TTEC Holdings Inc (TTEC) 2005 Q3 法說會逐字稿

Welcome to the TeleTech third quarter 2005 earnings conference call. I would like to remind all parties that you will be in a listen only mode until the question and answer session. This call is being recorded at the request of TeleTech. If you have any objections simply disconnect. And at this time I would like to turn this call over to Ms. Karen Breen. Thank you ma''am. You may begin.

That you and good morning. Thanks everyone for joining us today. My name is Karen Breen, Vice President of Investor Relations and Treasurer. TeleTech is holding this call today to discuss its results for the third quarter ended September 30th, 2005. Yesterday, TeleTech issued a press release announcing that its quarterly report on Form 10-Q had been filed with the SEC. This call will reflect items discussed within that press release and Form 10-Q and TeleTech management will make reference to it several times this morning. Speaking on today's call are Ken Tuchman our Chairman and Chief Executive Officer who is in New York today, and Dennis Lacey our Chief Financial Officer. Ken will begin today's call with the top level overview of the Company's performance during the quarter. Dennis will then review certain aspects of our financial results and turn the call back over to Ken, after which 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 judgment, 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 risk associated with lower profitability from or the lost 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, risks associated with performance based pricing metrics and certain client agreements, the risks associated with achieving improved profitability in the international and data base marketing and consulting segments, execution risks associated with achieving our target and cost improvement plan, 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 all. I'd like to begin with a review of our review of our third quarter financial results, after which I'll provide a brief business update. Third quarter revenue was a record 274 million. This was an 8% increase from last quarter and a 6% increase from the year ago quarter. As we mentioned in our business update release in mid September, our top line performance increased sequentially as a result of growth in both new and existing client programs. This has led to increased capacity utilization and improved profitability. s a result, our third quarter operating margin increased 139% to 4.3%, compared to 1.8% in the previous quarter. Third quarter earnings per share was $0.16. Excluding the one time tax benefit of $0.08 per share, nonGAAP EPS was $0.08. This compares to earnings per share of $0.14 in the year ago quarter and $0.05 per share in the second quarter of 2005. This quarter also included a litigation and claims charge of 2.9 million, or approximately $0.02 per share. I'm very pleased that we are achieving a majority of our targeted 2005 goals and believe the fundamentals of our business continue to strengthen.

Our improved performance is the culmination of three years of deliberate actions taken by the Company to return TeleTech to sustained profitable growth. Let me highlight some of the key factors contributed -- excuse me -- contributing to our improved results. First, the investment in our account base continues to payoff. Our client renewal rates and satisfaction levels are at an all time high. During the last several months, we renewed and/or expanded several existing client relationships worth an estimated 70 million in annual revenue.

Secondly, we continue to win new business as the pipeline of new opportunities across each of our targeted industries continues to strengthen. We're seeing early indications that the conversion cycle is returning to a more normalized period. After having lengthened for several years, over the last few months alone, we've signed an estimated 20 million in annual new client global business in the financial services, communications, health care, and commercial verticals.

Third, I believe market dynamics are shifting in our favor. The customer care and BPO industry is bifurcating. Prospective clients are increasingly becoming more sophisticated in what is being required from an outsource provider. They are focused on providers who can deliver innovative capabilities, operational know how, technological solutions, and have a solid balance sheet and reputation for execution. Given our 24 year history of delivering value based solutions with measurable results, this trend his working in our favor. We're seeing a clear distinction between clients that are focused on value versus those solely focused on price. Our market opportunities have significantly expanded. Enabling us to continue to be selective in what business we pursue while adhering to strict pricing disciplines. Globally we will only accept business that meets our stringent profit return hurdles.

The fourth factor is the operating leverage we are seeing in our operations. One year ago I said that in fourth quarter of 2005, capacity utilization would no longer be a primary concern for us. This quarter, capacity utilization in our shared centers increased to 71%, a significant increase from 57% in the previous quarter. We believe we will further improve utilization over the next several quarters with plans to exit three facilities in less desirable markets upon lease expiration. At the same time, we have plans for additional capacity in select north American and international locations. We have more demand than we have available capacity.

Fifth, we have the financial wherewithal to fund our future growth initiatives. We ended the quarter with 55 million in cash, no bank debt and access to 100 million revolving credit facility. Our improving financial results provides additional debt capacity if required. The strong financial position has enabled us to continue to actively buy stock this year. We've repurchased 6.6 million shares through October 31st, for a total of $63 million. When we complete the recently approved Board authorization for an additional 40 million in share repurchase, we will have spent 115 million in aggregate to repurchase stock since 2002.

Sixth, we have demonstrated our ability to successfully implement and achieve ongoing profit improvement initiatives throughout our global operations. In 2005, we announced 40 million in additional profit improvement initiatives. When these initiatives are completed next year, we will have improved our cost structure by 100 million since the plan was first put in place in August 2003.

The final factor driving our improved results is the nearing completion of our centralization and standardization initiatives, which we began four years ago. Global deployment of our core operating systems and global best practices is now 95% complete across worldwide operations.

While there are many positive factors impacting the business, there will always be areas continued focus. The primary ones I'll review with you today. The first area is our data base marketing and consulting segment. Newgen's financial performance improved this quarter with its operating loss being reduced by nearly half, to 1.9 million from 3.4 million in the prior quarter. The second targeted area for improvement is our international segment. In the third quarter we reached a significant mile stone. As this segment was profitable before corporate allocations. Our goal at the beginning of 2005 was to first return the segment to profitability before corporate allocations. Having achieved this during the quarter, our goal next year is to return them to profitability after corporate allocations. Keep in mind that of the 3 million accrued for litigation and claims expenses this quarter, nearly 60% or 1.7 million was in the international segment. If you reduce the international segment's operating loss of 1.9 million by this amount, the entire segment was nearly break even. This is a significant mile stone given this segment reported an operating loss of $38 million in 2003.

To conclude, we're very pleased with the improving financial performance in our core business and we're actively working to return both Newgen and our international segment to profitability after corporate allocations. I believe that the combination of improving market dynamics, Tele Tech's commitment to delivering the highest value with the most efficient delivery platform positions us for strong performance as we plan for 2006 and beyond. Let me now turn the call over to Dennis, after which I'll make a few closing comments.

Thank you, Ken and good morning to everyone. As you can tell from our press release and our report on Form 10-Q, this quarters results reflect many new transactions. Let me try to explain the quarter's results from our perspective. First, starting with income taxes. As you know, because we covered this in our September business update press release, we reversed the majority of our U.S. deferred tax valuation of allowance for approximately 9.9 million into income. As you may also recall, we had been forecasting that circumstances would allow us to do this sometime this year. Although a one time transaction, it does indicate that we expect to continue to operate as a profit in the U.S.. At the same time, to bolster our financial position, we transferred by repatriation and other means approximately $50 million in cash from foreign locals to the U.S. In doing so, we incurred a one time tax charge of approximately 3.9 million. As such, this quarter benefited from a net one time tax gain of 6 million comprised of the deferred tax valuation allowance reversal of 9.9 million, less the tax repiation charge of 3.9 million. We used a portion of the cash received to repay the balance of our bank revolver September 30th, 2005, so we are once again bank debt free at quarter end.

Secondly, as we discussed in our September business update, we expected to, and did, report a meaning increase in our operating margin for this quarter as compared to the second quarter. The reason our operating margin percentage increased are many fold, but include growth in existing client programs which we attribute to execution of our account management strategy, new business such as the U.S. Federal Agency Hurricane Relief program and other programs that Ken covered during his remarks, and our continued focusing on rationalizing capacity utilization. Our operating margin percentage as reported is 4.3%. ore than double our second quarter operating margin percentage of 1.8%, an increase that we view as meaningful. Another new transaction this quarter is that we incurred litigation and claims expense of approximately $3 million. The majority of this charge relates to reversal of a previous judgment in our favor that we plan to appeal and vigorously contest. Our operating margin percentage for the quarter, had we not incurred those charges, would have been higher, approximately 5.4%. Third quarter of 2004 also had one time benefits recorded. Chiefly the reversal of employee insurance related reserves. The operating margin percentage for the third quarter of last year, without those one time benefit reversals, would have been 3.9%. As such, this quarter's normalized operating margin percentage of 5.4% is clearly a meaningful improvement over the 3.9%. In summary we are quite pleased with our financial performance this quarter.

Moving on to cash flow. EBITDA is a measure of liquidity that is not impacted by quarterly fluctuations and working capital. Our working capital, as discussed in our form 10-Q, will vary from quarter to quarter as we launch new programs. Our EBITDA for the third quarter was nearly 25 million, up 37% from last quarter and comparable to the prior year quarter. Our free cash flow for this quarter of 7.4 million was impacted by, among other items, the ramp of a U.S. government program and increased capital expenditures. We are essentially debt free and generating free cash flow. We are pleased with our record revenue, new client wins and account management initiatives; and have further plans to enhance profitability through our phase profit improvement initiatives that we have previously discussed with you. Of course, like in any business, challenges remain, such as restoring Newgen to the operating margins we used to enjoy and our continued efforts to return our entire international segment to profitability after corporate allocations. We are in the midst of our annual strategic planning process and are, of course, focused on tactics to address these matters as well as growing the other segments of our business. With that, I will turn the call back over to Ken.

Thank you, Dennis. In conclusion, I'm very pleased to see that after being in a very tactical mode over the last three years, that all of our efforts and that the hard work of all of our employees to grow the business more profitably are now paying off, while actively investing for the future. We believe that in the future -- we believe in our future very much and the prospects of new business have demonstrated -- have allowed us to -- excuse me -- pay -- excuse me, I'm sorry, I'm having a problem with this document. We believe in the future the prospects of the business and have demonstrated that in our active share buy back program. I remain committed to the three year goals announced earlier in the year, which were growing revenue to 1.5 billion on a run rate basis by the end of 2007, growing our EBIT and EBITDA margin to 10% and 15% respectively also on a run rate basis by the end of 2007. We look forward to updating you on new business wins and on our progress against these goals in the coming quarters. And with that, let's open the call to your questions. Thank you.

[OPERATOR INSTRUCTIONS] My first question comes from Bob Evans with Craig Hallum Capital. Your line is open.

Good morning and nice progress this quarter.

Thank you.

Can you -- first on the government work that you had referenced in your press release, can you tell us -- I know specifically you don't get into a lot of client detail, but can you give us a little bit more color in terms of what the work is that you're doing, are you still doing that work and give us a little bit more color this terms of that program?

Yes. Well, it -- we've been doing work for a government agency that is assisting people who are affected by the Gulf Coast disasters. The work started out naturally focusing on Katrina and then moved to Rita and now Wilma. The work is scheduled to come to an end in the next week or so. However, we don't know whether it will continue or not, just based on that this is -- this will be up to the government. There -- there's been approximately 2,000 people at its peak, or positions, I should say, at its peak dedicated to the program. And what else would like to know?

That's -- that's what -- that's perfect. Also, can you comment in terms of the growth that you're seeing. I assume that it's not just coming from the hurricane effort, but can you give us a little by the more color in terms of the sequential growth that you saw in June to September, and then you're saying you expect more sequential growth from September to December. Where is that coming from? And does that -- you said there's 20 million in new business that you've won in the past month. Is that 20 million part of that growth or is that growth kind of yet to come in the future?

Yes. Well, first of all let me just clarify because I'm sure many people are wondering how much of the growth is coming from this particular government contract. And although we can't disclose the amount, what I can assure everybody of is that we would have had growth from -- from -- in this last quarter regardless of whether or not we actually had this government business, and we will have growth in fourth quarter regardless of whether we had the government business. So our core business is growing. It's growing in really multiple areas. Organically our clients are expanding with us right now. Some in a fairly significant way. And it's growing in that we're signing new client logos. It's growing in North America as well as it's growing in other global markets. Certain markets are a little bit stronger than others, but we're very pleased with all the activity across the globe and very pleased with, not only the conversion of the pipeline, but the fact that the pipeline continues to keep growing and new possibilities or prospects are entering into the pipeline.

The 20 million that you had referenced earlier, is that 20 million -- when does that start to -- when do we start to see that in terms of new revenue.

We're ramping as we speak.

Okay.

Therefore we would be seeing revenue, you know, some of this revenue is happening in this quarter.

Okay. And the -- the additional business that you're seeing, is that coming from people who have never out sourced before, or are you seeing it from clients that are expanding their level of out sourcing?

I really think that it's a combination of both. There tends to be a fair amount of business that -- of client who were outsourcing and now have decided that the business that they were doing internally they're not able to do as well as -- as well as we're providing for them. Meaning that our CSAT scores are higher. Our customer satisfaction scores, et cetera, and they're choosing to -- to expand the business and give us even more business.

Okay. Final question. Your operating margins improved nicely sequentially. Is this -- should we view this as a run rate to build off of going forward and hopefully improve upon?

Well, since I've been taking all the air time, I'm going to let Dennis answer that question.

Bob, our plan and our intention and belief is that we would continue to, over time, improve our margins consistent with our earlier articulated three year goal of getting to 10% by the end of 2007.

Okay. I guess is there anything in the margin structure this quarter that as we look forward sequentially we should continue to see operating margin improvement, if you can continue to add top line growth. Is that the right way to look at things?

Well a couple things, one, we do expect to see top line growth continuing; and two, we do expect to see our margins continuing to -- to expand and to get close -- to get closer to our three year target. That being said, obviously there is -- there is going to be some business that won't be recurring from this government business in the following quarter, but we're very happy with the fact that new business is coming on and we're ramping up that business. And so that will give us some air cover for the margins to continue to -- to continue to grow.

Okay. Thank you.

Thank you.

Thank you. My next question comes from Donna Jaegers with Janco Partners. Your line is open.

Hi Ken and Dennis. Can you talk about any sort of progress you're seeing with the new products of On Demand and InCulture? I know it's sort of a missionary work right now trying to get people to think differently. But are you having any conversions?

Yes. Well, first of all, our InCulture product is doing quite well. We now have about 13 clients and are in the process of probably closing realistically another 6 or so that we would hope to have closed by the end of the year. We fully expected this business to be a relatively small business in our over all portfolio, really all the way through next year. And we feel confident that we're tracking our plan. Just a couple of points. One, we're committed to the business, we like the business, our clients like the business. And two, it really just helps round out our overall solutions offering because virtually all of our clients require this capability. So, we have a lot of confidence that this business is going to do quite well in the medium term. As far as On Demand goes, we see a lot of -- a lot of significant interest in our On Demand offering and yes, we are a winning business. All be it, it's really people who are kind of trialing it and it's -- it's nothing that I would consider to be material, but that said, it's definitely enhancing our ability to win our core outsourcing business because all of our outsourcing clients get to go take advantage of the entire On Demand suite, which is extremely expensive. And so, we actually believe that it is one of the many areas that we can differentiate, that we're not just a call center company but in fact we're a company that's providing innovation and unique technological solutions. But we're very bullish On Demand and we're very bullish on where it's going to take us over the next, twelve months or so.

Great. And just a quick update on Newgen, as far as your management search for a new General Manager out there.

We're right now down to finalists and are actually now in the negotiating mode with a couple of different candidates. And hopefully, we will -- we will get through that and have something to talk about in the next quarter conference call.

Great. Thanks, Ken.

Thank you.

Thank you. My next question comes from Dave Koning with Robert Baird. Your line is open.

Good morning and nice quarter. Just a couple of follow-ups on the government contract. First of all, can you comment on whether the contract will generate more revenue in Q4 or Q3?

I'm sorry, I didn't hear the question, I apologize.

Oh, would you expect the government contract to provide more revenue in Q4 or Q3?

I think right now it's early to say, but I think it's about balanced.

Okay. And --.

Would you agree with that, Dennis?

Well it depends on if we get extension or not.

For now, I'm saying at our current snapshot, I will say it's about balanced in both quarters.

Okay. Great. And then secondly, I notice revenues generated from U.S. centers were up solidly up this quarter, after several years -- several quarters of sequential decline. I'm wondering if there's a shift in how clients are thinking about using capacity on shore here or if that was largely due to the government contract?

No. There really -- we have been saying for many years now, we anticipated this off shore labor arbitrage phenomenon many, many years ago and we've always predicted that a large percentage of business would go off shore in a significantly large percentage, as we called would boomerang and come back. And yes we're seeing a fair amount of business that in fact is coming back. What we're seeing is that clients really right now want to have a balanced portfolio, and if they are going to stay with their off shore, then they want to have their eggs in multiple baskets. We were the first company to provided blended capabilities. Several of our large clients are operating in 5 to 6 countries simultaneously with us. So what's happening is there are people that after blend their solution, they say now that we've put some in India, some in Philippines, some in Argentina, and some in Mexico, et cetera, we'd like to bring some to the United States as well. So we see this as a good sign, and although we don't expect there to be as much as a demand for U.S. capacity as there was, shall we say five years ago, there definitely is a requirement for U.S. capacity as we speak. From a multitude of our clients right now.

Great color. Thanks. And just lastly. It looks like internationals gross margin was about 23% this quarter. And historically it's been around 20% I guess for several quarters. I'm wondering if there was some change there, just in the margin profile.

Dennis, you want to comment on that?

Certainly. Before I do, though, let me correct my last statement. I did check while Ken was responding to you, and we currently forecast to have more revenue in the fourth quarter from that government program than the third quarter, rather than about the same, it would be more. But to answer your question, it's the global best practices that we've been talking about, which encompasses deploying our same tactics that we've employed successfully in North America overseas, as Ken mentioned in his scripted remarks, we got 95% of a lot of the technology and other tools around the world now, so we're starting to reap the benefits for that. Additionally, there's been a lot of work done culling out unprofitable programs and adding profitable programs, all contributed to that margin percentage. And lastly I'd add that that percentage would have been even greater had the litigation claim of almost $2 million in the international segment not been there.

You mentioned gross margin and I was thinking of the EBIT percentage. Thanks again.

Thank you.

Thank you. My next question comes from Tobey Sommer with SunTrust Robinson Humphrey. Your line is open.

Thank you. I was wondering if you could give us some color on the current status of your operations in Korea.

The -- the current status is that we are -- we're having multiple discussions with multiple -- different opportunities, and in the process of making some strategic decisions as to what our various different options are. Right now, because we're in negotiations, I really can't discuss what the various different options are, but what I will just simply say is that I'm confident that by -- by first quarter, that we will have a resolution to Korea not losing money.

Thank you very much. And I was curious, what you're seeing in terms of obviously, you signed some deals and renewed some contracts and I was wondering if you could comment on -- on what you're seeing in terms of sales cycles in the core business.

Yeah. Well we -- for a while there, we were seeing sales cycles in some cases going out as long as 18 months, and we're now actually seeing -- and again we hope that this continues, but we're seeing sales cycles that are as low as 6 months and as long as 12, and historically what we would enjoy during our go go days was 9 to 12 months. So we're feeling very good about the sales cycle and I -- I don't in any way want to sound overly bullish and pound the desk, I simply want to say we feel comfortable with where our business is today and where it's going. I think another way of putting it is the morale in our Company is without question, at a 5 year high right now.

I wonder if you could give us a little bit of color when you look at the variance in sales cycles. When the sales cycles do shorten a bit, do they tend to shorten for a prolonged period of time or do they eb and flow with a greater frequency.

If you go back to what I would call the go go days which were 1993 through 2000, the sales cycles stayed in that short mode for that period of time. They stayed in a -- for sure, a 9 to 12 month and I'd say probably 20% of the deals were done in 6 months. And that's what -- that's what we're experiencing right now. Now again, I don't have a crystal ball, so I can't prognosticate what all the variables that are going on right now, politically and economically and environmentally et cetera, as to if we're going to have the good fortune of that continuing on. But what I would just simply say is that our customer base and our prospect base are giving us all the right signs. And I think the market place is legitimately a lot more different today than it was for us multiple years ago in that we're feeling a lot less competition, to be very candid.

In shifting gears a bit, I'll ask one last question. Was wondering if you could comment about your sales force and it's compensation. Do you envision any shifts in the levers that you will pull in terms of compensation heading into '06?

Well, we've always been kind of a mega deal type company, and our focus is to continue to hunt down elephants. And so, the types of sales people that we hire, the ones that are successful have high expectations of making significant amounts of money, and when they do that, that's good for our share holders. And so our intention is to ensure that we create a plan that helps our -- our sales folks be successful and we're confident that we have the right compensation plans in place to motivate them properly and to make sure that the business that they bring in, most importantly, is profitable business because their compensation plan is not just tied to top line growth, but it's also tied to the actual bottom line EBIT, which is what we care the most about.

So you would envision the -- the relative incentive comp for revenue as well as EBIT to remain pretty consistent with this year.

Yes. Now, the only exception to that. And Dennis if you want to add some color, is we are ramping up in that area and we're adding more people. And the reason why we're ramping up is because we see the opportunities and we need the coverage. So from a fixed expense of just base salaries, we'll be adding up -- adding, bulking up in that area, although -- although it'll be in the millions or a few millions here and there, it's not going to be material to the over all numbers.

Thank you very much.

Thank you.

Thank you. My next question comes from Josh Vogel with Sidoti Company. Your line is open.

Hi. Good morning.

Good morning.

It seems that you're getting a little constrained in your North American segment. So besides any expansion plans there, are there any potential client migrations? Or, better yet, have any clients approached you about possibly migrating off shore?

I'm not sure what you mean by constrained.

Just your utilization is getting up over 80% now and --.

Let me share something with you. When we took the Company public in 1996, we were operating -- we had operating utilizations at 100%. Our goal is to get our utilizations into the mid nineties. So I want to just stress to you what -- the way you should look at this is high utilization is music to our ears and it creates operating leverage. And we certainly know how to operate in a high utilization environment. So the good news is that our dedicated facilities, which is a large percentage of our capacity, is already operating at high utilizations. It's been our shared capacity that's historically, over the last 4 years has been depressed. And now it is starting to move up into higher utilizations. But we certainly have a ways to go. We view that as a positive, and are very much looking forward to deriving those utilizations into the 90s.

Okay. Great. And I believe you mentioned something about you plan to exit 3 undesirable locations internationally. Can you just give us a little bit more color there, where the facilities are, the receipts?

We've already announced one location, which is our Glasgow location, Scotland.

Right.

And the other two locations we're not prepared to announce the exact locations. What we will tell you is that we're going to do what's in our clients best interest and what's in our shareholder's best interest, and we're confident that there's an opportunity to take advantage of leases that are ending and therefore we will be rationalizing some additional capacity that we've already discussed.

Okay. Thank you.

Thank you.

Thank you. My next question comes from Jeff Nevins with First Analysis Your line is open.

Good morning. On the international front, what specifically happened in the quarter to get those losses down so significantly, even if you X out the litigation expense? Because revenue didn't change much sequentially.

I think it's several things. And then Dennis, please feel free to join in. We have been very vocal and very transparent about our cost improvement plans around the globe. And we told you about phase one and we nailed it. We told you about phase two, we nailed it. We told you about phase 3 which brought us up to either 60 or $80 million. It'll be for sure complete before this quarter is up. And then we announced phase 4 which would take us to 100 plus million in cost improvements, which will take us through next year. So I think that there's -- some of it is that. Other -- others is the fact of what Dennis just said, which is that we've culled out business that is not profitable. And we've renegotiated contracts and explained to clients that we are only in business for profit and that our share holders in no way, shape or form will support not profitable business. So that has allowed us to, in many cases, raise our rates so that we can get a fair and equitable return. So I think it's those things. And then lastly, we have -- now that we've really cleaned up all of our north American operations, which again I want to remind you, not only include U.S. and Canada, but all the expansion that's going on in the Philippines and some of our other off shore markets, now we've been able to significantly add to our bench strength, and we're taking all of those best practices, which we committed that we were going to do at the beginning of this year in our analyst conference, and we're taking them across the globe and those best practices are having very significant impact. And quite frankly, we believe that there's still significant opportunities to improve margins that will be coming in the coming quarters.

What's the -- what country do you have the most significant presence, either in terms of revenue generated or seed to capacity.

Spain would be the answer.

Spain is.

Jeff, by the way, on your last question of Ken, I might remind you that last quarter, when we made the decision to shut down Glasgow, I believe in that press release that went out, we gave you some idea of what the future contributions to earnings would be for doing that, and that had an impact on this quarter too.

Okay. Last question is just a generally about the industry. Are you seeing most of the -- I'd say new business growth from the telecom vertical, which I know as a big area of your business, or is it across the board in other verticals as well.

We made a conscious decision because of the amount of concentration that we have in telecom, which we're happy with the concentration and we're very happy with the telecom business, but we made a conscious decision to really focus on some other verticals. And since we've -- since we've really started focusing in the financial services and health care areas, we're seeing some really good results. So financial services and health care is definitely an area that we are very focused on, and are going to be investing significant energy in, as well as building unique and proprietary and innovative capabilities technologically for those industries as well. And we think that they're relatively untapped. They're under served from an out sourcing standpoint. And they tend to be late adopters and now that the telecom industry is quite mature and has adopted it, it's logical for us now to be focusing on that. With that being said, our telecom segment continues to grow. So we just think that it's time to balance out the portfolio, add more financial institutions, add more property and casualty companies, add more health care companies. And we look forward to sharing those new additions as they come on board throughout our next conference calls.

Okay. Thank you.

Thank you.

Thank you. We have time for one more question and it comes from Brandon Dobell with Credit Suisse First Boston. Your line is open.

Thanks. Ken, I wondered if I could get some color on some of the dynamics going on with the expansion in the Philippines. And I'd focus on existing customers that are putting either transition or new business with you over there. I wouldn't call it a change in strategy, but it sounds like an acceleration in growth and seats over there and maybe what's driving that? And secondly, from a more macro perspective, do you -- what kinds of verticals do you think are best served over there for you guys? And from a wage perspective, are you worried about attrition, wage pressures, those kind of things, given how many companies are over there and how much volume is being done for customer care companies there?

Well, a lot of good questions. I'll try to remember them all.

I'll remind you.

A couple of things. We started the off shore labor arbitrage business almost 8, 9 years ago, so we're not new to this. The difference is that we haven't decided to ride the hype train, because we made the decision that labor arbitrage, or these off shore locations was nothing more than a tool. It wasn't a strategy. And so, we have been building all across the globe, our off shore and near shore capability for many years. We just don't go out of our way to brag about it. So today, TeleTech is the world's largest provider in the Philippines. We have more seats, more employees, more real estate, and according to the Filipino government we're the largest IT services company in the country. We're also the fastest growing. Again, we don't go out of our way to brag about that, but since you asked, I'm going to brag. We are adding right now 1750 seats in two locations. And there's a possibility that there'll be more capacity that will be added down the line as all of this capacity comes on line and gets taken up. It's safe to say that we tend to not build capacity on spec, but instead we tend to build it based on line of site of business and we have a line of site on a good percentage of that capacity.

As it relates to where the business is coming from, I'd say that it's about 65% new logos and the remainer is expanding business. And the other than -- I would say that less than 30% the over all business -- and I'm pulling that number out of the air, but I think it's a good guess -- is business that is actually migrating from our facilities to on shore to off shore. That's never been a focus of ours and it's never been a focus of our clients. As I said, our clients like the blending concept, and so soon many of these are U.S. based clients that now are putting their toe in the water, or they are clients that are already in the Philippines and have now given us business in the U.S. and in Canada and other places and now have said its ok to add a little bit more business in the Philippines. So we don't expect to see any major drain offs, so to speak. As a matter of fact, to the contrary, centers that we actually thought we were going to see drain off clients are renewing and expending and expanding their contract in the United States, even though they're doing business with us in the Philippines. If that helps you.

That's very helpful.

You had another question, I apologize. I don't remember where it was.

More of a macro perspective. As being as large as you guys over there, have you seen any changes in attrition rates or in wage pressure --.

No, that's a great question. It's something we're really very, very proud of. As a matter of fact it's one of our selling points and we go out of our way to -- to point this out to our clients. Our attrition right now, we're confident is the lowest in the country. We're operating at 34% attrition in the Philippines, that's as of last week. Our clients are very much aware that when they are using other providers that the attrition numbers are, in some cases, 200% per annum. This is very easily verifiable in the industry. I think that if any of you have an opportunity to come to the Philippines and visit our sites, visit the management team, it will become very apparent as to why we are able to maintain such low attrition rates and why we're becoming the employer of choice in that country. I think, just for me to elaborate any more, it's best done in a side line conversation, but what I'll tell you is that we're doing just fine with attrition. We tend to -- we tend to treat our people in a way and provide them with facilities and infrastructure and technology that from what they're telling us they're not getting in the other facilities. And we set -- our centers are located in areas where per se there's not high concentration of all the other competitors who've primarily chosen to be in the downtown [Mcady] area, and in many cases, a high percentage of these companies have chosen to go into high rise buildings where there's multiple competitors and the employees ride the same elevator and go from competitor to competitor. We only do free standing buildings, and we are not in -- in that type of an environment. So all in all, we feel very good about the Philippines. That said, the Philippines is one of many wonderful locations for near shore and off shore, and we plan on adding some other areas that right now its too early for us to discuss where those areas are. In some cases, they're areas where people are not currently doing any form of off shore.

That's very helpful. A quick one for Dennis. As we think about modeling the progression in reducing the operating losses in both international and data base business. On a relative business, is the impact more on the gross margin line or on SG&A? I think we've been a little off in our model trying to gage how those things progress. Trying to get a better feel for what is going to draw up the increased profitability there and if that's a strategic decision or just the way it fell out of the business.

Well, in terms of what our intentions are for both of those businesses, our stated goals for international was first to get the entire segment to profitability without corporate overhead, and then our plan was to get it to be profitable after that -- after allocations. I believe we said we would reduce the loss 50% this year and be break even next year, and we still think we're on track for that type of activity. We'd be achieving that by combinations of both the SG&A and the cost of services line. The cost of services line would be impacted by our global best practices approach and also our process of reworking contracts to make sure we have a portfolio profitable contract. And we also think there's room for further reductions in SG&A overseas. And as I think, as I tried to point out a moment ago, our SG&A were higher this quarter because of the litigation charge in the international area. For Newgen, we have not stated any revised guidance other than what's in our press release that went out last night. We're -- I think when our new head is hired, we'll give more guidance at that time working with the individual, but it's obviously our intention to get this business back to be a profitable business for us next year.

Okay. Great. Thanks a lot.

Thanks so much everybody.

That you and that does conclude today's teleconference call. Everyone may disconnect at this time.