Paul Miller - Senior Vice President, Treasurer and Investor Relations Officer Ken Tuchman - Chairman and CEO Regina Paolillo - Chief Financial and Administrative Officer.

George Sutton - Craig-Hallum Frank Atkins - SunTrust Bill Warmington - Wells Fargo.

Welcome to TTEC’s Second Quarter 2018 Earnings Conference Call. I would like to remind all parties that you will be on listen-only mode until the question-and-answer session. This call is being recorded at the request of TTEC. I would now 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 second quarter financial results for the period ended June 30, 2018. 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 in the second quarter, we also encourage you to read our quarterly report on 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 developments that may occur.

Forward-looking statements are subject to various risks, uncertainties and other factors that could cause the actual results to differ materially from those expected and described today. For a complete detailed description of our risk factors, please review our 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. Thank you for participating on today’s call. Our strategy has always been to take the long view with our business. We’ve been deliberate and transparent as we’ve evolved our company.

We’ve worked hard to transform TTEC from its legacy is a first-class provider of care services to a modern strategic customer experience partner offering consulting, technology, data analytics and operational services for digital transformation.

As the world becomes more digital and the volume of customer interactions increases, we are experiencing unprecedented demand for our customer engagement technology and services.

This is evidenced by our growing pipeline, which is up 40% over the last year and well-diversified across industries and geographies and business segments, and the momentum is accelerating.

Our solutions are attracting blue chip brands, urgently navigating their customer experience transformation, as well as exciting high-growth digital disruptors seeking actual partners to help them keep up with their surging growth. Our robust pipeline is rapid rapidly converting into bookings.

In the second quarter we booked 140 million, 131% increase over the same period last year and a 40% sequentially. This milestone represents the highest quarterly bookings achieved in over 10 years. We expect the trend to continue with full year 2018 bookings growth in excess of 20% over 2017.

In addition, we are experiencing strong performance in our customer growth, technology and strategy businesses, which are expected to meet or exceed our full year 2018 performance plans. In particular, our Customer Technology business is expected to outperform significantly on the top and bottomline, specific to our SaaS cloud offering.

We project on a full year basis revenue to grow approximately 72%, with gross margins approaching 45%. Through CTS, our -- we currently manage over 200,000 cloud licenses globally, as this business continues to scale, especially its SaaS cloud offerings, we are benchmarking its market value against other cloud providers in this space.

We are encouraged by the valuation multiples that the marketplace is on these businesses, which is a premium over TTEC’s current overall multiple.

We expect the growth in our technology segment to further accelerate as more governmental and enterprise size companies replace outdated premise-based technology with omnichannel cloud solutions that are more secure, flexible and scalable.

Our Humanify technology platforms are well-positioned to meet the growing demand in this $100 billion plus market. Excuse me, increasingly third-party analysts are citing our cloud technology solution as a differentiator for end-to-end customer experience transformation platform.

Just this month, our technology solutions were recognized by third-party analyst firms, Ovum and Forrester, as emerging leaders in the competitive customer experience cloud platform space.

Included in the second quarter’s technology bookings is a large deal with a multinational mass media and information firm that chose to replace its rigid on-premise technology infrastructure with our cloud solutions, when complete the platform will serve 11 countries and 29 locations and will be supported with a full set of optimization programs from our learning and performance teams.

With several additional opportunities of this scope in the pipeline, we remain confident about the growth potential of our Customer Technology business.

While the acceleration in our overall bookings is setting us up to achieve our longer-term strategic growth rate, our second quarter financial performance was met with a short list of unanticipated, temporary challenges, that are adversely impacting our 2018 results.

All of which relate to our Customer Management segment, namely the timing of our bookings is later than we originally anticipated, the timing of plan price increases related to certain U.S.

accounts where wage levels have fallen behind the market, an increase in ramping cost related to our over performance in bookings, a significant and unexpected increase in U.S. healthcare cost. Regina will provide more detail on these topics in her comments.

We are confident that these challenges are temporary and specific to 2018, and will be cleared by the end of this year. In the meantime, let me share some compelling trends to support our views on an expanding topline growth rate and bottomline margin.

Trend number one, the demand for our outcomes-based end-to-end customer experience solution has become essential. Although, we have been focused on digital transformation as an imperative for some time, companies across the globe are increasingly recognizing.

The digital service redesign is a necessity for their survival, every day digitally nimble disruptors are providing a new model that promises simple, seamless experience that satisfy and delight. To outpace these disruptors, brands are searching for experts to help them quickly design and execute more fluid and intuitive customer experiences.

One of our largest wins of the second quarter falls into the rapidly growing disruptor be to disrupted category. Our client is a Fortune 100 company experiencing massive transformation. They are expanding their brand beyond their traditional role as a neighborhood retailer to a trusted provider of ongoing wellness and health services.

To support their transition they were seeking a partner who shared their vision and passion for customer centricity. They chose TTEC because we have the full suite of strategic and operational capabilities to design and support their current needs and the expanded capabilities to ensure they remain relevant in the future.

This quarter the majority of significant deals we closed included elements from multiple segments of our business. Trend number two, the need for customer experience domain expertise for digital transformation is soaring. The analyst from Everest estimates that third-party spent on customer experience operations in the U.S. is $80 billion.

That accounts for only 26% of the overall spend of the $320 billion. The remaining 74% is being spent on in-house captive programs. Companies managing these internal operations are facing the same market pressures as those that outsource. They need customer experience domain expertise, thought leadership and enabling technology to compete.

Our TTEC digital center of excellence is operating in the sweet spot.

As the front-end of transformation our strategy consultants are catalyzing change for our clients, working with senior executives, our consultants are helping brands to find their target operating model, strategic roadmap in business case to deliver frictionless customer interactions across the full customer lifecycle, then to seamlessly link the strategy to execution, our consultants are handing off detailed plans to our technology teams to create the cloud-based text stack required to enable the omnichannel experience.

Trend three, the market for customer experience of excellence is growing in Europe. According to a report by IDC, spending on digital transformation in Western Europe is expected to accelerate in 2020. As the economy continues to improve in Europe, brands are pursuing partners with proven expertise to help navigate the new service environment.

Earlier this year we increased our investment in Western Europe with an expanded sales team and marketing focus. In a very short time we built a robust pipeline, closed several new clients and grown relationships with our embedded base. In addition, we’ve been recognized with several regional awards for innovation and delivery excellence.

Trend four, as digital interactions increase, protecting customer safety becomes paramount. Digital safety is a lightning rod issue impacting every brand that does business online. By 2021 multiple sources estimate that the cost of digital fraud in United States will exceed 15 billion.

To help our clients address this growing imperative, late last year we acquired Motif, a digital trust and safety content moderation company. Our trust and safety division is over performing in terms of revenue and operating income, and demand is growing.

We are in active discussions with several global clients and expect the adoption of our digital fraud and content moderation offerings to further accelerate in the quarters to come. Today our aspirations for TTEC are as high as ever. We offer the market a true end-to-end platform for customer experience differentiation.

We have assembled an experienced and relevant team, built a unique holistic technology enabled service platform, developed a powerful go-to-market engine and continue to deliver operational excellence for an incredible base of marquee clients. Transformation in a company like ours is not simple or straightforward.

We had to be pragmatic and balance investments and innovation, with our commitments to maintain our profitability, while ensuring our long-term future success, and while we’re not satisfied with the current financial performance of our Customer Management Services segment, our pipeline in bookings momentum is confirmation that our outcomes focused approach to digital customer engagement is relevant, valuable and growing in demand.

As we look to the second half of the year, we’re focused on continuing to convert our strong pipeline into bookings and rapidly ramping new business to deliver an improved topline. We remain confident in our strategy and look forward to sharing our continued progress over the next several quarters.

On behalf of all of us at TTEC thank you for your support and now I will turn the call over to Regina..

Thanks, Ken. Good morning. Before I jump into our first quarter results, I would like to provide some contexts regarding certain short-term items affecting our 2018 results. These items relate exclusively to our CMS segment, are temporary in nature and are expected to be remediated by the end of 2018.

Our second quarter performance and full year guidance is a tale of two extremes. On one hand we have a noteworthy over performance in our bookings across the business and the CSS, CTS and CA -- CGS business segments are outperforming both revenue and operating margin guidance.

At the same time, the CMS segment is faced with a short list of temporary challenges, most of which have to do with timing. The numbers included in the following comments are on a non-GAAP basis, excluding assets held for sale, restructuring and impairment charges.

On the positive side, our digital cloud offering grew 59% in the first half of 2018 and it’s estimated to grow approximately 72% on a full year basis. The gross margin percentage in this offering is estimated to expand 645 basis points in 2018, reaching 45% versus the total company gross margin percentage of approximately 24%.

Our digital systems integration offering grew 29% in the first half of 2018, and it’s estimated to grow approximately 30% on a full year basis. The gross margin of this business is estimated to expand 530 basis points in 2018, reaching approximately 40%.

Our Digital Customer Acquisition business after declining in 2017 grew 6% in the first half of 2018 and it’s estimated to grow approximately 25% in the second half and 15% on a full year basic. Operating margin is estimated to expand 200 basis points in 2018, reaching approximately 9%.

Our Digitally Focused Consulting business after declining in both 2016 and 2017 is estimated to grow approximately 3% in 2018 and expand its operating margin by 300 basis points, reaching approximately 13%.

Our end-to-end demand generation platform has been transformed, including digital lead generation, inside sales, client partners focused on growing our existing client relationships, sales executives focused on new clients and expanded geographic selling footprint in Europe and Asia-Pacific and a recent focus on the hypergrowth in mid-market.

Our second half 2018 pipeline has grown more than 40% versus the prior year and is increasingly delivering more larger and cross segment deals. Our second quarter bookings of $140 million, up 31% growth rate year-over-year, is a good example of the potential that our go-to-market platform has and improving our topline growth rate.

Based on the bookings already signed in the third quarter, we now expect 2018 full year bookings to grow in excess of 20%, supporting higher overall topline growth into 2019. CMS’ bookings in the second quarter grew 24% to $134 million. We anticipate continue growth in bookings in the second half.

This bodes well for future CMS growth and operating expansion. The offshore mix and pricing related to our CMS 2018 bookings is estimated to deliver improved operating margins in 2019. The percentage of offshore work is trending up and our U.S. pricing includes market relevant wages adjustments that will both contribute to improve profitability.

Despite these noteworthy tailwinds, we are adjusting our full year guidance to reflect changes in our assumptions related to CMS’ revenue and operating income. We are reducing our full year CMS revenue guidance by approximately $37 million, as follows.

$12 million related to changes in our foreign exchange rate estimates, $9 million related to delays in pricing adjustment in our U.S. business tied to wage increases in certain U.S. markets. To-date we have had good success in working with our clients to set market-based U.S.

wages that enable success in the acquisition and retention of our customer experience associates. $16 is associated with the timing of our CMS bookings, while our bookings are ahead of plan, they have been and are expected to be book later than originally anticipated, which is temporarily impacting the net new revenue in 2018.

With the 24% growth rate in CMS’ 2018 first half bookings and already signed business in the third quarter we expect CMS to comfortably deliver at a higher revenue growth rate and expanded profit in 2019. CMS’ operating margin will be up 210 basis points for the full year.

The GAAP in operating margin translates into approximately $28 million on a full year basis and is primarily attributable to the following. $2 million is due to changes in our foreign exchange rate estimates, $12 million relates to the delay in U.S. pricing increases associated with U.S.

wage rate discussed earlier, $5 million relates to the timing of bookings, previously mentioned, $3 million is tied to higher CMS new business implementation costs. As a result of the over performance and timing of CMS’ bookings, we are now ramping more business than we originally anticipated in the second through and fourth quarters.

In fact, the number of associates we will be ramping in this period is approximately 5,300 versus 2,700 in the same period last year. And finally, $6 million relates to increases in our U.S. healthcare costs, tied to an increase in the number of claims in the average cost per claim.

We are in the process of making changes to our 2018 healthcare platform and we will redesign the platform in 2019 to improve the cost of wellness, while ensuring we remain market competitive. We are confident we can achieve a lower cost of healthcare going forward.

Our view on these impacts to 2018’s operating income is that they are temporary in nature, as we fully ramp our 2018 new business volumes, finalize our pricing negotiations tied to wages on U.S.

existing business, effect changes to our healthcare platform and increase our offshore revenue mix, all of which is already happening, we fully expect to return CMS’ operating income margin to approximately 8%. I will now highlight the second quarter 2018 financial results.

On a GAAP basis the company reported revenue of $349.9 million, down 1% over the prior year quarter. Operating income was $13.5 million, 3.9% of revenue, compared to 6.1% in the same quarter last year. The second quarter operating income margin includes $1 million in restructuring charges.

Diluted earnings per share were $0.12, down from $0.32 in the prior year period. In the second quarter the adoption of ASC 606 as a -- had a positive impact of $2.4 million on revenue and $1.6 million operating income. Foreign exchange negatively impacted revenue by approximately $600,000 and operating income by a positive $2 million.

On a non-GAAP basis which excludes assets held for sale and restructuring and impairment charges revenue decreased 0.4% to $345.9 million over the same period last year, organic revenue declined 3.4%. Adjusted EBITDA was $35.4 million or 10.1%, a decrease from 12.8% in the same period last year.

Non-GAAP operating income was $15.3 million or 4.4% of revenue, a decrease from 7.3% in the prior year quarter. Non-GAAP EPS was $0.22 versus $0.40 in a year ago period.

Second quarter other income and expense included a $3.1 million non-cash expense associated with the estimated buyout of the remaining 30% minority interest in Motif, our trust and safety applications tied to Motif over performance.

Additionally, other income and expense was impacted by a non-cash loss related to the markdown of net assets held for sale. Our reported tax rate in the second quarter 2018 was 9.4%, compared to 9.2% in the prior year period. The low tax rate relates to lower taxable income in the global distribution of our taxable income.

The second quarter 2018 normalized tax rate was 19.5% versus 23.4% last year. Our capacity utilization was 76% in the second quarter of 2018 unchanged over the prior year. We anticipate utilization to exceed 80% as we ramp new and expanding programs and support seasonal work in the fourth quarter.

Our second quarter 2018 cash flow from operations was $37.3 million, compared to $50.5 million in the prior year. This decline is a function of lower profitability and higher DSO’s which were 84 days in the second quarter, up from 76 days in the prior year period and flat sequentially.

Year-to-date free cash flow was a strong $87.8 million, allowing us to reduce our net debt by $48.9 million to $238 million as of June 30th. This is an addition to paying a semiannual dividend of $12.4 million in the second quarter. Capital expenditures were $9.4 million in the second quarter 2018 down from $17.6 million in the prior year.

I will now cover our second quarter 2018 segment results, which are on a non-GAAP basis a reconciliation of GAAP to non-GAAP amounts are in tables attached to our press release. CMS’ second quarter revenue decreased 2.5% to $262.2 million over the prior year quarter. Organic revenue declined 6%.

CMS’ operating income was $4.8 million or 1.8% of revenue, compared to $17.7 million or 6.6% in the prior year period. ASC 606 positively impacted CMS’ revenue $2.4 million and operating income by $1.6 million. Foreign exchange negatively impact revenue $700,000 and operating income positively by $2 million.

Revenue exceeded our guidance while operating income fell short by approximately $8 million based on the items discussed earlier. Specifically, the impact of the second quarter were as follows.

$2.5 million tied to the timing of pricing increases, $1.5 million tied to the timing of bookings, $1 million tied to the timing and increase in new business ramps, and $3 million tied to healthcare costs. CGS’ revenue increased 12.3% to $35.1 million in the second quarter 2018 over the prior year.

Operating income increased 24.6% to $2.9 million or 8.4% of revenue, compared to 7.2% last year. Our CGS segment is delivering to plan and we anticipate further top and bottomline improvement in the second half of the year as more programs move into full production. We now expect CGS to exceed our previous top and bottomline full year guidance.

CTS exceeded our guidance in the second quarter reporting a 5.7% increase in revenue to $33.8 million and 50% increase in operating income, $5.6 million or 16.5% of revenue. The margin expansion represents a 490 basis point improvement over the prior year and 270 basis point improvement sequentially.

The favorable trends in our CTS segment continue, including a further uptick in new and existing client demand for our cloud-based contact center delivery and associated systems integration services.

As we scale, we are also experiencing a beneficial trend in our attachment rates or add-on as our existing clients expand and upgrade their technology and service offerings.

CTS’ pipeline and bookings are exceptionally strong, and as Ken mentioned, we continue to have client wins that showcase the confidence that governments and large multinational companies have in our expertise to design, implement and manage a modernize customer experience platform both on-premise and in the cloud.

Additionally, we are starting to see the applicability of our Humanify Connect omnichannel platform to the mid-market further expanding the landscape in which we expect to sell and operate this business.

While we anticipate a slight dip in third quarter margins, given a percentage of lower margin product we expect the CTS segment to outperform our previous revenue and operating income guidance on a full year basis. CSS’ revenue was $14.7 million in the second quarter 2018, down 2.5% over the prior year.

Operating income was $2 million or 13.5% of revenue up from 11.3% in the prior year. Sequentially, revenue increased 10.8% and the operating income margin improved 580 basis points.

We are pleased with CSS’ improved profitability and increase collaboration of talent with those practices within our Customer Strategy business and with our Customer Technology Management and Growth businesses. Looking ahead, we anticipate CSS to meet our original full year revenue and operating income guidance.

Turning to our consolidated guidance, which includes the adoption of 606 and foreign exchange, but excludes restructuring and impairment charges, and the assets held for sale, we estimate revenue to increase 2% to 3% between $1,490 billion and a $1,500 billion, compared to a $1,505 billion and a $1,525 billion in our original guidance.

We estimate our adjusted EBITDA to range between 12.8% and 13.2% versus 13.9% and 14.2% in our original guidance. We estimate our operating income margin to range between 7.4% and 7.8% versus 8.7% and 8.9% in the original guidance. Capital expenditure is unchanged at 3.8% of revenue, as is the tax rate unchanged between 24% and 26%.

On a full year basis using the midpoint of our guidance, we anticipate 24% of our revenue and 15% of our operating income in the third quarter with the distribution supported by our historical seasonal peak volumes in the fourth quarter.

On a full year basis and using the midpoint of our guidance, we now approximate 2018 segment performance as follows.

CMS revenue reduction of 1% and operating income reduction of 25% versus the prior year, with 23% of the revenue and 8% of the operating income in the third quarter, CGS revenue growth of 15% and operating income growth of 47% versus prior year with 25% of revenue and 25% of operating income in the third quarter, CTS revenue growth of 22% and operating income growth of 51% versus the prior year with 30% of revenue and 26% of operating income in the third quarter, CSS revenue growth of 3% and operating income growth of 35% versus the prior year with 26% of revenue and 27% of operating income in the third quarter.

We deliberately invested in our strategy to diversify our solutions portfolio to deliver the vital products and services across the customer experience continuum. We are delivering at scale, more digital, cloud-based and analytically rich solutions to improve the customer experience and increase our strategic relevance in a growing ready marketplace.

While we are extraordinarily pleased with the performance of our customer strategy, technology, and growth businesses, we are keenly focused on improving our customer management revenue growth trajectory and delivering more predictable, higher level profitability, with our current and projected backlog and bookings, we remain confident in our ability to get this segment back on track, delivering topline growth and an improved operating margin.

I will now turn the call back to Paul..

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

Thank you. Our first question comes from George Sutton from Craig-Hallum. Your line is now open..

I promise I will limit myself to one question. Unfortunately it’s a whopping four-part question. I wondered if you could discuss the bookings in the pipeline both -- and which were obviously strong, but in the context of the following.

Number one, the CMS versus non-CMS, number two, how much is Western Europe impacting those numbers, number three, what are the win rate numbers looking like relative to a traditional, and lastly, can you just talk about the length of deal cycles?.

Hi, George. It’s Ken.

How are you? Real quickly, the last part of your question, could you be a little more explicit?.

In terms of length of deal cycles?.

I thought there was a question -- a point after that?.

No, no. Just -- book -- you obviously had great bookings and you have a….

Yeah..

… very solid pipeline?.

Yeah. So….

I am just trying to understand it in the context?.

So I will start with the last one and make it first and then, I’m sure Regina will weigh in. As far as the cycle time on deal cycles, we are definitively seeing a compression of deal cycle time, which is very exciting to us, and therefore, overall, deals are across all segments are going from contact to contract in a shorter period of time.

Each segment is different for obvious reasons. So in the Technology Solutions segment, for example, if it’s a mega enterprise deal that 5,000, 10,000 SaaS cloud seats, those deals historically used to take when they were premise deals a year and a half in length and sometimes even longer.

They are now probably taking anywhere from eight months to 12 months. On the smaller size deals still very significant and opportunity in the CTS and the cloud area. They are taking well under six months.

So, again, it really depends that it’s a multi-country, multi-national deal, where there’s lots of organizations within the company and divisions, et cetera, obviously, it takes longer to win those deals, as well as to implement them. Our implementation time also on our large cloud deal has come down dramatically.

As we’ve really learned how to take advantage of the cloud and so we are seeing implementation times on small deals go live, in some cases in 30 days or less, very large deals where it’s 10, 15 countries we are completing the entire process from all the upfront consulting that’s necessary, all the engineering et cetera to the implementation and going live and training required in about a five months period of time.

I don’t know if that’s helpful on that segment. On the -- on the -- if we just kind of keep going through, consulting deals contact to contract are averaging 90 days and in some cases as long as may be 120 days and a very few that are much larger that would be as long as 180 day. So relatively quickly -- relatively quick.

On CGS -- on the Growth Services, I would say that, from contact to contract on average now under six months. Not that there isn’t a few exceptions on deals that are multinational, which we do do fair mount that are multinational, that might take slightly longer. But I’d say that’s a pretty good number.

On CMS deals, those deals used to historically take nine months to 18 months, and I think that we’re seeing a substantial amount of deals getting done in the six-month to nine-month timeframe. And in some cases, especially the areas where we are targeting hyper growth type clients, we are seeing deals getting done in 92 days, 120 days.

So, overall, I don’t waxing on a bit on this -- overall, we are seeing a compression and the time from contact to contract and we are feeling very good about that. Part of that has to do with the economy.

Part of it has to do, I would say, most of it has to do with there’s an increased sense of urgency, because digital transformation is so disruptive to so many legacy brands that this is gone from important to urgent. So that’s one part of your question. I hope I answered it.

Regina, since this is going to multi-part question, maybe you can answer some of the rest of it..

Yeah. I will just go back to -- on the bookings, on a year-to-date basis, CMS is about 56% of bookings, it’s up maybe 200 basis points from a mix point last year. Overall, as we said, the CMS bookings is up 24% and the overall bookings are up 20%.

So the good news is, is not that CMS is growing in a percentage, because the others are not, all of the segments are having a really good success in terms of momentum in the topline and that’s through the year-to-date. We have made some comments especially relative to the changing guidance.

We have made comments to help folks understand that already in the third quarter we have significant bookings that are kind of expected to be in line or better than Q2. And what I would say, on that quarter we have some exceptional bookings that we will be closing relative to CMS and I would expect the mix there to be slightly higher.

What -- if there were other things that you were trying to get out in terms of more contexts on the bookings from the metric point of view, I think, Ken, covered a lot of qualitative things in terms of time. But is there anything else that we can..

Well, Western Europe is obviously a new focus and I’m curious how much impact that is having? And then, finally, I was just curious about in general how are your win rates?.

Yeah. I mean, I would say, relatively speaking, overall, it is relatively small, but there’s a tremendous momentum. We are talking shy of $15 million of bookings. Again, remember our bookings are annual contract value. They are not total contract value. We don’t report that.

So but what I would say is, that is an area that we have historically not put a lot of energy and a lot of focus in. We are now focusing very much so on that area and we are very confident that we are going to see some significant acceleration across these -- across a myriad of Western European countries that are looking for our capabilities..

And let me just add some context. I will rattle off in terms of the bookings. In Q2 we did have 19 bookings that are over a $1 million. More than half of them has multiple elements..

Multiple segments..

Multiple segments..

That took advantage of multiple….

Multiple segments -- multiple elements from across our segments. We had two very noteworthy new logos. One, our retail pharma and we have extended our relationship to the government in a noteworthy department. Our average size of the deal -- of -- our average deal size is up 50% over the prior year.

We are seeing the bulk of our growth continues to be in our embedded base with interesting new logos and we are making good headway from an industry point of view seeing continued significant volumes in healthcare, penetrating online retailers, our offshoring mix is up, which bodes well for our future….

Margins..

… margins with more business, Philippines will start to grow faster than the U.S. And I think it’s important given some of the things that happen in the quarter to again note that we are having success from a pricing point of view in the U.S. on all of our new bookings and have for a number of quarters, getting the right U.S.

wage rates in those markets that are more and more competitive..

Okay. Great details. Sorry for the lengthy question..

No worries. Thank you..

[Operator Instructions] Our next question comes from Frank Atkins from SunTrust. Your line is now open..

Thank you for taking my questions.

First, can I get an update on total headcount and you could -- could you give a little bit of color on kind of the mix of headcount by geography or onshore offshore mix?.

One second, I want to kind of go..

So at the end of the quarter we are around 48,000 people and I would say that the bulk of that is in the Philippines and U.S., with U.S. up slightly and the Philippines starting to grow..

Okay. That’s helpful.

And then, in the CMS segment, can you give an update on industry exposure and are there any areas of strength or weakness by industry?.

Well, let see, from a -- what I would say to you is, is that, all the verticals right now are actually showing a lot of activity. Specifically, tech, healthcare, business services, financial services, online retail is definitely doing very well as well.

So I would say that those of the areas that we are seeing, I guess, the other area that I should mention is travel, travel is really doing extremely well and there’s a lot of activity, just because so many people are traveling right now, with the economy being where it is on a global basis.

As far as, weakness, I don’t actually feel like we’re too concerned about any particular industry or vertical.

So I don’t know if that’s answering your question?.

Yeah. I mean, I think, we do know, obviously that there is challenge in our industry relative to telco.

We have dramatically brought our telco mix down over the last number of years and we actually are starting to, I would say, the positive for us in telco is that, that -- those companies in telco have had some challenges relative to the quality of service and there is lots of movement in that industry across company. They are consolidating.

And we’re getting some of the tailend of that relative to volumes price at the level….

That will assess….

… that we will easy get to the financial profile that we want CMS to have. I would also say and maybe, Ken, will talk a little bit about is that. For us I think the theme is less about the verticals. We are focused on these verticals. These high growth verticals, right, that we have identified in terms of healthcare, in terms of online retail.

But I think the theme for us that we are seeing a success in what we would call a hyper growth digital disruptors.

And Ken, I don’t know you want to talk a little bit about that?.

Yeah. I mean, I think, it’s -- because we are not allowed to discuss the clients that we do business with.

What I would just simply say is, suffice to say that, all the major apps that are on your phone, a high percentage of those apps that you would use on it hourly basis to a daily basis, we have something to do with, whether it be providing service, providing technology, providing back office capabilities, et cetera.

And we are growing in that area very nicely and are very focused on that. The other thing that I would say is that the clients were focused on -- or tend to be much more focused on outcomes and much less focused on more of the old style commoditization of the business.

And so we are leaving the companies that are -- that really are treating customer care as a transaction to others that are interested in that type of business and we are focusing on what we believe is a much higher value business that requires significantly more experienced human capital and more technology.

A good example is, some of the contracts that we are signing today, the base labor wage is starting at $19 an hour, which I think is pretty different than what a lot of people are focused on in the marketplace. We are seeing the complexity of the interactions going up pretty dramatically and the good news of that is it makes it very sticky.

I would say this, the short-term negative of is it means that you’re having to hire people that are significantly more capable and talented, and the training period tend to be longer and that can have short-term impact on profitability as we are ramping these higher-priced or higher cost associates along with the investments that are being made in training, educating and then part of our nesting and simulation process.

So hope that’s helpful..

Yeah. That’s helpful. Thank you very much..

Thank you..

Our next question comes from Bill Warmington from Wells Fargo. Your line is now open..

Good morning, everyone..

Good morning..

So, I am just going to do my questions one at a time. That’s all I can handle.

So the first one is, could you give us a sense for what your exposure is as a percentage of revenue, in terms of what’s coming from telecom?.

It is probably right now about 24%-ish, somewhere around there. And what I would say is that the telecom work that we are doing is with companies that are very focused on having a very high Net Promoter Score and that are achieving the highest Net Promoter Scores across the globe. They are well-known companies.

They are not necessarily all based here in the United States. And so, what I would just simply say to you is, is that, they’re very focused on the customer journey and the experience of the customer is receiving..

The bookings number was very impressive and the trend that’s going to get you to 20% plus growth for 2018 sounds very strong.

And so it seems like the bookings number is half of the equation, meaning, that’s kind of the gross revenue? And then, there must be some offsets there that are taking the growth down and I’m just trying to understand that better. I mean is it attrition and is it the move offshore, is it lower volume at clients.

What is it that’s offsetting such a strong bookings number?.

Yeah.

I think your question is with the bookings at that level, why isn’t it materializing in the revenue growth? Is that your question?.

Yes. And may be is the question towards 2019 revenue growth then? You talked about the timing for….

And I am -- and so, again, right, there are a couple of things going on, right. One, we did anticipate, right. As we entered Q2 it looked like we were very close to some pricing increases with certain clients, I laid that out in script, I won’t go through that again.

But what’s happening in ‘18, right, is different, right, then what I would say, the overall theme is, right. We do expect and you can expect of us that the growth rates that we predict for that CMS business will be different than the growth rate we are going to have this year which overall is going to be 1% in CMS. So that’s for sure, right.

That’s one layer that is important to know that that growth rate that we are having in CMS that the kind of increase and the bookings of 134 and the bookings that we can see already in Q3 and expect will drive greater volumes in CMS.

Unfortunately, in year, depressing at are delay in some prices that we are negotiating with clients, which we believe we will get relative to wages that are not appropriate, right. In order for us to operate at the level we want to operate. The second thing is that the bookings are later. So even in Q2, we came off of Q1, right.

We had a level of bookings in CMS. We left a number of bookings on the table that didn’t get signed in time for Q1.

In fact, right, just through extended MSA negotiation, those got delayed in the quarter by a couple of months and we can see also for reasons that, Ken, pointed to, the bookings that will close in Q3, right, that the bookings are more complex, there are new lines of businesses, they are more complicated work, in some instances, right, the license work and these have elements of negotiation that don’t threaten to close but take longer.

And so longer time to get these bookings done and then the pricing increases are the two primary challenges. The other one, don’t forget, a $12 million is coming from a change in FX rates that we anticipate based on the strengthening of the dollar.

So those collectively are what our -- putting some pressure on revenue for CMS this year and we expect to be towards what we have kind of noted as our kind of strategic growth rate for this company into ‘19..

Well, if you can remind again, what are you thinking about for strategic growth rate for 2019, what is that?.

That over the midterm it’s 3% to 5% in that business..

On CMS..

On CMS, that’s the business we are talking about..

Yeah. As far as not on the other side..

Right..

Yeah. The other businesses are very different in terms of that growth rates..

Then in terms of the U.S. labor market challenges that you mentioned. We have been hearing that from other customer support companies as well, higher wages, higher attrition, a couple of recruitment.

What’s that doing to the client behavior? We have been hearing that, you talked about getting some price increases, we have been hearing that that’s been also driving some higher level of offshoring.

I am trying to get a sense for, specifically, how you guys are reacting to it and maybe as a corollary to that is, what percentage of your revenue is actually being handled out of the U.S.?.

Look, so, first of all, I would like to say that, all contracts that were negotiated and signed of new clients over realistically the last three quarters are all priced on new labor pricing and we feel very good about all the new businesses that’s been won that has all then priced at very competitive wages in the marketplace, competitive meaning that we feel very comfortable that we will have an advantage of hiring high quality people with those new contracts.

Many, if not the -- a high percentage of the embedded base contracts, we’ve been working for quite some time have also been renegotiated and clients have agreed to pay a fairly significantly higher rate due to base wage increases in the U.S.

As it relates to all other markets outside of the U.S., we are not experiencing pricing pressure that is anything other than what just normal cost of living that we see have seen over the years, et cetera, and have no concerns whatsoever whether it would be nearshore, offshore markets, European markets, et cetera. So this is for us right now a U.S.

phenomenon that we are focused on. And what I would say to answer your question about how our clients reacting is the following.

I would say that for the most part, clients -- I would -- are much more understanding than I’ve ever seen them be in the past, because they are experiencing the exact same thing in their internal captives where they have a much higher attrition than they have ever experienced and in many cases where they are not actually meeting their staffing requirements.

So they have been internally on their captives been increasing the payroll and naturally us being quote unquote a third-party provider we tend to get dealt with last, they take care of their own first and so we’ve got some stragglers, if you want to call it that, that we are in the midst of negotiating that we feel confident we will have completed between now and let’s just say the next 30 days to 45 days that we will get the rest of the pricing of the embedded base where it needs to be.

Unfortunately, we had to raise wages with some of these clients that have been with us, because as you know, a high percent of our client base has been with us more than 10 years. And so we had -- we did not want to lose valuable employees and in the process we raised wages as a act of good faith.

So that we could maintain the quality of service that we always promise our clients and now what we are doing is playing catch-up on the negotiations to be able to capture the new pay rates. So I would say, overall, the clients have been extremely understanding.

That said, some of them from a budgetary standpoint are realizing that they don’t see an end in sight on these raising -- rising wages, and in fact, are reverting to mixing their onshore business with nearshore and offshore as a way to dollar cost average their cost down.

And we are, obviously, happy to do so, because it’s no secret that our margins are significantly better nearshore and offshore than they are onshore. And then, lastly, I would just say the following. This industry as we all know is consolidating. We are huge proponents of it consolidating.

We think the best thing that can happen is for -- there to be fewer and fewer providers that think about this in a much more strategic and professional way and in doing so they tend to price much more intelligently. And so what’s happening is for lack of a better term the third tier providers.

Frankly, they are getting squeezed out of the marketplace, because they underbid on a ton of business and now they’re getting killed because they can’t deliver on the service levels that they promised, they can’t deliver on the quality that they promised and so there is a tremendous amount of business that is changing hands right now in the marketplace due to the fact of people coming in with a very low price and then not being able to deliver on the performance.

And I think that it will be very obvious over the quarters to come who the winners will be and who will benefit from that business as it reshuffles so to speak..

Well, I guess, the one question I had outstanding there was, what percentage of total revenue is being supported by U.S.

labor?.

Yeah. I don’t have that by -- I don’t have that right now. I don’t want to just throw out a number. But I will tell you is that 25% from the CMS point of view, 25% of the resource is U.S. based. I mean, you can’t -- and you can’t just look at revenue, you have got to look at by….

Okay. By headcount..

Yeah..

25% of headcount in CMS..

So I am just saying, I don’t have the -- I don’t have a precise number for you on that. I don’t want to throw out a number, but I can tell you that 20 -- around 25% of our headcount in CMS is U.S..

Got it. All right. That’s helpful. All right. Well, thank you very much for the insight..

Thank for your questions. That is all the time we have today..

Thank you..

And this concludes today’s TTEC second quarter 2018 earnings conference call. You may now disconnect at this time..