TTEC Holdings Inc (TTEC) 2004 Q1 法說會逐字稿

Good morning and welcome to the TeleTech first-quarter 2004 earnings conference call. I would like to remind 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 conference over to Karen Breen. Thank you, ma'am. You may begin.

Thank you. Good morning and thank you all 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 first quarter of 2004 ended March 31st. Yesterday, TeleTech issued a press release announcing that its quarterly report on Form 10-Q had been filed with the Securities and Exchange Commission. This call will reflect items discussed within that press release and Form 10-Q, and TeleTech management will make reference to it several times this morning.

Speaking on today's call are Ken Tuchman, our 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 the first quarter. Dennis will then review certain aspects of our financial results, following which Ken will make some closing comments. After our prepared remarks, 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 certain risks 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 certain new client programs; reliance on a few major clients; the risks associated with lower profitability from or the loss of one or more significant client relationships; the Company's ability to close new business in 2004; the risks associated with achieving improved profitability in the database, marketing and consulting segments; execution risks associated with achieving the targeted 40 million in annualized cost reductions announced last year; and the second phase of the cost reduction plan announced today; the possibility of additional asset impairments and restructuring charges; the impact to current and future earnings related to refinancing the Company's debt agreements; and the related make-whole provisions and the ultimate liability associated with the amount of past sales or used tax obligations for the Company.

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

Thank you, Karen. I'd like to begin by reviewing our first-quarter financial results, after which I will give a business update.

Let me begin with the first-quarter revenue, which was 266 million, up 20 million or 8 percent from first quarter 2003 and up 4 million, or 2 percent, from fourth quarter. The year-over-year increase in revenue is due in part to recent new program launches and growth in existing client programs, as well as foreign currency gains resulting from the recent weakening of the U.S. dollar.

First-quarter income from operations was 4.9 million compared to 6.9 million in the first quarter of 2003 and 8.1 million in the fourth quarter. As planned, included in the first-quarter income from operations was a 1.8 million net restructuring charge related primarily to streamlining our operations.

First-quarter net income was 1.6 million, or 2 cents per share, and in line with the approximate breakeven we discussed in the 10-k and on the fourth-quarter conference call. This compares to net income of 2.8 million, or 4 cents per share, in the first quarter of 2003, and a net loss in the fourth quarter of 2004 of 3 cents per share.

We invested 12 million in Capital Expenditures during the quarter, primarily to further invest in our technology infrastructure and to complete the construction on several international customer management centers, and believe we are on track to invest 40 to 50 million in Capital Expenditures in 2004.

We generated 14 million in free cash flow, which is calculated by taking cash flow from operating activities, subtracting capital expenditures. This compares to negative free cash flow of 62 million in the year-ago quarter, positive free cash flow of 19 million in the fourth quarter. Generating positive free cash flow allowed us to step-up participation in our previously approved share repurchase program, repurchasing 790,000 shares for a total of $5 million in the first quarter. Our cash balance increased 5 million from the fourth quarter and we ended the quarter with 147 million in cash and just over 123 million in total debt, placing us in a net positive cash position of 23 million, defined as total cash, cash equivalents less total debt.

Given our mix of international revenues, we're satisfied with DSOs (indiscernible) 53 days and relatively consistent with 51 days in the fourth quarter.

In summary, our first-quarter results were 2 cents higher than the analyst consensus and reflect our success in executing the multiphase profit-improvement strategy we announced in August, 2003, including closing new business, improving profitability in certain client programs, and implementing our targeted cost-reduction initiatives.

On the fourth-quarter call, we provided an update regarding the cost reduction aspects of the strategy and are now on target to realize the benefit of the full 40 million of cost reductions in the latter part of this year.

Looking ahead, we recognize that our ability to complete the changing -- to compete, excuse me, in the changing global marketplace will largely be contingent upon maintaining a lean, flexible operating environment that adapts quickly to changing business conditions. Therefore, the executive management team recently launched the second phase of our cost reduction plan. Given that we're just launching the second phase, we expect the incremental benefit to be partially realized in 2004 and fully realized in 2005.

Dennis will provide additional information on our financial results and details on the cost-reduction initiatives later in the call.

Before moving to the business update, we are pleased to have announced new or renewed agreements with Australia's largest wireless provider, a major new communications -- U.S. communications company, and AeroMexico, the largest airline in Mexico. Further, the Company entered into other agreements with new or existing clients during the first quarter, including a telecommunications company and a major institution, financial institution in Latin America, a government taxing authority and a telecommunications company in Europe and a multinational airline in the Asia-Pacific region.

In addition, we are expanding an existing business process management client relationship in the healthcare industry. And Percepta was awarded additional business with an existing client. We expect to announce additional new business wins and client expansions over the next several weeks as our pipeline of new opportunities continue to grow and existing clients are expanding their relationships with us.

Now, I'd like to give you an update to the business review I provided on the fourth-quarter call. Our North American segment, which includes our operations in the U.S., Canada and the Philippines and India, reported first-quarter revenue of 160 million, compared to 159 million in the fourth quarter. Excluding the 5 million reduction in revenue related to a large client program, revenue grew in the first quarter by 6 million, or 3 percent. Operating margin in the North American segment decreased to 4.8 percent from 7.4 percent in the fourth quarter and was negatively impacted primarily by lower profitability in a large client program as previously disclosed in our SEC filings, as well as cost to ramp several new client programs.

Moving to our International segment, first-quarter revenue was 81 million, an increase of 5 million from the fourth quarter. The increase was related to launching new client agreements and expansion in existing clients. In addition to the weakening U.S. dollar, operating margin improved from negative 10 percent last quarter to negative 5 percent in the first quarter, which is largely attributable to improved financial performance in certain regions.

I will now comment on each region individually.

Our Asia-Pacific region includes operations in six countries, many of which have recently won new or renewed client agreements. For example, we recently renewed the agreement with Australia's largest wireless provider, a relationship we've enjoyed for a number of years. Asia-Pac's first-quarter revenues grew 8 million, or 36 percent, over the prior-year quarter, which is mostly due to launching new client agreements, including new operations in Malaysia and in Korea in 2003, as well as the weakening U.S. dollar relative to the Asia-Pac currencies.

We are actively launching new client agreements in Asia-Pac region, which will negatively impact profitability as we incur startup costs. Overall, our operations in most of the countries in Asia-Pac regions are meeting our expectations and as I mentioned on the fourth-quarter call, we have proactively addressed the increasingly challenging marketplace in Australia with targeted cost reduction initiatives to improve profitability.

Latin America continues to make a meaningful -- to make meaningful progress in returning to profitability. Our first step was to return to break-even, and I am happy to report this region operated at that level in the first quarter, which is a significant improvement over the prior year. This is one of our larger accomplishments this year, as the Latin America region lost approximately 7 million in 2003.

Our operations in Brazil are growing and Argentina continues to play an important role in providing Spanish and English-based customer management solutions to clients outside of Argentina. Importantly, the financial performance in both Brazil and in Argentina are improving.

In Mexico, we launched several new client agreements and are pleased with the significant financial progress this country has made over the last 12 months. Having achieved break-even in the first quarter, we are forecasting the region will operate profitably in the second quarter, and I believe we will soon returned to long-term, sustained profitability.

I want to congratulate the Latin American leadership team on returning this region to profitability through lowering costs, improving unprofitable client relationships and strengthening the overall operational delivery.

Our third international region is Europe and although this region continues to be challenging, continual efforts to streamline the European operations resulted in improved year-over-year financial results. Europe's first-quarter revenue increased 12 million when compared to the prior year, the majority of which is due to new client agreements and expansions of existing client relationships. More importantly although, the region operated at a loss in the first quarter. The loss decreased by nearly 30 percent, compared to the prior-year quarter.

Let me also make a few comments regarding Percepta and Newgen. Percepta operated profitably in the first quarter and continues to maintain a strong relationship with Ford. During the first quarter, Percepta paid a $2 million dividend, 1.1 million of which we received as the majority shareholder. We believe Percepta will continue to generate excess cash and pay dividends in 2004 at approximately the same level as 2003, which would result in TeleTech receiving a total of 5.5 million in dividends from Percepta in 2004.

As expected, Newgen reported lower financial results on a sequential year-over-year basis due to the combination of factors, both internal and external, including new product launch costs and lower-than-anticipated client renewals. During the first quarter, we implemented measures to better align our revenue stream and cost structure and are hopeful Newgen will return to its historical operating margin by the end of this year, as we aggressively work to leverage the investment Newgen has made in the new product development.

In summary, first-quarter results were largely in line with our expectations. As we execute the multiphase profit-improvement plan we launched last year, revenue is growing and client satisfaction remains high, as demonstrated by continued growth in our existing client base. Although profitability is lower than our long-term targeted operating margin, we are seeing steady improvements in our financial performance, even as we incur costs to invest our sales and solutions infrastructure and to launch new client programs.

In addition, we recently began the process of deleveraging our balance sheet. Dennis will provide more information regarding these efforts, but I want to reiterate that we are very satisfied with the results. The new debt agreement provides increased flexibility to operate our business relative to the financial covenants we are required to meet while substantially lowering our annual interest expense once we've prepaid the senior notes. This was the right decision for our shareholders, and I want to express my appreciation to Dennis and his treasury team for the outcome they achieved.

Overall, we feel positive about the trends in the business and believe we're making noteworthy progress in executing the strategy we outlined during the last several conference calls. The primary focus of our executive leadership team continues to be aggressively pursuing new client opportunities and achieving Phase II of the cost reduction initiatives.

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. The 10-Q provides an extensive review of our first-quarter results, though as usual, 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 first-quarter results versus prior periods.

Within the MD&A, you'll find a table entitled "Financial Comparison". This table compares net income for first quarter of 2004 with first quarter of 2003.

Let me comment on a few of the more significant changes affecting the comparability of our results. Several quarters ago, we knew certain items would negatively impact the Company's profitability in 2004. As a result, we developed a strategy directly aimed at mitigating these factors. Our plan included growing revenue, achieving the 40 million in cost-reduction initiatives, transitioning certain work to lower-cost operating environments and improving the financial performance of certain underperforming client programs.

The good news is the financial comparison table clearly demonstrates that, for the first quarter, we successfully executed against the plan we outlined last year. As shown in the table, we generated a net increased income from operations of 8.4 million, compared to the first quarter of 2003, which, as expected, was offset by several items within the table, including -- first, the anticipated 4.7 million decrease to net income related to a large client program, the ramp-down of the United States Postal Service contract, the reversal in the first quarter of 2003 of previously accrued incentive compensation, and an increase to managed expense, also the impact of accounting rules related to costs associated with launching new client agreements and several other smaller items that are detailed in the table.

Also negatively affecting the first quarter is the net change in restructuring items. In the first quarter of 2003, we reported a net restructuring benefit primarily related to reversing previously recorded restructuring estimates. In the first quarter of 2004, we recorded 1.8 million in net restructuring charges primarily related to streamlining our operations. The net effect is a negative impact to earnings of 2.4 million when compared quarter-over-quarter.

When netted against the 8.4 million in higher net income resulting from our profitability initiative, the above items resulted in a 1.2 million negative variance to net income in first quarter, compared to first quarter, 2003. However, given the magnitude of the anticipated decrease in profitability, we are very pleased that our strategy for improving profitability was successful during the first quarter. Further, we believe the plan will continue to be successful as we move forward.

Before moving on, let me briefly comment on our fourth-quarter to first-quarter financial performance. Net income increased from negative 2.4 million in the fourth quarter of last year to positive 1.6 million in the first quarter of this year. The primary driver for the improvement – (technical difficulty) -- to recording 1.3 million less in revenue reductions resulting from performance-based pricing.

Let me now provide an update regarding our cost-reduction initiatives. In August, 2003, we established a goal of 40 million on an annualized run rate of cost reductions to be achieved during 2004. These savings were to be accomplished via several initiatives, including streamlining our operations, investing in global technology and systems enhancements, and reducing our cost structure to serious areas. We believe we are on target to realize the benefit of the full 40 million in savings during 2004. It is important to note that a majority of these savings will be offset by the 23 million in previously disclosed reductions in operating income associated with the large client program and the normal client attrition we see each year.

As Ken mentioned, we recently launched the second phase of the cost reduction plan. The areas we have identified for the additional benefits are operational improvements, enhancements to our technology infrastructure, telecommunications, professional fees, insurance, and reduced interest expense related to our debt agreements, which I will address momentarily. We are in various stages of implementing these additional cost savings and believe the full benefit will be realized in 2005, though we expect to see some benefit this year.

Now, I would like to review our decision to deleverage the balance sheet and the resulting positive impact to the Company. Over the last several years, we've maintained a relatively high level of cash and during the prior six quarters have been in a net positive cash position, or very close to it. The strong cash balance and improving financial performance allowed us to explore deleveraging the Company in an effort to reduce total debt and lower annual interest expense, going forward. The result is a Board-approved plan to enter into a new, $100 million revolving credit agreement, to terminate the existing $85 million revolving credit agreement, and to prepay the $75 million senior notes outstanding. The weighted average interest rate on these senior notes and the existing revolving credit agreement was nearly 9 percent as of March 31st, and the interest rate under the new $100 million revolver is LIBOR plus an applicable margin. As a result, we believe the Company's annual pretax interest expense will be decreased by 5 million, going forward, on an annualized basis. In addition, the new agreement provides us with less-restrictive financial covenants than our existing agreement.

Terminating the senior notes and the existing revolving credit agreement will result in recording approximately 9 million in one-time restructuring charges in the second quarter, including our approximate 8 million related to a make-whole provision in the senior notes and approximately 1 million to write-off previously capitalized debt issuance costs associated with both agreements. We are pleased with our new, long-term financing agreement and believe this decision is in the best long-term interest of the shareholders.

On a related note, we believe our financial position continues to be strong. Cash and cash equivalents were 147 million at quarter-end, up from 142 million at year-end. Our total debt was just over 123 million, putting us in a net positive cash position of 23 million, defined as total cash and cash equivalents, less total debt.

We expect to use approximately 60 million in cash to pay off the senior notes and will draw approximately 65 million on the new revolving credit agreement, 39 million to terminate the previous revolver and 25 million to terminate the senior notes, including the "make-whole" payment.

Also during the fourth quarter, we generated 14 million of free cash flow, defined as cash flow from operations less capital expenditures. We continue to operate within our targeted DSO range of 50 to 55 days with first-quarter DSOs at 53 days, compared to 51 days in the fourth quarter.

Regarding our business outlook and consistent with our approach for the last several quarters, we are not providing specific financial guidance at this time. However, we expect to operate profitably in the second quarter, excluding the debt refinancing costs I mentioned and absent any restructuring or impairment charges that might arise.

Before closing, I would like to comment on our effective tax rate. The first-quarter 10-Q states that we believe 2004 full-year effective tax rate will range between 30 and 45 percent. However, as evidenced in the first quarter, the rate will be higher in the first part of the year and we forecast it will come down over the next several quarters as we close new business. Also, we continue to focus on tax-planning strategies, including the possibility of a tax refund. It is still premature to know how much, if any, or when the refunds will take place and we will update you as we have additional information.

In conclusion, we remain focused on furthering our plan to position the Company for future, profitable growth, including closing new business opportunities and executing our cost-reduction strategy.

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

Thank you, Dennis. We are encouraged by the progress we've made in certain areas of the business and are executing on a well-defined strategy to drive additional improvement. Our executive management team is sharply focused on the key areas I outlined on the fourth-quarter call in order to return the Company to an acceptable level of profitability and to continue our position as the leader in the customer management industry.

First, we are focused on growing revenue with profitable, long-term client relationships. Although we are selective as to which new business opportunities we pursue, we are closing profitable, new business and renewing existing, profitable agreements.

Second, we are improving the financial performance of certain underperforming client programs, including negotiating price increases, making operational changes and, in some cases, transitioning the client relationship.

Third, we are focused on lowering costs around the globe, both cost of services and SG&A. We are on target to achieve the 40 million in cost reduction initiative this year, primarily through streamlining our operations, and have launched the second phase of our cost-reduction initiatives.

Fourth, we are actively engaged in developing and launching products to broaden our sales offering while also further enhancing our global technology infrastructure to drive additional efficiencies and improve profitability. As a result, we will soon be announcing a significant new offering that broadly diversifies our revenue mix and provides for a unique, collaborative working experience with our clients.

In summary, we are optimistic with the trends in our business. Our short-term plans to continue improving profitability have not changed. Like all well-run companies, we strive for improvement in every aspect of our business and we are pleased we're making progress on the multiphase profit-improvement plan we outlined in 2003. Phase I is complete and Phase II is now well underway.

Looking ahead, we expect our business opportunities to improve as the economy strengthens, and we're making significant investment in our sales and solutions infrastructure to profitably grow our enterprise while also strategically expanding our extensive capabilities.

We will now open the call to your questions. Thank you.

Thank you. (OPERATOR INSTRUCTIONS). Jeff Nevins, your line is open and state your company name.

Good morning, First Analysis. Just a question on the March quarter results, if you take out $1.8 million charge, the numbers came in very strong relative to the breakeven outlook that you had given about two months ago. I'm just kind of curious. What areas of the business came in much better than you expected?

Really across the board.

I mean, that's a big, big improvement.

Well, we had anticipated incurring that restructuring charge at the time we made the forecast about breakeven. That was assumed. As part of our overall cost-reduction initiatives, we knew there would be some reductions in force that would result in that, so that was known to us. However, beyond that, we certainly did perform well.

To answer your question, I think that, in North America, we performed better and certainly, in Latin America, we performed better. I think, overall, internationally in Europe, we performed better. I really think it's pretty much across the board and it's just really all a testament to the significant focus that we have around the globe, around individual client profitability, as well as cost-improvements.

Okay. My other and last question is, Ken, you had talked about, I think on the third-quarter call, the outlook for 2004 was looking pretty good from a pipeline perspective. You were looking to expand seats for the first time in several years. It looks like you opened two new call centers recently. Can you just comment on the environment in general? Do those comments you made two quarters ago still hold for what you're seeing this year?

Actually, we opened more than two call centers; I think it's three, to be exact, but I don't know the exact number if you count India, the Philippines and one in North America.

So yes, we still see fairly significant to very significant opportunity in front of us. As we've always said, the unknown is how long it takes to do the convert on each of these deals. But we have a significant amount of deals that, if we were fortunate enough to close just a small number of them, it would take up or absorb a majority of the remaining capacity that we have.

That being said, we don't want to get ahead of ourselves and we want to be conservative. Therefore, we've been very selective in where we're putting capacity; we've been very selective in how we are investing our capital as far as making sure that we're not building too far ahead. Yet, because of the size of the company that we are, we have to have a certain amount of available capacity where there seems to be a lot of demand or we will miss out on opportunities.

So, we feel very confident, with the capacity that we now have, that we're going to be filling it. I think it's safe to say that, in the quarter that we are in right now, you won't really see any more capacity expansion and instead, our goal will be to fill as much of that capacity that we have as possible prior to going out and adding any additional capacity.

Okay so the plans right now -- you don't have any significant expansion plans for the rest of the year from a call center perspective?

No, I did not say that. I said in the current quarter that we're in right now, which would be second quarter; we will not be adding another site. I said that we will be backfilling into the capacity that we just brought on, as well as backfilling into the existing capacity that we have, the legacy capacity we have all across the globe.

Okay, thank you.

Jeffrey Kessler.

Lehman Brothers. Ken , you don't comment specifically on individual contracts that are on the horizon, but could you describe where your discussions are and from a general, vertical market point of view, what looks more promising at this point in time than others in terms of general vertical markets?

Yes. First of all, let me make a general statement because we've had some comments from our investors recently about TeleTech not giving as much information on the contracts that we've been signing and renewing. There's an ever-increasing trend by our customers requesting that companies that are in our business, as well as other forms of outsourcing, not per se disclose information about their activities. So, I just want to stress that we're not trying to frustrate you; we would like to provide you with as much information. However, we need to respect what our clients are asking of us, so I wanted to just start off with that.

As far as the verticals, we are seeing significant activity in the telecommunications area, which is really no surprise as the competitive battle continues to heat up, especially in the wireless area, especially in the broadband area, DSL; we're seeing significant activity in the cable area, once again in the broadband area; we're seeing significant activity really across all of our other verticals circles. But I would say that financial services is looking very interesting right now, as well as healthcare and then, of course, just the overall kind of consumer/retail/consumer electronics, etc., is an area that we are seeing. I think it's all of the common areas that you would expect when the economy is growing. Automotive is doing well.

We are really seeing, pretty much across the board, opportunities. We've invested a significant amount of time, energy and money in restructuring our entire sales and marketing efforts. I think it's safe to say that we're very much out in the marketplace right now, and we are very focused on winning a certain key set of deals that meet our margin expectations.

Okay. Following up on that, Ken, you used to set out certain public margin expectations up until I guess it was -- whenever, 2002 or so. Are the negotiations that are going on now with some of these larger accounts -- are the margins on them comparable to what you were getting in -- not the mid-'90s but let's say the late '90s into the 2001, 2002 period?

In certain regions, yes, and in other regions, no. I realize that's not giving you enough detail, but it's really a fact. Also, certain verticals yes, and other verticals, no. But I would say, on par, Dennis and I have established a rigor that is global, where every single deal across the globe has to go through what we call our Transaction Review Committee. If it does not meet an internal hurdle that we know would be acceptable not only to us internally but most importantly to our shareholders, it's an automatic pass.

So, to answer your question, we are absolutely striving for margins that are similar to the 2002 margins. Now, to get there, one has to be more creative, and there's usually more hurdles that you have to jump through, etc., because the marketplace is competitive. The good news is that our capabilities have strengthened pretty significantly, and it's allowing us to offer some other capabilities that have, in many cases, higher margin.

One final question; that is, we have just seen a convergence by a financial-oriented service company and we've seen, on the other side, NCO acquire RMH all in the name of what these companies are calling business-process outsourcing. From a bird's eye view, can you make a comment -- is this, for you, a trend that you are looking at to become more of a generalized business-process outsourcer, or is the area that you occupy now enough for you to handle?

Well, BPO is another three-letter acronym. We've been in the business-process outsourcing business for the last ten years and we have the client base and list to prove it. We've been processing -- doing everything from processing claims to processing financial transactions where there's no voice involved, doing back-office work for telecommunications companies in the provisioning area, etc., for ten years. The fact is that we just haven't played it up as much because we view it as just like a CRM; it's now the new, 3-letter acronym.

Interestingly, though, you will note, I believe, in our Q, we did start to mention some of our back-office activity, but this is nothing that is new to us. We have always been applying our Six Sigma processes and our ISO 9002 industrial engineering capabilities towards our clients and we've always had product offerings to our clients that go far beyond processing customer-management calls where there's voice associated with it.

So, the answer is it's absolutely in our scope of offerings, it's absolutely a capability that we have today and we probably have just not done a very good job, from a marketing or investor relations standpoint, in educating our shareholders that, in fact, we've been in this business for many years and continue to plan on expanding upon it. Obviously, it's a good business for us because, in many cases, it takes up excess capacity in off-peak hours.

Thank you very much.

John Mahoney.

Congratulations. John Mahoney from Raymond James. Congratulations on a better-than-expected quarter.

Last year, the second quarter was up; gross margins were up. I was not thinking that the gross margins were up sequentially, you know, over 500 basis points, from 22.7 to 28.2. This year, we are up 23.9 or up 120 basis points year-over-year. Do you expect that same type of sequential improvement in gross margins or maybe you could speak to what happened last year?

I will answer half of the question and if Dennis wants to comment on the other half, that's fine, but clearly, we expect our gross margins to move up; that's our goal. So, the whole purpose of having cost-reduction programs and filling your excess capacity has a direct impact on that. Dennis, if you want to make a comment?

Well, right off-hand, I'm not sure where you got the number from.

Did you pull those numbers out of our 10-Q or were you using your Q from last year? Because we have made some reclassifications in the first-quarter 10-Q, where certain items were reclassified from SG&A to cost of goods sold. The segment data in the first quarter of this year footnotes changes that, so if you are pulling data -- (multiple speakers).

Okay, I probably only have the data for this quarter and this quarter a year ago.

Yes, you would have to restate your files for what we did this quarter to get apples-to-apples -- (technical difficulty) -- (Multiple Speakers).

So you provided the last three quarters of last year as gross margin?

No, we just did the first quarter this year and we restated our segment data this year to be apples-to-apples with the current presentation. So, no, we've not done 2Q and 3Q yet; we will do that as each quarter comes along.

Okay. Well, let me ask a follow-up then, which is -- obviously, it makes it more difficult for us on the outside to get a good -- and what was moved around? Before I get onto that, what was moved? What specific costs were recategorized?

Costs that were directly related to programs that were included in SG&A were moved up to the direct line.

So, what kind of items would have been -- where there was a grey area?

Certain items in IT-related, quality assurance, some training costs and some HR costs that we had in SG&A that were incurring in the call center, so they were directly related, so we applied them to the cost of goods sold line.

That just adds to the difficulty to try and forecast future results. I know it's difficult for you; it's even more difficult for us, obviously. There's no guidance in the press release. Could you speak to why you're not providing guidance?

If you're talking EPS type of guidance?

Well, yes, any type of guidance. You've given some cost control guidance but no information about where the revenues might be and -- not that I see.

Well, we made the decision several quarters ago that we were going to not provide guidance for a go-forward period or an indefinite period of time. We still believe that that is the trend by well-run companies throughout the globe.

That being said, over time, as we feel that we have better visibility, we might change our position but the form of guidance that we would consider providing would most likely be longer-term guidance because our focus is to get longer-term shareholders and for people to have better understanding of longer-term, where -- the direction that we are headed.

I think to answer, again, your original question, our intent is to drive the gross margins up. All of the activities that we're focused on, the four that I outlined, are all geared towards increasing the gross margins, both in the near-term and in the long-term.

Okay. You don't plan on providing guidance, short-term or long-term, in the near future?

At this juncture in this quarter, we do not plan on doing that. That could change in just another quarter or so but right now, we've made this decision and this is what we feel is in the best interest of our shareholders and our company.

I'm sorry, why is that again? I don't understand why you wouldn't want to provide any guidance.

I think the just explained it. We think that this is a trend where more and more companies are -- (Multiple Speakers).

But you just said you are going to start doing it.

(Multiple Speakers) -- providing less and less guidance, due to the fact of the uncertainties in the economy that we have been operating in. As far as we are concerned, we are operating in a very uncertain political climate. Therefore, we don't feel that it's prudent for us to provide guidance when there are so many unknowns -- you know, unknown issues, whether they be geopolitical issues, whether they be economic issues, etc. So, we think that it's in our best interest, at this point, to continue to provide the level of detail that we are providing in our Ks and in our Qs, and we feel that, off of that, we are developing trendlines that our investors can assess and make a decision if we are the right company that they would like to place their money into.

Thank you very much. Congratulations on the good results.

Bill Warmington.

Yes, good morning. It's Lilia Kozicky filling in for Bill Warmington, SunTrust Robinson Humphrey. First question -- we were wondering if you could provide a bit more detail on Newgen and how the progress is going in improving profitability in that segment.

Well, I think, generally, we are seeing that things are definitely getting better and that they are stemming the attrition that they were seeing earlier on. Their sales right now -- it's very early -- appear to also be picking up. Those are really the two key things that needed to change. So, we're very pleased with the fact that the attrition is dramatically slowed down and that we're getting back to a net positive position, from a dealer standpoint of attrition. As we've already stated in the information that we've provided, we feel that our goal is to get them back on track towards the end of this year. We think that it will take that amount of time. We've developed a significant cadre of new product offerings that there's been an intense focus on bringing to the market. Quite frankly, I think that those new offerings, albeit very critical to their future from a diversification standpoint, has created a little bit of a distraction on their core offering and therefore has caused them to stall.

But that being said, we have all the confidence in the world in the management team, in their product offering and in their customer base, and we feel comfortable that they will get back to where they need to be.

Great. In terms of your cost-reduction initiatives, what is the timing on the benefit that you expect to see from this in '04?

Well, the first phase, we are stealing the benefits and seeing them now and we will continue to see those benefits as the year progresses, but the work is basically done, the original 40 million.

The second phase, we will see a partial aspect of it in '04 and realize the full benefit in '05. Hopefully, we will be able to give more detail on our next quarter call as to what we believe the impact is going to be. But again, we tend to be a conservative company in nature and how we report, and we would like to be conservative and make sure that whatever it is that we commit and promise is something that we're going to deliver on, as we did on the first phase.

Okay. Next question -- we know that a lot of contracts have recently been announced, and I know you can't provide specific detail on these contracts, but as a whole, do you see -- in terms of ramping and all -- whether there will be enough revenue on the operating margin, enough to offset the 8.5 million loss that will be coming in next quarter with the loss of Verizon's CLEC business?

I think, if I understand your question -- let me repeat it. Are you asking if we will be able to be profitable in the quarter that we are in, based on the reduction in the subsidies that we were receiving from Verizon?

Based on the fact that you are losing the 8.5 million that you've received this quarter from Verizon and given the ramp-up of all your new contracts, will they, as a whole, be enough to offset that loss in the second quarter?

If we could kind of project off what happened in the first quarter, in the first quarter, we were able to overcome that hurdle, if you will, if you're describing -- (technical difficulty) -- the Verizon subsidy going away. That was in my scripted remarks I was referring to the table in the 10-Q, which is on the printed version, Page 22, where we showed we were able to improve operations from a variety of our initiatives, the cost reduction program, the program to eliminate or improve underperforming programs, etc. All of that was successful in meeting that nut (ph), if you will, for the first quarter. It's our expectation it will do the exact same thing in the second quarter.

Great. Final question -- what percentage of U.S. client business is currently serviced offshore?

Well, you know, offshore in our business, because we operate in so many countries, is sometimes confusing, but I think to your question of U.S.-based business that's physically offshore or North American business, I believe the number is about 15 percent.

Okay, great. Thank you very much.

Brandon Dobell.

Hi. It's Brandon Dobell from First Boston. A couple of quick ones, maybe leveraging off of the last question on Newgen. If your clients aren't renewing, what kind of things are they doing instead? Do they think kind of a solution is just tough to kind of get an ROI on? Are they choosing something different? Are they just tending to put things off because they are under more financial stress? I'm just trying to get a feel for what are their opportunities or options they have right now.

Yes. First of all, I think that when -- what we've tried to express in the last quarter call was there was what we believe was a temporary situation where the clients were not renewing. The fact that they didn't renew in the fourth quarter does not mean that they then do not renew in the first quarter.

So, to answer your question, in many cases, what they will do is they will just hold off and they will let their service contract laps. Then we will -- either they will come back to us or we will come to them and get them to come on -- come back on with us.

This is all, in many cases, a budget issue for them and where they are in their own budget cycles, etc. So, we saw an inordinate amount of contracts that did not renew. Now, we're starting to see the ones that didn't renew -- we're now starting to see them actually come back on and renew. So, that's typically what happens, is there is a stall or they just decide to 100 percent internal and do the capabilities or attempt to do the capabilities that we have on their own.

That makes sense. Maybe turning a bit to the political environment, you mentioned that as being uncertain. Are customers making decisions with that as a primary factor, you know, delaying things or choosing a different market to run their program out of because of what's going on right now? In your best guess, as we look towards the rest of the year, it would be my opinion that capital ends up finding the right place in this market. At what point do you think that the capital argument starts to offset any of the political concerns that some companies might have?

Well, there's no question that companies are, in fact, making their decision based on where they think they can mitigate their political risk. So, this is a very sensitive topic that we could talk about for quite some time, but I think it's safe to say that there is a fair amount of people that are holding off on certain decisions and are in a wait-and-see attitude, based upon the November elections.

That being said, there is plenty of clients (sic) that need to make decisions right now, or in the very near future, and those are the clients that we are capitalizing off of. But I do believe that you could see a very significant thrust of business over and beyond what we are already forecasting after the elections take place and once things settle down and people understand who is in the Office, etc.

You know, clearly, there's two political issues here, right? I mean, one is just their feeling of the overall patriotism issue; then the other issue is the issue of, depending upon what type of client, just the overall security issue and how reliable they think that particular country is that they are going.

The good news is that, because we operate in so many countries, because we basically invented the concept of blending interactions across multiple countries simultaneously, we are able to mitigate any of that risk that people would tend to be worried about by putting them in five countries or four countries simultaneously instead of putting all of their eggs in one theatre. I think that's been extremely beneficial and we have many examples where we're doing that and where we're going to continue to do that. We think it's prudent for them and we think it's prudent for us as well.

Okay, two quick, final ones -- maybe Dennis, in the Q, it mentions the consolidation of the India partnership. I wonder if we can get an idea of what the impact was in the first quarter on that.

Secondly, may be for Ken, if you could talk a little bit about your thoughts on the home agent market and if you see that as an opportunity, or maybe not, for your type of clients. Thanks.

The impact from India being consolidated was not material to any line item, be it income or revenue or just any particular item.

Okay, thanks.

As far as home agent, it's something that we've explored and have believed in for, gosh, probably five, ten years. The beauty of our centralized technology is that it supports home agents today, so our ability to provide home agent capability on a moment's notice, from a technological standpoint, is not an issue.

The real, main issue with the home agents in TeleTech is that the business that we tend to go after is very complex in nature. If you look at the companies that are announcing home agent capabilities -- and I'm not suggesting the we're not going to be providing home agent capabilities, but what I would suggest is that the interactions that they handle tend to be very simplistic interactions; they tend to be catalog order processing, TV direct response, etc., where the agent can be part-time, does not have to have a significant amount of training and where there is less focus on the complexity. The business we tend to go after, which is the long-term, reoccurring, complex interactions where training can be, in some cases, up to eight weeks, it does not lend itself for an in-home agent.

Now, that being said, we are exploring several other alternatives, and I don't think it would be prudent for us to discuss that right now. What I would say is that agent-at-home is a viable option; it makes sense at the lower end of the market, the less-complex market. Most likely, it will be something that we will be doing, but we also see it as potentially a career path opportunity for our agents who have been with us for quite some time and who have already been trained, where we give them an opportunity to work outside of the facility and at home X amount of days a week, which then creates more capacity in our existing infrastructure and reduces our overall capital requirement needs, going further.

We've been studying this for quite some time and when the time is appropriate, I'm confident that we will have a very competitive offering in this area.

Bob Evans.

Craig-Hallum Capital. Good morning, nice quarter and I'm pleased to see that debt refinance.

Can you comment -- clarify from a much earlier question on the capacity that you added? Did you say you have that business in-hand and will just be filling it, or is this business that you are looking to acquire?

It's both.

Can you give us some sense of how much you've already got filled in that capacity, or pretty high confidence in?

Yes. I would say that, in the new capacity, we have a pretty high confidence in filling a high percentage of the capacity.

In this quarter or what timeframe?

Well, it ramps, so I would say over the next few quarters. Remember, our goal isn't just to fill that capacity; our goal is to fill all of the Swiss cheese capacity around the globe.

Okay. For now, you are not going to be -- I mean, this is the biggest additional new capacity we should see until you start to fill some of that of that other capacity? Is that a fair statement?

That's an accurate statement.

Okay. Can you give us any more color on cost reduction in terms of magnitude? Your previous cost reduction was 40 million. Can you give us any sense of how big this might be?

You know, at this point in time, we have decided that we want to get a little bit farther into it. As you know, Bob, we have always been very focused on announcing something when we are either well into it. I.e., when we announce a client, they tend to have already been launched and we know what we have in front of, and the same thing with this. We've already launched this but we need to get a little bit farther into it. I think it's safe to say, though, that it would be considered material. You know, just do the math off of just the debt restructuring alone and assume that it goes beyond that.

Sure, I would assume so. Can you also comment on -- I think, Dennis, you said, under the debt refinance, we should assume 65 million in the revolver. Is that correct?

Yes. Yes, I did.

Okay. Why would the revolver have that level of balance, given that you are in a net cash position?

Well, we have a certain amount of outstanding right now today on our existing revolver, 39 million. We're going to you some of our existing cash to pay off the senior Notes, but not entirely. Then we're going to borrow a little bit more under the revolver for that. That's how we intend to start off. As we go forward if we decide to have further reductions and reduce our cash position, we may do that but right now, we want to start off at that level just for prudent capital management.

Okay, so not all of the senior debt is going to be paid off?

No, all of the senior debt will be paid off. We have senior Notes outstanding right now and we also have bank debt outstanding. The existing amount of that bank debt outstanding we're not going to reduce in total, although we are going to refinance with new banks. We're going to increase that marginally and pay off the senior Notes. We have cash. We are in many, many countries. So, we like to operate in a very prudent manner. We maintain certain cash balances across the world. That's one reason why we don't want to take it down to even further at this particular juncture. We want to see how things sort of level out and keep some of our powder dry, so to speak.

Okay. Can you comment on the European operating margin, what it was this year versus a year ago or sequentially or however you choose to look at it?

Well, we give the International segment overall and really haven't been breaking out things, but I can tell you, we certainly, as we did in Mexico, we've been stemming the tide of losses there considerably in the UK.

Okay.

Actually, the lost itself decreased up 30 percent from first quarter last year to first quarter this year in the UK.

Which obviously we're not going to be satisfied until it's profitable.

Okay, but it's moving in the right direction?

It's definitely moving in the right direction.

Again, I haven't had a chance to go through the whole 'K' because it just came out. But the number of dollars that was reclassified -- can you give me some sense of magnitude? I'm just trying to see what was just total reclass versus change due to the business changing.

Approximately $13 million -- (Multiple Speakers).

Okay. In Q2, I think you said you would be profitable in Q2. Is there any one-time expense or benefit that you foresee in Q2, or do you see much ramp-up expense in Q2 related to training or other costs?

Well, the one-time expense that I alluded to in my scripted remarks is the "make-whole" payment, which would be a substantial number -- that and the writing off of the deferred loan costs on our existing facilities. The sum total of those could be in the range of $9 million, and that would be a one-time charge in the second quarter.

No, I understand that. I am saying excluding that more -- because for example, you had a 1.8 million -- (multiple speakers).

(Multiple Speakers) -- they are expenses that you foresee. I don't think so.

Let me chime in. Sarbanes-Oxley is something we haven't talked about and clearly, it is an expensive endeavor, unfortunately. That's factored into our budget, but this is an expensive endeavor and time-consuming.

The reason I ask is because you said you had a $1.8 million expense this quarter that you had anticipated. I just wanted to see if there was anything similar to that that you are anticipating in Q2.

That one was mostly tied to a reduction in force and in part due to a restructuring charge at one of our centers. We are not anticipating a similar charge for restructuring in force next quarter. There is always the possibility -- and we discussed this in our MD&A -- center charges that can happen. That might happen. We are not forecasting that as a definite event but that risk is there and discussed in our MD&A.

Sure. How about as it relates to -- should we see much startup or training expense this quarter?

We're ramping programs; we're ramping them all over the world, so again, it's factored into our budgets and -- you know, in the long-term, that's a good thing, not a bad thing.

No, I agree. I'm just trying to get a sense of magnitude since you don't give a kind of guidance, I'm just trying to get a sense of that. Training expense is accelerating from Q1 about the same, or I'm just trying to get a sense of trend.

Well, in the fourth quarter of last year, the hit, if you will, to earnings was a deferral of about $2 million due to the adoption of the accounting rule EITF 0-21, the training item you're talking about. In the first quarter of this year, that number was $1 million. That's comprised of the deferral on new programs, plus the amortization of stuff that we deferred in the fourth quarter.

So, if you want to look at it on a trendline basis, it has gone from 2 million to 1 million from fourth quarter to first quarter. But this is all -- you know, what happens with that number is, dependent upon our success with new business -- I mean, the more we ramp up new business and those programs are affected by this, that could change that trendline. So, that's really the way to look at that particular item.

Okay, thank you.

Kit Case.

Southwest Securities. Good morning. A couple of quick questions -- first of all, the tax rate guidance is much higher than what I had believed was given earlier. I'm just wondering, what was the change in that? What's causing that change?

You are right; it is higher than what we gave earlier. For us, the tax projection is -- we were a rather complicated tax accrual. I'd hate to get into all of the mechanics on the phone call, but because we are in so many different countries, there's minimum taxes in certain countries. We also have -- because we have deferred tax valuation allowances on our balance sheets of roughly $30 million, which kind of distorts the effective rate, what happens in the projection process, depending upon where our business comes from and in what tax jurisdictions it comes from, it has a material impact on our overall effective tax rate at this time.

So I guess the simple short answer is two things. One, the guidance we gave for the overall year last time reflected overall year rate. We knew ourselves that it would be a little higher in the beginning of the year and go down throughout the year as we add new business. If we are as successful in adding new business as we expect, the effective tax rate will continue to trend down. That's based upon that we are putting the business in the countries where it has the most beneficial impact, if you will, on our tax accrual.

Is that implying that you all have less confidence in the business outside of the U.S. as the tax rate comes up? (multiple speakers).

No -- (Multiple Speakers).

Not at all.

That would be the right inference to draw from that.

You know, it's just basically kind of allocation of where you expect the income to come from?

Exactly. For instance, if we're pitching a deal to a multinational and we offered them three or four different countries and at the end of the day, they say, (indiscernible) in Country A and not A, B, C, D, that affects our tax accrual and what we originally forecasted for that. Those are things that are very difficult to nail down with position, hence the range around the tax accrual.

What I would say is that our tax planning has become dramatically more sophisticated than it's been historical. I think that it safe to say that we will be doing everything that we can to operate as tax-efficiently as possible.

How much impact -- and this is a little bit of a general question -- but how much impact in the first quarter was there from I guess the ramp-up of new contracts? When do you expect to start catching up with these new contracts and start producing better margins similar to what maybe you've done historically during better times?

Well, I mean, our goal is for our margins to, over time, to progressively continue to get better and better. I'm not sure, without giving specific guidance, how I actually answer your question.

What I would tell you is that we are very confident that, as we fill the remaining capacity that we have and as we continue to stay tightly focused on our cost-improvement objectives, that our margin is going to expand exponentially. I'm not sure what else I can give you that would be anything other than just pure guidance, which we've already stated we're not prepared to do.

I'm not looking for guidance; I'm looking for I guess the general timing of when -- because, as you increase your business, you have the ramp-up costs, which hurts your margin and for a temporary period. At some point, that's going to be less and less of an issue, as you get larger and as you get more of this newer business online, fully ramped up and where you don't have those unusual costs. I'm trying to just get a general feel of when does that start occurring, taking out your long-term view? Does that occur in '04? Does that occur in '05, when you start kind of overcoming those ramp-up costs?

Well, a couple of things. I think maybe another way of asking your question is, when do the ramp-up costs become less material due to the fact that the overall business is more profitable? Is that what you're kind of saying?

That's a better way to say it.

I think that would be more '05, if that's the question. That being said, we are very pleased with the direction that the profitability, on a client-by-clad basis, is operating and we have managed every client on a fully allocated EBIT profit basis. One of the benefits of managing the client profitability as tightly as we have is that it's also allowing us to create capacity by clients that we can't get to the proper threshold -- helping them transition to a vendor that would maybe be willing to operate at a different margin expectation or potentially at no margin. So what that does is creates capacity that doesn't require any capital.

So, I think we're doing all the right things. I'm confident we're focused in the right areas, and I think that the coming quarters will tell the story that our shareholders want to hear.

All right, thank you.

Thank you so much.

Thank you. This concludes today's conference. You may disconnect and thank you for joining the call.