Welcome to TTEC's First Quarter 2019 Earnings Conference Call. [Operator instructions] This call is being recorded at the request of TTEC. I would now like to turn the call over to Paul Miller, TTEC's Senior Vice President, Treasurer, and Investor Relations Officer. Thank you, sir. You may begin.

Good morning and thank you for joining us today. TTEC is hosting this call to discuss its first quarter financial results for the period ended March 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 or complete information about our financial performance, we also encourage you to read our first quarter 2019 quarterly report on Form 10-Q. Before we begin, I want to remind you that matters discussed on today's call may include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward-looking statements reflect our opinions as of the date of this call, and we undertake no obligation to revise this information as a result of new developments 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 or described today. For a more detailed description of our risk factors, please review our 2018 annual report on Form 10-K. A replay of this conference call will be available on our Web site under the investor relations section. I will now turn the call over to Ken Tuchman, TTEC's Chairman and Chief Executive Officer.

Thank you, Paul, and good morning everyone. We kicked off 2019 with solid results and exceeded our plan for the quarter. Our strong performance is a result of our steady focus on building and operating the leading customer experience technology and services platform for the world's most iconic brands. Our first quarter 2019 year-over-year bookings grew 32% and revenue grew 5.1%, of which the vast majority was organic. Our non-GAAP operating income grew 28.4% and cash flow from operations grew 19%. The year-over-year improvement is even greater when you normalize for foreign exchange and last year's adoption of ASC 606, which Regina will address shortly. Our momentum is the result of our continued sales velocity, differentiated solutions portfolio and delivery of exceptional customer experience outcomes. We are well-positioned to deliver significant top line organic growth, bottom line margin expansion and improved operating cash flow. Let me share why we are highly energized by the opportunities ahead. Customer expectations for simple, frictionless interactions across every channel and every device continue to skyrocket. Make it easy, make it fun and make it for me is the expectation. Brands that can't provide amazing experience are losing market share while brands that delight and deliver like our digital native clients are gaining share. Companies in every industry are fast-tracking their efforts to modernize customer touch points and infrastructure. Our expertise in enabling digital transformation with award-winning cloud, AI, ML, RPA and omnichannel technologies, coupled with our customer experience services, make us the natural go-to partner for digitizing the customer engagement and delivering exceptional customer experiences. There are numerous macro forces accelerating our growth. Omnichannel cloud investment is expected to continue its exponential growth. The market is growing near 25% a year, yet remains in its infancy with only 15% of companies using cloud-based solutions…

Thanks, Ken, and good morning, everyone. 2019 is off to a strong start with positive trends in our first quarter financial results on both top and bottom line. We closed $132 million in bookings with a mix in volume that reflects the relevancy of our comprehensive solution portfolio. CTS' bookings grew 83% and CMS grew 63%. We signed three new brands, one in each of financial services, healthcare and education. We grew our share of wallet with several existing clients including 12 significant multi-segment deals. We closed a large government contract that was over $20 million in cloud, technology and services. We booked $27 million with six new and existing clients in the hyper growth category, which includes new economy business models, such as ride sharing, home sharing, e-banking, and media streaming services. We are providing these brands the necessary CX technology and services to support their rapid growth. Ahead of my comments on our GAAP and non-GAAP financial results, I want to provide some context on three specific items: first, last year's adoption of ASC 606 had a onetime positive impact on first quarter 2018 revenue and operating income in the amount of $13.9 million and $7.3 million, respectively; second, our first quarter 2019 results included negative FX impact of $4.4 million on revenue and positive FX impact of $1.2 million on operating income; and last, as previously discussed during last quarter's conference call, the deferred client minimum volume commitment was recognized in the first quarter of this year, adding $6.4 million to CMS' revenue and operating income. Regarding our GAAP results, we recorded revenue of $394.4 million, up 5.4% over the prior year consisting primarily of organic revenue growth. On a constant currency basis and excluding onetime ASC 606 adjustments in 2018, revenue increased 10.4%. CTS' revenue grew…

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

Thank you [Operator instructions] Our first question -- we have two questions on queue, first question from the line of George Sutton of Craig-Hallum. George, your line is now open.

Thank you. Congrats on the results, and please put me on a list of supporters around your move to realign the segment reporting. I think that could be meaningful from a valuation perspective. And I wanted to be specific in looking at the CTS business and the run rate, which looks to be about $210 million of revenues, currently growing around 50% with $40 million of operating income. If I just look at that piece alone, depending on who I'm comping you against, that looks to be your valuation for the entire year of the company. Can you give us a sense of who are you competing with? In your view, who should you be compared with just in that specific segment?

Hi, George, nice to talk to you, I think it's safe to say that we primarily go up against Five9, inContact, Genesys, rarely Avaya now and then sometimes a few VARs here or there, but it's primarily the cloud providers that are focused on the marketplace, which would be Five9 and inContact at this point in time. With that said, those companies, which are good companies, are really much more focused on what I would call mid-market in SMB and are -- the lineage of TTEC digital has been that we've always focused on what I would say the F 500 and mega companies and governments. So we have a very different client complexion. Our contracts tend to be long term versus month-to-month, and we tend to have take-or-pay contracts, all of which is being delivered now in the cloud, which is very different than these other companies and where they're kind of -- what part of the market segment that they're focused on at this point in time.

Perfect. Let me ask on bookings. We've had greater than 30% bookings growth for four quarters in a row. I view that as a trend, beneficial trend. Can you give us a longer-term perspective on how sustainable you view these bookings type numbers to be? And you also mentioned that bookings doubled in Europe. I'm curious, given how we've always believed them to be a bit behind on digital transformation programs, how sustainable is that kind of opportunity in Europe?

So, starting with the latter part of your question, I think it's always safe to say that the majority of countries outside of the United States typically are a year to up to five years behind. And so the good news about that is, is that with the dramatic need for all companies to digitize, it's suffice to say that continental Europe is now becoming very focused not only on CX but on digitization. And so we see very significant opportunity there, which is why we did a small acquisition in Europe, why we doubled down on sales and management in Europe and we're currently in the market selling and doing quite well in the market in Europe. And I think you'll see over time us expanding and putting more energy into other markets for our digital business as well because there is a global requirement for delivering cloud-based omnichannel solutions. So I think that for quite some time when you look at the fact that only 15% of the market in the U.S. has moved to the cloud on omnichannel contact center, you look at the fact that CRM cloud is already now at 60-plus percent. The two are hand and glove. There's not a question in my mind that omnichannel contact center technology will easily catch up to the CRM, meaning the Salesforce, Microsoft Dynamics, Zendesk type marketplace as far as adoption. And I think that what happened was those guys did a great job of getting CIOs comfortable with their CRM being put in the cloud. And now they've -- they're questioning why do they have all this old VoIP equipment, etc., that is not omnichannel, that does not have the ability to interface with all the new AI and RPA, etc.. And therefore, they're turning it over to experts like us that have these technologies preintegrated, and that can turn clients on, on very, very short notice and take them global almost overnight because of our global network that we have. So I think you're going to see significant growth for many years to come in our digital space. Your first question though, I'm sorry?

Bookings, just the growth in bookings and how long -- how sustainable that is?

Yes. I mean, I've been doing this for really long time, George. I would love to give you a high level of confidence that we can maintain this level of bookings. But I think the reality is -- is that we're very comfortable with the level of bookings that we're doing right now and the organic growth that comes out of it. There is no question that the economy does help our bookings, but there's also no question that our clients are looking for significantly different solutions than what they've historically been acquiring. And they're not looking for just a labor-based solution, they're looking for a solution that, shall we say, kills multiple birds with one stone in that it's very clear to them now that if they don't drive a differentiated experience, that they run the risk of not making it across the river. They get that if their offering is not more frictionless, they also are at risk. And they also get that they have to come up with ways that are significantly more efficient than how they've historically done that, and that requires technology and that requires strategic consulting. And so I -- consequently, I think that all these acquisitions that we've done over the last eight years and all the integration, all the pain that we have gone through and the hundreds and hundreds of millions of dollars of investments that we've made, now that they're all integrated and now that you have a go-to-market platform, I think that what we're seeing is, is really nice adoption. We feel good about the year. I think for me to predict beyond the year, doing this as long as I have would probably be somewhat irresponsible other than to say that this trend of hyperfocus on customer experience…

I'm a simple man. I'll always be more excited about the 40% than the 10%, I promise you that, but great results. Thanks a lot, guys.

Thank you.

Our next question comes from the line of Bill Warmington of Wells Fargo. Your line is now open.

Good morning, everyone. So I wanted to ask about the capacity utilization being down quarter over quarter and year over year. It looks like it's the lowest it's been since Q3 2016. What's going on there? And when do we start to see the higher bookings translate into better utilization?

Yes. So you know, as usual, we'll always be slightly down fourth quarter, first quarter. I'd also say that as we -- there are two things -- two dynamics that are going on. One is, we have become very successful in executing seasonal work. As we do that seasonal work, we price into our contracts the cost of that space and cost of keeping that space available. So while I think you can see in the operating income there's not an impact, the reality it is in our utilization calculation, those seats for some months are underutilized. So you have a seasonal impact on the utilization to be completely transparent, but you have, what I would say, superior margin as you go into the seasonal months in terms of that being priced into our revenue. Second is, as you know, our bookings have been significantly increased, in particular, in CMS and it takes ramp to get those clients to their full ACV, and we're experiencing the implementation of that $200 million of bookings in Q4, and it will take us some time to fully utilize the space that's been allocated to these clients. So I think you're seeing -- again, as we talked about last year, there's a major step-up in our bookings. That means there's a major step-up in our ramps. The way it works is that those ramps can take three, six, nine, 12 months, depending on how -- the size of the ACV and the size of the training classes and you're seeing those two things come together in Q1 to impact the utilization. You will see more traditional utilization as we get into Q3 and Q4. Q2 is one of our hardest quarters. We begin to prepare for our seasonal work. And so you'll continue to see it around the level that you see it right now, but it'll uptick in Q3 and Q4. And the reality of it is that as stated in our guidance, you'll -- it's not an impact on the operating income. In fact, we're getting a better E to R on our overall real estate cost.

And at the risk of being redundant to what Regina just said, I want to just be very clear. With the bookings, once those bookings are signed, we have -- we absolutely have to put that capacity aside as we're ramping into it. When you have clients that have training programs that take four to sometimes nine weeks, unfortunately, that capacity sits idle until those classes graduate and people actually infill those seats. So again to reiterate, I'm not too concerned about the capacity utilization. And the other thing is, this is a very fluid type of situation in that we have many regions or areas in the world where our capacity, if anything, is too tight and therefore, we're expanding capacity in other areas. And then lastly, every year, as just a normal course of our business, we rationalize capacity where we see fit. And there will be some amount of rationalization, not a large amount but actually pretty small, in the U.S. where we've been in -- where we have capacity that we feel is not profitable to continue to execute on. So, all in all, I think you'll see that the capacity will tighten up. It's all in our plan, but we've -- and we feel quite good about the capacity that we have available right now so that we can infill to all the bookings.

Okay. Okay. And then question on the change in reporting. This is the first time I've ever seen a company claim that providing fewer segments is going to help with the sum of the parts. I mean if anybody wants to do a sum of the parts on the business today, they can do it pretty easily given that you have revenue and operating income broken out in four parts. So the -- I guess the question is, are you thinking about actually selling off one of those divisions or splitting the company? Because if you are, then you can argue that the sum of the parts shows a path to unlocking the value. If you're not, then it's a bit of an academic exercise.

I want to answer this, but first, I just want to just technically remind -- just remind us that technically, there are a number of SEC factors that go into considerations in terms of your segments. And what I would say is that as we have been working on our new branding and executing our go-to-market with our two centers of excellence engage and digital, it has become apparent, right, and we continue to operate these in a very integrated way. We believe that that is going to unlock its own value by virtue of getting more efficient, reducing what I would say, G&A and just leveraging the platforms, the capabilities, the human talent, the technical talent, the facilities, right? These are going to be leveraged much, much better in an integrated fashion given the likeness of our CMS and CGS business and the importance of the CSS and CTS together. So first and foremost, this is the way we're going to operate. The way we're going to operate dictates our segments and that is first and foremost. That said, we do believe that we get some derivative value from -- derivative other value from that and I'll hand it over to Ken.

Yes. Well, I don't think I could have said it better than what Regina just said. Our segments are dictated by how we operate the business. And the way we operate the business is by these two segments. And so part of this is the SEC, part of this is our auditors and accountants as far as recommending how we report, etcetera. We're in no way trying to take away any transparency. And I think that it's safe to say that the main reason why we're doing this is, is because clients are either buying our digital capabilities or they're buying our engage capabilities. As it relates to how people will understand the value, I think it's pretty obvious. I think that there is a set of analysts that cover contact centers and BPO, and there's another set of analysts that cover tech and SaaS and cloud. And we believe, based on the number of inquiries that we're now getting from tech analysts, they want to start covering the tech side of our business and they want us to go out of our way to create better understanding and transparency since they see us as a major competitor to the stocks that they are covering in the SaaS, cloud, tech sector. So this is not something that we just woke up one morning and thought about. This was -- has been thought through very clearly where the myriad of tech analysts have come to us and said, for God sakes, why don't you break this out because you are way undervalued in this area, and so that's what we're doing.

Okay. Well, thank you very much.

Thank you.

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