Welcome to TTEC's Fourth Quarter and Full Year 2019 Earnings Conference Call. I would like to remind all parties that you will be in a listen-only mode until the question-and-answer session. This call is being recorded at the request of the TTEC. I would 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.

Good morning, and thank you for joining us today. TTEC is hosting this call to discuss its fourth quarter and full year financial results for the period ended December 31, 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, for complete information about our financial performance, we also encourage you to read our 2019 annual report on form 10-K. Before we begin, I want to remind you that matters discussed in 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 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 2019 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.

Thanks, Paul, and good morning, everyone. In early December of last year, we took meaningful steps via marketed secondary offering to improve the overall liquidity in TTEC's public equity, as well as expand our institutional shareholder base and equity research coverage. We would like to offer a warm welcome to our new and prospective shareholders, and equity research analysts. We are proud to report that 2019 was a record-setting year for TTEC. As the leading global partner for the world's most iconic brands, we deliver a mission critical role in powering the experience economy, with the end-to-end solutions required for amazing customer experience. Our full year 2019 financial highlights clearly demonstrate success we're experiencing. Revenue increased 9% to a record $1.644 billion, driven by highly reoccurring organic growth in our embedded base. Our subscription-based CX cloud business grew 172%. Adjusted EBITDA increased 11% to a record $209 million. Non-GAAP EPS increased 27% to a record $1.89 per share, and cash flow from operations increased 41% to a record $238 million. In 2019, we grew our market share through a combination of strategic partnerships and acquisitions, geographic expansion, and the expansion of our digital-first integrated solutions. Our differentiated customer experience as a service platform has been a significant contributor to our top line growth. Customers are demanding an end-to-end solution that only TTEC can offer, where we design, implement, and operate the full CX technology stack, while also delivering experiences at scale through our deep bench of CX professionals. We expect our strong financial performance to continue in 2020, as our CX as a service platform continues to attract new clients and expand our wallet share with existing clients. Our position as a global leader in digitally transforming customer experience is rooted in a shortlist of fundamentals. First, we serve a…

Thank you, Ken, and good morning. I'll start with a review of our 2019 fourth quarter financial results, followed by full year 2019, and then the 2020 guidance. My references to revenue are GAAP-based, while profitability excludes restructuring and impairment. A full reconciliation of our GAAP to non-GAAP results is included in the tables attached to our earnings release. Our sales and marketing teams delivered $120 million in bookings in the fourth quarter of 2019. Highlights include significant bookings in our automotive, healthcare, and financial services verticals, nine new client relationships, continued momentum in AMEA, and 100% growth in our hyper growth new signings, inclusive of FCR, which contributed 23%. Revenue in the fourth quarter 2019 was $461.3 million, a 10.1% increase, of which 5.5% percent was organic growth. Digital grew 18.4%, driven by 129% growth in cloud and 14.8% in systems integration. Engage grew 8.4%, driven by 89.6% growth in our hyper growth portfolio, inclusive of FCR, 15.8% in our automotive offering, and 11.9% and customer growth offering. Operating income in the fourth quarter 2019 was $43.1 million, or 9.3% of revenue compared to 11% in the prior year. Digital operating income was $11.9 million or 14.4% of revenue versus 18.3% in the prior year. Engage operating income with $31.2 million or 8.2% of revenue versus 9.5% in the prior year. Decline in the operating income origin is related to increased bonus levels in the fourth quarter 2019, in line with the improvement in our financial performance, the fees associated with the secondary, and planned investment in our new Webex CCE messaging and automation offerings in anticipation of the launch of these solutions in 2020. On a full year basis, new business signing were $488 million versus $600 million in 2018. The highlights include significant expansion in our automotive…

Thanks, Regina. As we open up the call, we ask that you limit your questions to one or two at the time. Operator, you may now open the line.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is coming from the line of George Sutton from Craig-Hallum. George, your line is now open.

Thank you. Nice results and guidance. So, I'm curious, now that we've added Pega as an additional go-to-market partner, if we could just step back and talk about the Cisco, LivePerson, Pega potential market impacts as you're going to market with those partners. I'm thinking about it in terms of an expanded TAM, and also potentially a number of touch points that you're hitting in market.

Hi, George. As I think we already commented in our script that we feel like we've expanded our market opportunity significantly through all of the additions and focus areas, I think that really the best way of describing it is that we don't have a single client that's not looking for some form of automation, and most of them are looking for intelligent automation. In most cases, most of our clients historically have worked with classic systems integrators, many of which are highly qualified systems integrators. But the fact remains that most of them have very little CX experience and don't really understand the entire CX ecosystem. And so, consequently, our opportunity and the reason why Pega wants to work so closely with us is because they view us as the foremost experts in CX technology implementation, the same with LivePerson, and the same with Cisco. And so, our goal and our intention is to allow or make these relationships with both LivePerson and Pega in the medium and long-term to be equally as successful as our Cisco relationship has been. And so basically, we are, in many ways, utilizing a lot of the past capabilities that led us to be as successful as we were with Cisco, and we're applying them to Pega and applying them to LivePerson. Additionally, we have truly doubled down in digital, and we have, I would say, added some significant management leadership in the digital area, and with our new president of digital, who has hit the ground running hard, Jonathan Lerner, and multiple other senior executives that have been added all in the go-to-market area, all in the channel partnership area. And so, what I would just simply say to you is that we are highly focused on developing these relationships, working in concert with them on their pipelines, and helping them implement their backlog.

Great. One other thing, if I could, relative -- and I don't know if this is naive, but as we think through the brands that are wanting to continue to reach out and touch their customers and potential customers, I would think more of that is going to be done remotely with a virus concern, meaning I'm not going to go to a retailer necessarily, but a brand is going to continue to want to try to find me. I would think that would be a net benefit for you. But I don't want to be naive in saying that. So, I'm curious, your thoughts.

Look, this is -- you're asking the question that we are literally debating almost 10, 20 times a day throughout our organization. There's no question about it that food delivery services are going to see a major uptick. And so, certain logistic aspects and e-tailers, we think are going to see a major uptick as people make conservative decisions to, shall we say, travel less, staycation, stay more in their own environment, et cetera, et cetera. The fact of the matter though is that I was with two leading scientists last night, and we just don't know. And so, what we're doing is we are absolutely working with every one of our clients and helping them so that they can get through this situation. We're preparing for the worst. We're hoping for the best. And although there might be an opportunity to make lemons out of lemonade, the fact of the matter is that I'm sure there'll be some small amounts of offsets in other areas. And so, we'll be very pleased as long as everything just equalizes. I do think that you're going to see more and more virtual need. And we believe that we are more qualified than anybody in the market space because of the amount of infrastructure that we have, the 11 data centers that we have that are providing cloud-based solutions to hundreds of thousands of workstations across the globe. And that our ability to spin up tens of thousands of additional workstations in the cloud on very short notice, actually, not only does it give us a huge advantage, but frankly, we feel that it puts us in a market position to actually accept business that maybe we would not have even known about prior to. But because there is a higher sense of awareness with this current situation, you have a lot of corporations that are making preparations, and we're happy to be there to assist them.

Perfect. Thank you.

Thank you, George.

Thank you. Our next question is coming from the line of Michael Latimore from Northland Capital Markets. Your line is now open.

Great, thanks. Congratulations on the great year there. I guess in terms of the -- one of your higher level strategies is to sell both digital and engage to customers. I guess, as you look at the pipeline, what percent of the pipeline do you see customers desiring or viewing both sides of your business at this point? And where was that a couple years ago?

So, a couple of years ago, it was probably zero because a couple of years ago, we were representing that we had the ability to do it. But the fact of the matter is that we had both organizations approaching the client almost separately to create one. I would say today, it's very significant. And I would say that we're really excited because although it's early days in us providing a one TTEC solution, we're seeing 40% plus of our pipeline now, and more importantly, the deals that we're winning are more in that area. We just won a significant deal in let's just say the travel industry that's an end-to-end deal that requires all the technology, as well as the ongoing execution. We recently won a few different automotive deals that were both end-to-end, very large scale, multi-country, etcetera. So, what I would say to you is that I want to be -- I always want to be incredibly transparent. I tell you that it's 40% right now. I'll be surprised if next quarter, it's not more than 40%, due to the fact that by next quarter, our digital sales team will be in a much different position than they are even today, as they are continuing to ramp up, and as they are collaborating more and more with our embedded base. And so, I think that we feel very comfortable that in a medium term, it'll easily become 50% plus of our pipeline.

Yes, I would just add that -- the 40% is dollars. They tend to be the bigger deals, and if you look at our top three deals in fourth quarter, which add to almost $60 million, all three of those have multiple elements from both our digital and engage business.

Okay, great. And then the DSOs improved over the last year. I guess, what was the main cause of that? And does that trend continue this year?

Yes, about half of that improvement is due to the fact that we now factor. The only reason we factor -- we have very strong balance sheet. But the only reason we factor is that the rate of interest on the factoring is lower than the rate of interest on our credit line. So, we get some pick up there in terms of reduction of interest expense. And the balance is just really working with our clients. We were heavily reliant in a number of clients to receive data from them at the end of the month in order to bill. And so, driving efficiency and speed in that process and getting over-focused on it has really helped us to bill earlier, and therefore, pick up improved DSO.

Great. Thanks a lot. Good luck this year.

Thanks, Mike.

Our next question comes from the line of Maggie Nolan of William Blair. Your line is now open.

Good morning. On the digital side, you gave some breakout of cloud versus systems integration. How are you looking at those levels of growth? Is that kind of a sustainable level that we should be thinking about going forward? And then how did that compare with your expectations for the quarter?

When we look at the guidance, you'll see the midpoint of our guidance and our digital business is about $300 million. It was $305 million last year. So, we must remember that we have a step down of almost $25 million, and that's shorter-term government contracts. We're exiting the facilitations of business, which was $12.5 million. We're exiting the PRG Middle East practice, that's $5.2 million. And our product is coming down significantly from around $24 million to around $2.5 million because while we had two big sales of product last year, we just don't expect that into the future, as clients prefer a cloud option to an on-prem option. When you take those out of '19 and look at the numbers, right, there's about a 23% growth inferred in what I would call our strategic consulting, our recurring revenue business, primarily the cloud, and our systems integration. And then, I'll just repeat what we said in the past. We believe that this business is, X some of this noise that I just talked about, a 15% to 25% grower, and we're going to see the cloud at that 20% plus, and we expect to see the systems integration continue to grow 15% or so over the next couple of years. Does that help?

Yes, thank you. And then it sounds like from the prepared remarks that international expansion is a continued priority in 2020. Can you share a little more detail on kind of timeline level of investment, expected ramp, and any kind of changes in that strategy, just given the current state of the world? Thank you.

Yes, I mean, I think the trains have kind of left the station on multiple countries that we will be bringing online in the very near future. So, to answer your question, no, there has not been any change in strategy. As to whether the physical implementation slows down just based on what takes place in some of these geographies, I'd say that it would be premature for me to say. But right now, our intention is to increase our near shore and our offshore execution capabilities so that we have that much more diversification for our clients. We think that it's something that is -- not only do we -- is it something that we feel is important, but it's something that our clients are actually asking us to add in particular countries, etcetera. So, I think the bottom line is that they will be open in 2020. As to whether or not they get delayed a month or two or three, let's talk about it next quarter, and I'll give you that answer. But right now, we have no intention of slowing down the implementation of those locations.

Yes, and I'll say, geographically, what our guidance relies on is continued growth in Europe. We're seeding Asia pack, but we had no significant plans for in 2020 to go long on Asia pack from a client acquisition, and therefore, obviously, you have to follow with the delivery footprint. So, no exposure there. And I would just also add that I feel good about what we've kind of ingested into the guidance relative to Europe, largely because of the backlog that we have there against our revenue target, that AMEA group 72% its bookings in 2019. And we'll see that yielding now into 2020 in terms of revenue and profit.

And then you ask a question about capital. Our capital expenditures are in our forecast, and they're baked in. So, the capital that you see takes into consideration the new locations that are that are opening. Offline if you want to get further into that detail with Regina and folks. I'm sure she can give you a bit more detail on that. But nothing that -- there's no additional CapEx that's planned beyond what we've forecasted.

Yes, it's 3.6% to 3.8% of revenue, and that would include all the expansion we would need for the digital business, which is getting increasingly more capital light, and our engage business. Very good. Thank you.

Thank you, Maggie.

Thank you. Our next question is from Bryan Bergin of Cowen. Your line is now open.

This is actually Jared Levine on for Brian. Good morning. Can you start off talking about your expectations for gross margins and SG&A for kind of 2020, and kind of the drivers behind each of those?

Yeah. So, you're seeing almost 100 basis points of improvement in our margins year-over-year, and that is going to be driven by scale. We benefit from scale tremendously in terms of our margins. We have a lot of fixed costs in our cogs and our G&A. What is happening in the cogs is we're getting better utilization of our kind of fixed costs people, our technology assets, and our facilities in the engage business. What's happening with SG&A is we're continually improving the G in that, and quite frankly, investing more. I mean, we'll probably invest another $12 million to $14 million in total across the two businesses to continue to ensure that longer term, we can hit that 6% to 8% overall organic growth rate that Ken talked about in his script. Happy to go into more detail, but I think those are the key things.

Okay, great. And what's your expectations for inorganic contributions for fiscal year '20 now?

If you look at that $1.765 billion, it will have about $70 million of incremental -- it'll about $70 million of inorganic, and balance will be organic.

Great. Thank you, guys.

Thank you.

Thank you. Our next question is coming from the line of Jason Kupferberg of Bank of America. Your line is now open.

Hi, this is Kathy on for Jason. I just want to talk a little bit more about that organic revenue growth you guys called out. Just sort of wanted to know what you expect for the revenue growth cadence to play out in 2020 from that sort of 5.5% level we saw in 4Q. Thanks.

So, if you look at the $70 million, that's about 4.2%. So, in the midpoint of our guidance. Let me let me just step back. If you heard my comment earlier, we're losing about $60 million of 2019's business, right, based on the reduction in that shorter term government contract, the exit of our facilitation business, the exit of our PRG Middle East practice, and the reduction in product, right? So, when you when you take that $16 million out of our $1.644, right, it's important that you take that into consideration because those businesses are not going to be there, or just based on market forces, for example, product has gone down. So, just kind of giving you some information there. If you back out the $60 million from last year, and then you look at the $70 million of inorganic, which is a combination of FCR, right, the balance of FCR, we had about $19 million of FCR in 2019. So, we have the balance of that. Surrounded by it as an acquisition is really immaterial. We bought that platform so that we would have a platform for BPM and RPA in our digital business.

Got it. Thanks so much. And just one more follow-up. It's sort of just high level. How are you guys thinking about the trade-off between growth and margin going forward? Do you sort of -- think for one year, it will be more accelerating top line growth, and then margins will take kind of a backseat? And then just how you seen that trade off play out in the future? Thanks.

Well, I think we've used both as critically important, and although we do believe that top line growth is one of our higher priorities, the fact of the matter is that we have an obligation to our shareholders to deliver on the margins that we're forecasting. So, I guess that's my way of saying to you that we are balancing between the two, and it goes without saying that if we were probably a private company, we would maybe double down to fit more and increase our SG&A to drive the top line even faster. But we think that we're in a nice sweet spot right now where we can grow the top line nicely, organically, as well as expand our margin. So, I apologize if I'm not giving an exact answer as to what's the highest priority, other than to say that our highest priority is to deliver on the outlook that we publish, and that we that we put forth, and that we have a high degree of confidence in that. Regina, do you want to add anything to that?

Yes, I mean, I would say that there's probably 1.5 points of margin in 2020 being eaten by a stepped up investment in bringing these new omnichannel messaging and intelligent automation offerings to market, putting the leadership in place for those partners, putting the leadership in place for a head of digital, and quite frankly expanding the sales force domestically and in Europe. So, when all is said and told, what we're able to create from those investments in this year versus those costs is probably eroding about a 1.5 points. Our hope is we expect that that will drive significant bookings, which will lead to higher amounts of backlog going into next year, and that'll naturally then flush itself out as we scale the revenue against these costs and come back to the longer term EBITDA NOI margins that Ken spoke of.

Perfect, thanks for taking my question.

Thank you.

Thank you. Our next question is coming from the life of Josh Vogel of Sidoti. Your line is now open.

Thank you. Good morning, Ken and Regina. When we think about your digital platform and capabilities, Ken, you said you now service the market end to end with scale, and we know that technologies are always evolving. But how do you feel about the platform and offerings today? Are there still any holes you want to fill? And is it possible that you could do this organically, or would that only be through acquisition?

Well, I think our intention in what we're doing -- we're doing both. So, as we keep adding more and more engineers, we are adding more specific expertise in a multitude of areas that have the potential to touch our clients' embedded systems, as well as the future systems that they are looking to focus on. So organically, we're doing that. We've recently announced our new technology development hub in Hyderabad, which is now in full operation, and opening, and win at full scale will be in excess of over 400 engineers. I believe 200 have already been hired, and we're rapidly hiring the next 200. We also are expanding in our Chennai operation as we speak through the acquisition of Serendebyte, and we're also hiring engineers in our Austin location, et cetera. So organically, we are absolutely adding engineers and growing. As far as the actual technology voids, what I would just say is that you're right. This is a rapidly evolving area. You'll notice, though, that what we have done is we tend to bet on the technologies that have the most mature customer basis. And there's a ton of intention behind our strategy as to why we're doing what we're doing. We have tried to get involved with some of the more startup in nature companies. And unfortunately, A., their technology is not mature enough; B., it definitely doesn't have proof to scale at this point in time; and C., they just don't have the internal resources to support a company of our size and our scale. Because virtually all of the clients that we go after are up market, large enterprises, mega enterprises, and governments, they want companies that have proven track records and technologies. And so, there is a lot of logic to going with…

Thank you for all the insight there. Just one other. We're seeing very impressive growth in so many of your end markets or sectors today. But telecom is still one of your largest end markets. And we've heard from some competitors about some headwinds in that arena. Can you talk to what you're seeing within your existing base? And is this a market that could and should grow in 2020?

Well, first of all, what I would tell you is that telecom is not an intentional focus of ours at all. We probably have the least amount of telecom concentration of anybody in the industry. It's currently 18.5%. At one point, I'll remind you, it was as high as 50%. So, we feel really good about where we are with the telecom space. What I would also say to you is that our goal to grow the business is in many other high-growth sectors that have much more profitable potential, and that are not in as highly competitive a marketplace as telecom is. My father taught me a long time ago that when you're providing service, you follow the margin of the company that you're working with. So, what I would say to you is that on one end of the spectrum, we have the lowest concentration. The truth of the matter, though, is if you ask me whether or not we have more potential to expand within our existing telecom portfolio, I have no doubt that we have clients that would like to expand with us. And the question will be whether our management team wants to take the business that they want to offer us. It will all boil down to dollars and cents, and whether it meets our profitability expectations. And if it doesn't, then we'll allow our competitors that are willing to work at a substandard margin take the business.

All right. Thank you. Good luck in 2020.

Thank you so much.

Thank you. Our final question comes from the line up Bill Warmington from Wells Fargo. Your line is now open.

Good morning, everyone. So, I had a couple questions on the constant currency organic revenue growth. For the fourth quarter, it looked like 5.5% organic. It looked like 1 point from FX. So, just to make sure, a 4.5% constant currency organic growth in fourth quarter. And I wanted to also apply that to the 2020 guidance, just to make sure I followed. It looked like organic was coming in around 3%. Just wanted to see if there was any FX built into that 2020 guidance.

Yes, so, I think that again, what you have to take into consideration at the surface, depending on the range of the guidance, it's 3.5% to 4%. But that includes the fact that we have exited certain revenue streams that I spoke to. So, when you look at it with those revenue streams, what I get, right, is that our guidance at the midpoint is $1.765 billion. If you take from $1.644 billion that we did last year, that $60 million, you get to $1.584 billion. So, that's $181 million of growth, $1.765 billion versus $1.584 billion, which is around 11.4%. We have 4.4% of that in inorganic, that leaves about a 7% growth on kind of an apples to apples in terms of the businesses, and products, and offerings that we have on a go-forward basis. At surface level though, we're around a 7.4% growth rate, and we are around 4.4% of inorganic. That leaves 3%, depending on where you are in the range.

Okay. So on $60 million, you're backing out of 2019. So, what would be normal annual revenue attrition in dollar terms? What would be normal?

As I said earlier, I laid it all out.

I'm just saying it's a business that has attrition, and it's understanding every year you guys have some attrition. What's kind of a normal level of attrition?

It's not about attrition, Bill. It's not about attrition. We exited our facilitation business. We exited our business in PRG Middle East. We have a short-term, large government contract, which is an outlier. It is a very large, short-term contract in a business that is solidly three-year to five-year take or pay contract. So, you have the numbers. You can do the math, and draw the conclusion.

Okay. And then a second question on home agent capabilities. That seems to be something that clients are looking for, given the coronavirus. How many agents do you guys have that are doing at-home work?

Our at-home business spans from 6,000 to 10,000 associates. It typically spans up to 10,000 or 11,000 during seasonal periods. We have been making preparations for the at-home business to be able to span up dramatically above that. And so we believe that we can take our bricks and mortar associates in many locations if and when necessary, and with, of course, the permission of the clients, and in cooperation with our clients. And they could work at home, unlike many of our competitors, who have to go to third-party technology companies, et cetera, we're set up for today. It's in the cloud, and we literally just turn it on. So, we could certainly add tens of thousands of workstations.

So, at-home FTE right now is running 6,000 to 10,000, it sounds like.

I actually couldn't tell you the exact number right this minute. I just know that historically, that that's what they've been averaging in that range. And again, it's very seasonal. People typically use a lot of our at-home capabilities for seasonality. So, they go up and down, depending upon whether it's tax season, or healthcare season, or Christmas time, or post-Christmas returns. I could go on, and on, and on.

So, any exposure to China worth mentioning?

No. We have no operations and no businesses in China. And so, we do not have any -- or Korea or Italy. So, no exposure in those areas.

Excellent. All right. Thank you very much.

Thank you, Bill.

Thank you for your questions. That is all the time we have today. And this concludes TTEC's fourth quarter and full year 2019 earnings conference call. You may disconnect at this time.