Q3 2019 Earnings Call
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Thank you freestanding married the confidence will begin momentarily until such time, you'll hear music thinking piece in D. standby.
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Welcome to <unk> tax third quarter 2019 earnings conference call I would like to remind all parties that you will be enough listen only mode until the question and answer session.
This call is being recorded at the request 50 tax.
I would now like to turn trickled over to Paul Miller de Texas, Senior Vice President Treasurer, and Investor Relations Officer. Thank you Sir you may begin.
Thank you and good morning.
She tech is hosting this call to discuss third quarter financial results for the period ended September Thirtyth 2019.
Dissipating on today's call or Ken Tuchman, our chairman and Chief Executive Officer, and Regina Paolillo, our chief financial and administrative officer.
Yesterday to tax issue press release announcing his financial results. While this call will reflect items discussed within that document. We also encourage you to read our third quarter 2019 quarter 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 from what's the opinions at the state 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 describe today.
For a more detailed description of our risk factors. Please review our most recently filed quarterly report on Form 10-Q , and annual report on Form 10-K .
Replay of this conference call will be available on our website under the Investor Relations section I will now turn the call over 10, Tuchman, Gtx, Chairman and Chief Executive Officer.
Thank you Paul and good morning to everyone.
We're excited to share the meaningful progress we made this quarter executing on T. tech strategic roadmap to pioneer the CX categories.
Evolution from legacy contact centers to digitally enabled customer experience hubs.
Or as we'd like to call it.
Driving the disruption with digital CX.
We continue to deliver strong results and achieve our key financial performance objectives in the third quarter in fact in 2000 2019.
Setting up to be a record year for GTECH in terms of revenue and profitability.
Year to date through September revenue increased 8.5% to nearly $1.2 billion.
All of which over 99% is organic.
Adjusted EBITDA increased 17% to $146 million.
Adjusted operating income increased 46% to $86 billion.
And adjusted EPS increased 44% to $1.24.
GTECH digital grew just shy of 32%.
And when adjusted for FC six so six and FX checking gauge grew 6.5% year to date.
The strategic interplay between our digital and engage solutions is a marketplace differentiator that creates a virtuous cycle with the power to further enhance organic revenue growth and margin expansion.
We're also fortifying our integrated offering through a strong pipeline of accretive accretive strategic acquisitions and meaningful new digital channel partnerships to deliver a truly differentiated customer experience for our clients.
Our focus in these areas reinforces our ability to deliver strong top and bottom line growth objectives in 2020 and beyond.
I'll now provide further context around these main focus areas for the company.
Gtech's expanding addressable markets represents a massive opportunity.
The overall addressable market for T. Techs technology and services is $460 billion GTECH engage us at the center of growing off of a growing $360 billion global market through at GTECH digital we add an incremental $100 billion of annual opportunity that is expiring.
Anything significant growth.
We are seizing the opportunity to be at the center of digital disruption and lead with innovation across GTECH digital Antitax engage.
What differentiates GTECH is that for 37 years, we've been handling billions of customer interactions on behalf of our global 1000 clients across six continents.
We've consistently proven that we know how to listen to the voice of the customer in the largest and most complex enterprises in the world.
We design and implement customer journeys to eliminate frustration and friction and to deliver a federal overall experience across all touch points in the customer lifecycle.
Our in our industrial strength.
In digital is embedded in our Humana Fi enterprise cloud.
Delivering a full ecosystem of pre integrated industry, leading customer experience applications.
These prebuilt app integrations span hundreds of apps ranging from the largest CRM to market Harden best of breed technology solutions, the tech fully integrates into our clients backend systems.
We go to market with our Humana Fi cloud offering in part with with key strategic partners like Cisco.
Where today, we have significantly deepened our 20 year relationship as a premier technology partner to enable large enterprises to move billions of customer interactions to the cloud over the next few years.
We believe this newly announced partnership will be the tipping point for the 80% of the CX industry that is yet to shift to the cloud.
Our expanded Omnichannel end to end offerings with Cisco includes Humana Fi apps like customer journey analytics mapping in orchestration tools AI enabled conversational messaging digital proactive customer outreach embedded speech and sentiment and.
Now lets us using AI and the ml.
And real time associated assistance utilizing AI to name just a few.
These proprietary building blocks are the foundation that give our clients the confidence to move from legacy premise based solutions to our Humana Fi enterprise cloud.
Enabling faster deployment and dramatically reducing integration risk at a lower overall cost to serve.
As the delivery of customer engagement and gross solutions has become infinitely more complex our customers.
Who again, our some of the largest companies in the world.
Have found it increasingly challenging to do it on their own.
This is why they consistently turned to our industrial strength engage offering to design build and operate their portfolio of CX technology solutions.
We have developed.
A proprietary approach to humanizing digital that we call culture CX.
The strategy has been consistent first we assess and design optimal customer journeys then we built implement and operate those solutions at global scale.
Said another way, we prioritize full automation for basic task and move higher value complex interactions to humans augmented by artificial intelligence to drive the few protect those to the full potential of an amazing and differentiated experience.
One recent clients example is a high performing fintech disruptor that outgrew it enhanced customer support and is working with us to scale globally.
We are delivering digital support on three continents exclusively through INAP messaging.
This digital native client was looking for an innovative approach to customer support and wanted a partner who's culture could match its own fast paced energetic atmosphere, we implemented an agile way of working that scales up to match the clients exponential growth trajectory.
Through this work we've seen our business with with.
This client more than doubled since its recent inception.
Our recent purchases purchase of Fcr is a fantastic way for engaged to win even more business like this.
Accessing the fastest growth areas of our addressable market with leading customer with with with leading customer experience partner focused on supporting more than 80 hyper growth and emerging digital brands.
The combination of our go to market strategy for digital lending and engage is when we combine the two platforms into a fully integrated CX as a service offering.
Here, we provide an end to end solution for customer experience engagement and growth.
What sets T. tech apart as the true disruptor of the CX category is our ability to deliver the latest cloud based CX technology and integrated at scale within current complex client environments spanning many industry verticals, where we have deep subject matter expertise.
Clients have overwhelmingly responded to our ability to deliver the highest quality end to end differentiated solutions across digital and engaged.
Evidenced by a 10% increase in the total number of client engagements over the last 12 months in which we've integrated across all of our solutions. We expect this trend to continue to accelerate.
Emblematic of this trend.
This quarter, we partnered with a major multinationals that embarks on its digital transformation.
The company is pivoting its customer operations from voice to digital channels will self service automation and messaging the client chose us to help drive its omnichannel optimization on large part because of our integrated CX as a service model combining the best of our digital and engage offerings.
Our solutions for this client will create a cohesive differentiated customer experience that generates incremental revenue, while also improving customer satisfaction and reducing the total cost to serve.
Our recently announced Liveperson partnership will further assist.
In our go to market efforts in this area.
Through T. techs proprietary services, we're enabling both our digital and engage businesses to deliver personalized messaging capabilities for our clients.
Today more than 4 billion consumers already use messaging and channels such as Facebook Messenger Whatsapp, we chat Apple business chat and others.
With 470 million new users expected to join this space in the next 14 months, we've grown our digitally delivered customer interactions by 700% since 2014, and our partnership will help even more brands deliver high impact personalized customer experiences.
In consumers channel of choice.
Our joint offering is made up of end to end technology and services delivered in partnership with Liveperson, including conversational Commerce platform for AI enabled messaging centers of excellence across all of T. Techs 100, plus CX hubs on six continents.
And.
Hi Tech solution architects and AI bought developers, leading teams of conversational designers analyst and tuners.
Summing it all up we're pleased with our overall financial performance.
The pace with the pace with which we are leveraging our cloud offerings to modernize our customer experience capabilities through engaged and our success in accelerating the disruption of digital CX.
Meanwhile, we remain intensely focused.
On enhancing growth through accretive acquisitions strategic partnerships and large scale customer wins. These focus areas reinforce our belief that we can deliver on our plans to drive continued strong top and bottom line growth in 2020 and beyond.
This has been an incredibly busy quarter and year for T. Tech and we're excited to continue the momentum into 2020, we're energized by our financial results and our client share our enthusiasm around the market leading around our market leading solutions, we look forward to continuing to drive disruption of digital CX.
Half of our executive team and our employees around the globe. We thank you for your continued support and I'll now turn the call over to Regina.
Thanks, Ken good morning.
I can share, we're having a record year on numerous front.
Before I discuss our third quarter financial results.
And for that context on our guidance.
On a highlight a number of positive trends contributing to our growth in revenue and profitability.
First nine months for 2019 over the prior year period on a non-GAAP basis, our consolidated revenue grew 8% and operating income 46.4% year over year.
Excluding the impact of FX and one time adoption at AMC six of six.
Revenue and operating income grew 10.5% and 66.9% respectively.
Two tech Digital's segment grew revenue, 31.8% and operating income 43%.
Our CX cloud subscription based offering grew 197%.
And delivered a 44% gross margin and our systems integration services grew 19.6% and delivered gross margin of 43%.
Our t., taking gauge segment grew revenue, 4.2% and operating income 48.2%.
Normalizing for foreign exchange and assay six so six year to date revenue grew 6.5% and operating income grew 86.1%.
A subset of higher growth.
Higher margin technology forward and analytics rich offering addressing some of our clients. Most complex CX processes are contributing to detect engages improving financial performance.
Our fraud detection and prevention customer acquisition.
Agility and automotive offerings collectively comprise over 400 million of annualized revenue at the topline growth rate of 20% and are delivering a 12% operating income margin.
We anticipate the recent acquisition of SCR, which will be included in our engage segment to further advance this higher growth higher margin set of offerings within oxitec engage portfolio.
Turning to our third quarter 2019 results, we signed a number of strategic engagements with new and existing clients across multiple industries.
New business signings were 114 million in the third quarter 2019.
Compared to 153 million in the prior year quarter.
Year to date bookings were 368 million versus 393 million in the prior year period and included 16, new clients 34 deals with multiple offerings increased recurring revenue engagement and significant growth in our European bookings.
Lower compact powered and bookings are primarily a function of difficult year over year comps as well as timing.
In our digital segment, we had large product sales occurred in the third quarter of 2018 related to clients with on trend versus cloud solutions.
As the market preference increases the volume of upfront product sales is beginning is being replaced with higher margin subscription based revenue.
Engagement segment, the lower bookings are primarily related to the timing of pipeline conversion on larger deals.
We estimate our 2019 total consolidated booking at approximately 500 million while lower than 2018, we also expect lower revenue churn. It's the combination of both bookings and churn that determine our future revenue growth in 2019 churn decline from 15.6% to.
13.4%, we expect a further reduction to 12.5% in 2020 with reduced churn and increased percentage of recurring revenue and expansion of our faster growing offerings. We estimate 2019 forecasted bookings are sufficient to deliver high single digit revenue growth.
2020.
On a GAAP basis, we recorded an 8.4% year over year increase inorganic revenue to 295.5 million operating income was 26 million or 6.6% of revenue compared to 4% in the prior year restructuring charges were neck to neck negligible in the quarter FX.
Impacted revenue by a positive 2.2 million and operating income by a positive 2.1 million primarily impacting our engage segment.
Earnings per share was 43 cents in the third quarter up from 15 cents in the prior year.
My non-GAAP comments, primarily excludes restructuring impairment expenses.
Full reconciliation of our GAAP to non-GAAP numbers is included in the tables attached to our press release.
In the third quarter 2019 over the prior year period, adjusted EBITDA increased 20.8% to 46.2 million or 11.7% of revenue versus 10.5% operating income increased 50.6% to 26.2 million or 6.6% of revenue an increase from four.
Our 0.8% and earnings per share increased 82% to 40 cents in the third quarter compared to 22 cents. These improvements are primarily attributable to the positive trends highlighted in my opening comments.
Reported tax rate in the third quarter, 2019 was 20.6% versus 21.9% in the prior year period, the normalized tax rate decrease this quarter to 21.1%.
Versus 26.8% last year.
Capacity utilization was 70% in the third quarter of 2019 compared to 77% in the prior year, primarily a function of standing up dedicated sites for three significant longstanding clients with whom we are increasing our wallet share in existing and new lines of business.
Expect our utilization to normalized by the end of second quarter 2020, well impacting our seat utilization the underlying economic agreements with these clients adequately call covers the cost of these and utilize seat.
Capital expenditures were 16 million in the third quarter 2019 up from 15 million in the prior year due primarily to the expansion of our facilities and technology assets supporting increased revenue.
Our third quarter 2019 cash flow from operations was 63.1 million up from 61.4 million in the prior year third quarter 2019, DSL was 73 days down from 78 days last year in 70 days sequential 75 days sequentially.
The board of directors approved 32 cents any annual dividend per share or 14.9 million, which was paid on October seven team 2019.
The dividend represented 14.3% increase over the October 2018 dividend.
Turning to our third quarter 2019 segment results, which are presented on a non-GAAP basis to Tech digital revenue was 78.6 million in the third quarter 2019, an increase of 17.9% over the prior year operating income was 11.8 million or 15% of revenue compared to 12.8.
Okay sent.
Digital's operating income grew 30%.
The performance improvement is primarily due to our subscription based cloud offering which grew 212% in the third quarter 2019 over the prior year and systems integration services, which grew 30.8%.
Both offerings delivering gross margins above.
40%, excluding the large short term government contract our cloud business grew 60%.
Several factors continue to drive the growth in our CX cloud solution, including a growing market for our CX technology solutions, our differentiated turnkey approach for delivering fully integrated feature rich technology solutions to large commercial enterprises in government agencies and increased recurring revenue for multi year. So.
As agreements.
Detect digital's operating margin improvement reflects the inherent scalability of our CX technology platform and optimization of our systems integration resources. We are pleased with the segments overall improved profitability, including absorbing additional investment and extending our partnership based offerings and expanding our direct and indirect sales channels.
Really.
To take engage revenue increased 6.2% to 316.9 million in the third quarter 2019, and operating income increased 62.8% to 14.4 million or 4.5% of revenue 150 base basis point improvement over the prior year period.
Our improved top line performance is due to pricing increases higher volumes by driven by new and expanded lines of work across multiple industries, and our growing hypergrowth portfolio of clients.
Bottom line improvement reflects increased contribution from higher margin offerings as highlighted earlier lower operating in DNA expense to revenue ratios improved program in staffing optimization and vertical mix also continued to aid our bottom line performance.
Lastly, we are excited about the recent acquisition of SCR and welcome the SCR management associates to our Keytech family, we anticipate the acquisition to be immediately accretive Fcr furthers TTX continued focus on expanding our market share partnering with born digital hyper growing brand seeking an agile customer experiences.
Mission.
We are executing against our strategic priorities in both detect digital and T., taking each segment's year to date, we significantly increased our revenue profitability and cash flow generation, who the number of concurrent license uses in our CX subscription based cloud platform expanded our geographic and vertical market recently added an accretive acquisition.
And meaningfully deepen two highly strategic offerings was liveperson and Cisco.
Turning to our guidance, which includes both P. RG middle East and SCR, but excludes restructuring impairment charges. We estimate revenue between 1 billion 622, and a billion 630 operating income margins between 7.8, and 8% and adjusted EBITDA margins between 12.8 in 13%.
Well SCR will be additive to fourth quarter's revenue and profit margin. It is offset by certain onshore volumes transitioning to near shore and offshore a delay in a client ramp postponed to 2020 and the negative impact of changes in foreign exchange rates. As a result, we are maintaining our previous guidance we.
Spec to file our normal cadence of providing more formal 2020 guidance in conjunction with our fourth quarter reporting however, with our current revenue backlog and the addition of SCR. We do expect to have another record year with similar topline growth range and margin expansion. We currently estimate that engage will comprise.
83% of the company's 2020 revenue and digital 17% I'll now turn the call back to Paul.
So Gina operator, you may now open the lines for questions.
Certainly we will now begin the question and answer session. If you would like to ask a question you May press star followed by the number one.
These and meet your phone annual record your name slowly and your when prompted efficacy data to introduce your question.
The Castle your request to me Press Star followed by the number two.
Speakers. Our first question is from Josh Vogel from Sidoti and company your.
Your line is open.
Thank you good morning, Regina and Ken.
Excuse me I have a couple of questions first one.
You June good job generating cash and you've increased the dividend Im just wondering if you could talk a little bit about your capital.
Growth and expansion of our margins.
Acquisitions that are strategic and you know fill out the the the various gaps in our offerings.
And then last but not least we're committed to a dividend.
And you know at at this point, given our given our stock price as well as given our float.
You know a buyback would be Oh, so you know out much much much much further.
Yeah, I would I would second that fit you know we are.
A very focused on pulling every lever to deliver shareholder returns. We think we have demonstrated that through very aggressively purchasing our stock back over an eight year period.
Then we transitioned into M&A cycle.
And we're very excited about not only the deals that we've done.
The one we just announced and the ones we've done previously, but about just our overall M&A pipeline. So we're absolutely committed to continuing a focus in the M&A area. We have a tremendous balance sheet were as you know, there's very little leverage on our balance sheet.
Let alone the cost of money is extremely attractive and and we're committed to to paying a dividend and we think that.
With all of that that will allow us to not only continue to grow the top and bottom line, but it also sets us up really nicely for where we're taking the company.
As we are adding more geographies and as we are adding.
More digital capabilities, so that we can.
Provide a complete until end to end capability across the globe.
That's helpful. Thank you.
Shifting gears, a little bit I know you just gave some commentary Regina about.
With that Fcr being added in but I was wondering if you can give a little bit more specifics on the deal what is what should we expected contribution to be in Q4 versus what's built into your implied guidance I'm. Just seems you know just how you also want to get better handle on some of those items you mentioned with.
Klein ramp that's postponed and some shifts in volume elsewhere, just wanted to get a better handle around the implied guidance for Q4, which again is still impressive but its step down in the last two quarters.
Yes, so on SCR, we expect it to be about $12 million in a in the fourth quarter and about another $1 million of operating income net of the transaction expenses and including the.
Amortization of or the customer intangibles that'll happen.
As I said in my script, we did a leap into.
Late into Q3.
Experience a couple of changes in our outlook are related to a certain volumes of our seasonal work clients choosing to be offshore versus onshore. When originally they were onshore so that attack in fact that affected our topline, but not our bottom line.
Second we had a very large client that for very understandable reasons, which we can't divulge made a decision to Lou what was going to be a two for a ramp a into 2000 early 2020. So.
Across the board you know number one SCR will as a as a.
Well for us the a double digit grower and a double digit operating income margin or the movement to the offshore while it early or in in a short term impacts our top line is a good thing.
We aspire to have more balanced between onshore and our offshore and the delay in this ramp is very solid very long tenure client.
With a great reliability, you know just a matter of time.
Yes, I would just add to that that we feel very comfortable with.
The overall pipeline the backlog in the pipeline.
On the progress that we're making across both of the business units from a just from an overall.
Sales marketing and conversion standpoint, so we were very comfortable with.
Basically doing a repeat next year, what we've accomplished this year.
Thank you for the insight there and I I'm, sorry, if I missed the region and some of your response, just now but that large client that made the decision to move the ramp from Q4 into early 2020, you you're still confident that that that business is going to materialize.
They're very dominant 100%. It's it you know if I would be able to divulge that we got into it it would be very understandable, 100% 110%.
Okay great.
The outside of the short term government contractors curious if you can give us a sense of what percentage of your business mix comes from government related work and what.