TTEC Holdings Inc (TTEC) 2005 Q4 法說會逐字稿

Welcome to the TeleTech fourth-quarter 2005 earnings conference call. I'd like to remind all parties that you will be on listen-only until the question-and-answer session. This call is being recorded at the request of TeleTech. If you have any objection, please disconnect at this time.

I would now like to call over to Miss Karen Breen. Thank you, ma'am. You may begin.

Thank you, Emily, and good morning to everyone. My name is Karen Breen, Vice President of Investor Relations and Treasurer. TeleTech is hosting this call today to discuss its results for the fourth quarter and full year ended December 31st, 2005.

Yesterday, TeleTech issued a press release announcing that its annual report on form 10-K had been filed with the SEC. This call will reflect items discussed within that press release and Form 10-K, and TeleTech management will make reference to them several times this morning. We encourage all listeners today to read our annual report on Form 10-K.

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 fourth quarter and full year 2005. 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 conclude 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 our 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 relating 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 risk associated with achieving approved profitability in the international and database marketing and consulting segments, execution risks associated with achieving our targeted profit improvement plans, and the possibility of additional asset impairments and/or restructuring charges.

With that, I will now turn the call over to Ken Tuchman, our Chairman and CEO.

Thank you, Karen, and good morning. I'd like to begin by reviewing our fourth-quarter and full-year financial results. Then I will provide a brief business update.

For the fourth quarter of 2005, our revenue was a record high of $304 million. This was a 17% increase over the year-ago quarter and an 11% increase over the third quarter. Fourth-quarter earnings per share was $0.14. This compares to $0.13 for the year-ago quarter, which included a $0.04 benefit from a reduction in the health care liabilities. We encourage listeners to read our form 10-K for additional factors affecting comparability to prior periods.

For the full year of 2005, revenue increased more than 3% over 2004 to 1.1 billion. While this was a modest year-over-year increase, our revenue growth was accelerated meaningfully during the last six months of 2005, growing 11% from the same six-month period a year ago.

The improvement in the last six months' top-line performance is due to the high levels of new client wins, in addition to renewals and expansions with existing clients. Given these high client renewal rates, our 2005 attrition was the lowest in the Company's history, approximately 7%.

This success could not have been achieved without the operational excellence of our Global Delivery Team. This has enabled TeleTech to achieve high client satisfaction levels, as we consistently ranked number one or in the top tier among our clients' internal and external providers.

This core business growth has required us to add additional just-in-time capacity in select nearshore and offshore locations. We recently announced plans to add an additional 4500 positions during 2006 in Argentina, Canada and in the Philippines. Today, 60% of our revenue comes from nearshore or offshore locations, which is up from 50% at the end of 2003.

From an operational and delivery perspective, our business has never been more streamlined. More than three years ago we established specific operational goals to further centralize, standardize and virtualize our global delivery capabilities. I'm proud to say we've achieved all these goals during 2005.

We have centralized the majority of our proprietary core operating systems on an IP-based delivery architecture and have deployed our global best operating platform across 85% of our locations. We plan to complete the rollout of the remaining locations during the first half of this year. Additionally, we have centralized many of our administrative functions, including legal, finance, treasury, procurement, real estate, to name a few, to further improve worldwide controls and oversight.

Our year-end shared center capacity utilization of 72% was also up significantly over the 62% we reported at the end of 2004, with a goal of moving that to 90% or better. Hypothetically, assuming our shared-center utilization increased to 90% across a mix of both onshore and offshore centers, it could provide approximately $100 million of incremental revenue with virtually no additional SG&A cost.

We have successfully achieved ongoing profit improvements across our global operations. To date, we've either validated or achieved plans for $80 million in annualized profit improvement since our initial plan was implemented in August of 2003. Further, we previously announced another 20 million in annualized profit improvements to be completed during 2006 and fully realized during 2007.

Today, we believe we have a class of capabilities and differentiated offerings that are unparalleled in the industry. We continue to outperform internal client operations and distance ourselves from our remaining competition through proven execution and innovative delivery capabilities. Additionally, we continue to see increased demand for our more complicated BPO offerings, including insurance underwriting, claims processing for the financial services industry -- and Medicare Part D and claims processing for the healthcare industry.

We believe our strong operational and financial foundation has created a highly differentiated offering that sets the stage to achieve our goals throughout 2006 and into 2007. Our confidence in the future prospects for our business led us to repurchase 10% of our outstanding stock during 2005 for $68 million. We continue to repurchase stock during 2006, and our Board just recently authorized an additional $50 million share purchase program.

In 2006, our focus is now on profitable top-line growth. Some of our key initiatives for 2006 include, one, an intensified global sales effort to further grow our embedded client base and win new multinational client logos; two, a continued focus on high-growth industry verticals, including financial services, healthcare, retail and government. Today these verticals represent approximately 25% of our revenue, and we believe they have the potential to grow to nearly 35% during 2006.

Three, continued development and delivery of innovative offerings aimed at helping clients grow and strengthen their customer relationships. During 2005, we rolled out several new products in the marketplace including predictive analytical tools, which enable real-time analysis of the reasons behind customer inquiries; [Empower 1, 2, and 3], which enables the real-time agent monitoring to provide feedback about an agent's performance against predetermined client metrics; and VISAPOINT, a Web-based appointment system used extensively today by the U.S. Government for Visa issuances and applicable to many other vertical industries we serve today.

All of these capabilities reflect our commitment to innovation and have further expanded our market offerings, diversified our revenue stream and enabled us to win business and deepen many of our existing client relationships. Additionally, our product development team has a well-defined roadmap for new product launches over the next 24 months.

To conclude, we are very pleased with our performance and look forward to 2006 as we further capitalize on the significant investments we have made in new offerings and our sales organization.

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. As outlined in yesterday's press release, we reported a meaningful increase in revenue this quarter as compared to both the year-ago quarter and the third quarter.

As Ken mentioned, this increase is from organic growth, including the work we performed to assist with hurricane relief efforts. This program represented approximately 10% of our fourth-quarter revenue and contributed materially to our profits due to its utilization of available U.S. capacity.

As mentioned in our Form 10-K, at year-end, we had not billed the Government and accordingly did not recognize revenue for approximately 6 million of services, as the services did not meet the requirement of the related work order. We believe the work order should be amended to include these services and we have discussed this matter with the U.S. Government. We believe we have a solid basis for the request, and should they agree to include these services in the work order, which we of course cannot guarantee will occur, the amount will be recorded as revenue in the period in which they are realized. The costs were already recognized in 2005.

Our fourth-quarter operating margin, as recorded, is 3.2%. This is lower than the 5.9% reported for the year-ago quarter due to certain items that impacted both quarters that I will discuss. I encourage listeners to also review MD&A section of our Form 10-K entitled "Fourth-quarter Events" for other factors affecting comparability.

As Ken mentioned earlier, the fourth quarter 2004's operating results included a benefit of 4.8 million or $0.04 per share arising from the reversal of certain employee-related healthcare liabilities. On the other hand, this year's fourth-quarter operating results included a 3.4 million or $0.03 per share asset impairment and restructuring charge, principally for exiting Korea.

If you exclude both of these items from their respective quarters, the fourth quarter of 2004's operating margin would have been 4% and the fourth quarter 2005's operating margin would have been higher at 4.3%. Of course, had we been successful in billing the additional 6 million in hurricane relief work to the U.S. Government by year-end, our operating margin would have also been higher by almost 200 basis points.

With regard to the results of our International segment for the fourth quarter, they were materially impacted by our decisions to take charges now to improve future profitability. For instance, we ceased to operate in Korea and took an approximate $2 million charge that we believe will result in future annual savings of a greater amount. We also took almost 1 million in severance-related costs in Asia Pac to improve the future profitability of that region.

Further, as discussed in the Form 10-K, we incurred a one-time $2.6 million tax charge, included in SG&A for service taxes in Brazil based upon new guidance from outside counsel. This onetime charge relates to operations since 2002, so future results will not contain a similarly sized verdict.

Further, with regard to our International segment's results, we do record transfer pricing adjustments to operate in a tax efficient manner, and the effects of such adjustments is to reduce the amount of income recognized in foreign locales.

Lastly, we would like to point out that what we include in our International segment excludes our operations in the Philippines, which are quite large and quite profitable. We continue to believe that we will improve the results of our reported International segment during 2006.

Moving on to the full year 2005, we continued during 2005 to focus on client profitability, billing excess capacity, ongoing profit improvement initiatives and lowering our interest expense from reduced borrowings. This allowed us to operate profitably for the second year in a row and to overcome the scheduled loss of $8 million in previously disclosed minimum commitment revenue that we enjoyed from a communication client during 2004.

The 2005 operating margin of 2.8% was lower than the 4.6 for 2004, principally due to the decline in Newgen's year-over-year operating results. Had Newgen performed at the same level it did in 2004, our operating margin would have been higher by 150 basis points and comparable to our 2004 operating margins. However, as with any multinational company, there are many moving parts, and I encourage listeners to see the table on our Form 10-K MD&A that compares 2005 results to 2004's results.

Turning to taxes, our effective tax rate for the year was 8%, arising from the reversal of certain U.S. and international deferred tax valuation allowances, as these regions have been operating profitably. Excluding these reversals and taxes associated with our dividend repatriation plan our effective tax rate would have been approximately 36%. For 2006, we believe our effective tax rate will range between 35 and 40%.

Year-end cash and cash equivalents were 33 million. At year-end, we had a very low debt to equity ratio of 12%, and DSOs were 63 days compared to 62 days for the third quarter.

The U.S. government hurricane relief work also impacted our balance sheet and cash flow metrics. Had we collected the outstanding receivables by year-end, we would have had no bank debt outstanding at year end and our DSOs would have been lower by 4 days at 59 days, and our free cash flow would have been higher by more than $30 million.

As discussed previously at our mid-January business update release, we believe revenue for the first quarter of 2006 will be lower than the fourth quarter, given that the hurricane relief work ended in late November. In addition, our operating results will be lower due to the new requirement for stock option expensing and seasonally higher labor-related costs associated with increased payroll taxes for the first quarter.

Overall, we are pleased with our solid operational foundation, where our capacity exists today and the trend of client expansions and new business plans. The combination of these are the basis for our providing 2006 revenue and operating margin guidance.

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

Thank you, Dennis. To conclude, we exited 2005 in excellent financial shape. Our client satisfaction levels are at an all-time high, our global business has become increasingly more streamlined and efficient; in short, we've established a strong foundation for continued growth.

We've built the industry's first globally deployed front to back office IP-based customer management platform that has significantly reduced our capital and operating cost and further differentiated our offerings. This foundation and the increased pace of new business wins is why I believe we can organically grow 2006 revenue by 8 to 10% over the prior year.

Further, as we scale our business and more fully leverage our capacity and streamlined infrastructure, I believe our operating margins can grow to approximately 6 to 7% by fourth quarter of 2006. Exiting 2006 at this level would bring us closer to achieving our year-end 2007 goals that we first announced at our January 2005 Investor Day conference.

Those goals included growing revenues to 1.5 billion on a run rate basis by the end of 2007, which included approximately 100 million to 150 million from acquisitions; and growing our EBIT to 10% and our EBITDA margin to 15% by the fourth quarter of 2007. We are committed to remain an innovative-driven company that is strategically important to our global clients. In doing so, we will deliver value to our shareholders.

I want to recognize our nearly 200 global clients for their viable support and thank our more than 40,000 worldwide employees who work diligently every day to an ensure an exceptional experience for our clients' customers. We look forward to updating you on our continued progress in meeting our 2006 initiatives in the coming quarters.

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

(OPERATOR INSTRUCTIONS) Jeff Nevins.

First Analysis. My question is on your outlook in 2006, do you expect each segment to grow at about that same number or is there differing growth rates by segment?

Hi, Jeff, it's Ken Tuchman. We do expect there to be differing growth rates per segment. What we're seeing right now is growth in the financial services, growth in health care, growth in government, etc. That said, our overall embedded base is growing. So it would be difficult for me to give you with pinpoint accuracy on each segment, but we think we'll see good growth in the three segments that I just mentioned.

Assuming probably the fastest growth will be in North America, though? Or the best growth, I would say.

Well, the answer is yes. However, please understand that when we say North America, because of the way that we report our numbers, that includes offshore and nearshore, which is not in the international number. So it would be North American based multinational corporations, but those corporations may be placing their business in the Philippines or India or Mexico, Argentina, etc.

Got it. The other question was more of a kind of quarter accounting question for Dennis. On the International segment, how much of the charges were in the International segment. There were two charges you took in the quarter overall, at least in your press release -- not necessarily all the numbers reported in the 10-K. And just wanted to allocate those by segment, if possible.

Jeff, as a mentioned in my descriptive comments, Korea was about 2 million. And Asia Pac for the severance was just about 1 million. And then also there was the approximate $2.5 million onetime tax charge in Brazil. You add all three of those up, you're getting pretty close to 6 million in adjustments in the International area.

But if you take those out of International, it does look like the base business X the charges still had quite a dip. Is there anything going on there we could learn a little bit more about and what are you doing to make it better, I suppose?

As I'd also mention, Jeff, we use transfer pricing where we allocate profits and losses among the regions. We try to do that in a tax efficient manner. And the net effect of transfer pricing adjustments normally report less earnings overseas to improve our tax position. And those sort of events did occur in the fourth quarter.

We do you expect to improve our results in the international region going forward by virtue of taking the charges we've done. For instance, Glasgow, we took a $2.5 million charge earlier in the year, for which we save that much and more going forward. Asia Pac's charge of roughly 1 million we think will save us almost $2 million a year going forward. And then shutting down Korea we think will save us roughly $3 million going forward.

So those actions plus improvements in sales, we believe, will help make the International reported segment look more profitable going forward.

I'll just ask one more question. What I'm trying to I guess understand is that we were hoping that segment would get to breakeven or it was going to be reduced in half, I think, at some point this year. Even if you take out the charges, it just looks like it got worse. I guess I'm just trying to understand is it these transfer pricing issues that's causing some of that and we should see that normalize, or we just haven't seen the cost savings effect yet?

We've certainly had the transfer pricing had an impacted. And we've also been investing pretty heavily in sales and marketing overseas, particularly in the UK. And you have to sort of spend money to make money going forward. So a lot of moving parts, the restructuring charges, the investment in SG&A and the transfer pricing all impacted their results year-over-year.

Dennis, maybe you might want to just comment on your belief of the International segment and where it will be in '06.

We believe it will be better than what it was this year. We expect continued improvements going forward. And quite frankly, when we gave our guidance, Jeff, we haven't given guidance before like this for revenue growth and EBIT percentage. Those are blended numbers, which reflect what will happen overall. It's hard to get scientific about how much it will break down between Newgen and International and the U.S., but we think the numbers that we're giving guidance for are quite realistic.

Okay, thank you.

Bob Evans.

Good morning and nice job in progress in '05. Can you comment on the sales growth -- your target of 8 to 10%, does that include or exclude the government business that you did in Q4 and the latter part of Q3?

That guidance is to be taken on the 2005 reported revenue multiplied times that percentage, if you will. And we made that calculation without regard to whether or not there's hurricanes of such degree next year.

If I back that out, I get a ballpark 12, 13, 14% organic growth rate, which is frankly higher than I had expected. Can you give us more color in terms of where that growth is coming from and your confidence or visibility on that growth?

Well, since the third quarter, we've been announcing new business wins -- second quarter, excuse me. And our last business update on January 12, we announced more. If you add all those up for those three quarters, it's over $200 million. At some point, when you're adding that type of revenue growth from new contracts, that gives you the basis to have that type of percentage increase going forward, if you catch my drift.

Sure. That $200 million, what time frame is that over, I'm sorry?

Starting with the second-quarter release, we've been putting out new business wins in each of those quarters since that time.

So you're saying $200 million of annual business?

If you go back and add those up, that was new business wins that you tally them up, you'll get to a number over $200 million. And then we've kind of helped do the math for you. Rather than figure out what is the attrition element, we just gave you the year-over-year revenue growth number that we feel confident in providing.

Okay. How do you view attrition for next year, given what you just did in '05? When you are giving that as guidance, what are you assuming for an attrition rate?

I think our goal from an attrition standpoint is to be sub-10%. And for now, that is how we are forecasting and budgeting. Naturally, our account management and client partner group has a goal that is significantly below that. But we want to be conservative and realistic, and so we think that below 10% or at 10% is a good number to forecast.

Okay. Maybe this goes hand-in-hand with the International charges, but the gross margins being down this quarter, is that basically a reflection of the charges in International or is there more that we're missing there?

Well, you have the FEMA impact that I was describing in my script. There's $6 million of --.

Sure, right. And the -- the FEMA impact is a big impact and then the International. And those are the two big components. Okay.

And as you look at -- another way to ask the international question in terms of can you give us a sense of '06, do you view '06 as a modest loss International; is it possible to be profitable International? And if you could pick here's a couple of markets that we think are swing factors as we look from '05 to '06?

I think the biggest swing factor for us that we are starting to get some visibility on and look for to updating you on on our next conference call would be the UK, which is really the last bastion of losses, so to speak, concentrated losses. And we are in fact seeing contract wins and conversions, and we are also seeing a pipeline of business activity. And so we remain optimistic that the UK, in fact, will get to where we've wanted it to be. And I think that in itself would have a significant impact once the UK is at a breakeven or showing a modest profit.

Okay. And final question on tax rate. You said 35 to 40. Is there the ability to drive that down some, as more of your profits go to kind of nearshore or offshore? I've seen that with some of your competitors. I'm just wondering if there is kind of the ability to drive that down and increase the net margin.

A couple of basis points is certainly possible, but I don't see that markedly dropping below 35.

Okay, all right, thank you.

Josh Vogel.

Hi. Good morning. Sidoti & Company. I was just looking at your accounts receivable balance. It seems that even taking out the government work, accounts receivables are up, gross margins are down. I was just curious, have you been giving customers more pricing discounts and/or possibly more lenient payment terms?

Absolutely not on either. Our receivables are the best in the industry. And we have collected the government money with the exception of the 6 million that we have told you about. We feel very good about where our receivables are and we're well below the industry average. The FEMA was a large impact. As I've mentioned, that's over $30 million.

We're also not factoring receivables like we did in Spain in the past, because Spain makes money now so we don't have the need to incur that charge, if you will. So we've made a decision for better profitability, vis-a-vis balance sheet metrics.

And then I guess lastly, the new programs I was mentioning, with these new programs we're winning that have been ramping all year, as we've been ramping those programs, particularly in the fourth quarter, that resulted in receivable balances also, none of which we expect to have any collection issues over.

Right. Okay. I saw in the K that you had volume migration costs in '05 of about 800,000. What are you anticipating for '06?

That is always a hard one to nail down with any degree of precision, because of what our clients ask us. It's hard to say. Do I think it would be a larger number? Probably not. But it's what our clients come and they ask us to do.

So no clients so far in '06 have approached you?

Nothing has come along to make us want to give any guidance regarding that number being markedly different.

Okay. And finally, with regard to your top five clients, I saw their contracts expire between '06 and 2010. I was just curious which expire this year and how confident you are in retaining their business.

I think we feel at this point very good about the business that is coming up for renewal. It's a relatively small amount of business. We are well into advance negotiations. For competitive reasons, I'm not prepared to discuss which contracts or what contracts those are. But we feel very comfortable about that.

Great, thank you.

Dave Koning.

Robert W. Baird. First of all on Newgen, it looked like in the 10-K that there was a new type of relationship with Ford, and I'm wondering if you can expand on that a little bit. It looks like you're in a nonexclusive now relationship where you previously were in an exclusive relationship.

Yes, previously we had an exclusive relationship with Ford, and we took a look at how that contract or relationship with Ford worked out last year. We did not receive what we had hoped would be the benefits out of that relationship last year. Last year, we had a large launch of a new product, the biggest rewrite in our history with that product. And we didn't really get the support that we had hoped would occur or the impact that would occur from that.

As part of having the contract with Ford on that basis, we had to agree to certain conditions that they wanted -- some cost we had to incur -- and it sort of limited our ability to contract with the dealers individually and charge rates individually.

And when we took a look at that situation at the end of '05 and going into '06, we came to the decision ourselves rather than try to maintain an exclusive relationship, we thought we'd be better off having -- still have a relationship, but one that maybe changed the playing field some. So now we are -- under this new program, we can contract correctly with the dealers under our terms, charge rates that way. And we think that is the better situation for ourselves. We made that conscious decision to make that change.

Is this something that would, I guess, lower the revenue opportunity next year but maybe help profits? Or how should we think about this in revenue and profit terms?

We certainly believe -- our anticipation of doing that was with the decision that it would improve our profitability. For instance, General Motors, one of their biggest competitors. There is five different firms offering this product today. You don't have to be an exclusive to really market in this area. Quite frankly, we never had all the Ford dealers anyway.

So we think being in a competitive mode and offering our own product, if you will, with our terms and negotiating with the dealers individually -- and you know how dealers like to negotiate too -- they want to feel they've got a deal. So we believe that gives us the better prospects for the future.

Now, that will take some time to make that migration and move over, but in the long haul, it was our decision, our conscious decision, that it would be a better arrangement for ourselves.

Okay, great. Just one follow-up. It looks like in Q4 that there was 490,000 of Other income. When we strip out the interest income and the interest expense, it looks like there was a 1.7 million Other item benefit. I'm just wondering what that might be and if that is sustainable going forward.

Those were FX transactions we settled, and part of it for grant income. In some of the cities we operate in, municipalities give us a grant, if you will, and as we perform under those grants we recognize a portion of that in earnings.

Should we expect that to be more flattish in the future?

Yes.

Great, thank you.

Brandon Dobell.

Thanks. Credit Suisse. A couple of questions for '06, maybe Dennis. Your assumptions around CapEx or free cash flow. Obviously, you guys have got the AR issue under control, but thinking about the rest of the cash flow statement, how do we think about where you guys are going to be putting money this year, is it capitalized software, capacity expansions, that kind of thing?

We're giving guidance for next year of approximately $40 million again for CapEx. When Ken about talked about building out 4500 seats, that's going to involve some of that. Obviously, we're building centers cheaper now or more cost efficiently than we used to. But I think we can still do it within the $40 million number.

We do not give precise guidance on free cash flow. We anticipate to generate free cash flow certainly. As we collect on these receivables, we automatically have the rebound effect, if you will, on that metric going forward. But that is an element of our business we just don't give finite guidance on.

That is fair. Maybe going back to one of the earlier questions, when you think about North America, International and the consulting business, how much of a variance in the growth rates do you guys think you'll see? There's good growth happening in International and North America from the top-line perspective, but is it going to be wildly different? Can we model pretty much all three segments about the same?

And I guess implied in that question would be your expectations for consulting, given the new contract arrangements. Should we see some growth there, kind of return to kind of what the historical quarterly numbers would track like? Are we going to see a period where it dips down and then starts to recover in the back half of the year?

I think the best way to describe our growth is we feel good about the numbers that we've put out there as far as the top-line growth. Naturally, North America represents, and has always represented, a big chunk of the overall revenue; it's over 60% of the revenue. So in a pure, relative proportional basis, it's going to grow more than the International.

That said, we're seeing growth in virtually every market that we operate in today. We certainly would not, for the first time in many years, put out any type of a top-line guidance number if it wasn't based on actual realized activity closings of contracts that we actually are converting, etc. So I'm not trying to avoid your question, but we're very comfortable with the numbers that we've put out.

That's fair enough. From the perspective of Latin America, maybe a little bit more color there on what kinds of customers you're signing up down there. Is it local market stuff or is it serving back into the U.S. market? Are there particular verticals that are strong down there?

And then as you think about capacity additions of that 4500 or even looking out further, how much room do you think Latin America has for you guys? Is there a ceiling at which you either start to lose some of the scale opportunities or there's just not as many big companies down there that you can serve, or it is it wide open for the next five years or so?

That is a great question. I think it's important that you know that our Mexico operations are primarily nearshore. And you should also know that we are beginning to approach full-capacity utilization of the capacity that we have in Mexico. That said, I would not be surprised if we see some expansion in Mexico for more nearshore capacity. That is number one.

Number two, Argentina has been consistently running at a 90 plus percent capacity utilization, and we're adding more capacity in Argentina. And we've made the conscious decision not to serve local in-market companies for a variety of reasons. Some are obvious; it just has to do with the size of the company, the financial viability of the company, etc. So consequently, Argentina is serving U.S. as well as European-based clients.

Brazil is really the only country in Latin America that is serving in-country clients. And interestingly enough, both Brazil, as well as Argentina and Mexico, are really seeing significant growth in financial services. And that would mean property and casualty, that would mean banking institutions, it would mean stock brokerage work, etc.

Our capacity is also at capacity in Brazil as we speak. Brazil is nicely profitable, Argentina is nicely profitable, Mexico is nicely profitable. And we actually just recently added another 250 seats in Brazil, which within a matter of a couple weeks will be fully taken up, all of that capacity. So we are operating Brazil at 95 plus percent capacity there as well.

So to answer your question about growth in Latin America, we see Latin America as a very important market to us. And it is absolutely our intention to further invest in Latin America, but more from the perspective of being a nearshore provider to U.S. and Canadian and other types of clients primarily in the U.S. and Canadian marketplace. I would not be surprised at all to see capacity expansion in every single country that we operate in, as well as potentially adding some additional nearshore countries there.

That is great. Two following questions to that would be, is there any local political incentives that you're getting that you would have seen here in the U.S. a while back or that maybe the Philippines might offer from a real estate or capacity perspective?

And then secondly, wage pressures or wage activity down there. Is that a concern for you? Have you worked that into contracts with people? Just trying to look out at what we've seen in India and the Philippines and gauge the potential for those things to happen in Latin America as well.

First of all, you should know that these are things that we keep a pulse on on a, literally, day-to-day, week-to-week basis. And we feel very comfortable with where we are labor wise in Brazil, where we are labor wise in Mexico and Argentina. I would say Argentina will start to reach a saturation point as it relates to English-speaking, but will not reach a saturation point as it relates, obviously, to Spanish-speaking.

We overall are not seeing or expecting any significant wage pressure in those markets, other that what we factor into our forecasts, and we always factor in a cushion for that to take place. And in the event that it doesn't take place, it's a benefit to us. And then of course, we hedge the majority of these markets to protect ourselves from a currency standpoint.

I guess I'd lastly add many of our contracts -- our longer-term ones, of course, have cost living adjustments that help protect us.

Right. Which are recalculated on an annual basis to take up for any increase in cost.

Okay, great. Thanks a lot.

Tobey Sommer.

SunTrust Robinson Humphrey. I was wondering if you could comment about the new business you've been signing and announcing in recent quarters and maybe the outlook in '06. Relative to gross margin, are you bringing in this new business above companywide gross margin or in line?

Every piece of business that we have signed, not only in the last two quarters, but in the last couple of years, are well above the current gross margins. And just so you know, we have a rigorous process from a pricing control standpoint, and everything has to go to our transaction review committee, which meets three times a week. And if it does not meet the profit thresholds, we pass on the business.

Stepping back and looking at the cyclicality of profitability in the industry, is there anything that you think has structurally changed that would prevent company gross margins from maybe not reaching prior peaks, but expanding in that direction pretty significantly?

No, actually, we feel the exact opposite of that. We see far fewer competitors that are competing with us today, and we believe there will be far fewer competitors in the future. We see that the competitors who were at one time solely focused on winning business on price have learned their lesson and that it severely impacted their own internal financial abilities. And so consequently, they are now showing restraint, which is consequently creating pricing strength for everybody in the marketplace.

We are seeing clients that are acknowledging that they maybe were a little too aggressive with some of the deals that they tried to get done and are acknowledging that it's important for the suppliers to actually be healthy. We think that we really are entering a very good phase, where ultimately it's all about total value delivered and not just the price that is actually paid. No, we are not foreseeing there's anything that's going to get in the way of that.

Okay. Along that same vein, in terms of your salespeople, I was wondering if you have done any tweaking of the incentive compensation to more heavily weight profitability or any other changes you may have made as we head into '06?

Well, first of all, we have, as you may know, a renewed emphasis on sales, sales management and on marketing. With that has come a series of new senior executives that have a lot of experience in the outsourcing marketplace, number one.

Number two, there is incredible focus on profitable top-line growth. And as I said, not only are they incented the way their bonus based on actual profitability, but the physical deals cannot get completed unless they meet our minimum thresholds, and our minimum thresholds are well above the gross margin that you are seeing overall in our numbers today.

So yes, the sales force is properly aligned, they are properly incented. They are converting new deals, they are signing new logos and they are not only renewing contracts, but they are expanding contracts and they are also increasing prices of existing contracts on a regular basis.

Thank you very much.

Donna Jaegers.

I'm with Janco Partners. Thanks for taking my question and good quarter. Just two quick questions. The work that you did for the hurricane relief effort, is that -- granted, we can't forecast hurricanes for '06 yet -- but will that contract be rebid or are you in line to get that business if there are hurricanes?

Hi, Donna. It's Ken. That is a good question. And the answer is, A, you're right -- we can't predict hurricanes, even though those of you who saw "60 minutes" this last Sunday, is in fact predicting a lot more hurricanes, which we hope doesn't happen.

But we are one of a very limited amount of suppliers that is allowed to participate with the GSA for this type of business. So as to will we automatically win it? We would not ever make that assumption, nor is it in our forecast that would take place.

Do we believe that we executed beyond their expectations and consequently have demonstrated that we could scale to 4000 employees and build a private network in 133 hours? We think that positions us well for future potential relief efforts or disaster issues that take place with the government.

Great. And then on M&A, since you guys mentioned that that might account for 100 to 150 million of getting to your late '07 target. Dennis, can you talk a little about what your parameters are there? I know you guys look at a lot of stuff. The only one you've bid on so far is the Filipino BPO acquisition, and I don't know if you ever gave out size number on that, as far as revenues.

No, but we did indicate it was an emerging company, which gives you an idea that it's not material.

We've cast our net fairly wide. Obviously, we've taken a look at our competitors, of course, our own space. But we're equally if not more interested in things outside of our own space. For us, expanding our BPO capabilities, particularly picking up capabilities where we could offer the services of the acquired company to our existing embedded base are of great interest to us. And then also starting up in new verticals. Anything that would help us expand further into financial services or healthcare in the BPO space is certainly of interest to us.

And we're not necessarily looking for very, very material transactions where we're betting the farm, if you will. But for us, a strategy of a series of select smaller acquisitions that fit in strategically where we could cross-sell to our existing client base is of great interest to us.

Great, thanks a lot.

This concludes today's conference call. Thank you so much for joining. You may disconnect at this time.