TTEC Holdings Inc (TTEC) 2003 Q2 法說會逐字稿

Welcome to the TeleTech Holdings second quarter 2003 conference call. I would like to advise all parties that you will be in 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.

Good morning and thank you for joining us. My name is Karen Breen, Vice President of Investor Relations and Treasurer. TeleTech is hosting this conference call to discuss its results for the second quarter 2003, ended June 30. Yesterday TeleTech issued a press release announcing that its report on form 10-Q for the second quarter had been filed with the S.E.C.. This call will reflect items discussed within the press release and form 10-Q. TeleTech management will refer to it several times this morning.

Speaking on today's call are Ken Tuchman, our Chairman and Chief Executive Officer, and Dennis Lacy, Chief Financial Officer. Ken will begin today's call with a top-level overview of the company's performance during the second quarter. Dennis will review the financial results. And then Ken will conclude with a general discussion of our plans going forward. Ken and Dennis will then take your questions.

Before we begin, I would like to remind you of our disclosure regarding forward-looking statements. Matters discussed on today's conference call may include forward-looking statements relating to future plans and developments, financial goals and operating performance, and are based on management's current beliefs and assumptions. Such statements are subject to risks and uncertainties. Factors that could cause the company's results to differ materially from those described include but are not limited to reliance on a few major clients, the risks associated with losing one more significant client relationships, the ability to transition work from higher cost centers to lower cost markets, the company's ability to close new business in 2003, execution risks associated with achieving the targeted $40 million in annualized cost savings, the possibility of additional asset impairments and restructuring charges, and the ultimate liability associated with the amount of the past sales or use tax obligations for the company.

I will turn the call over to Ken Tuchman, Chairman and Chief Executive Officer.

Thank you, Karen.

I'd like to begin by reviewing our second-quarter results, after which I'd provide a business review of each of our operating segments. Second quarter revenue was $240 million, down $6 million or 2% from first-quarter revenues of $246 million. Second-quarter earnings per share were sequentially lower, excuse me, at a loss of 59 cents, compared to earnings of four cents in the first quarter. The second-quarter loss includes $31.9 million to record a noncash deferred-tax valuation allowance as an increase in tax expenses. It also includes $12 million in pretax charges to reduce the carrying value or close certain worldwide facilities, complete a reduction in force and record the minimum estimated liability related to sales or use tax for services performed by our Nugent Division.

We invested $12 million in capital expenditures during the quarter, and ended the quarter with $105 million in cash and cash equivalents and just over $120 million in total debt.

We've been operating in a difficult global economic environment, with extended sales cycles in a competitive landscape. Dennis will provide additional information on our financial performance later on in the call.

Now I'd like to review the second-quarter performance of each business unit. As expected, North America's revenue and operating income were sequentially lower as a result of the ramp down of the United States Postal Service's project which was completed in mid July. And while Nextel's results improved to nearly break even in the second quarter, the program operated at a loss for the first six months of 2003 compared to operating at a profit in 2002. As we complete the transition to lower cost centers, we are confident this program's performance will improve in the second half of 2003.

On a year-over-year basis, 2002 was positively impacted by higher revenues within our communications vertical, including short-term projects completed in the first half of 2002, on behalf of certain cable clients resulting in higher profitability in the year-ago period. Additionally, we're intently focused on the opportunities in North America's sales pipeline and are encouraged with the progress we are making toward closing new business in this region.

Moving to Latin America, we're pleased with our operational performance in Brazil and have made considerable progress in closing a meaningful piece of business in that country which we look forward to announcing shortly. Argentina is meeting our expectations, having recently won a renewed agreement to provide Spanish and U.S. English-speaking projects that support customers in both U.S. and Mexico.

Finally, Mexico's results have been negatively impacted by slow sales cycles and the ramp down of several client projects. In response, we implemented several changes, first, Mexico was a significant component of the second-quarter reduction in force, which will result in annualized employee savings in Mexico of approximately $3 million. In addition, the leadership team responsible for recent operational and financial improvements in Brazil and Argentina now has the responsibility for our Mexico operations. We believe they will drive change and improve Mexico's performance during 2004.

The Asia Pacific region continues to demonstrate steady performance, including several new client wins during the quarter. The region is recovering from SARS-related travel issues, in the first half of the year, and we expect it to perform in line with our expectations for the remainder of the year.

Europe continues to be a challenge, though we're seeing progress with Spain demonstrating steady improvement. However, the U.K. remains negatively impacted by excess capacity. We are making Belfast as a lower cost, high-quality offshore English language alternative and are beginning to negotiate meaningful client contracts with this center.

Percepta returned to profitability in the first quarter and continued the trend in the second quarter. In the first six months of 2003, it's paid a $4 million dividend to the joint venture partners. We're pleased the operational improvements and cost reductions we implemented last year were successful in returning the venture to profitability.

Nugent returns profitable results. With year over year revenue growth of 10%, Nugent's client satisfaction remains high and is focused on further penetration of their solution set into the existing client base, as well as signing agreements with new OEM's and dealerships. We believe Nugent offers a unique combination of customer-management solutions in the automotive industry with a model that can be expanded to other industry verticals. Nugent is successfully diversifying its products, which is further strengthening the company's strong market share and is well positioned for the future.

Finally, we recently received regulatory approval from the Indian government for our joint venture with Barty Enterprises and began providing customer care services to one of our partners' subsidiaries. India completes our global offering of English based services from lower cost markets including Argentina, Canada, Mexico, New Zealand, northern Ireland, and the Philippines. We're very excited about our progress in this area.

To conclude, client satisfaction is at its highest point as reported by CFI. A third party that has performed our customer satisfaction surveys. We are sharply focused on improving on our financial performance.

I'll turn the call over to Dennis Lacy for more in-depth discussion of our second-quarter results, after which I will close with additional comments on our tactical plan. We will then open the call for questions.

Thank you, Ken. And good morning. To begin, I have enjoyed my first three months with the company and look forward to working with Ken and the other senior executives to drive improved financial performance.

I hope you find it helpful having the expanded disclosures contained in our recently filed report on form 10-Q prior to the conference call. I believe this will allow our call to focus more on management's plans for the business, given the comprehensive nature of the financial information found in the filings. The 10-Q provides an extensive review of our second-quarter results. I will not spend time repeating what is available in the filing. Instead I will lead you through several key tables within the document to help you better understand our second-quarter performance.

Let's begin with the chart on page 22, which compares net income for the current quarter and year to date with the same period last year. We included this chart to provide information on the drivers affecting net income, excluding restructuring charges, impairment losses, and accounting changes. Excluding those items, there was an $18 million year-over-year decrease in net income for the six months ended June 30. The primary factors driving the decrease include the ramp-down of the USPS project and certain client programs in our north American multiclient centers, as well as a reduction in Latin American operating income due to the ramp-down of certain client programs in Mexico.

In addition, the Nextel transition negatively impacted year-over-year results as the project was in its initial launch phase in the first half of 2002 and was operating profitably primarily in the client centers. As expected, the project's financial performance was lower in the first half of 2003 as a result of a longer than anticipated transition to lower cost centers. We believe this project's profitability will begin to improve throughout the last half of the year as we complete the transition.

We also had an increase in U.S. corporate payroll and related expenses in 2003 related to an increased investment in our sales, solution, and corporate development efforts. Asia Pacific's financial performance has been negatively impacted on a year-over-year basis due primarily to lower profitability and a large client program in Australia, in addition to SARS-related issues with our transportation clients in that region. These factors were offset in part by improved profitability in Europe, primarily in Spain.

Overall, second-quarter profitability declined more than expected from the first quarter and relative to the prior year. To address the decline, we are accelerating our profit improvement goals, including aggressive cost containment initiatives which in part resulted in recording certain charges in the second quarter.

Let me provide comments on these charges and those planned for the third quarter. The largest is the $32 million deferred tax asset valuation relating to our domestic tax returns which was recorded as an increase to tax expense on the income statement. Accounting rules require that you periodically assess the recoverability of assets, including deferred taxes. In the case of deferred taxes, the assessment of recoverability is based on forecasted future taxable income on the tax returns.

Given the company has reported net losses for the last two years, the future period over which you forecast whether to defer tax asset is recoverable is shorter than it would be if the company were operating profitably. Although we are forecasting GAAP profitability over the next two years, the forecasted tax basis income is not high enough to justify maintaining the deferred tax asset at the current level and, therefore, we recorded a valuation allowance against the assets. The valuation represents a noncash charge and will be re-evaluated periodically. Going forward, we estimate our effective tax rate to be approximately 15% to 20% for the remainder of 2003, which primarily accounts for the tax expense we expect to incur for our international subsidiaries.

Another component of the charge relates to FAS-B 146 for severance and lease termination. During the second quarter we eliminated 120 general and administrative positions which will result in an estimated cost savings of approximately $3 million. The severance represents a cash charge of $1 million. The lease termination charge relates to closing the Kansas City facility due to the ramp-down of the United States Postal Service project and represents a cash charge of approximately $900,000.

The next component of the charge relates to FAS-B 144 facility impairment similar to the facility impairments recorded in the fourth quarter of 2002. We periodically test the recoverability of the assets associated with our customer management centers. Recoverability is based on comparing undiscounted cash flow forecasts to the net book value of the centers. If the forecasted cash flow is not adequate to recover the net book value, the center is written down to fair market value. As a result we took a charge to write off the underappreciated assets in the Kansas facility due to the ramp-down of USPS and impaired the Mexico facility due to weak financial performance in the country over the last 12 months. The total FASB 144 charges were $7 million and were noncash.

The final component of the second-quarter charge is the minimum estimated liability related to the applicability of sales or use tax for Nugent Services. As Ken stated, we are in the process of determining, excuse me, we are in the process of determining the extent to which sales or use tax are applicable to Nugent service necessary various states. In accordance with GAAP, we recorded the minimum estimated liability. A $3.3 million charge that is expected to be paid out in cash in future periods and will be re-evaluated periodically and adjusted as necessary.

Second-quarter charges totaled $43.9 million of which $38.7 million were noncash charges. Further we expect to record up to $3 million of charges in the third quarter of 2003, related to severance and the final components component of the Kansas City lease termination charge. As previously announced, we completed a reduction in force in the third quarter further reducing our general and administrative head count. Second and third-quarter work force reductions comprised just less than 10% of our global G&A personnel and will result in combined annual cost savings of approximately $14 million.

Turning to our bank agreements, as we expected, the company was not in compliance with certain financial covenants, and its revolving credit and senior note agreements as a result of second-quarter's performance. However, we were successful in negotiating amendments to the two agreements. We are pleased the lenders took the time to understand our long-term business plan and the steps we are taking to improve profitability. The financial covenants have been loosened for the next several quarters, as we work to sell new business and implement the profit improvement plan. Although some operating covenants have been tightened, they are within our forecasted expectations and are consistent with our growth plans.

As expected, the interest rate will increase in both agreements. This will equate to an annual increase in interest expense based on current borrowings of approximately $2 million or roughly two cents per diluted share annually.

Let me now make some comments on our profit improvement and cost reduction initiatives. We are not satisfied with our recent financial performance and accelerated our profit-improvement plan in the second quarter, including aggressive cost-containment measures and an increased focus on signing new business.

On the cost side, our goal is to further enhance our global delivery platform to take advantage of our worldwide footprint, increase work force utilization and reduce the company's cost structure by $40 million on an annualized basis. Ken and I are confident we will achieve the cost-saving goals which include, one, investments in technology and system enhancements including timekeeping and billing standardization, two, aggressively working to increase the utilization of our existing work force by, among other measures, modifying the ratio of part-time to full-time employees, and three, among other items, cost reductions from various areas of business including first people-related costs as a result of a reduction in our global work force during the second and third quarters and nonagent employee and facility costs as well as lower corporate expenditures in the areas of telecommunications, travel, insurance, and consulting.

As it relates to new business wins, we have been building our solutions team to develop products that differentiate our services and further strengthen our client relationships. Also, I am leading efforts to refine our economic approach to new deal opportunities including enhancing our pricing model. Additionally, the senior management team has focused a majority of its time on winning large, long-term client agreements. And I believe we are beginning to see positive results from these efforts.

Let me end by addressing our business outlook. During the last several months, I have spent the majority of my time learning about the company and its finances. Ken and I agree the current business climate requires us to advance our business practices via continued focus on strategic planning and financial forecasting.

Among other things, we are developing a revised forecasting model to better capture of the unique financial characteristics of our business. However, as we are working to fine tune the new forecasting model, and coupled with my short tenure with the company, we are not going to provide guidance beyond what is disclosed in the report on form 10-Q which itself is an extensive document.

To summarize, we are taking steps to strengthen the company including an extensive profit-improvement plan and stricter financial discipline. We are also revising our operating structure to deliver improved financial results. Beginning in 2004, the company's business unit leaders will be rewarded entirely on the return on equity they generate for their division further aligning our executive leadership teams' interest with those of our shareholders'. Each business unit leader will be responsible for revenue generation, cost containment, and capital allocation. As the capital base grows each year, the divisions will be required to generate more earnings to deliver a satisfactory return on equity, thus naturally encouraging accessible growth rate. This model has worked well for other companies, and we are moving aggressively to achieve implementation in 2004.

With that, I will turn the call back to Ken.

Thank you, Dennis. As you've heard, we have a plan in place to better align our revenue and cost structure, control costs, and most importantly, implement a revised reporting and incentive model focused on our vertical industries. I believe that as a result of these steps and in conjunction with new business opportunities, we have signed but not yet announced and additional opportunities we are currently working on, we will be operating profitably in the fourth quarter.

As we look ahead, we are optimistic about the company's future. We have a 20-year history of leadership in a dynamic industry. Yet we recognize the continually adapting to the global changing economic situation is critical to our long-term success. Our worldwide footprint is increasingly becoming a key differentiator as we vie for new opportunities in the global theater. Therefore, we are taking the necessary steps to strengthen the company for renewed growth.

In addition to the topics Dennis discussed, we are driving behavioral change within the organization, and as the industry matures, we are focused on being the most cost-effective, efficient provider of the highest delivered value. To address these efforts, the executive management team has developed a tactical business plan. As discussed in the 10-Q, the tactical business plan focuses on filling available capacity, winning large, complex multicenter opportunities requiring a global footprint, executing on our profit improvement initiatives, ferreting out unprofitable business, and differentiating our products and services.

I'm excited about the solutions development team we've in place and believe the value-added products and services they are developing and deploying will differentiate our offering and provide additional opportunities for growth within our existing client base.

To close, I want to reiterate we are sharply focused on improving our financial performance. I'm committed to closing new business in the second quarter, which, unfortunately, did not happen -- excuse me. I'm committed to closing new -- I committed to closing new business in the second quarter which, unfortunately, did not happen. However, we recently signed several new contracts that we are announcing shortly. I am optimistic about our opportunities that we are working on currently.

I also believe we are taking the right steps to successfully operate in the changing global business and economic environment. Our investment in our global footprint is paying off as we increasingly see large deal opportunities that require an extensive worldwide presence. I've been in this industry for over 20 years and am excited about the prospects for our business going forward.

We will now open the call for questions. Thank you.

Thank you. At this time if you would like to ask a question, press star-one on your touch-tone phone. You will be announced prior to asking your question. To withdraw your question, you may press star-two. Once again, if you would like to ask a question, please press star-one.

And Bill Warmington, you may ask your question and state your company name.

Bill Warmington can SunTrust, Robinson, Humphrey. Good morning, everyone. Ken, I wanted to see if you could expand a little on the discussion of your new business pipeline. It sounds like you've got some -- some things there that I believe you said you have signed but not announced. I want to understand what that means, and see if we can get a little bit of understanding in terms of the relative size of those transactions, whether we would consider those to be material or, you know, somehow trying to gauge that.

You know, I know I should have taken a pool on what the first question was going to be because I think that it would have been pretty easy to figure out that that would be the first question. I'll give you --

That's what I heard.

I'll give you as good of an answer as I can based on the FD issues that we have in front of us. The company has been diligently negotiating multiple agreements for quite sometime. Some of which we hoped would have been actually closed and signed in -- earlier in second quarter, which would have allowed us to announce them in later second quarter. That, unfortunately, did not happen. And in fact, multiple deals have in fact been closed, either at the very end of second quarter or the very beginning of third quarter.

Unfortunately, we -- because of the business that we're in and the nature of the business that we're in and the fact that many of the -- of the clients that we do business with or all the clients we do business with are global brands, it is really imperative that we get approval from them on press releases and that they are okay with it, especially considering that in many cases there are jobs that are lost when contracts are awarded to us. So we are hypersensitive about not talking about accounts and account wins until we're given the go ahead.

Our life is -- is increasingly being complicated even more so because in many cases, they want us to wait until we're operational, until all the changes have been made internally, etc., etc. So consequently, sometimes we can't even announce this stuff until 60 to 90 days after we're actually live.

So I'm sorry for a long-winded answer that doesn't really give you the visibility on the numbers. What I will just simply say is the following -- that we've entered into an agreement in the Latin America region which is material to Brazil. Or to -- as well as to Latin America. And we'll be giving you more color on that. I really can't give you the numbers at this point in time. But we're confident that it's something that we'll be able to announce, I'd say realistically, in the next three -- in the next, let's just say to be safe, three to six weeks just to be very conservative.

As far as what I will tell you is that it is a piece of business that meets our profit targets and our margin targets. And is something that we're very proud to have. And it's one of the global 150 companies. So it's one of the top corporations in the world. That's really all I can tell you on that particular agreement.

There have also been several other agreements that have been signed that are also actually coming -- are spooling up and being implemented as we speak. With very large companies that are operating in multiple feeders. You know, from Asia Pacific, Europe, and North America. And it's just at this point, we've made the decision that until we can actually put the releases out, we're really not going to be able to give you any visible.

What I will say to you is that several of these deals which have been signed have position counts that are material or we would not have even mentioned them in the -- in our document. When I say material, I mean the smaller deals would be in the suns of -- in the hundreds of seats, and one of the larger deals might be beyond that. That's really all that I can say at this point.

We're still, as Dennis mentioned, still fine-tuning our forecast models, etc., to understand what the actual benefits will be.

So even -- I guess the question would be usually when you guys start up new business, there's some ramp-up costs associated with that. Even with those ramp-up costs, it sounds like there's going to be enough revenue there so you'll be able to turn profitable in Q4. Does that mean a lot of ramp-up costs will take place in Q3?

Yes. I would say that that would be accurate.

Okay. Last question is on Nugent. Just because it seemed like -- it seemed like Nugent had, you know, potentially issues on the revenue side, on the margin side, and on the cash-flow side because on the revenue side, we've seen the deceleration in the year-over-year revenue and sequentially down revenue there. On the margin side, it sound like there's been a -- a renegotiation of the contract with Ford. And what's the -- the margin impact going to be there? Then in terms of the cash flow, it sounds like the -- now that Ford is -- is doing the billing and collecting from the dealers on TeleTech's behalf, that's stretching out the payment cycle there. See if you could comment on those -- those things in terms of what's going on Nugent.

I'll answer part it, then I'll let Dennis answer the other part. Nugent's business is not -- is not, in fact, slowing down. You're over year, Nugent's business is up.

Right.

That's number one. Number two, we're very satisfied with where Nugent's margin is at this point. And number three, we're very comfortable with where the Ford or negotiations are going. So if you have any other questions that are financially related, we'll let Dennis answer them.

What's the margin impact to -- the operating margin going to be as a result of the higher marketing fees being paid to Ford as part of this new contract?

You know, that's not -- we would never comment on something like that. That -- that would be proprietary in nature. So I -- that's just not something I'd comment on. What I would tell you is we're very comfortable with going forward the rest of the year on Nugent's outlook and on their [indiscernible]. So I would leave it at that. We're not concerned about it.

We should probably add, Ken, you mentioned cash-flow issues. Those outstanding receivables were collected after the quarter. So that situation's been rectified.

Right. But it sounds like that relative to how you were getting paid in the past, that the payment cycle has been stretched out --

That was a one-time event.

One time? Okay?

Yeah. Just a little -- a small misunderstanding, and everything is back on track.

Okay. Gotcha. Thank you. Better yield the floor. Thank you.

Thank you.

Thank you, the next question comes from Kit Case. Please state your company name.

Southwest Securities. Dennis, could you comment a little more on the debt issue because in the cue it mentions that you guys are going to have to securitize the debt. And then there's got to be an agreement between lenders by September 30. What's can you give us more detail on that?

Sure. I guess from our viewpoint, we viewed entering into the inter-credit agreement by September 30 as a purely administerial item. All the relevant terms have actually been worked out. Because what we received at the end of the quarter was not just a waiver --we received an amendment. The significance of an amendment versus a waiver is that the waiver would have only been for one quarter, whereas the amendment is a permanent change to the agreement persists going forward.

So the lenders looked at our forecast, and we reset our ratios going into the future to be consistent and allow us to remain within those covenant -- the newly set covenants. And as a result of negotiating an amendment, all the major deal points had to be negotiated at that point in time. There just was not simply enough time to actually document a full-blown inter-creditor agreement in the time frame we had. Which is why I view it purely as ministerial. The dealer points have been negotiated. It's down to counsel documenting it in a formal intercreditor agreement at this point. We really don't anticipate problems in that regard.

But they're still being -- these notes are being securitized by the domestic assets?

Correct. Actually before they had the guarantees of our domestic subsidiaries. Now they would like to perfect an interest in some of our collateral.

How much in collateral is there?

Pardon me?

How much -- what's the dollar amount of the ashes sets that are backing up the debt now?

Yeah -- well it would be the domestic assets. And it would be approximately half. When we finalized the agreement we can comment on those points later.

Okay. Okay. Great. And then Percepta has been looking good. Tell us -- you had a $4 million dividend to the JV. Is that -- the $2 million come back to the company and that's already in the cash, or was that reinvested in there? What's the outlook at Percepta?

Well, that money has been collected in cash and received. And as Ken mentioned in his opening remarks, we are confident about Percepta and pleased where that business is going.

Is it -- are you -- is the possibility due to increased possibility due to better margins or better penetration? Better revenue into -- into Ford? Or both ?

Could you repeat the question again, please.

Was the improved business at Percepta is that due to just cutting the costs or is due to bigger penetration into Ford?

I think it's really attributed to the leadership, the new leadership there, the streamlining of the overall operations and very strict cost controls.

Okay. All right. Thanks.

Thank you.

Thank you. The next question comes from Mark Bacurin. Please state your company name.

Good morning, Robert W. Baird. Couple of questions. Ken, this new business you signed sounds very encouraging. Could you just give us some sense of, you know, when Nextel, obviously that was a big contract and very profitable up-front. As you've gotten into it, you had cost overruns. What measures have you taken to ensure that the new contracts don't run into similar-type issues as you do with Nextel?

Well, first of all, I -- as Dennis mentioned, one of the first things that Dennis focused on when he came on board here was to really understand our pricing models and has really put a great deal of energy in policy standardization, approval process, as well as making sure that every single possible line item is included and accounted for in our pricing model. And what I would just simply say is that we're -- we're being diligent as we know how to be to ensure the fact that all the components are in fact included, and that we have operational buy-in as to the physical time that's being allotted to transitions, etc.

With respect to Nextel, we've been very open about what happened there. The bottom line is is that the transition took us significantly longer than we had hoped for it to take. And I would say that we're being much more conservative in our approach going forward with respect to transitions and understanding them.

I feel very confident that the business that we're bringing on board right now is, in fact, as we stated in our models. And that in fact the business will be profitable. I'm not that concerned about that.

What I do want to make sure of is that maybe we fan some flames here. And no one runs away with any statements or misunderstands. Please understand that as we talk about business being won in other theaters, the revenues in those theaters are typically at a lower rate due to the currencies, etc. And so, even if, in fact, we were to announce a larger contract or a large contract in some of these locations, the fact of the matter is the revenue per hour is, in fact, lower just due to the currency that operates there. So please understand that something could be very relevant to a region, but on a consolidated basis would have less relevance in the overall basis.

Understood. Could you comment about where you're seeing success. Is it concentrated within any specific industry vertical, or is it, you know, reasonably well spread across?

You know, I -- I have to say, and it is -- it is too early for us to -- for us to really bode huge amounts of confidence. But what I will tell you is the last four weeks for us have been very encouraging, and we are cautiously optimistic from the standpoint that in every region we are seeing deals either closed or being negotiated as we speak.

Much more activity where our pipeline was swelling and building and has been doing so over the last 18 months. And doing quite well. The fact of the matter is that our conversion of the pipeline has been very difficult. We are now starting to see conversion. That being the case, we don't know if this is an anomaly, and a temporary period, or whether this is -- whether we're back to the kind of conversions that we're used to seeing as far as from time frames could etc. And only time will tell. So we're encouraged, but we're -- we're being -- like I say, we're being cautious. And -- and any specific industries where you're seeing more success or less? Well, our -- clearly our wireless practice is continuing to do very, very well. We have more wireless business than anybody in the world. We are absolutely considered the experts in the wireless category across the globe. I would like to give you a number of global brand accounts that we do business with for the wireless sector, but I don't have it over the top of my head. I would tell you it's material. And so that area is doing quite well.

We are -- we're also seeing business coming in in the financial services area which we're very encouraged by in the Asia Pac region. We're also seeing business -- I would say in the travel sector, as well. I would say primarily in the financial services and in the wireless area, as well as the general telecommunications area.

Great. That's helpful. On the -- there was a mention in the cue about some short-term project-oriented revenue I guess in Spain that wrapped up in June. Could you comment on that -- what the size that was? Sound like it's not going to be returning going forward.

Go ahead, Karen.

That related to the tax agency work we did in Spain. And that was an annual thing. It was work this we have done historically and we had the opportunity to do it again this year.

And what sort of revenue contribution was that? Q2?

I don't have it right here. But it was probably a couple million dollars.

Yeah, I was going to say 2 million to $3 million for Spain, for the country. It was in a concentrated period of time, like in the quarter.

Okay. So that all fell within that quarter, Q2. And then just finally, on the new credit facility covenants or on your new debt covenants, are there restrictions there that would prohibit your ability to engage in share repurchase?

There is an overall basket that will allow us to make certain restricted payments which would include treasury stock transactions.

Okay. Great.

That we can go up to --

Okay. Thank you. Thank you.

Thank you. Jeff Nevins, you may ask your question. Please state your company name.

Good morning, First Analysis. What is the timing of the -- the annualized cost reductions? Are you going to see some of the benefits in Q3 and maybe a full benefit in kind of Q4 and Q1 of next year? What's the timing on that?

Well, our goal is to achieve the target starting on an annualized basis for next year. However, as I mentioned earlier, the reduction in force that we took already which has an annualized benefit of $14 million, we would start to see that on a pro-rata basis immediately. We have a variety of other initiatives, as I described, all of which phase in over time. So in our mind, the $40 million is the goal to get to on an annualized run rate for next year. But we're very, very much focused on accelerating those programs as quickly as possible.

And when you say "next year," that would mean the first quarter of '04 is where we'd see the full impact?

It would be during that particular year. You know, we're starting off this year mid point. So we started halfway through the year on these programs. Obviously the $40 million, you know, would be -- substantially smaller number for this year because you're starting halfway through the year and just ramping it up. The idea would be to be building up toward that number so that during 2004 our overall run rate is reduced by that amount.

Yeah. But I think it's safe to say that it will -- it will not all occur, if you wanted to do a pro-rata of the $40 million in first quarter. It will be somewhat backloaded. The reason behind that is we have significant technology that is being deployed beginning later this year that will take -- that will be deployed throughout the first three quarters of next year and will not be fully installed until then. It's proven technology. So we're not concerned about the ability for it to be -- for it to operate.

We're only -- our only concern is the length of time that it takes to get it deployed across the globe. And that technology will have a benefit and an impact to us from a cost-reduction standpoint, as it relates to our bill-to-pay goals and therefore, what I would simply say, is that from a modeling standpoint, I would be more conservative and not just assume four equal quarters divided by 40.

Right. What technology are you referring to? Are you automating in terms of IVR or other --

No. No, no. This is internal -- we're spending a great deal of energy now in the -- in the administrative area of things that really can help us tightening up controls, etc. So this has to do more with more sophisticated methodologies of timekeeping, etc. And we have our pilot program that's up and running, and it would -- just because of the sheer nature of the amount of facilities we have, the time that it takes to not only get it installed but get the employees trained on it, etc. So it's those types of technologies. It's some new forecasting technologies where our goal is to get much tighter ratios than we've had historically.

Okay. Just my last question was USPS ramp-down in the quarter, was it -- could you give a sense kind of in -- you know, linearity in the quarter of the USPS? I'm trying to get an idea of the base you're coming off the second quarter with. Halfway in the quarter, midway, it was gone? I know there was some business in the quarter.

Yeah. The majority of it was gone in the -- or by July -- all it was gone by July. But mid in the quarter, the majority of it was already gone.

Okay. Thank you.

Thank you.

Thank you, John Mahoney, you may ask your question and please state your company name.

Hi, John Mahoney from Raymond James. You mentioned winning bids in other theaters. Could you give an idea of what the seats are like you have in different regions around the world? Ken?

Do you want to do that? I'll just give you just general terms. In the 10-Q there is a table for capacity. It's general. What I would just simply say to you is that we have more capacity in Europe and certain parts of Latin America. And that's really where the primary capacity is. We are rapidly filling up our Philippine capacity, and there's also now new capacity in India because of our new India capacity that's come on line.

Where is that -- I'm looking in the cue. Is it listed by -- I didn't find it before. Is it listed by seats or how on it, by revenues, what?

We gave it worldwide one number. The top of page 23 of the 10-Q.

Okay, I'm sorry.

And -- Yeah, as of the end of the second quarter, it was roughly 40% of available capacity.

Was international? Right? Is that what you're saying?

Total. Total capacity.

Now how much --

That would be what we call our multicenter capacity, meaning the shared type environment capacity.

But I'm looking at the top of page 23 I believe. like a seat. It's by revenue. Isn't it?

Maybe yours prints out differently than ours --

But the --

The financial comparison -- There's a chart that lists out by production work station.

Oh. I'm sorry. To waste everybody's time. There we go, I'm sorry.

Ken was pointing out it's only in multiclient centers.

Right.

Excludes dedicated centers for which we don't have the same ability.

And how many dedicated work stations are there?

Approximately half the capacity is -- is, in fact, dedicated.

You got another 12,000 of dedicated?

Correct.

Okay. And -- so this is the utilization, 61, and how much of the 12,000 is -- is in Asia? Specifically? It appears to me that, you know, that's where everything anticipate moving.

You know, what I would just simply tell you is that we're -- we're not giving that level of detail by region. What I would tell you is we're comfortable with where our capacity is and that -- that we have the available capacity, and that there's a real opportunity for uplift because there is the amount of capacity that won't require new capital dollars.

Well, it seems like, you know, because of the pricing issues that everyone understands, Asia and English speaking is so important, that that's where you've got to be competitive. And I was just wondering if, you know, what your seats are there at total and what the plans are to grow those.

What I would tell you is that we have -- we have plenty of capacity available in from a labor ar arbitrage standpoint, and we feel very confident that we can meet the demands of the marketplace as they arise whether it be in our India theater, whether it be in the Philippine theater, the Argentina theater, the Mexico theater, we are not concerned.

But you're not going to tell us how much is in each theater?

No I'm not. I'm not. For competitive reasons. I would not be willing to disclose that. What I will just simply tell you is that we feel comfortable that we have the appropriate amount of capacity, and so do our prospective deals that are in the pipeline that traveled out to sea --

I understand for competitive reasons you don't want to do that. But investors, you know, trying to make investment decisions, hard to understand how -- how you're positioned around the world.

Right. Just remember that Asia-Pac is only 9% of our revenues right now. Now albeit that number is going to -- is a little bit confusing because --

That where you are sourcing the revenue from, right?

Right. Exactly. So, you know, right now, we're not breaking it out in a way that would get you to the U.S.-based revenue that's moving to some of these locations. But you know, you should understand that part of our unique solution is not just providing a Philippine-only or India-only solution.

In fact, one of the reasons why we're starting to see more wins is that we have the unique ability to blend our solutions. With one of our larger clients we're currently routing calls to five countries simultaneously. We believe we're the only company in the world that, in fact, is actually doing that. And so, therefore, more and more clients who are concerned about political unrest, etc., are seeing the values of positioning some of the interactions in Latin America, some of the interactions in Asia Pacific, and some of the interactions in North America.

So we're -- we're going out of our way to take advantage of blending and also as you see in our 10Q we also mentioned the fact that our Northern Ireland facility is also now becoming an arbitrage, if you want to call it that, or a near-shore lower cost opportunity for our customers.

Okay, thank you very much.

Thank you.

Thank you. And the final question comes from Brandon Dobell. Please state your company name.

Hi, Credit First Boston. Maybe more color on what the pricing environment might look like in the different regions generally, just begin the issues you talked about with Mexico. Want to get a flavor -- is it a pricing term or just kind of economic driven issue down there, especially as well as the U.S.? And secondly, you mentioned looking at unprobable business and essentially weeding out some of the contracts. Have you guys walked away from any existing contracts you have based on those terms of conditions not matching up to what your expectations have been or would be or should we sort of build that thinking into our reports -- that there might be contracts out there that you guys won't won't renew or maybe walk away?

Let me start with your last question, the last part of your question first. We are very focused on bringing this company back to profitability. We are going to do the right things for our shareholders and make sure that we bring this company back to profitability quickly. We are not, in fact, afraid to take the right actions as it relates to clients that are underperforming from a margin standpoint. If we take Spain as an example, Spain was -- was a country that had approximately $60 million in revenue year and a half ago. And we made the decision to get rid of close to -- close to $30 million of that revenue because it was not profitable. That revenue -- therefore, we dropped the revenues obviously in half.

Spain it s now back up to $60 million in revenues, and obviously is no longer losing money, like it was -- like it was in the past. So, therefore, we are going to take that approach across the globe on any underperforming account, where we do not see an opportunity. And so, therefore, there's many opportunities.

One is how else can we be operating the business that would bring the costs down and that would add more profitability? The other is talking to the client about different pricing scenarios. And then obviously the third, which is the least desirable but as I just mentioned before, we've done in the past, is moving away from the relationship.

We're not interested in being in relationships that, in fact, just trade dollars or lose money. And, you know, those relationships will allow to go to the competitors that are interested in those types of relationships.

As far as I think you asked something about pricing, but for some reason, the audio was fading on you at the beginning. I wasn't sure what it was, sounded like something that had to do with how competitive is the pricing -- what was the question?

Yeah, it was more looking at the different regions what are some of the kind of pricing characteristics there?

Yeah, you know, we -- we have historically avoided a lot of the pricing pressure through our differentiated solution. We are very focused on selling our services based on the value we deliver based on the value that we deliver versus on the unitized hourly price. We are absolutely convinced that through references of our client base, that we can demonstrate time and time again at a C.E.O. level that we are delivering more total value than companies that are strictly focused on the lowest hourly rate. Therefore, we tend to avoid those types of conversations.

Secondly, we as a company try to avoid RFP's. Instead we look -- we focus on creating business opportunities. That being said, once we create an opportunity, might it in fact go to an RFP stage? Yes, it might. But by then, we have already demonstrated our capabilities and our value and feel confident in our able to win the business.

So in certain locations, is there more pricing pressure today than we've seen historically? Yes. But the fact of the matter is that we think that our global solutions division is really starting to come on and creating some very unique capabilities that we believe will add value and allow us to in fact maintain the pricing that we need.

Obviously arbitrage, business that goes offshore, is done at much a lower rate. But that doesn't necessarily mean the margin is lower. It means that the revenue number is lower because there's cost compression on the labor side.

You know, I want to just stress that the marketplace is making a very big deal about the arbitrage environment meaning India and the Philippines. The bottom line is that we still are seeing a lot of customers that must be onshore or near shore and cannot or will not move to these other locations. So that being said, our current footprint gives our customers the choice to either do -- to either stay on shore, go offshore, or to do a blend.

Okay. That's helpful. One final data point. You mentioned the utilization numbers in the Q. Would you have similar numbers for Q1 of this year or even Q4 of last year? Don't have this off the top of my head.

You know what, if you wouldn't mind, maybe you could take that off line with Karen. I think it's in the Q. I think it's in the Q.

Okay. Will do.

Otherwise, feel free to give Karen or Dan a call.

Thanks a lot.

Thank you.

Thank you, this does conclude today's conference call. You may disconnect at this time. Thank you for joining.

Thank you.