TTEC Holdings Inc (TTEC) 2016 Q2 法說會逐字稿

Welcome to TeleTech's second-quarter 2016 earnings conference call. (Operator Instructions) 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, Treasurer and Head of Investor Relations. Thank you, sir. You may begin.

Good morning and thank you for joining us today. TeleTech is hosting this call to discuss second-quarter 2016 results, ended June 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 second-quarter 2016. While this call will reflect items discussed within those documents, we encourage our listeners to read our second-quarter Form 10-Q.

Before we began I want to remind you that matters discussed in 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 us 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 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 asset impairments and/or restructuring charges. For a more detailed description of our risk factors, please review our 2015 annual report on Form 10-K.

A replay of the conference call will be available on our website under the Investor Relations section.

I will now turn the call over to Ken Tuchman, who is traveling and calling in from a remote location.

Good morning. To provide clarity on the drivers of our performance this quarter I will first address the strategic aspects of our business plan and then Regina will focus on financials and business outlook.

Over the past several years, we have diversified our solution portfolio with technology-enabled and outcome-driven services, to increase our strategic relevance to our clients in the marketplace. Our value proposition has proven when we provide our clients with solutions that help them deliver a better customer experience at a lower cost to serve, their customers stay longer, spend more and become advocates for their brands.

So why aren't we meeting our performance expectations?

Our sales approach in its current form is not meeting our planned objectives. For the investments we have made in our sales platform, it is simply not delivering the volume and the quality of bookings we need to achieve our top and bottom line goals. Quite simply, we need far more predictable momentum to absorb the classic ebbs and flows of the business of our scale and diversity.

Here are a few examples. This quarter, several mega deals with Fortune 500 companies with annualized contract values near $60 million were postponed or canceled because of divestitures. In one instance we had already started to work when one of our client's divisions was sold. As you would expect, they had no choice but to cancel the work. In another instance, the company was sold to a private equity firm.

In both circumstances we were recognized as a trusted customer experience partner, and when the time is right we hope to reignite both of those relationships.

While these events were anomalies, they shed a bright light on our need to increase the volume of our opportunities and our pipeline to maintain our overall growth trajectory. We are keenly focused on what needs to be done to get back on track. We're strengthening our sales execution and aligning our organizational priorities to drive more consistent, higher levels of profitable growth. We are deep into building our plan and I look forward to sharing our progress in detail on our next-quarter call.

Now on to a few examples of our business progress this quarter.

Multiple segment deals are driving large bookings. While we acknowledge that we currently do not have enough momentum with new logos and growth in our embedded base, this quarter we did deliver strong bookings in several industries, geographies and segments. Several of the key deals combined solutions from our strategy, technology, growth and care segments. And we have several more multisegment opportunities in the pipeline.

Our focus on delivering outcomes is driving profitable growth for our clients. Our customer growth services segment grew double digit, margins approaching 10% this quarter. With our digital outcomes-based revenue generation model, we are delivering as much as a 10 to 1 return on investment.

In addition, we introduced outcomes-based pricing with our customer management services segment and are seeing positive early results.

When we implement these more advanced solutions with our clients, we improve first contact resolution, reduce customer effort, increase customer satisfaction and reduce total cost to serve.

Because our solutions cut across the entire business ecosystem from the C suite to operations we are able to drive the tangible, sustainable outcomes that our clients need and value. This is evidenced in a number of key accounts. When we bring strategy and execution together, we are consistently achieving double-digit revenue growth.

Proof points like these underline the strategic value of our platform. Our challenge is not the relevance of our solution portfolio or the excellence of our operational delivery. Let me be clear. Our challenge is specifically our ability to expand our market reach, develop more client executive relationships and accelerate deal closure.

The market is strong and growing. Across industries and geographies, more companies than ever are requiring partners to help them imagine, enable and differentiate their customer experiences.

According to a report from Forrester, 85% of companies surveyed view customer experience excellence as a differentiator. In stark contrast, a report from Dimension Data notes that only 22% of the companies have the ability to integrate channels.

This gap between customer experience vision and customer experience reality will only widen as the number of channels proliferate.

This new environment is complex. Whether a brand is a multinational icon or emerging disruptor, their future will depend on their ability to create and cultivate meaningful customer relationships across every channel. All of our services, coupled with our technology-enabled platforms, are positioned to support this complex ecosystem where brands, products and customers collide.

We are committed to our value proposition and the market opportunity before us. Our recent performance reflects neither our ability nor our ambition. Given our blue-chip client base, outcomes-based value proposition and strong and committed management team, we can do better. And we will.

We are resolute in our direction and we are making the necessary changes to achieve our goals. Our focus is twofold -- accelerating market adoption and improving profitability so that we can reap the full benefit of what we built.

We are moving full steam ahead to grow our top and bottom line.

In parallel, our commitment to our shareholders remains top of mind. We will continue to leverage our strong cash flow and balance sheet to provide early returns through continued share repurchases and dividends. In addition, we will consider acquisition opportunities that drive more and annuity-oriented revenue, that scale our platform and advance our top and bottom line growth. We are focused on what is required to execute successfully.

I appreciate your continued support and look forward to sharing our progress over the next several months. I will now turn the call over to Regina.

Thank you, Ken. And good morning, everyone. I'll start with a review of our second-quarter 2016 results, including segment performance, and then provide some context on our updated business outlook.

To summarize the second-quarter 2016 financial results, on a GAAP basis the Company reported revenue of $305.1 million, down 1.6% over the prior year. Operating income was $16.2 million, a 5.3% operating margin versus 7.5% in the same quarter last year. Diluted earnings per share was $0.24, down from $0.30 in the prior-year period.

On a non-GAAP constant currency basis, revenue increased 1.1% to $313.6 million while operating income decreased 23.5% to $18 million or 5.7% of revenue. This compares to an operating margin of 7.6% last year. Our diluted earnings per share was $0.28 versus $0.34 in the year-ago period.

In summary, the performance headwinds we are experiencing, which have led to a decline in our financial results, relate to a limited set of issues. These include gaps in our sales execution, an unprecedented number of M&A transactions in our client and prospect base, and a select set of industry and geographic-specific challenges in a couple of our businesses.

We deem these issues to be short-term in nature and have thoroughly focused on their resolution while advancing our profitability. We have an intense priority around balancing our long-term growth aspirations with a current return on the investments we have made in sales, marketing and R&D.

We are disappointed in the downward reset on our guidance. We're finalizing our plans relative to our topline challenges and will begin execution of a number of initiatives within the third quarter. In parallel, we are executing a full review of our cost structure to bring expenses in line with 2016's low single-digit revenue growth and our near-term priorities.

We see this as a significant opportunity to establish a faster pace to improve profitability.

Some additional details on our financial performance in the second-quarter 2016 -- new business signings in the second quarter of 2016 increased 13% to $113 million from $100 million in the prior-year quarter. Over the last 12 months, bookings totaled $463 million, up 4% over the same period last year.

We also achieved our 10th consecutive quarter of bookings at or above $100 million, which continued to be well-diversified across segments, geographies and industries, as well as new and existing client relationships.

Our effective tax rate was 19.1%. This is down from 33.6% in the prior year. The prior year included a nonrecurring reserve to true up our international tax provision. The normalized tax rate was 9.1% from 24.7% in the prior year, down due to the geographic mix of our taxable operating income.

Our GAAP diluted earnings per share was $0.24 in the second quarter versus $0.30 in the year-ago period. And our non-GAAP EPS was $0.28 versus $0.34. The decline in EPS is primarily due to our lower operating income.

Cash flow from operations was $41.5 million in the second quarter of 2016 compared to $81.7 million in the year-ago period. DSO was 78 days versus 76 days last year. Sequentially DSO has improved by five days from the first quarter of 2016.

Capital expenditures were $12.8 million in the second quarter compared to $16.5 million in the prior-year period. We expect full-year 2016 CapEx to approximate 4.2% of revenue versus 4.5% guidance and 5.2% in 2015.

Capacity utilization in the second quarter was 70%. This compares to 77% in the prior year. As we look beyond our seasonally low quarter, second quarter, and assess our current and future estimated CMS and CGS backlog, we expect utilization to reach the mid to upper 70s by the end of the year.

We're also evaluating our worldwide facilities portfolio to ensure appropriate alignment of our capacity with anticipated business requirements.

While the super site build and migration continued to burden our capacity utilization in the second quarter, we are now completely utilized in the super site and expect to be fully utilized in the sites that were vacated as we implement the $93 million of year-to-date CMS bookings.

In the second quarter of 2016, we repurchased 1 million shares for approximately $27.4 million. As of June 30, 2016 there was $33.5 million authorized by the Board for future repurchases. The Company also paid $0.185 per share semiannual dividend in April to shareholders of record on March 31, 2016.

Cash and total debt at quarter-end was $55.3 million and $146.2 million, respectively, resulting in a net debt position of $90.9 million. This compares to a net debt position of $30.6 million in the prior-year period and $66.3 million last quarter.

Over the past 12 months, beyond CapEx, we returned $58.7 million to shareholders through share repurchases and dividends, and invested $17.2 million in acquisition-related activities. This was offset by positive cash flow from operations.

Moving now to a review of our segments, my comments will reference non-GAAP constant currency results. Customer management services revenue was $220.5 million in the second quarter of 2016, up 0.5% over the prior-year period. While we are seeing strong performance across the majority of accounts, we are still working through the impact of one-time challenges as we absorb the impact of lower exchange volumes in healthcare and repatriation of offshore jobs in financial services.

The healthcare exchange issue will not affect our second half. The repatriation of offshore jobs does have an impact in second half of approximately $16 million.

We originally expected incremental onshore volumes from this client to reduce the impact of this repatriation, but the timing of this additional offshore work has shifted towards the end of 2016 versus our original expectations. This is one of our longest standing Top 5 clients with a strong relationship across our four segments.

CMS's operating income in the second quarter of 2016 was $9.9 million or 4.5% compared to 6.1% of revenue in the year-ago quarter. The operating margin decline is primarily a function of the above-noted churn, lower capacity utilization and an increasing mix of revenue onshore.

While CMS's bookings doubled in the second quarter, both sequentially and year over year, it fell short of expectations. As mentioned earlier, we experienced changes in strategy in several established Fortune 500 companies and key deals that were postponed or canceled. For the full-year 2016, we expect CMS revenues to be relatively flat year-over-year with operating margins in the range of 7.6% to 7.8% versus last year's 6.8%, including the impact of foreign exchange movements.

Customer growth services second-quarter 2016 revenue was $37.4 million, up 22.4% over the year-ago period. Operating income increased 73% to $3.7 million or 9.8% of revenue, compared to a $2.1 million or 6.9% in the prior year. CGS's double-digit growth continues to reflect the market demand for our outcome-based sales outsourcing capabilities. In the first half of 2016 alone, we have five new client programs in ramp and we're expecting three others for existing clients. Already in the third quarter, three new client program launches are scheduled.

CGS is also experiencing meaningful program expansion from several existing clients as well as growth abroad with approximately 20% of revenue now generated from international clients. CGS's improved operating margin in the second quarter was a function of higher revenues and increased scale.

Based on our current and estimated backlog, we expect the full-year revenue growth in the high teens and a full-year operating margin in the 7.4% to 7.6% range versus last year's 7%. We estimate CGS will achieve an operating margin of 7 -- 10% in the fourth quarter.

Customer technology services of the second quarter of 2016 revenue was $37.4 million, down 1.9% from $38.1 million in the prior-year period. Operating income was [$3.4 million] or 9.1% of revenue in the second quarter, up from 8.5% or $3.3 million in the same period last year. These are despite absorbing incremental SG&A to fund additions to the leadership and sales teams as we navigate through changes we are making to the Avaya platform and on-premise to cloud conversion.

We continue to see a division in the performance profile of our CTS Cisco versus CTS Avaya businesses.

Our Cisco business is performing well in the second quarter with double-digit operating margins in all five competencies inclusive of managed services, cloud, consulting, systems integration and product. We also saw year-over-year growth in all areas except product sales, which were down due to increased client migration, core virtualization and cloud-based solutions. The recurring revenue solutions including managed services and cloud grew 16% and related operating income grew 34%.

Conversely, our Avaya business volumes continue to struggle, due to product and decision-making delays which we largely attribute to delays in Avaya's product refresh. While the Avaya business represents less than 15% of CTS's total second-quarter revenue, its performance is nevertheless weighing on the otherwise stronger overall CTS business.

For the full year, we estimate CTS's revenue to be down by 5% to 6% with an operating margin of near 10% versus 8.5% in the prior year, including the impact of foreign exchange movements.

While CTS's bookings remain strong, the lower full-year outlook primarily relates to Avaya headwinds and Cisco revenue mix towards virtualization and cloud-based solution. While SaaS-based offerings are preferred in the short run the time to revenue is longer than on-premise solutions.

Customer strategy services' second-quarter revenue was $18.4 million, down 17.5% from $22.4 million in the year-ago period. The segment's operating margin was $1.1 million or 5.8% of revenue in the second quarter of 2016 versus $4.8 million or 21.6% of revenue in the prior-year period. As shared last quarter, the decline in revenue and operating income was primarily a function of lower volumes in our CSS Middle East business.

While we work through the macroeconomic challenges in that region of the world, we are outperforming in the Americas across most of our practice areas. We are also seeing an uptick in C suite conversations that are building deeper strategic relationships and fostering new opportunities both within CSS and other segments.

Sequentially, second-quarter versus first-quarter 2016, CSS grew revenue 15% and returned to profitability. Despite strong bookings and higher-end quality consulting engagements in the Americas and Europe, the higher demand for insights, analytics and content collaboration services, CSS's challenges in the Middle East negatively weigh on the full year over year compared. For full-year 2016 we estimate CSS's revenue to decline by 5% to 6% with operating margins in the midteens including the impact of foreign exchange movements.

A quick comment regarding our progress to remediate the material weaknesses in our internal control systems -- we are advancing the actions we outlined in our Form -- 2015 Form 10-K and continue to expect to have the weaknesses remediated by the filing of our 2016 10-K.

Regarding our full-year adjusted guidance, we estimate revenue to range from $1.285 billion to $1.295 billion compared to $1.335 billion to $1.345 billion including the estimated impact of foreign exchange movements. We estimate our operating margin before asset impairments and restructuring charges and including the impact of foreign exchange movements to range between 8.4% and 8.6% versus 8.1% to 8.3% in our original guidance.

This includes actions we will take to reduce our expense base in line with our commitments to increase the pace at which we get to higher profitability.

We estimate our capital expense at approximately 4.2% of revenue versus 4.5% in our original guidance. While we are achieving strong operational results and seeing increased client adoption of our suite of offerings, we are not realizing our full growth potential. We expect the sales execution challenges we are facing to resolve within the next couple of quarters. In the meantime we have every intention of advancing the pace in which we get to higher profitability by increasing our focus, rationalizing nonstrategic activities and continuing to streamline our cost structure across our service segments and shared services.

We look forward to sharing details and progress against our plan during our third-quarter earnings conference call. I will now turn the call back to Paul.

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

(Operator Instructions) Frank Atkins, SunTrust.

I wanted to ask first -- in the prepared remarks you talked about a couple divestitures, M&A as well as a private equity acquisition that impacted the business. Can you give us a little bit more color on perhaps which segments those were impacted in? And what gives you confidence this is temporary in nature?

Well, you asked about three different questions or four different questions there. So I'll do the best I can skim across some of them and if Regina wants to join me, that's fine.

Our confidence is that we are in the process of completing our plan as we speak or we are already into segments of the plan and making good progress, and we see opportunities where we can do some streamlining and increase our bottomline at a pretty rapid pace. And so, as we said on the call, we look forward to sharing the details of that in the next quarter. But it will be in the next quarter that will be sharing those details. We think that you people will be pleased with what we will be able to achieve.

As it relates to M&A, we are still very focused on acquisitions. And we are going to continue to be focused on acquisitions.

And then as it relates to anything that might have to do with divestitures, suffice to say that if -- we will do everything possible to make sure that every aspect of our business is performing optimally. And if we find an area where it's not, then we will look at whatever alternatives are in front of us.

Let me just add a little bit because I think maybe the question also was getting at the clients and the prospects that we did not close, relative to the $60 million was related to almost exclusively all CMS business. In some of those cases we believe that, as Ken said in the script, we can reignite those opportunities. But we suggest, given those businesses have seasonality to them, that would not happen until 2017.

That's the bulk of them. There was an additional what I would say change in the strategic direction of an existing client that will be included in that set that was in CGS. And while a recent client made a change at the high executive level relative to not outsource but to, in fact, redirect that back in-house. So that will affect, a little bit, CGS's growth into the second half, but still expect them to have near 20% growth rate year-over-year.

Okay, great. That's helpful. And for my follow-up, just wanted to ask about the hiring environment for people in general and sales in particular.

As far as -- we are actually very excited by several new senior business development executives that we have recently brought on and several more that we will be bringing on. So we feel very positive about the hiring environment. As a matter of fact, I would say we have never felt better about the environment as far as the quality of the candidates, of people that are really interested in selling an integrated type of the solution that's more end-to-end.

Okay, great. Thank you very much.

Shlomo Rosenbaum, Stifel.

This is Adam on for Shlomo. Why did the non-GAAP operating margin guidance go up? Is this due to a lack of [brand] cost because of the weaker expectations?

No. We've certainly, in particular in our CMS and CGS business, have some volatility relative to ramp. But as I said, our focus will be balanced in the near term, relative to certainly closing the gaps that we have on sales execution, ensuring that we retain our focus, importantly, on those things that have long-term strategic value but, at the same time, balancing our profitability.

As we step back, we believe that through a more narrow focus on the things that are most strategic and will build that long-term value for the Company, we, with more narrow focus and with a rationalization of certain unproductive activities or at least activities that are not getting the threshold of return or profitability, and then last but not least just continuing to streamline our cost structure, [we usually] have multiple enterprise services in multiple segments. We see an opportunity through things like consolidation and rationalization without a major impact on the Company's topline execution and/or slowdown in the execution of our strategy.

Okay, thank you.

[Eric Des Lauriers, Craig-Hallum Capital].

So I know you talked about a financial services company with some repatriation that had a $16 million impact. Going along that in the CMS margins were decreasing from 2014, 2015 to 2016, are you guys seeing a problem with attrition or is that mainly just one-time events?

Yes. So I would characterize the CMS margin as being impacted by the healthcare exchanges, which did impact the first half but will not impact the second half. The repatriation, which did impact the first half and will impact the second half to the tune of $16 million, but certainly as we get into next year we will have flushed that through.

The third piece was the utilization, which we have continued to talk about. I think the good news there is that we will see utilization in the mid-70s to high 70s and that we do have that supersite filled and that client that went into the supersite and vacated other spaces, that space will be filled by the end of the year, given that we have $93 million of CMS bookings at the half. It's not as high as we thought it would be but certainly strong bookings relative to 2015.

I think if you look at the growth in CMS, we're probably going to see about a 4% growth second half of 2016 versus first half of 2016 versus a decline that we saw in the first half of 2016 versus 2015.

And on the margin basis, we expect to see in the second half a 9% margin in CMS versus what was a 5.5% in the first half. So I think that we've had some challenges from that super site build. We've had some challenges that are one-time from the exchanges. There was a client who was deep to that. It didn't work out. They exited the exchanges. So our year-over-year compared is difficult. And a one-time from this repatriation from one of our top financial services clients.

Okay, thank you.

I'd like to just add real quickly and say that it's no secret that TeleTech somewhat doubled down on the exchanges. We saw a very significant opportunity in the healthcare space. Every major carrier in the United States, let's just say the top 10 carriers were all doubling down and heading that direction.

And it's no secret, without making any type of a political comment, that there has been about-face with exchanges. All one has to do is read the front page of the Wall Street Journal. Every major carrier has now gone from doubling down and expanding dramatically into that area to basically saying it's an area that does not work for them and in many cases it's not profitable for them.

And so consequently, look, some of these large carriers, basically the majority of them, have withdrawn from that exchange space. And so that obviously has impacted us and something that, frankly, we got blindsided by and did not anticipate.

So the last thing that I'd like to point out is that if you look at 2014 to 2016, with the increase in our healthcare business and some of the increases in our financial services business, there has been a big shift in mix as it relates to offshore to onshore. And that obviously has somewhat of a muting impact or degradation impact of profitability.

That said, the exchange situation, we feel, is behind us. Our focus is now back to classic healthcare in a myriad of areas that healthcare companies are not, shall we say, experimenting with. And we are confident that we will get this back on track.

Okay, great. And then, second, could you just speak about the hire of Michael Wellman? Is this a new position or existing? Could you just give us a little more color on that, why you hired him and what you're looking to get out of that?

Yes, sure. So, Michael Wellman has been with us just about a year. He joined to lead our human capital of our healthcare businesses, of our BPO businesses, CMS and CGS. We had made a decision at a certain point, given the emerging businesses had very different profile of employees, that we needed to divide and conquer. And so we did divide our human capital for a period of time to make sure that we had the appropriate focus. We always intended to reunify that.

And, given he has got a great background in human capital, has led a number of organizations including competitive organizations, has definitely proved himself over the last year. And we took the opportunity to, as I said, unify human capital. And that in fact, as we do that, is one of the areas that we feel is a consolidation. And there will be a natural rationalization.

So he has been with the Company for over a year. And we're very happy to have him take the helm in human capital, which is such a critical role for us in terms of creating, obviously, a great platform for talent acquisition and talent management but equally to create a culture where many, many people across geographies and very different types of roles are able to come together in a single culture towards the purpose of driving great customer experience engagement.

Great. And then finally, could you guys -- in Q,1 you guided that SG&A expenses would be relatively flat. Amid -- this new cost-cutting and streamlining, are you guys still expect SG&A to be really flat year-over-year? Or are you just adding a bit of a decrease?

No. We would expect a more significant decrease year-over-year and look forward to talking in more detail in and around the activities and actions that we take relative to that.

Great. All right, thanks for taking my quesions guys. (inaudible).

Bill Warmington, Wells Fargo.

This is [Eliza] for Bill Warmington. I'm just wondering what percent of clients are using multiple services and what are some of the biggest pairings within the segments or between segments?

Yes. I'll start by giving you just, I think, an interesting fact relative to second quarter. If I take our top 21 bookings, which were all bookings over $1 million, it's kind of interesting that eight of them have multiple capabilities in that booking. And what I would say is, pairings that we see much more frequently and consistently are CSS, CTS and CMS. On a year-to-date or life-to-date basis at this point, we have 76 of our client taking the integrated solutions, multiple capabilities.

So we continue to see progress there. I would say that we would expect even more momentum. And we see it in the pipeline and in the conversations we are having with clients as our consulting business really is hitting its stride in terms of leading through regional partners and practice partners and vertical partners, driving very rich, transformative conversations with our clients. And then there's a natural connect as clients drive their strategy, tweak their strategy into CTS and then either CMS or CGS, depending on the focus of the particular client.

Okay, thanks. And can you talk about some of those sales execution gaps that you had during the quarter, maybe provide a little more color on that? Are they specific to one segment?

What I would say to you is that just, overall, we feel that we could be doing a better job in our offer management and in how we are reaching the marketplace as far as the quantity of opportunities. And so what I would just simply say to you without giving up anything that's too proprietary is we are very focused. We are stepping up in areas that we think will allow us to expand our sales opportunities.

We are very happy with the closing ratio. So, our closing ratios are good. We just would like to see more overall opportunities that can take advantage of our complete end-to-end platform. And what we find is that when we get in front of the opportunities, we are quite successful. And so it's really more of a quantity situation. And that's something that I think you will see will start to mend itself over the next couple of quarters with some of the increased focus, the new hires in some of the other strategic areas that we are focusing on.

Okay, thanks for taking my questions.

That is all the time that we have today. This concludes the TeleTech second-quarter 2016 earnings conference call. You may disconnect at this time.