TTEC Holdings Inc (TTEC) 2013 Q3 法說會逐字稿

Welcome to the third quarter 2013 earnings conference call. I would like to remind all parties that you will be in a listen-only mode until the Q&A session. This call is being recorded at the request of TeleTech. I would now like to turn the call over to Paul Miller, TeleTech's Senior Vice President and Corporate Treasurer. Thank you, sir. You may being.

Good morning and thank you for joining us today. TeleTech is hosting this call to discuss the third quarter 2013 results ended September 30. Participating on today's call is Ken Tuchman, our Chairman and Chief Executive Officer, and Regina Paolillo, our Chief Financial Officer.

Yesterday TeleTech issued a press release announcing its financial results for the third quarter 2013 and also filed its quarterly report on form 10Q with the SEC. This call will reflect items discussed within those documents and we may reference them on the call today. We encourage all listeners to read our form 10Q.

Before we begin I want to remind you that matters discussed on today's call may include forward-looking statements related 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 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 large clients, the risks associated with lower profitability from or the loss of one or more significant clients, execution risks associated with ramping new business or integrating acquired businesses, and the possibility of additional asset impairments or restructuring charges. For a more detailed description of these Risk Factors, please review our most recent SEC filings, along with our 2012 annual report on form 10K.

A replay on this conference call will be available on our website through November 14.

And I will now turn the call over to Ken Tuchman, our Chairman and Chief Executive Officer.

Thank you, Paul. Good morning and Happy Halloween to everybody. We continue to make progress executing our strategy this quarter while our results were impacted by certain external factors, namely a negative impact from foreign currency translation. We're encouraged by the underlying improvement in our business. Our emerging businesses showed meaningful improvement with CSS and CTS delivering double digit revenue and operating margin growth.

We signed $80 million in new business including attracting 15 new clients to our growing roster of leading grants. The acquisition of Webmetro was completed and is being integrated into the CGS segment. We continue to deliver early returns to shareholders and repurchased an additional 857,000 shares at a cost of $20.6 million in the quarter. And our normalized operating margin adjusted for foreign exchange and other one-time items was 9.8%.

For the first time in three quarters in 2013 we signed an additional $285 million in annualized contract value, a meaningful increase of 23% from the same period last year. Of the $80 million signed in the third quarter, the revenue mix remained favorable with 80% from existing clients, 66% in reoccurring revenue, 50% from emerging business, and 21% from international clients. Furthermore, the combined emerging business grew revenue 28% year over year with 54% growth and a number of clients buying multiple services. While it's early days, we're encouraged by this trend and see ample opportunity for continued growth.

With every passing day, our focus on customer engagement becomes more relevant. We're living in an era where society and technology are moving faster than many organizations can adapt. In today's highly digital mobile 24 by 7 world success is being defined by a company's ability to sense and respond to their customer needs. It is a fact, a company's brand and value are either enhanced or hurt by the experiences they deliver to their customers.

Excuse me. Our clients are coming to us because they need new skills, proven approaches, and a rapid response to this disruptive environment. We've deliberately built our integrated customer experience platform to provide them with all the capabilities they need to drive these changes swiftly, effectively, and profitably.

For several years we've been pivoting from our legacy labor arbitrage model to a technology enabled service platform that includes all the elements of social media, mobile, analytics, and cloud services. This technology platform is designed to cut across the organizational silos of sales, marketing, and customer service to deliver a seamless experience to the customer.

Now I'd like to share some detail on our emerging business that operates at the center of the -- excuse me -- that operates at the center of the digitally enabled customer experience. For the third quarter in a row our customer technology services segment has delivered double digit growth and we expect to end the year at 50% growth over last year. Through our customer technology services group, we're providing our clients with an integrated set of social capabilities, mobile applications, multichannel communication services, and robust analytics that are hosted on a scalable and flexible cloud platform.

Our systems integration practice is growing in importance as our clients are challenged to integrate multichannel interactions with data sources. We're working with them to link together disparate systems in the cloud and create common data architecture that enable a 360 degree view of individual customer relationships. As clients continue to look for flexible and cost effective solutions, our SAS offerings are also gaining momentum.

Another one of our emerging businesses, customer strategy services, grew revenue 14.5% this quarter over the same period last year. These strategic consulting capabilities are opening up new opportunities for our higher margin technology, analytics, and process management solutions. As an example, we were recently engaged by a major telecom provider to develop a comprehensive multichannel customer experience strategy. Once it was complete, the client asked us to assess if their current context and operations could successfully deliver the strategy in terms of the people, process, and technology. Based on our assessment, we're engaged to help our client implement our proprietary technology stack, set up a project management office, and manage the day to day operations of the center.

This one strategy assignment resulted in higher margin follow-on business in our customer's technology services and customer management services business units. Our customer strategy services are providing us insight into deeper organizational challenges for our clients and opening up the door for enterprise wide solutions that have the potential to deliver long-term value. These examples demonstrate how our overall business strategy is taking hold and is reshaping how we build shared value with our clients. We remain focused on our four-pronged growth approach that we outlined several years ago.

First, deliver profitable growth with a robust diversified and integrated customer engagement platform. Second, increase market share by accelerating investments in our vertical and sales expansion strategy. Third, increase funding in continuous innovation to stay strategically relevant and ahead of the needs of our clients. And fourth, execute strategic and accretive acquisitions to add key capabilities to our solutions portfolio.

I've already covered the growth and innovation pillars of our strategy and now I want to focus on the pillars of increasing market share and acquisitions. In Q3 we stepped up our investments in our vertical sales platform and expect to accelerate these investments throughout 2014. We've brought in seasoned experts from financial services, communications, media, technology, and healthcare to join our global markets and industry organizations under the leadership of Keith Gallacher. These experts have deep domain expertise and are working directly with senior executives in our client organizations to drive vertical specific solutions. Early client response to our verticalized offerings has been positive and we look forward to growing momentum.

We continue to be committed to adding key capabilities to our customer experience platform and are building a strong pipeline of acquisition candidates that will expand our global footprint and support our emerging businesses.

In 2011 we began this journey to optimize TeleTech's value by advancing our customer engagement platform. We saw the fast approaching global disruption in customer experience and we anticipated the emerging capabilities our clients would need to respond. We began the transformation of our Company with the knowledge that it would require time, investment, and patience. We knew we would need to enhance our leadership, acquire new technology and create analytic-driven solutions as well as expand our geographic footprint and leverage our capital resources.

Today, I'm proud to say that 27% of our revenues is derived from the emerging businesses and we have recently established and integrated selling platform to bring our range of strategically relevant offerings to our clients. In addition, we have an incredible leadership team in place with unparalleled experience in leading organizations through change and growth. We're well-positioned and keenly focused.

With that, I'll turn it over to Regina to share details of our financial performance.

Thank you, Ken. Good morning, everyone.

Noticeable in this quarter's earnings discussion is the negative impact of foreign currency translation and the nonrecurring items. Quite honestly, this has been an unusual quarter with the confluence of uncontrollable events effecting both Q3's performance and our full year guidance. In the interest of transparency, we though it important to bridge our GAAP reporting to a more detailed view of our performance excluding foreign currency fluctuation and the nonrecurring items across our revenue, operating income, and EPS.

I'll start with a review of the consolidated and segment results including bridging our GAAP and non-GAAP numbers and end with some comments on updated guidance including some additional context on the changes we are making to revenue and operating margin estimates.

Third quarter bookings were $80 million and had a balanced contributed across the segments. In particular, emerging business bookings represented 50%. Third quarter GAAP revenue was $297 million compared to $286.3 million in the third quarter of 2012. On a constant currency basis, and adjusted for $5.2 million of revenue related to our exit from Spain and $1.2 million of revenue loss associated with severe storms in August in the Philippines, revenue grew 86.9%. Q3 2013 revenue from acquired companies post-Q3 2012 was $16.7 million.

Our third quarter GAAP operating income was $26 million or 8.7% of revenue compared to $27.4 million or 9.6% of revenue in the year ago quarter. Operating income from acquired companies completed post-Q3 2012 was $2 million. On a constant currency basis and adjusted for $800,000 related to the Philippines storms and $800,000 in restructuring charges, operating income was $29.9 million or 9.8% compared to $29.8 million or 10.3% in the year ago period.

The lower operating margin is primarily due to improvements in our emerging margins -- emerging business margins which grew 26% Q3 '13 versus Q3 '12 offset by $5.3 million of incremental investments and $1.1 million of additional amortization expense related to the acquisitions of TSG and Webmetro. The incremental investments include our expanded leadership team, the build out of our vertical sales platform, marketing investments related to our rebranding, and technology investments supporting new products and solutions. While these initiatives are not one-time expenses, they are in the development stage and are not yet contributing revenue or operating income.

SG&A expenses in the quarter were 16.9% of revenue, up from 15.3% in the year ago quarter. The increase is due primarily to SG&A from acquired companies in addition to the investments previously discussed. Our GAAP-based tax rate this quarter was 24.9% compared to a negative 13.8% for the same period of 2012. This increase in rate was partially influenced by the distribution of earnings in international jurisdictions and higher restructure and impairment charges in the prior year. The normalized tax rate was 21.3% consistent with Q3 2012.

Third quarter fully diluted GAAP earnings per share was $0.34 versus $0.52 in the year ago quarter. Q3 2012 included a significant one-time tax benefit equal to $0.16 of EPS. On a constant currency basis and adjusted for non-recurring items, EPS was $0.41 compared to $0.39 in the prior year quarter. We continued to be committed to early returns to our shareholders and as Ken mentioned during the quarter we repurchased approximately 857,000 shares for a total of $20.6 million. Year to date we have repurchased 2.3 million shares for a total of $52 million. As of September 30, 2013 we had $24 million authorized and available for future share repurchases.

Cash flow from operations was a strong $36.4 million compared to $14.8 million in the year ago quarter. We continued to pace our capital expenditures in line with our growth and spent $18.2 million on capital items in the third quarter compared to $15.8 million a year ago. We ended the quarter with $144.9 million in cash and $129.4 million of total debt resulting in a net cash position of $15.5 million.

In addition to our cash balances and cash flows from operations we have significant additional financial flexibility to fund working capital, accretive and strategic acquisitions, and share repurchases by utilizing our revolving credit facility. As of September 30 we had $579 million in additional capacity under the line of credit.

Our total debt to capital ratio is 22%, our current ratio, 2.6 times, and our adjusted return on invested capital was 22.7%. The strength of our operating cash flow, balance sheet, and capital structure have allowed us to fund our organic growth, execute significant share repurchases, and acquire important capabilities for supporting our emerging business strategy. Since January of 2012 alone we have deployed $255 million in share buyback, acquisitions, and capital expenditures. Our DSO was 75.9 days, an improvement of 2.6 days, and 78.5 days in the year ago quarter. Site utilization was 79% in the third quarter of 2013 an improvement from 77% in the year ago period and 75% in Q2 of 2013.

Before I move on to discuss segment performance, I'd like to add some context relative to the foreign exchange impact we experienced in Q3 2013. The foreign exchange impact relates solely to a handful of significant international clients in Australia and Brazil where the currencies in these countries weakened significantly against the US dollar during third quarter of 2013. The magnitude of the foreign currency devaluation -- 13% in the third quarter of 2013 over the same period last year.

It's important to note that this is purely a reporting exposure and has no underlying economic impact on the Company's cash flows. We continue to have a highly effective cash flow hedging program that actively manages the risk that arises when client billings and the related deliver expenses are in different functional currencies. We expect recent FX trends to effect our operating income as follows.

Revenue was impacted in Q3 by $6.9 million and we estimate a similar impact in Q4 for full year impact of approximately $14 million. Operating income was impacted in Q3 by $2.3 million and we expect a $3 million impact in Q4 for a full year impact of approximately $5.3 million.

Regarding our segment performance, customer management services revenue was $217 million compared to $224 million a year ago. On a constant currency basis and adjusted for $5.2 million of revenue related to our exit from Spain and $1.2 million of revenue loss associated with the Philippines storm, revenue was $224.6 million and grew 2.4% versus Q3 2012. Operating income of $17.9 million or 8.3% compared to $21 million or 9.4% in the prior period. On a constant currency basis and adjusted for nonrecurring items, operating income was $22.3 million or 10% compared to 10.5% in the prior period. The lower operating margin percentage is primarily related to continued improvements in our ongoing operations offset by the incremental investments we noted earlier and which are allocated to our segments.

Customer growth services revenue was $25.9 million versus $28.2 million in the prior year. The change in revenue is attributable to a combination of factors. The Webmetro acquisition, new bookings, and growth from certain existing clients contributed positive top line growth but were offset by the impact of a continued delay in ramping a significant multi segment client and churn and volume reduction from a couple of clients in the first half of 2013.

The CGS segment is making progress in transforming its solutions portfolio but it will take time. This encompasses the integration of Webmetro, including the development of new Revana Webmetro solutions, moving to outcome-based pricing, and the build out of the sales channel. Q3 bookings included a short list of important and noteworthy technology and new media companies who selected Revana for end to end selling capability.

Sequentially the segment grew revenues 16% including Webmetro and we expect similar progress as we go from Q3 to Q4. CGS had operating income of $588,000 compared to an operating profit of $2.5 million in the year ago quarter. The lower operating income was largely due to the variance in revenue. Sequentially CGS improved operating income by $1.2 million including Webmetro and we expect similar improvement Q3 to Q4.

Customer technology services revenue was $40.6 million, up 82% compared to $22.3 million in the year ago quarter. 52% of the growth came from the acquisition of TSG with 30% coming from organic growth. Our cloud and managed service solutions now comprise 43% of the segment revenue at an annualized run rate of $70 million. The profile of this business includes a three to five year client contract with upfront annual or multiyear subscription payments. The gross margins in these solutions are on average plus 40%.

CTS GAAP operating income was $5.2 million or 12% of revenue compared to $3.1 million or 13.7% of revenue in the third quarter 2012. The lower operating margin percentage is attributable to an increase in amortization expense related to the TSG acquisition and our investments in the cloud platform and sales channel.

The customer strategy services segment Q3 2013 revenue was $13.4 million compared to $11.7 million during the same quarter last year. The segment had an operating profit of $2.3 million or 16.9% in Q3 versus operating profit of $819,000 or 7% in the prior period. The increase in revenue year over year was primarily the result of our acquisition of Guidon as well as improved sales effectiveness and utilization resulting from our integration of the various acquisitions in this segment.

Sequentially, CSS grew revenue at $3.4 million and operating income $4.2 million. This improvement is the result of having fully integrated the CSS entities including leadership consultants, infrastructure, and service portfolios. We expect CSS to perform at a similar level in Q4.

I'll now spend a few minutes providing you context on our full year 2013 guidance. As indicated in our press release we are updating our full year guidance as follows -- revenue in the range of $1.175 billion to $1.185 billion, operating margin in the range of 8.75% to 9%, and CapEx in the range of $50 million to $55 million.

The change in guidance is driven by a handful of macro economic and client specific events in our BPO businesses that have recently taken place. In the interest of bridging our updated guidance to current consensus, including revenue of $1.215 billion, operating income of 9% and EPS of $1.53 I would offer the following context.

The full year impact of foreign currency in our estimates is $14 million. Our guidance includes a $6 million reduction in revenue from our decision to eliminate Q4 seasonal lines that were below our required margin targets. We've also adjusted our guidance by $14 million due to temporary delays in ramping four significant client programs one of which is a plus 15 year teleco client. The second is a large media client who signed a five year contract including services across all four of our segments. The third client is a healthcare payer with whom we have a ten year relationship. And the fourth client is a relatively new client within our financial services sector with a five year contract for 1,000 workstations. To these clients we are a strategic partner and vital to the customer experience journey.

The depth and scale of these client relationships require partnership, collaboration, and cooperation. We are confident based on our relationship in the underlying contractual term that we will see the expected volumes near-term. We expect the operating impact of these changes to include a $5.3 million reduction related to the FX impact and a $2 million reduction related to the seasonal volumes and delayed ramps. In combination with improving margins in our emerging businesses and the expense management in Q4 we expect the operating margin to be between 8.75% and 9%.

It's only natural as a leadership team that we're disappointed in the timing of events that have led to an update to our 2013 guidance. That said, we could not be more encouraged by the growing market opportunity, the relationship we have with our 250 plus clients, and the progress we are making in executing our strategy including the build out of our vertical sales capability which is critical to our top line growth.

With that, I'll turn the call back to Ken.

Thank you, Regina. With our continued focus on customer engagement, we're establishing a new category that transcends traditional labels of BPO. Our integrated set of offerings blur the lines between sales, marketing, and service to more accurately reflect the way customers interact and build relationships with brands.

As an industry leader with demonstrated capabilities in integrating the ecosystem of strategy, technology, data, and services, we believe we're uniquely positioned to capture a growing market opportunity. While the tools and processes may have changed over our three decades of operations, our vision remains steadfast. We are confident in our future and look forward to continuing to deliver value to our clients, shareholders, and employees for the next 31 years to come.

Operator, you may now open the line for questions.

(Operator Instructions) Mike Malouf, Craig-Hallum Capital Group. Your line is now open.

Thanks, guys. Thanks for taking my question. Ken, I was just wondering if you could talk a little bit about new business. I noticed that if you take a look at 2012's business, you averaged around $76 million of new business throughout the year. When you look at this quarter, you're at about $80 million. So, we're not really seeing an acceleration yet. I was just wondering if you could comment as you look out over the next couple years, is that a line that we should see in acceleration with regards to the synergy of all the businesses kind of rowing in the same direction? And then maybe you can comment just a little bit on attrition, if you're seeing any kind of change there. Thanks.

Sure, Mike. So, I believe your question was that last year we were at about $80 million?

$79 million. I mean $70 million to $75 million a quarter.

$70 million to $75 million in the quarter. This year we're averaging about $95 million a quarter. That's about a 23% increase. That said, we'd like it to be more and with our focus on making very significant investments in our sales and marketing, we're confident that in the relatively near-term we're going to see the benefits from the amount of people that we're adding, the account coverage, et cetera.

So, I'm not sure exactly what your question is as it relates to our growth but I think that the numbers speak for themselves as it relates to what it was last year, what it is this year, and obviously we're hoping that we can continue to see more and more improvement as the quarters -- as we enter new quarters with, A, a much wider and much more strategically relevant product line and, B, a significantly larger sales force and account management force in the marketplace than we've ever historically had.

All of that is coming on. We just started stepping up the investments starting in the third quarter and we plan on increasing the investments all the way through 2014 and so our belief is that we'll see good solid returns as these people come up to speed.

Okay. Thanks. Just a follow-up question with regards to acquisitions -- can you comment a little bit or give us some color on the acquisition environment out there? Do you still have a pipeline of bolt-on acquisitions specifically sort of focused in on the technology services area of your businesses?

The answer is definitely. We spent -- we didn't just start looking at this a few months ago. We've been boiling the ocean now for probably three years and we think we've got a very solid handle on the marketplace and opportunities both domestically and internationally and we feel pretty good about the pipeline that we have and our ability to convert the deals that are in our pipeline and we're excited about the fact that our balance sheet is in a great position to continue to accept them and that our team's really gaining stride on integrating these acquisitions and then pushing the capabilities out to the sales force.

So, I'd say we feel very good about that. I'm not going to tell you anything you don't already know. There's not a lot of high quality companies out there that are available right now. And so the ones that are out there in many cases are very pricey but it's finding needles in a haystack and we think we've got a very focused and very capable M&A department that eats, sleeps, and drinks this practically 24 by 7. So, stay tuned. I think you'll see more progress and continued growth in our emerging business segment.

Eric Boyer, Wells Fargo. Your line is open.

Ken, can you talk a bit more about the four major client delays? It sounds like the majority is coming from the core customer management segment. Why are the delays occurring? Have you already incurred ramp up costs? Are you going to be sitting on excess capacity now?

Eric, it's Regina. So, what I would say is across the board these are four clients that are obviously long-standing but also have a very strong contractual terms that give us confidence that will come in. You are correct. We do have a ramp in process and even that is a somehwat of a depression to ROI given these are rather large piece of business.

If you take the media companies that I talked about, in one respect that is a large transformation that we're doing. It includes all four segments and while that has because of the transformation and the degree of transformation it's extended our consultant business which you do see some of the benefit of that in our CSS segment in Q3 and you'll see some of it in Q4. It is delaying CGS's BPO business. But we can see it ramping and expect to be back to the levels that we expected in Q1. In part that was quite frankly a client decision relative to not continuing to reduce headcount around the holiday season. As I said, these are long, important clients that we collaborate and cooperate.

Others were just in and around initiatives going on in the environment around clients. So, unfortunate relative to the delay but fortunate to be in a set of clients where we have tight contracts, long-term or important relationships that they've already committed to and the progress has to happen contractually or at a high ramification and quite frankly more importantly it has to happen for these clients.

For awhile now the fundamentals within CMS have been pretty stable. Are we starting to see them slip here? Because earlier this week you had one of the other public players cite that consumer demand was off from some of their customers' forecasts in their core customer management business.

I don't think so. I think we actually feel pretty good about it. I think this was truly an unusual confluence of events and if I could talk specifically about the customers I would and it would make perfect logical sense as to some of the reasons for delays. But one of the things we don't want to do is make any excuses and we are really big on truly trying to have a partnership arrangement with our clients and therefore trying to hold their feet to the fire on something that they're having their own internal technology issue or Obamacare is causing a delay because they're in the healthcare business and certain volumes are getting pushed out and dates are getting pushed out, et cetera, we just think that the right thing to do is to accept it and to accept the fact that they are absolutely moving ahead.

Some of these -- I would say the majority of these delays are being pushed by a quarter or two at the very most. Nothing's being talked about of delaying a year from now or 18 months from now, et cetera. And this is not typical. But I think that it's safe to say that in this overall global economy, our clients are -- they're refiguring their business in a pretty radical way and they're forecasting in many cases is not as accurate as it's been historically because they're going through product alignment changes. They're going through some pretty major shifts technologically, et cetera.

We certainly did not see this coming. And we're rather surprised by it but at the end of the day we're not running a business for the quarter. We're running the business for the long-term and we don't think that a quarter makes up a Company or defines a trend. And I can't stress enough that our management team couldn't feel more comfortable and they're as double down as one can get based on the opportunities that we're seeing in the marketplace. So, there is -- I guess that's my way of saying that we're not concerned about CMS or there being something fundamentally changing.

Okay. Great. Thanks a lot.

Thank you.

Thomas Smith, First Analysis. Your line is now open.

Thank you and good morning. Thank you for taking my question. Just following up on the four customers and kind of strategically you're engaging with your customers in a fairly detailed way. Do you think that because of how you're engaging with the customers, you're trading long-term stickiness maybe for some short-term ramp up uncertainty? Do you think that plays into maybe some of these issues with these ramps?

I'm not sure I'm fully understanding the question but I think it's the opposite of what you're saying. I'm not sure why --

So, what I'm -- strategically you're really trying to engage multiple product lines, sometimes some transformation of the business. Do those types of programs -- are they subject maybe in the early stages to push backs, delays and things where as just adding another 500 seats to do the same thing --

Now I understand.

-- provide a little more predictability or visibility?

No, I think --

-- stick in the long-term?

Yes. No. Now I've got it. I apologize for not understanding. The answer is the following -- there's really two ways to engage in this business, right? You can be like a traditional outsourcer and respond to RFIs, and be in a commoditized process and win business that the client is being highly prescriptive on and in the process of doing so, of winning that business, the business is then viewed as something that's not sticky and in fact is very movable.

Or you can have an entire front end capability that does deep, deep strategic due diligence, deep strategic planning that takes -- that goes across all the customer journey mapping, all the opportunities for analytics and optimization, all the process optimization, et cetera, and to your point, yes, delay the CMS business. However, you get it right the first time and you transform the client's business and you transform the customer relationship and you show immediate impact of past net promoter score and now current net promoter score and show them quarter over quarter how you're moving their net promoter score, you're moving their CSAP, you're moving their JD Powers and now you have a partnership. Now you have exposure to the C-suite and now that C-suite is respecting you as a Mackenzie, as an Accenture, as a BCG, as any of their other more strategic partners.

That's exactly what we're doing. That is exactly why we've been hiring people from Mackenzie and BCG, and Bane, and Accenture, and Cognizant, et cetera. What we're seeing is the rest of the industry is very focused on being a contact center Company. That's not what we want to be. It's not what we are. And it's not -- and we're moving away from that at a very rapid rate.

So, just an accounting kind of follow-up, I just want to make sure I understood on this pro forma, maybe Regina, what you've done? You've taken the loss revenue from the typhoon and imputed what the cost would've been kind of as an estimate and then flowed that through the P&L?

It's not an estimate. On our regular course we do this for all -- some of the rigor behind it comes from the fact that we do have insurance on some of these things and so we build that rigor not only for our own understanding of what's happened but also for insurance purposes. It's very precise with regards to agents, with the particular client, with the particular agent, with the particular contract relative to its revenue on this.

And on the FX you say you have hedges in place. From a cash standpoint and the overall business it doesn't effect. Wouldn't the hedges show up as gains on the other income line? Where does that show up?

Ultimately what we have is cash flow hedges which are effective cash flow hedges which allows us to protect changes in the currency by placing the hedges and then the accounting of that gets matched up with the revenue. So, you're not -- what you're going to see below the line from time to time and you see it in other income expense. It's somewhat buried. You're not going to see the particular piecing of that.

Generally if you navigate yourself all the way through I think today the queue is maybe 20% is devoted to derivatives. If you could actually work your way through that. I think you would see it. But the reality is that what you see below the line is when we hedge at the end of the quarter primarily as we bring money back to the US, pay down our debts. So, those are -- those hedges are relative to protecting cash flows that we're bringing back at the end of the quarter. The hedges that are in place to absolutely correct differences in functional currencies that you're billing versus your expense, ultimately get matched up with revenue. You won't see that separately.

Thank you.

Tobey Sommer, SunTrust. Your line is now open.

Thank you. Good morning. Ken, you mentioned continuing to make investments in the emerging lines of business but at the same time I think you mentioned also seeing the fruits of your investments kind of to date. In aggregate, do you expect the emerging businesses to be more profitable over the next several quarters than they have been recently? Thanks.

Most definitely.

Yes. I think I included it in my remarks, the fact that for CSS and CGS, we did the level of improvement that you saw Q2 to Q3, you should see repeated Q3 to Q4. And the same with CTS. CTS, we've got investment in channel, we've got investment in cloud. We've been progressing very nicely on the cloud bookings. We've got a nice pipeline. We expect to convert. As we build that cloud, that basic investment gets smaller and smaller as a percentage of revenue.

Across those emerging businesses, we've seen a nice uptick up Q3 to '12 to '13 in terms of just the dollars of margin coming from those. We have said that we expect that as we approach the end of this year those emerging businesses as a group will approach or exceed double digits. We did have some challenges as we talked about previously in CGS and CSS earlier this year but I think when you look at the second half kind of stand alone you start to see that and we can expect into next year continued movement to getting these businesses collectively to that early to mid-teen growth rate and kind of early to mid- OI overall.

Thank you. In the CMS segment from time to time you do have to prune a little bit of low margin revenue as you did with some seasonal volumes I guess here for the fourth quarter. How do you feel about the ongoing book of business in terms of profitability? I do understand it's a journey where you're trying to match yourself up with customers who think about the customer experience the way you do. Thanks.

I think we feel really good about it. I think we feel like our relationships with our customers are frankly much more open than maybe they have been historically. I think our customers are truly beginning to understand that playing the cost at any cost game is nothing more than a vicious cycle that turns into a death spiral as it relates to quality and attrition. I think we're seeing that in terms of where they have successfully beaten up let's just say other providers and they're now not achieving the results that they were looking for which is then showing signs of benefiting us as they want to transfer projects over to us, et cetera.

That said, in fairness to the other providers, I don't think the other providers had any choice because they were -- meaning that for them to deliver the product that the customer actually wanted, they just simply agreed to something that in fact was not really possible to deliver on based on the rate that they were holding. And I think that there's a level of legitimacy with the tier one providers that they're beginning to realize that although it's taken them a long time that you can't make it up in volume in this business and that you have to focus on relationships where you're aligned with the client and you're aligned with the client's customers and that that alignment is truly all based on metrics that are no longer focused on things like permanent cost or per hour cost and much more focused on the outcomes and that if you can achieve the outcomes they're looking for then the client appreciates the value that you're delivering.

And so we think that the industry is evolving. It's maturing. And there is still plenty of clients out there that have realized that their entire brand is differentiated based on the experiences that they deliver to the customer and those are ones that are making very significant investments and we feel pretty good about who we're associated with now and how we're positioned for providing that type of a capability.

I'm sorry for a really long-winded answer but that's my way of saying that we actually feel quite good about the customer base and I think it's showing up in our percentages of our business that's growing, that when 75% to 80% of your growth is coming out of your embedded base, we think that is the best way of determining that they like the food that you're cooking up in the kitchen and that they're coming back to buy another meal.

We think that if you look at our strategy, where just a few years ago, like two years ago we had 80 clients. We now have 250 clients. And as we start to cross sell across those 250 clients, we think that we just have more and more opportunity of mining the embedded base that we already have tight relationships with in other segments of our business. So, it's a process. We're going to make the very best of it. We enjoy sharing with you our successes on this journey.

Thank you. I just have two quick numeric questions. One, what is the seasonal revenue in the fourth quarter? Just want to look at -- as we look at 2014 quarters, what kind of drop off there could be in Q1? And then I missed the number that you gave for the fourth quarter revenue impact from the four clients that are ramping more slowly. If you could just repeat that, that would be terrific. Thank you.

I'll take the second one first. That's $14 million from the delayed ramp. And we have not disclosed specifically seasonal volumes historically. What I would say about the drop off though is that if you focus on our comment and Ken's reiteration in and around when will those delayed ramps execute, it's mostly Q1, maybe some dribble into Q2.

My view is that as you look at our bookings this year, $285 million year to date and $95 million average versus the $75 million average last year, in part not fully yielding where we wanted it to this year because of these delays, we expect bookings to kind of continue within this range of -- that we've been experiencing between last year and this year. When you add that delay, my view, although I'm not setting guidance for next year is that there won't be some precipitous fall between Q3 and Q4 overall. There might -- yes, in CMS we'll have a dip.

But from a Company point of view there won't be the same level of change from Q4 to Q1 and quite frankly that from a financial point of view part of our strategy here in these emerging businesses is that these businesses collectively kind of counter each other in terms of the ups and downs.

Steven Shui, Stifel Nicolaus. Your line is open.

Good morning. Thanks for taking my questions. When I look at the midpoint of the guidance change, being lowered by about $47.5 million and even though in there you have currency, which is $14 million, you had the client delays, which is about $14 million, and another $6 million from getting out of certain seasonal revenue, can you kind of bridge the rest of the gap between the $47.5 million there?

Yes. I mean, I would say that the balance of that guidance -- that the balance of it, you're working off of the $1.240 billion, that the balance of that difference is the -- just the bookings level and the yields from the bookings. I think as Ken had said, we're -- we have heavy investment in our sales and marketing, building out the vertical channel of global markets and industries, as well as sales groups within the segments. And the $1.240 billion would have required slightly higher bookings throughout the year, as well as yield. So, it's a factor of bookings, more so, a factor of yields in general.

Okay. And just a follow-up on the four client delays. When I think about that coming back in, in 2014, the first quarter and second quarter, is that really going to bump the growth rate there? Or is it just might take away from some of the business you're already expecting from them in those quarters?

I didn't --

Yes. Well, we haven't given guidance for next year, right? So, I think, it's a hard question to answer. But right now we're going through our budgeting process and kind of understanding where that would be. So hard to kind of answer that question, given there's not a benchmark out there relative to Q1 or Q2 of last year -- of next year.

Eric Boyer, Wells Fargo.

Yes, just on the comments, I know you're not giving guidance for 2014, but you do have that longer-term -- the long-term goals that you set out there, I think, by the end of 2014. Can you just provide some context on how we should be thinking about that going forward?

The last thing I want to do is come across as elusive. What I would just simply say is the following, is that, we're going to do everything we can to ultimately achieve those numbers. It goes without saying that acquisitions help us get closer to that number, as well as us increasing the momentum overtime of our organic growth. But for me, to comment any more on that, really would be providing a form of guidance, and unfortunately, until we get to the next quarter call we really can't take it much farther than that.

Thanks.

This concludes the third quarter 2013 earnings conference call. You may disconnect at this time.