Paul Miller - Senior Vice President, Treasurer and Head, Investor Relations Kenneth Tuchman - Chairman and Chief Executive Officer Regina Paolillo - Executive Vice President, Chief Administrative and Financial Officer.
Kwan Kim - SunTrust Ross Licero - Craig-Hallum Group Steve McManus - Sidoti & Company Shlomo Rosenbaum - Stifel Bill Warmington - Wells Fargo.
Welcome to TeleTech's Third Quarter 2015 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..
Good morning, and thank you for joining us today. TeleTech is hosting this call to discuss the third quarter 2015 results ended September 30. Participating on today's call is 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 2015. While this call will reflect items discussed in those documents, we encourage all listeners to read our third 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 upon 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 impairments and/or restructuring charges; and the potential impact to the financial results due to foreign exchange rate fluctuations.
For a more detailed description of our risk factors, please review our 2014 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..
Thanks, Paul, and good morning everyone. We had a very productive third quarter and continue to make measurable strides with our market penetration and growth strategy.
Each quarter, we gained traction as we increasingly become the chosen strategic partner for companies committed to brand differentiation through customer experience, innovation and excellence.
I will briefly touch on a few year-to-date financial highlights and then illustrate by example how our managed services platform is delivering customer experience excellence, deepening customer engagement, igniting profitable growth for our clients within a rapidly changing environment.
Afterwards, I will turn the call over to Regina for a review of the company’s financial performance and outlook.
To summarize, year-to-date 2015 results on a non-GAAP constant currency basis versus 2014, revenue increased 10%, operating income increased 23%, EBITDA increased 18% and free cash flow was $67 million, up from approximately $10 million last year.
The business had solid performance in the third quarter of 2015 including bookings of $133 million spanning new and existing client verticals and business segments. Our strategy, technology and growth segments continue to show significant progress representing 30% of our total revenue in the third quarter.
Year-to-date, the constant currency revenue and operating income of these emerging businesses grew 21% and 142% respectively. The combined operating margin of the emerging businesses was just under 10%. Now on to the discussion of the business environment. There is absolute certainty.
The customer has taken control surrounded by new digital technologies, mobile devices and 24/7 connectivity. Customer empowerment has reached a new level. They are deciding where, when, and how they want to buy and how they want to be served.
Customers are independent, do their own research online and care more about what their peers think than what brands tell them. Customers are demanding a seamless experience across every interaction channel and touchpoint along their purchase and ownership journey.
If they are annoyed, abandoned, or treated like an anonymous number at any point in the experience, they will move on to the next best thing with a simple swipe of their mobile device. Contrary to popular belief, this customer revolution is being led by more than millennials, it’s happening across every age demographic from teenagers to golden agers.
They are flocking to new agile, disruptive companies who cater to their fickle demanding and price-sensitive shopping habits. Just look at the exponential growth and increased valuations of companies like Airbnb, Netflix and Spotify, to name a few.
Each of these businesses has disrupted its respected industry by being customer obsessed and finding new ways to create value and deeper customer engagements. Traditional businesses are stuck in a tenuous and potentially life-threatening position.
Their customers want an experience that is personal, convenient, and seamless, but their enterprise is shackled with aging technology, disjointed systems and bureaucratic organizational structures and processes. Considered this disconnect, according to a study from IPSOS 50% to 60% of retail traffic is now coming from mobile and digital devices.
However, forced to recently reported less than 15% of executive respondents at Fortune 500 companies felt they had a well-developed digital strategy. With the explosion of mobile devices and ubiquitous connectivity, this digital divide is only going to widen. Herein lies our opportunity.
To reach the level of customer experience differentiation that customers demand, companies must do far more than refine and incrementally improve their existing experiences in their contact centers.
They need to break new ground with an updated definition of what qualifies as an amazing experience across every interaction point, mobile, web, retail, video, text, social and voice. They know that point solutions and one-off initiatives will no longer suffice.
They require coordinated, transformative approach that will dramatically modernize and personalize their customer engagement environment quickly and profitably. Our outcome-based managed services platform delivers all of the capability of brand needs to achieve customer experience differentiation.
Because our approach combines consulting, technology, analytics, and execution, we are able to cut across organization silos and create breakthrough innovation that deliver faster results, more profitably than a company can do on its own.
In the second quarter of 2016, TeleTech will host an Analyst Conference where you will be able to experience first-hand what our outcome-based managed services platform can deliver. In the mean time, let me share an example.
This quarter, we began working on a project that will redefine the relationship between an iconic Fortune 50 manufacturer and its customers. This sharing economy has established a whole new value chain in its industry and our client is raising to define and claim their new place.
Once sought after for product innovation, our client is now redesigning their entire business to add service innovation to their differentiators. This radical new approach will require cutting-edge retail formats and technologies to guide customers through their research, sales, sharing and service journeys.
Our integrated platform is enabling them to evolve beyond incremental change as they revolutionize their business. Our client is using our consultative services to help design the new business model and drive the organizational change that will enable it.
They are leveraging our proprietary technology platform to coordinate and synchronize their customer tractions across all touchpoints and they are using our operational capabilities to acquire and serve customers with meaningful and differentiated experiences at scale.
I chose this example, because it demonstrates the incredible potential of an integrated approach.
Our managed services platform is helping our clients deliver an exceptional customer experience, anywhere the customer touches the brand, deepening customer engagement across all channels and igniting growth in the phase of a radically new, digitally disruptive environment.
Our ability to deliver breakthrough outcomes like this is why we set out to transform TeleTech several years ago. I look forward to sharing more of these exciting new examples in the quarters to come. As I mentioned earlier today, 30% of our business comes from products and services that did not exist in our portfolio a few years ago.
These emerging businesses are more strategic, have the potential to grow at a faster rate and are critical enablers of the dynamic offering I just described. Here in more detail on each of these growing areas. Excuse me, here is more detail. We view our customer strategy services segment as the front-end of transformational change.
Through this segment, we work with our client executives gaining visibility to the current state of the overall customer experience and the potential for change using proprietary methodologies and data analytics, we help our C-suite partners map the future state of the customer experience and design the organizational capabilities to help them achieve their vision.
Our consulting teams work across organizational silos and gain an enterprise-wide perspective.
From this viewpoint, we are able to identify broader opportunities for our holistic managed services platform and pinpoint areas where we can make a greater impact by increasing customer satisfaction, improving loyalty and driving greater growth in operating profitability.
Our customer technology services segment, provides technology infrastructure to enable a seamless cross-channel customer journey. We serve clients who require security, scalability, flexibility and omni-channel capabilities. We deliver our solutions in the cloud, as well as on premise.
With its scalable model and ease of implementation, our cloud business continues to accelerate and we are on track to grow cloud revenue by a 100% in 2015. Clients includes Federal and State government agencies, automotive manufacturers, large retailers and top-10 healthcare payers and providers to name a few.
With a reoccurring revenue stream approaching 50%, and significantly higher margins, our cloud offering is a strategic enabler of our overall platform. This business allows for integrated solutions with less financial risk and will undeniably drive growth and innovation.
Completing our triad, our customer growth services segment focuses on the acquisition phase of a customer journey, research, consideration and purchase. For our clients’ new existing customers, we use predictive modeling, search and digital technologies, to help our clients find, engage, and acquire customers through digital channels.
CGS’s 24% year-over-year growth in the third quarter demonstrates the value of this solution. We combine digital tools with sales, best practices, were able to help clients accelerate revenue growth at a lower overall cost.
Our ability to deliver a low-risk solution that yields predictable results and meaningful ROI is driving our continued growth in this segment.
When we combine our consulting, technology and growth capabilities with our foundational customer management strength, we are uniquely positioned in the market to help clients compete in this profoundly unfamiliar and challenging business environment.
Today, we are a very different company than we were – than we set out on our transformational journey several years ago. We are proud of our progress, but we have further to go. We have a different go to market strategy, business profile and product mix.
Working in tandem with our clients, we are delivering solutions that not only meet the needs of today’s mobile, social, complex and demanding customers, we are helping them prepare for what is coming next. We remain confident in the positive trajectory of our transformational journey and now I’ll hand it off to Regina. .
Thank you, Ken, and good morning, everyone. I’ll start with a very quick summary of our GAAP results and then focus the lion share of my comments on our GAAP constant currency results, which provide a more realistic view of our business volumes, and our profitability.
As always, our consolidated and segment GAAP financial results are thoroughly disclosed in our third quarter Form 10-Q and earnings press release. On a GAAP basis, our third quarter 2015 consolidated revenue was $309.2 million, an increase of 1.1% over the year ago period.
Our GAAP operating income in the third quarter of 2015 was $15.6 million or 5.1% of revenue compared to $21.3 million or 7% in the prior year period. And our earnings per share in the third quarter of 2015 was $0.23 versus $0.27 in the year ago period.
Turning to our non-GAAP, constant currency third quarter results, we grew our bookings 6.4% over the prior year quarter, hitting a recent quarterly high of $133 million. We grew our revenue 7.8% in a quarter that is seasonally low for our CMS business. Our organic growth rate was 5.9%.
The emerging businesses comprise 30% of our consolidated revenue collectively growing 26%. Our operating income margin at 7.1% was relatively flat to the prior year.
The emerging business’s operating margins improved from 3.7% to 10.7%, while the CMS margin declined from 8.4% to 5.5% due primarily to lower capacity utilization related to the super site we built for one of our largest clients, which we covered in our last earnings call, as well as the build-out recruiting and training costs related to peak seasonal volumes in the fourth and first quarters.
The normalized tax rate was 15.3% versus 22% in the prior year, due to the mix of international versus domestic pre-tax income. Our non-GAAP EPS before adjustment for foreign exchange was $0.29.
Tax-adjusted for approximately $4.1 million of foreign exchange impact on the company’s operating income, the EPS was $0.34, an increase of 10% over the prior year. Cash flow from operations was $30.7 million, compared to $30.3 million. Our cash flow was also affected by the significant foreign exchange impacts we are experiencing.
DSOs improved by two days from the prior year quarter. Capital expenditures were $19.7 million in the third quarter, up from $17.8 million over the prior year. CapEx is primarily related to the investments we are making in our cloud platforms, R&D initiatives and facility builds.
The facility builds are related to the Philippine super site and additional volumes related to seasonal work and our healthcare, retail, and business service verticals. This incremental build-out has resulted in the third quarter 2015 utilization of 69%, compared to 82% in the prior year.
We anticipate a significant uptick in facility utilization in the fourth quarter and into 2016. In the third quarter, we repurchased approximately 162,000 shares for approximately $4.3 million. As of September 30, 2015, there was $20.2 million authorized by the Board for future repurchases.
The Board also declared a $0.18 per share dividend in the third quarter of 2015, which was paid in October. Cash and total debt balances at quarter end were $86.2 million, and $122.9 million respectively resulting in a net debt position of $36.7 million, a modest increase over the same period last year.
Moving now to a review of our segments, my comments again will reference the non-GAAP constant currency results. CMS revenue was $229.8 million, up 1.3% over the prior year period while the revenue growth in the third quarter standalone is modest, the CMS year-to-date growth rate is 6.3% versus the comparable 2014 period.
The lower third quarter CMS growth rate is a function of the timing of our bookings, the revenue ramp on new business and a changing vertical mix with a greater percentage of the CMS business in healthcare and business services, leading to greater amounts of CMS revenue in the first, second and fourth quarters.
We are confident this business will hit a 6 plus percent revenue growth target in 2015. CMS’s operating income was $12.7 million or 5.5%, compared to 8.4% in the year ago quarter. CMS’s operating margin in the third quarter was impacted by the capacity utilization and changes in the vertical mix I just referred to.
We estimate a significant sequential increase in CMS’s revenue in the fourth quarter consistent with the uptick we’ve experienced in prior years. Customer growth services’ third quarter revenue was $35.7 million, up 24.2% from $28.8 million in the year ago period.
Operating income in the third quarter of 2015 was $3.5 million or 9.7%, compared to a profit of $1.8 million or 6.3% in the prior year. Our CGS GAAP numbers included a $3.1 million adjustment to the WebMetro goodwill.
As we integrate the assets and resources acquired via WebMetro into our CGS Solutions, we have adjusted estimates on their standalone digital marketing solution. As a result, we are adjusting goodwill in line with the future standalone cash flows.
Simultaneously, we have increased our fourth quarter and 2016 expectations with regard to revenue related to CGS’s sales outsourcing solution, inclusive of finding, engaging and acquiring clients through digital channels.
Our success with this solution is directly related to our fist to sales managed service platform in combination with our outcome-based pricing. We estimate a third quarter 2015 to fourth quarter 2015 sequential growth rate in the range of 4% to 5% and approximately 20% revenue growth in 2016.
Customer technology services’ third quarter 2015 revenue was $42.4 million, up 20.3% from $35.2 million in the prior year period. Operating income was $3.8 million or 8.9% of revenue in the third quarter, up from a loss of $300,000 in the same period last year.
CTS’s top-line growth is being driven by the strong market demand from modernizing customer experience technology with strong market tailwinds and a growing predictable, recurring revenue base, we expect CTS’s double-digit year-over-year revenue growth to continue into the fourth quarter and 2016.
Customer strategy services’ third quarter revenue was $21.8 million, up 43.8% from $15.1 million in the year ago period. Excluding acquisitions, organic revenue growth was 6.4%. The segment’s operating profit was $3.5 million in the third quarter of 2015, versus $1.2 million in the prior year period.
Operating income margin was 15.9% in the third quarter compared to 7.8% last year. Before I cover our full year guidance, in the interest of full transparency, I’d like to highlight an additional item that occurred in the third quarter.
In our quarterly evaluation of the effectiveness of our disclosure controls, we identified three material weaknesses related to our control environment and certain account reconciliations and journal entries. It is important to note that none of the underlying control deficiencies resulted in an adjustment to the financial statements.
That said, we realized the seriousness of these control deficiencies and have taken actions to improve our control environment including refining our organizational design, updating our reconciliation and journal entry platforms and adding compensating controls to guard against a single point of failure within the control environment.
Regarding full year 2015 guidance, we estimate full year revenue volumes in line with our original guidance and a foreign exchange impact that is higher than originally estimated.
Given the continued strengthening of the US dollar through the second half of 2015, we now estimate a 5.5% foreign exchange impact versus the 4% we communicated when we provided 2015’s guidance.
Utilizing a 5.5% foreign exchange impact for 2015, we now expect GAAP-based revenue between $1.295 million and $1.305 million and constant currency revenue between $1.370 million and $1.380 million, a 10% to 11% increase over 2014.
We continue to estimate an operating income margin at 8.25%, CapEx is now estimated to be between $65 million and $70 million, down from our original guidance of $70 million to $80 million. In closing, we are executing on many fronts and realizing tangible results from our strategy and our investments.
Excluding the significant impact of foreign exchange, our revenue and operating income growth are meeting or exceeding expectations in each of our segments. Additionally, we are pleased with the accelerated revenue growth and margin expansions in our emerging CGS, CTS and CSS businesses.
We are confident in our strategy and growth trajectory, particularly in light of our growing pipeline across all our businesses, and recent record high bookings in the third quarter and year-to-date. I’ll now turn the call back to Paul. .
Thanks, Regina. As we open up the call, I ask that you limit your questions to one or two at a time. Operator, you may now open the lines..
[Operator Instructions] Our first question is from Mr. Tobey Sommer from SunTrust. Your line is open..
Good morning. This is Kwan Kim in for Tobey. Could you give us additional color on the growth outside the CMS segment, maybe delineate what factors you see are sustainable and what maybe short in the emerging segments? Thank you. .
Yes, so, as little bit as we said in the script, relative to the emerging businesses, we are really now in the aggregate seeing, very good momentum both on the growth and turnaround in the operating income margins.
I think from my comments, you can see that into 2016, we are expecting near 20% growth in our CGS segment into the double-digits for our CTS and the same for CSS. As we come through, obviously the annualization of the rogenSi acquisition, we expect that growth to be more normalized in the low double-digit percentage..
Okay, and could you talk about the cross-selling services, what proportion of customers buy more than two services and how that has changed from a couple of years ago? And where your goals are right now? Thank you..
Well, I think that, what’s important to know is that, on all the new business that we are selling, I would say that a very high percentage, well in excess of 50% of the new business that we are selling, our clients are taking advantage of two or more services.
So our focus right now, since we seem to be successful at selling to net new logos, multiple service lines is really to attack our background embedded base.
We have close to 275 embedded based customers of which the majority are in the Fortune 500 or global 500, however you want to classify them and we feel there is a very significant opportunity to double back on them, but to answer your question, over the last – since we started offering these diversified services and – I am just giving you kind of a rough estimate, we’ve been increasing the number of clients that are taking advantage of two or more services buy somewhere between 75% and 100% per year.
So, we first started out, I believe the first year, we had around 15 clients taking advantage, now we went to 30 clients that were taking advantage of multiple services.
Now I believe, we are well in excess of probably close to 60 clients now that are taking advantage of multiple services and we expect to continue to continue to keep getting that kind of penetration and growth.
So, I guess, another way of saying it is, that by the end of next year, our goal would be to have well in excess of 100 clients that are taking advantage of multiple services. So, let’s just say somewhere around 45% of the client base by the end of next year to possibly even a little bit more, but I’d rather be conservative. .
Okay, thank you for that color. .
Thank you. .
Thank you. Our next question is from Mr. Mike Malouf of Craig-Hallum Group. Your line is open..
Hey, guys this is Ross Licero on for Mike. Just had a question related to currency.
Of that $20 million impact that you guys have, are most of the currency issues related to a specific customer account or just a little more color on that?.
Yes, I will note that, given the significance of the foreign exchange impact, on the company’s numbers, we have added a schedule to the press release schedule, it’s the last one. And you can see by segment what the revenue and OI impact. But to your question Mike, look, the - it’s really based on a short list of countries.
Australia is the most significant impact, New Zealand a bit, and then, Brazil. Our numbers include obviously the net of the positive impact that we are having in some places with the Mexico peso against the US dollar and bringing those expense back.
Some benefit there, but, as you know we are hedged fairly significantly to the tune of 80% to 85% to ensure that whether it’s good or bad that volatility is eliminated in the management of our customer contracts. .
Okay, I understand.
So, you are hedged with the Australian dollar?.
Yes, no, so let me explain, maybe I confuse you a little bit. My first comment is that, when you look at the revenue, the $20 million, right, that’s really, largely coming from Australia, little bit from New Zealand and Brazil, so within that. The second part of this is, the issue there is translation, right, it’s not an economic loss.
We are translating the Australian P&L, right, which is pretty significant, we have some pretty some significant clients there into USD. So it’s a point in time translation. I don’t look at that as an economic loss.
In addition to that, as I read our Q, you will see that any given time, we have a $500 million to $600 million portfolio of hedges, which are there to protect where we have expenses in one currency and the client revenue in another.
So our US client’s business being done in Mexico, right, we hedge that Mexican peso against the US dollar revenue, right, to ensure that we don’t have leakage of profit based on where we might be executing the delivery meaning the expense and where we collect the revenue. .
Okay, all right. That helps. Thank you..
Thank you. Our next question is from Mr. Steve McManus from Sidoti & Company. Your line is open. .
Hey, everyone. Thanks for taking my question. .
No problem, how are you doing?.
Not too bad. My first question, just getting back to the super site build out, the capacity utilization rates.
I guess, can you talk a little bit more about where you think you guys will fall in the fourth quarter? And then, do you think it will take, maybe the first or second quarter before you hit a more normalized run rate of 80% or so?.
Yes, actually, I think that fourth quarter you will see utilization go up quite a bit, because we have a tremendous amount of business that’s ramping as we speak.
Our CMS business, when you just look at just this last bookings quarter, of the $133 million, $70 million of that $133 million is all going towards CMS and $20 million is all net new logos coming from some clients that we are very excited about in really exciting industries and then the remaining $50 million is coming from our existing embedded base that’s expanding with that.
So as that business starts to lay in and a lot of it’s laying in, in the fourth quarter, you will see the utilizations go up quite significantly.
That said, we are seeing and we’ve communicated this in the past, that there is historically this trend where third quarter tends to be a bit of our down quarter, fourth quarter tends to be our up quarter and then we move into better utilization then we will come off a little bit because of the holiday.
But still be up considerably over the third quarter going into first quarter and then to your point, by the middle of the year we are very comfortable that will be in those 80% type range as for a steady run rate. But we are filling capacity right now, quite quickly. .
Okay, great. That helps a lot.
And then, with respect to the downward CapEx guidance, any projects right now, kind of put on the backburner or anything worth noting there?.
No, not at all. It’s really just efficiency and build-outs and maybe a little better negotiation on some of our CapEx type items, but nothing has been put on the backburner whatsoever. .
Okay, great. Thanks a lot guys. I appreciate it. .
Sure, thank you. .
Thank you. Our next question is from Shlomo Rosenbaum from Stifel. Your line is open..
Hi, good morning. Thank you for taking my questions.
Hey, Regina, can you just talk a little bit about kind of – maybe the seasonality of growth in the CMS segment? It seems over the last few quarters that the CMS segment was having very particular strength, vis-à-vis the rest of the business, and probably through the rest of the industry, what we are seeing and then this quarter, it just seem to have come down.
Is there anything material with regard to that ramp up that makes a difference in there or any other insight you can give on that would be helpful?.
Yes, so, first, I would say on the growth, we really are seeing a different pattern. We have a much greater mix in what I’d call, healthcare and we’ve always had retail, but we’ve added to our seasonal volume, healthcare as well as business services.
So, with the business services piece, right, which includes tax work, right, we see a very strong Q1 there and we see a very strong Q2. From healthcare and retail, right, we see a very strong Q4. So we’ve kind of redefined a little bit with that mix, Q3 being a very low quarter for CMS.
The second is that, Ken just talked about $70 million of bookings in CMS. We are seeing much stronger bookings in CMS picked up in Q2, but strong in Q3 and will be strong in Q4. So the timing of the books, the mix of the vertical business in particular the seasons, have caused incremental cost into Q3 to be ready for that.
I mean, I would say that that impact between the super site as well as the ramp – let me also just say that, if you look at the ramp between Q3 and Q4 last year, CMS grew $23 million – sorry – CMS grew about $23 million, yes. This year, it will be $34 million.
So, if you think about that ramp for seasonal volume, right, it’s a third, right, it’s significantly - $11 million is significantly more than last year. Now if you look at that impact, right, because we have that every Q3, one would say, hey, you have that every Q3.
It is different this year because of the super site and it is different because of the amount of seasonal volume growth that we had. If you look at it on the OI point of view, it’s probably hitting us about $4 million, $2 million on each of those, the super site and the seasonal.
The seasonal, will be completely earned through as we produce that volume in Q4. The super site will take us a little bit more into next year as Ken said, we’ve got great bookings and really new logos but also growth in existing that.
By the time we get into the second half of next year, we will fully have absorbed the impact of having built up that super site. One other point, we could have made the decision that the associates who are moving from the existing space into the super site, we could have taken those buildings and eliminated the amount of our portfolio.
We decided to air on the side of the cash and maintain those buildings albeit at lower utilization and it was a good decision. In the end, we are seeing the bookings and we are filling them and that’s a much lower cost to the company and our shareholders than to rebuild space with leasehold improvements and technology and all of that.
So hopefully that helps..
Yes, thanks.
One other question, can you go into a little bit more the write-down at WebMetro and just kind of what prompted that this quarter?.
Yes, I mean, I think that what you are seeing happening right now is that, we are integrating their legacy business with our new model which is much more of an outcome-based model.
And so, although we are still very focused on the digital agency business, the fact that the matter is, is that we are seeing tremendous growth in our outcome-based CGS business which was the whole reason why we did the acquisition. And so, it’s really just the matter of where our overall focus is and where we want to focus on winning accounts.
So, we believe that the account opportunity and the universe of the accounts, the size of the accounts are dramatically bigger, when we combine the two offerings and so that’s really where our focus has been and so, all that Regina did was take an adjustment on the classic agency side of the business.
That said, it’s being offset by the tremendous growth that we are seeing in CGS. .
So, was any contract item that prompted you to take a write-down it was something else?.
No, it’s really that, we got those that team very focused on acquisitions 360 and very focused on digital marketing services, especially as we move to outcome-based selling. So, we had a win in the quarter, major – we had a lot of wins, but one in particular, a technology company where we are executing sales for their SMB market.
And when you look at that, we are lead generating, we are campaigning and we have live sales execs closing and in that, right, we are injecting more and more digital marketing services to refine and improve the efficiency and effectiveness of the lead generation.
So, the assets are becoming one and when you look at the collective revenue and cash flows from the growth that CGS is experiencing, you see that in Q3, you’ll see it in Q4 and we are sure enough to articulate to you that we feel very comfortable with the 20% growth in this business.
So the collective cash flows that are coming from this business as integrated are certainly driving very fair returns on that acquisition. But when you separate distinct SOWs that they are also doing that flow of revenue is coming down and the flow of revenue for the outsourced selling is coming up. .
But, just to put this in perspective, just one of the new accounts that was added in the last quarter, which is already up and running right now and ramping as we speak. Its revenue on an annual basis will exceed all of the revenue of WebMetro taking advantage of all these capabilities. .
Yes..
So, our goal is to rinse and repeat and continue to look for accounts like that and therefore, we have to look at these things strategically at where we are going to put our energy and our energy is going to consistently go where we are going to start to drive the top-line growth that our investors rightfully deserve. .
All right, thank you very much..
Thank you. .
Thank you. [Operator Instructions] Our next question is from Mr. Bill Warmington from Wells Fargo. Your line is open..
Good morning everyone. .
Good morning. .
Hey, Bill. .
So, first question, Ken, the sharing economy example you gave where you are using your managed services suite, what’s the contribution look like to one of those types of relationships versus more traditional relationships? And the reason I am asking is, I was trying to assess what’s the margin benefit and when do we start to see it in the overall business?.
Well, I think, to answer your question, it’s really all about the mix that a client is taking advantage of all of our services. So, it’s pretty well established, what our CMS margins have been over the past multiple years, et cetera.
As we drive the mix up and as there is more consulting and especially more technology, where we have the highest gross margin, there is no, that is where we will see the benefits of operating income lift and operating leverage.
So what I would just simply say is on that particular example as well as other pursuits that we are working on, where we are focused on having them take advantage of our new technology, that is where we will over time, as we build a much bigger book of business on the technology side, where we will see significantly more margin lift due to the fact that the gross margins on the technology side of our business are the highest of our entire business.
And I don’t think we are prepared to communicate what those margins are, but what I would say is, is that they are substantially higher margins on that when clients are using our technology platform than they are when we are providing a labor component. And so our business model, we have been very, very deliberate.
To basically say that, over time, we want to have less labor involved in every dollar revenue and more technology leveragability. So that we are working on margins that we feel that we deserve and that are commensurate with the overall capabilities and services that we are delivering. .
And for Regina, how should we think about a normalized CapEx level forward to this and when you think we start to get there?.
Yes, I mean, I think, we continue to guide 5% as we fill out our portfolio and change the percentage that’s coming from CMS, which is a CapEx heavy. The reality is that, we are building managed services and those managed services have technology and not at the same level that we are going to find in CMS’s business.
But I think, for the foreseeable future, yes, they have technology. So, I think, for the foreseeable future, we are looking at around 5%. We are up this year because of that super site, that super site was $28 million of our CapEx and that will not occur into the future again. I mean, in the near term. .
And on the bookings of $133 million, that correctly 90% comes from existing clients and then it looks like also 90% from the US, is that correct?.
Yes. .
And so, I wanted to ask ….
US clients. .
Yes. .
But those clients might be – could be multinational clients and taking advantage of this in multiple countries..
Well, that, that’s just I want to ask about was, where do I conclude from those stats in terms of your strategy for growth? Is it basically, mining the existing book in the US and what does it say about the – about either demand weakness or it’s competitive environment internationally?.
Well, I think that, look, it’s common knowledge that we have historically been more North American focused and we think the good news about that is, is that’s playing into our hand over time as the one economy that appears to be steaming ahead is the US while the majority of the other large international economies are faltering.
So, we do not have a significant amount of business in Europe and we do not have a significant amount of business in China and we have no business in India.
So, I am not – I guess, what I would say to you is, we are absolutely going to put more and more focus on North America where the companies are doing far better and the economy is doing better and the currency is doing better. But that said, we still fully intend on growing our business. We are seeing growth opportunities in Brazil.
We are seeing growth opportunities in Asia-Pac, et cetera. But it’s no secret that we are much more North American-centric than some of the other companies that are in parts of our space. .
All right. Thank you very much..
Thank you..
Thank you. This concludes the TeleTech Third Quarter 2015 Earnings Conference Call. You may disconnect at this time..