TTEC Holdings Inc (TTEC) 2014 Q2 法說會逐字稿

Welcome to TeleTech's Second-Quarter 2014 Earnings Conference Call.

(Operator Instructions)

This call is being recorded at the request of TeleTech. I would like to now turn the call over to Paul Miller, TeleTech's Senior Vice President and Corporate Treasurer. Thank you, sir, you may begin.

Good morning, and thank you for joining us today. TeleTech is hosting this call to discuss its second-quarter 2014 results ended June 30th. Participating on today's call are Ken Tuchman, our Chairman and Chief Executive Officer, and Regina Paolilo, our Chief Financial and Administrative Officer.

Yesterday, TeleTech issued a press release announcing its financial results for the second-quarter of 2014, and also filed its quarterly report on Form 10-Q with the SEC. While this call will reflect items discussed within those documents, we encourage all listeners to read our Form 10-Q.

Before we begin, I want to remind you that matters discussed on today's call may include forward-looking statements 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: [compliance] and 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 businesses or integrating acquired businesses, the possibility of asset impairment and or restructuring charges, and the potential impact to the financial results due to foreign exchange rate fluctuations. For a more detailed description of our risk factors, please review our most recent annual report on Form 10-K.

A replay of this conference call will be available on our website under the Investor Relations section. I will now turn the call over to Ken Tuchman, our Chairman and Chief Executive Officer.

Thank you, Paul, and good morning to everyone.

It's an exciting time to be focused on customer experience, customer engagement, and customer growth. Our business reflects it. Our financial and operational performance was strong for the first half, and we're seeing momentum build as we execute against our strategy.

For the first half, our bookings and pipeline are up. Revenue was up, gross margin, EBITDA, operating income, and EPS are up, despite significant investments and acquisition-related amortization expenses.

Return on invested capital is up. Utilization is up, and our associate retention is up. Regina will provide details on the second-quarter in a few minutes.

So, why are we growing? Simply said, we're delivering to the market need. Advances in technology and data analytics are enabling brands to engage with customers as never before.

We see examples every day of how consumers are embracing businesses that are using these new capabilities to create an easier and better customer experience. But creating seamless and satisfying engagement is complicated.

Businesses are struggling to cobble together systems, operations, and disparate data sources. In a rush to be better, they invest in one-off solutions that historically inflate rather than eliminate customer friction.

We've been involved in designing and executing our clients' customer journey for over 30 years, and we understand the complexity. We know how hard it is to consistently acquire profitable customers, retain them longer, deepen their relationships, and increase their value. All while lowering the overall cost to serve.

We refer to this as unlocking the value of customer engagement, and see the lack of an integrated end-to-end solution as a significant market gap. Clients are struggling with multiple vendors, organizational silos, and a proliferation of redundant systems. Consequently, they're having difficulty stitching all the pieces together into a holistic customer engagement platform.

This approach creates huge inefficiencies. TeleTech has a significant opportunity in addressing this market gap. Our strategy is increasingly focused on integrating these distinct capabilities into seamless, outcome-based solutions across the full customer lifecycle.

We're advancing our clients' brand recognition and increasing customer loyalty by combining strategy, innovation, technology, analytics, and process optimization to deliver exceptional customer engagement. We are orchestrating this integration on two fronts.

Our global go-to-market platform, which is now vertically focused in unifying our segments to solve specific customer engagement challenges. Examples of these solutions include customer acquisition, multi-channel interaction, technology modernization, and learning innovation.

In each solution, we combine distinct capabilities from our consulting, technology, growth and Management segments to provide our clients a platform that will improve the value of their most important assets. Namely, their customer base.

As we change the conversation from customer service as a cost to customer experience as a value creator, our clients are increasingly viewing us as a strategic partner instead of a tactical vendor. And as we broaden the discussion from one-off tactics to long-term roadmaps, our clients are engaging us to provide multiple services across business segments and units. This wider sphere of influence is delivering a longer-term impact for our clients, and a deeper and more profitable relationship for us.

We've developed our strategy, and began this journey three years ago. Momentum is building, and we're more excited about our future than ever before.

We are increasingly more confident that as we scale the diversification of our business will lead to improved operating leverage on our sales, marketing and delivery costs. In turn, we anticipate higher growth rates and profit margins. To this end, we will continue to execute our planned investments in sales, marketing, geographic expansion, and solution innovation.

Let me give you some specifics. Last quarter, I told you about our global markets and industries group. The team is focused on customizing our integrated platform to solve vertical specific business challenges.

While still early and ramping, our group of industry experts in healthcare, financial services, automotive, and comms and media, to name a few, are making progress, building strategic relationships that are driving growth. Let me provide two examples.

As you know, the US healthcare industry is undergoing broad transformation. With the proliferation of new rules, regulations, competitors, and channels, their ability to respond to industry changing headwinds and tailwinds including consumerism, the cost and quality of care, and the convergence of payers and providers is paramount. Our business in this vertical has significant potential.

Leading players are seeking a long-term strategy to more effectively acquire, enroll, and manage their members and patients. All areas in which we have demonstrated capability.

In financial services, regulatory constraints, changing consumer behavior, and new disruptive players are challenging the industry as never before. As they begin to compete on the quality of the customer experience, we're benefiting with significant growth in this sector. By designing and delivering an exceptional experience across every touch point, we're helping our clients earn their customers' trust, and share of wallet, while reducing cost to serve.

These specific industry challenges are emerging across the globe, and we're expanding to respond. As you remember, last quarter we acquired operations in Eastern Europe to enhance our geographic footprint and language capabilities. This quarter we're expanding our Latin American presence.

Now, I'd like to talk a little bit about our acquisition strategy. Yesterday, we announced the acquisition of strategic consulting firm, rogenSi.

This acquisition in our customer strategy services segment will strengthen our consulting leadership and bench strength. It will also provide scale to our existing learning and change management practices.

Acquisitions are and will continue to be an important part of our strategy as they complement Management, drive innovation, expand geographic growth, and augment our global client base. We expect to continue acquiring a short list of strategic tuck-ins each year.

That said, in order to extract the full value of these acquisitions, we must effectively integrate them into our holistic customer engagement platform. To realize the full strategic and financial benefit of our investment in acquisitions, we continue to tightly integrate the human talent, go-to-market activities, and solution offerings.

For example, last year, we took steps to optimize the performance of our Customer Strategy Services group. We amplified their go-to-market, and improved their operational effectiveness by bringing our strategy, process, learning, and analytics capability into one organization. Today, we're benefiting from stronger year-over-year top line and bottom line results.

Similarly, this year, we're capitalizing on opportunities in the product portfolio with our Technology group. As you know, we've had a long history of technology innovation. Over a decade ago, we were the first to deploy an IP-based cloud platform to provide virtual access worldwide for our own Customer Management Services clients.

Last year, we were one of the first to develop a multi-tenant Cisco cloud to bring the flexibility of contact center in the cloud to our non-CMS clients. Currently, we're expanding our cloud platform to include our Avaya offering.

Market adoption of the contact center cloud is accelerating, with the industry analysts forecasting growth rates of 15% to 20%. Our clients, as demonstrated by our growing cloud pipeline, are increasingly asking us for cloud-based solutions.

For us, the cloud means putting all the capabilities of world-class customer interaction centers into a virtual environment. IVR, social, mobile, tat, analytics, CRM, and workforce management. Our feature-rich contact centers cloud solution enable our clients to gain multi-channel capabilities, speed, efficiency, and minimal disruption.

Our market focus for our cloud solution are enterprise level clients, who require customization as well as the financial services and healthcare sectors who have important security and privacy concerns. As such, we see the conversion to the cloud as gradual, additive to our CTS growth, and largely a transformative versus cost play for our clients.

Over the last quarter, I have visited with a number of clients, boards, industry analysts, and business editors. I can tell you with certainty that the TeleTech story is resonating in the marketplace on a global scale. The market need is undeniable, and the belief that companies who focus on providing a great customer experience, one that is relevant, simple, and empathetic will be the winners in the years and decades to come, is without question.

Customer experience, customer engagement, customer growth is the future. We're humbled to be operating at its epicenter.

Everything we do, every dollar we spend, every decision we make is focused on one thing. Making a positive impact on the customer experience at every point of the contact.

As the economy continues its recovery and expansion, customer experience will remain at the forefront. As we partner with our clients to ensure their brands deliver an exceptional experience, they will be the long-lasting beneficiaries of increased consumer spend. As our clients gain increased wallet share, so too will we.

We continue to believe that the investments we're making in the transformation of our business are well aligned with the needs of the market, and will drive continued returns for our shareholders. I'll now turn the call over to Regina.

Thank you, Ken, and good morning, everyone. I'll start with a review of our second-quarter consolidated results, followed by our segment performance.

I'll also provide some additional context on our Customer Technology Services segment. This performance is flat at the half, despite healthy bookings and revenue momentum in this segment's consulting, managed service, and cloud offerings.

To summarize the second-quarter of 2014 non-GAAP results, revenue increased 5.2% to $303.2 million over the same period last year. EBITDA increased 8.4% to $39.2 million.

Operating income was $23.4 million or 7.7% of revenue, versus 8.2% last year. And diluted earnings-per-share was $0.33 versus $0.35 in the year-ago period. New business signings were $110 million in the second-quarter of 2014, representing a 5% increase sequentially and year-over-year.

We had a favorable bookings mix across verticals and geographies. Healthcare and financial services, in particular, were strong, collectively representing 56% of total bookings. And from a segment perspective, bookings were especially strong in CMS and CTS.

In the second-quarter of 2014, GAAP revenue was $295.5 million, compared to $289.7 million in the second-quarter of last year, up 2%. On a non-GAAP constant currency basis, revenue was $303.2 million, representing a 5.2% growth rate over the year-ago period. 26% of revenue was generated from our Customer Strategy, Customer Technology and Customer Growth segments.

Our top line growth was complemented by further diversification across industries, geographies, and our expanded suite of integrated offerings. Collectively, our emerging CSS, CTS and CGS segments grew approximately 12%, of which 6.5% was organic.

Second-quarter 2014 revenue from acquisitions in the first year was $8.1 million. Organic growth for the quarter was approximately 2.3%.

Non-GAAP EBITDA increased 8.4% to $39.2 million, or 12.9% of adjusted revenue. This compares to $36.2 million, or 12.6% of revenue in the year-ago quarter.

Our second-quarter GAAP operating income was $20.7 million, or 7% of revenue compared to $19.7 million or 6.8% of revenue in the year-ago quarter.

Income from operations on a non-GAAP constant currency basis and adjusted for $617,000 of restructuring charges was $23.4 million or 7.7%, of adjusted revenue. This compares to $23.7 million, or 8.2% of revenue in the year-ago quarter.

In the second-quarter of 2014, there were two notable year-over-year items that impacted our profit margins. First, our incremental investments in sales and R&D increased by $1.6 million. And second, amortization related to acquisitions increased by $800,000.

In total, the adverse impact to operating income was approximately $2.4 million, or 80 basis points of margin. Absent these items, our operating margin was approximately 8.5%.

As previously indicated, the investments we are making in sales, marketing, and R&D are variable in nature. We'll pace these investments in line with our business performance and outlook. We now expect full-year investments to approximate $10 million, versus the $12 million to $14 million we outlined earlier.

SG&A expense was 15.8% of revenue in the second-quarter of 2014, versus 16% in the same period last year, despite an increase in sales and R&D related expense. The offset was largely the result of efficiencies in our general and administrative functions.

Our GAAP based tax rate this quarter was 23%, comparable to 23.3% for the same period last year. The normalized effective tax rate was 22.5%.

Second-quarter fully diluted GAAP earnings-per-share were $0.34, an increase from $0.23 in the prior-year period. Non-GAAP EPS were $0.33, compared to $0.35 in the prior-year quarter.

While non-GAAP income from operations is relatively flat year-over-year, non-GAAP other income in the second-quarter of 2013 included $1.8 million of FX gain and deferred income plan benefit that did not recur in 2014. Excluding the $2.4 million of investment previously highlighted, non-GAAP EPS were $0.37.

Cash flow from operations in the second-quarter of 2014 was $18.1 million, compared to $33.7 million in the year-ago quarter. This is primarily due to a change in working capital accounts specific to the quarter.

Capital expenditures were $19.4 million in the second-quarter of 2014, versus $9.6 million in the year-ago period. This increase is primarily related to demand-driven expansion in facilities and the cloud platform, as well as various internal upgrades. We expect CapEx to remain within our full-year guidance of $55 million to $65 million.

During the quarter, we repurchased approximately 666,000 shares, for a total of $16.6 million. In the first half of 2014, we repurchased 1.6 million shares for a total of $37 million. As of June 30, 2014, there is approximately $31.9 million authorized and available for future share repurchases.

The quarter ended with $98 million in cash, and $106.9 million in total debt. Total debt was relatively unchanged. The sequential quarter-over-quarter reduction in cash is largely due to share repurchases, acquisition-related payments, capital expenditures, and variability in working capital.

Year-to-date we've deployed approximately $58 million in share repurchases and acquisitions, versus $33 million in the same period last year. This was offset by positive cash flow from operations in the quarter. Our DSO in the second-quarter of 2014 was 77 days, unchanged over the same period last year.

Let me now share with you our second-quarter performance highlights from each segment. Customer Management Services second-quarter revenue was $218.7 million, compared to $220.6 million a year ago.

Adjusted for a negative $7.3 million impact from foreign currency translation, revenue was $226 million. This represents a year-over-year increase of 3.1%.

CMS operating income was $16.5 million, or 7.5%, unchanged in both absolute and relative terms over the same period last year. On a non-GAAP constant currency and adjusted for restructuring charges, the operating margin was 8.4% compared to 8.8% in the year-ago quarter. The change in operating income margin is largely due to incremental investments, depreciation related to facilities expansion, and amortization expense related to the Sofica acquisition.

CMS continues to show positive trends in employee retention and facility management with 81% capacity utilization in the second-quarter, compared to 75% in the prior-year period.

Regarding new CMS business, we saw another strong quarter of bookings with continuing large commitments in the financial services and healthcare industries.

Customer Growth Services second-quarter revenue increased 29% to $28.9 million compared to $22.4 million in the year-ago period. The organic growth rate was 14%. CGS had operating income of $1.8 million, or 6.3% of revenue, compared to a loss of $620,000 in the year-ago quarter.

We are increasingly seeing the top and bottom line benefits of the investment made to transform CGS' Solution portfolio and financial profile. Most notably, our solutions are becoming more outcome-based, as we further develop our integrated search to sales technology platform.

The integration of our digital marketing and sales capabilities is also progressing, which is allowing us to shift our sales channel to higher margin offerings. We are also seeing improvement with existing client retention and growth reflecting the increased value that we are delivering to clients.

CGS' favorable operating income trends reflect these efforts, offset by incremental investment in product development and sales channel build-out as well as higher acquisition-related amortization expense.

The Customer Strategy Services second-quarter revenue increased 22% to $12.2 million, compared to $10 million during the same quarter last year. The segment had an operating profit of approximately $700,000 or 6%, versus an operating loss of $2 million in the prior-year period.

We continue to realize the benefits from the integration of our consulting business, including leadership, professional talent, infrastructure and services, as well as improved sales effectiveness in several regions of the world, and expect this segment to reach double-digit margins in the second half of 2014.

We're also pleased with the announced acquisition of rogenSi, which we expect to close by the end of August. RogenSi 's focus on sales effectiveness, leadership development, and retail excellence will provide complementary methodologies and thought leadership for our growing CSS segment.

Furthermore, with the strong leadership and consulting team, operating in Asia PAC, Europe, and North America, rogenSi will produce more executive-sponsored relationships from which to further develop our business relations.

Turning to our Customer Technology Services segment. Revenue was $35.7 million in the second-quarter of 2014, down slightly from $36.6 million in the prior-year period. Operating income was $1.6 million or 4.5% of revenue, down from $5.8 million in the year-ago quarter.

Sequentially, revenue and operating income improved, up approximately $3 million in revenue and $1.3 million in operating income. While the year-over-year comparison of revenue and operating income are impacted by planned investments in our cloud platform and sales and marketing, CTS is behind our internal plan at the half. The GAAP and performance is primarily related to a year-over-year decline in our Avaya offerings.

Revenue from our Cisco offerings inclusive of consulting, product sales, systems integration, managed services and cloud are up 12% in the second-quarter of 2014 over the same period last year. While revenue from our Avaya platform is down 32% in the same period, primarily related to lower product sales.

We attribute the reduction in product sales to a handful of fundamentals, including the natural variability and the timing of product sales, a shift from premise-based to cloud-oriented sales, and to some extent sales execution. We expect the CTS segment to return to a more normalized level of revenue and operating income based on the following actions we are taking.

We are accelerating the refinement of our Solutions portfolio by investing in our cloud capabilities. We have booked $15 million of cloud business since we launched, and have a healthy backlog and pipeline. We expect our annualized backlog of cloud revenue to exceed $20 million by year-end.

We are driving increased demand through direct and channel partner sales, including white label offerings. To date, our new vertical sales organization has been largely focused on initiating and closing CMS and CGS opportunities. We will now extend this channel to our CTS business.

We are organizing CTS for improved efficiency by fully integrating our eLoyalty and TSG platforms, with common leadership, leveraging sales resources more broadly, and enabling operating improvements in our client delivery.

Before I leave the topic of CTS, I want to highlight a handful of second-quarter 2014 bookings. I'm encouraged by the strong business signings in the second-quarter, which include a number of meaningful premise and cloud-based engagements. For example, we signed two large multi-million dollar premise-based contact center contracts.

The first is a replacement and modernization project for a large payroll services provider. The second is a comprehensive platform upgrade for a gaming provider. Both engagements include hardware and software, infrastructure sales, design and implementation consulting services, and multi-year managed service arrangements.

We also signed two large unified communications and contact center cloud arrangements, one with a state attorney general office, and the other with a federal government agency. These multi-year, multi-million dollar contracts are a strong testament that our cloud-based infrastructure, security standards, and ability to customize solutions to meet a wide range of business needs and requirements.

Our cloud-based pipeline continues to grow. The execution miss on CTS is a disappointing one, but it is also one in which the rich contact center technology market opportunity, our extended selling platform, global reach, and relevant solution portfolio will allow for a relatively quick turnaround.

Regarding our outlook, we are raising the lower end of our full-year 2014 revenue guidance to $1.245 billion, from $1.240 billion. To summarize our full-year 2014 guidance, we now estimate revenue to range from $1.245 billion to $1.260 billion, reflecting an expected 2% adverse impact from foreign exchange translation.

The estimated operating margin range between 8.75% and 9% remains unchanged. However, we now anticipate approximately $10 million in incremental investment in sales, marketing, and research and development, versus the range of $12 million to $14 million. Capital expenditures are unchanged, ranging between $55 million and $65 million, of which 70% is expected for growth initiatives.

Appreciating the current focus around our CTS segment, I want to reflect more broadly on the overall performance of our business. In the first half of 2014, we executed across each of our key priorities and growth drivers. We grew revenue organically and inorganically.

Expanded our capabilities into more value driven businesses. Increased our vertical and geographic market share. Introduced new, integrated products and services, and executed on strategic and accretive acquisitions.

Including the significant investments we are deploying to expand our sales channel and innovate our solution portfolio, we continue to improve our gross margin, EBITDA, operating income, EPS, and return on invested capital. We see our strategy resonating in the marketplace, and hear the voice of our clients echoing the benefits of our diversified lines of business. We will continue to execute our investment roadmap, pacing the expense in line with our top line progress.

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

Thanks, Regina. As we open the call, we ask that you limit your questions to one at a time. Operator, you may now open the line.

Thank you.

(Operator Instructions)

Mike Malouf, Craig Hallum Capital Group.

Yes, hello. This is Ross Lucero on for Mike. I just had a question about the CTS. Could you give us a little bit more color on the timing of the turnaround? You said it would happen quickly, but is that a 2014 or we looking more towards 2015?

I think you'll see a different second half to the first half. I would suggest that our CTS business will remain fairly flat 2014 to 2013, but that requires a significant uptick in the revenue in the second half. And taking what at the half is about 2.9% OI to about 11% in the second half.

So with our current bookings, with the pipeline, and importantly with now the rise, a faster pace and the rise of our cloud business which was around $9 million in total for last year. Around $4.5 million at the half, and will be about $11.5 million for the full year. We expect that to be an important contribution.

This business has just over 50% of it in recurring business. So in terms of the backlog, the bookings in Q2, and our expected bookings in Q3 we believe that we can bring this business back to the 2014 level. And then see an important growth rate in double digit into 2015.

Okay, great, thanks.

Josh Vogel, Sidoti.

Thank you, good morning, everyone. I was curious of the -- and I may have missed it -- but of the $10 million that you're investing in sales and R&D, how much of that was already incurred in the first half of the year?

And as we look at your operating margin guidance, it basically implies about an adjusted 10% margin over the back half of the year. And could you just talk to us how you would get there? Is it going to be utilization improvement, is it going to be the scale-down of the investment in sales and R&D?

Yes. So you're right, the back half of the year will be somewhere between $10 million and $10.5 million depending on where the revenue was. I think if you take a look at -- there's a couple of things to consider when you think about that.

One is, we have an increasingly growing fourth-quarter relative to our CMS business. This is largely a function of the significant healthcare and retail business that we have. And so you'll continue to see a similar rise that you did in that business last year.

We also have a hockey stick relative to Q3 and Q4 on our CTS and our CSS business. We have the expense of the GMI, the global markets and industries, that started in the second half of last year continue to grow in the first half of this year. We're now starting to see the yield in the revenue against that investment.

So you'll see a fairly significant rise in the revenue first half to second half, a lot of that is in backlog in businesses like CTS and CSS. You'll also see a significant rise in CMS, given the seasonal business. And with that, as you did last year, you'll see an impressive incremental margin on that uptick in the revenue.

On your first question, on the investment. At the half, we have about $5.7 million of that $10 million laid in. So you'll see an approximate $4.3 million add to that getting to the full $10 million, with probably about 80% of that in sales and marketing, and 20% of that in R&D.

Okay, that's helpful, thank you.

Thank you.

(Operator Instructions)

Operator, if there are no other questions you may conclude the call. Thank you.

You're welcome. There are no other questions. This concludes the TeleTech second-quarter 2014 earnings conference call. You may disconnect at this time.