TTEC Holdings Inc (TTEC) 2005 Q1 法說會逐字稿

Good morning and welcome to TeleTech's first quarter 2005 earnings conference call. I would like to remind all parties that they will be on a listen-only mode until the question and answer session. This conference call is being recorded at the request of TeleTech.

I'd like to turn the conference call over now to Karen Breen. Thank you, ma'am, you may begin.

Thank you. Good morning and thank you for joining us today. 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 2005, ended March 31st.

Yesterday we issued a press release announcing that our quarterly report on Form 10-Q had been filed with the Securities and Exchange Commission. This call will reflect items discussed within the press release and Form 10-Q and TeleTech's management will make reference to it several times this morning.

Joining us on today's call are Ken Tuchman, our Chairman and Chief Executive Officer, Jim Bartlett, our Vice-Chairman, 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 quarter, along with discussing progress against our growth objective. Dennis will then review current aspects of our financial results, turn the call back over to Ken, and we will then 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 risks and uncertainties.

Factors that could cause TeleTech'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; execution risks related to achieving the Company's three-year financial goals, including selling new products and services; the ability to close and ramp business opportunities that are currently in advanced discussions; risk associated with performance-based pricing metrics and certain client agreements; the risks associated with achieving improved profitability in the international and database marketing and consulting segment; execution risk associated with achieving our targeted cost reduction plans; and the possibility of additional asset impairments and restructuring charges.

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

Thank you, Karen, and good morning. I'd like to start by reviewing our first quarter results, after which I'll provide a progress update regarding our longer-term growth and profitability goals.

On a macro level, we are pleased that our EPS doubled from the prior year quarter and that we remain virtually debt-free. I'm also pleased that we believe we will again be profitable for all four quarters of 2005, as we were in 2004. Like any business, there are always opportunities for improvement and I will review those in a moment.

But first, let me briefly summarize our first quarter results. Revenue was $254 million, down $6 million, or 2%, as expected from fourth quarter, primarily due to higher seasonal volumes in the previous quarter.

For the first quarter we reported earnings of $0.04 per share, double the $0.02 reported for the first quarter a year ago, and down from $0.13 per share in the fourth quarter. You may recall that the fourth quarter benefited from both the reversal of a healthcare accrual and a portion of our deferred tax valuation allowance, which in aggregate was a $0.05 benefit. Dennis will talk in more detail about our quarterly results.

Excluding those items, the decrease in first quarter's EPS relative to the fourth quarter, is attributable to Newgen. Internally forecasted, it would generate a small profit of about $0.5 million for the first quarter, while it lost $3 million, a swing of $0.04 per share.

As previously announced, Newgen entered into the largest new product implementation in its history and since the ramp was slower than expected, the selling and marketing cost represented a greater percentage of revenue in the first quarter.

We are extremely disappointed with Newgen's financial results. Jim Bartlett, our Vice Chairman, who has a long standing background in the automotive industry, now runs this subsidiary to ensure successful ramp of the new program and that Newgen returns to profitability in the second half of 2005.

Two years ago, we embarked upon a strategy to globalize and centralize our business unit. This included carefully analyzing every country in which we operate, from a financial, operational and technological standpoint, to determine what opportunities existed to improve financial performance and client satisfaction. The centralization is complete in the US and will be completed internationally in the third quarter. We've been successful in these efforts, as evidenced by higher profits and free cash flow.

Newgen was scheduled to be the last business unit integrated into the centralized environment. However, due to the current circumstances and in order to accelerate its return to profitability, we accelerated the immediate consolidation of all of Newgen's operations, technology, financial reporting, legal and human resources under TeleTech's executive leadership team.

As a result, it is now being managed just like our core business, with an increased focus on operational excellence to insure it's consistently exceeding clients' expectations and operating more profitably.

Newgen has a great business model and a strong leadership position in its industry and I am confident it will again be a strong contributor to our revenue and earnings growth as we ramp newly contracted business. We expect them to operate at a loss for the second quarter, while we complete our profit improvement initiatives and then return to profitability in the second half of 2005. I would like to add that this outlook is for Newgen only, as I believe consolidated TeleTech will continue to operate profitably throughout the year.

Before moving to the business update, I want to mention, as previously discussed, that our international losses are principally due to the performance in two locales; the UK and Korea. We recently made a management change in the UK, and we've enhanced the sales force and they are building the pipeline as we speak.

As you know, Korea is a relatively new part of our international operations. Our Korean operations are under the responsibility of a long-term TeleTech North American employee and we are in the process of strengthening our sales leadership in that country.

Let me now move to the business update. In early January, we outlined our financial goals for the next three years, including growing revenue to $1.5 billion and achieving EBITDA of 15%. Each on a run rate basis as we exit 2007. Although we are only one quarter into these three-year goals, we continue to believe they are achievable.

Today, we would like to update you on the progress against these goals. Our sales strategy is focused on three key areas, including maintaining current client relationships, winning new clients and capitalizing on mid-market opportunities. I'd like to briefly comment on each.

First, maintaining and growing our existing client relationships is paramount to meeting our financial goals. Historically, our revenue attrition has averaged 10 to 15% annually. For example, in 2002, we had revenue attrition of 16% and in 2004, it was down to just under 10%. After renewing several large client agreements in the fourth quarter and at the beginning of 2005, we only had approximately $75 million of business left to renew for 2005.

To date, we are well ahead of schedule, having renewed $25 million and we believe we will renew the majority of the remaining $50 million in the near future. As a result, we believe revenue attrition in 2005 will be lower than 2004 and the lowest it has been in five years.

We believe our ability to renew large, long-term strategic client relationships, reflects the value our clients place on partnering with TeleTech. Whether targeting new clients or renewing existing relationships, our primary objective is to provide customer management services that enhance the connection between customers and our clients' brands. To accomplish that objective, we focus on creating value for our clients by providing innovative and real-time insight into their customer behaviors, wants and needs.

Selling our value proposition requires a sales person with deep understanding of how to articulate a value-driven solution. As a result, we have been investing in our sales teams to add several senior business development professionals with strong solutions selling experience.

Our pipeline of new sales opportunities continues to be solid, and they are increasing based on the long-term value of our capabilities and broadening product suite, rather than on RFPs. We're committed to pricing new client agreements with long-term sustainable profit margins. We are confident in our ability to close new business, because our clients understand that we need to be successful financially in order for us to continue to deliver the highest performance at the lowest possible cost, while also delivering innovative new products and services.

The third key sales objective for growth is to address small to medium opportunities. We recently created a small team of senior business development resources, dedicated specifically to mid-market opportunities. The team has quickly gained traction in the marketplace and has secured an agreement with a North American business process provider for the financial services industry. And we look forward to sharing the details on this new agreement very shortly.

Let me now discuss our progress in launching innovative higher margin services. Earlier this year, we've launched two new services. The first is On Demand, which makes available the various components of TeleTech infrastructure, technology, applications and processes in a pay as you go model. And the second is In Culture, which offers our clients' solutions and services that provide access to traditionally underserved hyper-growth multicultural markets.

Although in their infancy, we have clients using both services and the client feedback has been extremely positive.

You should know that this is just the beginning of a three-year roadmap we have outlined to further differentiate ourselves by delivering innovative new products and services. We recognize that in order to maintain our market leadership and further strengthen our client relationships, we need to be more than a traditional customer management and BPO service provider.

So, we have and will continue to invest in new products and services that are a natural extension of our core offerings and are less labor intensive. These services will lower our internal operating costs and thereby drive higher profitability and increased ROIC.

Having covered the revenue goals, let me now turn to the profit improvements. You might recall that we previously outlined six key EBIT levers, each of which has the potential of driving up to a 1 to 2% improvement in the Company's consolidated EBIT margin by the end of 2007.

The first lever is cost improvement, and we announced phase 3 of our cost improvement plan in late January. Phase 3 will lower our global operating expenses by $20 million annually in 2006, and we will be complete this year. We have validated 75% of our plans for these cost improvements and are in the process of implementing them, including the reduction in workforce completed in the first quarter.

When combined with phase 1 and phase 2, we will have reduced our global operating cost by $80 million, once we complete phase 3, later this year. In addition, we are in the preliminary stages of identifying a phase 4.

The second EBIT lever is to globalize our North American best practices. As you know, the operating margin for North America segment has been improving during the last 12-months. This improvement has resulted from several key initiatives, including strengthening our North American leadership team, modifying our site level compensation plans and a concentrated focus on improving our technology platform.

The results have been dramatic. In addition to an improvement in operating margin, we're seeing less attrition at the agent level and our clients are more satisfied with our quality and performance. We are now rolling out our best practices implemented in North America to our international regions. The rollout is complete in Latin America and in the Philippines and will be completed in the third quarter in all other countries with significant operations.

The third EBIT lever, which is closely linked to the second, is completing the centralization and globalization of our technology platform. We refer to this platform as our proprietary GigaPOP. In simple terms, the new platform consolidates nearly all the technology and software applications that historically existed at each site and allows greater flexibility, utilization and return on investment, given its 24 by 7 availability to all sites around the globe.

Approximately 40% of the 25,000 existing workstations are controlled from a technology standpoint via our GigaPOP. By year-end, we believe nearly all our 25,000 workstations will be on the GigaPOP platform.

The fourth EBIT lever is increasing capacity utilization. This lever is closely tied to managing our global capacity and selling new business. We believe the utilization in our multi-client centers will continue to increase in the latter half of this year, as we ramp new client agreements and grow existing client relationships.

In addition, it is our practice to periodically review our facilities' leases globally for opportunities to rationalize certain sites in conjunction with the timing of lease expiration. Our longer-term goal is to operate our multi-client centers at a utilization rate in the high 80% range.

The fifth EBIT lever is automating the employee lifecycle. This key initiative is in the early stages of development and we believe it will have a very significant, positive impact on our employees, as well as provide meaningful operating margin lift. Our goal is to automate more of the screening, hiring and training processes to reduce our cost.

The sixth and final EBIT lever is complimenting our diversified product suite with higher margin services. We developed a three-year product roadmap with On Demand and In Culture, rolled out this year, as the first of several new products we intend to offer our clients. We are receiving very positive feedback about these products. These and future offerings will be based on TeleTech's core customer management and BPO business, leveraging our existing global technology infrastructure and unique industry experience.

These products will change our clients' economics and their customers' experience by driving revenue, building customer loyalty and enhancing the transparency of our clients' operations. Time and time again, we are told by clients and prospects that TeleTech continues to introduce capabilities previously unavailable or unknown in the traditional marketplace. As a result, we anticipate these new products will not only drive independent revenue for TeleTech, but also support higher margins and greater differentiation in our core business. And we believe our efforts to broaden our suite of products will continue to further differentiate TeleTech.

As you can see, we're making progress towards achieving or exceeding each of our six profit improvement levers and continue to believe we can achieve our goal of achieving 15% EBITDA run rate by the end of year 2007.

Let me now turn the call over to Dennis, after which I will make a few closing remarks.

Thank you, Ken, and good morning to everyone. As Ken mentioned, our tactics continue to yield results, as our net income doubled this quarter over the prior year. While we are naturally disappointed that Newgen's results negatively impacted our first quarter performance, we have experienced difficulties in other regional operations before, and have a history of successfully correcting them, and I believe we will be successful here too.

We reported diluted EPS of $0.04 per share for the first quarter, which includes certain items impacting the quarter's results, as discussed in our press release and report on Form 10-Q. The first of these items I would like to mention is that Newgen's profitability was down $4.1 million, or approximately $0.04 per share on a year-over-year basis. That decline was offset in part by a $2.4 million decrease in interest expense related to our decision last year to refinance our debt.

The third item is a restructuring charge of nearly $1 million we took, related to a reduction in workforce, including $400,000 at Newgen. The reduction did not represent a large number of employees, but we believe it's necessary to regularly assess our global workforce needs and make necessary adjustments due to the efficiencies we are achieving from our consolidation and centralization efforts.

The change in our operating margin from the fourth quarter of last year to the first quarter of this year requires some explanation. Last year's fourth quarter operating margin, all of these taken from amounts appearing in our GAAP income statement, was about 6%. But 2% of that was the one-time reversal of insurance reserves, or say, 4% without that item.

The operating margin percent for the first quarter of this year is about 2%, but that is burdened by about 2% of higher payroll taxes we incur seasonally during the first quarter. So, it would be about 4% without that burden. As such, we would be flat approximately 4% to 4% on an apples and apples basis.

However, Newgen's results pulled the first quarter's operating margin percent down about 1%. So, on an apples and apples basis, we are about 1% better without the Newgen results, meaning our base customer management business continues to improve.

However, at this time, due to the Newgen situation alone, and absent any acquisition we may make in the later half of the year, we do not see the operating margin percentage for the year increasing over the prior year, where Newgen was more profitable.

As I said, our tactics to improve profitability have been successful and nothing illustrates this better than the financial comparison chart that appears within the MD&A section of the Form 10-Q, which should be on about page 22 of your printed document. You will see it contains the same transparent explanation of our results, compared to the prior year, that we've included in our SEC filings. We believe this chart is helpful, because it quantifies the impacts of the various moving parts, if you will, of our business and how our strategy and tactics have impacted our financial results.

Turning to that chart, the line item in the chart labeled Net Increase To Income From Operations, shows an increase in income from operations of nearly $5 million from the first quarter of 2004. The nature of the items driving that change are discussed in the Management Discussion & Analysis section of our Form 10-Q, but they are the same items we have talked about today, focused on client profitability, global cost savings initiatives, implementing our global best practices and consolidating our technology platform; in short, all of the topics we have been telling you about.

The chart also shows that on a year-over-year basis, we overcame, as we had planned to do, a $3.4 million decline in minimum commitments, which impacts both revenue and net income by a like amount.

We had forecasted a lower effective tax rate for the first quarter, but that forecast assumed Newgen would generate approximately $0.5 million of profits, when in fact, it lost money for the quarter. As we incur no US income tax expense at this time, elimination of this anticipated taxable at Newgen increased our effective tax rate, because anticipated pretax income declined by over $3 million and tax expense did not otherwise change materially. As such, the effective rate goes up.

While on the topic of taxes, I would like to update you regarding our deferred tax valuation allowance. During the second quarter of 2003, and due to recurring and projected tax operating losses at that time, we determined it was appropriate to establish a deferred tax valuation allowance for our entire US deferred tax asset. Over the seven quarters since then, we have made significant progress in our efforts to improve client profitability and reduce costs, resulting in improved financial performance and US taxable income.

During the second quarter of 2005, marking the two-year anniversary date of the decision to record the valuation allowance, we will continue to review the facts and circumstances surrounding the valuation allowance, including cumulative and forecasted taxable income. It is possible that a result of such a review during that quarter or a succeeding quarter, the preponderance of the evidence may suggest that the US valuation allowance is no longer required and accordingly the valuation allowance would be reversed into income.

The amount of our US tax valuation allowance at March 31st, 2005, was approximately $13 million. In quarters subsequent to that determination, we would have a more normal tax rate of close to 40%.

In summary then, the financial comparison table shows that in the first quarter we increased net income by $1.3 million over the prior year.

Now I'd like to comment on our balance sheet, which we feel is strong. Cash and cash equivalents were $68 million at quarter end and we had just under $1 million drawn on our revolver, in additional to approximately $8 million in borrowings related to outstanding grant. As a result, we entered the quarter in a net positive cash position of nearly $60 million.

Going forward, we anticipate operating with a minimal amount of debt, except for potentially leveraging the Company to pursue selective strategic acquisitions and to finance our share repurchase program.

DSOs for the quarter were 55 days, a 3-day increase from the year ago quarter and the fourth quarter, but within our targeted range of 50 to 60 days.

While we are pleased that we continue to generate free cash flow, which we define as cash flow from operations less capital expenditures, free cash flow was $11 million for the quarter, compared to $14 million for the year ago period. This level of free cash flow enabled us to continue our stock buyback program during the first quarter, as we purchased 1.5 million shares for $16 million. There is approximately 27 million still remaining under the existing Board approved share buyback program and we intend to continue purchasing our shares.

When looking at our free cash flow, it is important to look at more than one quarter's results. Over the last 12 months, our net cash position increased from $23 million to $60 million, or about $40 million, after having spent $21 million to repurchase our stock over that time, or $60 million without the buyback. In short, our business has been generating free cash flow.

Our capital expenditures for the quarter were $4 million. We continue to believe CapEx for all of 2005 will be approximately $40 million, primarily as a result of our plans to build several new customer management centers in certain international locations.

Looking ahead, we expect revenue in the second quarter to be approximately the same as the first quarter. Although we anticipate revenue lift from certain client agreements recently signed and the expansion of several existing client agreements, we are in the process of transitioning several client programs to offshore locations, where the rate we charge will be lower. The net of the two will result in relatively flat revenue in second quarter compared to first quarter.

The transition of certain clients to offshore locations will also result in a higher SG&A and cost of services for a short period of time, due to duplication of resources in order to insure a seamless transition. We believe this increase in expense will be offset in part by improved financial performance at Newgen, which we believe will generate an operating loss about half of what it did for the first quarter.

In conclusion, I am pleased at our financial performance, as measured by an increase in net income, continued free cash flow and significantly lower debt. Because of our strong financial position, we continue to seek out merger and acquisition opportunities. And with that, I will turn the call back to Ken.

Thank you, Dennis. In conclusion, I am pleased with many aspects of our first quarter performance. Our financial results improved on a year-over-year basis, and recent client renewals validate our emphasis on strong account management and delivering superior capabilities and flawless execution, all of which are key factors in retaining and winning new business.

I also recognize that there are areas of the business that are underperforming. And although I'm extremely disappointed with Newgen, I want to make sure that everyone understands we will fix it and we will fix it quickly.

The UK and Korea also have been disappointing in the past and these areas have daily senior executive oversight, along with detailed turnaround plans underway. I believe we will see improvements in the latter part of 2005.

To close, we believe TeleTech is unique in its vision, innovation, comprehensive products and services and financial strength. Our mantra is simple; to create value for our clients and shareholders. Our long-term success is derived from entering into new business opportunities where the client is interested in comprehensive solutions, with a clearly defined return on investment and not simply labor outsourcing.

We are encouraged by our prospects for new business wins, recent client renewals, our strong global sales pipeline and the opportunities we see for profitable growth. I'm extremely proud of what our organization has accomplished over the last two years and again, I thank our dedicated employees who are making our vision a reality.

With that, we will open the call to your questions. Thank you.

(OPERATOR INSTRUCTIONS.) Bob Evans, Craig-Hallum Capital.

Can you first comment, Ken, on what your thoughts are for growth for the year? At the Analyst Day I think you clearly were thinking that you were going to grow for the year. Obviously, this quarter down a bit, but do you still expect to grow and can you give us a little bit more perspective?

Yes. The plan is to definitely grow. It's really ultimately going to all boil down to our ability to convert the deals that we have in our pipeline. We're in active negotiations on multiple deals, that should the timing take place sooner versus later, we would have growth that we would be happy with. Obviously, that's always an unknown, but that's where we stand today.

So we do feel comfortable with the pipeline and we do feel confident that we will be converting deals across the globe.

Okay. Can you also comment on--I apologize if you already said this, but I got interrupted. But the stock buyback, you were aggressive with your buyback in your balance sheet in Q1. Obviously, the price is down from where you had bought back earlier. Can you give us your thoughts in terms of will you continue to be aggressive on the buyback?

As soon as we are legally able to purchase our stock, we will be back in the market aggressively purchasing our stock. Which is only 48-hours.

Okay. And also, can you give us a little bit more color in terms of why the Newgen revenue was down? You had made some broad comments. But in terms of specifically, why was the revenue down this quarter and what should we expect from Newgen revenue in Q2?

Let me take that for a second, because Newgen is now going to be my responsibility on a day by day basis for a while. A couple of things happened, obviously. We have dealers that got tired of the fact that we were running late. So, for example, they had the opportunity, certainly, to lower their participation while we're preparing a new system. So we had some leakage on revenue there in the first quarter. But we can get that back very quickly in this quarter.

Okay. And can you give us a sense of, you've got a large new contract, that I believe you're signing new people on there. Can you give us any sense of magnitude of how big that is or how many dealers you can potentially sign in terms of new services?

I think what we would say here is it's the largest relationship that Newgen's ever had. It has the potential to be maybe the largest ever done in the industry. Number three, we feel very confident with the new system. It's extremely advanced. It is, obviously, extremely difficult and one of the problems, obviously, that you've all seen is that we had to run essentially two systems in parallel in the first quarter, which is a very expensive thing to do.

We had to be sure that it was running properly, because when you're affecting thousands of automobile dealers, you cannot take any chances with that. So, we took the prudent path and said we would take the time to make sure it was running properly.

It is a large relationship. We're very pleased with it. As you know, Ken and I do feel very, very positive about the automotive industry. And as you're probably aware, this part of the automotive industry that we're in is in the reminder and service business. We're not in the--although we have many products in it, this is not focused totally into the area of selling cars. It's focused into the maintenance programs and essentially selling additional services.

I think I'd like to add, Bob, that the good news is that Newgen is backlogged from a revenue standpoint. What we mean by that is that we don't actually generate the revenue until the VINs, the vehicle ID numbers are in the database.

And so, the situation that we're in right now is we're actually experiencing a tremendous amount of success of new dealer signups, which are in queue to actually be brought over and put into the system. And since there is a significant amount of growth that comes out of this new contract, we now have TeleTech involved in assisting getting these dealers and their VINs on line as fast as possible.

But the backlog has run as long as 45 days, when historically backlog would be a much shorter period of time. So we can't generate the revenue until those dealers are actually in the system. So, that's why we have confidence that by third quarter we will be out of it, we will no longer be losing money, because the revenue will be there to offset the marketing costs, etc.

Okay. And final question, on the international business, you are relatively flat from an operating loss standpoint. What kind of improvement should we see or expect there, or should we see improvement as we look at '05 versus '04?

We've ramped up significantly our sales capabilities throughout Europe and we definitely have the best pipeline that we've had in the history of our Company in Europe right now. That being said, the proof is going to be, once again, in the pudding of our ability to convert. And so, we need to be reasonable of the fact that the management that is there is relatively new in the UK, which is where our focus is right now.

So, I guess my answer to your question is that we think we'll begin to see results in the latter half of this year. And then for sure in 2006, just based on the physical timing of not just closing, but the fact that if they start closing in the second half of this year, we still have to onboard that revenue. And so I wouldn't want to build the false expectation as to what the amount of revenue might be towards the end of the year.

That said, I do think that there are significant opportunity for significant wins in the European theater. Spain is growing as we speak, very nicely. Spain has actually been out of capacity and is profitable and we're adding capacity as we speak. And we feel very good about the opportunities to take up a significant amount of the capacity in the UK, should they actually convert.

So, overall, internationally in Europe we feel very good. In Asia Pacific, we feel good about Asia Pacific and all of the changes that we've made in Asia. They also have been adding to their sales capabilities and it's yielding results and building a pipeline that is better than it's been historically. And their focus now is also closing.

So we feel very good about where they are. Their operations are also now taking on more of the North American technologies and the best practices, which we also believe will yield higher margins and matriculate ultimately to bottom line profits.

Overall internationally, we feel our business is stable. That said, we're not going to be happy and we're not going to rest until Korea is making money and until the UK is making money. And we're confident that we've got the right turnaround plans in place to make that happen.

So, should we see the loss reduced this year? Is that the right way to look at it?

That's the plan. The plan is to reduce it by 50%.

Brandon Dobell, CSFB.

Ken, I want to get some color from you on how you guys think about compensation, the different business units and geographies, with management turnover and focus on both top line and profitability and some of your earlier comments about returns. Have you guys made any changes to how you're compensating both kind of your line managers, guys on the ground, as well as the executives?

I'm not 100% sure I understand the question. We, as a Company, on a global basis, are experiencing extremely low turnover. And the only turnover that we are really experiencing is turnover that's caused for performance reasons. So, I just want to be very clear on that. As a matter of fact, I would say that we're entering one of the lowest periods in history on just core management turnover. So, we're very comfortable with where we are there.

As far as management compensation goes, we are very much a performance-based organization. And our goal is to variablize the performance opportunities that our management and our executives have. And we are going to continue to stick with that program. We think we're very sophisticated in this area. We're very pleased with the results that it produced in 2004 and we think that it drives the proper alignment with our shareholders as well as achieving the goals that our clients are contracting with us.

So, we're very comfortable with our compensation and have no plans on making any changes, other than the plans that are underway, which is to continue to variablize our agent pay, which we've been doing so at a rapid rate and is, in fact, driving higher performance, is driving much better client satisfaction, so we'll continue to stay with that. But otherwise, we feel like we're in great shape there.

Okay. Sorry, I didn't mean to infer that there was any issues, just trying to get more information on how you guys think about the different incentive packages. To a comment you made just a second ago about variablizing agent compensation, maybe we could probe a little bit further there. I want to better understand where you are in that process or how it's being communicated to clients in terms of what opportunities it might offer them or how it looks to them from a cost per resolution perspective, or whatever metric might make sense?

First of all, our new Agent Empower capability has been rolled out throughout North America, throughout Mexico, throughout the Philippines, was just recently installed in Argentina and I believe there's a couple of other countries that it's now installed. But the plan is to have it completely installed throughout the world by third quarter. And we are on track for that to take place.

As far as what the philosophy is, it's very simple. We want to tie our management and our agents and anyone else that's involved in the delivery side of the business, their compensation directly to what it is that we are contracting for. And in order to do that, we have to have very sophisticated data warehouses that are real time, on line, that operate globally. Which we have. They're done. They're in place. They're operating. They're tied right to our HRIS systems and we have been utilizing these now for several quarters in the North American theater.

Now we're taking that across the globe, because more and more of our clients are multinational clients taking advantage of three to five countries simultaneously. And therefore, what this is doing is driving better performance characteristic and allowing us to achieve, or increase our chances of achieving bonus potentials, gain sharing potentials, etc.

So that's the strategy and I would invite you the next time you're in the area, if you'd like to come on by and we'll demonstrate it to you, it's something that I think you'll find is very impressive.

Okay. And then last question would be, as you look at the effort to automate more of the employee lifecycle, what kind of timeframe are we looking at here? What kind of investment needs should we be thinking about? In terms of if it is an extra expense load for you guys, would that be more of a cost of services or SG&A kind of expenses?

First of all, we embarked upon the touchless recruiting system about roughly 90-days ago and have been in design on that for even longer than that. We just are starting our beta on touchless recruiting this month. So we're very pleased with the progress that we're making. My belief is that we'll be testing it and modifying it and making changes to it probably all the way through the year. Because it is a significant system. It has significant capabilities.

Our eLearning is up and running and is being utilized around the globe, and we're in the process of automating a lot of the training delivery and taking advantage of eLearning where it makes sense in a mixed format of live, versus self-paced, versus in-person training. We believe that this one initiative, to really do what we're trying to accomplish, which is really kind of reinvent how we do this internally, is going to probably take us, to begin to see significant results, a 24-month format. It is the longest area of all six areas, but we are very confident that it's worthwhile.

As far as investment, it's in our budget and we're comfortable with the investments that we're making in that area. And we'll continue to be investing throughout the next few years. But, I think I've answered your question. I hope I have.

Yes, great. Appreciate the color, thanks.

Mark Bacurin, Robert W. Baird.

A couple of things. Ken, you mentioned that part of the issue on pressuring revenue in Q2 is going to be migration of customers offshore and we've seen some of your peers go through the same migration issue. Could you give us some sense of what you've already been told needs to be migrated, as a percentage of maybe '04 revenue, and then what the pricing differential is for the domestic-based service versus the offshore?

It's a relatively small percentage of business. When I say relatively small, it's under 5% of the overall revenue. Quite frankly, the stuff that we're looking at migrating is stuff that we're recommending, not that the client is requesting, so it's done in a proactive manner. And it doesn't take place until really later, beginning late this quarter, towards middle of next quarter and will take some time.

We're finding that clients either already have a standing that they want to test it, or they are new clients and they're already doing it and they want to expand and they are viewing us as an ideal choice for doing so. But we are not seeing in our existing client base, a huge push right now to go offshore.

I think a lot of that might have to do with just the nature of the business, the sophistication of the business, the complexity of it, the customer set that we're facing and just the fact that they feel that it needs to be dealt with in a North American theater. That being the case, over time, I'm sure that as people get more and more comfortable and as the results are more proven in various different countries, more of our clients will begin to inquire and ask etc. But for now, it's a very small amount of business.

And maybe Dennis, I don't know if you can answer this, but of the 152 million or so of North American revenue you reported in the quarter, is there a way to quantify for us what is being serviced out of North American facilities versus offshore locations?

I guess 25%, roughly, would be US clients offshore.

Right, okay. And then the comment that you made about still expect to be profitable for all four quarters this year, I guess I want to make sure I'm not reading anything into that, but that doesn't sound like a real strong endorsement for improvement in profitability in the back-half of the year. I was just wondering if there's anything you see coming that would make you think that we might see additional market compression that would put you at risk of slipping into the red?

Let me tell you why that comment was put there. We had a situation where a news service picked up something regarding Newgen, and said it was going to be for the whole Company. You might recall, last quarter we thought Newgen would be flat for the year. And then a news service said TeleTech's going to have its earnings be flat.

We went to great lengths to make sure the news services wouldn't misinterpret what's happening at Newgen, which is 10% of our revenue, for the whole Company. So that was with an ounce of precaution to prevent another erroneous news story.

Okay, so that was not cautionary signaling other issues in the back half of the year?

No, I don't want the news story to pick it up wrong again.

Not at all. We just don't want the Dow Jones to misunderstand what happened, based on what we've seen in the past.

I understand. And then just finally, could you give us some sense of the timing, for the issues that caused the delay at Newgen, when those will be resolved, when the system will essentially be fully functional? I assume that's some time in Q2, but could you give us just an update on that?

The system is now fully functional. Obviously, any time you go to such a major system conversion, both from a database and application point of view, you've got to be cautious and take your time. I think we feel that the system today--we have it on dealers. We feel as it's running, obviously, all systems as they go forward have some bugs,but now we will aggressively start to ramp this system.

And have you seen already thus far some of that revenue starting to return as the system is now fully functional?

Yes. Oh, absolutely. Sure.

Jeffrey Kessler, Lehman Brothers.

Actually this is Minta Davidson, asking a question on behalf of Jeff. Hi, guys. What milestones should we be looking at over the course of the next two to three quarters, just to know that you are on track with your business plan?

I think that clearly, one of the milestones is that we want to start to demonstrate top line revenue growth, and that's where our focus is right now. And I think that's really the main milestone that should be focused on. Obviously, a derivative of that will be capacity utilization would then, of course get better, so that in itself.

And then another milestone will be the fact that we're onboarding new dealers at Newgen at a faster rate than what we're currently onboarding today. Our goal is to get that down to a more reasonable timeframe of 5 to let's say 10 days. So those are pretty much it. The fact that we'll continue to be showing good cash flow, which we're confident that we are. Anything else you'd like to add to that, Dennis?

No, I think those are the main drivers.

Donna Jaegers, Janco Partners.

Just a few quick questions. One for Jim, since he's there, just to drill down a little further in Newgen. As far as getting dealer VIN numbers into the system, have you added more staff, or what's the gating factor there?

The gating factor is, let me see if I can just take a second for everybody, because that's a very, very good question. If you take a company that's been running a system essentially the same system for years and years and years, the amount of new implementation of the customer base has been fairly normal. You know, 5, 10 dealers a week, that kind of a thing.

Now when you convert to database and then convert the application, essentially what you end up with, to be perfectly blunt, is a couple of thousand that you've got to convert. The system, just to be perfectly blunt, just plain wasn't running at the pace that Jim and I wanted it to run on the conversion of those new dealers onto the new platform. So that's really the gating of it.

The other side of it, obviously, is when you're setting up a much more sophisticated system, with more sophisticated database and data fields, we want to really, really be sure that we have that set up properly and that we're not making mistakes and sending out, for example, a reminder to you, on a vehicle that you don't even own, to bring it in for an oil change or a tire check or whatever. So, it's just caution and it's also for the very first time in the history of this Company, we went to a very, very sophisticated system simultaneously, along with a database conversion.

I want to stress that the data warehouse, which is the new technology, is up, it's running, it's stable. It is not showing any issues as far as bugs, etc. The component that's been a bottleneck has been the onloading of the data. And the reason for that is, to Jim's point, if the data does not go through a very, very tight quality assurance check from a data hygiene standpoint, then what ends up happening is we send data that ultimately, you know, bad data in equals bad data out. And the process, quite frankly, was a bit manual in the past, because of the number of dealers that were historically added on a daily basis and that was very acceptable.

Going forward, like everything at TeleTech, because we like to automate everything and have automation do the proper follow-through and quality checking, we have a team of people that as we speak are building a front end to the system that they believe they will have turned on in a relatively short period of time. It will be under 60-days. That will enhance the ability to not have to have bodies that we now put on this to make sure that the front-end data that's being entered is in fact correct.

So that's really the crux of this issue. Sorry that I'm getting so far into the weeds, but I do want you to understand that the new system is functioning. It has all the features that we contracted for. We're delivering on all those features. Now what we have to deliver on is the dealers that we've signed up actually getting them in and online and making sure that it's done in a way that they're extremely pleased. And that's where we stand.

Great. Thanks, Ken. And Jim, are you seeing any pushback from the dealers as far as accepting the new system?

I think what happens is, obviously, any time you do a change, all of us are a little bit, you know, whatever, reluctant, careful, cautious on a changeover in a system. And one of the things we did do, just so everybody understands this, we did let it run in a pilot stage a lot longer, just to absolutely be sure that we'd worked it out.

But as early as yesterday I was hearing really good things about people's interest in the system and the functionality of it.

Great. And as far as you taking over the management, Jim, over at Newgen, is that just temporary for the next two quarters or so? Are you looking for new management? And is any -- I saw old management’s left and there's some rumors about some misappropriations of funds, any detail you can give us there?

Well, gosh, no nothing on misappropriation of funds. I took over, just very simply, I know the business. It's a business that I had--those of you who know me know I love this business. I spent a major part of my career in Detroit in the automotive space and I'm very, very--I enjoy it. I'm going to run it until I'm sure that it's okay. And then we'll turn it over to a proper management, but I'm going to run it until Ken and I are comfortable that it's running the way it should be running.

Tobey Sommer, Sun Trust Robinson-Humphrey.

I have a few questions. One, if you could comment about what sales cycles are like, and perhaps some commentary on the different businesses that you're in, talk about whether they're lengthening or shortening, kind of what you're seeing there.

And then, if you could, in a follow-up to that, talk about the competitive marketplace and what you're seeing? And then also, a comment on wages and trends in wages in your book of business?

And you mentioned perhaps an opportunity for acquisitions and I'm curious how you would characterize the current state of the market and the pipeline as being perhaps more robust or thinner than it had been previously? Thank you.

Okay, that's quite a menu you've got there. So I'll start off of the top and whatever I'm forgetting, please remind me. I guess the first question was, what are the sales cycles? Although it's too early to really make a long-term commentary on In Culture and On Demand as far as sales cycles, what we're seeing is that on In Culture the sales cycles are probably in the 120 to 180-day range, which is significantly shorter than the sales cycles of the core customer management BPO business.

The reason for that being that they're smaller opportunities, they're smaller deals, they're less emotional, in that people tend to not be losing their jobs. And in many cases they're net add on capabilities to clients that need these capabilities.

In the On Demand area, again, it's early to say, but my guess, because it involves the CIO and many other key decision makers in the organization, and a fairly extensive due diligence process, my guess is that it's going to be anywhere from approximately 6 to 9 months. Still lower than the overall core business. And that's just based on the reception that we're receiving and the deals that we're currently, right now, in the running for, attempting to close now. And the speed at which we were able to put together the pipeline and then the stage that we're in at this point in time.

The core business, as far as the customer management business and the BPO business, I never like to blame things on any one [inaudible]. At the end of the day we think that we're good enough that we can compensate for whatever the current issues are within the industry, etc. But one of the things that is kind of interesting is, we are seeing that a lot of people slowed down a lot of what they did over the last few quarters because of Sarbanes-Oxley and that they had all hands on deck just to get through their Sarbanes-Oxley. We're very hopeful that with that behind them they can now make the resources available to complete what their plans were to outsource.

So, I guess what I would have to say is that if I factor in Sarbanes-Oxley, it's probably anywhere from 9 to as long as 18-months. What I'd like to think is that that's a one-time thing and that that's behind us. And what I would hope for is that it's more in the 9 to 12-month range on the larger type deals.

On the mid-market deals that we've been going after, definitely quicker, because they're smaller deals and they tend to involve less of consensus management, etc. And I'd say that that's in the 4 to 9-month range. So that's where we're seeing this stuff at this point in time.

You want to help me with--? Wage pressure, meaning for our wage pressure? Where we're seeing wage pressure is really only in the markets where there is multiple organizations with customer management or back office organization. Otherwise, we're not really seeing a significant amount of wage pressure in the majority of the markets that we are operating in. Dennis, we're not really getting requests to increase wages anywhere that I can think of.

We go out of our way to try to not be--some competitors, for example, that are in the Philippines are all in the same high-rise and they're experiencing dramatic turnover and dramatic wage pressure. We tend to go into standalone buildings and we try to distance ourselves as far away as we can from competitors and from captive users, which I think assists us significantly.

Obviously, I can't talk about what's going on in M&A. What I'll tell you is Dennis has a team that's very focused. We are looking literally around the globe and a lot of what we've seen, we just quite frankly are not interested in, due to the fact that we don't believe that it's low-risk, and therefore, we don't believe we can make accretive in the first 12-months, which is our commitment to our shareholders. I guess that's another way of saying that, like in any time you're looking through a large haystack to find a nice gem.

That said, there are still plenty of deals that we're very focused on right now. And it's not a matter of are we going to do an acquisition, it's really just simply a matter of when. And we still feel pretty good that we will most likely get one done this year.

That's pretty much all I want to mention or talk about regarding acquisitions, or I think I'd be overstepping.

Thank you very much for indulging the long list.

In addition to that, while we're not doing an acquisition right now, we're clearly going to be continuing to purchase our stock for none other than we think it's one of the best uses of our treasury, and because we're a believer in the short-term, medium-term and long-term potential of this Company and I think that our shareholders will be very pleased when they see the continued focus on purchasing of our stock.

You did ask one question about the competitiveness of the marketplace. What we're seeing is that there are lot of organizations in this business that over the last three, four, five years, did not see the industry changing, and consequently put no focus on shifting their strategy on product development, or research and development, on broadening their suite of capabilities, on diversifying their revenues. And so consequently, all they really have to fall back onto is really price in a labor arbitrage market.

And it's our belief that that's a strategy that will not succeed. It's demonstrated by what's taking place in the industry. We think the marketplace is bifurcating and is moving to fewer players in the marketplace. I'm not going to say who those players are. I think it's pretty obvious who they are. We think that that in itself will begin to create price strengthening.

We also think that several of the players in the marketplace have maybe experienced taking on business with the concept that they would make it up in volume. They're now realizing that that can't happen. And I have all the faith in the world that they're not going to continue to do that if they want to have any opportunity of being profitable in the future.

We have always been disciplined about our pricing and every deal that's in our pipeline meets our profit requirements. We are confident that the deals that we close will be accretive to our margin and that we will continue to hold to that. And we think that's the right thing to do for our shareholders and then let the business that's poorly priced go to the weakest competitors who ultimately will become whatever it is that they become through that type of pricing.

So that's how we're seeing the marketplace. Overall though, we're feeling very good. There is a huge amount of chatter amongst the large clients that they are very pleased with where our balance sheet is. And they feel that they need to do business with us because of our balance sheet. And so we think that we're going to actually see wins just because of our financial strength, let alone all the innovative new products that we are putting out in the marketplace.

Thank you very much for indulging the long list of questions. I appreciate it.

John Mahoney, Raymond James & Associates.

You gave us some guidance about the second quarter revenues and you mentioned the international transitions and some new potential contract signings. But we didn't get any help on the margin side for the second quarter, other than the fact that Newgen loss will be half as much. Could you give us some idea about what sequentially the second quarter profitability is going to look like?

Well, John, as you know, we don't give discreet EPS guidance, but some of the things we talked about, and there's always things going different ways, is the transition costs for the work going offshore and that goes one way.

Also, as we move into second and third quarter, the impact of the payroll taxes goes down. So that's helpful and that offsets that and goes the other way. And we've also said that we expect Newgen's loss to be in half, which is positive going the other way. Those would be the three pieces there. We expect the net of all those three by themselves is a net positive, is our current expectation.

Certainly. Anything else though, last year was a year of really tremendous improvement in profitability year-over-year and throughout the year. Anything else you can help us out?

We are sticking to our strategic plan, which has the six levers that will drive increased profit margin short-term and long-term. We're very focused on that. We're very pleased with the progress that we're making. We're very pleased with the progress that we've made on our phase 3 cost improvements. And we insinuated that there'll be a phase 4. I'm not sure that there's really much more that we can say.

We tried to say to people all along that we're going to focus on running our business for the long-term so that we have the best possible capability and the best possible business in the long-term and that from quarter-to-quarter, although sometimes results might not be exactly the way you folks have anticipated, at the end of the year our goal is for the numbers to be directionally where we suggested over our three-year plan.

And for now, based on where we are in our cycle, that's really the best guidance that we can give and we're sticking with that guidance and still have a high degree of confidence in our guidance.

Thank you. That concludes today's conference call. Thank you all for joining. You may disconnect at this time.