TTEC Holdings Inc (TTEC) 2002 Q4 法說會逐字稿

Good afternoon and thank you all for holding, welcome to the TeleTech fourth quarter 2002 earnings conference call. I would like to remind all parties that you will be on a listen only mode until the question and answer session. This call is being recorded at the request of Teletech. I would like to turn the call over to Karen Breen, thank you, you may begin.

Thank you and good afternoon. My name is Karen Breen, Vice President of Investor Relations, and I will be the moderator for of today's call. For your information, the call is being recorded. Participants today, include Kenneth Tuchman, Chairman and Chief Executive Officer and Margot O'Dell, Chief Financial Officer and Executive Vice President of International Operations.

Before we begin, I would like to make you aware that, during this call, there may be discussions of certain forward-looking information. Please understand that actual results could differ materially. You are encouraged to review our 2002 form 10-Q and other S E.C. filings regarding factors that could cause actual results to differ from those forward looking statements . Thank you and I would now to turn the call over to Kenneth Tuchman.

Thank you, Karen. I would like to welcome everyone joining us today. First, I would like to start by highlighting our 2002 results. Overall, we are pleased with many aspects of our performance in 2002, especially given the difficult global economic environment. We grew the top line by double digits, outpacing our peer groups, while continuing to operate profitably. We also generated significant cash flow and reinforced an already strong balance sheet throughout the year.

We remain operationally and financially healthy in a challenging geopolitical environment and are entering the 2003 with solid sales pipeline. Later in the call, Margot will provide a more comprehensive financial overview.

Let me begin by reviewing several of our accomplishments in 2002. We demonstrated solid year over year revenue growth of 11% and closed one of the largest deals in our industry's history. The Nextel relationship is an active partnership between the client, IBM and Teletech. IBM and Nextel are very pleased with our performance and we are meeting or exceeding the customer's satisfaction targets outlined in our agreement. While operationally the project is performing extremely well, the transition to lower cost TeleTech centers continues to be behind, which I will discuss in a moment.

While the sales pipeline remains strong in 2002, the time involved in acquiring firm compliant commitments and closing deals was as difficult as it's ever been. Nevertheless, in the addition to Nextel, we had other new client wins during the year including Unilever in Brazil and Primus, a division of Ford Motor Credit at Percepta, our Newgen division was awarded business with Hyundai and launched a proprietary web-based tool known as Marketing Point, allowing Ford dealers to develop customized promotions online.

We also renewed several important clients relationships including Verizon Wireless, which represents about 4% of our consolidated revenues, as well as Qwest in North America, [Briton] Energy and Telstra in the Asia/Pacific region, Volkswagen at Newgen, and TTI, the yellow page subsidiary of the Yellow Pages in Europe among others.

In the Asian Pacific region, we saw year-over-year revenue growth of 18%, closed new business for new and existing client relationships and maintained our market leadership in an important part of the world. In South America, we recently won several new deals and Brazil is now operating at nearly full capacity. We are gaining market share in Brazil as we continue to demonstrate a strong value proposition. In Argentina, the economic crisis have negatively impacted in-country business opportunities so we focused these operations on providing services to U.S., Mexico and Spain from our existing infrastructure in Argentina.

Newgen performed impressively in 2002 with revenue growth of 35% an increase in operating margin of nearly 400 basis points. Newgen continues to win business with additional OEMs as well as with new automotive dealers in North America. Additionally, during 2002, we invested heavily in Newgen's product development.

In the past, Newgen's core offerings was their results/solutions which today, has enabled them to become a leader in the service/ reminder business for the automotive dealers. They have now expanded their product suite to offer five comprehensive solutions, these range from customer satisfaction tools to the most recently introduced solution known as Sales Channel. Sales Channel was recently announced at the National Automotive Dealers Association conference in January and has been enthusiastically received by the market place.

We believe that Newgen will again have strong performance in 2003 and look forward to updating you on its progress during the year. Looking ahead, we are excited about Newgen's prospects and firmly believe Newgen will maintain market leadership in this unique industry with steady revenue growth and solid profitability.

We also recently completed a share repurchase program, acquiring approximately 3.8 million shares of our common stock for 25 millions since inception of the program in late 2001. Our Board of Directors and Executive Management Team firmly believe in the long-term value of our franchise and will re-evaluate additional share re-purchase programs this year.

In retrospect, 2002 was a year of significant accomplishments. We achieved $1billion in revenue for the first time and were the first in our industry to celebrate 20 years of business. We enjoyed a top leadership position in the majority of all our markets and have maintained a conservative balance sheet. Although we clearly have areas that need further improvement, overall, we are pleased with our recent performance as we navigate an unprecedented business climate.

Let me turn to a couple of areas where we are facing challenges and the results of our efforts to improve performance. First is Europe, overall, the region is improving with the operating loss in the fourth quarter roughly half of what we saw in the first quarter of 2002, and we continue to make steady progress. In early 2002, Spain and the UK were experiencing significant financial challenges, as a result, we made several management changes in the region and are starting to see improvements.

Although Spain's performance has improved significantly during the last several quarters, we continue to carry excess capacity in Belfast, the result of which has been ongoing operating margin pressure on our UK operations. The sales pipeline in the UK is strong but the visibility is limited. Belfast was included in the fourth quarter asset impairment charge which lowers the operating costs going forward, we continue to work actively to close on new business and improve utilization of this center

Similar to our recent strategy in Argentina, we are evaluating utilizing the Belfast capacity as a lower-cost English language solution for U.S. clients. Given the interest our clients have shown in Canada, Argentina and the Philippines, Belfast is a logical extension of our unmatched capability to offer lower cost high quality solutions with a diverse geographic footprint.

The second area of focus is Percepta. We continue to maintain a strong relationship with Ford Motor Company and the venture is exceeding expectations operationally. Although it continues to perform below targeted revenue growth and profitability, in 2002, Ford imposed a unilateral 8 to 10% price decrease to all vendors and partners, the result was Percepta operated as a loss in 2002. As we mentioned last quarter, we recently worked with Ford to name a new Chief Financial Officer at Percepta, we are starting to see improvement in certain areas, and expect to see Percepta to begin operating at a modest profit within the first quarter of 2003. We recognize that there is still work to be done and are pleased that our joint efforts are resulting in improved performance.

The final area that I would like to discuss relates to Nextel. As you know, we launched this project virtually overnight, but the long term objective is to transition the Nextel work from higher cost Nextel sites to lower cost TeleTech locations throughout North America and abroad . After the project launch, we required a number of employees that originally expected to accommodate existing volumes and their rapid growth. Assuming that the employee count and volumes had been in line with the original projection, the transition would be on schedule.

As a result, we have more employees still operating in the U.S. base higher cost centers and expect to migrate certain operations in the first half of 2003. Accordingly, we believe the project's financial performance will weaken in the first and second quarters of 2003 while we continue the migration to lower cost environment. As we complete the transition in late 2003, we are confident the operating margin can approximate our North America segment operating margins and will remain steady for the remainder of the eight year contract.

Let me now address other recent events. In December, we announced 40 to 50 million dollar charge primarily relating to excess capacity. From a business perspective, we believe that this was the right thing to decision. Going forward, we will be able to operate the centers more profitably which will improve our competitive position as we work to close new business opportunities. Margot will provide more details regarding the charge later in the call.

Also, we recently announced the United States Postal Services' decision not to renew its relationship with TeleTech upon expiration of the contract. We enjoyed working with the Postal Service since 1996 and we are very disappointed with their decision. We partnered with a strong IT provider on this opportunity and submitted a thorough and viable solution. We have a longstanding record of renewing top standing relationships and unfortunately this deal did not go in our favor. The Postal Service remains a referencable account for us and are working with closely them to finalize a transition plan. At this time, we believe that the work will ramp down between now and the end of the second quarter.

On a more positive note, we recently signed a five year agreement with a large broadband communications company to provide customer management services . We believe that the project will ramp to equivalent of approximately one center by the end of 2003, primarily utilizing capacity in our multi-client U.S. facility. This relationship builds on our legacy of providing comprehensive solutions to diverse clients within the communications industry and will further enhance the client's ability to build more profitable and lasting customer relationships.

Before concluding, let me briefly address several areas of near-term focus. First, our top priority continues to be closing new business. Our efforts are focused on large multi-center deals with the Global 1000 that will leverage our worldwide infrastructure. As I mentioned earlier, the industry remains in a difficult sales environment. However, I'm pleased with the progress of several opportunities within our sales pipeline and believe we are in a solid position to win new business in the first half of 2003.

The continued weak performance of many global 1000 companies further strengthens our value proposition as potential clients are increasingly looking to drive more efficient customer care operations. Additionally, as the scope of new business opportunities becomes more complex, we are selectively augmenting our executive level sales team with additional vertical sales expertise. We believe this investment will provide important benefits as we strengthen our industry-specific solutions.

Second, we are sharply focused on improving our operating margin. We have significantly reduced the SG & A over the last several months through aggressive cost controls and are now taking a similar approach related to cost of goods sold to improve our gross margins. We have identified areas for potential improvements and expect to see progress over the next several quarters. Finally, we increased our efforts in transitioning the company from a global holding company to a global offering company. The majority of our geographic footprint came via acquisition many of which had historically operated independently

In addition to existing centralized administrative functions such as financial, reporting, treasury, legal and procurement, we have begun to leverage our global technology, sales and marketing, human resources, and other capabilities to further standardize and strengthen our global scale. Additionally, we continue to evaluate opportunities to compliment our existing offshore solutions. Going forward, we'll draw on our vertical industry expertise to further enhance our sales approach the growth with the global 1000 while optimizing the utilization of our existing worldwide infrastructure.

To conclude, 2002 was a challenging but successful year. We celebrated 20 years in business, reached a record level of revenues with operations in 13 countries providing services to clients in 27 countries.. We continue to close the industry's largest new deals opportunities and believe we will remain at the forefront of our industry. We are sharply focused on driving increased profitability while continuing to generate strong cash flow and maintain a strong balance sheet. With that, let me turn the call over to Margot.

Thank you, Ken. Let me begin by reviewing revenue. Fourth quarter revenue was $258 million, up 12% from $230 million from a year ago quarter, and up 2% on a sequential quarter basis . For the full year, 2002, revenue grew 1 billion, 17 million, up 11% over 2001 driven largely by the win of the Nextel contract early in 2002.

International revenue was $89 million in the fourth quarter, unchanged from the third quarter and down approximately 8% from the year ago quarter. For the full year, international revenue was $353 million down $27 million or 7% from 2001. The decrease was due primarily to lower revenues in Spain as we elected to exit several unprofitable client relationships as well as in Argentina due to the currency devaluation. These two countries saw a combined year over year revenue decline of nearly $40 million which was offset in part by revenue growth in the Asia Pacific region. International revenue for in-country clients represented 18% of total fourth quarter revenue while another 16% of revenue came from services provided to U.S. based customers from our international facilities.

The full year breakdown is similar to the fourth quarter with 20% of 2002 revenue coming from in-country clients and 15% related to services provided to U.S. based customers. In terms of client concentration, Verizon and Nextel were are largest clients in both the fourth quarter and year to date at approximately 15% of revenue each. Non Nextel and Verizon, no client represented more than 10% of our fourth quarter or full year revenues.

Now let us shift to earnings. Fourth quarter earnings were 7 cents per diluted share excluding pro forma items and in line with our guidance. As expected and communicated in mid-December, these results were at the low end of our originally guided range. For the full year, earnings per share were 33 cents excluding pro forma items down from 37 cents in 2001. Year over year decline is attributable to three key areas which I will touch on momentarily in relation to our operating margin.

SG&A, as a percentage of revenue, was 20.7% up modestly on a sequential basis and down from 21.4% in a year ago quarter. For the full year, SG&A was 19.6% of revenue down considerably from 22.3% in 2001, driven by aggressive efforts to reduce cost related to our facilities, telecommunications and corporate overheads. Over the last four quarters, we have maintained SG&A as a percentage of revenue in line with our goal of approximately 20%.

Operating margin for the quarter was 3.6%, down from 7.5% in the year ago quarter. For the full year, 2002, operating margin was 4.7% compared to 7% in 2001. Approximately 1% of the year over year operating margin decline is related Europe while another 1% is related under performance at Percepta. The remaining margin degradation can be attributed to excess capacity in North America as well as lower operating margins while launching the Nextel project. We are sharply focused on improving our operating margin throughout our global operations and are placing increased emphasis on cost of goods sold and gross margin during 2003.

Moving to the balance sheet, our financial position remains very strong and I want to provide some detail on cash and short-term investments, capital expenditures and DSOs as well as an update on our share repurchase program. Cash and short term investments were $145 million at the end of the quarter, up sequentially from $107 million in the third quarter. We continue to generate healthy cash flow, even while investing in our infrastructure and repurchasing shares.

During the year, we generated $114 million in operating cash flow and spent approximately $38 million on capital improvements resulting in free cash flow of $76 million. In addition, we completed a $25 million share repurchase program and paid down $6 million in debt ending the year with a cash balance over $40 million higher than the year end 2001.

Fourth quarter capital expenditures were approximately $8 million, down $4 million in the third quarter and for the full year, capital expenditures were $38 million down $14 million from 2001. This was below our estimated range of $40 to $50 million for 2002. Going forward, we will continue to impose strict guidelines regarding the committment of capital including high hurdle rates and firm client commitments.

DSOs at quarter end were 49 days down from 57 days at the end of the third quarter and down from 65 days at the end of 2001. The decrease is due to improved collections in nearly every operating division, given strong controls and oversight to this process. Finally, our capital structure remains very conservative with a debt to capitalization ratio of 21% and given our strong cash management, the company is in a net positive position of approximately $65 million.

In summary, we are very pleased with the strength of our balance sheet and our cash position. Our primary focus going into 2002, however, will be to improve operating margin by closing new business and lowering costs. We will be focusing primarily on costs of goods sold and similar to our approach with SG&A, we will establish a formal target to drive organizational focus and deliver results.

Now, I would like to talk in more detail about the fourth quarter charge. We believe this was the right business decision and going forward, we will be able to operate the affected centers more profitably because of a lower asset carrying value. Let me explain each component of the charge in more detail. The largest portion of the charge relates to FAS144 and the impairment of customer management centers. FAS144 requires us to conduct a periodic review of our assets to determine if an impairment exists which we completed in the fourth quarter. As a result, we recorded non-cash pretax charge in the fourth quarter of 32.8 million to reduce the carrying value of certain centers in our U.S., European and Latin America operations.

Going forward, we expect to see an annual EPS benefit of 3 to 4 cents resulting from lower depreciation expense. Because the impairment is recorded against the gross carrying value of the assets, the benefit increases over time as the impaired facilities becomes fully depreciated. As a result, the benefit in the initial quarters is lower and builds over time.

The second component of the charge was a 6.7 million charge related to deferred tax assets for Spain and Argentina resulting from books losses in those countries over the last year or two. Deferred tax assets are typically used to offset future tax expense and we periodically assess the likelihood we will utilize them in future periods. While we expect the financial performance in each country to improve, we took a conservative view that their near-term profitability would not justify maintaining the deferred tax assets currently on the books.

In addition to the FAS144 impairment and the write down of the deferred tax assets, we are also completing a work force reduction of approximately 200 employees to further align our cost structure with our operating requirements. The pre-tax severance portion of the charge was approximate $4 .3 million and is cash related.

The final portion of the charge relates to [Enhances]. There were four outside shareholders that originally invested in [Enhances]. During the fourth quarter we acquired their shares for $2.3 million in cash. Consequently,TeleTech owns 100% of the common stock of [Enhances] and is now a wholly owned subsidiary accounted for as part of our consolidated SG&A. Going forward, [Enhances] will continue contributing to our technology R&D efforts and will assist in migrating the company from a decentralized technology infrastructed to a more regionalized structure.

To summarize the charge, the FAS144 asset impairments represented $32.8 million and the write down for the deferred tax asset was $6.7 million both of which were non cash. The severance was $4.3 million and the acquisition of [Enhances] shares was $2.3 million, both of which were cash. The total charge was $46.1 million.

Let me end by addressing our business outlook. As we enter 2003, we are optimistic about our long term prospects. We are encouraged by the progress of opportunities in the sales pipeline and are confident we will close additional new business during the first half of 2003. However, in the first quarter, we expect revenues to decline somewhat and be in the range of $240 to 245 million. This is as a result of lower revenue from the communications vertical coupled with sequentially lower revenues associated with the seasonality of our packaged delivery clients who peak in the fourth quarter.

We estimate diluted earnings per share will be in the range of 4 to 6 cents in the first quarter down sequentially from 7 cents. The decrease from the fourth quarter is partially due to the lower revenue forecast as well as costs associated with the transition of the Nextel project. In addition, we are further developing our sales infrastructure with specific vertical industry expertise to reinforce our global sales efforts. These declines will be partially offset by lower depreciation resulting from the fourth quarter impairment charge. Having just completed a 25 million share repurchase program in December of last year, we continue to believe our stock is attractively valued and we'll evaluate future share repurchases in 2003.

To close, I want to reiterate that we are pleased with having met our guidance in a very difficult economic environment. Our near term goals are closing new business and proving our operating margins and conservatively managing our balance sheet. The company is financially solid and continues to be a global leader in our industry, celebrating 20 years in business. With that, Ken and I would like to address any questions you may have.

Thank you. At this time if you would like to ask a question, press star followed by one on your touch-tone telephone. All questions will be taken in the order in which they are received and I will announce you by name when we are ready for you to proceed. Again, that is star followed by one.

And our first question comes from the line of Brandon Noble, you may ask your question.

Hi, how are you?

Fine, how are you?

Good. A couple of house-keeping questions. Give us an idea of the benefits from currency actually from Q4 and for the year and if you are building in any continuation of that directionally for '03 as it relates to Q1?

The impact of the currency overall for the company was pretty immaterial. From a revenue standpoint, it was not even half a million dollars for the full year and from an operating income perspective, it was a little over a million, a million to two. So, the overall foreign currency impact because of the flux and takes of the different regions that we operate in is pretty minimal overall. I think for next year, you know, obviously it would be speculative for me to guess where currencies are going to go but, at this point, it is not having a big impact.

Okay. Maybe talk a little bit about how we think about free cash going forward? Obviously great performance this year and in the fourth quarter. How do we look at modeling a more normalized level, is that a normalized level? Is there anything that you guys can point to in '03 that might change that, a change in the DSO's or a change in one of the contract structures that might impact free cash, or if you guys are going to provide any guidance on that for the year and at what point might you do that?

At this point, we are not providing guidance beyond the first quarter but I would say that we expect to continue to generate, you know, strong free cash flow, it would be typical that we would be in the range of about 50 to 60 million in free cash flow. We are operating right now in a very strong position with our DSOs getting our DSOs down to 49 days, so I would say that in the near term I don't see a big benefit from improvements in working capital because I think we've made some real strong improvements in the fourth quarter but we will continue to generate strong cash flow in the first quarter.

Okay. Thanks. And one kind of final macro question, looking at the differences or similarities between the offshore markets and the domestic markets, maybe comment on what you are seeing from an RFP perspective or a lead low perspective are the contracts much different? Are the sources of the leads or the sources of potential business much different, ie. by kind of vertical or types of services that customers are looking for in those different markets?

This is Ken Tuchman. We are seeing a mixed bag. We are seeing companies who are having trouble making their own internal numbers and are, in fact, looking for a very significant cost reductions and, therefore, they are very interested in off shore opportunities. At the same time, we are also seeing a little bit of a heightened concern with offshore due to the current pending war that's in front of us.

That being said, I would say that there is a significant amount of Global 1000 companies that are, in fact, interested in exploring offshore opportunities and I think what they find most interesting about TeleTech's proposition is that we can provide a blended solution, meaning that we can blend the incoming customer interaction and spread them across multiple regions to help mitigate any potential risk whether it be for terrorism or other things.

So, clearly, labor arbitrage is going to be a focus going forward. There is going to be more and more of it. But, I think it's very difficult for us to predict at this time point in time as to -- of the clients that are very, very focused on maintaining very high levels of satisfaction with their clients, it's difficult to determine whether they are willing to put all their eggs in an offshore location or not. Instead, what we are seeing is a lot of experimentation taking place.

Thanks a lot. I'll jump out.

Thank you.

Thank you, Bill Warmington, you may ask your question.

Thank you. Good evening. I want to ask a question about what you think you will be targeting for an operating margin in '03?

Bill, at this point, we are not establishing guidance so it would be premature for to us give a target. In the first quarter, the guidance that we gave would place us roughly where we operated in the fourth quarter of this year. While we do expect are revenues to come down in the first quarter, obviously our costs would come down along with that and we say roughly in the same position from an operating margin perspective.

The DSOs of 49 days look very strong and my question would be, going forward, is that a reasonable level to model going forward, or is it likely to move in the 50 to 55-day range or likely to go lower than that?

I don't think it would be prudent to take one of the lowest DSOs that we had in the history of the company and model that going forward. I think you have to use your own judgment. Obviously, I can't guide you all. All I can tell you is that I think what you just stated would probably be reasonable.

We obviously had a lot of things in line at the end of the year across all of the operating units. We were really pleased with the results, you know, from Percepta to Newgen, to the international locations. Everyone got their DSOs down, it was a big focus for the company and will continue to be going forward but obviously you are not going to have every quarter where all the stars align at the end of the quarter.

That being said, we are going to continue to maintain a laser focus on keeping it as low as humanly possible.

With the U.S. Postal business, are there any upcoming charges, or anything there that we need to account for?

At this point, it's still too soon to tell. We are in discussions with the Postal Service about the ramp down, and it is not completely clear yet which locations will be shut down on which ones may continue to operate. We may look at potentially keeping Kansas City open for other business, we have not made that decision yet.

And one final question for Ken. You mentioned that you were seeing some new business opportunities that are likely to close in the first half of '03. If you could talk about what verticals you are seeing the demand in, without obviously tipping your hand competitively, if you could talk a little bit about those opportunities?

What I'm going to do is answer that as ambiguously as I can know how which is to say that we are seeing opportunities in all of our verticals.

Thank you for trying.

Thank you.

Thank you. Jeff Nevins, you may ask your question.

Margot, the number you gave on the earnings benefits as a result of the asset write down, 3 to 4 cents, I assume that was annual?

Yes, it is an annual number.

Did you say yes?

Yes, that is an annual number.

Is that a number that you expect to--you say that kind of ramps up, do you have a time frame where expect it to be fully realized?

It won't actually be fully realized until about six or seven quarters out because it reduces the gross-carrying value of the assets and until they are fully depreciated, you don't get the full benefit from it. In the first quarter of this year, you know, it's not even going to be a full penny, but then overtime, it will actually get to the point where it will be over a full cent in a quarter.

Okay. Is it your sense that, in the first quarter of '03, given that you're going to have some seasonality, that's going to be your low water mark in terms of margin or earnings?

Well, we would certainly hope so. We have the Postal Service ramping down and until we have complete clarity on that situation, it would be premature to say. We do have, obviously a seasonality difference from Q4 to Q1, it happens with us every year. It's not atypical. We would hope that is the low point but again, we need to get through this transition with Postal Service.

Last question just on Nextel. Can you walk through maybe in some detail what's going to happen there that resulted in the transition that is not going as well as you would like it to? Is there duplicates cost that you are incurring is that part of it? Just wanted a little more detail on that.

The main issue is really that when we took over the project we expected that the number of employees that would be required to service the program would be less than what we are actually running at at this point. There are a number of factors related to that. The biggest one being that Nextel's business volume had gone up. They are doing a lot better.

At this point in the transition, we would have assumed a greater percentage of our employees would be operating outside of the U.S., but because the volumes are higher and the overall number of employees supporting the project are higher, we just simply have not been able to transition out of the U.S. as quickly as we would have hoped.

Where is the volume going out of the U.S.?

Well, we are supporting Nextel on a number of different locations, including Canada, the Philippines, Mexico, and that was all planned. But, at this point, it's just that a greater number as a percentage of the overall employees are still in the higher cost locations here in the U.S.

And is there a time frame they expect to reach the North American average operating margins on the Nextel deal?

It would probably be later this year. We have a very solid migration plan as far as opening up more capacity in lower cost areas, we are working very closely with the client on that. And we would expect that that transition will take place throughout 2003 and we can get to a steady run rate later this year.

Thank you.

You're welcome.

Thank you. Our next question comes from Kit Case. You may ask your question.

Good afternoon. A couple house keeping questions. Can you go through your percentage of revenue for your four segments for North American, Data Base, International and Newgen?

Sure. For the fourth quarter, the North American outsourcing was 70%. International was 21% and Database marketing consulting was 10%. And year-to-date, very similar numbers, 70%, North American, 21% international, 9% database marketing.

Okay. Great. And what was your absolute debt number, total debt?

Debt was 81 million.

All right. Could you talk more about the Philippines and how that's coming across, Ken, and how that's being accepted and the progress there?

The operations are doing quite well. We are very pleased with the quality that we are able to deliver from the Philippines. At this stage it was still very early on into the launch of the Philippines and we feel very confident that our first center will be at or near capacity, you know, towards the end of this year or maybe even before that.

You know, I think it goes without saying that, although we are pushing our clients into the best solution, we are also focused on many clients that, in fact, can't go offshore and are in regulated businesses and so forth and, therefore, they need to operate within the confines of the United States. So unlike other competitors that may be focusing on a different part of the marketplace, we are focusing on various different parts of the marketplace including ones that, in some cases are highly regulated.

What would you say is your most popular offshore option right now?

I think they are equal. We are getting very good traction in all of the various different areas. A lot of it has to do with the language that the client is asking for, but I would say that they are all equal. There is not any one particular area, and the key is getting the clients to go out, visit the site and see what the quality is with their own eyes and their own ears and once they see how high the quality is, it's typically -- you know, it's a sale from there.

And could you talk a little bit more about Newgen to kind of get some flavor here? What can we expect this year? Obviously you had a great year in '02 and what is going to drive that?

We fully expect Newgen to have a very nice growth year this year. We are obviously not giving giving guidance on what growth is but we are very excited about that performance and I think more importantly we are excited about their diversification and they are very thoughtful in the strategy over the last 18 months and have invested heavily in developing more products and services

So that, not only do we have the ability to continue to expand the current state business model, but we have an opportunity to penetrate further the existing dealers that we have and increase the average revenue per customer that we have rather dramatically with these new products that we brought online. So I think that, you know, what you're going to see with Newgen this year is going to be a nice growth year. We fully expect it to be very nicely profitable.

We are getting just very, very positive response from the industry on the new products that we have just recently introduced as well as some that we introduced earlier last -- excuse me, later last year. And we are also beginning to experiment with some international expansion and that expansion would always take place in areas where Newgen would be able to take advantage of our existing infrastructure and our existing market presence.

Margot, what about on the gross margin? Is that a function of more pricing pressure these days or more a function of cost, or both?

I think it's clearly both. There is certainly some pricing pressure out there right now given the state of the economy and as Ken was mentioning earlier, you know, many customers are having difficulties keeping their cost center under control and they are looking for lower cost solutions and we have got a great footprint for that and a good solution set to address that.

But certainly, on the cost side, there's a lot that can be done as well and I think that we've made some strides in getting ourselves positioned into some of these lower labor cost areas that, even within the U.S. and Canada, we've got some opportunities to further impact the gross margin and we're going to be very, very focused on that in the next several quarters.

Isn't that more a function of capacity, though?

It's a function of capacity effectively managing the work force, et cetera. There's a lot of leverage points in there, and we have a new gentleman running North American operations, I think, that's bringing a fresh set of eyes to the operation. I think he will do a great job in helping us fine tune and improve the cost structure within North America.

But you have not closed any centers, right?

No, we have not closed any centers. we obviously had an impairment in the fourth quarter and there were a couple of centers in the U.S. impacted by the impairment but we have not closed any centers.

So you have about roughly the equivalent of about four centers over capacity?

The capacity utilization has not changed much in the fourth quarter compared to the third.

The next question comes from David Doft. You may ask your question.

Good afternoon.

Good afternoon.

I have a couple of questions. One, just going back to Newgen for a second. Could you talk about the margin profile of that business relative to your traditional business?

Well, the margin, obviously at Newgen right now is proving to be somewhat, you know, non-cyclical. They are obviously doing well in the downturn and we are happy about that. I think that Newgen is doing well based on the fact that they are diversifying as Ken mentioned earlier. They also are in a very dominant position in the space that they are in, they are the recognized leader with their core product and results. I think that dealers look to them because of that strong market presence. They are looking to them for these other products and solutions that they are introducing.

And I think that the thing about Newgen that's working very, very well, is that they are a results-based organization, meaning the dealers pay for the results that they get as opposed to necessarily on a cost-plus basis. I think Newgen has done a great job marketing that way and selling their products and services based on what they can actually deliver to the dealers.

Right, but in terms of the relative operating margin opportunities at Newgen, are there companies in database direct mail that can get operating margins in the high teens, some are able to get a little bit better, is that what we are looking at here, do you need more scale, is that what you are looking at down the road?

They are pretty much already there, David. I mean, they are operating right now year-to-date at a 16% margin. So they are doing, you know, a good job from the margin perspective and, you know, certainly, they're going to drive to try to push that further but, right now, the main emphasis will be, how can we take Newgen and potentially expand internationally in areas where we again already operate and make sure that we push our current product set that we have invested in deeper into our dealer base. That will be the near term focus of Newgen.

As well as, Newgen is now starting to- instead of having to invest in any future infrastructure capacity, they are taking advantage of TeleTech's capacity. So in the future, as they have expansion requirements, they will be able to capitalize on our infrastructure which is an overall emphasis throughout the company worldwide which is to capitalize off the structures that already exist as opposed to building a whole new structure .

That makes sense. Got it. Switching over to Percepta, did you give a revenue number for that business? If you did, I missed it.

No, we didn't, David. We break out customers that represent more than 10%, but Percepta did not either in the quarter or year-to-date.

Okay. Given your discussions with Ford over that, you mentioned that in the first quarter, you expect a modest profit there. So you got them to give you better pricing on that? You were able to take some infrastructure out of that?

We took cost out.

So, are they being uncooperative on the price side?

No, I don't think they are being uncooperative. You know, we are not being treated any differently than any other partner or vendor of Ford. They are obviously going through a tough time and they expect their partners to be alongside of them. We think it's a great relationship, a long-term relationship and it's not in our best interest to not work with them closely while they are going through this cycle.

Right. It's just kind of doesn't seem to make sense that, one, they own a big chunk of the business, that they would force it to lose money. So, when they do lose money, do they give Percepta a chunk of losses back, like Percepta gives a chunk of the profits back to Ford?

You know, I think -- by no stretch do I have a significant amount of Detroit experience but what I will tell you is that what we are told by many, many long-time vendors to the Detroit marketplace, meaning the automotive companies, they are in a cyclical business they do have an absolutely unusual way of working with their vendors and partners and down times are down and up times are up.

I don't want to put any words in Ford Motor Company's mouth as to what they will or won't do, but I think they certainly would acknowledge that we are a very solid partner of theirs and we are cognizant of the pressures that they are under and we want to fully cooperate with them because we believe that the long-term potential far outweighs, you know, the short term pain.

And even though it's kind of stalled in the last year, they have committed to the long-term opportunity of outsourcing work at Percepta?

At this point, they have.

Great. And then -- this is kind of a vague question largely for you, Ken. In terms of the sales pipeline, we have been hearing about a pretty solid level of interest for several quarters now. It seems now though, that business is coming in little by little across the whole sector. Yourself and a few of your competitors have announced some new contracts in the last couple of months. Am I getting the right sense? I mean, are people now starting to close a little bit more and has the level of interest that's out there changed in any way, or is it for any other reason than it was, say, a year ago?

There is no question about it that -- and I want to stress that, at this point in time, and looking back, there is a little bit less distraction than there was with all the corporate malfeasance and all the 9-11 stuff and the recession stuff, et cetera, all kind of happening, you know, one right after the other.

That being said, I would be, I think, not being truthful if I didn't tell you that we are very concerned about what potentially lies in front of us as it relates to war. What I mean by that is, what does that mean? Does that mean that decisions where we have been given verbal commitments on certain things, are they going to be halted? We don't know. We believe we are in a time in business that's unique to our business experience. Clearly in my 22 years of business experience, I have never seen an economy like this, I've never seen an environment like this and therefore it is very difficult for me to project or predict.

That being said, there is no question about it that there has been several companies that we have been working on for a very long period of time that just can't sit on the sidelines any longer and, therefore, are starting to move forward with their plans. But I must warn you that I think it's premature for anybody to get excited until we really know what happens even in the next two or three weeks with, you know -- with -- you know, with our government's plan to have a war.

So we feel very good about some of the deals that we have been working on and we are hopeful that we can convert them to sign long-term contract in the relatively near future and if that happens, we are going to be in great shape.

Okay. Just to take that question one more step. It also seems that the environment is quite a bit more competitive and not to state the obvious but it seems that, in the past, at the level that you guys competed at with the big deals, it was either you or in-house as the option. Now, it seems like it's you, maybe a couple of other vendors and in-house as the option. Is that fair to say?

I think that's a great question. I will answer it two ways or in two different categories.

First of all, the businesses that are the most promising to us, we are, in fact, us versus in-house. So I want to just stress we are sticking to our guns and sticking to our motto. Should we be fortunate enough to announce some of the deals that we are focused on, they will be deals that the client has made the decision that we were the only game in town to provide the capability and functionality that they were looking for.

That being said, the competitive business that we tend not to compete in as much because we find it to be not as fruitful, is in fact more competitive and I think that is logical. I think when you look back at a dry spell of an industry that, for the last 18 months to two years has had nothing significant to announce, it's safe to say that all the competitors are doing anything and everything they can to try to win a deal and, therefore, the nature of the competitive business that's put out to RFP will, in fact, be more competitive.

I will also tell you that it is -- we are seeing some interesting things happening globally where many companies that were competing with us are now no longer in a position of strength that they can in fact even compete, not only with us but with other people. Some have just literally sunsetted and some have gone away. Some of these companies -- you know who they are -- it actually even happened in the United States. We are seeing this in Brazil, we are seeing this in Spain, we have seen this in Argentina. My only point is that it is too early to tell as to whether or not the current group of competitors are all going to make it across the river.

Got it. Thank you, Ken..

Thank you.

We have a question from Jeff Nevins. You may ask your question.

It looks like there is a charge for '02 related to an accounting change, FAS 142 and goodwill, can you talk about that a little bit?

Sure. The 142 charge was related to goodwill in Argentina, and in Mexico and that was recorded in the first quarter of this year when we adopted 142 and it was reflected as a cumulative effect of an accounting change.

Okay, and then when you listed out the year over year comps for operating margins and some of the pressure in a couple of the areas that you mentioned, is it safe to say that Europe, Percepta and some of the smaller components being the kind of fourth quarter and first quarter '03 -- those set categories being the issues for the lower operating margin?

Yes, those three contributed fairly equally to the year over year decline in our operating margin from 2001 to 2002. Certainly, those are areas that we are working on and focused on as far as trying to improve our operating margin back to historical levels.

And Europe continues to be the number 1?

No, Europe has improved a lot from the beginning of the year. So the losses in the fourth quarter of 2002 were roughly half of what they were in the first quarter of 2002 so we are making progress there, but, yes, it is still a drain and it's still something that we are, you know, very focused on in the near term.

Is Europe the biggest drain or one of the other ones bigger?

No, it's really not. I think it's -- you know, it's not any bigger or less than some of the other things we have talked about. We have to get Percepta back on track to where we want it to be and we have seen encouraging signs in the first quarter. It will operate at a slight operating margin in the first quarter. We need to get Europe improved from where it's at. We need to get Nextel and migrated to lower cost environments but all of those have leverage for us.

Okay. Thanks.

Uh-huh.

With that, we will turn the call back over to the speaker.

Thank you. We appreciate everyone attending the call today and if you have any additional questions, you can please give us a call after the conference call. Thank you.

This does conclude today's conference call. You may now disconnect.