Welcome to TTEC's Third Quarter 2019 Earnings Conference Call. [Operator instructions] This call is being recorded at the request of TTEC. I would now like to turn the call over to Paul Miller, TTEC's Senior Vice President, Treasurer and Investor Relations Officer. Thank you, sir. You may begin.

Thank you, and good morning. TTEC is hosting this call to discuss the third quarter financial results for the period ended September 30, 2019. Participating on today's call are Ken Tuchman, our Chairman and Chief Executive Officer; and Regina Paolillo, our Chief Financial and Administrative Officer. Yesterday, TTEC issued a press release announcing its financial results. While this call will reflect items discussed within that document, we also encourage you to read our third quarter 2019 quarter 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 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 the opinions as of this date, and we undertake no obligation to revise this information as a result of new developments that may occur. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our most recently filed quarterly report on Form 10-Q and 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, TTEC's Chairman and Chief Executive Officer.

Thank you, Paul, and good morning to everyone. We're excited to share the meaningful progress we made this quarter, executing on TTEC's strategic roadmap to pioneer the CX categories, evolution from legacy contact centers to digitally enabled customer experience hubs, or as we like to call it, driving the disruption with Digital CX. We continue to deliver strong results and achieve our key financial performance objectives in the third quarter. In fact, in -- 2019 is setting up to be a record year for TTEC in terms of revenue and profitability. Year-to-date, through September, revenue increased 8.5% to nearly $1.2 billion, of which, over 99% is organic. Adjusted EBITDA increased 17% to $146 million. Adjusted operating income increased 46% to $86 million, and adjusted EPS increased 44% to $1.24. TTEC Digital grew just shy of 32%, and when adjusted for ASC 606 and FX, TTEC Engage grew 6.5% year-to-date. The strategic interplay between our Digital and Engage solutions is a marketplace differentiator that creates a virtuous cycle with the power to further enhance our organic revenue growth and margin expansion. We're also fortifying our integrated offering through a strong pipeline of accretive strategic acquisitions and meaningful new digital channel partnerships to deliver a truly differentiated customer experience for our clients. Our focus in these areas reinforces our ability to deliver strong top and bottom line growth objectives in 2020 and beyond. I'll now provide further context around these main focus areas for the Company. TTEC's expanding addressable markets represents a massive opportunity. The overall addressable market for TTEC's technology and services is $460 billion. TTEC Engage is at the center of a growing $360 billion global market. Through TTEC Digital, we add an incremental $100 billion of annual opportunity that is experiencing significant growth. We are seizing the opportunity to…

Thanks, Ken, and good morning. As Ken shared, we're having a record year on numerous fronts. Before I discuss our third quarter financial results and provide context on our guidance on a highlighted number of positive trends contributing to our growth in revenue and profitability. For the first 9 months of 2019, over the prior year period on a non-GAAP basis, our consolidated revenue grew 8.5% and operating income 46.4% year-over-year. Excluding the impact of FX and onetime adoption of ASC 606, revenue and operating income grew 10.5% and 66.9%, respectively. TTEC Digital's segment grew revenue 31.8% and operating income 43%. Our CX cloud subscription-based offering grew 197% and delivered a 44% gross margin. And our systems integration services grew 19.6% and delivered a gross margin of 43%. Our TTEC Engage segment grew revenue 4.2% and operating income 48.2%. Normalizing for foreign exchange and ASC 606, year-to-date revenue grew 6.5% and operating income grew 86.1%. A subset of higher-growth, higher-margin, technology-forward and analytics-rich offerings addressing some of our clients' most complex CX processes are contributing to TTEC Engage's improving financial performance. Our fraud detection and prevention, customer acquisition, agility and automotive offerings collectively comprise over $400 million of annualized revenue. Have a top line growth rate of 20% and are delivering a 12% operating income margin. We anticipate the recent acquisition of FCR, which will be included in our Engage segment to further advance this higher-growth, higher-margin set of offerings within our TTEC Engage portfolio. Turning towards third quarter 2019 results. We signed a number of strategic engagements with new and existing clients across multiple industries. New business signings were $114 million in the third quarter 2019 compared to $153 million in the prior year quarter. Year-to-date bookings were $368 million versus $393 million in the prior year period, and…

Thanks, Regina. Operator, you may now open the line for questions.

[Operator instructions] Speakers, our first question is from Joshua Vogel from Sidoti & Company. Your line is open.

I have a couple of questions. First one, you're doing a good job generating cash and you've increase the dividend. I'm just wondering if you could talk a little bit about your capital allocation strategy when we look at dividends versus debt repayment and even acquisitions? And maybe you could talk to what your appetite is for additional deals like FCR?

Yes. I would say that our capital allocation priorities remain the same. First and foremost, organic growth. Second to that, organic growth while maintaining the growth and expansion of our margins. Acquisitions that are strategic and fill out the various gaps in our offerings. And then last but not least, we're committed to a dividend. And at this point, given our stock price as well as given our float buyback would be out much, much further.

Yes, I would second that, that we are very focused on pulling every lever to deliver shareholder returns. We think we have demonstrated that through very aggressively purchasing our stock back over an 8-year period. Then we transitioned into M&A cycle, and we're very excited about not only the deals that we've done, the one we just announced and the ones we've done previously but about just our overall M&A pipeline. So we're absolutely committed to continuing a focus in the M&A area. We have a tremendous balance sheet. We're, as you know, there's very little leverage on our balance sheet. Let alone the cost of money is extremely attractive. And we're committed to paying a dividend. And we think that with all of that, that will allow us to not only continue to grow the top and the bottom line, but it also sets us up really nicely for where we're taking the Company as we are adding more geographies. And as we are adding more digital capabilities so that we can provide a complete and total end-to-end capability across the globe.

That's helpful. Shifting gears a little bit. I know you just gave some commentary, Regina, about FCR being additive. But I was wondering if you can give a little bit more specifics on the deal. What is, what should we expect the contribution to be in Q4 versus what's built into your implied guidance? It just seems, I just, I also want to get a better handle on some of the items you mentioned with client ramp that's postponed and some shifts in volume elsewhere. I just want to get a better handle around the implied guidance for Q4, which, again, is still impressive, but a step down from the last 2 quarters.

Yes. So on FCR, we expect it to be about $12 million in the fourth quarter and about $1 million of operating income net of transaction expenses and including the amortization of the customer intangibles that will happen. As I said in my script, we did late into Q3 experience a couple of changes in our outlook related to certain volumes of our seasonal work. Clients choosing to be offshore versus onshore when originally they were onshore. So that, in fact, that affected our top line but not our bottom line. Second, we had a very large client that for very understandable reasons, which we can't divulge, made a decision to move what was going to be a Q4 ramp into 2000, early 2020. So across the board, number one, FCR will, as, will, for us, be a double-digit grower and a double-digit operating income margin. The movement to the offshore, while it early or in the short term impacts our top line is a good thing. We aspire to have more balance between our onshore and our offshore and the delay in this ramp is very solid, very long-tenured client with great reliability, just a matter of time.

Yes. And I would just add to that, that we feel very comfortable with the overall pipeline, the backlog and the pipeline and the progress that we're making across both of the business units from a, just from an overall sales marketing and conversion standpoint. So we're very comfortable with basically doing a repeat next year of what we've accomplished this year.

I'm sorry if I missed it, Regina, in some of your responses now. But that large client that made the decision to move the ramp from Q4 into early 2020, you're still confident that, that business is going to materialize?

100%. 100%.

Very confident. Very confident. It's, if I was be able to divulge the region it would be very understandable.

Yes. 100%. 110%.

Okay. Great. The, outside of that short-term government contracts, curious if you can give us a sense of what percentage of your business mix comes from government-related work? And what does the margin profile look like on government versus other clients?

Yes. So the government, just one second. Yes. I want to, so the government is about 20% of our overall business that's Engage and Digital. It is growing quite rapidly over 100%. That has to do with the large government contract. And the, what I would say is our government margins, in particular, because of some of the regulations in government relative to wages and things like that, that's applicable to Engage. But our premium on the Engage side, and I would say, very much in line with the gross margins that we're talking about in terms of our cloud and systems integration plus 40%.

Okay. Great. And if I could just sneak in one more, please. We've been seeing steady improvements in DSOs over the past few years. Just wondering if you can give a little bit of insider color on that? Are you benefiting from more favorable terms? Or is it just the nature of growing mix of digital work, the contracts are more favorable there. Can you just give some insight?

No. In fact as an industry, on the Engage side, we share what I would say degradation in the payment terms, meaning those payment terms are getting longer. It's typically 45 to 60 days. And so that's really, I would say, a function of time to bill, time to collect, working very collaboratively with our clients. On the Digital side in the tech piece, we do enjoy certainly less than 60 day. Consulting is a little bit longer. But I would say it's not, there's nothing noteworthy there in terms of changes in our agreements. It's really a matter of process improvement and focus.

Our next question is from George Sutton from Craig-Hallum.

I really wanted to focus on what seemed to be a couple of major announcements. The Cisco and the LivePerson partnerships. Could you talk about them in the context of what might that do for your demand drivers, what might that do for your margins? And what might that do for customer benefits? Just so we fully understand that.

George, it's Ken. So why don't we just start with Cisco first. So we've enjoyed a relationship with Cisco that span 20 years, and we have essentially re-upped our relationship. And without getting into a lot of specifics what I would just simply say is the following. Cisco has in excess of 3 million contact center licenses out there, the majority of which are premise-based. It is no secret that we are a major portion of Cisco's contact center revenue across the globe. And it's also no secret that we have won the majority of awards that Cisco gives out as their top gold provider. It's also no secret that we have multiple channel partners, meaning telcos that resell our cloud. What I would just simply say, without getting into contract details is that we believe there's a very significant opportunity, working closely with Cisco to start to very much focus on the premise-based customers and convert them to the cloud. So hopefully, that's helpful. And you can understand that with over 3 million licenses out there that, that creates a pretty significant opportunity.

And I would just add that what we have built relative to what we call our cloud. And what we're operating relative to the, let's say, plus 40 clients on that cloud. It's something that we will now do with Cisco for Cisco on a broader client base. And so we've enjoyed a 20-year relationship, where we've been a premium partner and have a good share of Cisco's cloud-based business or Cisco, right, is in the cloud. We've built our platform and now what we're doing is we're going to leverage that platform and build, operate, expand, service that platform for a much broader set of clients. This gives us a great deal of confidence, right, alongside a live person to continue to execute that articulated 15% to 20% growth rate on the top line. Certainly, this offering from Cisco is new. It does take time to get to general availability. And so we will slowly but surely start to talk with Cisco with clients. But it'll take a little bit of time before this part of our Cisco relationship ramps up.

And I think you'll see beginning -- actually, today, announcements from Cisco as it relates to their focus on the cloud. Historically, their focus has been from a contact center standpoint on premise-based solutions. And what I would tell you is that we have an extremely active mega deal pipeline that we're very advanced on and are excited to convert. So I know I'm being a little bit vague and that's intentional. I apologize. It's not because I don't have the details, it's because I really want to respect the relationship that we have with Cisco. I think there'll be more information coming out in the very near future. But what I would say is, is that clients right now, for the most part, when they're looking for very large implementations, which is what we're known for. Really the historic go-to companies have been Avaya. We all know what's happening with Avaya. We all know that their market share has been eroding at a very, very fast pace, probably well in excess of 10% a year, and Genesis being another and Cisco being the third. Cisco is gaining a tremendous amount of momentum. It's safe to say that there's rarely a shop in the Fortune 1000, Global 1000 that isn't already deploying Cisco hardware and software for their networks, et cetera. And therefore, our cloud lets us very quickly and seamlessly plug into their existing infrastructure and give them a complete turnkey omni-channel capability that we can sell to them on a per-user, per-month basis over a long-term contract. So that's on Cisco. On LivePerson, and I'm sorry if I went on too long on Cisco. On LivePerson, we have been scanning the messaging, conversational messaging area for the last probably 2.5 years and have been working with multiple companies…

Actually great detail. And I wanted to make sure I appreciate two numbers you gave. There's 3 million licenses that Cisco has...

Well, over 3 million. We're just saying 3 million, I mean I don't want to quote their actual license amount. I would just say it's over 3 million.

Well, I would view that as the TAM in this case. And you're saying you currently have 40-plus clients on your cloud. So the 40 versus, the 40 today with the 3 million potential that's, those are sort of the relevant numbers. Is that correct?

Yes. And look, they would say that they've got 30,000 enterprises, so we've got 40 clients.

Yes. It also, actually, George, that's only part of the TAM because the other part of the TAM, which is what we've been doing, with TTEC Digital for the last 8 or 9 years, is heat sinking net new customers that we are taking away from Avaya and others and converting them to our omni-channel platform. So there's the embedded base TAM. And then there is the, just the overall marketplace. That marketplace is, in my script, I mentioned, is about $100 million a year marketplace. The adoption rate right now, if you just look at it, depending upon which third-party analyst, Gartner, Forester, et cetera, it's somewhere between 15% to 20-ish percent that's been adopted, we believe the adoption rate will go, will follow very closely, almost identically to CRM cloud marketplace, and that's right now at about 65%.

Our next question is from Bill Warmington from Wells Fargo.

Guys, it's Bill DiJohnson on for Bill Warmington. I just had a few questions. I wanted to ask quickly about FCR. It sounds like it's growing double digits. But what's the margin profile? And is there any client concentration we should know about?

No. I mean they are well diversified. They've got a couple of larger clients. But they're well diversified across those 80. So no major concentration in the business. As I said earlier, they will have double-digit top line growth and a double-digit operating income.

And just to put a little color on why we did that deal. I can't stress this enough. We're, obviously, we're looking at deals constantly. And really what got us the most excited is, is that we look at the, our current internal hypergrowth business that we've been focused on since 2016. And the percentage that, that business is growing year-over-year has been astounding. And we, what we wanted to do was basically turbocharge that, the embedded base. So consequently, what this does is it brings forward 80 net new logos of which a high percentage of them are unicorns and are growing at, in some cases are growing at triple-digit rates as far as their businesses. And therefore, we want to capitalize off of that as they grow, that they can take advantage of our expansive global footprint. They can take advantage of nearshore and offshore. They can take advantage of our Digital capabilities, et cetera. We're not even two weeks into the acquisition, and we're already right now having multiple conversations with multiple clients about expanding into other countries, et cetera. So we're excited about this deal for multiple reasons. One, because it's a double-digit grower; two, because it's a double-digit bottom line; and three, equally as important is because the complexion of the clients are companies that were born digital and that are ultimately the disruptors and that are growing at a dramatically faster rate than our traditional Fortune 500 marketplace, which tends to grow at kind of the GDP level and in some cases below that.

And I also just wanted to clarify, how much of TTEC Digital work is government as a percent of Digital's revenue?

Yes. So I want to -- first, for the record, when we were looking at the percentage government overall is not 21%. My apologies, it's 8%. So I'm glad you asked the question, gives me an opportunity to adjust that answer. And in terms of TTEC, in terms of Digital, it's about 25% of the business. Little bit more -- will be a little bit more this year. As you know, we have a large government contract that's short term in nature. So on average, for Digital, it is a big segment, and it's about 25% to 30% depending on the quarter. It's a little bit higher at this point, given we have this large short-term government contract.

But we are winning government contracts on a very regular basis across various different branches of government as well as the military.

Got you. And do you guys have any cross-sell metrics you can provide and how that's been trending overall?

Yes. I mean we did that in the script. We've got year-to-date 34 bookings that have multiple elements. It totals just under $90 million. So it's a meaningful 23% to 25% of our overall bookings. And pretty consistent in terms of 10 to 14 deals a quarter that are focused on multiple segment and multiple capabilities within those segments.

Thank you for your questions. That is all the time we have today. This concludes TTEC's Third Quarter 2019 Earnings Conference Call. You may disconnect at this time.