TTEC Holdings Inc (TTEC) 2003 Q4 法說會逐字稿

Welcome everyone to the TeleTech fourth-quarter 2003 earnings conference call. (OPERATOR INSTRUCTIONS). I would like to turn the call over to Karen Breen. Thank you, ma'am. You may begin.

Thank you, Kevin, and good morning. My name is Karen Breen, Vice President of Investor Relations and Treasurer. TeleTech is hosting this conference call to discuss its results for the fourth quarter and year ended December 31st, 2003.

Yesterday we issued a press release announcing that our annual report on Form 10-K for 2003 has been filed with the SEC. This call will reflect items discussed within that press release and Form 10-K, and TeleTech management will make reference to it several times this morning. Speaking on today's call are Ken Tuchman, Chairman and Chief Executive Officer, and Dennis Lacey, our Chief Financial Officer. Ken will begin today's call with a top level overview of the Company's performance during fourth quarter and full-year. Dennis will then review certain aspects of our financial results, following which Ken will make some closing comments. After our prepared comments, Ken and Dennis will open the call to 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 risk and uncertainties. Factors that could cause the Company's results to differ materially from those described include but are not limited to recent pronouncements regarding the accounting treatment for costs associated with the launch of new client programs, reliance on a few major clients, the risks associated with low profitability from or the loss of one or more significant client relationship, the Company's ability to close new business in 2004, execution risks associated with achieving the targeted 40 million in annualized cost savings, the possibility of additional asset impairments and restructuring charges, the impact to current and future earnings related to the possibility of refinancing the Company's (technical difficulty) agreements and the related macro provisions, and the ultimate liability associated with the amount of tag sales or used tax obligations of the Company.

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

Thank you, Karen. I would like to begin by reviewing or fourth-quarter and full-year financial results. After which, I will provide a business review of each of our operating segments.

Let me begin with fourth-quarter revenue, which was 262 million, up 17 million or 7 percent from third-quarter revenue, up 245 million and the highest quarterly revenue in the Company's history. The increase in revenue is due to the higher seasonal volumes we historically see in fourth quarter, as well as growth in several international regions related to the launch or expansion of client programs.

Fourth-quarter income from operations was 8.1 million, down from 9.1 million in the third quarter and up from a loss from operations of 27.8 million in the fourth quarter of 2002. We generated a loss in the fourth quarter of 24. -- excuse me, of 2.4 million or 3 cents per share. This compares to net income of 2.1 million or 3 cents per share in the third quarter at a loss of 22.1 million or 30 cents per share in the year ago quarter.

The fourth-quarter loss included the negative impact of adopting EITF 0021. This new accounting unfortunately requires the deferral of revenue and expenses associated with the launch of new client programs. This resulted in the deferral of 2.1 million in operating income on an after-tax basis in the fourth quarter.

We invested 9 million in capital expenditures during the quarter, primarily for additional investments in our centralized technology infrastructure and construction of customer management centers in the Philippines and Brazil. We generated 19 million in free cash flow, which is calculated by taking cash flow from operating activities and subtracting capital expenditures. This compares to free cash flow of 28.4 million in the previous quarter and 47.5 million in the year ago quarter.

Our cash balance increased 15 million from the prior quarter, and we ended the year with 142 million in cash and just over 129 million in total debt, placing us in a net positive cash position defined as total cash and cash equivalents less total debt. Given our mix of international revenues, we are pleased that our DSOs decreased sequentially by two days from 53 days in the third quarter to 51 days in the fourth quarter.

Now let me provide some information on our financial results for the full year. 2003 revenue was 992 million, down 2 percent from 2002 revenue or just over 1 billion. The decrease in revenue is primarily attributable to the lower volumes in the North American segment, offset in part by increases in the international segment and Newgen. 2002 income from operations was 10.3 million in 2003 compared to 5.9 million in 2002. We reported a net loss of 41.2 million in 2003 or 56 cents per share, including in the 2003 net loss are the following items -- 29.9 million of non-cash charges related to establishing deferred tax asset valuation allowances, principally taken in the second quarter; approximately 6.2 million of non-cash charges related to the write-down of deferred tax assets along with tax adjustments of certain prior years' financial results, and net charges of 10.6 million related to the closure or impairment of certain facilities and severance costs, of which approximately 5 million were non-cash charges.

Capital expenditures were 79.1 million, including 38.2 million related to the acquisition of our corporate headquarters building in the first quarter of 2003. Finally, our year-end cash balance of 142 million is essentially flat with the year-end 2002 balance of 145 million.

In summary, our full-year 2003 results were negatively impacted by the continued global economic weakness that carried over from 2002 and existed through most of the year, resulting in further lengthening of sales cycles and a significant reduction in client call volumes.

We are working aggressively to improve our financial performance and are focused on closing new business while improving profitability in certain client programs and implementing our cost reduction initiatives. On the second quarter call in mid-August, we discussed our goal of achieving 40 million in annualized savings during 2004. In third quarter, we had achieved approximately 20 million or 50 percent of the targeted 2004 annualized savings. We believe that we are now on target to achieve the full 40 million this year. Dennis will provide additional information on financial results later in the call.

Now I would like to review the fourth-quarter and full-year performance for each of the operating units. Our North American segment, which includes our operations in U.S., Canada, the Philippines and India reported fourth-quarter revenues of 159 million, a sequential increase of 8 million. While authority margin declined to 7.4 percent from 8.3 percent in the third product, the increase in revenue was primarily attributable to higher seasonal volume. Our operating income was negatively impacted by the new accounting rules related to the deferral of revenue and expenses associated with launching new client programs.

For the full year, North American revenue decreased 82 million or 12 percent compared to 2002, primarily related to lower volumes while operating margin improved from 4.3 percent in 2002 to 5 percent in 2003.

We are encouraged with having recently signed several new client relationships in our North American business unit, some of which have been announced including agreements with Best Buy and Circuit City. In addition, we expect to announce additional new business wins over the next several weeks. Our pipeline of new opportunities continue to build, and several existing clients across our key industry verticals are increasing their with us.

Moving to our international segment. Fourth-quarter revenue increased 11 million sequentially to 76 million, primarily due to foreign currency fluctuation, while operating margin remained unchanged at a -10 percent. For the full year, the international segment generated 256 million in revenue, up 43 million or 20 percent over 2002. The operating margin improved from -17 percent to -12 percent. Although we saw modest profit improvement in the segment, we are not pleased with these results.

To better understand the performance of the international segment, I would like to briefly discuss each of our three international regions. In Latin America, the multiyear relationship with Banco Santander is operating successfully and is nearly double the size of our Brazilian operation. Argentina continues to meet our expectations and is primarily providing Spanish and English based customer management solutions planned outside of Argentina. Importantly, the financial performance of both Brazil and Argentina are improving, and we believe there is additional upside.

Moving to Mexico. We reduced operating costs during the year by approximately 3.5 million and recently logged several new business opportunities. For the first two months of 2004, Mexico reported breakeven results, and we believe this country will return to profitability during 2004. The leadership team in this region made substantial progress towards the end of 2003 to lower costs, improve on profitable client relationships, strengthen operational delivery and increase profitability. I believe this trend will continue in 2004.

The Asia-Pacific region has solid opportunities to expand its business, including a recent agreement to provide these information services in China on behalf of the U.S. Department of State. This agreement is fairly complex in nature and is utilizing our global IT expertise and resources from various parts of the world actively involved in this project. Asia-Pacific's year-over-year revenue grew by just over 20 percent year-over-year, the majority of which was due to the weakening of the U.S. dollar, and importantly we launched new client operations in Malaysia and Korea.

Our operations in many of the countries in this region are meeting our expectations, and we are proactively addressing the challenging marketplace in Australia with targeted cost savings initiatives (technical difficulty) profitability. During the year, we implemented programs in the Asia-Pacific region with BMW in New Zealand, Ozzie (ph) Home Loans in Australia, along with several other client programs in China, Singapore, Korea and Malaysia, and we look forward to announcing additional new client agreements.

Moving to Europe. We continue to be challenged in this region and are disappointed with its financial performance. On a positive note, during 2003, Spain signed a significant facilities management contract with a major global telecommunications company, and our efforts to streamline the European operations resulted in improved year-over-year financial results.

Our primary challenge in this region has been filling available capacity in the UK. During the year, we launched several new client programs, including a multi-label program with one of our key clients.

Having discussed the international operation, let me provide an update on Percepta and Newgen. Percepta returned to profitability in the first quarter of 2002 and continued the trend throughout the year. In addition, Percepta paid 12 million in dividends to its joint venture partners in 2003. We received 6.6 million related to our 55 percent ownership interest and have now recovered just under 50 percent of our total invested capital since the venture was formed. We are pleased with the operational improvement and cost reductions we have implemented. We are successful in returning the venture to profitability. This has enabled Percepta to generate cash that can be returned to the joint venture partner.

Newgen demonstrated year-over-year revenue growth of 14 percent in 2003. We recently welcomed Greg O'Neal as Chief Operating Officer. Greg comes to Newgen with nearly two decades of automotive industry experience, most recently as President and COO of Mitsubishi Motors North American sales division. Greg is well known within the automotive industry and is already having a positive impact on the relationships Newgen has developed with its OEMs and dealership clients.

Additionally, Newgen significantly expanded its solution set during 2003, with the launch of Sales Channel (ph), which supports the dealers and the sales process management, and AppointNet (ph), which supports the dealers in offering electronic scheduling of customer visits.

Although we believe these new offerings will further strengthen Newgen's increasingly diversified product set, we currently forecasting a decline in Newgen's operating income, predominantly during the first half of 2004. The decline is due to a combination of factors both internal and external, including the new product launch costs and the lower than anticipated client renewals. To offset this decline, we are implementing measures to better align our revenue stream and cost structure as we expedite the entry of new products.

In summary, 2003 was a challenging year, and as a result, the primary focus of our executive leadership team continues to be to aggressively pursue new client opportunities, pushing forward our cost reduction initiatives, and preserving the strength of our balance sheet.

I will now turn the call over to Dennis Lacey to review certain aspects of our financial results. After which, I will make some closing comments. We will then open the call to your questions.

Thank you, Ken, and good morning. I hope you will find again helpful having the expanded disclosures contained in our recently filed Form 10-K prior to the conference call. We believe our disclosures are consistent with and meet the most recent SEC guidelines and Sarbanes-Oxley requirements in that having the 10-K available to you prior to the call will allow you to focus more on management's plan for the business given the comprehensive nature of the financial information found in the filing.

The 10-K provides an extensive review of our full-year results, so I will not spend time repeating what is available to you in the filing. Instead, I will comment on the factors affecting the comparability of our fourth-quarter and full-year results versus prior period.

Before doing so, I would like to update you regarding our efforts to review and enhance our financial controls and processes. As is the case with most publicly traded companies in the U.S., we are actively involved in reviewing our internal controls and procedures in order to report on internal controls in 2004 as required by the Sarbanes-Oxley 404 requirement.

As disclosed in Item 9A in the 10-K, in conjunction with that review, we completed a global comprehensive analysis of our procedures, including those for reconciling financial statement accounts and identified adjustments, including certain tax matters which I will address in a moment totaling 11.7 million related to prior period. We determined that this total charge, which was recorded during 2003, is immaterial to all prior years affected both individually and in the aggregate.

Last quarter I spoke about instituting a quarterly asset quality review to insure a timely and well-documented assessment of the carrying value of all accounts that involve the use of judgment. Examples of items covered in the review include allowances against accounts and notes receivable, the (inaudible) of assets in our facilities, along with restructuring and certain other accruals such as income taxes.

During the year-end asset quality review, we determined the need to increase our deferred tax asset valuation allowance related to Brazil. In addition, our review resulted in adjustments to certain tax returns and the recording of additional tax expense related to prior years.

At the same time, we have focused on tax planning strategies and exploring the possibility of tax refunds. It is premature to know how much if any or when the refunds may take place. If we are successful in receiving tax refunds, we will record them as income at the time they are received.

To summarize, we have further strengthened our internal controls and have instituted even more rigorous procedures for period and analysis of financial statement account reconciliation and the correction of reconciling items in a timely manner. We also enhanced our accounting documentation policies.

Moving on to the MD&A in the 10-K, you will find a table entitled "Financial Comparison." This table, similar to the table found in the third quarter 10-Q, compares net income for 2003 with 2002.

Let me comment on a few of the more significant changes affecting comparability of our results. First, as discussed in the 10-K, a material factor impacting year-over-year results are the income tax adjustments in the establishment of deferred tax asset valuation allowances as required by Generally Accepted Accounting Principles. When these items are combined with the 3.6 million sales and use tax accrual we recorded for Newgen during the second and third quarters, the aggregate amount of the 2003 tax-related adjustments is approximately 40 million.

Other year-over-year factors, which were previously disclosed in our 2003 quarterly filings include, among other items, decreases in North American operating income due to no longer having our lower profitability on certain client programs and incrementally higher losses in Latin America. In addition, we saw lower margins in the Asia-Pacific region, primarily related to a renegotiating client agreement and higher net interest expense as a result of amendments to our existing debt agreement. These factors were in part offset by a reduction compared to 2002 in restructuring and impairment losses, an improvement in Percepta's financial performance, and a reduction in operating losses in Europe on a comparative basis.

Although the 10-K does not provide a financial comparison from the third quarter to the fourth quarter of 2003, I want to make some comments related to our sequential quarterly performance. First, as outlined in the press release, fourth quarter was negatively impacted by several items, including establishing a deferred tax asset valuation allowance for Brazil and adjustments to prior period's tax expense totaling 5.5 million, realizing a $3 million reduction of revenue during the fourth quarter compared to the third product under performance-based pricing contracts, and cost associated with launching new client programs and deferring approximately 2 million of income related to EITF 0021.

As I explained on the third-quarter conference call, This EITF requires that if a customer does not pay for upfront program launch costs, we immediately record as expense the associated costs, which results in an operating loss during the initial phase of a new program. If on the other hand a customer pays for the upfront launch cost separately, the net profit on the launch phase is deferred and spread over the life of the contract even the related profits are generated upfront. Either way, the impact of the EITF is such that as business ramps up, the profits are deferred to later periods.

Lastly, these items were offset by improved financial performance on certain North American outsourcing clients and the reversal of previously accrued 2003 bonus accruals because our results for the fourth quarter did not meet our expectations.

Let me also provide an update regarding our cost reduction plan. In the second quarter of 2003, we established a goal of 40 million on an annualized run-rate of cost reductions to be achieved during 2004. These improvements were to address management's dissatisfaction with the Company's recent financial performance, as well as the previously disclosed and scheduled reduction in operating income from a large client program. These savings were to be accomplished via several initiatives, including streamlining our operations, implementing get well plans for under-performing client programs, investing in global technology and systems enhancements and reducing our cost structure in various areas. As of today, we have achieved approximately 35 million of a targeted 40 million in actual annualized savings for 2004 and remain committed to achieving the full 40 million in savings during 2004. Approximately 50 percent of the savings were achieved via reductions in workforce, and the remainder came from lower costs in various areas of the business, including telecommunications and consulting costs. Further, we are currently actively exploring additional areas of cost savings initiatives.

Let me now take a moment to review our financial position, which we believe continues to be strong. Cash and cash equivalents were 142 million at year-end, up from 127 million at the end of the third quarter. Our total debt was 129 million, putting us in a net positive cash position of 13 million defined as total cash and cash equivalents less total debt.

Also, during the fourth quarter, we generated 19 million of free cash flow, defined as cash flow from operations less capital expenditures. DSOs decreased to 51 days from 53 days in the previous quarter, and we continue to operate within our targeted range of 50 to 55 days.

Regarding our business outlook, inconsistent with our approach for the last several quarters, we are not providing financial guidance for 2004 at this time. We expect to operate at approximate breakeven during the fourth quarter principally due to the previously disclosed reduction in profitability of a large North American client agreement and sequentially lower financial results in the database marketing consulting segment as Ken mentioned. We also expect to see some impact associated with the accounting deferral related to new program launch costs.

Taking into account the interplay of these moving parts, we are currently forecasting that our first-quarter financial results will cause us to violate certain financial covenants on our existing debt agreement. As a result, we will be working with our lender groups to amend the agreement and believe we will be successful in obtaining any needed amendments.

In conclusion, we remain focused on furthering our plans to position the Company for future profitable growth, including closing new business opportunities and achieving our cost reduction initiatives.

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

Thank you, Dennis. As we look back on 2003, we are encouraged by the progress we have made in certain areas of the business, including signing new client agreements every region we operate in, improved financial performance at Percepta, and the successful launch of new products in our customer management and Newgen segments. However, we still have work to be done.

I believe that for the last several years we have been operating in an unusual global business environment. Furthermore, the customer management industry has been pressured by increased client sophistication in certain sectors and to a lesser extent excess capacity, the result of which are tighter contractual terms and more aggressive pricing.

In response, our executive management team is working closely in three key areas to return the Company to an acceptable level of profitability to retain our position as a leader in the customer management industry. First, we are focused on growing revenue with profitable long-term client relationships. In my opinion, we continue to have a robust sales pipeline, and given our track record, we are confident we will win our share of the new business opportunities. However, we are selective as to which new business opportunities we pursue and are focusing only on agreements that meet our targeted hurdle rates and offer an appropriate return to our shareholders.

Second, we are focused on lowering costs around the globe, both cost of services and SG&A. As Dennis mentioned, we have achieved approximately 35 million of the 40 million cost reduction initiatives on an annualized basis, primarily through streamlining our operations and are on track to accomplish the 40 million going forward.

And third, we have established specific plans to improve the financial performance of certain client programs, including negotiating price increases, making operational changes and in some cases transitioning the client relation.

In closing, 2003 was a challenging year. Although we saw success in key areas of our business, we intend to remain sharply focused on these three areas I outlined and believe it will take the first half of 2004 to see the benefits of our success in closing new business as well as achieving our cost reduction initiatives.

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

(OPERATOR INSTRUCTIONS). Bob Evans.

Craig-Hallum Capital Group. Good morning, gentlemen. First, can you comment on how is the Verizon contract renewal going, Ken?

We feel very good about it. The progress that we have made to date is we are exactly where we want to be, and we are moving in a very positive direction, and we look forward to being able to announce something very shortly.

Would that be an inaggregate type of contract renewal, or would that be more for individual pieces of the business?

You know I really at this point would hate to comment on exactly what it is far, but I think I would just rather keep it at that. But, again, we feel positive about where we are with it and feel confident that both parties are where they want to be, and stayed tuned in the next week or two.

Fair enough. Also, I think, Dennis, in the 10-K, the breakeven assumes some severance costs. Can you give us a sense of how much that is? I guess I am trying to figure out what is onetime versus operating in Q1?

Well, there will be an element of severance costs involved. We have in the MD&A pointed out some of the areas where that severance cost will be incurred and gave some dollar amounts there. But beyond that, we are not commenting at this time.

Would that be the only onetime item in the Q1 that you are aware of?

That -- I am not anticipating any other onetime events at this time.

Okay and why was the other -- in Q1, the other expense line item was up more than I had anticipated. Is there anything in there that was unusual?

There are moving parts from year-to-year. If you are looking at the year-over-year change --

Even sequentially from Q3?

Yes. On the year-over-year results, we have the interest expense has gone up roughly 4 million. Also, I believe we discussed this last quarter, we had almost $3 million foreign currency adjustment related to into intercompany balances that occurred. And then in the prior year to that, we had (inaudible) losses we did not have the prior year, so those all net down to about 5 million. And then within the fourth quarter to third quarter, the difference would be the loss on disposal of assets and, of course, slightly higher interest expense.

Okay. Fair enough. Can you comment at all, Ken, in terms of since the beginning of '04, you have had a number of news announcements. You have not necessarily put the size or given us a sense of magnitude. Can you say at least in aggregate how many seats you signed or a ballpark? I am just trying to get a sense of how far the needle is moving in terms of adding more seats seats thus far.

As you can imagine, because we operate in some many (inaudible) and because the revenue is so different from one location to another, we always find it dangerous if we give people an idea of the number of seats because then they might calculate it as -- I am being hypothetical -- offshore capacity or U.S. capacity. What I will just simply say, and it is not meant as a (inaudible), is we are launching in the thousands of seats across the globe.

Okay. So that --

Several thousand.

That is business that you have already won; is that correct?

Yes. We would not be launching business unless it is signed contracts, a majority of which has not yet been announced. As you can imagine, clients are becoming increasingly more sensitive to announcements just based on publicity, negative media, etc., and so, therefore, it just made it that much more difficult for us to put out announcements with names. But I feel very confident that there will be announcements coming out in just the next couple of weeks or less that will start to put some clarity on where all this growth is taking place. But it is safe to say that the growth is happening all across the board -- North America, Asia-Pacific, Latin America, etc... And as I said, it is in the thousands.

Bob, one thing consistent with Ken's comments as he is talking about ramping up programs, the EITF 0021 that we talked about will have an impact on our results.

In the first quarter?

(multiple speakers). It is really -- the fact of the matter is as long as TeleTech is in a growth mode and it is signing up business, the EITF is something that we are going to live with forever. Therefore, the way the accounting is now done, it will have an impact. That is the bad news.

The good news is it has a positive impact so to speak I guess down the road, but it just requires -- it just elongates the whole process, and it is really an accounting rule that we don't control.

I guess the other thing I should probably mention is that we are very pleased with our capacity utilization, and it is something that has been moving up fairly rapidly. I believe in this last K that we filed, we posted 70 percent. We are very confident that in first quarter that that number will continue to go up in a significant way. So I think that it is clear that we are -- that management is, in fact, making quarter over quarter progress, not just in the cost reduction area, but in filling the unused capacity. So I hope I answered your question.

You did. Dennis, as a follow-up, can you give us any sense of magnitude in terms of how much it is hurting you in the first quarter, basically the accounting rule change relative to how much expense you're going to have to take, which will dampen EPS?

We do not -- that is not a number that we have with clarity that we could put out right now. Because as you might imagine, it is one of those moving targets. As you launch programs and depending on how they are structured, that is not something we can really give you any definitive guidance on right now. I believe there will be some impact, but we cannot really clarify that for you at this time.

Fair enough. Thank you.

Brandon Dobell.

It is First Boston. I wondered if I can get a little bit more clarity on the database business I guess from two perspectives? One, you talk about a material decrease in profits. I am just trying to get a sense if there is a margin level that you could give us or a year-over-year decline? I guess a little bit more color on if it is more of a near-term ratio with the product launches or if the renewal trends are consistently going against you there?

We are really not comfortable commenting on margin. This is something that we feel is a temporary cyclical thing. We have seen this happen about three years ago, and we are very confident that the margins will improve in the near-term.

Is a better renewal environment a necessary condition for the margins to improve in the back half of the year?

Well, the fact of the matter is we are actually already starting to see our renewals improving, but it is not just better renewals. It is all about the wallet share of the dealer and your ability to sell other products. We have all these new products that are now coming on that dramatically increased the wallet share, and they have significant margins. So it is a combination of many things, renewal of legacy contracts, sell-through of additional new products, etc., while also continuing to lower costs. And I think we are being very proactive in that unit and making sure that their costs are in proper alignment while simultaneously they are growing their salesforce so that they can continue to attack marketplace and garner more and more marketshare.

Okay. Fair enough. A different direction here. You mentioned meeting some hurdle rates when thinking about investing capital. I was wondering if -- did those hurdle rates change region to region, or did they change as you increased capacity utilization? Let's say if you are at 50 percent, are your hurdle rates different than they would be if you were at 85 percent capacity utilization? I am just trying to get a sense for how you think about filling up those marginal seats?

We use a risk-based pricing model, so things to definitely change region by region, contract by contract to the extent of whether or not we are employing new CapEx or using existing capability. So the model is rather dynamic in that sense, and we consider all those factors that you talked about.

Okay. So I guess in a related way, the last of the quarters we have heard pretty consistently I guess from you guys that the pipeline is getting better or it is real strong, and you mentioned that you expect to see utilization tick up pretty well in Q1. I guess I am trying to get a sense for if we could map out the next 12, 18 months or so, you mentioned in the K that the target utilization rate was more like 90 than 85 percent. Is there a timeframe that you guys can see based on what the pipeline looks like for the utilization to get that 75 or 80 or 85, or is that just too tough right now?

No, I don't think that is too tough. I think it is safe to say that we would like to see our utilization exiting fourth quarter in the 80 percent range, and I think that is very achievable based upon the pipeline that we have, the deals that we are converting, the growth that we are seeing. All that being said, what I want to point out is we are also intentionally exiting accounts that are not achieving profitability and, therefore, that does create capacity. So one of the best ways to get a better ROIC instead of just continuing to build capacity on top of business that is not performing is to cull the business and to recycle that capacity and repurpose it to higher margin business. That is something that we would say in the last two quarters have been very successful in doing, and hopefully in our next quarterly call, we will maybe have the opportunity to give you a little bit more visibility. But the fact of the matter is we have maniacal focus on client by client project by project profitability across the globe, and everyone of our region heads have programs and thresholds that they have to achieve so that the business that they are managing today is, in fact, needs to be accretive, and the new business that they bring in also has to be accretive.

So the only reason why I bring that up is because there are some offsetting factors that take place that as you are fueling capacity, you are also saying to yourself, okay, I am running out of capacity -- and I am being hypothetical -- in one particular region, now let's look at the business that is not generating a profit or is subpar performance, and let's see what we can do about having some form of a -- something to change the profitability whether it be a renegotiation of a price or whether it be a change in operations, or in some cases the potentiality of transitioning the business. But all that said, I still feel that we can get to 80 percent.

Okay. One last question and I will jump out. Related to that, when you go back to customers that you view as unprofitable or not quite as profitable as they need to be, are you getting pushback from them? Are they converting to a different price structure say they can keep you guys around? Are they just giving up and walking away? What has been the two or three trends there when you guys go back and look at those contracts?

That is a great question. In fact, I have a report on my desk that gives me all that information, and it just came this morning and I was not able to review it prior to the call. But I can tell you that anecdotally what you tend to find out happens is when the clients know that you are delivering value are very understanding if there is a reason as to why the account is operating in a subpar situation, and they tend to be reasonable and willing to renegotiate or to change the terms to convert it to something that is more palatable.

The clients where they in turn are dealing in their own very competitive marketplace and have less focus on the customer and more focus on treating it as a transaction, they tend to be a little bit less sympathetic and look at what their other opportunities are as to whether it makes sense to extend the relationship or to transition the relationship. So I would say it is in all the categories that you just suggested. There is no question about it that we are getting a very good percentage of take on adjusting of the price when necessary.

My view, this is not -- this is a certain segment of our business. A lot of business meets our thresholds and does not require anything. Just continuing to do what we already do.

And a lot of this stuff is not in North America. It is based in international regions which is where you can see the drag that has been historically, and that is why we are so focused internationally on making each and everyone of these clients profitable and not applying anymore future capital there until they are at 85 percent utilization and until they are operating profitably. And so I think you will see that the trend going forward is they are either going to be accretive, or they are not going to get any more capital. And I think we are making substantial progress, like I said, in the Latin American region, as well as in the Asia-Pacific region as it relates to this. We look forward to those results flowing through in the near-term.

Great. Thanks a lot. You have been very helpful.

John Mahoney.

Raymond James. Approximately how many seats or percentage rather do you have in Southeast Asia right now?

I am having someone look that up right now. I don't believe that we have all that many because we are really in a ramp mode. But hang on one second. We will see if we can give you a number in just one second.

As a follow-up to that question, how many do you think you will have at year-end as a percentage of total? That seems to be the thing that is obviously the big trend industrywide. I know you have the joint venture. I was wondering how you are going to manage those costs?

And I want to make sure I understand correctly that you don't expect any charges in the first quarter, so the breakeven level for profitability on an operating basis net of D&A and interest expense, right?

Let me -- although I think we all think we have got a good handle on our geography, Southeast Asia is a little ambiguous. Do you want to specify what region you are specifically speaking of?

India, China, Philippines. You know, the very low-cost labor market where most of the industry seems to be moving rapidly.

Yes. What I would tell you is that it is a relatively small percentage of our overall business. It is in the thousands. I really don't want to give an actual number out, but it is safe to say that we think we are in a very good position based on the current political climate. We tend to believe that it is important that we go where our clients need us to go and wants us to go and to make sure that we have the proper amount of capacity available in all the right theaters. We are not challenged in any way, shape or form in delivering on what the requirements are whether they be in India, whether they be in the Philippines or in other lower-cost markets.

So what I would just simply say to you is that the number is, in fact, growing, but we are probably not as focused on increasing at the rate that maybe some of these other companies are claiming to compete with us on.

Okay. Is that going to be where your fastest growth is in '04?

I don't think so. No, I don't.

Okay.

I think that there is a certain segment of clients that want to go to those regions, and there is a whole very large segment that will not go to those regions. I think that we view this area as a tool, one of many tools in our bag, and we don't believe that it is an overall strategy. We think that internally we believe that it would not be a prudent strategy if that was our only strategy. (technical difficulty) labor arbitrage, which really leads to nothing more than pure commoditization.

There is a tremendous amount of people that are very focused right now on quality, and that is not to say we cannot deliver that in those regions. We absolutely can, but the fact of the matter is their requirements are calling for them to be nearer to shore.

Okay. And just to clarify, on a pre-tax basis, you are going to basically breakeven in the first quarter? I know it's maybe not guidance, but that is the direction?

Yes. I believe after tax is what we are saying to be conservative.

Can you give us a feel -- the revenue is typically down sequentially in the first quarter. Is that going to follow suit just seasonally?

I am sorry. I think that the revenue is going to probably be -- if it downticks, it will downtick a little bit but not a lot. So it is tough, and we expect it to be somewhat flat.

Okay and the last question. The differential between the 6 cents of operating profit this quarter and breakeven in the first, how would you assign that? To what major -- the accounting is not an issue Q4 to Q1 or maybe it is because you're growing some new projects -- but how would you primarily assign the 6 cents?

I think I covered some of that in my presentation earlier. We do have the subsidy issue on a large client program going down in the quarter. We talked about that. We talked a little about the Newgen situation. We will have some risk costs that will pull us down, and of course, as we grow our business, that phenomenon will occur as we grow. We have that impact that retards the profit. So all those factors come into play in one particular quarter.

A fair amount of our new business that we're winning is multinational in nature and is taking advantage of our global footprint. There is no question that one of the key learnings that we are learning is that managing a multinational account is, in fact, at the beginning more costly as you go through the launch costs of getting them up in many many different countries. We have certain clients right now that are in launching in five plus countries all simultaneously on the same week, etc..

And so I would just simply tell you that it is why you are not seeing our revenues go to dip down most likely from the fourth quarter to first quarter because there is all this business that is launching across the globe. But associated with that is some pretty significant expenses.

Thank you very much.

Bill Warmington.

SunTrust Robinson Humphrey. A question for you on the tax rate. Just looking at it, it looks like you are not paying domestic taxes, and I wanted to ask how long you expect that that will continue?

Well, you picked a rather complicated (technical difficulty) financial position, our tax situation. We did give some guidance in the 10-K and the MD&A section on what we thought our effective tax would would be for next year, in the 20 to 30 percent range. But we are pursuing various tax planning strategies right now, and because we are a global company, until we know exactly how those tax planning strategies will pay out, I would rather not talk about our tax paying position in any one particular part of the world. But our overall guidance to have an effective tax rate in the 20 to 25 to 30 percent range is still the most reasonable thing to include in your model.

Okay. It seems that there is some deferred tax assets that are reducing the domestic level for a period going forward. I guess my question is at what point does that become a, for lack of a better word, more normalized tax rate?

Yes. We have deferred tax valuation allowances up for the bulk of our deferred tax asset, which as you understand from your comments, means we don't set up deferred tax expense until that is reversed from future earnings. So at some point either by virtue of tax planning strategies or earnings, we will not put up deferred tax expense at that time, and thereafter, as you say, we have a normalized tax rate. We are not giving guidance as to exactly what point in time that event would occur.

Okay. A question for you then on looking at the breakeven level in the first quarter of '04. Assuming that that includes the 8.5 million of the Verizon CLEC fees, which looks like about 11 cents, the question is for Q2 that seems like a steep sequential drop. Do you feel that you have enough new business ramping up,and given some of the accounting parameters you have described, that you will be able to bring the company to breakeven in subsequent quarters and how quickly after the second quarter?

Well, I am not giving specific guidance on the second quarter at time, but we are certainly not forecasting having a loss at that time. We started anticipating this quite a while ago. The cost reduction program that we put into place starting last year was in part driven by the fact of a loss of this subsidy, so we have been working on this for a long time so that we could absorb this particular phase-out if you will appear.

What unfortunately it did not work out in our plans was the accounting rule change. So at the same time to say that we are ramping up our business, we wind up growing our business, which is a positive economic impact. But this new accounting rule change reflects it as a negative. But it is an investment we have to make for the future. We really have no choice. If we don't invest in a new business, you don't get ahead of the curve.

So the accounting is such that as we invest in the future, we have this drag on earnings which is coming at the exact same time. But we would not be forecasting at this time a lost for the second quarter. Our breakeven comment remains.

And then I wanted to also ask about the buying back or increasing your ownership on the TeleTech India joint venture in February '04 taking it from 50 to 60 percent. How does that change the accounting for that venture in terms of how you recognize revenue and earnings? Does it impact it, or are you already consolidating it?

We will consolidate it starting in the first quarter because of that, and before that, it was accounted for as a joint venture. But the associated revenues and expenses were not material to anything that was reported.

Okay, fair point. The last question is relating to Newgen. I just wanted to ask for a little color in terms of what was going on there that was causing some of these accounts not to renew, and have they subsequently renewed or potential for them to renew in the future?

Well, it is a little bit to early to comment on exactly your question, but, yes, there is definitely an opportunity for them to renew subsequently. There is all kinds of things that are going on in the automotive industry, and some of them are cyclical that have to do with expense caps and things that I am not going to bore you with the details. But the net net is that we feel confident that the renewals will come back strong and that this would be nothing more than a speed bump when looked back historically.

All right. Well, thank you very much.

Kit Case.

Southwest Securities. Quickly what was the -- looking at the international business, can you give us maybe the growth rate sequentially and year-over-year in constant dollars?

(multiple speakers). In the fourth quarter, revenues grew roughly $16 million due to FX, and if I recall, year-over-year it was like 38. I believe around 38 million year-over-year.

Okay. So fourth quarter grew 16 million from fourth quarter of '02 or from (technical difficulty) '03?

(technical difficulty).

Does that answer your question?

I did not hear the answer.

I can give it to you by quarter if you would like. It is roughly 3 million in Q1, 9 million in Q2, 10 million in Q3 and 16 million in Q4. For the whole year, that should add up to around 38, 39 million.

Okay. Great. I guess to further breakdown on the other income, other expense line, could you breakout the interest expense and maybe interest income from that?

For the quarter?

Interest expense in the fourth quarter was $3.5 million. I am sorry, $3.2 million net.

Net. Okay. And the remaining 700,000 was for what generally?

Impairment losses was included in that, and there was probably the next largest number included in that.

Okay. Also going to Spain, I guess in the K you talked about your largest client putting the business out to bid. How is that going to impact you? Knowing you could lose some low profit type business, but how is that going to impact you overall if this thing goes out to bid? Is it going to reduce your price on this business?

Yes. We are very far into the renegotiations stage. They are done with bidding, and we look forward to announcing something in the near-term.

All right. Thanks.

Scott Schneeburger.

Lehman Brothers. Could you just comment -- a host of companies in the industry have been redefining their workforces. Could you just speak to that a little bit as far as industry and your position in it within this cycle in the forefront? Do you have aways to go? If you could comment around that, please?

I'm not sure I fully understand the question. I apologize.

As far as the workforce levels and what you see as trends in the industry and the trend for yourself and just juxtaposing yourself within the industry?

Again, I want to give you an accurate answer. Do you mean full-time versus part-time? Do you mean onshore versus offshore? I just need a little bit more --

Sure. I guess if you could just specify on full-time, and then if you could give a breakout for offshore, that would be helpful.

You know historically our organization has been more of a full-time organization, our client because of the nature and complexity of the business that we do, the amount of training that is required upfront requires much more in nature a less transient workforce ad a more full-time workforce that has a longer tenure. And, therefore, as you can imagine, there is some associated costs that go along with that, i.e. benefits.

We tend to seek out very complex opportunities. And hence our workforce has been fairly consistently operating at about 85 percent full-time. We do see an opportunity longer-term for our workforce to trend a little bit more towards the part-time, but I do not believe that we will ever get to where some of these other companies are who we don't really consider to be core competitors that are probably more in the 50-50 level of full-time, part-time. My guess is that we can maybe get it down to 75 percent over a longer period of time, but it is not going to drop below that based upon the nature and the complexity of the work that clients are asking of us.

As far as offshore versus onshore, that is a very complex question. The way that I will tempt to answer it is the following. We operate in 16 countries, serving clients in country, in region as well as on a multinational basis. And because we are defined by just our revenues, the second-largest player in the world, we are automatically going to get our share of the percentage of business that is being offered out there.

And as to what the percentage of that makes is going to be, that is going to require it to be offshore or blended with nearshore and onshore. I think it is too early to say due to the November elections and the fact that you have people making all kinds of political statements about this.

What I would tell you is that we are aggressively pursuing long-term clients that we believe can be profitable regardless of where we deploy the capability, and we are absolutely confident that we have the best global footprint and the best mixture of capability, whether it be our nearshore Latin American capabilities or our offshore abilities in the Philippines and India, and we are absolutely confident that there is a marketplace for both of them. What we will not do is tilt all of our business to offshore because we believe that that in itself is a slippery slope and that longer-term there are just not enough margins there to sustain an organization with the quality requirements that our clients are asking of us.

I would say the majority of clients that are looking at offshore opportunities are, in fact, not looking for a wholesale offshore capability but, in fact, are looking for a blend where they can put X percentage in offshore or multiple offshore environments, X percentage in the nearshore, and X percentage in an onshore environment. That is really going to be strategically I think the focus that we are going to stay with.

Either way we are market-driven, and we will allow our clients to assist us in assessing our capacity and taking advantage of it. The good news is the capacity is built out. It is up. It is running. It is fully operational. It is delivering high-quality, and now it is really just up to our client and them making decisions as to where they would like to place the capacity.

Thanks. That is helpful. A little more dynamics then with part-timers offshore, a little more fluctuation, and perhaps a little bit more bent towards part-timers, or is it still too tough to tell?

Well, I will tell you, the fact of the matter is that just as we suspected many of the organizations are starting to experience very high turnover rates in their offshore locations due to the amount of business that is going there. We are very very employee focused, and I would just simply say that what our human resources and human capital department is going to consistently do is determine what is going to allow us to retain the employee for the longest period of time. And if they believe that we are going to get better retention out of maintaining a full-time employee, whether it be in one of these offshore or nearshore countries versus it being part-time, that is the direction we are going to go. If that become something that is strategic compared to the other competitors that only want to hire them part-time, that is important to us.

Our clients invest too many millions and millions of dollars in training that their goal is retention and us being able to keep these clients and -- excuse me, these employees with us as long as humanly possible.

Thanks very much.

Mark Bacurin.

Robert W. Baird. A couple of things. Ken, given the required renegotiation of the covenants, is there any opportunity for you to take some of that cash balance and just payoff a large portion of that debt? And then a related question is, what is your thought process on the CapEx budget for '04 given some of the contract wins you have had?

I think our long-term finances is a fluid situation, and I believe that because we have a strong balance sheet, we have many options. And our CFO in our Treasury Department is looking at all of our options and assessing which wants makes the most sense.

The good news is that we don't really need to do anything, and it is really just a matter of figuring out what is going to be the best benefit to our shareholders. So, Dennis, if you want to add any additional commentary on that?

No. I think Ken praised it appropriately. We do have options we believe. There is a matter that we disclose in our 10-K and that is that there is a makehold (ph) provision with respect to some of our debt that would result in a loss if we were to pay it off now. However, we think if we refinanced at low rates, we could recoup that over the timeframe. I think you asked about CapEx, and we also have in the 10-K an estimated CapEx expenditure for next, and I believer that is in the range of $40 to $50 million that we disclosed.

Great. Trying to get a feel then for -- obviously the new accounting rules have some push out of profitability in some of these new contracts. But assuming you achieve your $40 million cost savings goal during 2004 and then you start to get some of the benefit of these contracts ramping and the profitability that comes in the back half or the latter part of these contracts, it sounds like you should be on track for nice sequential improvements in margins as we move throughout 2004. I was just curious if you have -- historically you have achieved 10 percent operating margins -- whether or not you have some sort of goal over the next two or three years of what kind of margins you think you can get back to given obviously some of the mix with (inaudible) going offshore as well?

Well, we certainly have goals, and because we have really taken the position that we are not going to be giving guidance, I think it would maybe be imprudent and premature for us to provide you with what our internal goals are. What I will tell you is that it goes without saying that as these regions are now stabilizing and as they are entering a period of profitability from losses and as more business comes on and as we are much more focused on the profitability on an account by account basis, we certainly believe that, in fact, is possible and achievable for us to achieve margins that we have historically achieved in the past.

The question, though, that I am not going to answer for you is to when that is going to take place. We would like to get another quarter or so behind us and get even more visibility on how we are doing, as well as we see more opportunity for further streamlining and cost reduction, and we would like to get those plans under way, etc., to create an adequate cushion so that we can feel confident in our future forecast from a prediction standpoint of what we can achieve from an margin standpoint. I do think it is certainly safe to say that getting to the high single digits is something that will be achievable, and clearly it is not going to be achievable this year, but it is certainly something that is achievable in the future.

And just finally, could you comment given all the negative press that is out there with regard to offshore and outsourcing of jobs offshore, have you seen any change in client attitude or behavior toward the way they are thinking about a blend solution, or what percentage they might want to go offshore? Are you seeing any pushback and maybe some stuff coming back domestically?

The answer is yes. It is no secret that there has been a fair amount of business, none of which by the way that has been with us. But there has been a fair amount of business that has actually already come back -- that has round-tripped, so to speak, if you want to call it that -- and we are seeing that.

That being said, we really do believe that this is tied to the November election, and we really do believe that this is going to blow over. At the end of the day, the media is confusing outsourcing with offshoring, and they don't seem to be drawing the parallel between manufacturing and service. I think it is very safe to say that it is not going to be physically possible to in a material way impact the servicing in a nearshore/offshore environment without also creating some pretty draconian type of policies as it relates to manufacturing. I just don't think that is going to happen.

Although I don't have a crystal ball, I think that this is a lot of political rhetoric to win votes. It is now coming from both sides because it is a populist thing to do, but I think this will die down, and once we get past the November elections, you'll see probably a little bit more demand than you are actually seeing right now.

I think the big unknown is going to be what actually happens in the future with some of these campaigns that are going on and whether or not they are going to start to really lash out as they have in the UK and some other countries against users of some of these services, which, in fact, could cause some of these companies to want to come more nearshore/offshore. What I will just simply say is, we are prepared in the event of wherever this ball falls, we feel very confident in our ability, whether it be with North America capacity or whether it be with offshore capacity, to have the right amount of capacity at the right time. Therefore, we feel that we can capitalize off of whatever the situation is.

Great. Thanks.

Thank you.

This concludes TeleTech's fourth-quarter earnings conference call. Thank you for joining us today, and you may disconnect by hanging up your touchtone phone. Have a good day.