TTEC Holdings, Inc. (TTEC) Q1 2012 Earnings Report, Transcript and Summary

Welcome to the First Quarter 2012 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 Karen Breen, TeleTech's Vice President of Investor Relations. Ma'am, you may begin.

Good morning, and thank you for joining us today. TeleTech is hosting this call to discuss its first quarter 2012 results ended March 31. Participating on today's call will be Ken Tuchman, our Chairman and CEO; and Regina Paolillo, our Chief Financial Officer. Yesterday, TeleTech issued a press release announcing its financial results for the first quarter 2012 and also filed our quarterly report on Form 10-Q with the SEC. This call will reflect items discussed within those documents, and we will make reference to them on the call today. We encourage all listeners to read our quarterly report on Form 10-Q. Before we begin, I want to remind you that matters discussed on today's call may include forward-looking statements relating to our operating performance, financial goals and business outlook, which are based on our current beliefs and assumptions. Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise this information as a result of new data that may become available. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those described. Such factors include, but are not limited to, reliance on several major clients, the risks associated with lower profitability from or the loss of one or more significant client relationships, execution risks associated with ramping new business or integrating acquired businesses and the possibility of additional asset impairments and/or restructuring charges. For a more detailed description of our risk factors, please review our most recent SEC filings along with our 2011 annual report on Form 10-K. A replay of this conference call will be available on our website through May 16. And I will now turn the call over to Ken Tuchman, our Chairman and CEO.

Thank you, Karen, and good morning to everyone joining us today. I'd like to start by reviewing the 2012 priorities that we originally highlighted on our fourth quarter call, then discuss our progress against these initiatives during the first quarter. After that, Regina will review our financial results in detail. In 2012, our mission remains steadfast, to be the global leader helping companies design, build, grow, manage -- excuse me, and manage the next-generation customer experience. This, in turn, will drive meaningful economic value for our clients and our shareholders. This mission requires much more than just the labor-based delivery model. It requires the ability to impact multiple aspects of the client's business, including strategy, analytics, technology and business process redesign. As we continue to execute on this vision, let me review the priorities for 2012 that we outlined on our last call. First, we wanted to deliver a winning growth strategy. Second, we will continue to invest in innovation via our proprietary, fully integrated platform that spans strategic consulting, data analytics, revenue generation, technology and global delivery. Third, we will leverage our strong balance sheet to pursue strategic accretive acquisitions that further complement and enrich our existing suite of capabilities. And last, we want to provide increased visibility to the financial profile and performance of our new segments so investors can properly value these businesses. Let me now review our first quarter progress against these stated objectives, beginning with our growth strategy. We have 3 primary areas of focus, including, one, expanding the breadth and depth of our offering with the existing clients, while selectively adding new relationships; two, positioning ourselves for increased vertical growth and delivering a fully integrated value proposition across our business segments, focused on complex engagements that drive empirical results and substantial economic value for our clients. During the first quarter, we signed an incremental $85 million of annualized business, of which 80% was reoccurring. This represents the expansion of 54 existing client programs, along with the signing of 7 new clients. Importantly, nearly 30% of these wins came from our higher growth segments. We saw particularly strong revenue gains in our financial services, technology and transportation verticals, each of which grew more than 20% over the year ago quarter. Our fully integrated go-to-market strategy is gaining traction, as more and more clients are investing in multiple aspects of our offerings. This enterprise-wide perspective is enabling us to meaningfully impact our clients' businesses. This, in turn, is enabling us to benefit from deeper, more strategic and longer-term client relationships. Let me share some proof points on how we're realizing the benefits of our integrated value proposition. We were engaged by one of the largest and most well-respected financial service clients to create a 5-year plan that would accelerate their market leadership. Our client, who is already viewed as the gold standard for the customer experience, asked us to deploy a team of experts from our consulting, technology and operations practices to develop a vision for their future state customer experience, along with the implementation roadmap. Another example highlights the ability of our data analytics business to open a door to our other offerings. A large cable provider recently selected us to complete an extensive business evaluation in analytics projects that they viewed as the most critical undertaking of 2012. The most exciting client opportunities underway are where we can meaningfully infuse technology into a traditionally labor-intensive solution to dramatically improve not only the quality of experience but the overall cost to serve the customer. These proof points also validate our strategic priority around continued investments in both our sales efforts and our technology-enriched platform during 2012. These organic investments, complemented by the pursuit of highly targeted accretive acquisitions, will enable us to stay strategically relevant to our clients, while also providing strong returns to our shareholders. The acquisitions we completed over the last 18 months are the Peppers & Rogers Group, eLoyalty and iKnowtion are a testament to this strategy. These accretive acquisitions collectively added approximately $100 million of profitable revenue over the last 12 months. Turning to our segments. We introduced new reporting this quarter as promised. We did this in order to provide greater transparency into these businesses that we view as both higher growth and higher margin over the long term. We look forward to the clarity that this new reporting will bring to our shareholders to enable them to more properly value the elements of our differentiated strategies. We're also very excited to announce the rebranding of our e-commerce business, formerly known as Direct Alliance. Direct Alliance is changing its name to Revana. In order to create greater market awareness as the leader in delivering real-time, highly effective multichannel marketing and revenue generation solutions that accelerate growth in this hyper competitive global market, our ability to help our clients acquire and grow profitable customers is paramount. We believe Revana is on track to accelerate its growth through the remainder of 2012. Regina will review the financial performance of this segment and the others in just a few minutes. In closing, we're pleased with the progress we've made in the first quarter. We believe the breadth and depth of our solution portfolio, our solid financial profile and our experienced leadership team puts us in a strong position to deliver empirical outcomes for our clients and increased returns for our shareholders. With that, I'll turn the call over to Regina.

Thank you, Ken, and good morning, everyone. Let me start with the review of our first quarter results. Revenue for the first quarter was $293 million, up 4.2% from $281 million in the year ago quarter, and up 5.5% in constant currency. Our non-BPO businesses, now brought to light in our newly reported segments, comprised $57.8 million or 20% of Q1 2012 revenue, up from 12% in the year ago quarter. Sequentially, revenue declined from $300.5 million in the fourth quarter to $292.7 million in the first quarter. This decline was directly related to the seasonal wind-down of holiday volumes that peaked in Q4, the reduction of certain non-strategic programs and geographies associated with the $100 million to $115 million revenue restructure we announced earlier this year, offset by growth from new logos and existing clients. Our first quarter 2012 GAAP operating income was $18.8 million or 6.4% of revenue compared to 7.6% in the year ago quarter. Adding back $3.9 million of restructuring impairment and acquisition-related charges, along with a $1.4 million negative FX impact, our first quarter 2012 non-GAAP operating income was $24.1 million or 8.2% compared to 8.1% in the first quarter of 2011. The decrease in non-GAAP operating margin is related to lower capacity utilization in the quarter. As we actively ramp several new logos and existing client programs, we continue to have confidence in our ability to exit 2012 with solid improvement in our asset utilization. SG&A expenses in the quarter were 16.4% of revenue, down 17% a year ago -- down from 17% a year ago, as a result of profit improvement initiatives undertaken throughout 2011 and continuing into this year. We're actively managing our SG&A costs to enable increased investment in R&D and sales and marketing, while gaining increased leverage from our general and administrative costs. We estimate our SG&A spend as a percentage of revenue at approximately 16.5% in 2012, further improving over the longer term in the range of 15% to 16%. Our normalized effective tax rate for the first quarter of 2012 was 18.2%. We continue to believe that our 2012 effective normalized tax rate will range between 20% and 22%. Our first quarter 2012 fully diluted earnings per share was $0.28 versus $0.18 in the year ago quarter. On a normalized year-over-year basis, EPS was unchanged to $0.29. During the quarter, the company repurchased 1.4 million shares for a total of $23 million. As of quarter end, we had $34 million authorized for future share repurchases. Cash flow from operations was lower in the first quarter on an increasing prepaid assets and a significant increase in the fair market value of our FX-related derivative contracts. Payables decreased as we paid out the $5 million deferred portion of the PRG purchase price and the earlier-than-normal timing in settling trade payables to facilitate an orderly upgrade of our financial systems platform in the last week of Q1 2012. We ended the quarter with $172.8 million in cash, $85 million of borrowings on our credit facility and total other debt of $8 million, resulting in a net positive cash position of $79.8 million. Our total debt-to-capital ratio was 16.2%; our current ratio, 3.3x; and our adjusted return on invested capital, 24%. As of March 31, we had $411 million of additional borrowing capacity available under our revolving credit facility. During the first quarter, we exercised $150 million accordion feature to increase our total committed capacity to $500 million. This provides us the financial flexibility to continue to fund organic growth, repurchases and accretive acquisitions. We expect to continue to execute a tuck-in acquisition strategy consistent with the last 2 years, adding additional non-BPO competency, scale and geography. Capital expenditures in the first quarter 2012 were $6.4 million compared to $3.9 million in the first quarter of 2011. The higher capital expenditures are primarily related to select expansion of capacity in the U.S., associated with new business wins, as well as increased investment in building technology and information-rich solutions. We will continue to pace our investment in real estate, fixed assets and capitalized R&D to maintain both CapEx and depreciation at a 3.5% to 3.75% of revenue. Our DSOs for the first quarter were 76 days compared to 72 days in the year ago quarter, and 75 days at year end. The sequential and year-over-year increase on our DSOs is primarily due to the change in our business mix, along with the addition of AOR from the acquisitions we've completed in the first quarter. We have targeted DSOs in the 70- to 72-day range in 2012 and over the longer term to less than 70 days. Turning now to our segments. We're pleased to introduce new reporting this quarter, which we believe will create greater clarity in the progress we are making and the value we are creating in our higher growth businesses. As we kick off this new reporting structure, it's important to note that we're managing the non-BPO segments to generate rates -- growth rates at a premium to our traditional BPO segment. As such in the short run, these segments will require further growth investment. We would characterize 2012 as an investment year for these non-BPO segments, including executive leadership, sales and marketing, product management and technology. These investments are fully included in our 2012 operating margin guidance of 8.5% to 9%. We expect these investments to contribute significantly to our 2014 revenue target of $1.6 billion, and 2014 operating margin in the range of 11% to 12%. The new reporting structure includes 4 segments, Customer Management Services, which represents the company's customer experience delivery centers, which integrate technology and customer experience professionals to optimize customer management across all channels and all stages of the customer life cycle, whether onshore, offshore or any work-from-home environment. Customer Growth Services, which includes Revana, formerly Direct Alliance, our technology-enabled revenue generation business. Customer Technology Services, which includes the company's hosted and premise-based technology offerings, including certain acquired assets of eLoyalty. And Customer Strategy Services, which includes our customer experience consulting and data analytics, all of which we consider customer optimization services. You will note that our corporate expenses are shown as a separate line item. This is in line with our strategy to maintain a highly centralized shared service environment, which will enable our business leaders to prioritize their focus on profitable top line growth and client satisfaction, while ensuring we manage toward increasing improvement in our G&A as a percentage of revenue. Let me now review our segment results. Customer Management Services revenue was $234.9 million compared to $246.1 million a year ago. Operating income was $45.4 million or 19.3% of revenue compared to 19.6% in the year ago quarter. The $11 million revenue reduction compared to the year ago quarter is comprised of the following: $22 million in growth from bookings in the second half of last year, offset by the following: a $4 million negative currency impact, $14 million from the restructure associated with our proactive decision to exit certain underperforming geographies and programs as we discussed earlier this year; and lastly, $15 million of existing business compression, consistent with our reported attrition and also inclusive of migrations, offshore, contract changes and terminations. As of Q1 2012, the cumulative quarterly impact of the $100 million to $115 million restructured revenue is $14 million or approximately 15% of the targeted quarterly impact. We continue to estimate that we will complete the restructure by the end of Q4 2012, when the quarterly impact will reach $27 million to $28 million. Likewise, we continue to expect the restructure to cost $15 million to $18 million, and to contribute a $10 million to $12 million improvement annually or an approximate 100 basis point increase in operating margin once completed. Customer Growth Services' first quarter revenue was $22.8 million compared to $22.1 million a year ago, and operating income of $1.1 million, or 4% -- 4.7% of revenue compared to 13.5% of revenue in the first quarter 2011. The current quarter operating results include a $1.8 million charge related to the rebranding of Direct Alliance to Revana. Excluding these impairment charge, first quarter 2012 operating income was $2.9 million, or 12.6% of revenue. The Customer Growth segment grew 3% Q1 2012 versus Q1 2011. While new logo and existing client growth was $5.7 million or a 26% growth rate, the net growth was just under $1 million. This was due to a slower start to the first quarter in a federal sector after a strong fourth quarter. In addition, we proactively exited certain nonstrategic relationships, given our intent to position this business as a technology- and outcome-based sales engine with premium pricing and margins. The exiting of these nonstrategic accounts primarily impacts Q1 and Q2. Based on our solid pace of new business wins and the current ramp of new bookings, we expect this segment to grow a minimum of 20% in 2012. Customer Technology Services' first quarter revenue increased to $25.6 million from 2011's Q1 revenue of $5 million on the acquisition of eLoyalty. Operating income increased to $3.6 million from $2.7 million. Q1 of 2012 includes increased investment in R&D and sales and marketing to support a sustained plus 20% growth rate for this business. Customer Strategy Services' first quarter revenue increased 16.7% to $9.5 million. Operating income increased 9.4% from 5.7% in the year ago quarter. In Q1 2012, corporate expenses were $32.3 million, down 2% from $32.9 million. Relative to our 2012 guidance, we continue to expect our revenue to be in the range of $1.15 billion to $1.2 billion, and our non-GAAP operating margin to be in the range of 8.5% to 9%, which would be up from 8.3% in 2011. In closing, our top priority remains driving increased shareholder value. We are committed to delivering on the priorities we outlined and look forward to providing updates on our progress in the coming quarters. Thank you. And with that, I'll now turn the call over to Karen.

Thank you. [Operator Instructions] Mary Anne, you may now open the call to questions.

[Operator Instructions] Our first question comes from Mike Malouf of Craig-Hallum Capital Group.

I'd like to focus, first of all, on the corporate expenses. Can you just give us a little bit of color, $32.3 million, where you think that, that might go over the next couple of years? Is that a big focus to take that down, or is that going to kind of edge up over the next couple of years, just maybe less than revenue growth?

Yes, what I would suggest, number one, I guess, is that in the corporate expenses, as you can imagine, is our shared services, HR, IT, finance, our corporate offices and such. And within that also, certain marketing expenses and sales expenses. And I think what you can expect is that the G&A components, components of IT, components of HR and finance, will largely come down, absolutely come down as a percentage of revenue. In the midterm, you're going to see a tick up relative to investment in sales and marketing and R&D. I'd parallel that expense along with SG&A. I mean, it's not a complete compare, it's only a component of the SG&A. There's other SG&A that sits directly in the segment. But as we stated, you will see, longer-term, our SG&A as a percentage of revenue coming down in the 15% to 16%, probably around 16.5% this year. But the corresponding decrease as a percentage of revenue will largely be seen in that corporate line item, albeit growth in sales and marketing within it, as well as continued ramp of R&D as we drive a more technology and analytic-based platform.

Okay, great. And then with regards to the restructuring in Europe, I'm wondering if you can just give a little bit of color. Do we have any major hurdles to go over, maybe this summer and into the fall, or is it basically on track with regards to the plans?

We continue to work through that. As you can see, we expected to go as we planned in Q1 where you continue to see this as $100 million to $115 million hit to the top line, costing us $15 million to $18 million but returning a point of margin, so we have a break-even point in the 15 to 18 months period. And it's a number of clients and a couple of geographies, and so has some variables that we're working through. So hard to call exactly in Q2, in Q3, in Q4 how it's going to continue to lay out, but we're on track.

Our next question is from Tobey Sommer of SunTrust.

My question is, are these elements of the business, some of which are new through acquisition, integral to the whole in beneficial in getting your work as you kind of described in some of the examples in the prepared remarks? Or are they separable in allowing them to kind of flourish in their faster growth trajectory?

Tobey, it's Ken. They're both. The reality is that we did these acquisitions as being able to provide an end-to-end integrated capability. It's something that we believe that the market, over time, is going to move towards. And more importantly, the clients that we target, which tend to be more sophisticated clients, tend to have more complexed requirements, need a heck of a lot more than a technology-enabled labor-based solution. So it's both. It's an integrated capability and the great news is, is that they all have solid management teams and they all have the ability to attract their own clients and grow independently, which then gives us the ability to cross sell from their client base to ours and vice versa. And so frankly, we're very pleased with the traction that we've gotten in such short period of time, and we're excited to be able to share more with you in the coming quarters.

And my follow-up and I'll get back in the queue is that you've done an awful lot of available borrowing capacity now and your recent M&A has been relatively small, so should we expect that the tuck-ins, that you described as being your focus from an M&A strategy, to be slightly larger than they have been recently?

I think that we're going to be strategic with whatever we do. And I think that, although it would be interesting if something was strategically relevant and also had some more scale to it, the fact of the matter is, is that we're going to make sure that we are conservative and that we're not surprising anybody, and that everything that we do is going to be accretive and strategic to the overall plan. What I would just tell you is that to us, it's all about the focus of the quality of the asset that we're looking at. And frankly, there's -- on the larger side, there's not as many interesting or high-quality assets that we think could really add a lot of value. And also, we look at the cultural fit because we're not looking to buy broken companies. We're looking to buy companies that, as we've told of The Street, can grow 20% or better on the top line and can get to 20% or better on the bottom line. And so right now, we're very comfortable with the strategy that we have. I think it's rather interesting, there was an article not too long ago in the Wall Street Journal that discussed what the most successful companies have historically done. And in every case, what they said is that they did not do a bet to company acquisition but instead did a series of strategic acquisitions that allow them to expand their product offering, which is something that we've been focused on for the last 36 months. So yes, we've got a great balance sheet, we've got great borrowing power and I think you'll see that we'll use it wisely and that we will -- ultimately, we will deliver shareholder value that our shareholders will be very pleased with.

[Operator Instructions] Our next question comes from Shlomo Rosenbaum of Stifel, Nicolaus.

Can you just, first, tell me how much of the revenue that was exited on purpose happened in the quarter? I saw you mentioned $14 million in one segment and then there was a certain amount from another segment, and I want to just get a total number.

The number is $14 million. That restructure is entirely within our Customer Management Services.

So there was something else in the Customer Growth Segment that I thought came out that's not being counted towards that?

Yes, so slightly different, right? I mean, when we talked about the $100 million to $115 million, this is largely a geographic exit in our Customer Growth, Revana, that business. In preparation last year of moving this business to a profile that is technology-enabled, information-enabled, we made a decision that there were certain customers that didn't hit that profile and/or a profile that we believe is higher growth and, importantly, a higher margin, given the outcomes that we're driving for our clients. So slightly different. Very strategic decision to make, to reset, I would say, the customer base in that group. But not to be confused with the $100 million to $115 million of restructure that we're doing, which is largely a geographic exit.

Okay. And then is there some currency movements that's impacting the Philippine revenue? It seems to have declined sequentially in each of the last 2 quarters?

No, I think that -- one of the things that we're seeing both in our existing base and new logo, is a bit of a move to back to the states, and certainly more growth in the states. But if you listened to the prepared comments on Customer Management, again, we did have a continued compression in that business as well, and that's just in alignment with that.

What's going on exactly over there? Is the trend towards outsourcing in the Philippines starting to moderate? I mean, could you give some color on that.

No, I don't think it's starting to moderate. I think what's happening is that there is the segment of the client base that is coming to the conclusion that if they really want to drive and focus on the highest possible Net Promoter score that they've been doing testing in their in-country markets. And what they're finding in some cases, not all cases, that they can deliver a higher overall Net Promoter score, and consequently, that is leading to companies that are growing at a faster rate, retaining their customers longer and tend to be more profitable on a higher ED value. And so we have a stable of customers that are very interested in expanding more so rapidly in the U.S., while still maintaining a very significant footprint offshore. And this is something that we've actually been predicting was going to happen almost, probably, 36 to 48 months ago. And where we think it's normal, we think it's healthy. And we're very positive on it. And it also, we think, will help us drive our top line over the -- in the near and the medium term. And so consequently, we are seeing more demand for U.S. That said, we're still seeing significant opportunities in the Philippines and in other offshore markets.

At this time, there are no other questions. This concludes the First Quarter 2012 Earnings Conference Call. You may disconnect at this time.