due to issues with 2 of our clients' payables process and systems. These issues have since been resolved and will not impact our fourth quarter DSOs. Additionally as with previous quarters, we saw increased payment activity in the month of October. Nonetheless, we're working diligently to reduce our DSOs and are confident they will return to more normalized range.

The third quarter capital expenditures were $8.8 million compared to $5.1 million 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. As Ken mentioned, we are also continuing to expand our capacity in countries where demand dictates. We expect our 2011 capital expenditures to approximate $35 million.

Finally, during the quarter we continue to actively repurchase our shares, buying approximately 900,000 shares for $14.6 million. Through the first 9 months of 2011, we have purchased approximately 3 million shares for $58 million. As of September 30 we have approximately $37 million remaining for future share repurchases under our current Board authorization.

In summary, we remain committed to delivering positive returns for our clients, their customers and our shareholders. We are confident that our continued investment in innovative solutions and exceptional service delivery will enable us to further capitalize on the growing market opportunity and continue to deliver solid financial performance. Thank you, and with that I will now turn the call back over to Ken.

Thank you John. We believe TeleTech's performance will continue to be fueled by our clients' intensified focus on growing revenue and redefining the customer experience. As more and more companies are looking for a provider with a broad array of services to accelerate commerce and lifetime customer value, we are well-positioned with our fully integrated end-to-end suite of highly scalable technology driven solutions. I look forward to sharing our progress with you in the coming quarters. Thank you.

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

Thank you.

(Operator Instructions)

One moment for your first question. Mike Malouf, Craig-Hallum Capital Group.

Great, thanks guys. And nice to see the execution in such an interesting economic time. The question I have is with regards to the higher margin technology services portion of your business. It sounds like you are running ahead of your plan of getting the 20% by year end that you have gotten the 20% in the third quarter. And I'm just wondering, can you give us a sense of where margins are in a sort of quote-unquote higher-margin area? And also, if you could just give us a little bit of a breakdown, or at least a sense of the revenues between say PRG, eLoyalty, Direct Response and the at home business, that would be helpful. Thank you.

Hello Mike. Nice to hear from you. You asked a multi part question. So I will do my best to try to answer as most of it as I can at this point in time. Clearly, we are very focused on the diversification of our revenues. And what I would just simply say is that we are at very early stages. So as it relates to the actual profitability et cetera, there's a tremendous focus on growth of those revenues. And naturally when you put a lot of energy into growth that means you tend to be spending more money in SG&A area et cetera.

So we believe that these diversified revenues, over time, will clearly deliver on what our ultimate goal was longer-term, which is that we're looking for revenues the long-term have the ability to achieve up to 20% in operating margin and 20% in growth. Clearly, we are not there yet in all of those components. In some areas we are there on the growth side and et cetera. But we are making tremendous strides and we think that we will be working very hard at it all through next year et cetera to push those margins up even further. As far as giving you actual color by segment, I don't think that would be appropriate, because as you know, we basically do our segment reporting the way you see it in our cues. That said, I think you can tell that we are investigating and looking at other forms of ways to create more clarity on these new segments as they over time get to a scale that our accountants feel is in fact appropriate for us to report on. So I hope that I have answered your question.

Great thanks a lot. I appreciate it.

Thanks Mike.

Tobey Sommer, SunTrust.

Thanks. Wondering if you could give us some color on what you're annual guidance implies for operating margin in the fourth quarter? Because you did have -- I'm just kind of curious whether it is GAAP or you would include for example like the $0.35 of non-GAAP EPS and the operating margin associated with that for the third quarter and embed that into the annual number? Any kind of clarity you can provide would be great, thanks.

Tobey, it's John. Yes relative to the guidance we provided, it is always excluding the unusual charges. The third quarter would be based on the 9.3%. Relative to the fourth quarter, and again our annual guidance, we provide annual guidance, we do not provide quarterly guidance. So we are not at this point going to indicate anything specific relative to the fourth quarter. We're standing by the annual guidance we gave and believe that we will end within the range that is outlined there.

Okay. If you may ask just a separate question, how do feel about the organic growth of 9.5%. And it looks like new sales picked up a bit. Has the sales environment changed much from 2Q to 3Q? Thank you.

I think really what is happening is we are just executing on our strategy. And we have all along known that as we really connect more and more of our product offerings and have more of an end-to-end capability, that we would get more overall acceptance. I think it is partly that. I think it is also partly that we are operating very well and our clients, our embedded base is expanding with us. So I think execution clearly has something to do with it. But I also think that frankly, we've said all along that we are getting our sales act together. And we still have a ways to go quite frankly, both sales and marketing. And we are very comfortable that we have got the right beginning ingredients and we are excited about what ultimately this is going to lead to in the years to come.

So what I would say to you is that we feel like we are building momentum. That said, we are naturally, in this overall macro environment, where every day there's a new headline from some event taking place somewhere in the world. We naturally remain cautiously optimistic.

Thank you. I will get back into queue.

Kevin McVeigh, Macquarie.

Great thank you. I wonder if you could give us a sense of the level of SG&A. You saw real nice leverage in Q3, how we should think about that on a go forward basis in Q4 and 2012?

Kevin, it's John. Relative to SG&A, again as we look at the business and where we are at today and the investments we're going to continue to make, especially on the sales front to make sure that we can get to the targets we have set for ourselves, I believe that SG&A would normally run in the 15% to 16% of revenue category. Obviously, as the revenues continue to grow that will moderate down to the lower end of that particular range.

And then, I know you have been doing a great job in terms of adding to the business and professional services. Are there any businesses that you would look to potentially sell within the legacy business? I don't know if there's anything still within database marketing or things that you would consider shedding to more refine business model?

Well, look, I think the answer is no. I think we are very satisfied with our assets are performing. That said, I have to obviously make the obligatory comment, which is everything is for sale at the right price. But what I can tell you is we are not in any way, shape or form actively marketing any of our assets. That said, Regina as well as myself, as well as our M&A team et cetera are definitely going to be spending a fair amount of time on looking at new opportunities and new acquisitions et cetera. So our focus is not in shedding assets, our focus is in acquiring assets that meet the criteria of 20% top line and 20% bottom line, 20% top line growth and 20% bottom line growth. And I believe that we are going to give it an absolute college try to execute on that through next year and the years to come. Which will drive better overall margins.

Super. And if I could just -- any thoughts from Regina on what attracted her to TeleTech and what she really plans to focus on and kind of early days?

Well I don't want to put words in her mouth. She will be here later on this afternoon. And I am sure will be happy to comment directly with you on that. I think that there is a buzz at TeleTech right now. I think people are very excited by the strategic direction and that they see that we are clearly focused on truly providing a transformational capability in the area of customer experience and customer engagement.

And I think that Regina is impressed with the fact that we are not going after the low-end of the marketplace and focusing on lift and shift and mess for less. And I don't want to put words in her mouth, but just from what I have heard her say, think she thinks that we have a very bright future and that there's a significant opportunity for her to be a significant contributor to our overall vision. That said, we will do our best to get Regina out to see all of our analysts as well as all of the investors that are interested in meeting with her as quick as possible. Naturally she has got a lot to absorb as she comes on board. And so, my guess is that you will be seeing her sooner than later.

Super. Thank you.

Josh Vogel, Sidoti and Company.

Thank you, good morning. We saw another strong quarter here of signing new business and I was just curious if you could break out of the new business signed, what percentage came from PRG and eLoyalty? And then also if you could just comment on the duration of the sales cycle on the tech-based and rev-gen business versus the more traditional BPO work? Thank you.

Josh, John. Relative to that break out, let me provide that. 25% of the new business wins came from clients PRG and eLoyalty. And again, we are excited about that, represents opportunities for us to take our other service offerings into those particular opportunities and clients and further expand our core business.

Okay.

Was there another part to your question? I'm sorry.

Yes, with regard to the sales cycle on the PRG and eLoyalty, the tech-based and rev-gen type of work versus the more traditional BPO work. I was just curious if you could comment on that.

Yes, Josh, again it's John. What I would say is that the cycle time for those businesses is a bit shorter than what we see in our large customer care type projects.

Okay thank you.

Manish Hemrajani, Oppenheimer. Your line is open.

Thanks for taking my call. Just a question on the macro environment, I wonder if you could take us through any impact you are seeing on either pricing our decision-making and what assumptions have you baked into guidance?

What I would say is from a macro standpoint we are seeing, obviously many parts of the world are a little bit deer in the headlights as it relates to areas like Europe. I would say that is the bad news. The good news is we have very little concentration in Europe, and so we are really not affected by that.

I think that our North American clients are in fact getting very focused on being prepared for next year and the years to come. And they see what we are currently offering them as something that can really help them in a relatively slow growth environment. When you think about that a big chunk of our business is about helping our clients grow their embedded base, as well as keeping their embedded base installed, and then of course, whenever possible, finding new customers for them, that is resonating to a slow growth marketplace. So I think from a macro economic standpoint, we are feeling good. Our volumes thus far are holding, and if anything, they are forecasted to increase in fourth quarter. And so, for us, it feels like things are moving definitely in the right direction.

That said, I want to temper that with, every other day, some headline of something crazy happening in Greece or somewhere else in the world. That said, I think that it is safe to say that North America and Asia Pacific are still very much focused on expanding their opportunities and looking for new ways for us to engage. We are seeing a lot more opportunities in areas like data analytics, a lot more opportunities in what I would just call focusing on the upper right-hand of the quadrant. And frankly, that is where we want to be. So that we are dealing more at a strategic level versus at a quote-unquote procurements level. So I hope that I've answered your question.

Yes, thank you.

Shlomo Rosenbaum, Stifel Nicholas.

Hi, this is Steven Shu in for Shlomo. Thanks for taking my question. Can you discuss why revenue growth has slowed down in Latin America this quarter? And what is going on in Asia-Pacific? It looks like revenue growth, revenue hasn't really been growing there this year.

Steven, it's John. Yes, relative to Latin America, what you are seeing is the shift that we talked about at the end of last year. Where we are literally moving our operational footprint out of Argentina due to the economic environment in that particular country, especially as it relates to labor. And so we have shifted a large percentage of that revenue either back to the US in some cases, some of it has stayed in the region. But we also have moved quite a bit of it to the Philippines.

And I think we should point out that we have substantially completed the majority of that -- of what we are going to move, et cetera, so there is no charges or anything coming up or anything like that. Not anything substantial. So we're in great shape there. We were very proactive.

Okay thank you.

Gary Krishnan, Credit Suisse.

Hello, thanks for taking my question. Ken, I just wanted to get back to your comments around, you referenced getting your sales act together and I think you referenced branding. Can you help us understand if these are more than just productivity initiatives, is there some sort of retraining involved as to -- as you try to adapt to a more complex selling environment? And any thoughts on what specific branding initiatives you have in mind? And as a follow-up to that, other than the obvious metrics like sales growth and new business sales and margin performance, what are sort of performance indicators we could monitor to make sure that those are working?

Yes, I think that it is really pretty straightforward. We have historically been a company that has organically grown off our reputation and have done quite well when you look back historically as to the organic growth that we have achieved. As we've stated in the past, and as I have openly taken responsibility for, we have never really invested significantly in building a proper sales organization, that has proper global coverage, that can reach out to all of the global multinational companies that we choose to have relationships with. And so really, all this is, is a concerted effort to make sure that we have proper sales coverage across the globe and that that sales coverage has a highly integrated product offering that is strategically relevant to our client base.

So of course, it is a combination of recruiting more sales people, that tend to be significantly more sophisticated than what one would classically see in this type of an industry. It is being far more consultative with our clients and far more of business goal oriented with our clients. And basically, focusing much more on what their overall goals and their outcomes are. I think we are demonstrating, based on the number of new logos that we are adding, that we're making progress there. But what I would say to you is, our goal is to have a machine that can be consistently producing significantly more new logos and significantly more revenue on a quarter by quarter basis. And we have all the faith in the world that our strategy is going to lead to exactly that. That said, this doesn't happen overnight. It takes time. And we are committed to the long-haul of executing on this.

As far as how do we actually know whether we're making progress? It is really very simple. And that is, we look at two things. One is our conversion rates? Is it going up? And the answer is definitively yes.

Then the second thing we look at is, what is our future and what is the pipeline? And is the pipeline expanding? And the answer is, the pipeline is in fact expanding and we have more visibility to a larger overall pipeline. So we are pleased with the progress that we have made to date. And we are confident that there is more room for us to make more progress, which we think is nothing more than an opportunity. I hope that was helpful.

Yes thanks for the clarification.

Thank you.

Thank you. This concludes the third quarter 2011 earnings conference call. Thank you for participating. You may disconnect at this time.