TTEC Holdings Inc (TTEC) 2012 Q4 法說會逐字稿

Welcome to the fourth quarter and full-year 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 of this call. This conference 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. Good morning. Thank you to everyone joining us today.

TeleTech is hosting this call to discuss its fourth quarter and full-year 2012 results ended December 31. 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 the fourth quarter and full-year 2012. We also filed our annual report on Form 10-K with the SEC. This call will reflect items discussed within those documents. We will make reference to them on today's call. We encourage all listeners to also read our annual report on Form 10-K.

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 expectations. Please note that, these forward-looking statements reflect our opinions only as of the date of this call. 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 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 or one of more significant client relationships, execution risks associated with ramping new business or integrating acquired companies, and the possibility of additional asset impairments and our restructuring charges. For a more detailed discussion of our risk factors, please review our most recent SEC filings along with our annual report on Form 10-K.

A replay of this call will be available on our website through March 13. I will now turn the call over to Ken Tuchman, our Chairman and CEO.

Thank you, Karen. Good morning to everyone.

It's a pleasure to be with you today to review our financial performance along with the progress we've made on key imperatives. As I reflect on both 2012 and our past 30 years, I realize that our continued success has stemmed from unwavering clarity of purpose. That is, to build stronger brands for our clients through the delivery of extraordinary customer experiences. This focus is enabled by relentless commitment to innovation in everything that we do. This has led us to further diversify our revenues into a fully integrated offering that spans strategies to execution. Last year, 21% of our revenues came from these technology-enabled services up from 17% in 2011 and from 8.5% in 2010.

Technology has clearly revolutionized every aspect of our lives. We undeniably live in the age of the customer. We firmly believe that success of every company will be determined by how they respond to this heightened challenge. What is most exciting about our future is that customer experience is squarely at the forefront of every Board and every CEO's agenda. Numerous studies have validated that companies who sustain a long-term competitive advantage are those that differentiate via the customer experience versus those that benefit from a short-lived price or product advantage. Having managed billions of interactions in 2012 alone, we have a unique insight into the experiences that customers want. More importantly, how to deliver it.

Let me now reflect on our 2012 accomplishments and key priorities in 2013. I'm pleased that we delivered on all of our 2012 financial commitments that were first outlined a year ago when we announced our 2011 results. I'm proud to say that, we achieved both our revenue and profitability targets for 2012 despite a volatile macroeconomic environment. We successfully exited certain under-performing programs which equated to over $110 million of annualized revenue. Importantly, we stayed within the low end of the $15 million to $18 million range of restructuring costs associated with the exiting of those markets. As a result of this initiative, along with our revenue diversification efforts and our shared capacity utilization reaching 79%, our non-GAAP operating margin reached a three-year high of 9%.

Our strong balance sheet and free cash flow allowed us to continue to fund organic growth, accretive acquisitions and return capital to shareholders. To that end, we completed several acquisitions during 2012 that further laid the groundwork for our integrated offering and also acquired 9% of our shares outstanding. Lastly, we remain committed to achieving our longer-term financial objectives and expect to reach our revenue diversification goal of 25% during 2013, a year ahead of our originally stated timeline.

As we begin the new year, our focus on becoming the preeminent global provider of fully integrated customer experience solutions, strategy to execution remains steadfast. To that end, we continue to concentrate on the following three priorities. First, position the Company for top-line growth with increased penetration in targeted verticals. Second, invest in innovation and technology rich solutions that ensure we remain a vital partner to our clients while also driving higher margins on our diversified business segments. Third, pursue strategic and accretive acquisitions. We believe the successful achievement of these objectives will lead to superior shareholder returns over the coming years.

As it relates to top-line growth, we expect 2013 will grow between 4.5% and 6.5%. Our pipeline remains strong with a number of potential opportunities across all segments and verticals. Our sales pursuits continue to be solely targeted towards clients that are focused on total value delivered versus tactical labor augmentation engagements. Clients are selecting TeleTech because of our demonstrated value proposition and our ability to analyze, design, deploy and deliver turnkey solutions that drive measurable outcomes and improve customer acquisition, retention and higher third-party net promoter scores. The recently announced business win with Fairfax Media, one of the largest media companies in Asia-Pacific, is an excellent example of another relationship that spanned our integrated offering and was the key factor in winning this five-year engagement. Our work span strategy to execution as Fairfax's goal is to re-engineer their business around the customer to enable faster growth and greater profitability through a more optimized set of processes. We expect additional wins of this nature during 2013 as both existing and prospective clients are clearly resonating with the value of our integrated offering. We now have more than 20 clients that are using multiple services from our solution set. We believe this is solid progress. Our goal is to double the number of clients buying these integrated services by this time next year. In regards to vertical penetration, we continue to gain traction in our financial services, healthcare and transportation verticals, each of which grew 20% or more for the year.

Turning to our second priority, which is continued innovation. Over the last 30 years, our ability to stay strategically relevant to our clients and their customers needs has continued to differentiate TeleTech. Innovation is in our DNA. It will continue to fuel our prosperity over the next decade. In 2013, we plan to invest approximately $25 million towards innovative new offerings in addition to sales and marketing. Our innovation pipeline remains robust. We will continue to prudently pace this investment relative to our near and long-term financial objectives.

Turning to our third priority. We continue to pursue complementary and accretive acquisitions. In late December, we completed the acquisition of Technology Solutions Group or TSG, which became part of our CTS segment. They have a strong presence in the large enterprise market and bring deep expertise in consulting and systems integration along with the management of large complex converged IP-based environments. As we execute against our three imperatives, we continue to build our leadership team. We're delighted to have Brian Shepherd recently join our executive ranks in the newly created position of Executive Vice President of TeleTech and President of our Customer Strategy and Technology Services segment. Brian is an internationally recognized business leader with more than 20 years of customer experience consulting and technology acumen. Most recently, having held several executive leadership positions at Amdocs. By adding someone of Brian's stature to lead these two critical segments, it reaffirms our commitment to our diversification strategy and to accelerating the growth of these key segments via a strong executive focus.

Finally, our strong balance sheet provides us with tremendous optionality to invest in the business as well as pursue accretive acquisitions that further complement and enrich our existing offerings. In addition, we continue to drive enhanced returns to shareholders via our long-term buy-back program which we first started 12 years ago. During the fourth quarter, we spent $26 million on share repurchases and $81 million in 2012. As we begin 2013, we had $25.4 million available for future repurchases. In closing, as we embark on our fourth decade in business, our path forward is deliberate and focused entirely on profitable top-line growth. We are pleased with the alignment of our emerging businesses as we enter 2013 and their strong pipeline of opportunities. When you reflect on the actions, investments and key hires that we've made over the past 24 months, I hope you see the level of commitment and conviction we have to achieving our future financial objectives for the combined benefit of our employees, clients and shareholders.

Today, we serve 200 of the world's leading brands, more than double the 85 clients we supported just two years ago. Given a majority of our historic growth has come from our embedded base, we see great future opportunity with these and other prospective clients. We have a strong Management team, a solid balance sheet and proof points that our integrated value proposition is resonating with the market. I'm confident that our strategy will continue to create value as we embark on the next 30 years.

With that, I'll turn the call over to Regina.

Thank you, Ken. Good morning, everyone.

Let me start with some comments on the full year, after which, I'll discuss our fourth quarter and 2013 business outlook in more detail. Revenue of $1.163 billion was in the middle of our originally guided range of $1.150 billion to $1.200 billion. The declined from 2011 was attributable to $64 million in lost revenue from exiting certain unprofitable programs combined with the nearly $15 million negative currency impact. Excluding these items, revenue grew $63 million or 5.3% over the same period a year ago. Adjusted operating margin reached a three-year high of 9% and at the high end of our originally guided range of 8.5% to 9%. The charges associated with exiting unprofitable markets were $15.5 million and at the low end of our originally guided range of $15 million to $18 million. We returned $81 million to shareholders or 9% of our net market cap via the repurchases of 5 million shares. We generated nearly $66 million of free cash flow for a near 7% yield on our market cap.

Let me now review our fourth quarter results in more detail. Revenue for the quarter was $295.3 million compared to $300.5 million in the year-ago quarter. The $5.2 million decline was related to the loss of $21.7 million in revenue from exiting certain unprofitable markets, offset in part by a $2.9 million favorable foreign currency impact. Excluding these items, revenue grew $13.6 million or 4.5% over the year-ago quarter. Our diversified businesses comprised approximately $60 million or slightly more than 20% of fourth quarter revenue. Our fourth quarter GAAP operating income was $26 million or 8.8% of revenue, compared to 6.9% in the year-ago quarter. Adding back the $2.2 million of restructuring charges, our non-GAAP operating income was $28.2 million or 9.5% compared to 7.4% in the year-ago quarter.

SG&A expenses in the quarter were 15.2% of revenue down from 16.7% in the year-ago quarter. These improvements are the result of ongoing efficiencies we are realizing as we leverage our general and administrative expenses across an expanding suite of services. Our effective tax rate this quarter benefited from several items none of which were individually significant. Excluding these benefits, our normalized effective tax rate for the quarter was 18.7% and 20% year-to-date. Our fourth quarter GAAP fully diluted earnings per share grew 36% to $0.38 from $0.28 in the year-ago quarter. On a non-GAAP year-over-year basis, EPS grew 31% to $0.38 compared to $0.29 a year ago. During the quarter, the Company repurchased 1.5 million shares for a total of $26 million. As of year-end, we had $25.4 million authorized for future share repurchases. Free cash flow was $36.1 million, compared to $57.2 million in the year-ago quarter and was lower primarily due to the timing of certain working capital items.

Capital expenditures were $7.4 million, compared to $17.1 million in the fourth quarter of 2011. The full-year CapEx was $40.5 million, comparable to the $38.3 million in 2011. We ended the quarter with $164.5 million in cash and $119.5 million of total debt. This resulted in a net positive cash position of $45 million. Our total debt to capital ratio was 19.3%. Our current ratio was nearly 3 times. Our adjusted return on invested capital, 24%. As of December 31, we had approximately $388 million of additional borrowing capacity under our revolving credit facility. This continues to provide us the capacity to fund a combination of organic growth, share repurchases and accretive acquisitions. We will continue to opportunistically execute tuck-in acquisitions adding additional competency, scales and geography. Our DSO's were 76 days which was down 2 days sequentially and up 1 day from a year-ago quarter.

Let me now review our fourth quarter segment results. As we noted in the press release, we allocated our corporate costs against each of our business segments. We felt the allocation of corporate costs to the individual segments would provide greater insight into the fully allocated profitability of each business. As we move into 2013, we plan to further refine our allocation methodology using a combination of consumption and pro rata-based methodologies. Customer Management Services' revenue was $235.5 million, compared to $240.7 million a year ago. Revenue was reduced by $21.7 million in the fourth quarter due to exiting certain unprofitable markets, partially offset by a $3.1 million favorable foreign currency benefit. Excluding these items, revenue grew $13.4 million or 5.6%.

Adjusted operating income was $24 million or 10.2% of revenue, compared to 6.5% in the year-ago quarter. The operating margin increase was attributable to the seasonal lift we see in the fourth quarter from holiday-related volumes in our retail sector, along with the benefit we expected to see from exiting certain under-performing businesses during the latter half of 2012. Customer Growth Services' fourth quarter revenue grew nearly 5% to $25.4 million as a result of new programs. Operating income was $850,000 or 3.3% of revenue, compared to 8.1% in the year-ago quarter. Our margins in 2012 were impacted by higher sales, marketing and rebranding expenses combined with increased investment in the scalability of our marketing platform.

Customer Technology Services' fourth quarter revenue was $24 million, up 7.4% sequentially from $22.3 million, but down from the year-ago quarter which benefited from a large product sale in the fourth quarter 2011. Customer Strategy Services' fourth quarter revenue grew 32% to $10.4 million from $7.9 million in the year-ago quarter, primarily as a result of the iKnowtion and Guidon acquisitions. The operating loss in this segment was due to seasonally lower utilization in certain geographies and investments in select geographic expansion. We expect the operating income performance of this segment to improve in 2013 as we leverage our investment and drive synergies across our consulting practices.

Turning to our business outlook. We are introducing our 2013 guidance. We expect revenue to grow 4.5% to 6.5% to a range of between $1.215 billion and $1.240 billion with operating margin increasing to between 9.25% and 9.5%. In addition, we believe our effective tax rate will range between 20% and 22% in 2013. With regard to capital expenditures, in 2013, we continue to prudently pace our investment in global infrastructure in line with our new business wins and would expect full-year 2000 CapEx to range between $50 million and $60 million. While we don't provide specific guidance on our four business segments, let me share some additional color. Regarding the CMS segment, keep in mind that the first quarter results are seasonally lower both from a revenue and operating margin perspective due to the runoff of holiday volumes. In addition, there was approximately $50 million of revenue that we recognized in 2002 as we exited under-performing businesses that will not recur in 2013.

We believe the CMS operating margin will approximate the 9% non-GAAP margin we reported in 2012; however, keep in mind that there was an approximate 25 basis point one-time benefit to the 9% margin, related to the finalization of certain real estate and employee-related expenses in Q3 of 2012 that will not recur in 2013. Regarding the other three emerging segments, which include CSS, CGS and CTS, we expect the combined revenue for this group will grow 30% to 40% of which roughly half will be organic. As Ken indicated, we would expect these businesses to reach 25% of revenue during 2013. With regard to the combined operating margin for these businesses, we believe they will exceed 10% on a full-year basis in 2013. Also keep in mind that, about 0.5 of the $25 million incremental investment in 2013 to support our growth initiatives will be directed to these three emerging segments.

Thank you. With that, I'll turn the call back to Karen.

Thank you. As we open the call to your questions, we would ask you limit them to one at a time, so we have the opportunity to take everyone's inquiry. Operator, you may now open the lines.

(Operator Instructions)

Ashwin Shirvaikar, Citi.

My question is on -- from a segment basis, as I look at margins, they were -- in all of the -- in the non-call center businesses, they were down except for technology. I wanted to understand, as these businesses grow at a faster pace, is there a scale impact -- are these fundamentally lower margin businesses compared to call center? Or is there expectation that margins improve at some point?

Hi, Ashwin. It's Ken. How are you? Long time. Our expectation is that the margins in fact will be higher. We communicated that when we set fourth on our strategy. We're very confident that we will deliver on higher margins, as well as a significantly higher growth rate.

Could you quantify what you might mean by higher margins? Are there milestones we should be looking for?

Well, I think over the medium-term, I think that our expectation is that business typically will put forth a margin that's going to range on the very low end of 15% and to 21%. So you can just do an average if you want. We'd be comfortable with that. But what I would just simply say is that, I don't think you should judge that segment with the amount of acquisitions that we've done, going forward. I think that it's safe to say that, we're pretty good at rationalization and that we're aggressively going through that process and feel very confident in what we're seeing as well as the pipeline.

If I can ask one more. Can you talk about the strategic imperative in the integration of TSG and Guidon into your current operations?

I'm sorry, you faded out on the very end.

Strategy around TSG and to Guidon.

-- and Guidon integration. How will you integrate TSG and Guidon (inaudible) --

Yes. So I'm still not sure I fully understand the question, but let me try to take a crack at your question. What we're finding is that -- although the Street thinks that we're in the call center business, the fact of the matter is that, our clients now understand that they need something that's going to drive and dramatically change their customer experience. In order for us to do that, we have to be able to provide strategic consulting for them. But to just provide strategic consulting and to provide a three ring binder of the what and what has to be done, is not enough. What they're looking for, is they're looking for an organization that they can hold responsible to outcomes. The only way we can deliver to outcomes is to basically manage the ecosystem that drives whether a customer experience is good or bad. Or whether revenue is growing or shrinking.

Or whether retention is staying. Or a loyalty is maintaining or declining. We believe that the assets that we've pulled together and the capabilities that we've pulled together are allowing us to work with very large companies that have very legacy processes. They're very much legacy in their technology area, et cetera. They're looking for an end-to-end solution. So what I would just say to you is that, we're getting very significant clients resonating to what it is that we're offering. We're selling in that manner. We are not selling a staff augmentation capability, which is something that we think, longer-term, is not an overall business that's going to have the types of margins that have traditionally been afforded in the past.

Instead, clients are looking for outcomes where they can predict what in fact is going to take place with their customer base. So we have a myriad of case studies of clients where we've had these types of impacts. Offline, I'd be happy to talk more with you on how we are impacting this. But that is exactly what we're doing. TSG is merely now become part of the eLoyalty. The difference is that, it just simply gives eLoyalty that much more overall scale than what eLoyalty already had. eLoyalty has been growing at a very fast clip and is going to continue to grow at a very fast clip with more acquisitions planned, so that we can continue to drive a more technological solution. So, sorry for the long-winded answer. I hope that answered your question.

That was quite useful. Thank you, Ken.

Mike Malouf, Craig-Hallum.

Nice quarter. Great job, guys. My question is a two-part question. Can you talk a little bit about foreign exchange, specifically, the Filipino peso and how that's affecting you guys? What kind of impact that's going to have going forward? How you're trying to -- how you're mitigating that? Thanks.

Yes. Let me address the FX piece. So it's not affecting us. I would say, we've got a very mature program relative to the risk that we have around the world with regard to FX. That's program really is twofold. One is that, we risk mitigate a fair amount of it, especially with our larger clients through contractual terms and conditions which allow us to true-up that FX on a fairly frequent basis. Then second to that, we have a very active hedging program both short-term, but very much long-term. For example, specifically your question on the Philippine peso, where for a part of our portfolio, we are hedged out almost four years. So we have, I think, done a very good job over the last number of years. It's been a long-term program of very actively and successfully managing that risk. Expect to continue to do that on both those fronts, that I mentioned. As we bring new clients in, clearly, we're pricing our contracts at that moment relative and immediately at the gate, establishing hedges where relevant.

Great. That's really helpful. Thanks. Maybe, Ken, can you talk a little bit about how the traditional call center business is right now? I know you do a good job of -- as you sit here at the end of 2012 and looking out over the next couple of years. Your results and some of the other companies in your industry seem to be experiencing a little bit of a strengthening in demand. I'd love to get some color on where we think we are with the outsourcing trend. Specifically around maybe if there's been any structural changes, for instance, at home and how that's affecting the industry. Thanks.

I think just to layer on to what I was just saying to Ash, in that, the business -- in our opinion, in order to really be differentiated in the space, we have to become the leader that is driving the outcomes. Therefore, what we're focused on is having differentiated technological capabilities that allow us to help our clients deliver a capability that ultimately their customers are saying is differentiating their brand. In doing so, what we're seeing is that there's really two types of clients in the marketplace. There is a client that wants to be prescriptive and tends to have the lowest net promoter scores, tends to want to be focused on the lowest price in the Excel spreadsheet and is very focused on more of a staff augmentation lift and shift less, mess for less. We're going the exact opposite direction. If you actually look at who our clients are, it's safe to say that the majority of them have some of the highest CSAT scores, JD Power scores and NPS scores.

They actually understand the fact that investing in the customer, being able to be predictive with the customer, being able to almost have a psychic ability -- I don't mean to be corny by saying this, of knowing and understanding what the customer's looking for, is very important. That's why we've been making significant investments in the data analytics space. It's why we're building platforms in that area, et cetera. So I think again, the Street focuses on our name because of its legacy of how long we've been in this business, as a call center Company, when in fact, what we're seeing, to your point, is a dramatic shift in the types of interactions that are taking place. So our ability to be able to service and support customers, not just across the voice channel, but across the chat channel, not just across the chat channel, but across social media channels like Facebook, like Twitter, like video. The ability to be able to take all that information, consolidate the information and give our clients a single view, so that they understand what the voice of the customer is, where their customer is going, where they are trending, are they happy, aren't they happy?

If not, what are the treatments that need to be used, et cetera? We're not seeing other folks in the marketplace focus on this. We understand that they've got a great business. They're focusing on their traditional business. But the business that we're focusing on, like I say, is to have a strategic differentiation with our strategic consulting, a technological differentiation with the capabilities that we offer, the platforms that we offer, the SaaS-based capabilities that we offer through the Cloud and the ability to have a delivery capability that physically can provide the arms and legs to interact with the customers. At the end of the day, we are totally fine if the customer is not interested in using our BPO delivery capabilities. As long as they're purchasing our technology capabilities and our consulting capabilities and our strategy capabilities, we're very happy. So the point is, we feel that the marketplace is going to continue to evolve. There are going to be those customers who are very focused on their customers. There are going to be those that are going to treat them as transactions. We're going to focus on the companies that, in fact, are passionate about their customers and therefore need the capabilities that we have.

[Steven Shew], Stifel Nicholas.

It looks like CapEx has taken a healthy step up in 2013. We've seen that with the competitor as well. Can you give us some color into what you'll be spending on and whether some of your newer businesses are just more capital-intensive?

Yes. I'd first start by saying that $50 million to $60 million is a range that will be tied to bookings. So the infrastructure required around the world either for CMS or for CTS which are really the two businesses that consume the bulk of that capital. But the lion's share of the step up would be new sites based on the pipeline that we have, the bookings that we're seeing in Q1. We still expect over the long-term to be within that 4% to 5% of revenue. Our CapEx was $40 million last year. I think within that, we spent probably about 25% on site build-out. As you see, our capacity has moved up from 72% to 79%. We continue to improve in Q1. As we come off of Q1 and book new business in CMS globally, we expect that we will start to build-out new sites. So the bulk of that is really, as I said, site build-out as well as in CTS the build-out of our Cloud platform which backs up our recently achieved certification in Cisco Cloud.

Okay, thanks.

Then, just one other comment that, for the most part, our CapEx continues to be around 70% new and 30% maintenance.

A separate question, what was TSG's revenue in 2012? How fast do you expect that business to grow in 2013?

TSG's revenue was in the mid-$30 million. We expect that business to be between $35 million and $40 million on a forward basis.

Kevin McVeigh, Macquarie.

This is actually [Derek Sprague] in for Kevin. Thanks for taking my question. Nice job in the quarter. With the new operating margin guidance for 2013 in the 9.25% to 9.5%, given that new range, do you guys still see the 11% to 12% that you had previously outlined for 2014 as attainable?

Definitely.

Great. Should we be thinking --

I want to just stress, so that if you're wondering, where is the delta? The amount of investment that we're making in sales and marketing and R&D is significant. I would just suggest that you take a look at what that investment is and what our margins would be without that investment. So we're very comfortable with the future guidance.

Got it. We should be thinking about that as a run rate for the entire year not an exit rate, correct?

Yes. That's correct.

Then, I know you're not probably going to provide too much color, but given all these investments that you spoke about, what does that imply for the margin profile of the core CMS business? Do you expect that to continue to expand? Or even -- if you can talk about it directionally?

What I would just say to you, that on an aggregate, when you look at onshore, nearshore and offshore, I think that business is going to range probably in the 8% to 9% range. I think that what's going to bring the margin over the top is all the emerging capabilities that we've been putting together and that we're now getting excellent traction on.

Okay. That's very helpful. Thanks, guys. Nice job.

At this time, there are no other questions. Do you have any closing remarks?

We do not at this time.

Thank you all.

Thank you. This does conclude the fourth quarter and full-year 2012 earnings conference call. You may disconnect your phones at this time.