TTEC Holdings, Inc.
Q3 2016 Earnings Call Transcript

Published: 10 Nov 2016

[Operator:]

Welcome to TeleTech’s Third Quarter 2016 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 TeleTech. I would now like to turn the call over to Paul Miller, TeleTech’s Senior Vice President, Treasurer, and Head of Investor Relations. Thank you. Sir, you may begin.

[Paul Miller:]

Good morning. And thank you for joining us today. TeleTech is hosting this call to discuss its third quarter 2016 results ended September 30th. 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 preliminary financial results for the third quarter 2016. While this call will reflect items discussed within these documents, we encourage all listeners to read our most recent quarter report on Form 10-Q. 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 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, 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 impairment and/or restructuring charges and the potential impact to the financial results due to foreign exchange related fluctuations. For a more detailed description of our risk factors, please review our 2015 annual report on Form 10-K. A replay of this conference call will be available on our website under the Investor Relations section. I’ll now turn the call over to Ken Tuchman, TeleTech’s Chairman and Chief Executive Officer.

[Ken Tuchman:]

Thank you, Paul. Good morning, all. Last quarter, we shared two areas of focus

[Regina Paolillo:]

Good morning. There are three topics that I’ll address in my comments this morning

[Paul Miller:]

Thanks Regina. As we open up the call, we ask that you limit your question to one or two at a time.

[Operator:]

[Operator Instructions] Our first question is from Mike Malouf with Craig-Hallum Capital Group. Sir, your line is now open.

[Mike Malouf:]

Can we just focus a little bit on the CGS side, going from 10% operating margins to flat and then obviously bounced back a little bit? Can you just talk -- give us a little bit more color on specifically what you’re doing with regards to profitability in that section? Thanks

[Ken Tuchman:]

Sure, so CGS, as you know is in the business of basically providing demand generation of leads we create digitally and then those leads then get converted to actual sales, and we’re responsible for not only delivering the leads but then converting and delivering the sales. And in some cases, with a handful of clients, we have a high variable component to the pricing model, which is something that actually we don’t mind to have it. Unfortunately on, like I said, a handful of clients, let’s just say 4ish, 5 type clients, frankly we got the models wrong. And that yielded dramatically lower profitability than what we modeled and what was expected. We learned a lot from that and we took swift action. Because we were delivering high-quality, large quantity of net new revenue to these clients, we went back to the clients, we showed them what the problem was and where we made some assumptions that were not accurate, some of which was based on client feedback. And we adjusted the contracts of which go into affect no later than January 1. So we are very confident that this will have the impact that we needed to have and will bring us back to the double-digit margin that we expected. So, it’s something that we’re not proud of, we’re embarrassed of it and frankly it’s something that we should have caught earlier on. But the good news is that it’s behind us and thankfully our clients have been very cooperative with the action that was needed to be taken. And so, I think that we’ll be back on track and you’ll start seeing those results in the first quarter timeframe.

[Mike Malouf:]

Okay, great. That’s very helpful. And then, just a follow-up, your comments about M&A, I think it’s a little bit new, obviously a big focus there for you, it sounds like. Can you talk a little bit about the pipeline? Are we talking about some -- a lot of smaller type opportunities like the Atelka that you just announced or are there some larger opportunities in there? Thanks.

[Ken Tuchman:]

Our strategy has always been to never bet the Company on a very large deal. We think that that typically address too much risk and we’re pretty conservative. So, what I would say to you is that the pipeline that we’re looking at and that we’re working right now would fall into the category of tuck-ins, some might be larger than the Atelka and some might be slightly smaller. But I would just say that in that range in general. And the truth of the matter is when you say, it hasn’t been the focus, it’s actually been the focus. I mean, we look at a large amount of M&A deals every single month; we have a dedicated M&A department. And when we think something is -- when we don’t see the quality that we’re looking for or something that we believe is going to be accretive, we pass. So, what I would say to you is, is that we’re now entering the phase where we’re starting to see some interesting assets. And we’re hopeful that we can convert more of what we see in the pipeline. So, we have always been focused on increasing shareholder value. And as I mentioned in the script, our levers have been M&A and have been dividend and have been share repurchase, and we really have no intentions of changing that strategy.

[Operator:]

Thank you. Next is from Bill Warmington of Wells Fargo. Your line is now open.

[Bill Warmington:]

So, first question for you, I just wanted to ask about Atelka to see if we can get some details there. Revenue, gross margins, how much is contributing the fourth quarter guidance? Back of the envelope, it looks like assuming the same revenue per employee as TeleTech it would imply about $8 million of revenue. And the rationale for it, because on the one hand, you’re talking about not investing in commodity services business, but this would seem like pretty much playing another call center company with a big telecom concentration. So, I’m trying to understand that dichotomy there?

[Ken Tuchman:]

Yes. How about if I answer the last part of the question and then we’ll have Regina answer the first part of your question? So, we have -- Canada is a market that we’ve admired for quite some time. And based on what we’re seeing going on in the world right now, we think it’s one of the most stable countries in the world. And so, we are very interested in being active in the Canadian market. And what we have learned over the years is, is that it’s one thing to operate in Canada and to provide a near shore capability; it’s another thing to operate in Canada and provide in-country services. And our focus is in-country services. And so, we wanted to acquire a company with a Canadian management team that had access to the unique Canadian market that we think is -- like I said, very interesting and very stable. And that was really our main decision behind this and that we felt that we needed a platform in Canada. And we’ve said all along to our investors that geographic expansion is important to us and that we’re going to be very careful in making sure that where we get the geographic expansion is going to be areas where we believe we can find stability and that we can find growth. The economy in Canada could not be any better right now. And so consequently, this is our way of putting our toe into the water. As far as commodity services, what I would say to you is the following. What we’re finding right now that our richest source of revenue is our embedded base. And that when we take on embedded base clients and we show them how we can dramatically change their business through all of our other offerings, we’re having tremendous success. We met with all the key Atelka clients and we are very confident that they have a significant need for the capabilities that we have that can make them easier to do business with and can allow them to be more fruitful in their net new customer acquisition as well as lower their cost to serve in a more frictionless way. So what I would say to you is, is that I think you should stay tuned. I think you will see that we will do just fine with this asset. And we will not only expand the embedded base but we will also expand within several new clients that we already have a beat on in Canada that frankly we were not very qualified to provide services too, because we did not have Canadian assets from a delivery standpoint. I’m going to stop there and let Regina take on your other question.

[Regina Paolillo:]

This acquisition will represent about 6% of CMS’s current revenue; from a EPS point of view, it’s very slightly accretive. It will not add materially in the quarter to our operating income, meaning Q4 or EPS just in the sense that we had acquisition cost that will be expensed in quarter as well. But I will think of it as the size of it is about 6% of our current CMS business.

[Bill Warmington:]

And then, for my second question, the commentary around the new business sounds very positive and you’re getting a lot of opportunities for cross-sell and ups-ell. But the new business signings of 487 million, that’s the first time the new business signings have been down below a $100 million since I think fourth quarter of 2012. So again, it seems like there is a disconnect there, maybe it’s timing issue, but that seems like important question to ask.

[Ken Tuchman:]

Yes, it is a timing issue. We made the decision a couple of quarters ago that we needed to do things very differently to take advantage of all the capabilities that we have. And in the process of making some organizational changes and in the process of inserting the sales into the individual business units and then bringing forth our consulting to provide strategic solutions, integrated offerings across all of the different business units, there is no question that that slowed us down as we went through that shift and that change. We’re not in any way apologizing for it. We’re going to always do what’s right for the business over the long term. And based on what we’re already seeing and the types of deals that we’re now seeing in the pipeline, we’re pleased that we made these decisions and that the deals are far less tactical and the conversations are much more strategic. So, I do agree with you. We would like to see the bookings where they were historically, but we’re confident that over time that we’ll get them back and that the bookings will be higher quality bookings that yield better margins.

[Bill Warmington:]

Thank you for the answer.

[Ken Tuchman:]

And lastly and most importantly that more of the deals that we will be seeing will be deals that are looking for overall integrated solution that starts with strategic consulting or technology and then goes through the other divisions.

[Operator:]

Thank you. Our next question is from Shlomo Rosenbaum of Stifel. Your line is now open.

[Shlomo Rosenbaum:]

What are the non-strategic assets that were sold? What’s the impact -- what has been the impact of those assets through the balance of the year and in the quarter, what’s going on there?

[Regina Paolillo:]

So, a couple of things. The assets held for sale are within the CGS and CSS segments. The primary focus there is shift in strategy, tightening geographic focus and just prioritization around outcome-based sales outsourcing. They’re small in total; they’ll represent about $15 million to $16 million. They’re not sold yet. They are -- once you make a decision to sell, you’re required from an accounting point of view to hold them for sales. And you’re putting yourselves in a position as if you sold them. And so, you are seeing in the accounting and you’ll say it in more detail when the Q is filed. The write-off of not only the loss, which is sitting in other income and expense of collectively between those two assets about $5.3 million, but you’ll also see that it impacted other intangibles. So, small from a revenue point of view, a drag on our revenue; we don’t view these components critical to go forward; and obviously, from a market point of view, we’re going to be very careful about obviously identifying the specific assets at this point.

[Shlomo Rosenbaum:]

Okay. And is there, can you just comment a little bit? I mean, you had good growth in the CMS business, it’s actually basically in line to what I would expect in a regular basis or probably ahead of what I would expect, 5% growth in this area. So, what drives the growth better, excuse me, the margin better, because the growth seems like it’s there. Is there other some ramp costs that happened in the quarter or some seasonal issues that, I have to make sure that I’m more focused on?

[Regina Paolillo:]

The margin is -- so first of all, I want to make the comment again, because this is critically important. We’re getting through now our last quarter of the impact of this repatriation of business from the Philippines to the U.S. to this financial services client. So that was a $10 million impact in Q3; it will be slightly less in Q4. But once we get through Q4, we’re done. That has been a major shift for us. If you pro forma last year as if that volume was not there, right, and do an apples-to-apples today, the CMS business would have grown in the quarter 10%. The margin came up really very nicely in CMS from the 5% in Q1 and Q2 to -- it's 7% in Q3. We have as you know a restructure of these profitability improvements. We only had a piece of that, the bulk of that restructure will benefit the CMS business. So, we’re very confident. I made a comment that in going from Q3 to Q4, we’re very confident and you’ll see that our margin at 9% and improving from there.

[Shlomo Rosenbaum:]

Can I squeeze in one more?

[Ken Tuchman:]

Go ahead.

[Shlomo Rosenbaum:]

Is there a difference in definition between income from operations and EBIT? The income from operations is $12.267 million and when I go to the EBITDA on reconciliation of EBIT and EBITDA, it’s 12.023 and I am wondering what is the definitional difference there.

[Ken Tuchman:]

Give us a second.

[Regina Paolillo:]

It’s in EBIT and what?

[Shlomo Rosenbaum:]

And income from operations, like if you take the P&L income from operations and then the next page will have a net income, excuse me reconciliation of EBIT and EBITDA and there the EBIT number is 12.023. So, it’s like 2.44 missing, just I don’t know if it is definitional difference?

[Regina Paolillo:]

Yes, it’s going to be FX -- I mean, so let me just say this. I think what you are doing is you’re kind of doing two things. When you look on the top of that schedule right, it’s really from a GAAP point of view, it’s reconciling EBITDA to EBIT. So that’s a GAAP basis. When you’re looking down below and you’re seeing kind of the non-GAAP income from operations of 21.6, right, it’s non-GAAP. And so it’s not going to have restructure and impair and those types of things.

[Shlomo Rosenbaum:]

I was just trying to figure out, if I start from 11.232 and add back the numbers, I’m getting -- you get 12.023, I’m just trying to figure out, I wanted to…

[Regina Paolillo:]

Okay, difference between the 12.023 and 12...

[Shlomo Rosenbaum:]

Yes.

[Regina Paolillo:]

It’s going to be FX.

[Shlomo Rosenbaum:]

So, there is an FX headwind embedded in or there is a tailwind in the P&L and it’s removed in the schedule?

[Regina Paolillo:]

Yes. This is when we translate our balance sheet at end of the month and the end of the quarter, we’re going to have some FX and that’s going to be the difference. It’s not -- does not have anything to do with the hedging we do relative to our content.

[Operator:]

Thank you for your questions. And that is all the time that we have today.

[Ken Tuchman:]

Thank you, all.

[Operator:]

This concludes the TeleTech’s third quarter 2016 earnings conference call. You may disconnect at this time.