Paul Miller - Head of Investor Relations, Senior Vice President and Treasurer Kenneth D. Tuchman - Chairman and Chief Executive Officer Regina M. Paolillo - Chief Administrative & Financial Officer, Executive Vice President and Secretary.

Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division Josh James - Stifel, Nicolaus & Company, Incorporated, Research Division.

Good morning. Welcome to TeleTech Third 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..

Thank you, operator. Good morning, and thank you for joining us today. TeleTech is hosting this call to discuss its third quarter 2014 results ended September 30. Participating in 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 third 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 goal and business outlook, which are based upon 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 may cause our actual results to differ materially from those described.

Such factors may include but 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 businesses or integrating acquired businesses, the possibility of asset impairments and/or restructuring charges and the potential impact to the financial results due to foreign...

[Technical Difficult].

Let me say something. Ladies and gentlemen, I apologize. There was a problem with the conference -- third-party conference system, so we're going to restart the call. I believe, Paul, you did get your intro in, or....

Yes.

Operator, was my introduction properly received?.

Yes, it was..

Okay, and....

And were the callers able to hear any of my presentation, or did they....

They heard the first few minutes, Mr. Miller, before your line disconnected..

Okay.

So why don't we start with Ken [indiscernible]?.

Technology today connects us in ways we could have never imagined. As businesses have access to more data than ever before, we are helping our clients turn that data into insight that enables seamless interactions, deeper engagements and greater customer value. This tectonic shift has profound implications for our clients and for our company.

Businesses are seeking a new way to compete, and we've designed our company to equip them with all the customer experience capabilities they need to do it.

We're privileged to be helping some of the most successful brands across the globe set customer strategy, change organizational mindset, implement multichannel technology and manage customer experience operations seamlessly across every channel, business unit and employee. We are gaining speed.

With all bold journeys, there are calculated risks along the way. We knew there would be challenges, but we saw an enormous market opportunity. We envisioned a better way to help companies deliver a simpler and more human experience to their customers. We set out to transform our company to be that resource, and we are well on our way.

We've invested in our strategy. We've built our company with unprecedented breadth and depth. Our unique end-to-end customer engagement platform is solidly in place, and as we scale, our potential for growth will increase exponentially.

While we're disappointed with the performance of the technology business segment this quarter, we're energized by our progress. We remain unwavering in our commitment to our direction and look forward to continued advancements in the quarters and the years to come. I'll now turn the call over to Regina..

Thank you, Ken. And good morning, everyone. Let's start with a review of our third quarter consolidated results, followed by our segment performance and then with some comments on our updated guidance. On a non-GAAP basis, Q3 revenue was $305.8 million. EBITDA was $37.3 million or 12.2% of revenue.

Operating income was $21.5 (sic) [ $21.3 ] million or 7%. And diluted earnings per share was $0.31. Additional highlights on the quarter include strong bookings and pipeline development across our 4 business segments, the launch of new technology offerings. We closed the rogenSi acquisition.

We continued to improve facility utilization, associate retention and client retention. Regarding bookings. Our expanded suite of offerings is gaining broader market acceptance, as evidenced by the momentum and diversity of our new business signings. We're pleased with the $125 million in third quarter 2014 bookings, a company record.

And we're mindful of the potential variability by quarter. We are particularly encouraged by the sequential quarterly increases in our overall bookings over the last 12 months. In the third quarter of 2014, GAAP revenue was $305.9 million compared to $297 million in the third quarter of last year, up 3%.

26% of revenue was generated from our CGS, CSS and CTS segments. Third quarter revenue from acquisitions in their first year was $9.6 million. Non-GAAP EBITDA declined to $37.3 million or 12.2% of adjusted revenue. This compares to $41.2 million or 13.8% of revenue in the year-ago quarter.

Our third quarter GAAP operating income was $21.3 million versus $26 million. Operating income was 7% versus 8.7% of revenue in the year-ago quarter. The decline in operating income is related to a $5.4 million decrease in our CTS segment.

Operating income in the quarter was further impacted by $1.8 million in investments; $0.6 million in incremental amortization related to the acquisition of WebMetro, Sofica and rogenSi; and $0.6 million of restructuring impairments. The total of these items was $3 million, negatively impacting operating margin by 100 basis points.

SG&A expense was 16.3% of revenue in the third quarter of 2014 versus 16.9% in the same period last year. The reduction in the SG&A expense-to-revenue ratio is related to a decline in variable incentive comp, in line with performance against our internal operating plan.

Our GAAP-based tax rate this quarter was 28.2% compared to 24.9% for the same period last year. The normalized effective tax rate was 22%. The higher tax rate in the third quarter is primarily related to an audit settlement with an international taxing authority.

Third quarter fully diluted GAAP earnings per share were $0.27 compared to $0.34 in the prior year period. Non-GAAP earnings per share was $0.31 compared to $0.38 in the prior year quarter. Cash flow from operations in the third quarter of 2014 was $30.3 million compared to $36.4 million in the prior year.

Capital expenditures were $17.8 million, relatively flat, unchanged over the prior year. CapEx is primarily related to global facilities expansion and the cloud platform, as well as various internal system upgrades. During the quarter, we repurchased approximately 387,000 shares for a total of $10.2 million.

Year-to-date, we repurchased 1.9 million shares for a total of $47.3 million. As of September 30, 2014, there was $21.6 million authorized and available for future share repurchases. Cash and total debt balances at quarter end were $87.6 million and $121.1 million, respectively, in a debt -- and resulting in a net debt position of $33.5 million.

Sequentially, net debt was impacted by the rogenSi acquisition, share repurchases, capital expenditures and variability in our working capital. Year-to-date, we deployed approximately $85.8 million in share repurchases and acquisitions versus $67.3 million in the same period last year.

This was offset by positive cash flow from operations in the quarter. DSO in the third quarter of 2014 was 79 days, up 3 days from last year, reflecting variability in the timing of payments from select larger clients. Moving now to a review of our segments.

Customer Management Services third quarter revenue was $226.8 million versus $217 million, up 4.5%, with strong contribution from new and expanded healthcare and financial services programs. Organic growth was 2.3% versus 0.2% last year. CMS operating income was $18.6 million versus $17.9 million, a 4% increase.

Operating income margin was relatively flat at 8.2%. Facility utilization increased to 82% in the third quarter compared to 79% in the prior year. CMS delivered strong bookings in the quarter, with large commitments in the healthcare and financial services industries. We booked additional business for U.S.

clients with multilingual, European requirements in our newly acquired Bulgarian-based customer engagement center. Customer Growth Services revenue was $28.8 million compared to $25.9 million, an 11% increase. Organic revenue growth was 6.2% versus negative 17% in the prior year period.

Operating income was $1.8 million versus $0.6 million, a 6.3% operating income margin versus 2.3% in the prior period. CGS' bookings growth was strong in the quarter both year-over-year and sequentially and well diversified across numerous existing marquee clients.

The majority of new business was also recurring in nature, including sales of our search-to-sales technology capabilities, and the pipeline is strong going into year-end. The Customer Strategy Services third order revenue was $15.1 million compared to $13.4 million, an increase of 12.7%.

The growth was largely contributed by rogenSi, a recent addition to our learning and change management practice. The segment's operating profit was $1.2 million versus $2.3 million. Operating income margin was 7.8% versus 16.8%. The third quarter operating income was impacted by the rogenSi acquisition and lower consulting utilization.

Based on Q3's strong bookings and backlog, we anticipate a strong Q4. Integration plans and efforts related to rogenSi are well underway. While early, the rogenSi team is off to a great start.

We saw strong CSS bookings across consulting lines, including advanced analytics and customer experience strategy within our embedded base and a large enterprise cost-efficiency initiative in a new retail client relationship. CTS' revenue was $35.2 million versus $40.7 million, down 13.3% and attributable to lower volumes in our Avaya offering.

Operating income was a negative $0.3 million compared to $5.2 million, a $5.5 million decline.

Ken covered the key reasons for the operating income decline, including a $1 million impact from lower Avaya revenue, $2 million from onetime expenses related to the integration of TSG and eLoyalty and $2 million associated with the buildout of our cloud solutions necessary to deliver the $60 million of cloud backlog at September 30, 2014.

Bookings returned to historical levels in Q3. With strong bookings in the quarter, our strong cloud and managed service backlog and the involvement of our GMI team in selling CTS solutions to our current client base, we expect CTS to return to growth in the first half of 2015.

2014 -- in 2014, the short-term challenges in CTS will, unfortunately, impact our overall results. We anticipate the impact to affect our overall 2014 revenue growth by 110 basis points and our operating income margin by 60 basis points. That said, in 2014, the non-CTS segments will have a very respectable year.

We estimate the non-CTS segments will have revenue growth of approximately 7.5% and have operating income growth of approximately 24%.

While we could further reduce the investments we are making in sales, marketing and R&D to maximize operating income margin, we do not view this to be in the best interest of our shareholders given the progress we are making into transitioning the company's growth profile. We are realizing significant tangible results from our investments.

We can see this in our year-to-date new business signings growing at 19%. We can see it in our year-to-date revenue growth rate at 5.7% versus 1.3% last year. And in particular, we can see it in our organic growth rate at 3.1% versus a negative 3.5% last year.

As a result, we believe we should stay the course, execute our planned investments and continue our path towards higher revenue growth rates. We're confident, based on our current 2015 backlog and our ever-improving bookings engine, that we will deliver continued improvement in the top line.

We estimate our 2014 revenue to range from $1,230,000,000 to $1,235,000,000. We estimate operating margin to range from between 7.75% and 8%. Incremental investments will approximate $9 million in 2014. And capital expenditures are unchanged, ranging between $55 million and $65 million, of which 70% is expected for growth initiatives.

While we are pleased with the general progress we've made in transitioning the company's growth profile, you should know that Ken and I are deeply disappointed in the CTS performance. It's unacceptable. Our management team is completely committed to do everything we can to reestablish CTS' profitable growth record. I'll now pass the call back to Paul..

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

[Operator Instructions] We have a question from Mike Malouf..

I was just hoping that you could give a little bit more color on CTS. I know, in the last quarter, we were kind of hoping for a bounce back.

And I know that some things are on the -- certainly on the investment side, but do you think there's more competition going on in there? Is there some pricing issues? Is there anything that maybe -- that you were -- as you got deeper into CTS in the last quarter, that you realized -- that you didn't realize when we were in the last quarter? If you can just give us some more color, that would be great..

Mike, it's Ken. I'll answer maybe the first part and let Regina add any other commentary. I do not believe that this is, in any way, tied to more competition or a pricing compression, et cetera. I think that we were very open and very transparent.

And I think that this was really a, frankly, self-inflicted situation where we -- where our management in this group did not deliver. And part of it has to do with the fact that this was one unit, TSG, that was not fully integrated.

And the fact of the matter is that the other unit, which was eLoyalty, is powering on through and doing just fine, but this particular acquisition brought down the whole group, and it's inexcusable. It's truly just tied to lack of execution, not the proper focus that we should have had. We absolutely see what we need to do.

And I think it's why we're confident that -- in the coming quarter, that we're already going to -- we're already seeing a bounce back from just the first half to the second half. The reality is that there should have been some structural changes made probably 1 year ago, and for whatever reason, they weren't made.

And we're paying the price for that, and we're very apologetic about it..

Yes. I think the only thing I would add is we were off in the first half. We had good bookings in Q3. I think, relative to the conversations we had coming off of Q2, I would say we believe that we could recoup some of that sooner. And it's going to take a little bit longer for our return to historical-level bookings to work its way into the revenue.

We've also seen our way to a number of things that we can do in further integration with these 2 acquisitions, which will naturally, in a very healthy way for our clients and our top line and bottom line, streamline the organization a bit. We've talked during the script about the engagement of GMI. We believe that's going to make a huge difference.

That's a nice-sized Avaya business today, but when you take a look at the market share that Avaya does have and the opportunity we have through our embedded base, which has significant Avaya platform, we believe the market's there. I think the market issues have largely been around unified communication. Ours is a contact center play.

We have these great relationships with Cisco and Avaya. As I mentioned, we have $60 million of total contract value in our cloud business, and we have another $59 million to $60 million of backlog in our managed service business. So we feel pretty good about the return. It's going to take us a couple of quarters to navigate that.

We believe that, as we navigate back to growth in CTS, we are seeing momentum. This is a single quarter. It's... [Technical Difficulty].

Mike, I'm sorry. We're -- the Verizon conferencing system is having an issue. We outsource it. Probably, we shouldn't be doing that anymore. Anyway, so I don't know that you heard my response..

I think they heard your -- my response [ph] and not yours, Ken..

Yes, we heard your response. And most of....

I think you were adding the relationship we have with senior folks..

So you heard the fact that we've got very strong relationships with Avaya, all the way at the very top, and that they're working closely with us. They're very committed to us being successful because they view us as one of the most sophisticated providers in the multichannel space.

And that secondly, that the market right now -- Avaya has 72% globally of the contact center market, of which 75% of that 72% is 10 year -- the equipment or the kit is 10 years old. And therefore, we see a real opportunity in transitioning those folks to the cloud..

Our next question is from Tobey Sommer..

This is Frank, on for Tobey.

I wanted to ask, just what gives you some confidence? Can you share with us any metrics, as we exit the quarter, over the last 4 or 5 weeks that kind of back up that this is more of a 1-quarter event going forward?.

Yes, I mean I guess I'll start. And then I think I'll start quantitatively, and then Ken can kick in with some color. Look, we are in the last -- into the last 7 weeks or so of the quarter. We have good visibility to backlog across each of these businesses.

Near term, right in Q4, we can already see obviously October's -- a good part of October's revenue. And so what I would say is we're very confident that -- the tick-up, that is in our -- was in our guidance. I mean the reset on guidance is it's really primarily a reset based on what's happened in CTS. But the seasonal volume is up.

It's up from last year. And if you take a look at our lift from Q3 to Q4, you'll definitely see a premium to that lift as we go into Q4.

And then as I said earlier, we can already see what the existing business will be; going into last year's were heavily in our planning process, and we most likely have about a 3% lift in the existing business going into next year versus last year. So we feel relatively comfort.

We still have a fair amount of nonrecurring business to deliver through bookings and revenue, but the platforms are there to do that. And those platforms have been further improved by the rogenSi and the Sofica acquisitions that we did that are doing very well, albeit rogenSi is with us just a short period of time..

Okay, great. And then within CTS, the $2 million that was related to cloud investments.

Is there something that suggests that the pace of those investments will slow? Is there something that you have visibility on as you move into 2015? What are your thoughts in terms of future investments in these cloud capabilities?.

Yes, I mean almost $1 million of that was really an accounting adjustment that we had to do relative to capital R&D, so that truly is onetime in nature and really doesn't have anything relative to a tick-up. The balance of it had to do with some onetime expenses related to our managed services. So I really feel that those are truly onetime.

They won't repeat.

That said, as you hear laced throughout our conversation, delivering that $60 million of backlog TCV, total contract value, for the cloud has taken us CapEx, which is now showing up in depreciation as we put these clients in service, but you can -- I think you can generally look at that $60 million, and while our gross margin on that will change through various levels of seats, the next 5,000 seats give us about a 20% reduction in the cost per seat.

But if you look at that $60 million, you can generally count on it driving 40% to 45% of gross margin.

And so we continue to look at that investment and feel that the amount of money that we're deploying there -- historically, it's been to build the stadium, if I could use a parallel, and now what we're doing is, as we gain client contracts, we fill out each section.

So a lion's share, at least for the next couple of years that the stadium has been built, and now it's a function of, as we get clients, there are things that we need to add to the environment specific to those clients..

Our next conference -- or next question, excuse me, is from Shlomo Rosenbaum..

This is actually Josh James filling in for Shlomo. I just have 2 quick ones.

First, can you tell us how much revenue rogenSi added to the CSS business in the quarter? And second, how much currency impact is factored into your revenue guidance for the fourth quarter?.

Yes, sure. So rogen is a couple of million dollars in our numbers for the quarter. We had it a short period of time. We'll have it a full quarter next quarter. And our view, our current estimate shows that, from a revenue perspective, we'll have about a $3.5 million impact on -- from FX on our revenue Q3 to Q4..

[Operator Instructions].

Yes, operator, hi. This is Paul. You may end the call..

Thank you..

Thank you..

Thank you. This concludes the TeleTech Third Quarter 2014 Earnings Conference Call. You may disconnect at this time..