Welcome to TTEC's Fourth Quarter and Full Year 2019 Earnings Conference Call. I would like to remind all parties that you will be in a listen-only mode until the question-and-answer session. This call is being recorded at the request of the TTEC.

I would 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 fourth quarter and full year financial results for the period ended December 31, 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, for complete information about our financial performance, we also encourage you to read our 2019 annual report on form 10-K.

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 various risks, uncertainties, and other factors that could cause our actual results to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our 2019 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. In early December of last year, we took meaningful steps via marketed secondary offering to improve the overall liquidity in TTEC's public equity, as well as expand our institutional shareholder base and equity research coverage.

We would like to offer a warm welcome to our new and prospective shareholders, and equity research analysts. We are proud to report that 2019 was a record-setting year for TTEC.

As the leading global partner for the world's most iconic brands, we deliver a mission critical role in powering the experience economy, with the end-to-end solutions required for amazing customer experience. Our full year 2019 financial highlights clearly demonstrate success we're experiencing.

Revenue increased 9% to a record $1.644 billion, driven by highly reoccurring organic growth in our embedded base. Our subscription-based CX cloud business grew 172%. Adjusted EBITDA increased 11% to a record $209 million. Non-GAAP EPS increased 27% to a record $1.89 per share, and cash flow from operations increased 41% to a record $238 million.

In 2019, we grew our market share through a combination of strategic partnerships and acquisitions, geographic expansion, and the expansion of our digital-first integrated solutions. Our differentiated customer experience as a service platform has been a significant contributor to our top line growth.

Customers are demanding an end-to-end solution that only TTEC can offer, where we design, implement, and operate the full CX technology stack, while also delivering experiences at scale through our deep bench of CX professionals.

We expect our strong financial performance to continue in 2020, as our CX as a service platform continues to attract new clients and expand our wallet share with existing clients. Our position as a global leader in digitally transforming customer experience is rooted in a shortlist of fundamentals.

First, we serve a massive addressable market with compelling long-term growth fundamentals. We've built a differentiated CX as a service platform at scale with significant competitive advantages. Our track record of growth is driven by a loyal blue chip client base, a diverse set of channel partnerships, and strategic M&A.

And our business model delivers a financial profile with a significant percentage of reoccurring revenue, expanding profit margins and substantial free cash flow. Let me cover each of these in more detail. We operate within a sector that has a massive addressable market with compelling long-term growth.

TTEC is the only proven player able to serve the entire market with end-to-end CX technology and services at scale, including foreign digital disruptors, Global 1000 companies, and mega government agencies. TTEC has deployed hundreds of millions of dollars in the last decade, building CX capabilities organically and through strategic acquisitions.

These investments have significantly expanded our addressable market by almost $150 billion per annum just in the last 10 years.

With this expanded addressable market, our top line has benefited from the tailwinds presented by digital transformation, the migration of CX technologies to the cloud, the rapid adoption of intelligent automation, and the ever-increasing demand from customers for personalized, frictionless, and differentiated experiences.

TTEC's differentiated CX as a service platform is providing a significant advantage, as we can compete for market share. Our global leadership in CX as a service is demonstrated by our client list, which includes the world's most iconic and disruptive brands.

For example, we serve six of the top 10 healthcare payers, five of the largest automotive brands. We are a trusted partner to our clients, a partner they turn to for their most complex and challenging customer experience initiatives, clients for whom only the highest net promoter score and CSAT scores will suffice.

Our market-leading NPS puts us squarely at the top of their list of technology and service providers. With our differentiated CX as a service platform, we've seen a continued increase in the total number of client engagements, with a unified one TTEC digital and engage solution.

These holistic engagements span the entire customer experience lifecycle, including consulting, technology, and operations, and help enable mission critical outcomes for our clients and their customers.

Our track record for growth leveraging our existing client base, channel partners, and M&A is highlighted by our hyper growth sector focused on born digital, disruptive logos, including fintech, health tech, and curated e-tailers in just four years is now at a run rate of $300 million.

We've aggressively expanded our geographic footprint into fast growing regions. In 2019 alone, our AMEA region achieved a 73% increase in new business signings. You will see us further our regional expansion again in 2020. Through our Cisco channel partnership, TTEC is expanding its addressable market to include Cisco's millions of on-premise users.

These on-premise users are eager to migrate to the cloud, adopt more intelligent automation, and accelerate their digital transformation with TTEC digital. Overall, an estimated 10% of the market has moved to the cloud globally, providing a runway of 20% growth per annum in this market for the foreseeable future.

Both existing and future technology partnerships, such as Cisco, LivePerson, and Pegasystems will keep TTEC at the epicenter of a massive market opportunity, facilitating large enterprise migration to cloud-based CX technology.

Since 2010, we've successfully executed strategic acquisitions that have delivered a set of integrated capabilities, allowing TTEC to power the experience economy.

As recent examples, we acquired FCR to give us significantly more scale with hyper growth clients, and we purchased Serendebyte to add more scale to our market-leading intelligent automation solutions. Expect us to continue expansion through strategic acquisitions in the years ahead. Our business has a strong financial profile.

We enjoy high single-digit revenue growth, high reoccurring revenue streams in both digital and engage, as demonstrated by our plus 90% backlog, expanding profit margins, and significant free cash flow.

Given our total addressable market, differentiated solution portfolio, growing client base, and expanding sales and marketing platform, we see our three-year top line growth in the 6% to 8% range, EBITDA margins in the 14% to 16% range, and operating income margins in the 10% to 12% range.

Before I conclude, I want to briefly discuss how we're responding to the impact of the coronavirus. We are a global company, and began establishing response protocols 45 days ago. Our employees and client health and safety are paramount in our preparations.

Accordingly, we are taking appropriate precautions and initiating actions to ensure we fully educate and communicate, adjust policies to adapt to the heightened level of virtual delivery, and maintain clean offices and contact center environments.

As a standard practice, TTEC is operating as a proactive partner and exploring all avenues by which we can support our clients.

TTEC has one of the world's largest contact center technology infrastructures for voice and messaging in the world, and this allows us to quickly add capacity in an at-home environment or in alternative locations with very short notice.

Our support also includes helping clients establish and execute contingency plans across their entire operations with proactive solutions to help reduce risk by creating on-demand capacity and rapid deployment of technology to assist in the event of a crisis.

Our clients are responding extremely positively to our proactive dialogue with them, and we've been complimented on this on this comprehensive nature of our solutions. Over the past 37 years, we have regularly supported first responder organizations and government entities with large-scale disasters and response efforts.

This has included terrorist events, natural disasters, and pandemics, as well as 911, Hurricane Harvey, H1N1, bird flu, swine flu, just to name a few. Although we don't have a crystal ball, we feel as though we are as prepared as one can be in the current circumstances. I am bullish about the path ahead.

Given the powerful market tailwinds, combined with our long-standing reputation for quality delivery, history of innovation, unrivaled customer experience technology, and service platform, we have all the necessary ingredients to accelerate our growth and margin potential beyond 2020.

TTEC's business allows shareholders to benefit from profitable growth exposure to the pure play SaaS landscape within CX. We will continue to maximize shareholder value, focusing on innovation, channel partner expansion, and accretive and strategic acquisitions.

On behalf of our executive team, our board of directors, our global employee base, we thank you for your continued support. We look forward to updating you on the progress in the months ahead. Regina will now walk you through the key financial highlights to the quarter and year, as well as share our growth and margin outlook for 2020..

Thank you, Ken, and good morning. I'll start with a review of our 2019 fourth quarter financial results, followed by full year 2019, and then the 2020 guidance. My references to revenue are GAAP-based, while profitability excludes restructuring and impairment.

A full reconciliation of our GAAP to non-GAAP results is included in the tables attached to our earnings release. Our sales and marketing teams delivered $120 million in bookings in the fourth quarter of 2019.

Highlights include significant bookings in our automotive, healthcare, and financial services verticals, nine new client relationships, continued momentum in AMEA, and 100% growth in our hyper growth new signings, inclusive of FCR, which contributed 23%.

Revenue in the fourth quarter 2019 was $461.3 million, a 10.1% increase, of which 5.5% percent was organic growth. Digital grew 18.4%, driven by 129% growth in cloud and 14.8% in systems integration.

Engage grew 8.4%, driven by 89.6% growth in our hyper growth portfolio, inclusive of FCR, 15.8% in our automotive offering, and 11.9% and customer growth offering. Operating income in the fourth quarter 2019 was $43.1 million, or 9.3% of revenue compared to 11% in the prior year.

Digital operating income was $11.9 million or 14.4% of revenue versus 18.3% in the prior year. Engage operating income with $31.2 million or 8.2% of revenue versus 9.5% in the prior year.

Decline in the operating income origin is related to increased bonus levels in the fourth quarter 2019, in line with the improvement in our financial performance, the fees associated with the secondary, and planned investment in our new Webex CCE messaging and automation offerings in anticipation of the launch of these solutions in 2020.

On a full year basis, new business signing were $488 million versus $600 million in 2018.

The highlights include significant expansion in our automotive financial services and business services verticals, 105% growth in new logos, a 73% increase in AMEA bookings, a 21.5% increase in our hyper growth sector, including FCR, a 16.8% increase in customer growth, and a healthy mix of recurring and non-recurring signings with 71% recurring and 29% non-recurring.

The year-over-year decline in bookings is primarily related to the large shorter-term government contract that occurred in the fourth quarter of 2018 and the wind down of the PRG Middle East and facilitation consulting practices. For full year 2019, revenue was $1.64 billion, an increase of 8.9%, of which 7.6% was organic growth.

Our operating income was $129.2 million, up 23.3% from the prior year. The operating margin was 7.9% of revenue in 2019, 100 basis points of improvement year-over-year. Adjusted EBITDA was $9.1 million, or 12.7% of revenue, compared to 12.5% in the prior year period. And adjusted EPS was $1.89, up 27% compared to $1.49 last year.

Excluding the impact of foreign exchange and the one-time adoption of ASC 606, which impacted our engaged segment, revenue grew 10.2% in 2019, with an adjusted operating income margin of 7.3% versus 6.3% in the prior year.

We're pleased with our full year revenue growth is 8.9% and operating income of 23.3%, despite the $22 million restoration of our variable incentive compensation, without which operating income growth would have been 44%.

Our 2019 performance confirms our market opportunity, the momentum we are gaining in our solution portfolio and sales and marketing strategies, as well as the margin expansion we can realize as we increase our top line value.

Our digital segment grew revenue 27.9% to $305.3 million in 2019, with an operating income of $41.5 million or 13.6% of revenue, compared to 14% in the prior year. Our CX cloud subscription-based offering continued to perform well, increasing 172% in 2019 over the prior year period, and delivering a 44% gross margin.

Excluding the previously mentioned large short-term government contract, our cloud offering grew 60%, with a 42% gross margin, including both large enterprise and government agency engagements.

Our systems integration practice is benefiting from upfront cloud integration, as well as noteworthy follow-on volumes, as clients expand and upgrade their CX technologies. Systems integration services increased 18% over the prior year, and delivered a 42% gross margin.

Several factors are facilitating the growth of our CX cloud solution, a growing market for CX technology, our differentiated turnkey approach to delivering highly scalable feature rich CX platforms, including our recently announced channel partnerships with Pegasystems, LivePerson, and Cisco, in addition to the acquisition of intelligent automation CX solutions provider, Serendebyte, and increased recurring revenue from multiyear take or pay agreements.

Turning to our engage segment, revenue increased 5.4% to $1.34 billion in 2019, with operating income of $87.7 million, or 6.6% of revenue, compared to 5.6% the prior year. Excluding the impact of foreign exchange and one-time adoption of ASC 606, revenue grew 6.7% with an adjusted operating margin 5.9%, compared to 4.8%.

Last quarter, we highlighted a growing contribution of diversified offerings that are delivering high growth, high margin results. In our engage business, to subset includes our customer growth, fraud detection and prevention, work from home, automotive, and hyper growth solutions.

Collectively, these offerings comprise 543 million of engages, $1.34 billion in revenue, and have a growth rate of 29.1% versus the overall engage revenue growth rate of 5.4%. Cash flow from operations improved significantly to $238 million from $168.3 million, a 41% increase over the prior year.

The increase is attributable to improvement in our cash-based income and working capital. In addition, our DSO improved each quarter throughout the year, declining to 66 days in the fourth quarter of 2019 from 77 days in the prior year period, and 73 days sequentially.

Capital expenditures were $60.8 million or 3.7% of revenue for the full year 2019, compared to $43.5 million or 2.9% of revenue in the prior year. The increase is attributable to the continued build out of our cloud platform and our site diversification in Europe, the U.S., and India, all of which are in line with new business growth.

Our normalized tax rate was 22.9% in 2019 versus 25.6% in the prior year. The reduction is related to differences in jurisdictional mix of income and various changes in certain tax rates and credits. Capacity utilization was 74% in the fourth quarter of 2019, down from 80% in the prior year period, and up from 70% sequentially.

The year-over-year decline in capacity utilization is tied to an increase in capacity for a handful of large bookings with long-standing clients. Additionally, and as planned, we have been reducing our U.S.-based seasonal business, and are in the process of aligning our seasonal capacity.

As we ramp the new business and complete the rationalization of seasonal capacity, we expect our utilization to get back to the high 70s in 2020.

We made noteworthy progress in 2019, and are well positioned to further advance our top line growth and profit expansion in 2020, taking full advantage of our market opportunity, our high growth, high margin offerings, our new omnichannel messaging and intelligent automation solutions, the market adoption we are gaining in Europe, our 2020 92.3% backlog as a percentage of revenue versus 91.6% in the prior year, the reduce churn in engage, an elevated pipeline, the proven expansion of our profit margin with pipeline scale, we continue to see 50 basis points to 75 basis points of margin expansion for every $100 million of additional revenue.

And last, we have reshaped our digital consulting business, including the elimination of the facilities in many Middle East practices, while representing a year-over-year reduction in digital's revenue of $17 million. In exiting these practices, we enable digital to focus on maximizing more strategic solutions.

The midpoint of our 2020 guidance is laid out in our earnings press release, which excludes restructuring and impairment charges, is as follows.

$1.765 billion in revenue, an increase over the prior year of 7.4%; adjusted EBITDA of $236 million, an increase of 13% over the prior year; and 13.4% of revenue compared to 12.7% in the prior year; operating income of $146 million, an increase of 13.1% of the prior year and 8.3% of revenue compared to 7.9% in the prior year; earnings per share of $2.06, an increase of $0.17 or 9% over the prior year.

Other relevant guidance metrics, capital expenditures, is estimated to be between 3.6% and 3.8% of revenue, of which approximately 65% is growth oriented. A full year effective tax rate between 25% and 27%, and a diluted share count between 46.9 and 47.1 million.

To obtain our first and second half 2020 mix of revenue, operating income, adjusted EBITDA, and EPS at the consolidated and segment level, please reference our commentary in the business outlook section to the fourth quarter 2019 earnings press release. 2019 was a milestone year.

We exceeded many of our financial goals with record revenue and profitability, completed a strategic acquisition, entered into new and expanded technology partnerships, increased our CX cloud market share, and added meaningful new hyper growth and Global 1000 clients across our expanded global footprint.

We are pleased with our 2019 performance, and anticipate continued profitable growth in 2020. I'll now turn the call back to Paul..

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

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is coming from the line of George Sutton from Craig-Hallum. George, your line is now open..

Thank you. Nice results and guidance. So, I'm curious, now that we've added Pega as an additional go-to-market partner, if we could just step back and talk about the Cisco, LivePerson, Pega potential market impacts as you're going to market with those partners.

I'm thinking about it in terms of an expanded TAM, and also potentially a number of touch points that you're hitting in market..

Hi, George.

As I think we already commented in our script that we feel like we've expanded our market opportunity significantly through all of the additions and focus areas, I think that really the best way of describing it is that we don't have a single client that's not looking for some form of automation, and most of them are looking for intelligent automation.

In most cases, most of our clients historically have worked with classic systems integrators, many of which are highly qualified systems integrators. But the fact remains that most of them have very little CX experience and don't really understand the entire CX ecosystem.

And so, consequently, our opportunity and the reason why Pega wants to work so closely with us is because they view us as the foremost experts in CX technology implementation, the same with LivePerson, and the same with Cisco.

And so, our goal and our intention is to allow or make these relationships with both LivePerson and Pega in the medium and long-term to be equally as successful as our Cisco relationship has been.

And so basically, we are, in many ways, utilizing a lot of the past capabilities that led us to be as successful as we were with Cisco, and we're applying them to Pega and applying them to LivePerson.

Additionally, we have truly doubled down in digital, and we have, I would say, added some significant management leadership in the digital area, and with our new president of digital, who has hit the ground running hard, Jonathan Lerner, and multiple other senior executives that have been added all in the go-to-market area, all in the channel partnership area.

And so, what I would just simply say to you is that we are highly focused on developing these relationships, working in concert with them on their pipelines, and helping them implement their backlog..

Great.

One other thing, if I could, relative -- and I don't know if this is naive, but as we think through the brands that are wanting to continue to reach out and touch their customers and potential customers, I would think more of that is going to be done remotely with a virus concern, meaning I'm not going to go to a retailer necessarily, but a brand is going to continue to want to try to find me.

I would think that would be a net benefit for you. But I don't want to be naive in saying that. So, I'm curious, your thoughts..

Look, this is -- you're asking the question that we are literally debating almost 10, 20 times a day throughout our organization. There's no question about it that food delivery services are going to see a major uptick.

And so, certain logistic aspects and e-tailers, we think are going to see a major uptick as people make conservative decisions to, shall we say, travel less, staycation, stay more in their own environment, et cetera, et cetera. The fact of the matter though is that I was with two leading scientists last night, and we just don't know.

And so, what we're doing is we are absolutely working with every one of our clients and helping them so that they can get through this situation. We're preparing for the worst. We're hoping for the best.

And although there might be an opportunity to make lemons out of lemonade, the fact of the matter is that I'm sure there'll be some small amounts of offsets in other areas. And so, we'll be very pleased as long as everything just equalizes. I do think that you're going to see more and more virtual need.

And we believe that we are more qualified than anybody in the market space because of the amount of infrastructure that we have, the 11 data centers that we have that are providing cloud-based solutions to hundreds of thousands of workstations across the globe.

And that our ability to spin up tens of thousands of additional workstations in the cloud on very short notice, actually, not only does it give us a huge advantage, but frankly, we feel that it puts us in a market position to actually accept business that maybe we would not have even known about prior to.

But because there is a higher sense of awareness with this current situation, you have a lot of corporations that are making preparations, and we're happy to be there to assist them..

Perfect. Thank you..

Thank you, George..

Thank you. Our next question is coming from the line of Michael Latimore from Northland Capital Markets. Your line is now open. .

Great, thanks. Congratulations on the great year there. I guess in terms of the -- one of your higher level strategies is to sell both digital and engage to customers.

I guess, as you look at the pipeline, what percent of the pipeline do you see customers desiring or viewing both sides of your business at this point? And where was that a couple years ago?.

So, a couple of years ago, it was probably zero because a couple of years ago, we were representing that we had the ability to do it. But the fact of the matter is that we had both organizations approaching the client almost separately to create one. I would say today, it's very significant.

And I would say that we're really excited because although it's early days in us providing a one TTEC solution, we're seeing 40% plus of our pipeline now, and more importantly, the deals that we're winning are more in that area.

We just won a significant deal in let's just say the travel industry that's an end-to-end deal that requires all the technology, as well as the ongoing execution. We recently won a few different automotive deals that were both end-to-end, very large scale, multi-country, etcetera.

So, what I would say to you is that I want to be -- I always want to be incredibly transparent. I tell you that it's 40% right now.

I'll be surprised if next quarter, it's not more than 40%, due to the fact that by next quarter, our digital sales team will be in a much different position than they are even today, as they are continuing to ramp up, and as they are collaborating more and more with our embedded base.

And so, I think that we feel very comfortable that in a medium term, it'll easily become 50% plus of our pipeline..

Yes, I would just add that -- the 40% is dollars. They tend to be the bigger deals, and if you look at our top three deals in fourth quarter, which add to almost $60 million, all three of those have multiple elements from both our digital and engage business..

Okay, great. And then the DSOs improved over the last year.

I guess, what was the main cause of that? And does that trend continue this year?.

Yes, about half of that improvement is due to the fact that we now factor. The only reason we factor -- we have very strong balance sheet. But the only reason we factor is that the rate of interest on the factoring is lower than the rate of interest on our credit line. So, we get some pick up there in terms of reduction of interest expense.

And the balance is just really working with our clients. We were heavily reliant in a number of clients to receive data from them at the end of the month in order to bill. And so, driving efficiency and speed in that process and getting over-focused on it has really helped us to bill earlier, and therefore, pick up improved DSO..

Great. Thanks a lot. Good luck this year..

Thanks, Mike..

Our next question comes from the line of Maggie Nolan of William Blair. Your line is now open..

Good morning. On the digital side, you gave some breakout of cloud versus systems integration.

How are you looking at those levels of growth? Is that kind of a sustainable level that we should be thinking about going forward? And then how did that compare with your expectations for the quarter?.

When we look at the guidance, you'll see the midpoint of our guidance and our digital business is about $300 million. It was $305 million last year. So, we must remember that we have a step down of almost $25 million, and that's shorter-term government contracts. We're exiting the facilitations of business, which was $12.5 million.

We're exiting the PRG Middle East practice, that's $5.2 million. And our product is coming down significantly from around $24 million to around $2.5 million because while we had two big sales of product last year, we just don't expect that into the future, as clients prefer a cloud option to an on-prem option.

When you take those out of '19 and look at the numbers, right, there's about a 23% growth inferred in what I would call our strategic consulting, our recurring revenue business, primarily the cloud, and our systems integration. And then, I'll just repeat what we said in the past.

We believe that this business is, X some of this noise that I just talked about, a 15% to 25% grower, and we're going to see the cloud at that 20% plus, and we expect to see the systems integration continue to grow 15% or so over the next couple of years.

Does that help?.

Yes, thank you. And then it sounds like from the prepared remarks that international expansion is a continued priority in 2020. Can you share a little more detail on kind of timeline level of investment, expected ramp, and any kind of changes in that strategy, just given the current state of the world? Thank you..

Yes, I mean, I think the trains have kind of left the station on multiple countries that we will be bringing online in the very near future. So, to answer your question, no, there has not been any change in strategy.

As to whether the physical implementation slows down just based on what takes place in some of these geographies, I'd say that it would be premature for me to say. But right now, our intention is to increase our near shore and our offshore execution capabilities so that we have that much more diversification for our clients.

We think that it's something that is -- not only do we -- is it something that we feel is important, but it's something that our clients are actually asking us to add in particular countries, etcetera. So, I think the bottom line is that they will be open in 2020.

As to whether or not they get delayed a month or two or three, let's talk about it next quarter, and I'll give you that answer. But right now, we have no intention of slowing down the implementation of those locations..

Yes, and I'll say, geographically, what our guidance relies on is continued growth in Europe. We're seeding Asia pack, but we had no significant plans for in 2020 to go long on Asia pack from a client acquisition, and therefore, obviously, you have to follow with the delivery footprint. So, no exposure there.

And I would just also add that I feel good about what we've kind of ingested into the guidance relative to Europe, largely because of the backlog that we have there against our revenue target, that AMEA group 72% its bookings in 2019. And we'll see that yielding now into 2020 in terms of revenue and profit..

And then you ask a question about capital. Our capital expenditures are in our forecast, and they're baked in. So, the capital that you see takes into consideration the new locations that are that are opening. Offline if you want to get further into that detail with Regina and folks. I'm sure she can give you a bit more detail on that.

But nothing that -- there's no additional CapEx that's planned beyond what we've forecasted..

Yes, it's 3.6% to 3.8% of revenue, and that would include all the expansion we would need for the digital business, which is getting increasingly more capital light, and our engage business. Very good. Thank you..

Thank you, Maggie..

Thank you. Our next question is from Bryan Bergin of Cowen. Your line is now open..

This is actually Jared Levine on for Brian. Good morning.

Can you start off talking about your expectations for gross margins and SG&A for kind of 2020, and kind of the drivers behind each of those?.

Yeah. So, you're seeing almost 100 basis points of improvement in our margins year-over-year, and that is going to be driven by scale. We benefit from scale tremendously in terms of our margins. We have a lot of fixed costs in our cogs and our G&A.

What is happening in the cogs is we're getting better utilization of our kind of fixed costs people, our technology assets, and our facilities in the engage business. What's happening with SG&A is we're continually improving the G in that, and quite frankly, investing more.

I mean, we'll probably invest another $12 million to $14 million in total across the two businesses to continue to ensure that longer term, we can hit that 6% to 8% overall organic growth rate that Ken talked about in his script. Happy to go into more detail, but I think those are the key things..

Okay, great.

And what's your expectations for inorganic contributions for fiscal year '20 now?.

If you look at that $1.765 billion, it will have about $70 million of incremental -- it'll about $70 million of inorganic, and balance will be organic. .

Great. Thank you, guys..

Thank you..

Thank you. Our next question is coming from the line of Jason Kupferberg of Bank of America. Your line is now open..

Hi, this is Kathy on for Jason. I just want to talk a little bit more about that organic revenue growth you guys called out. Just sort of wanted to know what you expect for the revenue growth cadence to play out in 2020 from that sort of 5.5% level we saw in 4Q. Thanks..

So, if you look at the $70 million, that's about 4.2%. So, in the midpoint of our guidance. Let me let me just step back.

If you heard my comment earlier, we're losing about $60 million of 2019's business, right, based on the reduction in that shorter term government contract, the exit of our facilitation business, the exit of our PRG Middle East practice, and the reduction in product, right? So, when you when you take that $16 million out of our $1.644, right, it's important that you take that into consideration because those businesses are not going to be there, or just based on market forces, for example, product has gone down.

So, just kind of giving you some information there. If you back out the $60 million from last year, and then you look at the $70 million of inorganic, which is a combination of FCR, right, the balance of FCR, we had about $19 million of FCR in 2019. So, we have the balance of that. Surrounded by it as an acquisition is really immaterial.

We bought that platform so that we would have a platform for BPM and RPA in our digital business. .

Got it. Thanks so much. And just one more follow-up. It's sort of just high level.

How are you guys thinking about the trade-off between growth and margin going forward? Do you sort of -- think for one year, it will be more accelerating top line growth, and then margins will take kind of a backseat? And then just how you seen that trade off play out in the future? Thanks..

Well, I think we've used both as critically important, and although we do believe that top line growth is one of our higher priorities, the fact of the matter is that we have an obligation to our shareholders to deliver on the margins that we're forecasting.

So, I guess that's my way of saying to you that we are balancing between the two, and it goes without saying that if we were probably a private company, we would maybe double down to fit more and increase our SG&A to drive the top line even faster.

But we think that we're in a nice sweet spot right now where we can grow the top line nicely, organically, as well as expand our margin.

So, I apologize if I'm not giving an exact answer as to what's the highest priority, other than to say that our highest priority is to deliver on the outlook that we publish, and that we that we put forth, and that we have a high degree of confidence in that.

Regina, do you want to add anything to that?.

Yes, I mean, I would say that there's probably 1.5 points of margin in 2020 being eaten by a stepped up investment in bringing these new omnichannel messaging and intelligent automation offerings to market, putting the leadership in place for those partners, putting the leadership in place for a head of digital, and quite frankly expanding the sales force domestically and in Europe.

So, when all is said and told, what we're able to create from those investments in this year versus those costs is probably eroding about a 1.5 points.

Our hope is we expect that that will drive significant bookings, which will lead to higher amounts of backlog going into next year, and that'll naturally then flush itself out as we scale the revenue against these costs and come back to the longer term EBITDA NOI margins that Ken spoke of..

Perfect, thanks for taking my question..

Thank you..

Thank you. Our next question is coming from the life of Josh Vogel of Sidoti. Your line is now open..

Thank you. Good morning, Ken and Regina. When we think about your digital platform and capabilities, Ken, you said you now service the market end to end with scale, and we know that technologies are always evolving.

But how do you feel about the platform and offerings today? Are there still any holes you want to fill? And is it possible that you could do this organically, or would that only be through acquisition?.

Well, I think our intention in what we're doing -- we're doing both. So, as we keep adding more and more engineers, we are adding more specific expertise in a multitude of areas that have the potential to touch our clients' embedded systems, as well as the future systems that they are looking to focus on. So organically, we're doing that.

We've recently announced our new technology development hub in Hyderabad, which is now in full operation, and opening, and win at full scale will be in excess of over 400 engineers. I believe 200 have already been hired, and we're rapidly hiring the next 200.

We also are expanding in our Chennai operation as we speak through the acquisition of Serendebyte, and we're also hiring engineers in our Austin location, et cetera. So organically, we are absolutely adding engineers and growing. As far as the actual technology voids, what I would just say is that you're right. This is a rapidly evolving area.

You'll notice, though, that what we have done is we tend to bet on the technologies that have the most mature customer basis. And there's a ton of intention behind our strategy as to why we're doing what we're doing. We have tried to get involved with some of the more startup in nature companies.

And unfortunately, A., their technology is not mature enough; B., it definitely doesn't have proof to scale at this point in time; and C., they just don't have the internal resources to support a company of our size and our scale.

Because virtually all of the clients that we go after are up market, large enterprises, mega enterprises, and governments, they want companies that have proven track records and technologies. And so, there is a lot of logic to going with LivePerson that has over 60% of the chat marketplace.

A lot of logic going with Pegasystems, which is deeply embedded in a substantial amount of our embedded client base, and that they need more resources to expand capabilities like next best action, robotic process automation, etcetera.

So, what I would say to you is that yes, you will hear about additional acquisitions, and yes, they will cover other aspects of our clients' technology portfolio, but my commitment to you is that all of it will be around the customer experience spectrum, and that we will not go astray and focus on accounting systems or things that have no relevance to our business, which is what we think makes us unique and makes us special, in that we are so laser-focused on customer experience, customer engagement, customer growth, and helping our clients build trust through fraud prevention and detection.

And so, all of our investments are going in those areas. They're going to stay hyper-focused in those areas, and we're convinced that this is an area that we can really own because we've been at it for so long. We've made such significant investments in this area, and we don't plan on slowing down..

Thank you for all the insight there. Just one other. We're seeing very impressive growth in so many of your end markets or sectors today. But telecom is still one of your largest end markets. And we've heard from some competitors about some headwinds in that arena.

Can you talk to what you're seeing within your existing base? And is this a market that could and should grow in 2020?.

Well, first of all, what I would tell you is that telecom is not an intentional focus of ours at all. We probably have the least amount of telecom concentration of anybody in the industry. It's currently 18.5%. At one point, I'll remind you, it was as high as 50%. So, we feel really good about where we are with the telecom space.

What I would also say to you is that our goal to grow the business is in many other high-growth sectors that have much more profitable potential, and that are not in as highly competitive a marketplace as telecom is. My father taught me a long time ago that when you're providing service, you follow the margin of the company that you're working with.

So, what I would say to you is that on one end of the spectrum, we have the lowest concentration. The truth of the matter, though, is if you ask me whether or not we have more potential to expand within our existing telecom portfolio, I have no doubt that we have clients that would like to expand with us.

And the question will be whether our management team wants to take the business that they want to offer us. It will all boil down to dollars and cents, and whether it meets our profitability expectations. And if it doesn't, then we'll allow our competitors that are willing to work at a substandard margin take the business. .

All right. Thank you. Good luck in 2020..

Thank you so much..

Thank you. Our final question comes from the line up Bill Warmington from Wells Fargo. Your line is now open..

Good morning, everyone. So, I had a couple questions on the constant currency organic revenue growth. For the fourth quarter, it looked like 5.5% organic. It looked like 1 point from FX. So, just to make sure, a 4.5% constant currency organic growth in fourth quarter. And I wanted to also apply that to the 2020 guidance, just to make sure I followed.

It looked like organic was coming in around 3%. Just wanted to see if there was any FX built into that 2020 guidance..

Yes, so, I think that again, what you have to take into consideration at the surface, depending on the range of the guidance, it's 3.5% to 4%. But that includes the fact that we have exited certain revenue streams that I spoke to.

So, when you look at it with those revenue streams, what I get, right, is that our guidance at the midpoint is $1.765 billion. If you take from $1.644 billion that we did last year, that $60 million, you get to $1.584 billion. So, that's $181 million of growth, $1.765 billion versus $1.584 billion, which is around 11.4%.

We have 4.4% of that in inorganic, that leaves about a 7% growth on kind of an apples to apples in terms of the businesses, and products, and offerings that we have on a go-forward basis. At surface level though, we're around a 7.4% growth rate, and we are around 4.4% of inorganic. That leaves 3%, depending on where you are in the range. .

Okay. So on $60 million, you're backing out of 2019.

So, what would be normal annual revenue attrition in dollar terms? What would be normal?.

As I said earlier, I laid it all out..

I'm just saying it's a business that has attrition, and it's understanding every year you guys have some attrition.

What's kind of a normal level of attrition?.

It's not about attrition, Bill. It's not about attrition. We exited our facilitation business. We exited our business in PRG Middle East. We have a short-term, large government contract, which is an outlier. It is a very large, short-term contract in a business that is solidly three-year to five-year take or pay contract. So, you have the numbers.

You can do the math, and draw the conclusion..

Okay. And then a second question on home agent capabilities. That seems to be something that clients are looking for, given the coronavirus.

How many agents do you guys have that are doing at-home work?.

Our at-home business spans from 6,000 to 10,000 associates. It typically spans up to 10,000 or 11,000 during seasonal periods. We have been making preparations for the at-home business to be able to span up dramatically above that.

And so we believe that we can take our bricks and mortar associates in many locations if and when necessary, and with, of course, the permission of the clients, and in cooperation with our clients. And they could work at home, unlike many of our competitors, who have to go to third-party technology companies, et cetera, we're set up for today.

It's in the cloud, and we literally just turn it on. So, we could certainly add tens of thousands of workstations..

So, at-home FTE right now is running 6,000 to 10,000, it sounds like. .

I actually couldn't tell you the exact number right this minute. I just know that historically, that that's what they've been averaging in that range. And again, it's very seasonal. People typically use a lot of our at-home capabilities for seasonality.

So, they go up and down, depending upon whether it's tax season, or healthcare season, or Christmas time, or post-Christmas returns. I could go on, and on, and on..

So, any exposure to China worth mentioning?.

No. We have no operations and no businesses in China. And so, we do not have any -- or Korea or Italy. So, no exposure in those areas. .

Excellent. All right. Thank you very much..

Thank you, Bill..

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