Paul Miller - Head, IR, SVP & Treasurer Kenneth Tuchman - Founder, Chairman & CEO Regina Paolillo - EVP and Chief Financial & Administrative Officer.

George Sutton - Craig-Hallum Capital Group Francis Atkins - SunTrust Robinson Humphrey William Warmington - Wells Fargo Securities.

Welcome to TTEC's Third Quarter 2018 Earnings Conference Call. [Operator Instructions]. 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 third quarter financial results for the period ended September 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 third 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 in today's call may include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management's current beliefs and assumptions.

Please note that these forward-looking statements reflect our opinions as of the date of this call, and we undertake no obligation to revise this information as a result of new developments that may occur.

Forward-looking statements are subject to the various risks, uncertainties and other factors that could cause our actual results to differ materially from those expected or described today. For a more 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. We appreciate your participation on today's call. Since the company's founding over 36 years ago, our strategy has been consistent, to grow our top and bottom line and increase shareholder value by building enduring client relationships that deliver exceptional customer experiences.

To accomplish this, we've been deliberately investing in continuous innovation and transformational change to deliver maximum value to our clients.

We have transformed into a leading global customer experience technology and services company, offering end-to-end capabilities across consulting, technology, care, growth and more recently, trust and safety.

Our integrated suite of offerings is resonating in an ever-expanding customer experience marketplace and delivering measurable results as evidenced by our growing pipeline and record level bookings. In the third quarter of 2018, bookings were $153 million, up 34% over the same period last year.

Year-to-date, our bookings, excluding assets held for sale, increased 25.6% to $393 million over the prior nine month period. New business signings were especially strong in our CMS and CTS segments. We're seeing positive momentum across the business with sequential top and bottom line improvement, a trend that we anticipate will continue into 2019.

Shortly, Regina will provide further context in her financial commentary. During the quarter, we made progress in addressing wages in our CMS North American business, which included meaningful price increases from a number of our clients, tied to fair and competitive wages for our frontline associates.

Attracting and retaining talent with the right wages is just one of the ways we are helping our clients complete. Every day, we're engaging in proactive dialogue based on real-time insights with our clients, partnering with them to drive transformational change that is leading to satisfied, loyal and growing numbers of customers.

A good example of the impact of this differentiated approach is a recent new client win in the diversified financial services sector. This client was seeking a strategic partner to innovate and optimize their field operations, comprised of 130,000 financial service brokers.

By modernizing their training, knowledge-based CRM systems and customer interaction platforms were helping to simplify complex broker operations and connect a fragmented customer base.

We're also creating better ongoing education around our dynamic product set and improving an outdated-technology infrastructure, enabling the client to achieve more customer acquisitions, brand loyalty and top line growth.

They are taking advantage of our managed services platform to enable rapid implementation and providing immediate value, supported by our SaaS-based omni-channel engagement platform, our digitized training curriculum, our content creation and optimization services to curate and improve field education materials and an agile team of brand ambassadors that leverage analytics and insights.

With this transformed modern customer experience platform, TTEC will enable their brokers to build a deeper and more relevant customer relationships. Additionally, we're increasing efficiency, driving cost savings and further improving business outcomes for our clients.

It is our deep experience in customer engagement across strategy, technology, analytics and operations as well as our one TTEC methodology that provides differentiated value to our clients. As their trusted partner, we design, build and operate the CX solutions that deliver measurable impact to their business and guide their digital transformation.

I want to now highlight the accelerating strength of our Customers Technology Services segment, which is at the epicenter of the work we are doing to digitize customer experiences.

Supported by a 40% year-to-date growth rate in bookings over the prior nine month period, CTS reported record third quarter 2018 revenue of $50 million, increasing 45% over the prior year period.

Operating income was a record $6.8 million, increasing 63%, also contributing the stronger performance, there's a higher growth rate in a reoccurring cloud revenue from enterprise SaaS subscriptions, which increased 76% in the third quarter of 2018 over the prior year.

Today, we are the go-to technology partner for broad cross section of government and Fortune 500 enterprises. We are providing the core technology, driving the digital interaction hubs for our clients, supporting more than 240,000 reoccurring licenses, inclusive of approximately 40,000 TTEC associates.

Through a variety of digital touch points, including e-mail, chat, SMS text, video, AI box and traditional voice, TTEC is supporting modern connections between companies and their customers.

We design and deliver SaaS-based omni-channel technology for large enterprises, which facilitates a seamless integration with noteworthy third-party CX applications and systems. This is a differentiator in extending our value proposition to clients.

As we partner with clients to create solutions that address their highest priorities, we continue to introduce new technologies, focused on providing frictionless experiences to our clients, customers and enabling seamless transactions across touch points. Machine learning AI and advanced analytics are embedded in all our go-forward solutions.

Extensible, flexible and build-to-enterprise scale, these solutions provide significant advantages for our clients. We continue to innovate, iterate and improve these proprietary solutions, including a number of capabilities recently brought to market. For example, Humanify Insights Platform.

With this solution, TTEC is integrating and analyzing data across disparate data silos to capture real-time insights, we then using predictive modeling and machine learning to determine outcomes and prescribe next-best actions for improved prospect and customer engagement.

RealPlay Simulated Learning allows associates to interact in real time with a training bot that uses artificial intelligence to conduct training scenarios. This capability increases the speed and proficiency of our associates, both improving engagement results and driving a better experience.

Associate assist is augmenting and supporting our associates, leveraging AI to increase their accuracy and efficiency by rapidly surfacing the best responses to customer inquiries in real time.

And service to sales is a turnkey process technology and analytics solution, built on the principles that every customer interaction provides an opportunity for growth. It empowers associates to recommend cross sell and upsell offers through real-time personalization, increasing revenue, customer loyalty and retention.

Our CTS business with its portfolio of innovative customer experience technology solutions has reached in annualized revenue run rate of $200 million and an adjusted EBITDA margin of 20%.

With its current scale projected 20% -- 20-plus percent growth rate, subscription-based revenue model and attractive cash flow, we believe this business has the potential to add significant shareholder value. In closing, the evolution of TTEC has been strategic and deliberate with a single focus of customer experience.

We've aligned ourselves with today's modern customer and the trusted CX advisors for the most revered brands worldwide. On behalf of all of our employees around the world, we thank you for your continued support, and I'll now turn the call over to Regina..

Thanks, Ken. Good morning. I'll start with an update on our progress related to the tailwinds and headwinds we highlighted in our last earnings call. With regard to the tailwind, our bookings momentum continued with new business signings, growing 34% in the third quarter 2018 versus the prior year.

Most noteworthy was a 37% year-over-year growth in both CMS and CTS. In the third quarter, CSS, CTS and CGS continued to execute at levels consistent with or above our strategic financial targets for these advancing segments.

Excluding assets held for sale, CTS' revenue grew about above its 20% target at 45% with an adjusted EBITDA margin in the high teens at approximately 18%. CGS' revenue grew above its mid-teens target at 21%, with the near double-digit adjusted EBITDA at approximately 10%.

And CSS' revenue returned to growth, increasing 2.5% with adjusted EBITDA now approaching the high teens at approximately 16%. Regarding the CMS headwinds experienced in the second quarter, our progress against these headwinds is evidenced by CMS' sequential improvement and overperformance against last year -- last quarter's restated guidance.

Revenue overperformed by approximately $5 million and operating income $1 million. We are making good progress working with our CMS clients to set market-based North American wages. Our tailored, market-specific, client labor summits are especially effective. To date, we have collaborated with clients to reprice the 3,300 associates.

Additionally, based on our year-to-date bookings and anticipated pipeline conversion in the fourth quarter, we expect a healthier onshore, nearshore and offshore mix, as we head into 2019, which together with wage-based price increases will result in improved profit margins.

We've continued -- we've contained the impact of lower-than-expected net new revenue and higher ramp cost tied to the timing of bookings. There's been no further erosion to 2018's performance, and we continue to expect this delayed revenue and profit to positively impact of the first half of 2019.

I'll now highlight the third quarter 2018 financial results. On a GAAP basis, the company reported revenue of $364.9 million, up 1.6% over the prior year quarter. Operating income was $14.7 million, 4% of revenue compared to 4.4% in the same quarter last year. Diluted earnings per share was $0.12, down from $0.32 in the prior year period.

Third quarter 2018 was impacted by $2.7 million in restructuring charges. Foreign exchange negatively impacted revenue by $6.1 million and positively impacted operating income by $1.1 million. The adoption of ASC 606 had a negative impact of $10.1 million on revenue and $4.1 million on operating income.

Restructuring, FX and ASC 606 primarily impacted our CMS segment. The remainder of my comments are on a GAAP basis, which excludes asset held for sale and restructuring and impairment charges. A reconciliation of GAAP to non-GAAP amounts are in the tables attached to our press release.

On a non-GAAP basis, revenue increased 2%, $363 million over the same period last year. Inorganic revenue contributed 3.2% of growth, adjusted EBITDA was $38.2 million or 10.5%, a decrease from 12% in the same period last year. Non-GAAP operating income was $17.4 million or 4.8% of revenue, a decrease from 6.4% in the prior year quarter.

Non-GAAP EPS was $0.22 compared to $0.35 in the year-ago period. On a constant currency basis and adjusted for ASC 606, third quarter revenue increased 6.5%, including 3.4% organic growth. Our adjusted EBITDA margin was 10.9%, operating income margin was 5.4% and EPS was $0.26.

Third quarter revenue and adjusted EBITDA and operating margins were in line with our restated guidance. Other income and expense was a net expense of $6 million in the third quarter, which includes a $3 million noncash expense associated with the estimated buyout of the remaining 30% minority interest in Motif, our trust and safety acquisition.

This is in line with Motif's continued overperformance. Our reported tax rate in the third quarter 2018 was 21.9% compared to 11.7% in the prior year period. The higher tax rate relates to the global distribution of our taxable income, tax rate changes in certain jurisdictions and lower restructuring charges versus the prior year.

The third quarter 2018 normalized tax rate was 26.8%. Capacity utilization was 77% in the third quarter of 2018, down from 78% over the prior year quarter. Our third quarter 2018 cash flow from operations was especially strong, totaling $61.4 million compared to $24.2 million in the prior year period.

This 154% increase in cash flow generation is primarily a function of improved working capital, including a reduction in DSO to 78 days in the third quarter 2018, down 3 days over the prior year period and 6 days sequentially. Year-to-date, cash flow from operations was $166.1 million versus $149.6 million in the prior year period.

Net debt was $202.3 million at the end of the third quarter compared to $192 million in the same quarter last year. Net debt is down $36 million versus the end of the second quarter and down $85 million since December 31, 2017. Capital expenditures were $15 million in the third quarter 2018 compared to $14.3 million in the prior year.

I'll now cover our third quarter 2018 segment results, which are also on a non-GAAP basis. CMS' third quarter revenue decreased 5.4% to $262.4 million over the prior year quarter. Inorganic revenue growth was 3.6%. CMS' operating income was $6.2 million or 2.4% of revenue compared to $15.1 million or 5.4% in the prior year period.

Foreign exchange negatively impacted revenue by $5.4 million and positively impacted operating income by $1 million. The adoption of ASC 606 had a negative impact of $10.1 million on revenue and $4.1 million on operating income. Adjusted for FX and ASC 606, third quarter CMS revenue increased 0.2% with an operating income margin of 3.3%.

CMS overperformed the midpoint of our third quarter guidance with revenue over $5 million and operating income over $1 million.

Looking forward, higher CMS bookings, North American price increases, a healthier balance of business across onshore, nearshore and offshore and reduced healthcare expenses are establishing a strong top line backlight and improved profit margins.

We anticipate renewed 2019 organic revenue growth in our CMS business with an operating -- with operating margins returning to historical levels. CGS' revenue increased 21.3% to $35.9 million in the third quarter 2018 over the prior year. Operating income increased 51.9% to $2.7 million or 7.4% of revenue compared to 5.9% last year.

The improvement is largely due to several client additions. We anticipate sequential CGS top and bottom line improvement in the fourth quarter as more programs move into full production. Our CTS segment reported record revenue and operating income in the third quarter of 2018.

Revenue increased 44.6% to $50 million year-over-year, and operating income increased 61.7% to $6.8 million or 13.6% of revenue compared to 12.1%. As Ken mentioned, we are especially pleased with the accelerating growth in our SaaS-based cloud offering, which grew 76% in the quarter versus the prior year period.

We continue to have wins that showcase the confidence that governments and large enterprises have in our expertise to design, implement and manage a modern customers' experience platform. We exceeded top and bottom line guidance in the third quarter and expect the same in the fourth quarter.

CSS' revenue was $14.8 million in the third quarter 2018, up 2.5% over the prior year. Operating income was $1.7 million or 11.7% of revenue, down slightly from the prior year period. As we align our consulting business with the focus on digital transformation, we are reallocating select resources and investing in new talent.

While this realignment weighed slightly on third quarter margins, we anticipate full year revenue and operating income margins in line with guidance. Before I provide closing comments, I want to summarize a few key takeaways from our third quarter results.

Related to last year's -- last quarter's tail of 2 extremes, we continue to execute upon a growing pipeline with 2 consecutive quarters of record bookings. Our CSS, CTS and CGS businesses are performing at or above our financial targets with significant overperformance in CTS.

Our CMS business reported sequential improvement, and as we begin to realize the benefit of the wage-related price increases, we believe the improvement will continue. Other notable highlights include an overall year-over-year growth rate of 6.5% in the third quarter 2018, of which 3.4% was organic, when adjusted for foreign exchange and ASC 606.

Stronger year-to-date cash flow generation has reduced our net debt balances in 2018 by $85 million since December 31, 2017. In closing, our strategy to differentiate our solutions portfolio and improve our go-to-market platform is a catalyst for anticipated renewed organic growth in 2019.

Market demand for our integrated suite of customer engagement offerings is accelerating with record level bookings in the second and third quarter of 2018, and continued strong bookings expected in our fourth quarter. We're also pleased with the sequential improvement in third quarter revenue and operating income.

As we approach year-end, we remain keenly focused on delivering performance in line with the guidance we provided during our second quarter earnings. Maximizing our peak, fourth quarter volumes remediating the challenges impacting our CMS business and converting our strong bookings into profitable revenue.

We are setting up well for 2019 and anticipate full year higher operating margins on renewed organic revenue growth. I'll now turn the call back to Paul..

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

[Operator Instructions]. Our first question comes from George Sutton from Craig-Hallum..

Bookings is where I want to start.

They remain outstanding, and I'm wondering if you could walk through how much of that is driven by a larger funnel? How much of that is -- how much of that relates to your win rate?.

I think it's a little both. Our pipeline is dramatically bigger in 2018 than it was in 2017. We tie that to multiple factors, not the least of which is, we truly believe that we have our go-to-market strategy down significantly. We have rebuilt our sales force with a much more sophisticated group of people that know how to sell across the enterprise.

So the pipeline is quite strong. And then, I think because we've rebuilt the sales force and because we have more sophistication in sales and in marketing, our closing rates are better. And so I think that it's a combination of all that.

And also, it doesn't hurt to have a little wind behind our sails with an economy that is clearly quite strong right now..

Yes, and I'd say while it varies from quarter-to-quarter, the bulk of our bookings in the quarter were from the embedded base, which bodes well with the focus that we've made there. And when we're talking about the embedded base, we're seeing a win rates 70% and above. So in the quarter, I would say, in particular, win rates and embedded base.

I'd also say that the average size of the deal is growing pretty significantly, not that this is going to hold into the future, but in this year, we're seeing almost a 62% increase in the average deal across our entire bookings in terms of size.

Our top 3 deals were $85 million, which demonstrates we have many more -- what I would say, more mega deals in our mix that we're converting on.

And we continue to be very successful in the verticals that we're focused on, healthcare, retail, financial services, travel and transportation in the quarter and on a year, are showing very well in terms of vertical mix. And last but not least, we saw another couple of, what we call, hyper growth new logos or logos that are growing with us.

Hyper growth for us is focused on those logos that are, kind of, new economy disruptors and obviously have a chance to grow dramatically..

Given the growth of CTS, I'm just curious, your plans to grow the size of that segment, is it getting an in-ordinate amount of funding? I think, Regina, you might have mentioned realignment, I believe it was towards that group.

But does it require much capital, I'm just curious about the gating factors?.

No. My comment was on our CSS business, and that's the consulting business that we're obviously orienting towards digital. It is part of digital alongside CTS. But interestingly, it's -- this business, as you can see from the margin expansion....

We already made a very significant investment over the last few years..

Yes. So our investment was laid out in earlier years, and we're enjoying margin expansion, and not only margin expansion, we have, what I would say, in-ordinate EBITDA to cash conversion in this business, both coming from advanced payments from our clients and our ability to 0 finance the purchases of the technology that we make..

I also think that the business is starting to reach critical mass with $200 million in revenue just on the CTS side on an annualized basis. Obviously that's giving us significant scale. And then the last point is that, every one of our large institutional clients are on a journey to digitize their entire business and that's what these guys do.

They're in the business and helping our clients to transform their entire technology platform and provide them with the SaaS-based cloud offering..

The next question comes from Frank Atkins from SunTrust..

I wanted to ask first on the CMS business.

Can you highlight some of the margin drivers going into 2019?.

Yes. So first of all, this business, as you will see Q3 to Q4, has an enormous opportunity to expand that margins with volume.

We have good amount of fixed cost and the SG&A that [indiscernible] are on those expenses come down dramatically with every $20 million, $30 million, $40 million, $50 million of revenue, and we've see that in the past and that will happen again.

It will only happen in Q4, but these bookings are starting to get ramped and materialized from sales into revenue and get to -- they will begin to get to steady state in the first half of next year and that scale will enable us to expand margin.

The second thing is that, you're not seeing in Q3, and you'll see some of it in Q4, but by the time, you get to the end of the next year, the impact of 2 things. Everything that we've priced in 2018 is priced for very market-competitive wages. And so those -- that business will just right -- beside scale, it is also priced for our target margins.

And then second, as we lay in these pricing increases that we've got from clients, that will help us well. One of the point I would highlight is that, we are seeing in our mix of bookings recently and certainly in Q4 that we're getting to a much healthier balance between onshore and -- versus nearshore, offshore.

Ken, anything to add?.

No, that's good. Thank you..

Okay, great. That's very helpful.

And then you've had a lot of success with the SaaS and cloud offerings, are there any other areas of investments that you're looking at or places in the -- that you're seeing, particularly client demand that could fit well with the ecosystem you have there?.

Well, I think that we have told you folks that in the past that we're going to continue to invest in from an M&A standpoint, and we're going to continue to add more global footprint as it relates to just geographies.

So CTS is now providing its services in Europe, and we're very happy with what's taking place there, and our goal is to expand across the globe, so that our global footprint mimics across all of our capabilities.

That said, CTS today on clients that we're signing that are multinationals, we are in fact, servicing the entire globe with their SaaS solutions.

However, our deployment is right now really focused out of North America, Europe and then offshore resources in India, and now we're starting to build out more capabilities in other regions, where we can have more of the sales focus, et cetera, to capture more of the multinational accounts.

So I think that's where you would probably more likely than not see us expand. And then also on CMS, continuing to expand in a few more geographies that make sense in that clients are taking us to, et cetera. But overall, our strategy is set, and we're staying focused on the strategy that we have in front of us.

We're not really looking to add significantly more products. We think we've got the solution set that clients are looking for, and so our focus is really top and bottom line expansion across the globe..

The next question comes from Bill Warmington from Wells Fargo..

So a question for you on the backlog.

Just wanted to get a sense for you about where your confidence is coming from that the -- in terms of -- how the backlog has been developing? And how that's going to actually flow through to 2019? Why you have confidence that's going to give us an improvement in organic revenue growth?.

Well, I guess, I'd start out with the fact that we openly admitted that we had a slow start in first quarter. Second quarter was strong bookings. Third quarter was strong bookings. And we feel good about fourth quarter bookings.

So I think that the way our business works is that it's suffice to say that if you have a good second, third and you're bookings are where you want them to be, let's say, in fourth quarter, that flows through to the next year and that's what gives us confidence that the revenues will flow, the growth will take place, et cetera.

That said, as Regina's pointed out on multiple occasions, depending upon what aspect of the business that you look at, if it's a digital client, it typically takes up to 6 months to fully deploy on large-scale implementations, where we're doing 17 countries at a time, et cetera, for these large multinationals.

If it's a engaged client, meaning, CMS our CGS, it's not uncommon for us to take 9 to 12 months. And in some cases, on a recent bookings, it could take up to 18 months just because of the size of the overall deal.

And one of the things that we've always stressed is, our clients come to us because they know that we provide the highest quality available in almost all cases we're exceeding their internal operations.

And so consequently, we are not -- because we want to be able to stick to that quality level, there is only -- you can only roll these contracts out, hire these people, train them, et cetera, so fast. And so therefore, the pace of which we roll these contracts out does take anywhere from, like I say, 6 to 9 months.

But that's where we have our confidence. And then overall, I mean obviously, it's like any other funnel. You look at your overall pipeline and you're measuring consistently your overall pipeline that goes through tremendous amount of vetting of how does it look compared to the previous month, the previous quarter and the previous year.

And obviously, we're seeing trends that showing that our overall pipeline is continuing to grow. Then you look at your conversion rate off of that pipeline and how that conversion rate flows through, and we're starting to see the, kind of, consistency that we like to see.

Now that said, as much as I would love to tell you, that it's -- that there is exact precision.

The fact of the matter is that some of these sales that we're making because of the deal size, because of the complexity, because of the fact that they're spanning across all of our different entities, sometimes it takes longer to physically get the contract signed, the SoWs signed, et cetera, and they push into another quarter.

So I hope that gives you a little bit of insight. I only give an example lastly, because I didn't want -- I don't want people to think that this like a software sale, where the last 3 days of the quarter, everybody is going to get every single deal done, et cetera.

As you can imagine, there is a lot of implementation that takes place with pretty much all of our capabilities and all of our offerings..

So a follow-up for you. I wanted to ask about the M&A environment. There's been a lot of activity in the space. Although, we are hearing complaints about valuation.

You guys have a great cash flow, you have strong balance sheet, I'm just curious, if you're finding the environment as good shopping environment? Or may be given the gyrations of the stock market, maybe your stock is the best M&A you can do at this point? What do you think?.

What I would say is that there is no question at the market for everybody other than ourselves, based on where our stock prices, it's extremely toppy. That said, I think that it's about looking through a lot of hey to find that one needle.

And so what I would say to you is that we are cautiously optimistic that we can still get more M&A done in this market. The difference between our M&A and some of the other traditional competitors is, we're not trying to, per se, consolidate this industry.

Our goal is becoming much more of a technology play, and we're very happy with the consolidation that's taking place as we believe that it will lead to far better pricing rationalization as you have more sophisticated people in the industry that are pricing more responsibly so to speak.

So what I would say to you is that we realized that we have really, kind of, 3 levers to pull right now. Our highest priority is M&A, where it can be strategic and accretive. Our second is to pay a dividend, because many of our investors have asked us to pay a dividend.

And I want to note that thus far we keep increasing the dividend each time we've paid it out. And then, third is to purchase our stock back. We're in a little bit of a tough spot on the purchasing of the stock due to the fact that we would like to be able to make stock available to other people.

And if we keep purchasing the stock, then there won't be much stock left for people to take advantage of as far as a flow.

So what I would say to you is that we are looking at that, and we're discussing with our board the various different options, but I can assure you that we're going to do everything we can with our balance sheet to try to maximize shareholder value..

Thank you for your questions. That is all the time we have today. This concludes TTEC's third quarter 2018 earnings conference call. You may disconnect at this time..