TTEC Holdings Inc (TTEC) 2014 Q3 法說會逐字稿

Good morning. Welcome to TeleTech third-quarter 2014 earnings conference call. I would like to remind all parties that you will be in a listen-only mode until the question-and-answer session. This call is being recorded at the request of TeleTech.

I would now like to turn the call over to Paul Miller, TeleTech's Senior Vice President and Corporate Treasurer. Thank you, sir. You may begin.

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

Yesterday TeleTech issued a press release announcing its financial results for the third-quarter 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 upon management's current beliefs and assumptions. Please note that these forward-looking statements reflect our opinion 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 may cause our actual results to differ materially from those described. Such factors may include but not be 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 businesses or integrating acquired businesses; the possibility of asset impairments in our restructuring charges; and the potential impact to the financial results due to foreign (technical difficulty)

Excuse me, this is the operator. We are unable to hear the speaker. For participants on the line, please continue to stand by for today's teleconference. We apologize for the delay. Please continue to stand by for today's teleconference.

Let me say something. Ladies and gentlemen, I apologize. There was a problem with the third-party conference system, so we are going to restart the call. I believe, Paul, you did get your intro in, or --?

Operator, was my introduction properly received?

Yes, it was.

And were the callers able to hear any of my presentation, or did they --?

They heard the first few minutes, Mr. Miller, before your line disconnected.

Okay. So why don't we start with Ken?

All right. So I apologize for doing a restart.

Again, thank you, Paul, and good morning to everybody. We had a busy quarter. When all is said and done, there are two important highlights from our third-quarter performance.

First and foremost, we are finally growing; and second, we have had short-term challenges in our Customer Technology Services segment. In the third quarter, we signed $125 million of new business, a 56% increase over the same period last year and a Company record.

Year-to-date we closed $340 million of new business, up 19% over the prior year. Furthermore, our constant currency growth rate was 5.7% versus 1.3% in the same nine-month period last year. Most notably, the organic growth was 3.1% in 2014 versus a negative 3.5% in the prior year.

The balance of new business across segments, industries, and regions underlines the breadth of our new sales and marketing platform. We are optimistic that with our 2014 bookings; continued investment in sales, marketing, and product development; and increased progress in selling multi-tower solutions, we are confident that we can deliver continued improvement in the top line.

Now let me address the elephant in the room: the question of profitable growth. The third-quarter decline in our operating income margin is specific to our Customer Technology Services segment, also known as CTS. Year over year, the operating profit in CTS declined $5.5 million. The impact on third-quarter operating margin was 180 basis points.

The decline in operating margin is attributable to a handful of items: $2 million in incremental cloud investment, $1 million related to lower revenues, and $2 million in one-time expense adjustments. We viewed this decline to be unique to this quarter. The growth in customer engagement technology is undisputed, especially as it relates to multichannel communications and collaboration. This is true across platforms, and in particular, Cisco and Avaya, who have the lion's share of the market globally, including our existing embedded client base.

We have strong roots with both these platforms. Over the years, we have built significant partnerships with Cisco and Avaya and understand the technology well. We have over 275 enterprise clients operating on the platforms and first-hand experience through our 35,000 associates who use this technology every day. We have enjoyed impressive growth in our CTS segment from May of 2011, when we acquired eLoyalty through 2013, including the acquisition of TSG at the end of 2012.

So what happened in 2014 to change the historical growth trajectory of CTS? From a revenue perspective in 2014, we set out to deliver double-digit revenue in our CTS business. We now expect 2014 revenue to decline between 8.5% and 9%, or $13 million to $14 million. Our premise-based Avaya business is the primary driver of this decline.

In a nutshell, it comes down to lack of execution. We are already improving on our new signings and revenue in the second half of 2014 versus the first half and expect to be back in the growth mode in early 2015.

Let me share a couple of initiatives we believe will have meaningful impact on profitable CTS growth. First, we are focusing on bringing our Avaya platform upmarket to TeleTech's global enterprise level client base. Second, we are continuing to build our customer engagement cloud solutions as the market for cloud-based services continues to gain momentum. We have tripled our cloud-based contract value to $60 million. And third, we have begun to utilize the power of a vertically-based sales engine: the global markets and industries group, GMI, to lead our new customer technology opportunities with our embedded client base and strategic new accounts. I will share more detail about the GMI shortly.

I want to reiterate that the market opportunity for customer engagement technology is significant. We grew this business 44% in 2012, 57% in 2013. The upgrade and conversion to the cloud in our embedded base alone across both our Cisco and Avaya platforms will afford us ample opportunity for growth. Furthermore, as I just outlined, we believe that the steps we are taking to return to the revenue growth will allow us to deliver more normalized operating margins into 2015.

Now, on to how we are driving overall growth. Last year, we began to invest in the creation of GMI. This vertically-focused sales organization is comprised of experts who understand the specific business drivers that impact growth and profitability in each industry they serve.

Every day, our GMI is out in the market, leading conversations around complex business issues that cut across the entire customer lifecycle. They are partnering with clients to tap into comprehensive set of strategy, analytics, technology, and service offerings to create solutions that are increasing customer engagement and driving profitable growth.

For example, in healthcare, where the B2C model is creating major disruption for payers, we are providing member acquisition and onboarding services that include digital demand generation, HIPAA-compliant technology, and specifically licensed member support. In financial services, where multichannel customer experience is driving competitive differentiation, we are delivering our solution across mobile, web, and traditional platforms.

In telecommunication, where churn is having dramatic impact on profitability, we are delivering real-time analytics-based customer retention programs. And in automotive, where social and mobile are radically changing the customer experience from prepurchase to repurchase, we are helping OEMs optimize digital interactions across every phase of the life cycle.

With four consecutive quarters of increased bookings growth, our GMI continues to gain momentum. The team has forged strategic relationships in our embedded accounts and has expanded our care and growth services footprint within existing clients, building on their established relationships.

As I mentioned before, the GMI team will now begin to focus on deepening our penetration within our embedded base by introducing our technology and consulting offerings. This quarter, 11 clients signed on with multiple segment solutions. These proof points highlight the economic value of our integrated solution set and are opening doors with new accounts. With continued investments in our sales and marketing engine and access to new client relationships through our M&A activity, the GMI team is seeking out strategic new clients.

It is undeniable -- technology today connects us in ways we could have never imagined. As businesses have access to more data than ever before, we are helping our clients turn that data into insight. That enables seamless interactions, deeper engagements, and greater customer value.

This tectonic shift has profound applications for our clients and for our Company. Businesses are seeking a new way to compete, and we have designed our Company to equip them with all the customer experience capabilities they need to do it. We are privileged to be helping some of the most successful brands across the globe set customer strategy; change organizational mindset; implement multichannel technology; and manage customer experience operations seamlessly across every channel, business unit, and employee. We are gaining speed.

With all bold journeys there are calculated risks along the way. We knew there would be challenges, but we saw an enormous market opportunity. We envisioned a better way to help companies deliver a simpler and more human experience to their customers. We set out to transform our Company, to be that resource, and we are well on our way. We have invested in our strategy; we have built our Company with unprecedented breadth and depth. Our unique end-to-end customer engagement platform is solidly in place. And as we scale, our potential for growth will increase exponentially.

While we are disappointed with the performance of the technology business segment this quarter, we are energized by our progress. We remain unwavering in our commitment to our direction and look forward to continued advancements in the quarters and the years to come.

I will now turn the call over to Regina.

Thank you, Ken. Good morning, everyone. I will start with a review of our third-quarter consolidated results, followed by our segment performance, and end with some comments on our updated guidance.

On a non-GAAP basis, Q3 revenue was $305.8 million. EBITDA was $37.3 million or 12.2% of revenue. Operating income was $21.5 million (sic - see press release and 10-Q, $21.3 million) or 7%, and diluted earnings per share were $0.31.

Additional highlights on the quarter include strong bookings and pipeline development across our four business segments; the launch of new technology offerings. We closed the rogenSi acquisition. We continue to improve facility utilization, associate retention, and client retention.

Regarding bookings, our expanded suite of offerings is gaining broader market acceptance, as evidenced by the momentum and diversity of our new business signings. We are pleased with the $125 million in third-quarter 2014 bookings, a Company record; and we are mindful of the potential variability by quarter. We are particularly encouraged by the sequential quarterly increases in our overall bookings over the last 12 months.

In the third quarter of 2014, GAAP revenue was $305.9 million compared to $297 million in the third quarter of last year, up 3%. 26% of revenue was generated from our CGS, CSS, and CTS segments. Third-quarter revenue from acquisitions in their first year was $9.6 million.

Non-GAAP EBITDA declined to $37.3 million or 12.2% of adjusted revenue. This compares to $41.2 million or 13.8% of revenue in the year-ago quarter. Our third-quarter GAAP operating income was $21.3 million versus $26 million. Operating income was 7% versus 8.7% of revenue in the year-ago quarter.

The decline in operating income is related to a $5.4 million decrease in our CTS segment. Operating income in the quarter was further impacted by $1.8 million in investments; $0.6 million in incremental amortization related to the acquisition of WebMetro, Sofica, and rogenSi, and $0.6 million of restructuring impairments. The total of these items was $3 million, negatively impacting operating margins by 100 basis points.

SG&A expense was 16.3% of revenue in the third quarter of 2014 versus 16.9% in the same period last year. The reduction in the SG&A expense to revenue ratio is related to a decline in variable incentive comp, in line with performance against our internal operating plan.

Our GAAP-based tax rate this quarter was 28.2% compared to 24.9% for the same period last year. The normalized effective tax rate was 22%. The higher tax rate in the third quarter is primarily related to an audit settlement with an international taxing authority.

Third-quarter fully diluted GAAP earnings per share were $0.27 compared to $0.34 in the prior-year period. Non-GAAP earnings per share were $0.31 compared to $0.38 in the prior-year quarter. Cash flow from operations in the third quarter of 2014 was $30.3 million compared to $36.4 million in the prior year.

Capital expenditures were $17.8 million, relatively flat, unchanged over the prior year. CapEx is primarily related to global facilities expansion in the cloud platform as well as various internal system upgrades.

During the quarter we repurchased approximately 387,000 shares for a total of $10.2 million. Year-to-date we have repurchased 1.9 million shares for a total of $47.3 million. As of September 30, 2014, there was $21.6 million authorized and available for future share repurchases.

Cash and total debt balances at quarter-end were $87.6 million and $121.1 million, respectively, resulting in a net debt position of $33.5 million. Sequentially, net debt was impacted by the rogenSi acquisition, share repurchases, capital expenditures, and variability in our working capital.

Year-to-date we have deployed approximately $85.8 million in share repurchases and acquisitions versus $67.3 million in the same period last year. This was offset by positive cash flow from operations in the quarter. DSO in the third quarter of 2014 was 79 days, up three days from last year, reflecting variability in the timing of payments from select larger clients.

Moving now to a review of our segments -- customer management services third-quarter revenue was $226.8 million versus $217 million, up 4.5%, with strong contribution from new and expanded healthcare and financial services programs. Organic growth was 2.3% versus 0.2% last year.

CMS operating income was $18.6 million versus $17.9 million, a 4% increase. Operating income margin was relatively flat at 8.2%. Facility utilization increased to 82% in the third quarter compared to 79% in the prior year.

CMS delivered strong bookings in the quarter, with large commitments in the healthcare and financial services industries. We booked additional business for US clients with multilingual European requirements in our newly-acquired, Bulgarian-based customer engagement center.

Customer growth services revenue was $28.8 million compared to $25.9 million, and 11% increase. Organic revenue growth was 6.2% versus negative 17% in the prior-year period. Operating income was $1.8 million versus $0.6 million, a 6.3% operating income margin versus 2.3% in the prior period.

CGS's bookings growth was strong in the quarter, both year over year and sequentially, and well diversified across numerous existing marquee clients. The majority of new business was also recurring in nature, including sales of our search to sales technology capabilities, and the pipeline is strong going into year-end.

The customer strategy services third-quarter revenue was $15.1 million compared to $13.4 million, an increase of 12.7%. The growth was largely contributed by rogenSi, a recent addition to our learning and change management practice.

The segment's operative profit was $1.2 million versus $2.3 million. Operating income margin was 7.8% versus 16.8%. The third-quarter operating income was impacted by the rogenSi acquisition and lower consulting utilization. Based on Q3 strong bookings and backlog, we anticipate a strong Q4.

Integration plans and efforts related to rogenSi are well underway. While early, the rogenSi team is off to a great start. We saw strong CSS bookings across consulting lines, including advanced analytics and customer experience strategy within our embedded base, and a large enterprise cost efficiency initiative in a new retail client relationship.

CTS's revenue was $35.2 million versus $40.7 million, down 13.3% and attributable to lower volumes in our Avaya offering. Operating income was a negative $0.3 million compared to $5.2 million, a $5.5 million decline.

Ken covered the key reasons for the operating income decline, including a $1 million impact from lower Avaya revenue; $2 million from one-time expenses related to the integration of TSG and eLoyalty; and $2 million associated with the buildout of cloud solutions necessary to deliver the $60 million of cloud backlog at September 30, 2014.

Bookings returned to historical levels in Q3. With strong bookings in the quarter, our strong cloud and managed service backlog, and the involvement of our GMI team in selling CTS solutions to our current client base, we expect CTS to return to growth in the first half of 2015.

In 2014, the short-term challenges in CTS will unfortunately impact our overall results. We anticipate the impact to affect our overall 2014 revenue growth by 110 basis points and our operating income margin by 60 basis points. That said, in 2014 the non-CTS segments will have a very respectable year. We estimate the non-CTS segments will have revenue growth of approximately 7.5% and have operating income growth of approximately 24%.

While we could further reduce the investments we are making in sales, marketing, and R&D to maximize operating income margin, we do not view this to be in the best interest of our shareholders given the progress we are making in the transitioning the Company's growth profile. We are realizing significant, tangible results from our investments.

We can see this in our year-to-date new business signings growing at 19%. We can see it in our year-to-date revenue growth rate at 5.7% versus 1.3% last year. And, in particular, we can see it in our organic growth rate at 3.1% versus a negative 3.5% last year.

As a result, we believe we should stay the course, execute our planned investments, and continue our path toward higher revenue growth rates. We are confident based on our current 2015 backlog and our ever-improving bookings engine that we will deliver continued improvement in the top line.

We estimate our 2014 revenue to range from $1.230 billion to $1.235 billion. We estimate operating margin to range from between 7.75% and 8%. Incremental investments will approximate $9 million in 2014. And capital expenditures are unchanged, ranging between $55 million and $65 million, of which 70% is expected for growth initiatives.

While we are pleased with the general progress we have made in transitioning the Company's growth profile, you should note that Ken and I are deeply disappointed in the CTS performance. It is unacceptable. Our management team is completely committed to do everything we can to reestablish CTS's profitable growth record.

I will now pass the call back to Paul.

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

(Operator Instructions) Mike Malouf.

I was hoping you could give a little bit more color on CTS. I know the last quarter we were hoping for a bounce-back, and I know that some things are on the -- certainly on the investment side. But do you think there is more competition going on in there? Is there some pricing issues? Is there anything that maybe that you were -- as you got deeper into CTS in the last quarter, that you realized that you didn't realize when we were on the last quarter? If you could just give us some more color, that would be great.

I will answer maybe the first part and let Regina add any other commentary. I do not believe that this is in any way tied to more competition or pricing compression, et cetera. I think that we were very open and very transparent, and I think that this was really, frankly, a self-inflicted situation, where we -- where our management in this group did not deliver.

And part of it has to do with the fact that this was one unit, TSG, that was not fully integrated. And the fact of the matter is that the other unit, which was eLoyalty, is powering on through and doing just fine. But this particular acquisition brought down the whole group, and it's inexcusable.

It is truly just tied to lack of execution, not the proper focus that we should have had. We absolutely see what we need to do. And I think it is why we are confident that in the coming quarter that we are already seeing a bounce-back from just the first half to the second half.

The reality is that there should have been some structural changes made probably a year ago, and for whatever reason they weren't made. And we are paying the price for that. And we are very apologetic about it.

Yes. I think the only thing I would add is we were off in the first half. We had good bookings in Q3, I think, relative to the conversations we had coming off of Q2. I would say we believe that we could recoup some of that sooner. It is going to take a little bit longer for our return to historical-level bookings to work its way into the revenue.

We have also seen our way to a number of things that we can do in further integration with these two acquisitions, which will naturally, in a very healthy way for our clients, and our top line, and bottom-line streamline the organization a bit.

We have talked during the script about the engagement of GMI. We believe that is going to make a huge difference. That is a nice-size Avaya business today, but when you take a look at the market share that Avaya does have and the opportunity we have through our embedded base, which has significant Avaya platform, we believe that market is there.

I think the market issues have largely been around unified communication. Ours is a contact center play. We have these great relationships with Cisco and Avaya. As I mentioned, we have $60 million of total contract value in our cloud business. And we have another $59 million to $60 million of backlog in our managed service business.

So we feel pretty good about the return. It is going to take us a couple of quarters to navigate that. We believe that as we navigate back to growth in CTS, we are seeing momentum. This is a single quarter. It's (technical difficulty)

Hello?

Please continue to stand by, everyone, for conference. It will continue momentarily.

Mike, I'm sorry. The Verizon conferencing system is having an issue. We outsource it. Probably we shouldn't be doing that anymore. Anyway, so I don't know that you heard --

I think they heard -- he heard my comments and not yours, Ken.

-- my response.

Yes, we heard your response, and most of --

I think you were adding the relationship we have with senior folks.

So you heard the fact that we have got very strong relationships with Avaya, all the way at the very top, and that they are working closely with us. They are very committed to us being successful, because they view us as one of the most sophisticated providers in the multichannel space.

And that, secondly, that the market right now -- Avaya has 72% globally of the contact center market, of which 75% of that 72% is 10-year -- the of equipment or the kit is 10 years old. And therefore we see real opportunity in transitioning those folks to the cloud.

Got it. Great. Thanks a lot for the color.

Tobey Sommer.

This is Frank on for Tobey. Wanted to ask -- what gives you some confidence? Can you share with us any metrics as we exit the quarter, over the last four or five weeks, that kind of back up that this is more of a one-quarter event going forward?

I guess I'll start, and then I think -- I'll start quantitatively, and then Ken can kick in with some color. Look, we are into the last seven weeks or so of the quarter. We have good visibility to backlog across each of these businesses.

Near-term, right, in Q4 we can already see, obviously, October's -- a good part of October's revenue. And so what I would say is we are very confident that the tick-up that is in our -- was in our guidance. I mean, the reset on guidance is really primarily a reset based on what has happened in CTS.

But the seasonal volume is up. It is up from last year. And if you take a look at our list from Q3 to Q4, you will definitely see a premium to that list as we go into Q4. And then, as I said earlier, we can already see what the existing business will be going into last year, as we are heavily in our planning process. And we most likely have about a 3% lift in the existing business going into next year versus last year.

So we feel relatively comfort. We still have a fair amount of nonrecurring business to deliver through bookings and revenue, but the platforms are there to do that. And those platforms have been further improved by the rogenSi and the Sofica acquisitions that we did that are doing very well, albeit rogenSi is with us just a short period of time.

Okay, great. And within CTS, the $2 million that was related to cloud investments -- is there something that suggests that the pace of those investments will slow? Is this something that you have visibility on as you move into 2015? What are your thoughts in terms of future investments in those cloud capabilities?

Yes. Almost $1 million of that was really an account adjustment that we had to do relative to cap R&D. So that truly is one-time in nature and really doesn't have anything relative to a tick-up.

The balance of it had to do with some one-time expenses related to our managed services. So I really feel that those are truly one-time. They won't repeat.

That said, as you hear laced throughout our conversation, delivering that $60 million of backlog TCV -- total contract value -- for the cloud has taken us CapEx, which is now showing up in depreciation as we put these clients in service. But you can -- I think you can generally look at that $60 million, and while our growth margin on that will change through various levels of seats, the next 5,000 seats give us about a 20% reduction in the cost per seat.

But if you look at that 60 million, you can generally count on it driving 40% to 45% of gross margin. And so we continue to look at that investment and feel that the amount of money that we are deploying there -- historically it has been to build a stadium, if I could use a parallel; and now what we're doing is as we gain client contracts, we fill out each section.

So a lion's share, at least for the next couple of years, of the stadium has been built. And now it is a function of as we get clients, there are things that we need to add to the environment specific to those clients.

Okay. Great. Thank you very much.

Shlomo Rosenbaum.

This is actually Josh James filling in for Shlomo. Thanks for taking my questions. I just have two quick ones.

First, can you tell us how much revenue rogenSi added to the CSS business in the quarter? And second, how much currency impact is factored into your revenue guidance for the fourth quarter? Thank you.

Sure. So RogenSi is a couple of million dollars in our numbers for the quarter. You know, we had it a short period of time; we'll have it a full quarter next quarter. In our view, our current estimate shows that from a revenue perspective, we will have about a $3.5 million impact on from FX on our revenue Q3 to Q4.

Okay. Thank you very much.

(Operator Instructions)

Operator, this is Paul. You may end the call. Thank you.

Thank you.

Thank you. This concludes the TeleTech third-quarter 2014 earnings conference call. You may disconnect at this time.