TTEC Holdings Inc (TTEC) 2004 Q2 法說會逐字稿

Welcome to the TeleTech second-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 call over to Ms. Karen Breen.

Thank you 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 second quarter 2004 ended June 30. Yesterday, TeleTech issued a press release announcing that its quarterly report on Form 10-Q had been filed with the SEC. 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 second quarter. Dennis with 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 expectations. Such statements are subject to risks and uncertainties.

Factors that could cause the Company's actual results to differ materially from those described include, but are not limited to, 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; execution risks associated with performance-based pricing metrics in certain client agreements; the risks associated with achieving improved profitability in the Database Marketing and Consulting segment; and execution risks associated with achieving the second phase of our targeted cost reductions; and finally, the possibility of additional asset impairments and restructuring charges.

With that, I would now like to turn the call over to Ken Tuchman, our Chairman and Chief Executive Officer.

Thank you, Karen, and good morning. As reported yesterday, we earned 3 cents per share in the second quarter, including a onetime chart we previously announced of 7.6 million to refinance our debt. Without that onetime charge, our results were 9 cents per share, with operating income increasing 28 million over the prior-year quarter.

We are extremely pleased with our second-quarter results as we have begun to see the financial benefits of the strategy I outlined on previous calls. Although it took longer to reposition TeleTech than I originally thought when I resumed an active role in the Company in 2001, I am very excited about our current accomplishments, our management team, and the market opportunities in front of us.

I attribute the success to the implementation of a series of major initiatives to improve the Company culturally, operationally, and financially. One year ago, I indicated that we hit bottom in the second quarter of 2003, and today I want to highlight the accomplishments that enabled us to improve profitability over the last 12 months.

First, these objectives were embraced during our 2004 strategic and operational planning process completed last fall. Our extreme focus on this plan has enabled us to achieve many of our year-to-date successes. Additionally, we completely revised our incentive plans to align them with the 2004 plan and reward behavior and initiatives that drive long-term, profitable growth. We recently began the 2005 planning process and look forward to sharing our long-term objectives with you on future conference calls.

Second, I handpicked the management team to surround myself with a seasoned group of business professionals with backgrounds in global multibillion-dollar professional service and outsourcing organizations. It has taken us the last 24 months to identify and recruit a high-caliber leadership team and for them to gain traction in their new positions. We are now just seeing the operational and financial benefits of recruiting such a talented team, who have the breadth and the depth to run a growing multinational company. I am very pleased with the bench strength each of these leaders has developed in each of their respective organizations.

The next major initiative was to implement a simplified organizational structure comprised of two core groups. The first are vertical business units with full P&L responsibilities, including sales, account management, and product development. The second are service delivery teams that work closely with the vertical business units.

To implement this structure, we hired seasoned industry veterans to run three business units, ultimately responsible for eight industry verticals. These verticals include automotive, communication and media, financial services, government, health care, retail, transportation, and travel. To successfully execute on our vertical structure, we implemented an activity-based cost accounting system, which I will say more about in a moment.

Fourth, we continue to invest in building a technology foundation premised on innovation and our goal to have our clients perceive us as innovators. To that end, we have spent the last four years developing and on-demand virtual global network that allows for consolidation of our technology platform. The project took a considerable human and capital investment, and I'm very pleased to announce we have successfully achieved that vision. All new business launched over the last 18 months has been utilizing this platform and running at 99.9 to 100 percent uptime.

This consolidated technology platform has numerous benefits. It simplifies global deployment needs, enables global standardization of applications, and dramatically increases flexibility and reliability. Additionally, it reduces future capital requirements, enables a higher return on invested capital. Going forward, we no longer need to deploy switches, servers, and software at each location. It also provides a platform for additional service offerings, which I will come back to in a moment.

In addition to investing in our global network infrastructure to support our clients, we have spent the last two years enhancing our internal systems, developing proprietary technology to deliver real-time reporting on our operational and financial results around the globe. For example, we recently completed the implementation of a global data warehouse that provides comprehensive dashboard and operational reporting, as well as analytic and financial tools, with significant drill down and what-if capabilities. This application is being used at every level in the organization, from the executive level to the operational management.

This is just one of the many internally developed systems we are working on. We look forward showing the investment community the capabilities we have developed over the last several years at our upcoming investor day.

Six, and consistent with the strategy I articulated in prior conference calls, we are diversifying our revenue base with new products that are less labor-intensive, yet tightly coupled with our traditional service offerings. The first new product allows us to offer our clients the full range of TeleTech services, from using our global network to workforce management, quality assurance tools, to our diagnostic capabilities. Clients can use these products in our facilities or internally in their organizations. This capability further extends our client relationships beyond the traditional outsource model.

We are also providing a full suite of powerful data analytic products with proprietary decision-making, predictive and learning engines that transform how clients utilize the breadth of data captured during customer interactions. In addition, every vertical industry we target has back-office requirements (ph). And given our innovative technology and global footprint, we are uniquely positioned to expand our revenue in this area. This includes services we currently provide, such as telecommunications provisioning, as well as opportunities in claims processing, imaging, and other back-office functions.

The objective of these new or expanded offerings is to strengthen TeleTech's position in the marketplace. Admittedly, we have not done a good job explaining to the investment community that we are far more than just a customer management company. My comments today are a high-level overview of the products and solutions our clients are currently using and that we will formally be announcing in the near future.

Seventh, and related to the new products I just mentioned, we have modified our sales approach to be consistent with our capabilities. Our approach is far more consultative in nature, and is focused on helping clients improve profitability in their customer base. Our relationship might include professional services, technology solutions, along with both front- and back-office capabilities to assist clients in acquiring, growing, and retaining their customer base.

Eight, we have dramatically changed our approach to client profitability by modifying our internal systems to better measure and track the financial performance of individual client programs. On a daily basis, we monitor the gross margin performance of each client program. On a monthly basis, we fully allocate corporate costs to every program around the world. There is nothing left unallocated. It is all pushed down to client level, and thus gives us the ability to evaluate profitability on an apples-to-apples basis. Our goal is to move to a real-time gross margin reporting by the end of this year.

Several of the Company's most experienced operations professionals were brought together over the last nine months to form a revenue assurance group, reporting to the CFO. Their sole purpose is to review all global client programs, identify those that are underperforming, and implement effective get-well programs.

The first action under the get-well program is to look with the operations team to deliver the service in a more efficient or innovative manner in order to maintain the superior service we're known for, while also driving improved profitability. If that effort does not result in satisfactory financial performance, we attempt to modify the financial terms of the client agreement to improve profitability. If neither approach results in an acceptable improvement, we work with the client to professionally transition the work.

This, in part, explains why our utilization of shared centers has declined since the end of 2003, creating available capacity that can be redeployed for higher quality revenue opportunities and earning a better overall return. The get-well program has helped improve our operating margins for the second quarter. In summary, the program has reduced annualized revenues by approximately $20 million to date and involved over 30 clients. Our revenues for the first six months of 2004 increased 45 million over the prior-year period. So you can see we have more than made up the revenue loss from our get-well initiatives.

The ninth initiative I want to mention is the notion of embracing continuous cost improvement while improving our quality of delivery. Approximately one year ago, we announced Phase I of our cost reduction plan to achieve $40 million of cost savings during 2004. Phase I was primarily initiated to offset the previously announced reduction of a material client subsidy. We have achieved the 40 million in savings in early 2004.

On the first quarter conference call, we announced Phase II of the cost reduction plan. The plan, which Dennis will discuss further, is underway and we anticipate will result in $20 million in savings on an annualized run rate basis during 2005. In addition, as we complete our strategic planning process for 2005 later this year, we may announce additional phases of this plan.

The final initiative that I will address today is the enhancement of our overall control environment. We began the Sarbanes-Oxley process more than a year ago and budgeted 2 million for its rollout this year. We're halfway through the process, and it will be completed prior to year-end, as required by the new rules. From an accounting viewpoint, we believe our controls are adequate and there are no significant deficiencies or material weaknesses.

In addition to the financial controls required by Sarbanes-Oxley, we implemented additional business controls that have also been critical to our turnaround. For example, we have substantially modified and strengthened our pricing discipline. We are committed to achieving an acceptable return on investment for our shareholders, and the pricing process requires a minimum operating margin in the double digits for new and renewal client programs.

In addition, we established a foreign currency committee that reviews our cross-border business to select appropriate hedging strategies, and also developed a yield management committee that analyzes our center utilization across the globe.

While the 10 initiative I've mentioned are only a partial list of the things we are doing, my goal was to give you a flavor of the discipline we have implemented to run the business in a more professional manner.

Now that you have an idea what we have been working on for the last 12 months, let me make a few brief comments regarding our global operations, after which I will turn the call over to Dennis.

We have seen in significant improvement in our North American operations, with operating margins increasing from 4 percent in the first half of 2003 to 8 percent in the first half of 2004. Internationally, Asia-Pac continues to operate profitably and Latin America continues to show improvement, with capacity utilization increasing in the region. Spain is making good progress and we expect to complete the renewal of our largest client program there in the very near future. Winning new business in the UK remains our only challenge.

Newgen is demonstrating financial improvement under new leadership and signed several new client agreements in the first half of 2004 and are encouraged by their new business opportunities.

With that, I will turn the call over to Dennis.

Thanks, Ken, and good morning to everyone. Ken explained the positive steps we have taken to increase operational efficiency and drive profitable future growth. I will explain the improvements in our result and link them back to the strategies and tactics Ken talked about.

Starting with the second quarter's results, as outlined in yesterday's press release, we reported revenue of $265 million, down modestly on a sequential basis from $266 million in the first quarter. But I'd like to point out that that includes a $3.6 million negative impact to revenue related to foreign currency fluctuations.

Second-quarter revenue was up nearly $25 million from approximately $240 million in the year-ago quarter. The year-over-year revenue increase is mostly from new clients, and only $3 million is related to foreign currency fluctuations.

As Ken mentioned, we reported GAAP EPS of 3 cents per share, which includes certain material items impacting the quarter's results, as detailed in our press release and Form 10-Q. The largest of these items relates to one-time charges associated with refinancing the Company's debt. We discussed this charge on last quarter's conference call, and it includes the make-whole payment and write-off of remaining deferred loan costs, which together add up to $7.6 million. We expect future net pretax interest savings of approximately $5 million per year going forward. The nature of this one-time item allows us to state under Regulation G, promulgated by the SEC, that our earnings without this one-time item would be 9 cents per share.

Another item we incurred this quarter, whose possible incurrence we previously disclosed, was a $2.6 million non-cash charge to reduce the carrying value of our Glasgow facility. Although we do not intend to close the center, our accounting policy is to review the recoverability of our assets on a center-by-center basis, and when the center's results are not improved within a reasonable time frame, generally two years, we record a charge to reflect the current fair value of the facility. We were concerned about the Glasgow facility last year, and therefore took a conservative approach and highlighted this possible asset impairment in last year's report on Form 10-K.

Also during the quarter, we obtained greater clarity on the expected resolution of certain state sales tax matters. As we disclosed one year ago, using the assistance of outside specialists, we established an initial liability for prior-year sales taxes incurred by our database marketing subsidiary. Subsequently, we recruited an in-house tax expert that has been resolving this matter on a state-by-state basis, which resulted in a reduction to the reserve in the second quarter of nearly $2 million.

In addition, we previously disclosed the possibility of state sales taxes applying to the activities of other TeleTech subsidiaries. During the second quarter, we determined it was necessary to record a reserve of approximately $500,000 for this matter. The good news is that for the quart, approximately $1.5 million of income was recorded associated with the favorable resolution of these state sales tax matters. You will note this favorable development resulted in a year-over-year increase in operating income of about 5 million, as shown in the Form 10-Q table I will cover with you momentarily.

Going back to the second quarter just completed, the quarter's results were impacted by our client-by-client get-well initiatives Ken described earlier. As disclosed previously, some of our client contracts have provisions for performance-based revenue, which means that the amount of revenue we receive can be impacted by either a bonus or a penalty. We have considerable organizational focus on performance-based pricing to ensure maximum results for our customers and our shareholders.

The amount of performance-based pricing could have a considerable impact on our performance in any given quarter. During the fourth quarter last year, we incurred approximately 2 million in net penalties. During the first quarter of this year, we incurred approximately 1 million in net penalties. And during the second quarter just completed, we earned net bonuses of approximately 2 million. As such, the swing in performance-based revenue was approximately 3 million from the first quarter to the second quarter of this year. Although the recent trend with performance-based pricing has been positive, we believe the amount in the second quarter may not be repeated in the third quarter.

Another benefit in the second quarter that we do not expect to recur in the third quarter is a foreign currency transaction gain of approximately 1 cent per share, which arose from identifying and locking in a gain on the Canadian dollar during the second quarter. Also, as we look forward, it is important to note that third-quarter revenue may be lower than the second quarter revenue, due primarily to a large seasonal program in Europe completed in the early third quarter.

I would now like to direct your attention to the financial comparison chart that appears within the MD&A section of the Form 10-Q, which should be approximately page 22 on your printed document. You will see it contains the same transparent explanation of our results compared to the prior year that we have been including in our reports. We believe this chart is helpful because it quantifies the impacts of the various tactics that Ken outlined for you earlier.

The line item in that chart labeled "net increase to income from operations" shows a positive impact to income from operations of approximately 36 million for the six months ended June 30 versus the same period a year ago. The nature of the items driving that change are discussed in the management discussion and analysis section of our Form 10-Q, but they are the same items Ken talked about -- client profitability focus, cost savings and controls, etc.

However, let me comment on some of these a bit further. First, our cost action programs. As you know, nearly one year ago we announced Phase I of our cost reduction program, which was to achieve a $40 million annualized reduction of operating expenses during 2004. That amount has been achieved and was developed principally to offset the impact of a previously-known phaseout of a customer subsidy, but not the actual client relationship itself.

We actually realized cost reductions of a greater extent and used the excess to cover our investment in sales, marketing, and product development staff, which currently approximates 4 million per annum. We will continue to invest in this area and expect to capitalize on that investment as our business grows.

Last quarter, we announced Phase II of our cost reduction programs, but because we were then in the process of validating the final target, we did not state the dollar amount. Yesterday, we announced that Phase II will result in a $20 million reduction in annualized expenses, to be achieved during 2005. The components of that reduction include the $5 million reduction in interest expense I mentioned a moment ago.

It also includes targeted programs to reduce real estate-related operating costs, insurance costs, and workforce management-related costs. Our investment in workforce management technology, as well as our insistence (ph) on client profitability daily, gives us additional tools to maximize labor dollars, which is our largest single cost element.

Besides focusing on reducing operating costs, we are also focused on reducing capital expenditures. As Ken mentioned, we are using technology to drive down our infrastructure costs and have reduced the CapEx commitment associated with building workstations by 40 percent in new customer management centers.

Our cost reductions have affected three lines in the income statement, cost of services, SG&A, and, to a limited extent, future depreciation as our CapEx costs are declining. As detailed more fully on page 20 of the 10-Q, when comparing second quarter 2004 to the year-ago period, cost of services as a percent of revenue declined to 73.4 percent from 77.7. In addition, SG&A as a percent of revenue declined to 14.6 from 18.4, and depreciation declined to 5.4 from 6 percent. These improvements resulted in our cost reduction programs and drove the improvement in operating income.

Another way of looking at the impact of our cost reduction program is that one year ago, we announced that during 2004 we would reduce costs by $40 million per annum and we also announced our client profitability program. As such, you would expect to see our operating results during 2004 increase by over 40 million. Going back to the chart in the Form 10-Q, it indicates the operating results increased by about 36 million for six months, so if you annualize that, it's around 70 million, which is north of the 40 million plus that I just illustrated one would expect if we were successful in executing our plan. Obviously, we were successful.

As a result of executing on our plan, our operating margin for the quarter was 5.5 percent. This includes the impairment of our Glasgow facility and other restructuring costs, which were partially offset by the reduction in the sales tax liability.

Due to Regulation G, we cannot report operating margin including or excluding any item separately enumerated in the Form 10-Q or this conference call. However, we would like to note the reported operating margin materially improved over the prior-year quarter of negative 5.8 percent, which we attributed to the tactics by Ken and I this morning.

I do need to comment on our effective tax rate for the quarter, which is again high. The higher-than-expected effective tax rate is attributable to a few items, but most importantly, it's related to our expanded global footprint, where we are developing operations in new international markets.

For the first six months of this year, we incurred losses in those new markets of approximately 3.5 million, for which we recorded no tax benefit, which in turn, makes the effective rate look high. As we place new business in these developing markets, this trend would reverse.

Our tax situation is admittedly rather confusing. We did include a chart in the footnotes to the Form 10-Q on page 10 that hopefully makes the situation a little clearer. With our expectation for new business for the remainder of the year and the tax jurisdictions we expect that work to take place in, we estimate that our effective tax rate for the 2004 year will range between 40 percent to 50 percent, excluding potential tax refunds that we are pursuing.

Also regarding taxes, we continue to pursue our new tax planning strategy, some of which are resulting in the filings of amended returns that we expect will lead to tax refunds.

Lastly, I would like to point out the changes in working capital always have an impact on quarterly cash flow from operations, as we discussed in our Form 10-Q. However, ignoring any quarterly variations, I am pleased with our performance in that subsequent to the quarter end, we reduced borrowings under the new revolver by 16 million from 64 million outstanding at the end of June to approximately 48 million today.

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

Thank you, Dennis. As you can see, the entire organization has been sharply focused on executing our strategy to position TeleTech for the continued future profitable growth. I believe the majority of the operational and majority blocking and tackling is behind us, and our focus now remains on sales, marketing, and innovative new products.

While we are pleased with our accomplishments to date, we have more work to do during this transitional year as we continue to invest in our sales and product capabilities. While these investments will result in our operating margin for the full year 2004 being similar to the operating margin for the first six months, we firmly believe these efforts will create a strong foundation for improved performance in 2005 and beyond.

To close, I thank our dedicated employees, who have embraced our internal vision and are focused on making it a reality. We are confident we have the right strategy in place and the right people to make it happen. With that, we will open the call to your questions. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Jeff Nevins.

First Analysis. Congratulations on the significant improvements. Just two questions. One was, Dennis, if I am looking at the financial comparison table you put together related to the minimum commitments of that client, year-over-year, am I reading it right to think about that it looks like in the first half of the year, you have recognized about 6 to 6.1 million of revenue related to the 8.5 million you were supposed to recognize for the full year in '04?

Well, the total we disclosed, Jeff, on that chart is closer to $9.5 million, which reflects all of that associated activity for the six-month period.

But that is the decline from whatever it was in the '03, right?

Correct, that's the year-over-year change.

I guess the way I'm reading it is that the amount that you recognized year-to-date is roughly 6, which would be declining from the half of the 31 in '03.

Correct.

Okay. Could you just talk about, Ken, what you're seeing in the offshore markets? I had read an article that you're expanding quite significantly as far as employees go with your Indian joint venture, and I just wanted to get your take on how the prospect of offshore is faring, the challenges you're experiencing -- because I think there are some -- and just how it is working with a partner over there as well?

First of all, our expansion plans are typically always tied to client opportunities. And because we don't discuss client opportunities until we have made contract announcements, it is rather difficult for me to get into any real detail. What I would just simply say to you is that we are very pleased with our India capabilities and fully expect to take advantage of them and grow them, as well as we are in other markets where we have some labor benefits.

That being said, I think unlike some of the other traditional competitors, we are still very focused on our core North American business and believe that there is still a significant opportunity right here in our own back yard.

Okay. If I could just ask one more question. You had talked about a virtual agent -- or you may have used a different term -- on demand, I think. Is that technology that was originally brought up from the old enhasiv? And what are you seeing in that marketplace as far as -- are you seeing that model of virtual agents and home agents growing quite rapidly from a competitive standpoint?

First of all, the technology is not just meant for -- when we say on-demand, we mean our entire core capability is on-demand now and is virtualized or liquefied, so to speak. So not only does it mean that we have the ability to offer it in a unit of one, i.e. at home, but we can offer it a unit of 50 or a unit of 100,000. It doesn't matter.

So really, the point we were trying to make is that because our technology is now virtualized and centralized, our ability to deploy it anywhere on the globe is almost instantaneous and is really simply tied to the last-mile connection and how long it takes to get the last mile connection turned up.

As for the at-home agent marketplace and our opinion on it, we've been studying the at-home market for, gosh, I want to say 10 years, and we find it very interesting. We think in the majority of cases it makes the most sense on rather simplistic interactions or on interactions where the agents have worked for you for quite some time and you feel comfortable certifying them to then work out of their home.

That being said, as far as high growth in the marketplace, I don't think that has yet happened. There are some companies that are providing it, but when you add up the total agent at-home population, it is really not a significant number in the overall marketplace. But we do find it intriguing and it is certainly something that we have done trials with in the past and will continue to do so and look forward to updating you on what our plans are in that area.

Thank you very much.

Bob Evans.

Craig-Hallum Capital. Good morning, and again congratulations on a great fundamental improvement this quarter. Can you comment on -- I was impressed mostly by the gross margin improvement that you demonstrated. Can you comment a little further in terms of how sustainable is that going forward, given the cost cuts you've made and other moves that you've made?

We would like to believe that it is sustainable. What I would tell you is that the things that we are doing are all about new ways to manage our capabilities in a more streamlined fashion that allow us to yield better results than we have in the past. And so the changes that we've made we believe are permanent changes, not temporary changes.

That being said, we are very reliant upon a lot of human beings, and it is in fact possible sometimes for us to maybe not perform in one particular location as well as we would like to from a client metric standpoint, which would then in fact impact the overall gross margin of that particular client.

But I think it's safe to say that we have laid down very significant new processes all across the globe and feel very confident that on a whole that this is a trend that is long-term and our goal is for it to do nothing but get better.

Fair enough. And can you comment -- you had mentioned new products and services that you have underway in your -- I'm not sure if you're offering them to clients now or -- if you could clarify where you are in terms of your new products and services and trying to fill that pipeline with new clients to use them. Where are you there?

We've developed several new products that have been developed over the past roughly anywhere from 24 months to, let's say, 48 months that are done, that are live, that are being marketed to our clients as we speak. And it is our intention to come out with formal announcements on each product and give very precise detail on what each one of these products will do.

What I will say to you is that the majority of the products are software driven or technologically driven, and therefore, we believe provide us with an opportunity to gain more leverage and not necessarily have to have the same labor relationship or ratios that we do on the current core offering.

The products are horizontal in nature. They span across virtually every vertical that we have. There is significant reusability of the products. And what I would simply tell you is that the products were developed based upon what our clients have been asking of us over the past many years, and we are very excited that we have these types of capabilities to offer our clients.

We are really not -- on this call, we have no intention of getting into very specific detail, but what I would simply say is that we are in very short order of starting to give a lot of detail and for the marketplace to better understand our overall strategy, which is to lead through innovation and to continue to diversify our revenues beyond just the customer management component of our core business offering.

But to clarify, the revenues that are coming from these products and services, they will be recurring in nature?

They are definitely reoccurring in nature.

And higher margin, I would assume?

They are higher margin and they're contractually committed to, and they tend to be priced and invoiced separately, if that helps you in any way, meaning that we are not bundling them into the core offering. The goal again is to get away from the commoditization of just providing raw infrastructure and labor, and to be able to provide value by being able to provide insight-based products, which we discussed a little bit in the script today, where we can give our clients dramatically more insight, dramatically more capabilities as it relates to trending and where their clients are, towards satisfaction, etc.

There is an entire suite of products; they are all linked together, and they could all be used either independently or together as an entire suite, and they are all deployable on a global basis. Everything that we have designed is designed for very significant scalability, and scalability to us means 50,000-plus type users, not 500 users or 1000 users.

So this is all -- everything that we're talking about is done. It is up. It is running. Clients are using virtually every one of these products now, and it is all industrial strength. And now it is really all part of a branding and positioning and introducing properly to the marketplace.

Another quick question. On the government contract that you recently announced and that's out there, when does that start to hit or when does that start to ramp up?

I apologize. I don't actually know the exact date, but my guess would be that it is probably '05 revenue. And I apologize that I'd don't know if any of it starts in '04. We have been pretty busy on many things, but we are very excited to welcome the GSA as a new large customer of ours.

Final question, Dennis, on the cash-flow statement, you had pretty significant changes in working capital on the negative side for AR and accounts payable. Can you give us a little more color there and will that reverse next quarter?

Mostly on the AP side was we had a full two weeks of payroll accrued at this time which we didn't have last time, a modest increase in DSOs, but still within our general range. But as I said earlier in my scripted comments, quarterly, those will vary. But I think things are moving well, just by virtue of the fact we could pay down the debt the additional amount we did in the third quarter.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Brandon Dobell.

Credit Suisse First Boston. Ken, wonder if I could get a little bit more color. You mentioned a number of different potential areas for I would consider to more be process outsourcing versus the customer care. And then in the previous comments you were talking about separate pricing, not bundling them with the core customer care business.

I am wondering how, on a positioning basis relative to some of the bigger BPO companies out there or relative to some of your competitors, how you anticipate positioning yourself in the industry. Is it going to be specific BPO path that make more sense, given a certain customer set or product set, or are you going to go after some of the business that a CSC or AES or an ACS might go after, but just from a different perspective, a little bit more targeted maybe. Just trying to better understand the positioning you anticipate.

As I think you know, our belief is that BPO is another (technical difficulty) acronym. And so consequently, when you read all the various different analyst reports on BPO and what they include, you could fit five Grand Canyons in there as to the definition of what BPO is. So what we have tried to do is basically say that we're going to be very focused on the front- and the back-office processes as they relate in the areas of customer management.

And what that means is that we will take a series of very defined processes in certain verticals that we feel that we can offer dramatic value creation capabilities for our clients and really focus on them. So instead of saying that we're the do-all, end-all and we can do anything in the BPO space, which really encompasses everything beyond even back-office stuff, what we will do is we'll be very tightly focused on areas that we believe we have significant background, significant subject matter expertise, and significant process, as well as significant technology advantages.

So you will see that -- you'll see our focus in areas like health care, areas like banking, and areas like telecom. We have already suggested what some of those applications are. Some we're already doing. In the health care claims area, in the banking area, with various different forms of loan kind of administration, we are very focused in that area, and you'll see others. But the goal will be to be very focused in those areas so that we can win the deals from a credibility standpoint and from the ability to demonstrate that we have something unique and that we have something that is differentiatable (ph) and that we have value that we can quantify to the client from a total value delivered point of view, versus just simply saying that it's all about, let us move it to India and compress your labor costs.

Because at the end of the day, that (indiscernible) as well will -- people will understand that there is more to the one-time event of just labor compression. And ultimately it's about a complete end-to-end solution, which has to include everything from, obviously, a well-thought-out strategy, a well-thought-out technological platform and very sophisticated human capital capabilities, along with our global infrastructure.

So we think that we're going to do fairly well to a very well in that market. And we're very pleased being so early at it with the amount of business that we have already been able to attract in this area. Again I want to remind you of the fact that we're servicing 40 countries right now out of 16 locations, and a high percentage of our locations are very cost competitive locations. Many of them have significant available capacity in what they view as their off hours, which in many cases could be their daytime hours.

So our ability, now that are technology is centralized, to put imaging work in these facilities, claims work, etc., is something that has proven to be very doable for us.

And that makes an interesting segue. I was going to ask if you anticipate any change in the level of capital that you expect to put in the business. Or over the next one, two, or three years, are you going to be able to ramp this business to a level you feel is acceptable or even attractive with capacity you have existing, like in the off-hours in certain countries. And I guess somewhat related, is this going to change the nature of the types of capital you put to work or maybe change the nature of your working capital cycle at all, make it even more compressed, given this many more transaction-driven business, or should expect kind of the same look and feel to the cash-flow statement as we go forward?

I think you're going to see that we have become much more sophisticated in the efficient use of our capital. We are extremely focused on the overall return on invested capital. And I think that you're going to see that capital is going to be deployed in areas only when we absolutely are confident that we're going to get the return that our shareholders expect. I think you're going to see that the investments that we have made over the last 36 months are absolutely paying off, and therefore, our capital requirements over the next 12 months most likely will be on the lower side than the higher side than they've been historically.

Okay, thanks a lot. I appreciate it.

Mark Bacurin.

Good morning. Just wondering if you could comment a little bit, Dennis, on the -- it sounds like you offered some comments during your prepared remarks about cautioning against extrapolating the strong results this quarter. And just curious whether or not there was any other sort of one-time events that benefited this quarter from a revenue standpoint. And the margins that you achieved this quarter, when we back out some of the non-recurring expenses, whether or not we can assume that that is at least a flattish kind of run rate going forward?

I think I identified the material items during my scripted comments. Individual quarters will vary. Ken, a little while ago, made a comment about the long-term margins, and I think that comment remains true. Individual quarters will vary, but we expect to improve over time -- maintain and improve over time. But like I said, individual quarters can vary.

I think it is really important to know that the management team here feels that we really are in a proving (ph) mode right now, and we are very focused on being very cautious and conservative in our nature in how we represent ourselves to the marketplace. And with that being said, we're still very bullish on our outlook and on our future. So I think that what we want to do is get multiple quarters behind us where people can see that we are absolutely in a total -- that we have transitioned the Company, that the Company has taken hold to a whole new strategy, that we've successfully implemented that strategy. And we think that that has to be -- we have to demonstrate that through the numbers.

So we are very confident. We're very pleased with how this quarter has come off, how this last quarter that we've reported has come off, and we're very excited about the future quarters in front of us. And yet, we're going to still maintain a relatively cautious point of view.

One reason for Ken's cautiousness, I think, is that we are still continuing to invest in our future new business development engine here, Ken talked about investing in the sales force, marketing, sales support, new products, etc. And we have been bearing the cost of that investment because we can't capitalize those costs, and it has been rather significant. And we are incurring those costs during the quarters to date and expect to for the remainder of the year. But from our viewpoint, that bodes very well for the future, because during 2005, we expect to be capitalizing on that investment, if you will. And that's why we say a longer-term margin should certainly improve.

Great. And could you comment about -- with these new business offerings that you are going to be announcing soon, if there is any way to quantify what the pent-up demand is within your existing client relationships, and then whether or not these new offerings will be used as getting your foot in the door with new clients or whether or not they will typically be sold as a bolt-on to existing call-center type service offerings?

Really all of the above. There's no question that they will be used as a Trojan horse to get our foot in the door. They will absolutely be used as a bolt-on to our existing business. And as far as the pent-up demand, what I will tell you is that we're very satisfied with the pipeline of opportunities and we're very pleased with the initial clients that are already using the capabilities and the margins that we are seeing that these products are capable of delivering.

So all-in-all, we're very positive about this. And I think it is important to note that by the end of this year, we will be out of the significant investment phase of all of these products and really focused on just garnering sales, and I think that is the lift that Dennis is suggesting. So anything else on this particular question?

That's it. Thanks.

Thank you very much. We will conclude the call today and we appreciate everyone's participation. Thank you.

Thank you for joining. This concludes today's conference.