TTEC Holdings, Inc. (TTEC) Q3 2013 Earnings Report, Transcript and Summary

Welcome to the Third Quarter 2013 Earnings Conference Call. [Operator Instructions] This call is being recorded at the request of TeleTech. I will now like to turn the call over to Paul Miller, TeleTech's Senior Vice President and Corporate Treasurer. Thank you, sir, you may begin.

Good morning, and thank you for joining us today. TeleTech is hosting this call to discuss the third quarter 2013 results ended September 30. Participating on today's call is Ken Tuchman, our Chairman and Chief Executive Officer; and Regina Paolillo, our Chief Financial Officer. Yesterday, TeleTech issued a press release announcing its financial results for the third quarter 2013 and also filed its quarterly report on Form 10-Q with the SEC. This call will reflect items discussed within those documents, and we may reference them on the call today. We encourage all listeners to read our Form 10-Q. Before we begin, I want to remind you that matters discussed on today's call may include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward-looking statements reflect our opinions as of the date of this call, and we undertake no obligation to revise this information as a result of new information that may become available. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those described. Such factors include, but are not limited to, reliance on several large clients; risks associated with lower profitability for us for the loss of one or more significant clients; execution risks associated with ramping new business or integrating acquired businesses; and the possibility of additional assets impairment or restructuring charges. For a more detailed description of our risk factors, please review our most recent SEC filings along with our 2012 annual report on Form 10-K. A replay of this conference call will be available on our website through November 14. I will now turn the call over to Ken Tuchman, our Chairman and Chief Executive Officer.

Thank you, Paul. Good morning, and Happy Halloween to everybody. We continue to make progress executing our strategy this quarter. While our results were impacted by certain external factors, namely a negative impact from foreign currency translation, we're encouraged by the underlying improvement in our business. Our emerging businesses showed meaningful improvement with CSS and CTS delivering double-digit revenue and operating margin growth. We signed $80 million in new business, including attracting 15 new clients to our growing roster of leading brands. The acquisition of WebMetro was completed and is being integrated into the CGS segment. We continue to deliver early returns to shareholders and repurchased an additional 857,000 shares at a cost of $20.6 million in the quarter. And our normalized operating margin, adjusted for foreign exchange and other onetime items, was 9.8%. For the first time in 3 quarters of 2013, we signed an additional $285 million in annualized contract value, a meaningful increase of 23% from the same period last year. Of the $80 million signed in the third quarter, the revenue mix remains favorable, with 80% from existing clients, 66% in reoccurring revenue, 50% from emerging business and 21% from international clients. Furthermore, the combined emerging business grew revenue 28% year-over-year, with 54% growth and a number of our clients buying multiple services. While it's early days, we're encouraged by this trend and see ample opportunity for continued growth. With every passing day, our focus on customer engagement becomes more relevant. We're living in an era when society and technology are moving faster than many organizations can adapt. In today's highly digital, mobile, 24/7 world, success is being defined by a company's ability to sense and respond to their customer needs. It is a fact, a company's brand and value are either enhanced or hurt by the experiences they deliver to their customers. Our clients are coming to us because they need new skills, proven approaches and a rapid response to this disruptive environment. We have deliberately built our integrated customer experience platform to provide them with all the capabilities they need to drive these changes swiftly, effectively and profitably. For several years, we've been pivoting from our legacy labor arbitrage model to a technology-enabled service platform that includes all the elements of social media, mobile, analytics and cloud services. This technology platform is designed to cut across the organizational silos of sales, marketing and customer service to deliver a seamless experience to the customer. Now I would like to share some detail on our emerging business that operate at the center of the -- excuse me, that operates at the center of the digitally enabled customer experience. For the third quarter in a row, our Customer Technology Services segment has delivered double-digit growth, and we expect to end the year at 50% growth over last year. Through our Customer Technology Services group, we're providing our clients with an integrated set of social capabilities, mobile applications, multichannel communication services and robust analytics that are hosted on a scalable and flexible cloud platform. Our systems integration practice is growing in importances as our clients are challenged to integrate multichannel interactions with data sources. We're working with them to link together disparate systems in the cloud and create common data architecture that enable a 360-degree view of individual customer relationships. As clients continue to look for a flexible and cost-effective solution, our SaaS offerings are also gaining momentum. Another one of our emerging businesses, Customer Strategy Services, grew revenue 14.5% this quarter over the same period last year. These strategic consulting capabilities are opening up new opportunities for our higher-margin technology, analytics and process management solutions. As an example, we were recently engaged by a major telecom provider to develop a comprehensive multichannel customer experience strategy. Once it was complete, the client asks us to assess if their current contact center operations could successfully deliver the strategy in terms of the people, process and technology. Based on our assessment, we are engaged to help our client implement our proprietary technology stack, set up a project management office and manage the day-to-day operations of the center. This one-strategy assignment resulted in higher-margin follow-on business in our Customers Technology Services and Customer Management Services business units. Our Customer Strategy Services are providing us into -- insight into deeper organizational challenges for our clients and opening up the door for enterprise-wide solutions that have the potential to deliver long-term value. These examples demonstrate how our overall business strategy is taking hold, and it's reshaping how we build shared value with our clients. We remain focused on our 4-pronged growth approach that we outlined several years ago. First, deliver profitable growth with a robust, diversified and integrated customer engagement platform. Second, increase market share by accelerating investments in our vertical and sales expansion strategy. Third, increase funding in continuous innovation to stay strategically relevant and ahead of the needs of our clients. And fourth, execute strategic and accretive acquisitions to add key capabilities to our solutions portfolio. I've already covered the growth and innovation pillars of our strategy, and now I want to focus on the pillars of increasing market share and acquisitions. In Q3, we stepped up our investments in our vertical sales platform and expect to accelerate these investments throughout 2014. We've brought in seasoned experts from financial services, communications, media, technology and health care, to join our company -- to join our global markets and industry -- excuse me, our global markets and industry organizations under the leadership of Keith Gallacher. These executives have deep domain expertise and are working directly with senior executives in our client organizations to drive vertical-specific solutions. Early client response to our verticalized offerings has been positive, and we look forward to growing momentum. We continue to be committed to adding key capabilities to our customer experience platform and are building a strong pipeline of acquisition candidates that will expand our global footprint and support our emerging businesses. In 2011, we began this journey to optimize TeleTech's value by advancing our customer engagement platform. We saw the fast approaching global disruption in customer experience, and we anticipated the emerging capabilities our clients would need to respond. We began the transformation of our company with the knowledge that it would require time, investment and patience. We knew we would need to enhance our leadership, acquire new technology and create analytic-driven solutions, as well as expand our geographic footprint and leverage our capital resources. Today, I'm proud to say that 27% of our revenues is derived from the emerging businesses and we have recently established an integrated selling platform to bring a range of strategically relevant offerings to our clients. In addition, we have an incredible leadership team in place with unparalleled experience in leading organizations through change and growth. We're well positioned and keenly focused. With that, I'll hand it over to Regina to share details of our financial performance.

Thank you, Ken, and good morning, everyone. Noticeable in this quarter's earning discussion is the negative impact of foreign currency translation and the nonrecurring items. Quite honestly, this has been an unusual quarter with a confluence of uncontrollable events affecting both Q3's performance and our full year guidance. In the interest of transparency, we thought it important to bridge our GAAP reporting to a more detailed view of our performance, excluding foreign currency fluctuations and the nonrecurring items across our revenue, operating income and EPS. I'll start with a review of the consolidated and segment results, including bridging our GAAP and non-GAAP numbers and end with some comments on our updated guidance, including some additional context on the changes we are making to revenue and operating margin estimates. Third quarter bookings were $80 million in a balanced contribution across the segments. In particular, emerging business bookings represented 50%. Third quarter GAAP revenue was $297 million, compared to $286.3 million in the third quarter of 2012. On a constant-currency basis and adjusted for $5.2 million of revenue related to our exit from Spain, and $1.2 million of revenue loss associated with severe storms in August in the Philippines, revenue grew 8% -- 6.9%. Q3 2013 revenues from acquired companies post-Q3 2012 was $16.7 million. Our third quarter GAAP operating income was $26 million, or 8.7% of revenue, compared to $27.4 million, or 9.6% of revenue in the year-ago quarter. Operating income from acquired companies completed post-Q3 2012 was $2 million. On a constant-currency basis and adjusted for $800,000 related to the Philippine storms and $800,000 in restructure charges, operating income was $29.9 million, or 9.8%, compared to $29.8 million, or 10.3% in the year-ago period. The lower operating margin is primarily due to improvements in our emerging margins -- emerging business margins, which grew 26% Q3 '13 versus Q3 '12, offset by $5.3 million of incremental investments and $1.1 million of additional amortization expense related to the acquisitions of TSG and WebMetro. The incremental investments include our expanded leadership team, the buildout of our vertical sales platform, marketing investments related to our rebranding, and technology investments supporting new products and solutions. While these initiatives are not onetime expenses, they are in the development stage and are not yet contributing revenue or operating income. SG&A expenses in the quarter were 16.9% of revenue, up from 15.3% in the year-ago quarter. The increase is due primarily to SG&A from acquired companies, in addition to the investments previously discussed. Our GAAP-based tax rate this quarter was 24.9%, compared to a negative 13.8% for the same period of 2012. This increase in rate was partially influenced by the distribution of earnings in international jurisdictions and higher restructure and impairment charges in the prior year. The normalized tax rate was 21.3%, consistent with Q3 2012. Third quarter fully diluted GAAP earnings per share was $0.34 versus $0.52 in the year-ago quarter. Q3 2012 included a significant onetime tax benefit equal to $0.16 of EPS. On a constant-currency basis and adjusted for nonrecurring items, EPS was $0.41 compared to $0.39 in the prior year quarter. We continue to be committed to early returns to our shareholders, and as Ken mentioned, during the quarter we repurchased approximately 857,000 shares for a total of $20.6 million. Year-to-date, we have repurchased 2.3 million shares for a total of $52 million. As of September 30, 2013, we have $24 million authorized and available for future share repurchases. Cash flow from operations was a strong $36.4 million, compared to $14.8 million in the year-ago quarter. We continue to pace our capital expenditures in line with our growth and spent $18.2 million on capital items in the third quarter, compared to $15.8 million a year ago. We ended the quarter with $144.9 million in cash and $129.4 million of total debt, resulting in a net cash position of $15.5 million. In addition to our cash balances and cash flows from operations, we have significant additional financial flexibility to fund working capital, accretive and strategic acquisitions, and share repurchases by utilizing our revolving credit facility. As of September 30, we had $579 million in additional capacity under the line of credit. Our total debt-to-capital ratio is 22%. Our current ratio, 2.6x, and our adjusted return on invested capital was 22.7%. The strength of our operating cash flow, balance sheet and capital structure have allowed us to fund our organic growth, execute significant share repurchases and acquire important capability for supporting our emerging business strategy. Since January of 2012 alone, we have deployed $255 million in share buybacks, acquisitions and capital expenditures. Our DSO is 75.9 days, an improvement of 2.6 days from 78.5 days in the year-ago quarter. Site utilization was 79% in the third quarter of 2013, an improvement from 77% in the year-ago period and 75% in Q2 of 2013. Before I move on to discuss segment performance, I'd like to add some context relative to the foreign exchange translation impact we experienced in Q3 2013. The foreign exchange impact relates solely to a handful of significant international clients in Australia and Brazil, where the currencies in these countries weakened significantly against the U.S. dollar during third quarter of 2013. The magnitude of the foreign currency devaluation [indiscernible] 13% in the third quarter of 2013 over the same period last year. It's important to note that this is purely a reporting exposure and has no underlying economic impact on the company's cash flows. We continue to have a highly effective cash flow hedging program that actively manages the risk that arises when client billings and the related delivery expenses are in different functional currencies. We expect recent FX trends to affect our revenue and operating income as follows: Revenue was impacted in Q3 by $6.9 million, and we estimate a similar impact in Q4 for a full year impact of approximately $14 million. Operating income was impacted in Q3 by $2.3 million, and we expect a $3 million impact in Q4 for a full year impact of approximately $5.3 million. Regarding our segment performance. Customer Management Services revenue was $217 million, compared to $224 million a year ago. On a constant-currency basis and adjusted for $5.2 million of revenue related to our exit from Spain and $1.2 million of revenue loss associated with the Philippine storms, revenue was $224.6 million and grew 2.4% versus Q3 2012. Operating income was $17.9 million, or 8.3%, compared to $21 million or 9.4% in the prior period. On a constant-currency basis and adjusted for nonrecurring items, operating income was $22.3 million, or 10%, compared to 10.5% in the prior period. The lower operating margin percentage is primarily related to continued improvements in our ongoing operations, offset by the incremental investments we noted earlier, and which are allocated to our segments. Customer Growth Services revenue was $25.9 million versus $28.2 million in the prior year. The change in revenue is attributable to a combination of factors: the WebMetro acquisition, new bookings, and growth from certain existing clients contributed positive top line growth, but were offset by the impact of a continued delay in ramping a significant multisegment client and churns and volume reduction from a couple of clients in the first half of 2013. The CGS segment is making progress in transforming its solutions portfolio, but it will take time. This encompasses the integration of WebMetro, including the development of new Revana WebMetro Solutions, moving to outcome-based pricing and the buildout of the sales channel. Q3 bookings included a short list of important and noteworthy technology and new media companies who selected Revana for end-to-end selling capability. Sequentially, the segment grew revenue 16%, including WebMetro, and we expect similar progress as we go from Q3 to Q4. CGS had operating income of $588,000, compared to an operating profit of $2.5 million in the year-ago quarter. The lower operating income was largely due to the variance in revenue. Sequentially, CGS improved operating income by $1.2 million, including WebMetro, and we expect similar improvements, Q3 to Q4. Customer Technology Services revenue was $40.6 million, up 82% compared to $22.3 million in the year-ago quarter. 52% of the growth came from the acquisition of TSG, with 30% coming from organic growth. Our cloud and managed service solutions now comprise 43% of the segment revenue at an annualized run rate of $70 million. The profile of this business includes a 3- to 5-year client contract, with upfront annual or multiyear subscription payments. The gross margins in these solutions are, on average, plus 40%. CTS GAAP operating income was $5.2 million, or 12% of revenue, compared to $3.1 million, or 13.7% of revenue in the third quarter 2012. The lower operating margin percentage is attributable to an increase in amortization expense related to the TSG acquisition and our investments in the cloud platform and sales channel. The Customer Strategy Services segment Q3 2013 revenue was $13.4 million, compared to $11.7 million during the same quarter last year. The segment had an operating profit of $2.3 million, or 16.9% in Q3 versus operating profit of $819,000, or 7% in the prior period. The increase in revenue, year-over-year, was primarily the result of our acquisition of Guidon, as well as improved sales effectiveness and utilization resulting from our integration of the various acquisitions in this segment. Sequentially, CSS grew revenue $3.4 million and operating income, $4.2 million. This improvement is a result of having fully integrated the CSS entities, including leadership consultants, infrastructure and service portfolios. We expect CSS to perform at a similar level in Q4. I'll now spend a few minutes providing you context on our full year 2013 guidance. As indicated in our press release, we are updating our full year guidance as follows: revenue in the range of $1.175 billion to $1.185 billion, operating margin in the range of 8.75% to 9%, and CapEx in the range of $50 million to $55 million. The change in guidance is driven by a handful of macroeconomic and client-specific events in our BPO businesses that have recently taken place. In the interest of bridging our updated guidance to current consensus, including revenue of $1.215 billion, operating income of 9% and EPS of $1.53, I would offer the following context: The full year impact of foreign currency in our estimates is $14 million. Our guidance includes a $6 million reduction in revenue from our decision to eliminate Q4 seasonal volumes that were below our required margin targets. We have also adjusted our guidance by $14 million due to temporary delays in ramping 4 significant client programs. One of which is a plus 15-year telco client. The second is a large media client who has signed a 5-year contract, including services across all 4 of our segments. The third client is a health care payer with whom we have a 10-year relationship, and the fourth client is a relatively new client within our financial services sector, with a 5-year contract for 1,000 workstations. To these clients, we are a strategic partner and vital to their customer-experience journey. The depth and scale of these client relationships require partnership, collaboration and cooperation. We are confident, based on our relationship and the underlying contractual term, that we will see the expected volumes near term. We expect the operating impact of these changes to include a $5.3 million reduction related to the FX impact and a $2 million reduction related to the seasonal volumes and delayed ramps. In combination with improving margins in our emerging businesses and expense management in Q4, we expect the operating margin to be between 8.75% and 9%. It's only natural as a leadership team that we're disappointed in the timing of events that have led to an update to our 2013 guidance. That said, we could not be more encouraged by the growing market opportunity, the relationship we have with our 250-plus clients and the progress we are making in executing our strategy, including a buildout of our vertical sales capability, which is critical to our top line growth. With that, I'll turn the call back to Ken.

Thank you, Regina. With our continued focus on customer engagement, we're establishing a new category that transcends traditional labels of BPO. Our integrated set of offerings blur the lines between sales, marketing and service to more accurately reflect the way customers interact and build relationships with brands. As an industry leader with demonstrated capabilities in integrating the ecosystem of strategy, technology, data and services, we believe we are uniquely positioned to capture a growing market opportunity. While the tools and processes may have changed over our 3 decades of operations, our vision remains steadfast. We are confident in our future and look forward to continuing to deliver value to our clients, shareholders and employees for the next 31 years to come. Operator, you may now open the line for questions. Thank you.

[Operator Instructions] Mike Malouf, Craig-Hallum Capital Group.

Ken, I was just wondering if you could talk a little bit about new business. I noticed that if you take a look at 2012's business, you averaged around $76 million of new business throughout the year. When you look at this quarter, you are at about $80 million, so we're not really seeing an acceleration yet, and I'm just wondering if you could comment on -- as you look out over the next couple of years, is that the line that we should see in acceleration with regards to the synergy of all the businesses kind of rolling in the same direction? And then, maybe you could comment just a little bit on attrition, as if you're seeing any kind of change there?

Sure, Mike. So, I believe your question was that last year we were at about $80 million?

$70 million -- $75 million a quarter.

$70 million to $75 million a quarter. This year, we're averaging about $95 million a quarter, so that's about a 23% increase. That said, we'd like it to be more. And with our focus on making very significant investments in our sales and marketing, we're confident that in the relatively near term, we're going to see the benefits from the amount of people that we're adding, the account coverage, et cetera. So, I'm not sure exactly what your question is as it relates to our growth, but I think that the numbers speak for themselves as it relates to what it was last year, what it is this year. And obviously, we're hoping that we can continue to see more and more improvement as the quarters -- as we enter new quarters with, A, a much wider and much more strategically relevant product line; and, B, a significantly larger sales force and account management force in the marketplace than we've ever, historically, had. All of that is coming on. We just started stepping up the investments starting in the third quarter, and we plan on increasing the investments all the way through 2014. And so our belief is, is that we'll see good solid returns as these people come up to speed.

Okay. And then just a follow-up question with regards to acquisitions. Can you comment a little bit or give us some color on the acquisition environment out there? Do you still have a pipeline of bolt-on acquisitions, specifically sort of focused in on the technology services area of your businesses?

The answer is definitely. We've spent -- we didn't just start looking at this a few months ago. We've been boiling the ocean now for probably 3 years. And so we think we've got a very solid handle on the marketplace and opportunities, both domestically and internationally. And we feel pretty good about the pipeline that we have and our ability to convert the deals that are in our pipeline and are excited about the fact that our balance sheet is in a great position to continue to accept them, and that our team's really gaining stride on integrating these acquisitions and then pushing the capabilities out to the sales force. So, I'd say we feel very good about that. I'm not going to tell you anything you don't already know. There's not a lot of high-quality companies out there that are available right now. And so -- and the ones that are out there, in many cases, are very pricey. But it's finding needles in a haystack, and we think we've got a very focused and very capable M&A department that eats, drinks and sleeps this, practically 24/7. And -- so stay tuned, I think you'll see more progress and continued growth in our emerging business segment.

Our next question comes from Eric Boyer, Wells Fargo.

Ken, can you just talk a bit more about the 4 major client delays? It sounds like the majority is coming from the core Customer Management segment. Why are the delays occurring? Have you already incurred ramp-up costs and are you going to be sitting on excess capacity now?

Eric, it's Regina. So, what I would say is, across-the-board, these are 4 clients that -- obviously long-standing, but also have a very strong contractual terms that give us confidence that, that will come in. You are correct, we do have a ramp in process, and even that is somewhat of a depression to OI, given these are rather large pieces of business. If you take the multimedia -- the media company that I talked about, in one respect, that is a large transformation that we're doing. It includes all 4 segments. And what that has -- because of the transformation and the degree of transformation it's extended our consulting business, which you do see some of the benefit of that in our CSS segment in Q3 and you'll see some of it in Q4. It is delaying CGS' BPO business. But we can see it ramping and expect to be back to the levels that we expected in Q1. In part, that was, quite frankly, a client decision, relative to not continuing to reduce headcount around the holiday season. As I said, these are long, important clients we collaborate and cooperate. Others were just in and around initiatives going on in the environment and in our clients. So unfortunate relative to the delay, but fortunate to be in a set of clients where we have tight contracts, long-term or important relationship that they've already committed to. And the progress has to happen contractually or at a high ramification, and quite frankly, more importantly, it has to happen for these clients.

For a while now, the fundamentals within CMS have been pretty stable. Are we starting to see them slip here? Because earlier this week, you had one of the other public players cite that consumer demand was off from some of their customers' forecasts in their core customer management business.

I don't think so. I think we actually feel pretty good about it. I think that this was really -- it was truly an unusual confluence of events. And if I could talk specifically about the customers, I would, and it would make perfect logical sense as to some of the reasons for delays. But one of the things we don't want to do is make any excuses. And we are really big on truly trying to have a partnership arrangement with our clients, and therefore, trying to hold their feet to the fire on something that they're having their own internal technology issue, or Obamacare is causing a delay, because they're in the health care business and certain volumes are getting pushed out and dates are getting pushed out, et cetera. We just think that the right thing to do is to accept it and to accept the fact that they are absolutely moving ahead. Some of these -- I would say the majority of these delays are being pushed by a quarter or 2 at the very most. Nothing is being talked about of delaying a year from now or 18 months from now, et cetera. And this is not typical, but I think that it's safe to say that in this overall global economy, clients are -- they're rejiggering their business in a pretty radical way. And their forecasting, in many cases, is not as accurate as it's been historically, because they're going through product alignment changes, they're going through some pretty major shifts, technologically, et cetera. We certainly did not see this coming and we're rather surprised by it. But at the end of the day, we're not running the business for the quarter, we're running the business for the long term. And we don't think that a quarter makes up a company or defines a trend. And I can't stress enough that our management team couldn't feel more comfortable, and they're as double-downed as one can get, based on the opportunities that we're seeing in the marketplace. So there is -- I guess, that's my way of saying no, we're not concerned about CMS or there being something fundamentally changing.

Howard Smith, First Analysis.

Just following up on the 4 customers and kind of strategically, you're engaging with your customers in a fairly detailed way. Do you think because of how you're engaging with the customers, you're trading long-term stickiness, maybe some -- for some short-term ramp-up uncertainty? Do you think that plays into, maybe, some of these issues with these ramps?

Yes, I'm not sure I'm fully understanding the question, but I think it's the opposite of what you're saying. So, I'm not sure why...

So -- so -- what I'm thinking, you're strategically -- I mean, you're really trying to engage in multiple product lines, sometimes in transformation of the business, so do those types of programs -- are they subject, maybe, on the early stages to pushbacks, delays and things whereas just adding another 500 seats to do the same thing...

Okay. Now I understand your question.

A little more predictability or visibility. But being stickier long term.

Yes, yes -- no. Now I got it. I apologize for not understanding. So, the answer is the following: There's really 2 ways to engage in this business, right? You can be like a traditional outsourcer and respond to RFIs and be in a commoditized process and win business that the client is being highly prescriptive on. And in the process of doing so, of winning that business, the business is then viewed as something that is not sticky and, in fact, is very movable. Or you can have an entire front-end capability that does deep, deep strategic due diligence, deep strategic planning that takes -- that goes across all the customer-journey mapping, all the opportunities for analytics and optimization, all the process optimization, et cetera. And to your point, yes, delay the CMS business. However, you get it right the first time and you transform the client's business, and you transform the customer relationship, and you show immediate impact of past Net Promoter Score and now current Net Promoter Score, and you show them quarter-over-quarter how you're moving their Net Promoter Score, you're improving their CSAT, you're moving their J.D. Powers and now you have a partnership. Now you have exposure to the C-suite, and now that C-suite is respecting you as a McKenzie, as an Accenture, as a BCG, as any of their other more strategic partners, and that is exactly what we're doing. And that is exactly why we've been hiring people from McKenzie and BCG and Bain and Accenture and Cognizant, et cetera, where -- what we're seeing is the rest of the industry is very focused on being a contact center company. That's not what we want to be. It's not what we are, and it's not -- and we're moving away from that at a very rapid rate.

Okay. And just an accounting kind of follow-up. I just want to make sure I understood on this pro forma, maybe, Regina, what you've done. You've taken like the loss revenue from the typhoon and you've imputed what the cost would have been, kind of as an estimate, and then flowed that through the P&L?

Yes, it's not an estimate. We, on a regular course, we do this for all. Some of the rigor behind it comes from the fact that we do have insurance on some of these things. And so we build that rigor, not only for our own understanding of what's happened, but also for insurance purposes. So it's very precise with regard to agents, with a particular client, with a particular agent, with a particular contract, relative to its revenue elements.

Okay. And on the FX, you said you have hedges in place, so from a cash standpoint and the overall business, it doesn't affect. Wouldn't the hedges show up as gains on the other income line, or where does that show up?

Yes, so -- I mean, ultimately, what we have is cash flow hedges which are effective cash flow hedges, which allows us to protect changes in the currency by placing the hedges, and then the accounting of that gets matched up with the revenue. So you're not -- what you're going to see below the line from time to time and you see it in other income expense. And so it's somewhat buried, you're not going to see all of the particular pieces of that. Certainly, if you navigate yourself all the way through, I think today, the cue is, maybe 20% is devoted to derivatives, right? If you can actually work your way through that, I think you would see it. But the reality of it is that what you see below the line are -- when we hedge at the end of the quarter, primarily as we bring money back to the U.S., pay down our debt. So those are -- those hedges are relative to protecting cash flows that we're bringing back at the end of the quarter. The hedges that are in place to absolutely correct differences in functional currencies in your billing versus your expense, ultimately get matched up with the revenue, so you won't see that separately.

Tobey Sommer, SunTrust.

Ken, you mentioned continuing to make investments in the emerging lines of business, but at the same time, I think you mentioned also seeing the fruits of your investments kind of to-date. In aggregate, do you expect the emerging businesses to be more profitable over the next several quarters than they have been recently?

Most definitely.

Yes. I mean, I think I included in my remarks the fact that for CSS and CGS, we did -- the level of improvement that you saw Q2 to Q3 you should see repeated, Q3 to Q4. And the same with CTS. CTS we've got some investment in channel, we've got some investment in cloud. We've been progressing very nicely on the cloud bookings. We've got a nice pipeline we expect to convert. And as we build that cloud, that basic investment gets smaller and smaller as a percentage of revenue. So across those emerging business, we've seen a nice uptick Q3 to '12 to '13 in terms of just the dollars of margin coming from those. We have said that we expected, as we approach the end of this year, that those emerging businesses as a group will approach or exceed double-digit. We did have some challenges as we've talked about previously in CGS and CSS early this year. But I think when you look at the second half, kind of standalone, you'll start to see that. And we can expect into next year continued movement to getting these businesses collectively to that early to mid-teen growth rate and kind of early to mid-OI overall.

In the CMS segment, from time to time, you do have to prune a little bit of low-margin revenue as you did with some seasonal volumes, I guess, here for the fourth quarter. How do you feel about the ongoing book of business in terms of profitability? Because I do understand it's a journey where you're trying to match yourself up with customers who think about the customer experience the way you do.

I think we feel really good about it. I think we feel like our relationships with our customers are frankly much more open than, maybe, they have been historically. I think our customers are truly beginning to understand that playing the cost-at-any-cost game is nothing more than a vicious cycle and turns into a death spiral as it relates to quality and attrition. And I think we're seeing that in terms of where they have successfully beaten up, let's just say, other providers and they're now not achieving the results that they were looking for, which has been showing signs of benefiting us as they want to transfer projects over to us, et cetera. That said, in fairness to the other providers, I don't think the other providers had any choice, because they were -- meaning for them to deliver the product that the customer actually wanted, they just simply agreed to something that, in fact, was not really possible to deliver on based on the rate that they were holding. And I think that there's a level of legitimacy with the Tier 1 providers, that they're beginning to realize that, although it's taken them a long time, that you can't make it up in volume in this business. And that you have to focus on relationships where you're aligned with the clients and you're aligned with the clients' customers, and that, that alignment is truly all based on metrics that are no longer focused on things like per-minute cost or per-hour cost and much more focused on the outcomes. And that if you can achieve the outcomes that they're looking for, then the client appreciates the value that you're delivering. And so we think that the industry is evolving. It's maturing. And there is still plenty of clients out there that have realized that their entire brand is differentiated based on the experience that they deliver to the customer, and those are ones that are making very significant investments. And we feel pretty good about who we're associated with now and how we're positioned for providing that type of a capability. So I'm sorry for a really long-winded answer, but that's my way of saying that, we actually feel quite good about the customer base and I think it's showing up in our percentages of business that's growing, that when 75% to 80% of your growth is coming out of your embedded base, we think that, that is the best way of determining that they like the food that you're cooking up in the kitchen and that they're coming back to buy another meal. We think that if you look at our strategy where just a few years ago, like 2 years ago, we had 80 clients. We now have 250 clients. And as we start to cross-sell across those 250 clients, we think that we just have more and more opportunity of mining the embedded base that we already have tight relationships with in other segments of our business. So it's a process, but we're going to make the very best of it, and we enjoy sharing with you our successes on this journey.

I just had 2 quick numeric questions. One, what is the seasonal revenue in the fourth quarter? Just when I look at what -- as we look at 2014 quarters, what kind of dropoff there could be in Q1? And then I missed the number that you gave for the fourth quarter revenue impact from the 4 clients that are ramping more slowly. If you could just repeat that, that would be terrific.

Yes. So, I'll just take the second one first. That's $14 million from the delayed ramp. And we have not disclosed specifically seasonal volume historically. What I would say about the dropoff, though, is that, if you focus on our comment and Ken's reiteration in and around when will those delayed ramps execute, it's mostly Q1, maybe some dribbles into Q2. So my view is that, as you look at our bookings this year, $285 million year-to-date, a $95 million average versus a $75 million average last year, in part not fully yielding where we wanted it to this year because of these delays, we expect bookings to kind of continue within this range of -- that we've been experiencing between last year and this year. And so when you add that -- the delays, my view, although I'm not setting guidance for next year, is that, there won't be some precipitous fall between Q3 and Q4 overall, there might -- yes, in CMS, we'll have a dip, but from a company point of view, there won't be the same level of change from Q4 to Q1. And quite frankly, that from a financial point of view, part of our strategy here in these emerging businesses is that these businesses collectively kind of counter each other in terms of the ups and downs.

Our next question comes from Steven Shui from Stifel. Steven Shui - Stifel, Nicolaus & Co., Inc., Research Division: When I look at the midpoint of the guidance change being lowered by about $47.5 million and I know the -- in there you have currency, which is $14 million, you had the client delays, which is about $14 million, and another $6 million from getting out of certain seasonal revenue, can you kind of bridge the rest of the gap between the $47.5 million there?

Yes. I mean, I would say that the balance of that guidance -- that the balance of it, you're working off of $1.240 billion, that the balance of that difference is the -- just the bookings level and the yields from the bookings. I think as Ken has said, we're -- have heavy investment in our sales and marketing, building out the vertical channel of global markets and industries, as well as sales groups within the segments. And the $1.240 billion would have required slightly higher bookings throughout the year, as well as yield. So it's a factor of bookings, more so, a factor of yields in general. Steven Shui - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And just a follow-up on the 4 client delays. When I think about that coming back in, in 2014, the first quarter and second quarter, is that really going to bump the growth rate there? Or is it just -- it might take away from some of the business you're already expecting from them in those quarters?

I didn't...

Yes. Well, we haven't given guidance for next year, right? So I think it's a hard question to answer. We're right now going through our budgeting process and kind of understanding where that would be. So hard to kind of answer that question, given there's not a benchmark out there relative to Q1 or Q2 of last year -- of next year.

Eric Boyer, Wells Fargo.

Yes, just on the comments. I know you're not giving guidance for 2014, but you do have that longer-term -- the long-term goals that you set out there, I think, by the end of 2014. Can you just provide some context on how we should be thinking about that going forward?

The last thing I want to do is come across as elusive. What I would just simply say is the following -- is that, we're going to do everything we can to ultimately achieve those numbers. It goes without saying that acquisitions help us get closer to that number, as well as us increasing the momentum over time of our organic growth. But for me to comment any more on that really would be providing a form of guidance, and unfortunately, until we get to the next quarter call, we really can't take it much farther than that.

This concludes the third quarter 2013 earnings conference call. You may disconnect at this time.