TTEC Holdings, Inc. (TTEC) Q2 2012 Earnings Report, Transcript and Summary

Welcome to the Second Quarter 2012 Earnings Conference Call. [Operator Instructions] This call is being recorded at the request of TeleTech. And I'd like to turn the call now over to Karen Breen, TeleTech's Vice President of Investor Relations. Thank you, ma'am, you may begin.

Thank you, and good morning. TeleTech is hosting this call today to discuss its second quarter 2012 results ended June 30. Participating on our call will be Ken Tuchman, our Chairman and CEO; and Regina Paolillo, our Chief Financial Officer. Yesterday, we issued a press release announcing our financial results for the second quarter and also filed our Form 10-Q with the SEC. This call will reflect the items discussed within those documents, and we will make reference to them on the call today. We encourage all of you 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 management's current beliefs and expectations. 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 call will be available on our website through August 15. 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 discussing our continued advancement against our 2012 priorities and the progress we're making in diversifying and growing our fully integrated offerings. After that, Regina will review our financial results in detail. Our priorities continue to be squarely focused on being the preeminent global provider of fully integrated customer experience solutions. As we further develop our higher value offerings, we believe the breadth and depth of our capabilities are unmatched. This is validated by the client programs we're implementing, which I'll touch on later in my remarks. Let me first recap the 2012 priorities we've outlined on our previous calls: First, positioning the company for renewed growth due to the expansion of our offerings and continued investment in greater, more vertically oriented sales leadership. Second, we continue to invest in innovation via our proprietary, fully integrated platform that spans strategic consulting, data analytics, revenue generation and technology-enabled solutions. Third, we are leveraging our strong balance sheet to pursue strategic, accretive acquisitions that further complement and enrich our existing suite of capabilities. And last, we're providing increased visibility to the financial profile and performance of our new segments so investors can properly value these businesses. Let me now review our second quarter progress against these stated objectives. Beginning with revenue, we signed an incremental $55 million of annualized business during the second quarter, of which 70% was reoccurring. This represents the expansion of more than 40 existing client programs, along with the signing of 11 new clients. Importantly, nearly 60% of these wins came from our enhanced service offerings. Our pipeline remained strong with a number of potential opportunities across all segments. Our revenue diversification efforts, which are still in their infancy, enabled our enhanced service offerings to reach 21% of revenue in the second quarter, up from 15% in the year-ago period. Importantly, both our customer growth and technology segments have now reached an annualized run rate of $100 million. In addition, we expect our organically grown work-from-home business will grow more than 30% this year and reach $50 million in revenue. We continue to invest in stronger, more vertically oriented and geographically diverse sales leadership, and this remains an ongoing priority for us. And while we've made steady progress, we have continued work to do in this area. An important hire that we announced in May was our new Chief Sales Officer for Revana, Matt Rosenberg. His proven sales experience and track record for further accelerating high-growth businesses gives us great confidence in his ability to accelerate demand for Revana's data-driven commerce solutions. Our sales pursuits are solely targeted towards clients that are focused on total value delivered versus tactical labor augmentation engagements. Clients are selecting TeleTech because of our ability to analyze, design, deploy and deliver end-to-end turnkey solutions that drive measurable outcomes that increase customer acquisition, retention and drive higher NPS scores. Clients recognize that our holistic solutions deliver the highest value at the lowest overall cost, given our ability to bring strategy, analytics, technology and operational excellence together to deliver a truly differentiated customer experience. We're gaining particularly strong traction in our health care, technology and transportation verticals, each of which grew more than 20% over the year-ago quarter. In addition, we're pleased with the continued uptake rate by both new and existing clients for our targeted offerings. To date, we have more than 20 clients that are taking multiple services from our solution set. We believe this is solid progress, and our goal is to double the number of clients taking these integrated services by this time next year. Customer experience excellence is a continuous endeavor. A truly customer focused firm is constantly innovating for ways to improve the customer experience, further distancing itself from the competition and adding higher financial returns in the process. A good example of a recent success we had in selling our integrated offerings involved a long-standing client in the communication industry. This client has continued to expand the services it receives from TeleTech. Given the highly competitive nature of its industry and TeleTech's track record of performance, this client not only expanded its customer management relationship with us, but also engaged our customer growth segment to drive higher sales conversions across their channels, which span value-added resellers, chat and general support. TeleTech is the only non-captive sales resource that this client uses globally. And with the strength and differentiation of our analytics platform, we increased sales conversion by more than 70%, while driving the highest NPS scores within their business. Our ability to help our clients strengthen their market leadership and long-term brand equity continues to drive meaningful outcomes for our clients, while at the same time, enabling us to benefit from deeper, more strategic and longer-term relationships. Our strong balance sheet provides us with the financial flexibility to invest in the business, as well as pursue accretive acquisitions that further complement and enrich our existing suite of capabilities. During the second quarter, we also made significant progress on our decision to exit certain unprofitable markets and programs. While there is still work to be done in this area, we believe this distraction will be behind us by year end, and we will be able to direct our full attention to future growth and our strategic initiatives. Lastly, we believe our new segment reporting is providing greater transparency into the business that we view as both higher growth and higher margin over the long term. In closing, we're pleased with the progress we've made in the second quarter in certain areas and have work to do in others. We're very confident in our ability to execute on our strategic priorities, which will, in turn, deliver measurable outcomes for our clients and increase returns for our shareholders. With that, I'll now turn the call over to Regina.

Thank you, Ken, and good morning, everyone. Let me start with the review of our second quarter results. Revenue for the second quarter was $288.8 million, compared to $293.6 million in the year-ago quarter. This decrease was primarily related to the loss of $13 million in revenue, due to exiting certain unprofitable markets, and the $10 million negative currency impact. Excluding these items, revenue grew approximately 6% over the year-ago quarter. Our diversified businesses, now brought to light in our newly reported segments, comprised $59.4 million or 21% of Q2 2012's revenue, up 15% from the year-ago quarter. Our second quarter 2012 GAAP operating income was $6.4 million, or 2.2% of revenue, compared to 8.4% in the year-ago quarter. Adding back the $17.3 million of restructuring and impairment charges, our second quarter 2012 non-GAAP operating income was $23.7 million or 8.2% of revenue. SG&A expenses in the quarter was 15.8% of revenue, down from both 16.1% a year ago and from 16.4% in the first quarter. This is a result of ongoing efficiencies we're realizing as we leverage our corporate expenses across an expanding suite of services. We intend to continue to drive further efficiencies in general and administrative costs to enable increased investment in R&D and sales and marketing. Our goal remains to bring our annualized SG&A spend over the longer term in the range of 15% to 16%. Our normalized effective tax rate for the second quarter of 2012 was 18.7% and 19.9% year-to-date. We expect our full year 2012 normalized tax rate will now approximate 20%. Our second quarter 2012 GAAP fully diluted earnings per share was $0.10 versus $0.38 in the year-ago quarter. On a non-GAAP year-over-year basis, EPS was $0.31 versus $0.29 a year ago. During the quarter, the company repurchased 1.2 million shares for a total of $18.1 million. As of quarter end, we had $15.9 million authorized for future share repurchases. Cash flow from operations increased by 45% to nearly $34 million as payables returned to more historical levels. If you remember on our last call, we discussed having accelerated certain payments on trade payables in the first quarter of 2012 to facilitate an orderly upgrade of our financial systems platforms. We ended the quarter with $170.6 million in cash, $78 million of borrowings on our credit facility and a total of other debt of $13 million. This resulted in a net positive cash position of $79.6 million. Our total debt-to-capital ratio was 16.3%; our current ratio, 2.7x; and our adjusted return on invested capital, 24%. As of June 30, we had $418 million of additional borrowing capacity available under our revolving credit facility. This provides us with the financial wherewithal to continue to fund organic growth, share repurchases and accretive acquisitions. We will continue to opportunistically execute tuck-in acquisitions, consistent with the last 2 years adding additional competencies, scale and geography. Capital expenditures in the second quarter of 2012 were $11 million, compared to $8.5 million in the second quarter of 2011. The higher capital expenditures were 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 global infrastructure to maintain both CapEx and depreciation at 3.5% to 3.75% of revenue. Our DSOs for the second quarter was 77 days compared to 76 days in the prior quarter and 74 days in the year-ago quarter. This year-over-year increase was primarily due to the change in our business mix. Turning now to our segments. We believe our reporting is providing increased visibility into the components of our business and greater clarity into the progress we are making and the value we are creating in our higher growth businesses. It's important to reiterate that we are managing the enhanced service segments to generate growth rates at a premium to our traditional BPO segment. As such, in the short run, our enhanced services will require further investment. We would characterize 2012 as an investment year for these 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 view these investments as pivotal to achieving higher top line growth rates. Let me now review our segment results. Customer Management Services revenue was $229.4 million, compared to $248.2 million a year ago. Revenue was reduced by approximately $22 million in the second quarter, due to the combination of exiting certain unprofitable markets and a negative foreign currency impact. Operating income was $28.6 million, or 12.5% of revenue, compared to 20% in the year-ago quarter. Excluding $17 million of restructuring and asset impairment charges, primarily related to our previously announced plans to exit certain unprofitable markets, CMS's operating income was $45.6 million or 19.9%. As of Q2 2012, the cumulative quarterly impact of the $100 million to $115 million restructured revenue is $13 million or nearly 50% 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. In addition, we continue to expect to restructure the cost, $15 million to $18 million and to contribute roughly $12 million in improved operating income on an annual basis. Customer Growth Services second quarter revenue was $24.4 million, compared to $23.5 million a year ago, and operating income was $4.2 million, or 17.3% of revenue, compared to 19.6% of revenue in the second quarter of 2011. Revenue in this segment grew more than 7% sequentially, and this business is on track to grow double digit in 2012. Q2 2012 includes investment in sales and marketing, the rebranding of Revana and R&D related to evolving our digital marketing platform. Customer Technology Services second quarter revenue increased to $25 million from 2011's Q2 revenue of $11.7 million on the acquisition and continued growth of eLoyalty. Operating income increased to $4.1 million from $3.2 million. Q2 2012 includes continued investment in sales and marketing to support a sustained 20% growth rate in this business. Customer Strategy Services second quarter revenue was $10 million, compared to revenue of $10.3 million in the year-ago quarter. Operating income decreased from 12.7% a year ago to 3.1%. Revenue in this segment was lower by nearly $1 million due to FX, and operating margin was also negatively impacted by $300,000. The CSS segment had exceptionally strong revenue and profitability in the second quarter of last year. And this, combined with certain acquisition and integration-related costs for iNotion [ph], led to the remaining operating margin reduction. We expect this segment to resume its growth trajectory in the coming quarters. In Q2 2012, corporate expenses were $30.7 million, down 9.6% from $34 million. We're committed and on track to achieve further reduction in corporate expenses. We intend to redirect those savings in part to greater sales and product development initiatives. Relative to our 2012 guidance, we 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%, up from 8.3% in 2011. Our top priority remains driving increased shareholder value. We're 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 turn the call back to Karen.

Thank you, Regina. [Operator Instructions] Fran, you may now open the line.

[Operator Instructions] Our first request now is from Mike Malouf of Craig-Hallum Capital Group.

I've got a question with regards to the acquisitions and the acquisition pipeline. I'm wondering if you could give us just a little bit of color, just specifically around sort of targets where you're thinking of. And the reason why I'm asking is there's obviously been a large acquisition in the @Home section. And I'd love to get some color on how you think of your @Home, which is I think you had mentioned about $50 million now. Do you think you'll grow that organically still, or is there some acquisition potential for you?

Hi, it's Ken. So I'm not sure if that was 2 questions or 1 question. But I'll just start with what the last part. We are -- we've always felt good about our @Home capabilities and are proud of the fact that we have some very proprietary technology that allows us to do things in an extremely efficient way. The business, we feel, is on track and growing nicely. And we think it will continue to grow over the years to come. As it relates to potential acquisitions, I would say never say never, but I would tell you that it's definitely not our focus for acquisitions in that area. We think that this business is scaling nicely at $50 million. And at the rate that it's growing, it will be, in the not-too-distant future, $100-plus million business. And we think that, that's probably the best use of our capital to expand our @Home through our existing client base and then focus our capital in other areas where potentially we can provide stronger returns.

And just a quick follow-up on the @Home business. Is that business, either now, or at least, sort of theoretically over the next few years as it gets more mature, is it more profitable than the traditional business or sort of in line? Just a little bit of color on that would be helpful.

Yes. That business, as it exists at a $50 million level today, is pretty much in line with the margins of our core BPO business.

Our next request now from Manish Hemrajani, Oppenheimer.

This is [indiscernible] sitting in for Manish. Just a question, can you guys comment on the [indiscernible] environment you are seeing out there? What kind of competitive pressures you are seeing, especially new client wins?

Yes, I believe the question was what type of a competitive environment are we experiencing? Is it that...

Right, on the pricing side for new client wins?

For new clients. So what I would say to you is, is that we see, for the most part, 2 types of business in the marketplace. I'm oversimplifying. We see very tactical business that is really only where the client is highly prescriptive, and basically, is leveraging, outsourcing as a form of labor augmentation. And that tends to be a business that we are choosing to not focus on and leave more to others in the industry that tend to be interested in that business. We're focused on business where we can provide a technology solution, along with our other human capital capabilities, and that the combination of the 2 can deliver a capability and a level of value that the client can't replicate internally, nor can they find externally. With that, we feel it's the only way that we can protect our margins. And outside of that, we just choose to not spend a lot of time chasing a bunch of business that is about the lowest price per minute or hour or whatever. So for what we're focusing on, I would say that the business is moderately competitive. But it's nothing that we haven't experienced over the last 30 years, and that we're not very comfortable based on the fact that we think that our offerings, as they become more and more integrated, are very unique and are very defensible. So I hope I've answered your question. As for pricing, I think it's safe to say that pricing, just in general across our clients' business, I'm not speaking about our business, is very competitive. And so therefore, what we're seeing across the globe is that when all businesses, regardless of the sector, whether it's health care, financial services, automotive, et cetera, when they are all experiencing cost pressure, naturally, they're going to lean in to their partners and their providers and try to come up with more creative ways to assist them in lowering their cost. And we welcome that challenge, and we think that we can assist them in that area.

[Operator Instructions] And my next request now is from Shlomo Rosenbaum of Stifel, Nicolaus.

Just kind of following up on your commentary about the types of business that you guys are looking for right now. The trend in the bookings over the last 3 quarters has been trending downward. I'm wondering, is that the factor of what's going on in the industry in terms of just less business available? Or is that related to some of the commentary that you guys have had about going after a very particular type of business in order to protect your margins? And then if it's okay, I'd like to ask a follow-up.

I think I can't speak to the rest of the industry, per se. But what I can say for us is that we are maniacally focused on certain types of business. And therefore, the kinds of business that we're going after and the complexity that revolves around it, in many cases, elongates the sales cycle, especially when we're selling multiple product offerings simultaneously. So I would say that, that in itself has had a bit of an impact. And we're -- to be very candid with you, we're still getting our legs on what is the very best and most efficient way to represent these capabilities holistically to our embedded base, as well as to new clients. And with that said, I'd say that we're definitely making significant progress. And consequently, we feel comfortable with the pipeline. But as it relates to just the actual sales bookings for the quarter, I think that it's safe to say that this is only a quarter, and that some of the sales were very rigid on when we count the sales or not. And if we don't have a signed contract, even if we just have a letter of intent, we don't count it. And suffice to say that in the first week of this quarter, a fair amount of business got pushed into the next quarter. And so that's just the way we do our accounting here. And again, we judge our business on goalposts that start January 1 and finish on December 31. So we're in no way alarmed.

Okay. And if you -- just a housekeeping item. As I'm looking at the operating margin in the contact center business and the EPS, as I'm working through the things that are included and excluded, does the EPS exclude the $4.6 million expense reserve reversal related to the salary expensed up in Spain? In other words, is that benefit included in the $0.31 or excluded from the $0.31?

Yes, it's included in the $0.31.

Our next question now is from Kevin McVeigh of Macquarie.

This is actually Derek Sbrogna in for Kevin. Just one quick question, did you guys -- are you guys maintaining the longer term 2014 guidance that we heard in the past, or is that not intact anymore?

No, we are definitely maintaining the longer-term guidance. There's been no change.

Okay. And can you maybe just help us, I know you guys have talked about some of the things coming up. But maybe just help us kind of bridge where we are now, what we've seen in the first half of 2012, kind of high 7s%, low 8s% operating margin. How we kind of bridge that to get to the 11% to 12% you're looking at by 2014?

Yes, so a couple of things. We've continually reiterated our guidance for the year at 8.5% to 9%. Obviously, that we require based on where we are today, a pick up in the second half. We still believe that we'll deliver against that. When we talk about the $1.6 billion in the future, it's -- as we've said before, it is a combination of both organic and inorganic. We've articulated before that organically, we believe we get to about $1.4 billion or so, and that we will continue tuck-in acquisitions that ultimately, the buy, plus the growth on those will give us the $1.6 billion. So first driver, obviously, is getting to that $1.6 billion. The second is that as we get to that $1.6 billion, the composition of the business, in terms of our traditional BPO business and these emerging businesses, will be very different. And we are investing, admittedly, aggressively in this year to set ourselves up for continued plus 20% growth in those businesses, which will have higher margin, given the market value on the solutions, as well as the technology and analytics that is embedded. Last but not least, as you see demonstrated already, we are working globally on our overheads and believe that we will continue to see greater efficiency, allow us to invest more money in R&D and sales and marketing, while improving the expense-to-revenue ratio on those overheads.

Our next question now from Ashwin Shirvaikar, Citibank.

I guess my question is sort of a follow-up to the previous one. As I look at the various segments, in particular, the diversified businesses, and I understand that you're clearly investing in those. But the margins currently in your faster growth businesses are actually lower than the margin in your core BPO business from a segment basis. So what's the total level of investment? If you can talk about how you expect the margin trajectory to look like, and when do these investments you're making come off? That would certainly help give confidence into the future number.

I would -- a couple of things. I would say that you collectively on those businesses are looking in the quarter at $4.5 million to $5 million investment that is hitting in the form of R&D, sales and marketing and so on. We have also, for example, in Revana, some onetime issues relative to the write-off of a brand name, which is $1.8 million on $100 million business is 1.8%. So across the businesses, we are making an investment. But we do not expect that, that investment -- expect that investment to maintain itself at the dollar level. But as we grow the top line, it is embedded in the run rate and will not grow at a level equal to the revenue. So to short it out, I would say that by -- as we enter 2013, certainly, into the second half, I think you'll see the bulk of these businesses into operating income margins that are very consistent with the base business and onwards from there. And in fact, some of those businesses will start -- you'll start to see that in the second half of this year.

It's Ken. I would say to you that -- I would second what Regina said and tell you that we have high confidence that this is really just part of these businesses being a bit smaller, but that are -- but, in fact, are growing rapidly. And actually, we're very pleased with the numbers that they're producing based on the amount that we're investing in them at this point.

The other thing to keep in mind is that these emerging businesses all have amortization of purchase costs that are -- some of them will -- they're the types of things that non-competes, customer relationships, these things will have a shorter-term tail. And so as smaller businesses, those can be a couple of points a margin. And we're coming through that. So in comparison to the base business, which is much larger and has very little amortization, these businesses, as a percentage of their revenue, have a bit more. And as you know, that's a noncash expense. And as I said, it will start to tail off.

That makes sense. And the $55 million in annualized revenue from the new and expanding client relationships, is there a way to potentially break that out across segments?

Yes, I mean...

There is. We have not yet chosen to do that, but let's -- we'll take a look at that and consider providing that data in the future.

And this concludes the second quarter 2012 earnings conference call. Thank you for your participation. You may disconnect now at this time.