Q4 2019 Earnings Call
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Welcome to <unk> exports.
Well you 29, <unk> earnings conference call I would like to remind all parties that you will be in a listen only mode until the question answer session.
This call is being recorded at the request.
I would like to trickle over into Paul Miller.
Vice President Treasurer, and Investor Relations Officer. Thank you Sir you may begin.
Good morning, and thank you for joining us today. She tech 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 or Ken Tuchman, Our chairman and Chief Executive Officer, and Regina Paolillo, Chief financial and administrative officer.
Yesterday to take issued a press release announcing its financial results well this call will reflect items discussed within that document.
Fleet information about her financial performance. We also encourage you to read or 2019 annual report.
Okay.
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 data. This call them. We undertake no obligation to revise this information is real.
Built new developments that may occur forward looking statements are subject to various risks uncertainties and other factors that could cause actual results to differ materially from those expected and describe today.
For a more detailed description of our risk factors. Please review our 2019 annual report on form 10-K.
Replay of this conference call will be available on our website under the Investor Relations section. It will now turn the call over to Ken Tuchman, TJ, 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 t. techs 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 equity research analyst.
We're proud to report that in the 2019 was a record setting year for T. Tech as the leading global partner for the world's most iconic brands, we deliver a mission critical role empowering the experience economy.
The end to end solutions required for amazing customer experience.
Our full year 2019 financial highlights clearly demonstrate success we are experiencing.
Revenue increased 9% to a record $1.644 billion driven by highly recurring 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 dollar 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 topline growth.
Customers are demanding an end to end solution that only T. Chek 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 short list the 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 recurring revenue expanding profit margins and substantial free cash flow.
Let me cover each of these in more detail.
We operate within a sector that as a massive addressable market with compelling long term growth.
Check is the only proven player able to serve the entire market with end to end CX technology and services.
At scale, including.
Born digital Disruptors global 1000 companies and Mega government agencies.
GTECH 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 in the last 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 office automation and the ever increasing demand from customers for personalized frictionless and.
Variances.
TJX 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.
Two for their most complex and challenging customer experience initiatives.
Clients for whom only the highest net promoter score and see sat 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 key tech digital and engage solution.
These holistic engagements span the entire customer experience lifecycle, including consulting.
Technology and operations, and then 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 foreign digital disruptive logos, including Fintech Healthtech and curated detailers.
In just four years is now at a run rate of $300 million.
We have aggressively expanded our geographic footprint into fast growing regions in 2019 alone our EMEA 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 GTECH 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 T. Tech 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 well keep detect 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 t. tech to power the experience economy.
As recent examples we acquired Fcr to give us significantly more scale with hyper growth clients and we purchased surrender by 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 recurring 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 topline 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 Corona virus.
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.
Hi Tech is operating as a proactive partner and exploring all avenues by which we can support our clients to tech 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 it 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 complemented on risk on this comprehensive nature of our solutions.
Over the past 37 years, we regularly supported first responder organizations in government entities with large scale disasters and response efforts. This has included terrorist events natural disasters and Pandemics.
As well as 911 Hurricane Harvey up H, one N. One 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'm bullish about the path ahead.
Given the powerful market tailwinds combined with our longstanding 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.
Gtx 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.
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, our GAAP base, well 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 2019.
Highlights include significant bookings in our automotive healthcare and financial services vertical nine new client relationships continued momentum in EMEA and 100% growth.
Hypergrowth new signings.
Inclusive of SCR, which contributed 23%.
Revenue in the fourth quarter, 2019 was 461.3 million, a 10.1% increase of which 5.5% 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 a hyper growth portfolio inclusive of SCR, 15.8% in our automotive offering and 11.9% in our customer growth offerings.
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 was 31.2 million or 8.2% of revenue versus 9.5% in the prior year.
Decline any operating income margin is related to increase bonus levels in the fourth quarter 2019 inline with the improvement in our financial performance fees associated with the secondary and planned investment.
New Webex cc messaging in automation offerings in anticipation of the launch of the solutions in 2020.
On a full year basis, new business signings 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 is 73% increase in EMEA bookings, a 21.5% increase in our hyper growth sector, including Fcr.
16.8% increase in customer growth.
And a healthy mix of occurring and nonrecurring signings was 71% recurring and 29% nonrecurring.
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 TRG 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 29.1 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 a onetime adoption of assay six so six.
Which impacted our engage 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 of 8.9% and operating income of 23.3%. Despite a 22 million restoration $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 great gaining in our submission portfolio and sales and marketing strategies as well as the margin expansion, we can realize as we increase our topline 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 engagement.
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.
ASCO. In addition to the acquisition of intelligent automation CX solutions provider surrounded by and increased recurring revenue from multi year 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 onetime adoption of assay six so six revenue grew 6.7%.
With an adjusted operating margin, 5.9% compared to 4.8%.
Last quarter, we highlighted.
A growing contribution.
A diversified offerings that are delivering high growth high margin results.
Our engage business. The subset includes our customer growth fraud detection and prevention work from home automotive and Hypergrowth solutions.
Collectively these offerings comprised 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 at 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 rate 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 declining capacity utilization is tied to an increase in capacity for a handful of large bookings with longstanding clients. Additionally.
And as planned we have been reducing our U.S based seasonal business and on 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 Seventys in 2020.
We made noteworthy progress in 2019 and are well positioned to further advance our topline 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 good.
Turning in Europe, our 2020, 92.3% backlog as a percentage of revenue versus 91.6% in the prior year.
A reduced churn engage an elevated pipeline the proven expansion of our profit margin with topline scale. We continue to see 50 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 track.
Mrs, while representing a year over year reduction in digital as revenue of $17 million in exiting these practices, we enable digital to focus on maximizing more strategic solutions.
The midpoint of our 2020 guidance as laid out in our earnings press release.
Which excludes restructuring and impairment charges is as follows.
A billion 765 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 in six cents, an increase of 17 cents 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 tax rate effective tax rate between 25 in 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 meaningfully new meaningful new hyper growth and global 1000 clients across our expanded.
Global footprint, we're 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.
Can you May press star followed by the number one please UN mute your phone and record your name slowly and clearly when prompted.
These required to introduce your question.
Request.
Followed by the numbers Q.
First question is coming from the line of George Sutton from Craig Hallum.
James 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 wide person pega potential market impacts as you're going to market with those partners.
Taking about it in terms of an expanded Tam and also potentially a number of touch points that you're hitting in the 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 the really the best way of describing it is that.
We don't have a single client it's not looking for.
Some form of automation and most of 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 CXC 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 we are goal and our intention is to.
Allow or make these relationships with both Liveperson pega.
In the 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 our 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.
Two 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 learner.
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 is that we're 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 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 better 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 and in saying that so I'm curious your thoughts.
Look this is you're asking.
The question that we.
Our literally debating almost.
10, 20 times a day throughout our organization.
Theres no question about it that food delivery services.
We're going to have are going to see a major uptick.
And so.
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 factor 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 we're hoping for that for the best.
And although there might be an opportunity to make lemons out of lemonade.
The fact of the matter is is that I'm sure there'll be some small amounts of offsets and 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 datacenters that we have that are providing cloud based solutions to hundreds of thousands of 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 does does it give us a huge advantage, but frankly.
We we feel that puts us in a market position to actually except.
Business that maybe we would not have even knowing 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 a system.
Perfect. Thank you.
Thank you George.
Thank you. Our next question from your line of Michael Latimore from Northland Capital markets. Your line is now open.
Great. Thanks.
Graduations on the year there.
I guess in terms of the.
One of your higher level strategy.
Digital engaged customers I guess as you look at the pipeline what percent of the pipeline do you see.
Customers desire and are reviewing both side of your business at this point, where without a clear.
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 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 to tech solution.
We're seeing 40% plus of our pipeline now and more importantly, the deals that were winning.
Our more in that area, we just want a significant.
Deal in the.
Let's just say the travel industry, that's an end to end.
Deal that requires tech 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.
It's cetera, So what I would say to you is is that I want to be I always want to be incredibly transparent.
I tell you that it's 40% right now all be surprised if next quarter, it's not more than 40% due to the fact that by next quarter.
Digital sales team will be and 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 the medium term it will easily become 50% plus of our pipeline, yes, I'll just add that the 40% is dollars.
On the tend to be the bigger deals and if you.
Look at our top three deals.
In fourth quarter, which add too.
Almost 60 million.
All three of those have.
Multiple elements from both our digital and engaged business.
Okay, Great and then.
Dsos improved over the last year I guess, what was the main positive that does that trend continue to Sir 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 in slower 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 recede 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.
Now has really helped us to bill earlier, and therefore pick up.
Improved DSL.
Great. Thanks, Good luck is there.
Thanks, Mike.
Our next question comes from the line up.
William Blair.
Your line is now open.
Good morning.
On the digital side, you gave some breakout of quad system 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 does that compare with your expectations for the quarter.
So.
When we look at the guidance, you'll see the midpoint of our guidance that our digital businesses about 300 million. It was 305 last year. So we must remember that we have a step down.
$25 million that shorter term government contract, we're exiting the facilitations business, which was 12.5 million or exiting.
The TRG middle East practice, that's $5.2 million and our product is coming down significantly.
From around 24 million to around two and a half million because.
Well, we had two big sales of product last year, we just don't expect that in to the future as.
Clients prefer a cloud option to an on Prem.
Option when you take on data of 19 and look at the numbers right, there's about a 23% growth.
In far and what I would call our strategic consulting hour.
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.
Ex some of this noise that I, just talk about 15% to 25% grower and.
We're going to see the cloud.
At that low, 20% plus and we expect to see the.
Systems integration continue to grow.
Ill pick 15% or so over the next couple of years.
Does that help.
Okay. Thank you and then it sounds like from the prepared remarks that international expansion is continued priority in 2020.
Can you shed a little more detail on kind of timeline level of investment expected ramp.
And any kind of changes in that strategy just given.
Current state of the world. Thank you.
Yes, I mean, I think the trains of 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 it's something that we feel is important but it's something that our clients are actually asking us to add in particular countries et cetera. So.
I think to the bottom line is is that they will be opened in 2020 as to whether or not they get delayed a month or two or three.
Now, let's let's talk about it next quarter and I'll I'll give you that answer but right now we have no intention of slowing down the implementation of those locations and I'll say geographically what.
Our guidance relies on his continued growth in Europe.
We're seating asiapac, but we had no significant plans right in 2020.
To go along on Asia Pac from a client acquisition and therefore, Ivy Hill to follow with the delivery footprint. So no exposure there and I would just also add that I feel good about what we thought on.
Ingested into that the guidance relative to Europe, largely because of the backlog that we have there again to our revenue target that.
EMEA grew 72%.
It's bookings in 2019 and.
We'll we'll see that yielding now into 2020 in terms of revenue and profit.
And then you asked a question about capital.
Our capital.
Expenditures or or in our forecast and their 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 there there's no additional capex.
Thats planned beyond what Weve forecasted yeah.
Three to 3.6% to 3.8% of revenue and that would include.
On the expansion we would need for.
The digital business, which is getting increasingly more capital light.
And.
Our engage business.
Hi, good thank you.
Thank you Manny.
Thank you. Our next question is from Bryan Bergin of Cowen your.
Your line is this actually drilled living on for Brian. Good morning can you sort of talking about your expectations for gross margins and showing a for kind of 2020 and kind of the drivers behind each of those.
Yes, so you're here.
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 we benefit from scale tremendously in terms of margins, we have a lot of fixed cost in our Cogs.
And our.
DNA.
What is what is happening in the Cogs is were getting better utilization of our.
Kind of fixed cost people our.
Technology assets and our facilities in the engage business.
What's happening with SGN a is.
We are continually improving.
The.
The the Gi and 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.
We 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 themes.
Okay, great and what's your expectations for inorganic contributions for fiscal year 20 now.
Yes, I would if you look at.
That 17 65.
It will have about $70 million.
Of.
Incremental.
We will have about 70 million of inorganic and the balance will be.
Organic.
Great. Thank you guys.
Thank you.
Thank you. Our next question is coming from the line of Jason Kupferberg Bank of America.
Please 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.
What sort of wanted to know like what you expect further revenue growth cadence to play out in 2020 from that sort of 5.5% level, we saw him for Q.
Thanks.
Yes so.
[music].
If you look at the 70 70 million.
That's about 4.2%. So you know in our 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 business.
Right based on the reduction in that shorter term government contract the exit of our facilitation business the exit of RF DRG Middle East practice and.
The reduction in product right.
So when you.
When you take that $60 million that of our billion 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 is now 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 know you look at the 70 million of inorganic which is a combination of fcr right balance of Fcr, we had about $19 million of SCR in.
2019.
So we have the balance of that surround abide as an acquisition is really immaterial, we bought that platform.
So that we would have a platform for.
Ppm in RPK in.
Our digital business.
Got it thanks, so much and just one more follow up is sort of just high level. How are you guys thinking about the tradeoff between growth and margin going forward I'd like to sort of bank.
One year will be more accelerating topline growth and the margins will take kind of a back the and then just how are you seeing that tradeoff play out in the future. Thanks.
Well I think we view both is critically important.
And do and although we do believe that topline growth is.
Is or is one of our higher priorities. The factor the matter is that we have an obligation to to our shareholders.
To to deliver on the margins that were forecasting so I guess thats my way of saying too 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 a bit more often and increase our SGN today.
To drive the topline even faster, but we think that we're in a nice sweet spot right now where we can grow the topline nicely organically as well as expand.
Our margins, so I apologize if I'm not giving you.
The 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 is.
There's probably.
A point and a half of margin in 2020 being eaten eaten by a.
Stepped up investment in and bringing the new omnichannel messaging and intelligent automation offerings to market.
Putting the leadership in place for those partners, putting leadership or ahead of digital.
And.
Quite frankly, expanding the salesforce domestically and in Europe, So when off when all said and hold what we're able to create from those investments in this year versus those costs is probably eroding a battle appointing a half.
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 will naturally then flush itself out as we scale.
Revenue against these cost and come back to.
The longer term EBITDA in NOI margins that Ken spoke up.
Perfect. Thanks for taking my question.
Thank you.
Thank you. Our next question comes from the line Josh Vogel.
Your line is now open.
Thank you good morning kind of Regina.
I think about your digital platform capabilities can you said you now serve as 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 Theres still any holes you want to fill and is it possible that you can do this organically or that only be through acquisition.
Well I think our our intention and 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.
Has the potential to touch our client 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 and hydro bought which is now in full operation and opening and when at full scale will be it in excess of over 400 Engineers I believe 200 have already been.
And hired and we're rapidly hiring the next.
200.
We also are expanding in our Chennai operation as we speak through the acquisition of surrender bite.
And we're also hiring engineers and our Austin, a location et cetera. So organically we are absolutely.
Adding engineers and and.
Growing as far as the actual technology voids.
What I would just say is is that.
You're right. This is a rapidly evolving area. If you will notice, though that what we've done is we tend to bet on the technologies that have the most mature customer bases and there is.
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 be in nature companies and unfortunately, a their technology is not mature enough be it definitely does it have proved to scale at this point in time.
And see 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 our up market large enterprises Mega enterprises and governments they want.
Very they want to companies that have proven track records in 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 Pega systems, 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.
Et cetera, So what I would say to you is 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.
And spectrum and that we will not go astray and focus on accounting systems or.
That have no relevant to our business, which is what we think makes us unique and makes a 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 high.
Hyper focused in those areas and we're convinced that this this is an area that we can really own because we've been added 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.
Seeing very impressive growth in so many of your end markets or sectors today.
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.
Unintentional focus of ours at all.
We probably have the least amount of telecom concentration of anybody in the industry.
It's currently 18.5%.
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.
I, what I would also say to you is is that.
Our goal to grow the business is in many other high growth sectors that have much more profitable potential.
And that.
Our not in is highly competitive a marketplace as telecom is my father taught me a long time ago that you know when you are 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 to the spectrum, we have the lowest concentration the truth of the matter, though is if you asked me whether or not we have more potential to expand within our existing telecom portfolio I have no doubt that.
We have clients that we'd like to expand with us and the question will be whether our management team.
Wants to take the business that that they want to offer us it will all boil down to dollars and sense and whether it meets our profitability expectations and if it does it then will allow our competitors that are willing to work at a substandard margin take the business.
Alright. Thank you good luck in 2020, thank you so much.
Thank you.
Our final question comes from the line of Bill Warmington from Wells Fargo.
Good morning, everyone.
So I had a couple of questions on on the constant currency organic revenue growth for for the fourth quarter look like 5.5% organic it looked like a point from FX. So just to make sure 4.5% constant currency organic growth.
And fourth quarter and I wanted to also apply that to the 2020 guidance just to make sure followed it look 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, you have to take into consideration at the surface yet 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.
Hi, I spoke too so.
When you when you look at it without those.
Those revenue streams, what I get right is that our guidance at the midpoint is 17 65. If you take from 16 44 that we did last year that 60 million you get to 15 84.
So.
That's a 181 million of growth 17, 65 versus 15, 84, which is around 11.4% we have 4.4% of that in.
In.
Inorganic that means about a 7% growth on a 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.
Where around 7.4% growth rate and we.
We are around 4.4% of inorganic that these 3% depending on where you are in the range. Okay. So on that on 60 million you're backing out of 2019, so what would be.
Normal annual revenue attrition in dollar terms, but we're being done warm, yes, as I said earlier I laid it all out.
Yes.
I'm, just saying I'm, saying, it's a business that has attrition in it. So I'm just saying every year you guys have some attrition what's kind of an automatic attrition bill it's not about attrition, we exited our facilitation business, we exited our business NPR G. Mentally we have a short term large government contract which is.
An outlier is a very large short term contract in a business that is solidly three to five year take or pay contract.
So you have the numbers.
You can do the math and.
Draw the conclusion.
Okay.
And then.
Good question on home agent capabilities that seems to be something that.
Clients are looking for given the krona virus.
How many agents do you guys have that are doing.
At home Mark.
Our at home business spans from six to 10000 associates.
It's typically spans up to 10000 or 11000 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.
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 make it work at home. Unlike many of our competitors who have to go to third party technology companies et cetera.
We have we're set up for today.
It's in the cloud and we literally just turn it on so.
You know, we can certainly add tens of thousands of workstations.
So at home Ft, right now is running like six to 10000 sounds like.
I could actually couldn't tell you the exact number right. This minute I just know that historically that thats, what they what they've been averaging.
In the in that range and again, it's very seasonal people typically use a lot of our at home capabilities for seasonality. So they.
They go up and down depending upon whether its tax season or healthcare season, or Christmas time, more post Christmas returns I could go on and on and off.
So any any exposure to China worse.
Worth mentioning.
We have no operations and no businesses.
In China.
And so we do not have any occurring.
Or Korea, Fortunately or Italy.
[laughter] exposure in those areas.
Excellent alright, thank you very much thank you bill.
Thank you for your questions that is all the time we have today.
This concludes deep next quarter.
Earnings Conference call you may disconnect at this time.