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TELETECH HOLDINGS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

May 5, 2014

RESULTS OF OPERATIONS Executive Summary TeleTech Holdings, Inc. is a leading provider of customer strategy, analytics-driven and technology-enabled customer engagement management solutions with 41,000 employees delivering services across 25 countries from 54 delivery centers on five continents. Our revenue for the quarter ended March 31, 2014 was $302 million. For over thirty years we have helped clients strengthen their customer relationships through strategy, innovation, technology, and process that provide exceptional customer engagement. The results are customer interactions that are more personalized, seamless, and relevant, and in turn improve our clients' brand recognition and loyalty. Our end-to-end offering originates with the design of data-rich customer-centric strategies, which are then enabled by a suite of technologies and operations that allow for effective management and growth of the economic value of our clients' customer relationships. We continue to transform the Company by providing a distinct value proposition through our integrated customer engagement offerings. Our services are value-oriented, outcome-based, and delivered on a global scale across all of our business segments, including Customer Management Services (CMS), Customer Growth Services (CGS), Customer Technology Services (CTS), and Customer Strategy Services (CSS). Our integrated platform is an industry differentiator, one that unites strategic consulting, data analytics, process optimization, system design and integration, technology solutions and services, and operational excellence. This holistic approach increases customer outcomes, satisfaction and loyalty, improves operating effectiveness and efficiencies, and drives long-term growth and profitability for our clients. We have developed industry expertise and serve more than 250, customer-focused industry leaders in the Global 1000. Our business is structured and reported in the following four segments, each serving multiple industry segments: 23 -------------------------------------------------------------------------------- Table of Contents Operating Segments and Industry Verticals Customer Customer Management Customer Growth Technology Customer Strategy Services Services Services Services Automotive ? ? ? Communication ? ? ? ? Financial Services ? ? ? ? Government ? ? Healthcare ? ? ? ? Media and Entertainment ? ? ? ? Retail ? ? Travel and Transportation ? Technology ? ? ? ? To improve our competitive position in a rapidly changing market and stay strategically relevant to our clients, we continue to invest in innovation and growth businesses, diversifying our traditional business process outsourcing into high-margined analytics and technology-enabled services. Of the $302 million in revenue we reported in the current period, approximately 25% or $74 million came from our consulting, technology and accretive acquisitions. Consistent with our growth and diversification strategy, we continue to invest in technology differentiation, analytics, cloud computing, digital marketing, and geographic footprint. In 2014, we acquired Sofica, a customer lifecycle management and business process outsourcing company. In 2013, we acquired WebMetro, a digital marketing agency, and completed the buy-out of a 20% interest in Peppers & Rogers Group, our global strategic consulting business.



Our strong balance sheet, cash flows from operations and access to capital markets have provided us the financial flexibility to effectively fund our organic growth, strategic acquisitions, incremental investments and stock repurchase program.

Business Overview In the first quarter of 2014, our revenue increased 4.8% to $302.2 million over the same period in 2013 despite a decrease of 4.7% or $13.7 million due to foreign currency fluctuations, primarily the Australian dollar and the Brazilian Real. Revenue, adjusted for the $13.7 million decrease related to foreign exchange, increased by $27.5 million, or 10.1%, over the prior year. This increase was primarily due to organic growth. Our first quarter 2014 income from operations increased 5.9% to $24.4 million or 8.1% of revenue, from $23.0 million or 8.0% of revenue in the first quarter of 2013. This increase is due to organic revenue growth, the benefits of increased capacity utilization, and income from the recent acquisitions. These were partially offset by a $3.8 million negative impact from foreign currency fluctuations, $0.8 million additional amortization of intangibles related to the acquisitions, and investments in sales and research and development. Income from operations in the first quarter of 2014 and 2013 included $0.5 million and $0.9 million of restructuring charges and asset impairments, respectively. Our offshore delivery centers serve clients based in North America and in other countries, and spans four countries with 18,400 workstations and representing 63% of our global delivery capability. Revenue from services provided in these offshore locations was $114 million and represented 44% of our revenue for the first quarter of 2014, as compared to $123 million and 49% of our revenue for 2013, with both years excluding revenue from the acquisitions completed outside the CMS and CGS segments. Our cash flow from operations and available credit allowed us to finance a significant portion of our capital needs and stock repurchases through internally generated cash flows. At March 31, 2014, we had $120.4 million of cash and cash equivalents, total debt of $108.4 million, and a total debt to total capitalization ratio of 18.8%. 24 --------------------------------------------------------------------------------



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We internally target capacity utilization in our delivery centers at 80% to 90% of our available workstations. As of March 31, 2014, the overall capacity utilization in our multi-client centers was 82%. The table below presents workstation data for our multi-client centers as of March 31, 2014 and 2013. Dedicated and Managed Centers (5,056 and 3,124 workstations, at March 31, 2014 and 2013, respectively) are excluded from the workstation data as unused workstations in these facilities are not available for sale. Our utilization percentage is defined as the total number of utilized production workstations compared to the total number of available production workstations. We may change the designation of shared or dedicated centers based on the normal changes in our business environment and client needs. March 31, 2014 March 31, 2013 Total Total Production Production Workstations In Use % In Use Workstations In Use % In Use

Multi-client centers Sites open <1 year 2,166 1,793 83 % 495 401 81 % Sites open >1 year 22,040 18,142 82 %



23,376 18,408 79 % Total multi-client centers 24,206 19,935 82 % 23,871 18,809 79 %

We continue to see demand from all geographic regions to utilize our offshore delivery capabilities and expect this trend to continue with our clients. In light of this trend, we plan to continue to selectively retain capacity and expand into new offshore markets. As we grow our offshore delivery capabilities and our exposure to foreign currency fluctuations increases, we continue to actively manage this risk via a multi-currency hedging program designed to minimize operating margin volatility.



Recently Issued Accounting Pronouncements

Refer to Note 1 to the Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. We regularly review our estimates and assumptions. These estimates and assumptions, which are based upon historical experience and on various other factors believed to be reasonable under the circumstances, form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Reported amounts and disclosures may have been different had management used different estimates and assumptions or if different conditions had occurred in the periods presented. For further information, please refer to the discussion of all critical accounting policies in Note 1 of the Notes to the Consolidated Financial Statement in our Annual Report on Form 10-K for the year ended December 31, 2013. 25

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Table of Contents Results of Operations



Three months ended March 31, 2014 compared to three months ended March 31, 2013

The tables included in the following sections are presented to facilitate an understanding of Management's Discussion and Analysis of Financial Condition and Results of Operations and present certain information by segment for the three months ended March 31, 2014 and 2013 (amounts in thousands). All inter-company transactions between the reported segments for the periods presented have been eliminated. Customer Management Services Three Months Ended March 31, 2014 2013 $ Change % Change Revenue $ 227,924$ 222,582$ 5,342 2.4 % Operating Income 20,823 20,731 92 0.4 % Operating Margin 9.1 % 9.3 % The change in revenue for the Customer Management Services segment was attributable to a $25.7 million net increase in client programs offset by program completions of $7.6 million. Revenue was further impacted by a $12.8 million reduction due to foreign currency fluctuations, primarily the Australian dollar and the Brazilian Real. The operating income as a percentage of revenue decreased slightly to 9.1% in the first quarter of 2014 as compared to 9.3% in the prior period. Adjusted for the negative $3.6 million of foreign currency impact, the operating income margin increased on operational efficiencies and lower restructuring charges of $0.5 million in the first quarter of 2014 as compared to $0.7 million in the first quarter of 2013. Customer Growth Services Three Months Ended March 31, 2014 2013 $ Change % Change Revenue $ 28,905$ 22,856$ 6,049 26.5 % Operating Income 1,770 1,276 494 38.7 % Operating Margin 6.1 % 5.6 % The change in revenue for the Customer Growth Services segment was due to the combination of a net increase in client programs and the acquisition of WebMetro in August 2013 of $7.8 million in an aggregate amount, offset by program completions of $1.2 million, and a $0.6 million reduction due to foreign currency fluctuations. The operating income as a percentage of revenue increased to 6.1% in the first quarter of 2014 as compared to 5.6% in the prior period. This increase was primarily driven by program operational improvements and a shift in program mix to additional outcome-based higher margin programs. Included in the operating income was amortization related to acquired intangibles of $0.7 million and $0.2 million for the quarters ended March 31, 2014 and 2013, respectively. Customer Technology Services Three Months Ended March 31, 2014 2013 $ Change % Change Revenue $ 32,776$ 33,562$ (786 ) (2.3 )% Operating Income 311 2,898 (2,587 ) (89.3 )% Operating Margin 0.9 % 8.6 % Revenue for the Customer Technology Services segment remained flat between the two periods. While the consulting, cloud and managed service solutions revenue each grew greater than 12%, the product sales and system integration volumes were down due to the timing of sales pipeline conversions. 26 --------------------------------------------------------------------------------



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The operating income as a percentage of revenue decreased to 0.9% in the first quarter of 2014 as compared to 8.6% in the prior period. The decrease was due to the decline in product and systems integration revenue as well as increased investment in sales and research and development. Included in the operating income was amortization related to acquired intangibles of $1.2 million and $1.0 million for the quarters ended March 31, 2014 and 2013, respectively. Customer Strategy Services Three Months Ended March 31, 2014 2013 $ Change % Change Revenue $ 12,616$ 9,383$ 3,233 34.5 % Operating Income 1,453 (1,907 ) 3,360 176.2 % Operating Margin 11.5 % (20.3 )% The change in revenue for the Customer Strategy Services segment was related to organic growth in operational consulting and analytics and learning innovations revenue. The operating income as a percentage of revenue increased to 11.5% in the first quarter of 2014 as compared to a loss of (20.3)% in the prior period. The increase was related to the increases in revenue noted above and the full integration of the businesses comprising the segment which allowed for additional revenue as well as cost savings based on the realignment. Included in the operating income was amortization expense of $0.4 million and $0.4 million for the quarters ended March 31, 2014 and 2013, respectively. Interest Income (Expense)



For the three months ended March 31, 2014, interest income decreased slightly to $0.5 million from $0.7 million in the comparable period in 2013. Interest expense decreased to $1.7 million during 2014 from $1.9 million during 2013 primarily due to lower interest rates on our Credit Facility borrowings.

Income Taxes The effective tax rate for the three months ended March 31, 2014 was 11.9%. This compares to an effective tax rate of 11.4% for the comparable period of 2013. The effective tax rate for the three months ended March 31, 2014 was influenced by earnings in international jurisdictions currently under an income tax holiday and the distribution of income between the U.S. and international tax jurisdictions. Without a $0.6 million benefit related to changes in the valuation allowance, a $0.2 million benefit related to restructuring charges, a $1.2 million benefit related to the lapse of statute of limitations in Canada, and $0.2 million of benefit related to other discrete items recognized during the quarter, the Company's effective tax rate for the first quarter would have been 20.4%.



Liquidity and Capital Resources

Our principal sources of liquidity are our cash generated from operations, our cash and cash equivalents, and borrowings under our Credit Agreement, dated June 3, 2013 (the "Credit Agreement"). During the quarter ended March 31, 2014, we generated positive operating cash flows of $13.5 million. We believe that our cash generated from operations, existing cash and cash equivalents, and available credit will be sufficient to meet expected operating and capital expenditure requirements for the next 12 months. We manage a centralized global treasury function in the United States with a focus on concentrating and safeguarding our global cash and cash equivalents. While the majority of our cash is held offshore, we prefer to hold U.S. Dollars in addition to the local currencies of our foreign subsidiaries. We expect to use our offshore cash to support working capital and growth of our foreign operations. While there are no assurances, we believe our global cash is protected given our cash management practices, banking partners and utilization of diversified, high quality investments. 27 --------------------------------------------------------------------------------



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We have global operations that expose us to foreign currency exchange rate fluctuations that may positively or negatively impact our liquidity. We are also exposed to higher interest rates associated with our variable rate debt. To mitigate these risks, we enter into foreign exchange forward and option contracts and interest rate swaps through our cash flow hedging program. Please refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk, Foreign Currency Risk, for further discussion. The Credit Agreement provides for a secured revolving Credit Facility that matures on June 3, 2018 with an initial maximum aggregate commitment of $700 million and includes an accordion feature that permits us to request an increase in total commitments up to $1.0 billion, under certain conditions. We primarily utilize our Credit Agreement to fund working capital, general operations, stock repurchases and other strategic activities, such as the acquisitions described in Note 2 of the Notes to Consolidated Financial Statements. As of March 31, 2014 and December 31, 2013, we had borrowings of $100.0 million and $100.0 million, respectively, under our Credit Agreement, and our average daily utilization was $270.9 million and $219.6 million for the three months ended March 31, 2014 and 2013, respectively. After consideration for issued letters of credit under the Credit Agreement, totaling $3.5 million, our remaining borrowing capacity was $596.5 million as of March 31, 2014. As of March 31, 2014, we were in compliance with all covenants and conditions under our Credit Agreement.



The following discussion highlights our cash flow activities during the three months ended March 31, 2014 and 2013.

Cash and Cash Equivalents We consider all liquid investments purchased within 90 days of their original maturity to be cash equivalents. Our cash and cash equivalents totaled $120.4 million and $158.0 million as of March 31, 2014 and December 31, 2013, respectively. We diversify the holdings of such cash and cash equivalents considering the financial condition and stability of the counterparty institutions.



We reinvest our cash flows to grow our client base, expand our infrastructure, for investment in research and development, strategic acquisitions and the purchase of our outstanding stock.

Cash Flows from Operating Activities

For the three months ended March 31, 2014 and 2013, net cash flows provided by operating activities was $13.5 million and $6.5 million, respectively. The increase was primarily due to a $8.6 million decrease in payments made for operating expenses and a $9.2 million decrease in cash spent on prepaids and other assets offset by a $13.1 million decrease in cash collected from accounts receivable.



Cash Flows from Investing Activities

For the three months ended March 31, 2014 and 2013, we reported net cash flows used in investing activities of $23.1 million and $4.1 million, respectively. The decrease was due to increased spending on acquisitions of $8.2 million along with a $11.0 million increase in capital expenditures during the first three months of 2014.



Cash Flows from Financing Activities

For the three months ended March 31, 2014 and 2013, we reported net cash flows used in financing activities of $24.4 million and $0.2 million, respectively. The change in net cash flows from 2013 to 2014 was primarily due to a $7.0 million decrease in net borrowings from our line of credit, a $3.7 million decrease in proceeds from other debt, an increase of $10.6 million in purchases of our outstanding common stock and an increase of $2.2 million related to the payment of purchase price payables related to our acquisitions. 28 --------------------------------------------------------------------------------

Table of Contents Free Cash Flow Free cash flow (see "Presentation of Non-GAAP Measurements" for the definition of free cash flow) increased for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 due to the increase in cash flows provided by operating activities offset partially by a decrease in capital expenditures. Free cash flow was $(1.6) million and $2.4 million for the three months ended March 31, 2014 and 2013, respectively.



Presentation of Non-GAAP Measurements

Free Cash Flow Free cash flow is a non-GAAP liquidity measurement. We believe that free cash flow is useful to our investors because it measures, during a given period, the amount of cash generated that is available for debt obligations and investments other than purchases of property, plant and equipment. Free cash flow is not a measure determined by GAAP and should not be considered a substitute for "income from operations," "net income," "net cash provided by operating activities," or any other measure determined in accordance with GAAP. We believe this non-GAAP liquidity measure is useful, in addition to the most directly comparable GAAP measure of "net cash provided by operating activities," because free cash flow includes investments in operational assets. Free cash flow does not represent residual cash available for discretionary expenditures, since it includes cash required for debt service. Free cash flow also includes cash that may be necessary for acquisitions, investments and other needs that may arise.



The following table reconciles net cash provided by operating activities to free cash flow for our consolidated results (amounts in thousands):

Three Months Ended March 31, 2014 2013



Net cash provided by operating activities $ 13,537 $

6,494

Less: Purchases of property, plant and equipment 15,095 4,105 Free cash flow $ (1,558 )$ 2,389



We discuss factors affecting free cash flow between periods in the "Liquidity and Capital Resources" section below.


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Source: Edgar Glimpses


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