Welcome to TTEC's Second Quarter 2019 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 second quarter financial results for the period ended June 30, 2019. 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, we also encourage you to read our second quarter 2019 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, which may occur.

Forward-looking statements are subject to 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 2018 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..

Digital and Engage. TTEC Digital is a global provider of digital transformation omnichannel contact center technology, systems integration and managed service solutions delivered through our Humanify cloud.

This subscription-based platform provides a comprehensive best-of-breed and fully integrated ecosystem of CX technology, including messaging, AI, RPA, analytics, cybersecurity and CRM in the cloud.

TTEC Engage delivers innovative global managed services for customer care, customer growth and fraud prevention by leveraging people, processes and technology to help clients acquire, serve, grow, retain and protect customers across every touch point in their journey. We're seeing strong performance across both segments.

The market is reacting favorably to our digital offerings, most notably, our Humanify cloud platform. For example, we worked with a leader in the retail industry, who is managing multiple legacy on-premise contact center technologies. We delivered our award-winning Humanify cloud solution that consolidated this contact center and CX technology stack.

The client significantly lowered its cost to serve and delivered higher total value. We also deployed self-service technology, which helped the client achieve an 85% improvement in first contact resolution and a dramatic increase in customer satisfaction.

In our Engage segment, we're benefiting from changing customer expectations and the type of work we deliver. We're seeing growth in our Digital mix represented by 5-year 38% CAGR for customer interactions in channels such as messaging, chat, social, SMS and e-mail. The complexity of interactions is also increasing.

As we remove less-complex interactions through automation, the engagements handled by our associates get more complex and add more value. In the last 5 years, the increase in our most complex interactions represents a 24% CAGR.

As a result, our associates are increasingly reliant on technology, real-time data, critical thinking and soft skills to serve the digital-first customer. Our bookings remained strong and diversified, and we are encourage the organic growth we're seeing, especially from our hypergrowth clients.

One example of this is a born-digital fintech company that has seen significant growth since becoming a client in 2018. We won the business because of our best-in-breed -- excuse me, best-in-class cybersecurity expertise and focus on customer satisfaction. Since then, we helped the company improve its customer satisfaction ratings by 58%.

As a result, our business with the client has grown by over 100%. And we're continuing our strategic partnership as it expands into new products and markets. We're also excited by the opportunity to continue expanding into new geographies and investing in additional capabilities to serve and grow with existing and future clients.

For example, we recently created a strong presence in Greece and are expanding elsewhere in EMEA, Latin America and Asia Pacific to add depth to our capabilities in all our major global markets. The impact of each of our segments is exponentially amplified with Digital and Engage converge.

With our integrated offerings, we take unique approach focused on humanizing digital by digitally enabling humans. For example, our associate assist solutions, monitor customers' interaction and scale relevant data to deliver critical information to associates in real time.

The solution creates an AI-enhanced self-training knowledge base that makes it easier for associates to serve customers. Our AI-enabled solutions learn from each interaction and continuously improves over time to enhance both the associate and customer experience.

One of our global automotive clients deployed Associate Assist as part of its CX improvement efforts. The solution dynamically served up next best action recommendations instantly as associate tell customers with complex questions.

Our associates' performance significantly improved and the client also saw higher customer satisfaction in first contact resolution. Each one of our solutions is designed to allow our employees to bring humanity to business. It's the cornerstone of our unique culture that puts employees first.

Everything we do from our work environment to our career development and community outreach is done to engage and empower employees so they can deliver amazing customer experiences. We provide -- we pride ourselves on our culture where employees are proud of the work they do and the iconic brands they serve.

Our industry-leading employee Net Promoter Score and Glassdoor ratings demonstrate that our culture sets us apart and allows us to deliver superior experiences for our clients and their customers. TTEC is at the forefront of digital consumer revolution.

We are growing and transforming existing client relationships and adding new clients, many of whom were born digital and need a proven CX partner to further propel their success. We are expanding our product portfolio to continually meet digital CX needs with new cloud and technology offerings.

Finally, we're creating new channel partnerships, expanding into new geographies and delivering new capabilities with companies that share our vision of servicing the digital revolution. In closing, we're encouraged by our continued progress, executing our strategy and our ability to deliver increasing value to our clients and shareholders.

On behalf of our executive team and our employees around the globe, we thank you for continued support. And I'll now turn the call over to Regina..

Thanks, Ken, and good morning. I'm delighted to share additional context on the details of our second quarter performance. There are many areas of the business that are exceeding our 2019 plans.

We're seeing growing demand for our CX technology suite of offerings, inclusive of our rapidly growing subscription-based cloud offering and increased volumes across our digitally enabled customer care and acquisition services.

We are positioned to deliver significant organic growth alongside anticipated improved profitability and cash flow generation. As Ken mentioned, our first half results and improved visibility into the second half have led us to raise our full year guidance. Ahead of my financial remarks, I want to comment on two items.

First, we started reporting our business in two versus four segments this quarter to better align our financial reporting with our internal management structure, business operations model and go-to-market strategy.

The two segments include TTEC Digital, previously our customer strategy and technology segments which design, build and operate tech-enabled insight-driven CX solutions in the cloud. And TTEC Engage, previously our customer management and growth segments, which provide digitally enabled turnkey customer care, acquisition and fraud detection services.

The second item includes our decision to deprioritize our learning facilitation consulting practice and focus our resources on higher-value strategy, analytics and digital transformation solutions.

This realignment resulted in a $2 million noncash impairment charge in the second quarter of 2019, which impacted our TTEC Digital segment on a GAAP basis. We continue to view our management consulting competencies as critical to our integrated solutions portfolio, especially as market demand grows for additional omnichannel solutions.

Turning to our bookings; in the second quarter 2019, new business signings were $122 million. On a year-to-date basis, bookings grew 5.5% with TTEC Digital growing 22.6% and Engage declining 3.3%.

The decline in Engage bookings is primarily related to lower seasonal health care bookings and intentional decision to improve the mix of permanent versus seasonal revenue in Engage.

In the quarter, we signed large, strategic engagements with new and existing clients, a number of which were integrated offerings within and across our TTEC Digital and Engage segments. We signed 6 new client relationships across multiple industries, including an additional government agency.

This agency selected TTEC Digital's cloud solution due to our expertise, scalability, reliability and proven experience within other government agencies in addition to TTEC now being FedRAMP certified. Turning to our second quarter 2019 GAAP financial results. We recorded a 12.2% year-over-year increase in organic revenue to $392.5 million.

Operating income was $22.9 million or 5.8% of revenue compared to 3.9% in the prior year. Restructuring and impairment charges totaled $2.5 million, primarily impacting on TTEC Digital segment for the reason discussed earlier.

FX impacted revenue by a negative $1.1 million and operating income by a positive $1.2 million, related primarily to TTEC Engage. GAAP earnings per share was $0.29 in the second quarter, an increase from $0.14 in the prior year. My non-GAAP comments primarily exclude restructure and impairment expenses.

A full reconciliation of our GAAP to non-GAAP numbers is included in the tables attached to our press release. In the second quarter 2019, adjusted EBITDA was $44.8 million or 11.4% of revenue, an increase from 10.1% of revenue in the prior year. Operating income was $25.4 million or 6.5% of revenue, an increase from 4.2% in the prior year period.

Earnings per share was $0.34 in the second quarter, an increase from $0.22 in the prior year. In comparing second quarter 2019 over the prior year quarter, after adjusting for foreign exchange and onetime ASC 606 amounts, our revenue grew 13.2% and our operating income grew 85%.

The growth in our revenue is related to the significant bookings growth in 2018, materializing into strong revenue growth in 2019. Our operating profit expansion is attributable to increased scale and pricing and improved segment, service offering and client sector mix.

Our reported tax rate in the second quarter of 2019 was 35% compared to 9.4% in the prior year period. The normalized tax rate increased this quarter to 24.7% from 19.5% last year due to higher income in the U.S., and associated U.S. tax impacts of foreign income.

Capacity utilization declined to 72% in the second quarter of 2019 from 76% in the prior year, a function of the mix of new sites that are early in ramping to their targeted utilization.

Capital expenditures were $15.2 million in the second quarter of 2019, up from $9.4 million in the prior year due primarily to the expansion of our facilities and technology assets supporting increased revenue. Our second quarter 2019 cash flow from operations was $41.3 million, up from $37.3 million in the prior year.

Second quarter 2019 DSO was 75 days, down from 84 days last year and 76 days sequentially. The Board of Directors approved a $0.30 semiannual dividend per share for $13.9 million, which was paid on April 18, 2019. The dividend represented an approximate 11% increase over April -- over the April 2018 distribution.

Turning to our second quarter 2019 segment results, which were presented on a non-GAAP basis. TTEC Digital's revenue was $78.5 million in the second quarter 2019, an increase of 49.6% over the prior year. Operating income was $9.7 million or 12.4% of revenue compared to 12.9%. Digital's operating income grew 43.6%.

The significant revenue growth was primarily due to higher demand for our digital cloud technology and service offerings and to a lesser extent the timing of larger product sales to support new and expanding programs. Our subscription-based cloud offering grew an impressive 196% over the prior year quarter and delivered gross margin growth of 220%.

Our cloud growth is benefiting from a growing addressable market for outsourced CX technology solutions, our expanding enterprise and government clientele and the multiyear recurring nature of our contracts. In particular, we are realizing the benefit of a 2-year government contract that we announced in our fourth quarter 2018 earnings call.

We are designing, building and operating an 8,000-plus licensed omnichannel contact center platform. Excluding this contract, our cloud-based revenue grew 51% in the second quarter 2019.

The TTEC Digital operating margins reflect the inherent operational leverage in our cloud-based technology platform, offset by additional sales resources to penetrate a growing addressable CX technology market and a $4.1 million decline in management consulting.

As explained, we are in the process of refocusing our consulting business to modernize and align its practices with our digitization strategy. Our 2019 guidance assumes management consulting will be dilutive as we execute against current contracts and restructure for 2020 and beyond.

Looking ahead, we anticipate our TTEC Digital business, excluding the large 2-year government contract that ends in late 2020, to perform in line with our longer-term target, including 15% to 20% top line growth, adjusted EBITDA margin in the 18% to 20% range and operating income margin in the 15% to 18% range.

The TTEC Engage revenue increased 5.6% to $314 million in the second quarter 2019. And operating income doubled to $15.7 million or 5% of revenue, a 240 basis point improvement over the prior year period. We are pleased with the TTEC Engage overall improved performance, which exceeded our second quarter revenue and operating income plan.

Revenue performance is due to strong bookings levels in 2018 and continued momentum in volumes in our customer care acquisition and fraud prevention services.

We also saw meaningful contribution from our focus on hypergrowth companies as well as program expansions and new lines of work from existing client relationships in health care, automotive, financial services and tech.

The operating margin is benefiting from pricing increases, lower operating and D&A expense-to-revenue ratios and improved program and staffing optimization. Our vertical mix is also aiding our margin profile as we grow our book of business in more profitable market sectors.

Of particular note is the second quarter performance in our growth services offering. Bookings increased over 3x, revenue grew 10.4% and operating income grew 36%. For the first 6 months of 2019 versus the prior year period, our Engage business, normalizing for foreign exchange and ASC 606 amounts, grew revenue 6.7% and operating income 94%.

In closing, it is evident that we are delivering the essential comprehensive CX technology and service solutions that are improving our clients' engagement with their customers, especially in today's disruptive digital world.

Our years of dedication and investment in transforming the company has differentiated our solutions portfolio and increased the value we deliver to our clients across the CX continuum.

We are pleased with the operational execution in our TTEC Digital and TTEC Engage segments and the improvement in our top and bottom line performance and backlog to the first half of 2019. As a result, we are raising our guidance.

Our updated 2019 estimated full year guidance, which excludes restructuring charges, impairment charges and PRG Middle East is as follows.

Revenue between $1.622 billion and $1.630 billion versus $1.614 billion and $1.630 billion, operating income margins between 7.8% and 8% versus 7.4% and 7.6%, adjusted EBITDA margins between 12.8% and 13% versus 12.6% and 12.8%.

To obtain our full year 2019 estimated revenue, adjusted EBITDA and operating income outlook by segment and fourth quarter contribution, please reference our guidance commentary in the business outlook section to the second quarter 2019 earnings press release. I'll now turn the call back to Paul..

Thanks, Regina. Operator, you may now open the line for questions..

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

Super results, guys.

So Ken, given that this is the first time you've broken out the Digital piece of the business, I wondered if you could walk through a little bit more of a description for folks relative to the target market for that offering, who you view as the comps, possibly the orchestration layer and how that works? But I think that would be helpful..

Sure, George. So really the focus of Digital is really in what I would call the enterprise and mega enterprise marketplace. We're tend to really be focusing primarily on the -- what I would call the Global 1000 and the Fortune 500. That's really been the legacy of the group for many, many years.

And as more and more of these large enterprises are adopting the cloud and coming off of their premise-based systems, they are looking to us to be able to put them in the cloud and connect them to other cloud offerings. So our clients are major health care providers, governments, banks.

Kind of just across the board, I would say the majority of our verticals that the Engage group focuses on are very similar verticals that the Digital group focuses on as well. The offering right now is serving our clients and their customers across 5 continents.

We have -- excuse me, I believe, 11 of our own data centers where we've created our own private cloud. And then from there obviously, we would be connected to the classic third-party clouds like Amazon and Azure and Google Cloud. Let's see what else can I tell you. I want to make sure I'm answering your question fully.

In the stack itself is a -- obviously a routing capability that's omnichannel that allows us to route everything from SMS text to chat to e-mail to all forms of third-party messaging to voice.

And then that is connected to everything from voice analytics, auto quality assurance, workforce management, CRM systems, third-party CRM systems, the likes of the Salesforces and the Microsoft Dynamics and Zendesk, etcetera.

We have spent a great deal of energy over the years in pre-integrating to the majority of what I'd call kind of the top 40 technologies that most large enterprises use.

And so therefore it allows us to launch on behalf of our clients and convert them of their premise-based system in a very expeditious mode where rather than taking a classic systems integrator, an Accenture, et cetera, 18, 24, 36 months to complete the integration, we're able to do so in a fraction of that time period with the integrations already being -- with many of the components already pre-integrated.

So it not only gets it done faster and lower cost, but it also reduces the risk of there being integration issues since we've done this so many times over and over and over again for these very large corporations. We enter into 3-year to 5-year contracts. They tend to be -- the contracts are paid on a per user, per month basis.

And then, of course, there is managed service capabilities if we're managing folks' clouds on their prem as well as their systems integration charges for integrating to their ERP system, their billing system, their OSS system, their CRM system, et cetera. So hopefully that helps explain.

The other part of your question has to do with who we see is competition. If we're asked this question often, and we clearly have competition, I would say that in in some cases it's some of the classic systems integrators, like the Accentures, like the IBMs.

But what's interesting is that, in many cases, they bring us the business, and we implement it for them. In some cases, its various different other omnichannel providers who have competitive offerings.

But more likely than not, it's not the classic companies that you see, the Five9s or the in-Contacts [ph] as they are more focused on the mid-market and on the kind of the start-up market, and so we tend to not bump into them since our product offering is much more geared towards highly scaled, very large enterprises where we're processing tens to hundreds of millions of interactions per annum.

So....

You may not bump into them, but the -- I think as the world looks it both your size and growth rate in that segment, I think they will obviously compare you to them. And that's what's so compelling when we look at the numbers. I wanted to move on to NPS scores, which I you know you have a lot of customers with very high NPS scores.

We certainly appreciate how important that is to customers.

Have you done anything relative to marketing, your ability to drive these very high NPS scores? Does that make its way into your sales process?.

So it makes its way into our sales process as it relates to the references that we give to prospective customers where they can contact our references and see the impact that we've had on their Net Promoter Score.

What really hasn't been done and at some point in time probably needs to be done is SAT metrics, which invented the Net Promoter Score with Bain really needs to start running the Net Promoter Score on the industry itself so that people can look at what our score is and compare it to other scores.

We do independently have a Net Promoter Score taken of our client base every 6 months. We also do the same thing with our employees because we think there is a golden thread to employee satisfaction and customer satisfaction. We've been doing that now for close to, I'd say, almost 10 years, maybe even a bit longer than that.

And the good news is that our management team is very focused on all the dials and all the levers of what it takes to try to drive that score higher and higher each quarter. But we're very pleased with where we are. Obviously, we're never satisfied. We always think we can do better.

But more importantly, what we think is the ultimate measure is what our clients' Net Promoter Scores where we're representing all of their customers..

Last question for me. If I look at your bookings which remain very strong. And to get a sense of your pipeline, which I believe remains very strong.

Are there sizable deals within there that we should be aware of both either in what you have booked or in what you see in your pipeline?.

Well, I mean, we're always working on sizable deals. As to whether or not we're going to win them is another story. So what I would simply say to you is, yes, we have a really good pipeline on both aspects of our business.

But it's no secret that -- and it's one of the reasons why we give annual guidance versus quarterly guidance that bookings can be chunky. And sometimes they get pushed into the next quarter, sometimes they get delayed even another quarter.

And so what I would just simply say to you is that we feel very good about our prospects and about our pipeline, and we feel that success begets success. And so we're excited by many large deal opportunities and now it's up on us to be able to try to get these deals closed and on-boarded.

And so I guess the answer to your question we feel pretty good about the pipeline..

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

Congratulations on a strong quarter. So I just wanted to ask about capacity utilization and maybe you could talk a little bit about how trends are going with new seats being added? You're adding a lot of business. You're adding a lot of seats.

How is capacity utilization trending today? And does that create an opportunity to increase margin further as that new business ramps?.

Yes, this is Regina. So what I would just say, as you saw, the utilization is down year-over-year. The driver of that is primarily the build-out of new sites, some domestically. But as we expand Europe, we're needing to standup space. European bookings increased 50% in the first 6 months versus last year.

And so as we get ahead of fitting out of the space, we do -- it has a bit of a burden on the utilization.

From a go-forward point our view, we see a nice uptick into Q3 as we continue to onboard permanent business as well as start to train and higher train and get into production agents for the seasonal work, and then you'll further see it peak at its max into Q4.

So we would say that during our peak quarters of Q4 and Q1, we will continue to see that utilization in the 80s. And continue to refine the portfolio both bringing on space as well as exiting space with a view of being able to maximize that metric. I will say though, it's important to look at many things relative to the real estate and the seat costs.

And we have seen from an empty seat costs. So when the seats are empty, the cost to the OI of that has pretty much halved at the half of this year. So while utilization is one metric, I think it's also very important to look at what is the cost related to that, and we see those coming down year-over-year..

Thank you for your questions. That is all the time we have today. This concludes TTEC's second quarter 2019 earnings conference call. You may disconnect at this time..