TTEC Holdings Inc (TTEC) 2005 Q2 法說會逐字稿

Welcome to the TeleTech second-quarter 2005 earnings conference call. I would like to remind all parties that you will be in listen-only mode until the question-and-answer session. This call is being recorded at the request of TeleTech. I would like to turn the call over to Karen Breen. Thank you, ma'am, you may begin.

Thank you, and good morning. My name is Karen Green, Vice President of Investor Relations and Treasurer. TeleTech is hosting this conference call today to discuss its results for the second quarter of 2005 ended June 30th.

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

Speaking on today's call are Ken Tuchman, our Chairman and Chief Executive Officer, and Dennis Lacey, our Chief Financial Officer. Ken will begin today's call with a top-level overview of the Company's performance during the quarter; Dennis will then review certain aspects of our financial results, turn the call back over to Ken and then we will open the call to your questions.

Before we begin I would like to remind you of our disclosure regarding forward-looking statements. Matters discussed on today's conference call may include forward-looking statements relating to future plans and developments, financial goals and operating performance and are based on management's current beliefs and assumptions. Such statements are subject to 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; 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 advance discussions; risks associated with performance-based pricing metrics and certain client agreements; the risks associated with achieving improved profitability in international and database marketing and consulting segments; execution risks associated with achieving our targeted cost improvement plan and the possibility of additional asset impairments and/or restructuring charges.

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

Good morning. Before discussing the quarter as we customarily do, I'd like to start by providing an update on the three-year goals we provided in January. The decision to publish our goals was based upon feedback from our shareholders and analysts who have asked questions such as how much could revenue growth and what operating margin percentage could you achieve over the long-term?

To address these types of questions we issued our three-year goals which we characterize three ways -- one, that they are achievable; two, that our revenue growth has historically been lumpy, meaning that periods go by with no growth and then we win large contracts; and third, a general caveat that analysts should back-end load these goals toward the end of the three-year period.

Even unrecognizing those caveats, I acknowledge that we are not off to the start that I had hoped. With that let me update you on the status of our progress against these goals. Let me begin with our goal for organic growth in our core BPO and customer management business. The industry is one where at any point in time there are half a dozen or so large deals that a few competitors are pursuing. These mega deals, if you will, generally take a long time to close, usually between nine and 18 months. When I characterized our business as lumpy I was specifically referring to these types of deals.

The majority of the mega deals we were pursuing in January we continue to pursue today. I have said before that our goal would be to add approximately 150 million in annual revenue from new business over the three-year period; I continue to believe this goal is achievable. However, this growth will not be in a straight line manner. Our recently announced sales wins bear this out. As you know, we announced in July a business update that we entered into an agreement with a large U.S. healthcare provider.

This work will fully utilize one customer management center in the U.S. and will replace work for a client currently served from that center. That client has excess internal capacity and elected to move the work in-house. Had they not made the decision the new healthcare client would have contributed to our top-line revenue growth in the manner that I have been describing.

The business update also announced that we were recently awarded a multiyear inbound customer management contract with a large airline. We have also been awarded business with a large U.S. cable company and a digital entertainment company and a leading U.S. wireless company among others. Some of these awards are with new clients while others represent an expansion of business with existing clients. I would like to point out that year-to-date we've been awarded new business that represents approximately $85 million of annualized revenue once fully ramped.

Before moving to our second revenue goal of new products I'd like to update you on our sales and marketing organization. As you know, Greg Hopkins joined the Company over a year ago and has done a remarkable job of increasing the effectiveness of our current client relationships. Retaining and growing existing business is an extremely important part of what we do and going forward Greg's primary focus will be leading TeleTech's current account management teams.

The next step in the evolution of TeleTech's growth strategy is new business development opportunities. I would like to publicly welcome Alex Schutman (ph) as our Executive Vice President of Sales and Marketing. Alex comes to us from a $1.4 billion leading provider of enterprise management solutions. Alex has had great success in closing large multinational accounts and brings experience in cultivating a productive sales structure through an environment of execution and accountability. We're excited about Alex joining our team and we look forward to working with him.

Moving on to the second revenue goal for new products. The goal is to achieve the annual revenue run rate of 100 million by the end of 2007. These new products are part of our strategy to diversify revenue and improve margins by moving us further away from a traditional call center company to one that generates software-like margins by providing discrete business processes on a per even or per subscriber basis.

I want to point out that we are incurring at least 15 million per year in higher SG&A expenses alone to launch these de novo businesses as well as expand our sales organization and product suite. Naturally this impacts the Company's profitability in the short- to medium-term, but we believe these investments will be a strong contributor to future revenue and profitability.

I am encouraged by the in culture startup as we are only six months into the sales process and have already added several new clients. As you know, on demand is a much more complicated offering and so we expected the sales startup process to take longer. We're extremely pleased with the impact on demand has had on streamlining and lowering our costs in our internal operations and remain enthusiastic about our sales prospects.

Moving to Newgen. When we were setting our three-year goals we believe that if we added one of the two new automotive manufacturers we would be well on our way to doubling Newgen's revenue. However, we fell behind in this initiative due to the issues discussed last quarter and we're very close to having a new leader for Newgen. I expect this hire to occur during the fourth quarter and I still believe the goal of doubling Newgen's revenues on a run rate basis by the end of 2007 is reasonable, but the ramp will be slower than originally anticipated.

Now to the last revenue goal which is acquisitions. Our goal is to add approximately 150 million of annual revenue from acquisitions over the three-year period. Finding the right acquisitions require a considerable amount of prospecting and due diligence to successfully complete a strategic and accretive transaction. Which naturally means the timing of this goal is not predictable. I still believe that over the three-year period we can acquire 150 million or more via acquisitions as we do not view this goal as particularly aggressive given our strong balance sheet.

Let me now switch to the operating margin goal. We price new business today with operating margins well in excess of our three-year goal. If we are successful in closing this future business, our operating margin would naturally rise. It will also increase when we successfully improve Newgen's financial performance.

For instance, had Newgen's second-quarter operating margin been at its historical level of 8% on a fully allocated basis the Company's consolidated operating margin would have been approximately 4% in the second quarter, about twice what we reported. Further, if you also add back the 15 million we are incurring annually to launch de novo businesses and to expand our sales organization, the Company's second-quarter operating margin would have been approximately 5%. The future operating margin will also benefit from the targeted cost improvement plans including Phase III and Phase IV, both of which we announced this year.

We are seeing the benefits of the progress we have made to globalize our delivery platform which is a significant component to our success in achieving these cost improvement initiatives. Today we announced Phase IV of this plan which we expect will further improve our future cost structure by an additional 20 million on an annualized basis. We have demonstrated our ability to successfully improve our cost structure so I am not concerned about our ability to deliver on these future cost improvements.

Moving to our second-quarter results. We reported earnings of $0.05 per share which was up from $0.04 in the previous quarter. Had we achieved our goal to reduce Newgen's operating loss by 50% in the second quarter, our results would have been better by $0.03 per share. Let me now provide an update on our international segment.

First, I'm pleased to announce that profitability in Latin America region improved by 2 million from the year ago quarter. However, as you know, our international segment overall loses money due primarily to the United Kingdom and Korea. As announced in July, we are streamlining our capacity in the United Kingdom which is the key component of our plan to achieve profitability in these operations during the latter half of 2006. The other major component of the UK plan is achieving new business wins from the sales force we recruited earlier this year.

In Korea we're making progress in reducing the losses. We hired a new general manager and very recently implemented cost reductions and now only need a few modest client wins to achieve breakeven at a local level. As I mentioned on the first-quarter call, our Korean operations are now under the responsibility of a long-term TeleTech North American employee and we are pleased with the progress he is making.

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

Thank you, Ken, and good morning to everyone. We reported diluted EPS of $0.05 per share for the second quarter which includes certain items that materially impacted the quarter's results as discussed in our press release and Form 10-Q. I would like to discuss these with you now.

The first item is the $2.4 million reversal of the worker's compensation self-insurance accrual. Historically the self-insure accrual was estimated by third party actuaries based on industry data, whereas we now have enough history by ourselves as a company that the external actuaries can use our actual claims history to estimate the accrual. The actuaries recommend that we reduce their accrual based upon this new data.

The second item is a onetime $1 million benefit related to a real estate settlement. Combined these two items benefited second-quarter's profitability by 3.4 million. However, as noted in our recent business update, we incurred a one time $2.5 million charge related to the planned exit of our Glasgow facility which partially offset those benefits. These items resulted in a net onetime benefit this quarter of approximately $1 million or $0.01 per share. Also as announced in the business update, Newgen's operating loss was $2 million higher than anticipated and therefore negatively impacted the quarter by $0.03 per share.

Let me now discuss the financial comparison chart that appears within the MD&A section of the Form 10-Q. We believe this chart is helpful because it quantifies the impact of the various moving parts, if you will, of our business and how our strategy and tactics have impacted our financial results. The line item in that chart labeled "net increase/decrease to income from operations excluding items separately identified below" shows that for the first time in five quarters on a year-over-year basis, there is a decrease in this statistic of about $4 million from the second quarter of 2004.

Let me explain what is driving the year-over-year quarterly change. Cost of services as a percentage of revenue is flat at about 73.5%. However, since some of these costs are fixed in nature and revenue decreased 12 million year-over-year, you do not see the impact of the savings we achieved at the cost of services line that you would have seen if our revenue had been the same or grown. Additionally, as Ken mentioned, we are investing in our sales organization, new products and de novo enterprises, which has increased our SG&A both in absolute dollars and as a percentage of revenue. These costs include headcount additions and associated recruiting fees and represent nearly $4 million of a decrease in year-over-year results I just referred you to.

We also had a net decrease in performance-based revenue from certain clients, about 2 million this year versus last year. These items were offset by a $1 million improvement in net profit in several international regions. As shown on the chart in the Form 10-Q, the largest year-over-year quarterly operational variant is the $5.4 million decrease to Newgen's profitability, exclusive of the onetime reversal of sales tax reserves last year. This resulted in a negative impact on second-quarter results of approximately $0.07 per share on a year-over-year basis. The chart also shows that on a year-over-year quarterly basis, we overcame, as we had planned to, a $2.7 million decline in minimum (ph) commitments.

The other major components in the financial comparison table include a reduction in interest expense which offsets an increase in foreign currency transaction losses. In summary, the financial comparison table shows for the second quarter we increased net income by 1 million over the prior year.

Let me move on to taxes which, for our Company, remains a complex discussion because of the multiple tax jurisdictions in which we operate. We have included in the MD&A a chart that breaks down the components of our tax expense by category of tax jurisdiction and the resulting impact on our effective tax rate depending on which bucket, if you will, our operations occur. These buckets are countries with valuation allowances, countries without valuation allowances and, third, countries operating at a loss without a tax benefit. Because we do not know with precision which bucket new work will occur, it presents difficulties in forecasting future effective tax rates.

Lastly, regarding taxes, let me also address our U.S. deferred tax valuation allowance of approximately $14 million. At some point in the future the preponderance of the evidence may allow us to reverse all or a portion of our U.S. deferred tax valuation allowance. That possibility still exists, but we cannot predict which quarter this event may occur. In quarters subsequent to making that determination we would have a more normal tax rate of close to 35%.

Now I'd like to comment on our balance sheet which, with almost 300 million in equity and a 10% debt-to-equity ratio, is strong. Cash and cash equivalents were 83 million at quarter end and we had approximately $22 million drawn on our revolver in addition to approximately 8 million in other borrowings, principally outstanding grants. As a result we ended the quarter in a net positive cash position of $53 million versus 8 million for the year ago quarter, an increase in $45 million. Given that we repurchased approximately $30 million of our stock during that period of time, we are very pleased with the amount of cash the Company is generating.

We continue to generate free cash flow, which was 11 million for the quarter compared to -18 million for the year ago period. This level of free cash flow enabled us to continue our stock buyback program during the second quarter as we purchased 1.9 million shares for $15 million. Management of the Company tends to continue purchasing shares.

Capital expenditures were 9 million during the second quarter. We currently estimate the CapEx for all of 2005 will be approximately 30 million primarily from plans to build several new customer management centers in certain international locations where we believe there is client demand.

Looking ahead we expect revenue in the third quarter to be approximately the same as the second quarter, although we anticipate revenue lift from certain new and existing client agreements recently signed. The summer is seasonally slower for certain regions of the globe such as Europe, and some of our clients are migrating their work with us to foreign locales. The net of these will result in relatively flat revenue for the third quarter compared to the second quarter.

Additionally, we will occur some cost to ramp new programs and migrate existing programs to alternative locations. We estimate these costs will be approximately $1 million more during the third quarter than in the second quarter. The recent new business wins Ken referred to are expected to begin ramping primarily in the fourth quarter of 2005 and continue to ramp during 2006.

In conclusion, I believe we are well positioned for growth as we benefit from a strong financial position and have further opportunities to improve our cost structure. With that I will turn the call back over to Ken.

Thank you, Dennis. To conclude, although I am pleased with certain aspects of our second-quarter performance, I know that overall we can and will perform at a much higher level in the near future. To reiterate our goals, we continue to be focus on growing and diversifying our revenue with targeted clients that seek high-value, technology driven, process oriented solutions. We are further improving our cost structures and we are committed to maintaining a strong balance sheet and continuing to repurchase our shares.

I am encouraged by our recent new client agreements and believe we are seeing signs of additional opportunities converting in the latter part of this year. Our new products set and delivery platform have been well-received by our clients and have also allowed us to be successful in streamlining our global operating costs. With that we'll open the call to your questions. Thank you.

Jeff Nevins.

On the CapEx, it looks like you brought it down about 10 million from where you were thinking it was going to be a quarter ago. Could you talk about just the general reason? And I assume it's related to one of two things -- one, it just could be you're starting to see some of the CapEx leverage in your infrastructure -- in your VoIP infrastructure; or two, some of the excess capacity that is out there you're able to fill up at less cost.

I think you've answered the question well for me. Those are certainly factors. And there's always a degree of imprecision when you put a CapEx budget together when the actual spend will occur. But yes, I think it's as you articulated it, Jeff.

Is there one greater than the other? I know that's tough to quantify, I'm just trying to understand how much leverage you're seeing from your VoIP infrastructure?

We're seeing significant leverage, it's not just from VoIP. VoIP is really one component. It's really from just the overall virtualization centralization strategy which is considerably more than the VoIP infrastructure. So the fact that all of our applications have been rewritten over the last three years and now operate in a single location is definitely having an impact.

In addition to that, the fact that we're not having -- that over time we'll be maintaining far less data centers as all the traffic begins to move to GigaPOP. By the end of this year we were hopeful to be at 75% and now it's looking like we're going to be more like 85% or 90% of all traffic on our GigaPOP infrastructure. So that is certainly having an impact.

And then to Dennis' point, there's just timing issues. We have a fair amount of construction going on of new facilities right now and sometimes based on when the payments are made, etc., is when the expenses will actually be incurred. So, yes, it's a combination of that as well as we've reengineered how we build these facilities and we've become more efficient in that area as well.

Okay. My second and last question -- then I'll hop off -- was related to Ford and Newgen. There was a comment in the Q talking about new terms that -- absorbed subsidies in return for additional dealers and some sort of language like that. Could you maybe just explain that a little bit and talk about how much that's impacting the Newgen profitability today?

The language you're referring to, which was also in the first-quarter 10-Q, has to do with the fact that when we launched our new program with Ford there were changes to the contract terms. And there was an expectation that we'd have more dealers signing up and we looked at the manner in which certain costs, if you will, of operating the program would be shared between ourselves and Ford. And at the time the decision was reached based upon expectations of ramp of that particular program and a revised amount of the sharing, but that was a good risk/reward curve to enter into. This turned out we have not had the degree of growth in revenue we anticipated but yet we agreed to absorb some additional cost hence it's pushed us down some.

Okay.

I think the industry situation -- what's going on with the auto industry, particularly U.S. auto makers today, was not the best timing I think for that.

Right. Okay, thanks a lot.

Bob Evans, Craig-Hallum Capital.

Just a follow-up to a previous question and answer. When do you think you're at the point where the new deal that you struck, if you get more benefit on volume -- when do you expect to be at that point where the new relationship pays off in terms of you're making more now than you would have under the old arrangement?

We're not going to make a definitive quarter on an individual contract. With respect to Newgen itself, though, as we have announced in our press release, we expect that enterprise by itself, absent corporate allocations, will be making money in the fourth quarter of this year. So of course that would include that particular program.

And for the third quarter should we expect progress, but obviously not enough progress to get profitability and we would expect to have less of a loss I guess in Q2?

Yes, it will not be profitable in the third quarter.

But will we expect less of a loss than Q2?

That's our intention.

And can you comment in terms of the new business that you've won -- ballpark how many seats are you adding and where is that capacity going?

There's been multiple contracts so I would hate to get this wrong, but one of the contracts is 450 or so seats, another contract is 1,000 seats, another contract is about 350 seats -- and I'm sure I'm missing others because there's been multiples around the world. So let's just say 1,700 52,000 (ph) seats worth of business just kind of lumped together. Mind you that it's difficult for analysts to project what that revenue is because some of that revenue is going offshore, some of that revenue is actually onshore and we need to see how it all falls out. But I think it's safe to say that we'd be very pleased if we have another quarter like we just had as far as the amount of business that we're starting to close.

Okay, but most of that business, is it fair to say some U.S.-based or North American-based and then some offshore Philippines, that type of situation?

Definitely.

Okay. And new business pipeline, in terms of the UK and Europe, are you seeing much there in terms of opportunity?

Yes, first of all, our pipeline throughout North America as well as throughout Europe is increasing. We're also -- our rigor is getting much better on the qualification of the pipeline and we're moving deals down through the different phases and we're feeling like we're making progress in the actual -- adding to the pipeline and the quality of the deals. In addition to that we're starting to see existing global clients of ours asking us to increase capacity, in some cases significantly. So from a same-store sales growth that's something that we're always very focused on and that's why we've made the decision to take Greg Hopkins and have him just focus on growing the existing logos.

I want to remind you, we have close to 200 of the world's largest companies as long-term clients and we only did -- the amount of business that we do for them is as an overall percentage in most cases in the 15% range. So clearly, just mining our own customer base is of significant value.

And final question. You've been an aggressive buyer of the stock thus far this year. Should we expect that trend to continue?

Absolutely.

Okay, thank you.

Donna Jaegers, Janco Partners.

Just a follow-up on new business prospects. Can you talk a little since Sprint and Nextel just got FCC approval last night and the deal will probably close very shortly, can you talk about any prospect there for maybe picking up more business from Sprint? And also on the Telstra contract that you have out there, when is that -- if that comes up for renewal I think later this year can you talk about any sort of indications on it?

On the Sprint/Nextel thing, obviously it would be difficult for me to comment on what the new business prospects are other than to just simply tell you that we've been told by both companies that because of the way we're performing that they feel that we're a very viable provider to receive additional business. That's pretty much -- as much as I can tell you. We have had meetings with both companies and we've heard this from them separately. The relationship remains very good and very strong and we're performing very well.

As far Telstra, they've actually been increasing their capacity with us. Just recently they've asked us to increase capacity. And you're probably going to ask me by how much, and as I recall it's a few hundred seats. And so we're making progress on that front. As you know, there's a new management -- new leadership there and so that tends to sometimes slow down things just because the new leadership has got everybody tied up in understanding and redefining the strategy of the Company. But we've enjoyed a long-term relationship with Telstra and we feel positive about our go-forward relationship with them as it relates to renewing (ph).

Thanks.

Josh Vogel, Sidoti and Company.

The client that you are losing in the third quarter, how many seats were they?

It was approximately 300, 350 seats. I think it's 350, and the other client that's coming in is actually taking up 100% of the capacity of the center that they used to be in.

Okay, so that U.S. healthcare company that is coming in there, are they going to completely offset the revenue that you're losing with this client?

More so.

Okay. And which of the new contracts that you signed -- which are actually new clients?

About half of what we described or more. The airline, the healthcare company and then there were multiple other ones that we have announced just because of the size of them, etc. We tend to not talk a lot about a lot of the smaller ones.

Okay. And do you have any data as far as utilization for the dedicated and managed centers?

I think it's disclosed in the Q. I apologize, I normally have that in front of me, but I don't. If you just look in the Q --.

The data we make available is in the 10-Q in the MD&A section.

Because I thought I saw a further reduction in workstations but not for the dedicated and managed centers.

We never report on dedicated and managed. That's always been part of the Company's philosophy. It's really difficult to do so because the client, regardless of what the capacity is, it's dedicated to them. We've just always felt it was too confusing to report that capacity number.

Okay, thank you.

Brandon Dobell, Credit Suisse First Boston.

A couple of quick ones. Ken, you mentioned some progress on the in culture side with some customers. Is this customers in advance of a formal product launch or from a worldwide product launch or what are those guys paying you for at this point? And then second, also more of a broad question. As you look at your industry exposures -- or vertical industry exposures in the U.S., you've managed to keep a lot of the capacity here when a lot of your competitors have seen stuff go offshore. I wonder if you can give us a feel for what makes it different for you guys, how you've been able to keep that stuff -- either the capacity or the revenues here and how you look at that playing out the next couple of years or so? Thanks.

First of all, in culture is a real business. It's live, it's up and running, it's operational, it's not a concept. There is a significant amount of employees that are online interacting in 150 languages today. So it's a live business. It's up and running and is just now starting to receive revenue. The clients that we've entered relationships into, I want to say probably 85% of them are Fortune 500 type companies.

And what we've decided to do is we're going to hold off on giving much more color on that until most likely the end of the year because we want to give the management team the benefit of delivering on and tracking to their business plans. But thus far they're making very good progress. Their pipeline is very significant and we're confident that this is a viable business and that the investments will be well worth it and that it will pay off. Your other question is a bit more abstract.

Sorry about that.

Which what I would just simply say to you is the following -- we do not lead in our sales process through cost or cost compression. Others, maybe that's how they choose to sell or maybe that's their only value proposition. We lead through a whole business transformation process. We lead through total value delivered and what we're finding is that many of our clients, for various reasons some of which are actual legal reasons, cannot leave the United States. Certain types of business in the financial services and the Healthcare and certain aspects of banking, etc., must be done by law in the United States. So we're cognizant of what that business is and we're targeting it, number one.

Number two, many of our clients have chosen our blended solution and, because we do offshore in more countries than pretty much anyone else in the world, they're choosing to keep ex percentage of their business in the U.S., ex percentage in Canada, ex percentage in Mexico, ex percentage in India, in the Philippines and no on and so forth. And so the point is that we're providing them with what we believe is a lower risk solution.

And so the point is that that is going to continue to be our strategy. That said, you should know that our Philippines operation is growing at a very, very fast rate. And it's pretty safe to say that we are vastly becoming the largest and fastest growing provider in the Philippines. We just don't go out of our way to brag about it because we just think it's a very small portion of our value proposition. We think that customers are coming to us because of the types of things we're able to do for them from a technological standpoint and what we're able to do for them in a way of getting their customers to ultimately have more stickiness through retention strategies that we're putting together. I don't know if I'm answering your question and I'm sorry if I'm being too long-winded about it.

That's some pretty good color actually. I'd just step back to the in culture product for one second. The customers who are signing up, are those existing TeleTech customers in different parts of your business or are these new guys that you're going after that you haven't been able to tap into before?

It's mostly new, mostly new logos. Which we're very excited about. That was actually -- what we have is they've divided the salesforce. We have a totally separate salesforce and we have ex amount of the salespeople focused on only new kind of global logos and then we have another group that are focusing on our internal business. And I can absolutely tell you that every client that we present this to of our existing client base is very interested in our capabilities in this area.

So again, we're not saying that this is going to turn into a $200 million a year business. We don't want people to get the wrong idea. But what we are saying is that the margins are going to be very different and that it's going to be able to demonstrate that we can leverage our platform into other areas that have significantly higher margins and that are also faster growth areas.

Got it. Appreciate it, thanks.

Tobey Sommer, SunTrust Robinson Humphrey.

This is actually Mike Vincent for Tobey. Just a couple quick questions. I see that you're expecting third-quarter revenue to be flat kind of in line with what it was in the past and that is including the exit of the customer that's going to be offset by the healthcare company if I remember correctly. Is that healthcare company revenue going to ramp up earlier than the fourth quarter as you suggested for the other companies, or is there enough expansion in the existing business that's going to cover for that drop in revenue?

It's really both. One, it is ramping up at an accelerated rate; and two, it's other business that's organic that's being ramped up at the same time; and three, it's the existing base that's asking for -- to take more capacity right now. So if you're asking how are we compensating for this one client exiting and one ramping, the way our forecasts are showing, we're being conservative and we feel comfortable that we'll be able to achieve no loss in revenue while the other client exits.

Okay. And then one more question. Just if you could talk a little bit more about the fourth phase of the cost-cutting initiative, the $20 million. How much of that is already identified and can you add a little bit more visibility on the timing of that?

Actually we have plans to make up all of that. Before we put a number out historically we always have plans. We don't set the goal and then do the plan. So we do it bottoms up. So we've already identified the steps that would come up with that. In fact, when we do this planning process we always identify more than what our goal is because when we do an endeavor like this things usually go wrong occasionally.

So we always have to plan for more than the number we signed up for. In terms of when that takes effect, we'd be starting to work on those as we speak. We'd see partial benefits during 2006 and then you'd see full benefit thereafter. It's all these plans to have an annual effect -- they take effect during the year so you don't have the impact during a calendar year, it's thereafter.

And I just one to stress that the first two phases we completed either on time or ahead of time and actually ahead of the dollar amount that we originally forecasted. The third phase we are on track to complete on time or potentially a little bit ahead of time. We're 90% plus there on third phase. And so this is what gives us the confidence to announce the fourth phase. So our goal is to consistently try to create -- try to get towards a world-class cost structure. And we feel that with this fourth phase we're going to be there and with new business coming on, etc., is where we'll begin to see the leverage.

Okay. Thanks, guys.

Thank you, this concludes today's conference call. Thank you for joining us.