TTEC Holdings Inc (TTEC) 2012 Q1 法說會逐字稿

Welcome to the first quarter 2012 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 will now turn the call over to Karen Breen, TeleTech's Vice President of Investor Relations. Ma'am, you may begin.

Good morning, and thank you for joining us today. TeleTech is hosting this call to discuss its first quarter 2012 results. Participating on today's call will be Ken Tuchman, our Chairman and CEO, and Regina Paolillo, our Chief Financial Officer. Yesterday TeleTech issued a press release announcing its financial results for first quarter 2012, and also filed our quarterly report on Form 10-Q with the SEC. This call will reflect items discussed within these documents and we will make reference to them on the call today. We encourage all listeners to read our quarterly report on 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 our 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 data that may become available.

Forward-looking statements are subject to various risks and 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 possibility from or the loss of one 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 2011 Annual Report on Form 10-K. A replay of this conference call will be available on our website through May 16.

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 start by reviewing the 2012 priorities that we originally highlighted on our fourth quarter call, then discuss our progress against these initiatives during the first quarter. After that, Regina will review our financial results in detail. In 2012 our mission remains steadfast, to be the global leader helping companies design, build, grow, and manage the next generation customer experience. Thisin turn, will drive meaningful economic value for our clients and our shareholders. This mission requires much more than just a labor-based delivery model, it requires the ability to impact multiple aspects of a client's business, including strategy, analytics, technology, and business process redesign.

As we continue to execute on this vision, let me review the priorities for 2012 that we outlined on our last call. First, we want to deliver a winning growth strategy. Second, we will continue to invest in innovation via our proprietary fully-integrated platform that spans strategic consulting, data analytics, revenue generation, technology, and global delivery. Third, we will leverage our strong balance sheet to pursue strategic accretive acquisitions that further compliment and enrich our existing suite of capabilities. Last, we want to provide increased visibility to the financial profile and performance of our new segments, so investors can properly value these businesses.

Let me now review our first quarter progress against these stated objectives. Beginning with our growth strategy, we have three primary areas of focus, including one, expanding the breadth and depth of our offering with existing clients while selectively adding new relationships, two, positioning ourselves for increased vertical growth, and delivering a fully-integrated value proposition across our business segments focused on complex engagements that drive empirical results and substantial economic value for our clients.

During the first quarter, we signed an incremental $85 million of annualized business, of which 80% was reoccurring. This represents the expansion of 54 existing client programs along with the signing of seven new clients. Importantly, nearly 30% of these wins came from our higher growth segments. We saw particularly strong revenue gains in our financial services, technology, and transportation verticals, each of which grew more than 20% over the year ago quarter. Our fully integrated go to market strategy is gaining traction as more and more clients are investing in multiple aspects of our offerings. This enterprise-wide perspective is enabling us to meaningfully impact our client's businesses, this in turn is enabling us to benefit from deeper, more strategic and longer term client relationships.

Let me share some proof points on how we are realizing the benefits of our integrated value proposition. We were engaged by one of the largest and most well-respected financial service clients, to create a five year plan that would accelerate their market leadership. Our client who is already viewed as the gold standard for the customer experience, asked us to deploy a team of experts from our consulting, technology, and operations practices, to develop a vision for their future state customer experience, along with the implementation road map.

Another example highlights the ability of our data analytics business to open the door to other offerings. A large cable provider recently selected us to complete an extensive business evaluation and analytics project, that they viewed as the most critical undertaking of 2012. The most exciting client opportunities under way are where we can meaningfully infuse technology into a traditionally labor intensive solution, to dramatically improve not only the quality of the experience, but the overall cost to serve the customer.

These proof points also validate our strategic priority around continued investments in both our sales efforts and our technology enriched platform during 2012. These organic investments, complimented by the pursuit of highly targeted accretive acquisitions will enable us to stay strategically relevant to our clients, while also providing strong returns to our shareholders. The acquisitions we completed over the last 18 months are the Peppers & Rogers Group, eLoyalty, and I-notion are a testament to this strategy. These accretive acquisitions collectively added $100 million of profitable revenue over the last 12 months.

Turning to our segments, we introduced new reporting this quarter as promised. We did this in order to provide greater transparency into these businesses that we view as both higher growth and higher margin over the long term. We look forward to the clarity that this new reporting will bring to our shareholders, to enable them to more properly value the elements of our different strategies.

We are also very excited to announce the rebranding of our e-commerce business, formerly known as Direct Alliance. Direct Alliance is changing its name to Revana. In order to create greater market awareness as the leader in delivering realtime, highly effective, multichannel marketing and revenue generation solutions, that accelerate growth. In this hyper-competitive global market our ability to help our clients acquire and grow profitable customers is paramount. We believe Revana is on track to accelerate its growth through the remember of 2012. Regina will review the financial performance of this segment and the others in just a few minutes.

In closing, we are pleased with the progress we have made in the first quarter. We believe the breadth and depth of our solution portfolio, our solid financial profile, and our experienced leadership team, puts us in a strong position to deliver empirical outcomes for our clients, and increased returns for our shareholders.

With that, I will turn the call over to Regina.

Thank you, Ken. And good morning everyone. Let me start with a review of our first quarter results. Revenue for the first quarter was $293 million, up 4.2% from $281 million in the year ago quarter, and up 5.5% in constant currency. Our nonBPO businesses now brought to light in our newly reported segments comprise $57.8 million, or 20% of Q1 2012 revenue, up from 12% in the year ago quarter.

Sequentially revenue declined from $300.5 million in the fourth quarter to $292.7 million in the first quarter. This decline was directly related to the seasonal wind down of holiday volumes that peak in Q4, the reduction of certain non strategic programs and geographies associated with the $100 million to $115 million revenue structure we announced earlier this year, offset by growth from new logos and existing clients.

Our first quarter 2012 GAAP operating income was $18.8 million, or 6.4% of revenue, compared to 7.6% in the year ago quarter. Adding back $3.9 million of restructuring impairment and acquisition-related charges, along with a $1.4 million negative FX impact, our first quarter 2012 non-GAAP operating income was $24.1 million, or 8.2% compared to 8.1% in the first quarter of 2011. The decrease in non-GAAP operating margin was related to lower capacity utilization in the quarter, as we actively ramped several new logos and existing client programs. We continued to have confidence in our ability to exit 2012 with solid improvement in our asset utilization.

SG&A expenses in the quarter were 16.4% of revenue, down from 17% a year ago, as a result of profit improvement initiatives undertaken throughout 2011 and continuing into this year. We are actively managing our SG&A costs to enable increased investment in R&D and sales and marketing, while gaining increased leverage from our general and administrative costs. We estimate our SG&A spend as a percentage of revenue at approximately 16.5% in 2012, further improving over the longer term in the range of 15% to 16%.

Our normalized effective tax rate for the first quarter of 2012 was 18.2%. We continue to believe that our 2012 effective normalized tax rate will range between 20% and 22%. Our first quarter 2012 fully diluted earnings per share was $0.28 versus $0.18 in the year ago quarter. On a normalized year-over-year basis, EPS was unchanged at $0.29. During the quarter, the Company repurchased 1.4 million shares for a total of $23 million. As of quarter end we had $34 million authorized for future share repurchases.

Cash flow from operations was lower in the first quarter on an increase in prepaid assets, and a significant increase in the fair market value of our FX related derivative contracts. Payables decreased as we paid out the $5 million deferred portion of the PRG purchase price, and the earlier than normal timing in settling trade payables, to facilitate an orderly upgrade of our financial systems platform in the last week of Q1 2012. We ended the quarter with $172.8 million

in cash, $85 million of borrowings on our credit facility, and total other debt of $8 million, resulting in a net positive cash position of $79.8 million. Our total debt to capital ratio was 16.2%. Our current ratio 3.3 times, and our adjusted return on invested capital 24%. As of March 31, we had $411 million of additional borrowing capacity available under our revolving credit facility. During the first quarter, we exercised the $150 million accordion feature to increase our total committed capacity to $500 million. This provides us the financial flexibility to continue to fund organic growth, repurchases, and accretive acquisitions. We expect to continue to execute a tuck-in acquisition strategy consistent with the last two years, adding additional nonBPO competency, scale, and geography.

Capital expenditures in the first quarter 2012 were $6.4 million compared to $3.9 million in the first quarter of 2011. The higher capital expenditures are primarily related to select expansion of capacity in the US, associated with new business wins, as well as increased investment in building technology and information rich solutions. We will continue to pace our investment in real estate, fixed assets, and capitalized R&D, to maintain both CapEx and depreciation at a 3.5% to 3.75% of revenue.

Our DSOs for the first quarter were 76 days, compared to 72 days inthe year ago quarter, and 75 days at year-end. The sequential and year-over-year increase in our DSOs is primarily due to the change in our business mix, along with the addition of AR from the acquisitions we completed in the first quarter. We have targeted DSOs in the 70 to 72-day range in 2012, and over the longer term to less than 70 days.

Turning now to our segments, we are pleased to introduce new reporting this quarter, which we believe will create greater clarity in the progress we are making and the value we are creating in our higher growth businesses. As we kick off this new reporting structure it is important to note we are managing the nonBPO segments to generate rates, growth rates, at a premium to our traditional BPO segment. As such in the short run these segments will require further growth investment. We would characterize 2012 as an investment year for these nonBPO segments, including executive leadership, sales and marketing, product management, and technology. These investments are fully included in our 2012 operating margin guidance of 8.5% to 9%. We expect these investments to contribute significantly to our 2014 revenue target of $1.6 billion, and 2014 operating margin in the range of 11% to 12%.

The new reporting structure includes four segments, Customer Management Services, which represents the Company's customer experience delivery centers, which integrate technology and customer experience professionals, to optimize customer management across all channels and all stages of the customer life cycle, whether onshore, offshore, or in a work-from-home environment. Customer Growth Services which includes Revana, formerly Direct Alliance, our technology-enabled revenue generation business. Customer Technology Services which includes the Company's hosted and premise-based technology offerings, including certain acquired assets of eLoyalty. And Customer Strategy Services, which includes our customer experience consulting and data analytics, all of which we consider customer optimization services. You will not that our corporate expenses are shown as a separate line item. This is aligned with our strategy to maintain a highly centralized shared service environment, which will enable our business leaders to prioritize their focus on profitable top line growth and client satisfaction, while ensuring we manage towards increasing improvement in our G&A as a percentage of revenue.

Let me now review our segment results. Customer Management Services revenue was $234.9 million, compared to $246.1 million a year ago. Operating income was $45.4 million, or 19.3% of revenue, compared to 19.6% in the year ago quarter.

The $11 million revenue reduction compared to the year ago quarter is comprised of the following, $22 million in growth from bookings in the second half of last year, offset by the following. A $4 million negative currency impact, $14 million from the restructure associated with our proactive decision to exit certain underperforming geographies and programs as we discussed earlier this year, and lastly $15 million of existing business compression, consistent with our reported attrition, and also inclusive of migrations offshore, contract changes, and terminations.

As of Q1 2012 the cumulative quarterly impact of the $100 million to $115 million restructured revenue is $14 million, or approximately 15% of the targeted quarterly impact. We continue to estimate that we will complete the restructure by the end of Q4 2012 when the quarterly impact will reach $27 million to $28 million. Likewise, we continue to expect the restructure to cost $15 million to $18 million, and to contribute a $10 million to $12 million improvement annually, or an approximately 100 point increase in operating margin once completed.

Customer Growth Services first quarter revenue was $22.8 million, compared to $22.1 million a year ago. And operating income of $1.1 million or 4.7% of revenue, compared to 13.5% of revenue in the first quarter 2011. The current quarter operating results included a $1.8 million charge related to the rebranding of Direct Alliance to Revana. Excluding this impairment charge, first quarter 2012 operating income was $2.9 million, or 12.6% of revenue.

The Customer Growth Segment grew 3% Q1 2012 versus Q1 2011. While new logo and existing client growth was $5.7 million, or a 26% growth rate, the net growth was just under $1 million. This was due to a slower start to the first quarter in the federal sector after a strong fourth quarter. In addition, we proactively exited certain non strategic relationships, given our intent to position this business as a technology and outcome-based sales engine with premium pricing and margin. The exiting of these non-strategic accounts primarily impacts Q1 and Q2. Based on our solid pace of new business wins, and the current ramp of new bookings, we expect this segment to grow a minimum of 20% in 2012.

Customer Technology Services first quarter revenue increased to $25.6 million from 2011's Q1 revenue of $5 million on the acquisition of eLoyalty. Operating income increased to $3.6 million from $2.7 million. Q1 of 2012 includes increased investment in R&D and sales and marketing, to support a sustained plus-20% growth rate for this business.

Customer Strategy Services first quarter revenue increased 16.7% to $9.5 million. Operating income increased 9.4% from 5.7% in the year ago quarter. In Q1 2012 corporate expenses were $32.3 million, down 2% from $32.9 million.

Relative to our 2012 guidance, we continue to expect our revenue to be in the range of $1.15 billion to $1.2 billion,and our non-GAAP operating margin to be in the range of 8.5% to 9%, which would be up from 8.3% in 2011. In closing, our top priority remains driving increased shareholder value. We are committed to do delivering on the priorities we outlined, and look forward to providing updates on our progress in the coming quarters.

Thank you. And with that, I will now turn the call over to Karen.

Thank you. As we open the call to your questions, we would ask that you limit them to just one at a time, so we have the opportunity to pick up more of you. Marianne, you may now open up the call to questions.

Thank you. (Operator Instructions). Our first question comes from Mike Malouf of Craig-Hallum Capital Group.

Great. Thanks for taking my question. I would like to focus first of all on corporate expenses, can you just give us a little bit of color on $32.3 million, where you think that might go over the next couple of years? Is that a big focus to take that down, or is that going to kind of edge up over the next couple of years, just maybe less than [inaudible], thanks.

Yes. So what I would suggest, number one, I guess is that in the corporate expenses as you can imagine is our shared services, HR, IT, finance, our corporate offices, and such. And within that, also certain marketing expenses and sales expenses. And I think what you can expect is that the G&A components, components of IT, components of HR and finance will largely come down, absolutely come down as a percentage of revenue. In the midterm, you are going to see a tick up relative to investment in sales and marketing and R&D. I parallel that expense along with SG&A. I mean it is not a complete compare.

It is only a component of the SG&A. There is other SG&A that sits directly in the segments. But as we stated, you will see longer term our SG&A as a percentage of revenue coming down in the 15% to 16%, probably around 16.5% this year. But the corresponding decrease as a percentage of revenue will largely be seen in that corporate line item, albeit growth in sales and marketing within it, as well as continued ramp of R&D, as we drive a more technology and analytic-based platform.

Okay. Great and with regards to the restructuring in Europe, could you give a little bit of color?Do you have any major hurdles to go over maybe this summer and into the fall, or is it basically on track with regards to the plan? Thanks.

We continue to work through that. As you can see, we expected to go as we planned in Q1 where we continue to see this as a $100 million to $115 million hit to the top line, costing us $15 million to $18 million, but returning a point of margin. So we have a breakeven point in the 15 to 18-month period. And it is a number of clients in a couple of geographies. And so has some variables that we are working through so hard to call exactly in Q2 and Q3 and Q4, how it is going to continue to lay out, but we are on track.

Okay. I will get back in the queue. Thank you.

Our next question is from Tobey Summer of SunTrust.

Thank you. Nice to have the new reporting. So appreciate that segment detail. My question is, are these elements of the business, some of which are new through acquisition, integral to the whole, and beneficial in getting new work as you kind of described in some of the examples of the prepared remarks, or are they separable in allowing them to kind of flourish in their faster growth trajectory?Thanks.

Hey, Tobey. It is Ken. They are both. The reality is that we did these acquisitions as being able to provide an end-to-end integrated capability. It is something we believe that the market over time is going to move towards, and more importantly, the clients that we target which tend to be more sophisticated clients, tend to have more complex requirements, need a heck of a lot more than a technology enabled labor based solution.

So it is both. It is an integrated capability and the great news is that they all had solid management teams, and they all have the ability to attract their own clients and grow independently, which then gives us the ability to cross-sell from their client base to ours, and vice versa. And so frankly, we are very pleased with the traction that we have gotten in such a short period of time, and we are excited to be able to share more with you in the coming quarters

And my follow-up and I will get back in the queue is you have an awful lot of available borrowing capacity now. And your recent M&A has been relatively small. So should we expect the tuck-ins that you described as being your focus from an M&A strategy to be slightly larger than they have been recently?

I think that we are going to be strategic with whatever we do. And I think that although it would be interesting if something were strategically relevant and also had some more scale to it. The fact of the matter is that we are going to make sure that we are conservative, and that we are not surprising anybody and that everything that we do is going to be accretive and strategic to the overall plan.

What I would just tell you is that for us it is all about the focus of the quality of the asset that we are looking at. And frankly, there is on the larger side, there are not as many interesting or high quality assets that we think could really add a lot of value. And also, we look at the cultural fit, because we are not looking to buy broken companies. We are looking to buy companies that as we have told the Street, can grow 20% or better on the top line, and can get to 20% or better on the bottom line.

So right now we are very comfortable with the strategy that we have. I think it is rather interesting. There was an article not too long ago in the Wall Street Journal, that discussed what the most successful companies have historically done, and in every case what they said is that they did not do a bet the company acquisition, but instead did a series of strategic acquisitions that allowed them to expand their product offering, which is something that we have been focused on for the last 36 months. So yes, we have got a great balance sheet. We have got great borrowing power, and I think you will see that we will use it wisely, and that we will ultimately we will deliver shareholder value that our shareholders will be very pleased with.

Thank you.

(Operator Instructions). Our next question comes from Shlomo Rosenbaum of Stifel Nicolaus.

Good morning, everybody. Thank you very much for taking my questions. Can you just first tell me how much of the revenue that was exited on purpose happen in the quarter?I saw you mentioned $14 million in one segment, and then there was a certain amount from another segment, and I just wanted to just get a total number?

The number is $14 million. That restructure is entirely within our Customer Management Services.

So there was something else in the Customer Flow Segment, I thought came out that is not being counted towards that?

Yes. So slightly different. Right? When we talk about the $100 million to $115 million, this is largely a geographic exit in our customer growth, Revana, that business. In preparation last year of moving this business to a profile that is technology-enabled, information enabled, we made a decision that there were certain customers that didn't hit that profile, and/or a profile that we believe is higher growth, and importantly, a higher margin given the outcomes that we are driving for our clients. So slightly different, very strategic decision to make, to reset, I would say, the customer base in that group. But not to be confused with the $100 million to 115 million of restructure that we are doing, which is largely a geographic exit.

Okay. Thanks. And then is there some currency movements that is impacting the Philippine revenue, it seems to have declined sequentially in each of the last two quarters?

No. I think that one of the things that we are seeing both in our existing base and new logo, is a bit of a move back to the States, and certainly more growth in the States. But it is if you listen to the prepared comments on customer management again, we did have a continued compression in that business as well, and that is just in alignment with that.

What is going on exactly over there, what is the trend towards outsourcing in the Philippines, is it starting to moderate, can you give us some color on that?

I don't think it is starting to moderate. I think what is happening is that there is a segment of the client base that is coming to the conclusion that if they really want to drive and focus on the highest possible net promoter score, that they have been doing testing in their in country markets, and what they are finding in some cases, not all cases, that they can deliver a higher overall net promoter score, and consequently, that is leading to companies that are growing at a faster rate, retaining their customers longer, and/or tend to be more profitable at a higher EV value.

And so we have a stable of customers that are very interested in expanding more so rapidly in the US, while still maintaining a very significant footprint offshore. And this is something that we have actually been predicting what would happen, almost probably 36 to 48 months ago and we think it is normal. We think it is healthy. And we are very positive on it. And it also, we think, will help us drive our top line over the, in the near and the medium term. And so consequently, we are seeing more demand for US That said, we are still seeing significant opportunities in the Philippines. And in other offshore markets. Thank you.

At this time, there are no other questions. This concludes the first quarter 2012 earnings conference call. You may disconnect at this time.