TTEC Holdings, Inc.
Q2 2014 Earnings Call Transcript

Published: 13 Aug 2014

[Operator:]

Welcome to TeleTech's Second Quarter 2014 Earnings Conference Call. [Operator Instructions] This call is being recorded at the request of TeleTech. I would like to now turn the call over to Paul Miller, TeleTech's Senior Vice President and Corporate Treasurer. 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 second quarter 2014 results ended June 30. 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 second 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 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 businesses 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 rate fluctuation. For a more detailed description of our risk factors, please review 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.

[Kenneth D. Tuchman:]

Thank you, Paul. Good morning to everyone. It's an exciting time to be focused on customer experience, customer engagement and customer growth. Our business reflects it. Our financial and operational performance was strong for the first half, and we're seeing momentum build as we execute against our strategy. For the first half, our bookings and pipeline are up; revenue is up; gross margin, EBITDA, operating income and EPS are up despite significant investments and acquisition-related amortization expenses. Return on invested capital is up, utilization is up and our associate retention is up. Regina will provide details on the second quarter in a few minutes. So why are we growing? Simply said, we're delivering to the market need. Advances in technology and data analytics are enabling brands to engage with customers as never before. We see examples every day of how consumers are embracing businesses that are using these new capabilities to create an easier and better customer experience. But creating seamless and satisfying engagement is complicated. Businesses are struggling to cobble together systems, operations and disparate data sources. In a rush to be better, they invest in one-off solutions that historically inflate, rather than eliminate customer friction. We've been involved in designing and executing our clients' customer journey for over 30 years, and we understand the complexity. We know how hard it is to consistently acquire profitable customers, retain them longer, deepen their relationships and increase their value, all while lowering the overall cost to serve. We refer to this as unlocking the value of customer engagement and see the lack of an integrated end-to-end solution as a significant market gap. Clients are struggling with multiple vendors, organizational silos and a proliferation of redundant systems. Consequently, they're having difficulty stitching all the pieces together into a holistic customer engagement platform. This approach creates huge inefficiencies. TeleTech has a significant opportunity in addressing this market gap. Our strategy is increasingly focused on integrating these distinct capabilities into seamless, outcome-based solutions across the full customer life cycle. We're advancing our clients' brand recognition and increasing customer loyalty by combining strategy, innovation, technology, analytics and process optimization to deliver exceptional customer engagement. We are orchestrating this integration on 2 fronts

[Regina M. Paolillo:]

Thank you, Ken, and good morning, everyone. Let's start with the review of our second quarter consolidated results [indiscernible] our segment performance. I'll also provide some additional context on our Customer Technology Services segment, whose performance is flat at the half, despite healthy bookings and revenue momentum in the segment's consulting, managed service and cloud offerings. To summarize the second quarter 2014 non-GAAP results, revenue increased 5.2% to $303.2 million over the same period last year, EBITDA increased 8.4% to $39.2 million, operating income was $23.4 million or 7.7% of revenue versus 8.2% last year, and diluted earnings per share was $0.33 versus $0.35 in the year-ago period. New business signings were $110 million in the second quarter of 2014, representing a 5% increase sequentially and year-over-year. We had a favorable bookings mix across verticals and geographies. Health care and financial services, in particular, were strong, collectively representing 56% of total bookings. And from a segment perspective, bookings were especially strong in CMS and CTS. In the second quarter of 2014, GAAP revenue was $295.5 million compared to $289.7 million in the second quarter of last year, up 2%. On a non-GAAP constant currency basis, revenue was $303.2 million, representing a 5.2% growth rate over the year-ago period. 26% of revenue was generated from our Customer Strategy, Customer Technology and Customer Growth segments. Our top line growth was complemented by further diversification across industries, geographies and our expanded suite of integrated offerings. Collectively, our emerging CSS, CTS and CGS segments grew approximately 12%, of which 6.5% was organic. Second quarter 2014 revenue from acquisitions in the first year was $8.1 million. Organic growth for the quarter was approximately 2.3%. Non-GAAP EBITDA increased 8.4% to $39.2 million or 12.9% of adjusted revenue. This compares to $36.2 million or 12.6% of revenue in the year-ago quarter. Our second quarter GAAP operating income was $20.7 million or 7% of revenue compared to $19.7 million or 6.8% of revenue in the year-ago quarter. Income from operations on a non-GAAP constant currency basis and adjusted for $617,000 of restructuring charges was $23.4 million or 7.7% of adjusted revenue. This compares to $23.7 million or 8.2% of revenue in the year-ago quarter. In the second quarter of 2014, there were 2 notable year-over-year items that impacted our profit margins

[Paul Miller:]

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

[Operator:]

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

[Ross Licero:]

This is Ross Licero on for Mike. I just had a question about the CTS. Could you give us a little bit more color on the timing of the turnaround? You said it would happen quickly, but is that a 2014 or are we looking more towards 2015?

[Regina M. Paolillo:]

Yes. I think you'll see a different second half to the first half. I would suggest that our CTS business will remain fairly flat 2014 to 2013, but that requires a significant uptick in the revenue in the second half, and taking what, at the half, is about 2.9% OI to about 11% in the second half. So with our current bookings, with the pipeline and importantly, with now the rise -- the kind of -- a faster pace in the rise of our cloud business, which was around $9 million in total for last year, around $4.5 million at the half and will be about $11.5 million for the full year, we expect that to be an important contribution. This business has just over 50% of it in recurring business. So in terms of the backlog, the bookings in Q2 and our expected bookings in Q3, we believe that we can bring this business back to the 2014 level and then see an important growth rate in double-digit into '15.

[Operator:]

The next question comes from Josh Vogel with Sidoti.

[Josh Vogel:]

I was curious. Of the -- and I may have missed it, but of the $10 million that you're investing in sales and R&D, how much of that was already incurred in the first half of the year? And as we look at your operating margin guidance, it basically implies about an adjusted 10% margin over the back half of the year. And could you just talk to us how you would get there? Is it going to be utilization improvement? Is it going to be the scale-down of the investment in sales and R&D?

[Regina M. Paolillo:]

Yes. So the -- so you're right. The back half of the year will be somewhere between 10% and 10.5%, depending on where the revenue was. I think if you take a look at -- there's a couple of things to consider when you think about that. One is we have an increasingly growing fourth quarter relative to our CMS business. This is largely a function of the significant health care and retail business that we have. And so you'll see -- you'll continue to see a similar rise that you did in that business last year. We also have a hockey stick relative to Q3 and Q4 on our CTS and our CSS business. We have the expense of the GMI, the Global Markets and Industries, that started in the second half of this year, continued to grow in -- the second half of last year, continued to grow in the first half of this year. We are now starting to see the yield in the revenue against that investment. So you'll see a fairly significant rise in the revenue first half to second half. A lot of that is in the backlog in businesses like CTS and CSS. You'll also see a significant rise in CMS, given the seasonal business. And with that, as you did last year, you'll see an impressive incremental margin on that uptick in the revenue. On your first question, on the investments, at the half, we have about $5.7 million of that $10 million laid in. So you'll see an approximate $4.3 million add to that getting to the full $10 million, with probably about 80% of that in sales and marketing and 20% of that in R&D.

[Operator:]

[Operator Instructions]

[Paul Miller:]

Yes. Operator, if there are no other questions, you may close the call. Thank you.

[Operator:]

You're welcome. There are no other questions. This concludes the TeleTech Second Quarter 2014 Earnings Conference Call. You may disconnect at this time.