TTEC Holdings, Inc. (TTEC) Q1 2014 Earnings Report, Transcript and Summary

Welcome to the TeleTech First Quarter 2014 Earnings Conference Call. [Operator Instructions] This call is being recorded at the request of TeleTech. I would now like to turn the call over to Paul Miller, TeleTech's Senior Vice President 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 its first quarter 2014 results ended March 31. Participating on today's call are Ken Tuchman, our Chairman and Chief Executive Officer; and Regina Paolillo, our Chief Financial and Administrative Officer. Yesterday, TeleTech issued a press release announcing its financial results for the first quarter 2014 and also filed its quarterly report on Form 10-Q with the SEC. While this call will reflect items discussed within those documents, we encourage all listeners to read our Form 10-Q. Before we begin, I want to remind you that matters discussed on today's call may include forward-looking statements regarding 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 opinion as of the date of this call, and we undertake no obligation to revise this information as a result of new information that may become available. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those described. Such factors include, but would not be limited to, reliance on several large clients, the risks associated with lower profitability from or the loss of one or more significant clients, execution risks associated with ramping new business or integrating acquired businesses, the possibility of asset impairments and/or restructuring charges and the potential impact to the financial results due to foreign exchange rate fluctuations. For a more detailed description of our risk factors, please refer to our most recent annual report on Form 10-K. A replay of this conference call will be available on our website under the Investor Relations section. I will now turn the call over to Ken Tuchman, our Chairman and Chief Executive Officer.

Thank you, Paul, and good morning to everybody. 2014 is off to a strong start with progress on multiple fronts. On a constant currency non-GAAP basis, revenue increased 10.1% year-over-year. Operating income was 9.1%, up from 8.3% in the same period last year. And diluted earnings per share was $0.42, an increase from $0.32 last year. New bookings were $105 million for the first quarter, and we accelerated early returns to our shareholders in the first quarter of 2014 with the repurchase of 887,000 shares for $20.5 million. This leaves $23.4 million available for future share repurchases as of March 31. We are pleased with the performance in our Customer Management Services; our Customer Strategy Services, also known as CSS; our Customer Growth Services, CGS segments, each reporting significant increases year-over-year. While our Customer Technology Services, CTS segment, was relatively unchanged, we remain confident in this business and continue to see double-digit revenue growth and operating margin consistent with historical organic performance. Over the last 3 years, we've been deliberate in the execution of our strategy. The result is a unique value proposition that is extremely difficult to replicate. Today, we're a company that can take a client from innovative ideas and customer experience to flawless execution across every channel and phase of the customer life cycle. Our integrated platform helps clients solve their complicated business challenges around their most valuable assets, their customers. Let me share how our capabilities are delivering meaningful outcomes with a few examples. In the health care where consumerism is turning the fundamentals of the industry on its head, we're helping clients build and execute strategies to improve member and patient engagement. Our holistic platform is being embraced as a way to accelerate progress and effectively address changes brought about by health care reform. For example, we started working with one of our health care clients on a small technology project. The client had limited experience with outsourcing. But in light of health care reform, they required a more effective and scalable way to enroll and support their members. Because they knew us and the quality of the work, they trusted us with a piece of their member support operations. 18 months later, our relationship has grown to an estimated $30 million in annualized revenue, and discussions are underway to expand into other business segments. Telecommunications is another vertical experiencing rapid transformation, where clients are seeking expert guidance. This is particularly true for one of our telecom clients in Asia. The dramatic change in their markets were forcing them to move beyond incremental service improvements to a strategy that would redefine their entire customer experience. Working in partnership with this client, we designed, built and are operating a new multichannel customer interaction hub that has set the standard for excellence in their region. The results have been dramatic. The client's primary retail mobile customer base jumped over 20% from 2011 to 2013 and has generated more than $3 billion in new revenue. In addition, they've realized nearly $2 billion in efficiencies and are receiving the highest customer satisfaction scores in their history. With regard to sales and marketing, over the past few quarters, we've been ramping our investment in our Global Markets and Industries groups. This team is focused on driving deeper relationships with our existing clients and identifying new opportunities for growth. The leadership team includes industry veterans across our target verticals. They are now in the process of building out their account teams to cover our key verticals and new geographies. As we nurture deeper relationships with our clients, we're seeing how our holistic platform can deliver increases in value to both our clients, the customers they serve and to our bottom line. Likewise, we continue to invest in new tools and approaches across every aspect of our business. In the area of multi-channel interactions, many of our clients are struggling with how to manage the technology disruption that is empowering their customers. We see these rapid changes as a great opportunity. With R&D investments, we're developing new ways to help our clients become more nimble, responsive and operationally effective. Two growing areas include advances in our cloud solutions and the digitization of revenue generation. On the operational side, the benefits of investments and innovation are being measured through our biennial client Net Promoter survey. For the third year in a row, across over 40,000 professionals, 80 countries and 51 languages, we're achieving stellar results. Our high marks are the result of our commitment to continuous improvement through analytic-driven, multichannel platforms, cloud-based knowledge and learning programs and performance-based human capital management strategies. On the acquisition front, in February, we announced the purchase of Bulgaria-based Sofica Group. The integration with the Sofica business is proceeding well, and we're pleased with the flow of new opportunities. We continue to seek out additional acquisition candidates to enhance capabilities on our segments, expand our geographic footprint and add scale to our emerging businesses. The customer-driven economy is here to stay, and it's demanding a very different set of competencies. To be successful, companies must be able to understand their customers in real time, have empathy for their needs, provide frictionless interactions and use technology to create humanlike experiences at scale. We call this competency customer engagement, and we've been delivering it for over 30 years. While our tools have changed, our goals remain the same: to help our clients build and grow lasting, authentic relationships with their customers based on empathy and trust. Whether a business seeks a customer experience strategy, a cloud communication infrastructure, a digital demand generation platform or turnkey customer interaction center, our singular focus on customer engagement is enabling us to bring the best technology, analytics, people and business practices to clients across the globe. With 2014 off to a strong start, the team is excited about our momentum and the outlook for our business. And now I'll turn the call over to Regina to take you through the financial details.

Thank you, Ken, and good morning, everyone. I'll start with a review of our first quarter 2014 consolidated results, followed by our segment performance. To summarize the first quarter 2014 performance results, revenue increased 10% to $315.9 million, EBITDA increased 25% to $45 million, operating income increased 21% to $28.7 million, and diluted earnings per share increased 30% to $0.42. As Ken mentioned, new business signings were $105 million in the first quarter of 2014. This represents a 15% increase over 2013's quarterly average. As outlined in our press release, we had a healthy balance across segments and geographies. In the first quarter of 2014, GAAP revenue was $302.2 million compared to $288.4 million in the first quarter of last year, up 4.8%. On a constant currency basis, adjusted revenue was $315.9 million, representing a 10.1% growth rate over the year-ago period. Revenue from acquisitions in their first year was $4.8 million in the first quarter of 2014. Non-GAAP EBITDA increased approximately 25% to $45 million or 14.2% of adjusted revenue. This compares to $36.1 million or 12.6% of revenue in the year-ago period. Our first quarter GAAP operating income was $24.4 million or 8.1% of revenue compared to $23 million or 8% of revenue in the year-ago quarter. Income from operations on a constant currency basis and adjusted for $540,000 in restructuring charges increased 21% to $28.7 million or 9.1% of adjusted revenue. This compares to $23.8 million or 8.3% of revenue in the year-ago quarter. Our first quarter 2014 operating expenses included $2.5 million in incremental investment, primarily related to the buildout of our vertical integrated sales platform. A majority of these investments are variable in nature, and we can course-correct if the intended yield is not realized. The improvement in operating income was driven by strong performance in our CMS, CSS and CGS segments, including top line growth, revenue mix from expanded offerings and improved employee retention and capacity utilization. These improvements were offset by incremental investment, additional amortization expense related to the WebMetro and Sofica acquisitions and variability in the performance of our CTS segment, which I'll discuss shortly. SG&A expense in the quarter was 16.7% of revenue, up from 15.9% in the year-ago quarter. This increase was anticipated due to planned incremental sales investment. Our GAAP-based tax rate this quarter was 11.9%, comparable to 11.4% for the same period last year. The normalized effective tax rate was 20.4%. First quarter fully diluted GAAP earnings per share was $0.40, an increase from $0.34 in the prior year period. Non-GAAP EPS increased approximately 30% to $0.42 compared to $0.32 in the prior year quarter. Cash flow from operations in the quarter -- in the first quarter of 2014 increased to $13.5 million, compared to $6.5 million in the year-ago quarter. Capital expenditures were $15.1 million in the first quarter 2014 versus $4.1 million in the year-ago period. The increase is due to the timing of several projects initiated last year and into this year. We expect our CapEx to remain in line with the anticipated historical full year levels. We ended the quarter with $120.4 million in cash and $108.4 million of total debt, resulting in a net cash position of $12 million. The sequential quarter-over-quarter reduction in net cash is due to the higher first quarter payments related to share repurchases, acquisitions and capital expenditures. Additionally, accrued 2013 annual bonuses were paid. This was offset by positive cash flow from operations. Our DSO in the first quarter of 2014 was 73 days, a decrease of 4 days from 77 in the year-ago period. Let me now share with you our first quarter performance highlights for each segment. Customer Management Services first quarter revenue was $227.9 million compared to $222.6 million a year ago. Adjusted for a negative $12.8 million impact from foreign currency translation, revenue was $240.8 million. This represents a year-over-year increase of 9.2%. CMS operating income was $20.8 million or 9.1% compared to $20.7 million or 9.3% in the year-ago quarter. On a constant currency basis and adjusted for approximately $500,000 in restructuring charges, the operating margin was 10.4% compared to 9.4% -- 9.5% in the year-ago period. The CMS segment delivered well on multiple fronts, including new business signings, revenue growth and operating efficiencies. Capacity utilization was 82% in the first quarter compared to 79% in the prior year period. Customer Growth Services first quarter revenue increased 26.5% to $28.9 million compared to $22.9 million in the year-ago period. Approximately 57% of the growth was contributed by WebMetro, with the remaining 43% organic. CGS had operating income of $1.8 million or 6.1% of revenue compared to $1.3 million or 5.6% in the year-ago quarter. The improved operating income was largely due to the increase in revenue, operational improvements and a continuing shift in services to more outcome-based programs, offset by incremental investment in product development and higher acquisition-related amortization expense. We are making meaningful progress on our planned transformation of CGS's financial profile and end-to-end solution portfolio, which includes the development of a more integrated search-to-sales technology platform. We remain focused on the WebMetro integration, advancements of our digital marketing and sales capabilities, a shift to higher-margin programs and the buildout of our CGS sales channel. In the first quarter 2014, CGS added new lines of business with key existing clients, including 3 new programs in Latin America and 1 in EMEA, for our largest technology client. A few existing TeleTech clients also expanded their services to include CGS solutions, including a new line of business with one of the largest cable providers. Turning to our Customer Technology Services segment. After exceptionally strong performance in 2013, with year-over-year growth of 57%, the segment's performance experienced variability in the first quarter of 2014. First quarter 2014 revenue was $32.8 million, relatively unchanged from $33.6 million in the prior year quarter. While CTS's consulting practice grew 12.2%, its cloud services grew 12.7%, and its managed services grew 16.5%. Product sales declined by $3.6 million in the first quarter of 2014 over the prior year period. Decline in product sales is due to the timing of sales pipeline conversion. We view this as temporary in nature and anticipate that the CTS segment will grow organically, in line with its historical double-digit performance. Currently, CTS's cloud and managed service multiyear solutions have an estimated annualized run rate of $68 million. CTS's GAAP operating income was $311,000 or 0.9% of revenue, compared to $2.9 million or 8.6% of revenue in the first quarter of 2013. The lower operating margin is attributable to the reduction in revenue, as I just mentioned, and increased investment in sales and solution development. Operating income is impacted by acquisition-related amortization expense, totaling $1.2 million and $1 million in the first quarter of 2014 and 2013, respectively. We expect this business to produce an operating margin percentage in the low to mid-teens. CTS business signings in the first quarter included a number of interesting engagements. For example, we signed 2 state contracts, 1 to develop a cloud-based contact center for its medical transportation services and the other to implement a multichannel contact center for its justice division, including a site location -- relocation, infrastructure implementation and critical contact recording services. We also had additional transformative bookings in the health care, transportation and education sectors, all of which have favorable long-term growth prospects. The Customer Strategy Services first quarter revenue increased approximately 35% to $12.6 million compared to $9.4 million during the same quarter last year. The segment had an operating profit of $1.5 million or 11.5% versus an operating loss of $1.9 million in the prior year period. The performance improvement continues to reflect the benefits on the integration of our consulting businesses, including leadership, professional talent, infrastructure and services, as well as improved sales effectiveness in several regions of the world. We're encouraged by the CSS sales platform built last year as bookings more than doubled year-over-year and sequentially in the first quarter of 2014. We also had 3 meaningful new engagements. One opportunity is from an existing CMS client in the automotive industry that is seeking comprehensive call center analytics, which is planned to provide more call-centric views of who is calling, visibility to issues and opportunities and how customer insights can develop a better customer experience. The second contract is for a client in the cable industry. We were expanding the relationship that outlining, executing on a broader vision of how analytics and customer intelligence can add value in a variety of areas, including price optimization, customer life cycle management, customer experience design and account profitability. Last, we added a new client in EMEA, whereby our CSS strategy consulting practices will set up a group loyalty program across its conglomerate's multiple businesses. Regarding our outlook, we are reiterating our 2014 guidance as provided in our February earnings call. In closing, we're increasingly more confident in our ability to execute a healthy balance of organic and inorganic growth, on our way to sustainable, high-single, low double-digit revenue growth rates. Furthermore, our revenue is growing in more value-driven, outcome-based offerings, and we are demonstrating greater consistency in our overall financial performance. We're committed to our strategy and planned incremental investments and remain confident in our 2014 outlook. With that, I'll turn the call back to Paul.

Thanks, Regina. [Operator Instructions] Operator, you may open the line for questions.

[Operator Instructions] And our first question comes from Mike Malouf with Craig-Hallum Capital Group.

One of the things that I was struck by in the commentary was the continued synergy or really, the ramping synergy that you're getting between the sections of -- with regards to leveraging the CMS business into some of the growthier segments. I'm wondering, if you could talk a little bit more and give us a little bit of color on as you look out over the next couple of years, do you see that continuing to accelerate? And maybe just give us a little color on some of the conversations you are having.

It's Ken. As you can imagine, our strategy has been very deliberate, as I mentioned in the script, to make sure that we're leading on a strategic side. And so what I would say is that as this industry goes through massive change. We see incredible synergies across all of our emerging businesses since every single one of our clients is facing very significant requirements to not only change their strategy but in many cases, change their process and their infrastructure, et cetera. And so our goal is to capitalize off of that. When you think about it, 80% of the market -- 75% of the market's not outsourced. This gives us an ability to go after the largest percentage of the market that we've never focused on over the last 30 years. So now we can focus on 100% of the market, which is well in excess of $300 billion. So we see synergies across the globe, and we feel like we're at the very beginning stages of capitalizing off of this. It's taken us a long time to build the platform capabilities and to have the management in place that's competent to be able to consult and sell and deliver the way we're delivering. We think that this is a definitive differentiation. And I think you'll see in our future M&A opportunities that we're not going to slow down. We're going to continue down this path. I can say with absolute certainty that there's not a single region that we operate in where the capabilities that we've brought forth are not in demand and are not required. And so our biggest issue right now, as I mentioned in my script, is just simply staffing, the requirement of the account experts, the account management folks, et cetera, across the globe and being able to do it in a way that's fiscally responsible so that we can have these people in place and yet deliver on the promise of our numbers.

Your next question comes from Tobey Sommer with SunTrust.

This is Frank in for Tobey. Wanted to ask, in regards to the 45% of backlog related to the emerging segments and as you look out the pipeline a little bit, can you give us some color on where do you think growth has then come from in terms of the rate of growth and the fastest growth and kind of how you think that will develop over time?

When you say -- let me just understand the question. When you say 45% backlog from our emerging businesses, maybe just tell me about that a little bit?

Okay. In the press release, it said that 45% of the bookings, I guess, was from ...

Okay. I'm sorry, yes. So yes, I mean, I would say that we'll continue to see the emerging businesses grow in the kind of low to mid-teen digits, while our core business grows in the kind of 4% to 5% business, the contact center business. I think that the historical trend of around 90% on an annual basis of that business coming from existing clients will continue. I think the piece that'll change over time, as we make inroads through M&A, as well as investing in sales leadership in certain countries that have strong GDP and consumer spend, we'll see more of that come internationally over time. And I think from a segment point of view, we're very bullish on health care and financial services, as well as transportation and retail.

Okay, great. That's helpful. And in terms of the tax rate we should be expecting for the year in terms of modeling purpose, any color there?

Yes. I mean, yes, our guidance is 23% to 25%. We saw it slightly lower, so we're probably around the 24%. But our guidance remains in the 23% to 25%.

Your next question comes from Bill Warmington with Wells Fargo.

So a question for you on the -- on how higher minimum wage would potentially impact your business.

Is that the question?

That's the question.

Well, I think that it impacts everybody's business, and I think this is just one of those situations that high tides raise all boats. And so consequently, a high percentage of our contracts have in them the ability to true up on our -- on cost-of-living increases, and that would be included in the cost-of-living segment. I think the sad part of this, which I'm not going to get political on a Wall Street call, but I'll just simply say that the sad part is that what it's absolutely going to do is drive more offshoring. And that's not because we're recommending it. It's because when our clients are seeing the potential of that happening, they're preparing for their -- the worst case scenario. So what I would just simply say to you is just that I think overall, we don't see the impact being anything that we can't handle or absorb. But our goal is we're trying to drive more jobs in the United States right now, and things like this simply unfortunately drive things potentially the other direction. That said, I mean, I think that we follow these types of things very closely. And we're not in Washington, and I don't suspect that there is going to be a ton of other states that are necessarily going to agree to what Seattle has -- is proposing. But if they do, then the net-net-net is that it means that all of these services to interact with customers are going to simply cost more, as is your cheeseburger at McDonald's and as is prices at Walmart and everywhere else. So it -- this doesn't just affect us. It affects every industry, every business, every service in America.

And then you have almost $600 million in available borrowing capacity and then another $120 million in cash. So what are your plans for that $700 million war chest?

Well, I think we've been -- I think that we don't just talk about it, we actually do it. I think if you look at our history, we've been returning value to our shareholders by consistently buying our stock. And at these prices where it's -- we've been pretty blatant about saying that we are definitive buyers of our stock in the marketplace. That said, our #1 priority is strategic opportunities as it relates to M&A. And what I would say to you is that we've been -- for the last 3 years have been building a pretty sophisticated M&A capability across the globe where we've boiled the ocean in a multitude of industries, et cetera, and we're tracking and following them. And suffice to say that there will be more acquisitions which will leverage our balance sheet. So I think that those are the 2 areas that we see are going to yield the best returns. And everything that we're going to do in the M&A area is going to be -- it's going to stay within this whole spectrum of customer experience and customer engagement and is going to give us more growth in the areas where we could use a bit more scale, and it's going to give us more reach geographically. So we're going to stay with that plan, and we're very excited to execute on it.

Our next question comes from Josh Vogel with Sidoti & Company. Josh Vogel - Sidoti & Company, LLC: I had a question on the workstation count. I see that the amount of dedicated seats have doubled since the end of 2012. And I was curious, is this a function of giving those CMS clients that are buying more of your services a dedicated or a team of dedicated seats? And if not, I'm just curious why the increase there. And are you seeing it more from your existing clients or new logos? And could you just remind us the pricing and margins on these seats versus non-dedicated?

Yes, I think that it really has to do with the complexity of the capabilities that we're offering. I think that as more clients are consolidating their providers and looking for a much deeper, more comprehensive capability, to do that it requires, in many cases, more sophisticated management, more sophisticated human capital on the front line and definitely, more sophisticated technology. And so I think that, that tends to be carried out best in a site that is dedicated. In addition to that, there is a huge push culturally. And the best way that we can get these employees to understand that they're the extensions of our clients' mission, vision and values is to do them in dedicated sites that are properly catered to their needs. And it's harder to do that in a site that has potentially multiple clients, 4 clients, et cetera. And so do I think it's a trend? Yes, I think it is a trend on the larger clients who are making commitments to larger agreements and longer-term contracts, and we think it's a good trend. As it relates to margins, I'll let Regina comment on that.

Yes. I mean, I would say that we don't really observe any major difference in margins. Number one, we take that into consideration as we price. I do think it's more efficient for clients, especially those clients who deliver the anticipated volumes and resource. And I think part of that as well is that as we've gotten our utilization from the mid- to high 70s right into the 80s, that's been a tremendous driver of efficiency for us in our non-dedicated sites.

The only thing that I would also add on is that many of our clients were performing aspects of their business that they feel is very proprietary and very -- and is what they believe has differentiated them in the marketplace. And in many cases, they have on-site management in our sites, trying to learn and observe so that they can incorporate some of these capabilities into their own facilities. And when you have the kinds of clients that we have, the large search engine companies, the large high-tech companies, et cetera, they tend to be very proprietary. And so that in itself creates another reason for them wanting to be within their own 4 walls where they can manage whose eye sees what and know that there's not going to be any potential for leakage of what their strategies are or what they're doing, et cetera. Josh Vogel - Sidoti & Company, LLC: That's helpful. If I could just sneak in one more quick one. Regina, with regards to the $12 million to $14 million incremental spending on sales and R&D, could you remind us, is that going to be fairly evenly spread throughout the year or more upfront in the first half?

Yes. We -- from the comments I made in the script, in Q1, it was about $2.5 million. So it will progress pretty evenly towards that $14 million as we get through the year. So kind of expect it to go up and hit somewhere between $3 million, $3.5 million by the end of the year.

The next question comes from Howard Smith at First Analysis.

Yes. My question is in regards to bookings kind of as it relates to the increased sales investment. A strong booking quarter overall, but a higher percentage of onetime revenue in that. Do you see that as a leading indicator? With the new sales on all your products, maybe they buy the -- some of the onetime stuff you get. And you do assignments, you convert that to longer-term recurring and other projects over time. Or maybe just give some color of how you see the stepped-up sales flowing through the funnel in the bookings.

Yes. So I would say it's really a matter of mix in the quarter overall. We see kind of in line with historical levels that we have somewhere around 75% recurring and 25% nonrecurring. We have significant CSS bookings in the quarter. So I really -- it's really just a matter of what got converted. We have a very strong pipeline. What I would say of the CSS bookings is, as was alluded to earlier, we are really seeing a very nice conversion of CSS work, SOWs concluded turning into additional CSS work but more importantly, I think into CTS, CGS and CMS bookings. So having that strong CSS booking in Q1 is a welcome because we believe we have huge opportunity to convert it to more recurring. And just a couple of other things around the recurring. We're really nicely building our cloud business, the pipeline for that, as well as our managed service. And that cloud business is across platforms within our CTS business. We see nice momentum in CGS, as well, our international, our focus within our global markets and industries, our sales group. As we see that being resourced, we would expect, as we get into the second half of this year, that we'll see a continued rise in CMS and CGS.

At this time, I'll turn the call back over to the speakers.

Yes, that concludes our call. We appreciate everyone's attendance. Thank you.

Thank you.