TTEC Holdings Inc (TTEC) 2006 Q1 法說會逐字稿

Welcome to the TeleTech First Quarter 2006 Earnings Conference Call. I would like to remind all parties that you will be in a listen-only mode until the question and answer session. This call is being recorded at the request of TeleTech.

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

Thank you and good afternoon. My name is Karen Breen, Vice President of Investor Relations and Treasurer. TeleTech is hosting this call today to discuss its results for the first quarter ended March 31. Earlier today, TeleTech issued a press release announcing that its quarterly reports 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 them several times this afternoon. We encourage all listeners today to read our quarterly report on Form 10-Q.

Speaking on today's call are Ken Tuchman, our Chairman and Chief Executive Officer, and Dennis Lacey, our Chief Financial Officer.

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 year-end 2006 and 2007 financial goals, including selling new products and services, risks associated with performance based pricing metrics and certain client agreements, the risks associated with achieving improved profitability in the international and database marketing and consulting segments, execution risks associated with expanding capacity in a timely manner to meet demand and achieving our targeted profit improvement of plans, and the possibility of additional assets impairments and/or restructuring charges.

I'll now turn the call over to Ken Tuchman, our Chairman and CEO.

Thank you, Karen and good afternoon. I would like to begin by reviewing our first quarter financial results and then I will provide a brief business update. We reported a record first quarter revenue of 283 million, up 11.4% over a year ago period. Revenue in our North American and international customer management segment, which represents nearly 95% of the total revenue, grew more than 14% year-over-year. This is the second consecutive quarter of double-digit revenue growth and is due to high levels of new, renewed and expanded client business.

First quarter earnings per share was $0.08, which was double the $0.04 we reported in the year-ago period. The $0.08 included a 1.4 million charge for stock option expenses or $0.01 a share. It also included a $1 million asset impairment and restructuring charge, which also impacted EPS by approximately $0.01 per share.

In highlighting the trends in our business, since the start of 2006, there are three key takeaways that I want to share with you. First, the outsourcing cycle is clearly on an upswing, and our global pipeline across each of our targeted vertical industries is the strongest we have seen in years.

TeleTech is uniquely positioned to capitalize on the growing opportunity, given our increasing product diversity, our strong global delivery capabilities and our reputation for operational excellence. In addition, we are seeing a stronger, more rationale pricing environment, and when combined with the shortened sales cycle, we are currently enjoying, it gives us confidence in our ability to achieve our near and longer-term financial goals.

Let me give you a sense of what's driving the increase interest in BPO outsourcing. Ten years ago, we spent the majority of our sales efforts convincing companies to outsource. With the earliest adapters, primarily in the communications and airline industries, five years ago, while more diverse companies were interested in outsourcing, they were typically only willing to give us 10 to 15% of their total customer management requirements.

Today, companies in every industry realized, the technology, processes, and global scale required to manage a worldwide customer base is far beyond their internal capabilities. As a result, more and more of our current and prospective clients are asking us to manage significantly more of their total customer management requirements. The second takeaway is our core client base is stable and growing. And we are winning increased business across each of our targeted industries, including healthcare, financial services, retail and our traditional verticals.

For instance, revenue in our healthcare vertical has grown to 6% of total revenue from less than 2% a year ago. Further, as a result of continuing high levels of client satisfaction and a proactive account management focus, we now have completed a majority of our key client renewals that were opened during 2006. These renewals for multi-year periods are giving us good visibility into 2007 and beyond.

The third and final takeaway is we are increasingly diversifying our revenue stream into higher margin opportunities. This includes winning more back office business, given our clients need to more effectively integrate both their front and back office requirements. Of our total revenue, 40% is either pure back office work or combination of voice and back office work. One example of new BPO work, we won this quarter, was with LenderLive. TeleTech will perform a number of roles for LenderLive, including scheduling and closing of loans, contacting of the various third parties involved in the close, such as title and appraisal companies to both schedule and follow-up on the required work. Our recent success in growing our back office and customer management business is a direct result of our ability to outperform internal client operations and distance ourselves from our remaining competitors through proven execution and innovative delivery capabilities.

The core business growth has required us to expand our global delivery capability by 25%. Today, we have the largest capacity deployment underway in the Company's history with 4,500 previously announced positions now being deployed in Argentina, Canada, and the Philippines. In addition, we now have plans for an incremental 3,000 positions in the Philippines and Latin America due to continued growth requirements. As a result, near shore and offshore capacity is expected to grow to nearly 80% of total capacity by yearend.

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 2007. From a technology standpoint, we've never been so streamlined. Our fixed plan GigaPOPs are in production, and we believe we are now running the largest private voice-over-IP network in our industry. Our annualized rate of voice-over-IP usage is expected to reach over 1 billion minutes during the second half of 2006. I am pleased to say, that we have built more than one dozen -- excuse me, we have filed more than one dozen technology patent applications, which are in various stages of the patent process.

Moving to our International Customer Management segment, this segment reduced its operating loss by nearly 40% year-over-year, and if you exclude the $1 million asset impairment and restructuring charge, the operating loss was actually lower by 60%. Our goal is to return this segment to breakeven or better by fourth quarter of 2006. And we believe that is achievable, given the increased pace of new business wins, in certain international locations, and with continued profit improvement initiatives underway across various regions.

Turning to Newgen. Its fully allocated operating loss was approximately 1 million and in line their budget. During the quarter, we announced Dan Powell's appointment to President, and his new management team will be on board this month. We are confident in this new team and their ability to restore Newgen to profitability. We are now currently budgeting an operating loss for Newgen that is 3 million to 4 million higher in the first quarter as we continue to reduce our forward concentration and work to rebuild a broader OEM and dealer base. I believe the strength in our core customer management business will make up for this higher operating loss. Further, it does not change our previously communicated outlook for the overall business for revenue and operating margin growth during 2006.

To conclude, our focus continues to be profitable topline growth. Some of the 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 20% of our revenue, and we believe they have the potential to grow to more than 30% during 2006. And three, continued development and delivery of innovative offerings aimed at helping our clients grow and strengthen their customer relationships. All these capabilities reflect our commitment to innovation and have further expanded our market offerings, diversified our revenue streams and enabled us to win new businesses and deepen many of our client relationships.

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

Thank you, Ken, and good afternoon to everyone. Let me begin by providing an overview of our first quarter financial results. As outlined in today's press release, we reported an 11.4% increase in revenue this quarter as compared to the year ago quarter. The impact of foreign currency translation on revenue was a typical 1.8 million, and the impact on operating impact was immaterial. This resulted primarily from the strengthening of the Canadian dollar and the Brazilian real(ph).

As Ken said, our first quarter results included both stock option expense and an asset impairment restructuring charge, each of which reduced GAAP EPS by approximately $0.01 per share. Our gross margin dollars improved by 6.5 million this quarter compared to last year, driven by our rising revenues. Our gross margin percentage was approximately the same from period to period.

Our SG&A as a percent of revenue last year was 17.3%, and this year is slightly lower at 17.0%. However, this year includes stock option expense, and without that, this year's percentage would be 16.5%, and as such, our efficiency improved by 5% over the prior year period.

Our first quarter operating margin percentage was 3.2%, double the 1.6% reported for the year ago quarter. Had we not incurred the asset impairment restructuring charges of 1 million, our operating margin would have been 3.5%. And without the stock option expense, it would have been 4%.

In addition, we incurred $1.7 million, or over $0.01 per share, of training and training-related expenses during the first quarter. As we ramp business, the accounting rules reduce our profitability in two ways. The first is when we bill for training in the hourly rate and recover the upfront cost over the contract life. In that situation, all training costs are expense when incurred, and this amounted to 1 million of expense for the quarter.

The other 700,000 relates to the second way is which we the accounting rules impact us when we built for training separately. In that situation we are required to defer both the training revenue and related expenses, and then amortize them on a straight-line basis over the contract life. During the first quarter, our operating income was reduced by 700,000 from what it would otherwise have been due to this accounting. These types of training expenses in accounting therefore will continue to impact our results during 2006 as we continue to ramp new business.

Our international segment was profitable before corporate allocation. The improved performance in this segment stems from actions we took in 2005 to improve future profitability, including exiting certain underperforming international locations. Further, with regard to our international segment's results, we do record transfer pricing adjustments to operate in a tax efficient manner. And the effect of such adjustment is to reduce the amount of income recognized in foreign locales.

Lastly, we would like to point out that our international segment excludes our operations at Philippines, which is growing and quite profitable. The results for the Philippines along with India are included in our North American segment as all the work in those countries is primarily done for U.S. clients. We continue to believe that we will improve the results of our reported international segment during 2006.

Turning to income taxes, our effective tax rate for the quarter was 36%. And as we said before, we believe our effective tax rate will range between 35% and 40%.

Moving to the balance sheet cash and cash equivalents at the end of March were 34 million. At quarter end, we had a very low debt to equity ratio of 13.6%. And DSOs were 63 days, which remains unchanged from the fourth quarter. Cash flow from operations was $16.7 million, an 11% increase over the $15.1 million for the year-ago quarter. Our EBITDA for the quarter was 20.9 million, up from 18.9 million for the year ago quarter.

As a result of increased global demand, capital expenditures were $14.6 million for the quarter, up from $4.8 million for the year-ago quarter. According, free cash was 2.1 million in the first quarter compared to 10.3 million in the prior quarter. The investment in cash flow, we believe will result in future free cash flow in future periods.

As announced previously, we have plans to add 4,500 workstations during 2006 in Argentina, Canada and Philippines and based on recent new business wins we will be adding an incremental 3,000 workstation in the Philippines and Latin America. Based on continued growth requirements, we believe CapEx for 2006 will now range between 40 million and 50 million, which is up from our original estimate 40 million because of the additional business we have signed since then.

To conclude, this was a second quarter of double-digit revenue growth and our operating margin doubled to 3.2%. Based on this improved performance and the strong pipeline of new business opportunities, the entire management team believes, we can achieve our previously announced goals, which was to grow revenue by 8% to 10% over 2005 and to increase our operating margins to 6% to 7% by the end of the fourth quarter.

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

Thank you, Dennis. To conclude, we are pleased with our first quarter results and are excited about the remainder of 2006. Our client satisfaction levels are at an all-time high, demonstrated by our strong renewal rates and expansion of existing client business. In short, we have established the strong foundation for continued growth. This foundation and the increased pace of new business wins, is why I believe we can organically grow 2006 revenues by 8% to 10% over the prior year.

Further, as we more fully leverage our capacity and streamlined infrastructure, I believe our operational margins can grow to approximately 6% to 7% by the fourth quarter of 2006. Our confidence in the future prospects of our business lead us to repurchase $8 million of our common stock during the first quarter. We have an additional $58 million authorized under our share repurchase program. We look forward to updating you on our continued progress in meeting our 2006 initiatives and in coming quarters. Thank you.

[Operator Instructions].

Our first question comes from Josh Vogel. Please state your company name.

Sidoti & Company. Good afternoon, gentlemen. A couple of questions here. What was the status of the 6 million in revenue outstanding from the government contract in the fourth quarter?

We are still in the process of collecting that revenue, and we are working with the government to come to an agreement. And we are confident that this is something that we will collect in the near future.

Okay. And turning over to the Philippines. After your recent deployment of the 4500 seats, how many total seats do you have out there?

Out in the Philippines?

Yes.

No. The question is after the 4500. I think the total seats will eclipse 8,000 - 9,000 seats. About 9,000 seats and that will support in excess of -- close to -- almost 11,000 employees.

Okay. And it seems with all the seat expansion in the Philippines amongst all the providers out there, that there is more seats than actual bodies to fill the seats. So are you starting to see some wage pressures out there?

Well, I think our strategy is quite a bit different than the other organizations. And we are very confident in how we are fulfilling the labor requirements. So at this point in time, we are not seeing that, but we have a fairly -- we have a different strategy in where we're locating our facilities etc., so no that's not been a concern of ours.

Okay. And what about other locations for instance Latin America are you seeing any wage pressures out there?

No. We are not seeing wage pressures, but what we are seeing in countries like Argentina, we are coming to the end of the amount of population that can actually speak the quality of English that we are looking for. So we will most likely slow down our build out in that area and we are now moving on to other Latin American countries.

Okay. And just one more question. On the M&A front, do you have anything in the acquisition pipeline right now?

I am sorry could you repeat the question?

On the -- are you looking at any acquisitions maybe to get more into the back office BPO work? I am just curious how the pipeline was looking?

We are constantly looking at potential M&A opportunities and at this point in time, we are look -- we are not in a position to really discuss anything. So we look forward to updating you when there is something interesting to talk about.

Okay. Thank you, gentlemen.

Thank you.

Thank you. Our next question comes from Tobey Sommer. Please state your company name.

SunTrust Robinson Humphrey. Thanks for taking my call. I just had a question on Newgen, I think you gave some commentary about the trajectory of your operating profit or loss expectations. I think I just missed it, so please you could repeat that for me.

Yes. We said that we would expect the operating losses to be approximately $3 million or $4 million over the first quarter, which is what we budgeted for.

Over the first quarter?

Right, over the first quarter losses.

Okay. And I was just curious of the new seats that you have already told us about and the incremental one that you just told us about, what sort of revenue generating capacity, would those have on an annual basis?

We -- I think a good number to budget would be approximately 25,000 per seat.

25,000. And what kind of utilization does that assume?

I think which -- that assumes a -- when you say utilization, do you mean turn on seats? And that's why I am hesitating to answer your question?

Yes, that's what I was aiming for.

Yes. I mean that assumes a typical 1.2 turn on keys.

And I guess, turning to CapEx, you maybe have to spend a little bit more this year, would you expect that the turn in the business short of sales cycles, et cetera and the demand keeps coming? Would you expect that that new higher level of CapEx to be maybe the way we should think about '07 as well?

Well, Tobey, this is Dennis. That would be nice if that was the case because that would mean that we're drinking from the fire hose on the new business side. But right now, we have our hands pretty full with building the capacity for '06. The level of build that we are doing right now is I think unprecedented in our history.

And we believe that will result in future free cash flow in subsequent periods. And it will be our hold of management that that situation would continue into '07, but we'll have to see how the pipeline plays out there.

Okay. And then just one question on the healthcare. You have made really good progress there, and it's a larger proportion of revenue. And I was just wondering if you have any expectations that you could share with us for how large a proportion of revenues that could become? It seems like an interesting vertical that is really contributing to growth during this expansion.

Yes. You know, I mean the healthcare industry has now become a $2 trillion industry. The fact of the matter is that a very small portion of the industry is outsourced. If you go off of industry estimates, the back office portion of the pay or as well as of the provider is anywhere from a low of 10% to a high of 18%. So the number -- the opportunity out there is obviously quite large.

And we are very pleased with the number of healthcare companies that we are currently doing business with and the opportunities that we see in the marketplace in the front and back office areas. So I think it would be difficult for me to quantify other than to just simply tell you that the market size is extremely large. All the major healthcare players are realizing that there are substantial benefits from outsourcing their back office. And we believe being the size of our organization, that we will be a major participant in the space.

Thank you very much.

Thank you.

Thank you. Our next question comes from Dave Koning. Please state your company name.

Yes. Robert W. Baird. I had a question on Newgen, you know, given the bigger loss in Q2, should we expect a similar revenue decline as well or do you expect revenue to stay around where it is at?

Go on, Dennis.

You know, our budget right now is approximately the same for the revenue. I mean on what base are you measuring that, from year-over-year or quarter-to-quarter? I guess you wanted to ask that first?

Yes, so just on an apples-to-apples basis, would your operating guidance meaning -- you know, sequentially your operating income is down...

Actually, if that's how you want to look at it, that will be fine. I didn't if you meant year-over-year. But it should be -- it will definitely be down from the prior-year period for second quarter.

Okay. So sequentially, you expect roughly flat revenue, but a bigger loss?

Sequentially, it will be down. We have already told you what projection is for second quarter that it will be down. When it hits, we believe it hits bottom right and flattens out.

It will decline some first to second quarter and then flatten out from there.

Exactly.

Okay. Great. That's helpful. And then I guess secondly, another healthcare question. I know you did a little bit of Medicare Part D work, and I think some of that starts to run out in Q2. And I am just wondering if maybe you can give a little color on how much revenue was in Q1 and how much you think it will be in Q2 or maybe just some directional guidance, if that's at all meaningful?

I can't actually give you the number or the dollar amount on Part D, only because I don't actually know it off the top of my head. But what I can tell you is that our healthcare business is very nicely diversified, and we have been providing healthcare capabilities prior to Medicare Part D. So although Medicare Part D is part of it, we have many other projects in the healthcare area, especially in the back office area, and more projects that are coming on board.

Okay. Great. And then I guess just finally, North America revenue was very strong and -- definitely nice job there. But the margin was the lowest in several quarters. And I am wondering if maybe you can just give a little color on that.

From what date, prospectively are you looking at it from, if you're talking from last quarter to this quarter?

On just -- North America margin in Q1 '06 was lower than it's been in, I think eight quarters or so.

Well, we have got -- as we have talked about in prior calls, we have been investing in our sales force and other products. We also have the phenomenon I was talking about in the conference call as we ramped business that the accounting rules make us eat the ramp cost, if you will, and differ in other cases too.

So when you are in a growth stage, there is a retardation, if you will, of the profit recognition pattern. And that's what is going on right now. As we grow, we'll eat those upfront cost, it will not incur later, when you come out of the ramp-up stage.

Are those accounting costs -- are those something new this year -- in this quarter?

No, but our revenue has not been growing like it is this year. This quarter, we have an 11% increase in revenue year-over-year. I think if you go back over the eight quarters, you won't see that. So what occurs on a growth period is that accounting phenomena I was describing during my script of comments.

The other thing is that as you see more of the business that is now infilling this large amount of capacity that's being built in some of the near-shore and offshore markets, you'll see significant margin improvement that will start taking place in the quarters later on in the year.

Very helpful. I appreciate it.

Sure.

Thank you. Our next question comes from Donna Jaegers. Please state your company name.

Hi. I am with Janco Partners. Ken and Dennis, I was just curious on international. I know you said that you hope that it would be profitable by the fourth quarter. Given the sales growth we are seeing there, can you give us some idea of how fast that ramp is going to be?

Well, really, you know, Donna, as we have stated, the last market for a bastion of unprofitability internationally is the UK. And as you know, we have taken some pretty significant measures to reduce the losses in the UK, hence the rightsizing of the business.

But in addition to that, we have been fortunate in that we have learned some new contracts that we are now on-boarding. And as we onboard them, we will begin to see the situation turned from a loss to a profit. And so we expect that to all place during the third and the fourth quarter based on signed commitments.

Great. And then, Dennis, maybe I missed it in your prepared remarks, but on foreign exchange what was the impact of that in the quarter.

On the bottomline it was nothing. It was about a 1.8 million increase in revenue.

Okay. And that just --

-- adjustment. It's about a 1.8 increase to revenue but...

Great.

-- virtually no impact at the bottomline level.

And that should help you going forward, as the dollar is weakening now, right?

Well, if you want to look at it that way. Yes.

All right. Thanks.

Yes.

Thank you.

Our next question comes from Jeff Nevins. Please state your company name.

First Analysis. On Newgen and database marketing, to what extent are you going to be able to rationalize some of that as you go throughout the year? Are we going to be at this operating loss level for just a couple of quarters or is it something that you can rationalize pretty quickly?

Yes. You know, what we would like to say on the whole Newgen topic is that we just brought in a very significant management team. All of them are now on board with the exception of one individual that starts the 15th of this month. And we feel very good about the qualifications of these people in the background as well as of our leadership and background in turning situations around.

And we really -- we look forward to giving you guys an update in the third quarter, but the fact is that we think that we will more than be able to sell through this situation with the core business. Newgen represents approximately 5% of the overall business, and we really think that there is no need for it to be a focus as it relates to us achieving our topline and bottomline numbers that we have stated for.

So we'd like to get this team just a few months to get some miles under their belts, and then we look forward to giving you an update. But we're very comfortable that they are already making all the right adjustments in the business, and we think that they'll have the business under control and where it needs to be so that we can go into the new year with a much brighter future than we have had experienced this last year.

Okay. And just two other questions, one is housekeeping, I didn't see how many shares you repurchased in the quarter, if you could just mention that at point. If you can find it. But the other question I had was, it sounds like there is one or two or some sort of number remaining in terms of existing customer renewals that you're expecting this year. Is one of those renewals one of your larger customers?

Go ahead, Dennis.

As we said nearly all -- as we have discussed before about a client that we have in Asia-Pac that we expect to have renewed.

Right, we're highly confident that we'll renew in the very near term.

And but that's not one of your top two customers?

No.

No.

No. All those are already renewed.

Okay.

And Jeff, your other question, it was 668,000 shares.

Okay. Thanks, Dennis.

Thank you.

Thank you. Ty Govatos, your line is open. Please state your company name.

Yes. CL King. Let me -- can you give us more indications of what those training cost again were in the first quarter, I'm sure if I caught all of them. And some kind of color as to what will happen to those as the year progresses?

Certainly, yes, the amount that we expensed, directly because we could not billed clients for those, separately was $700,000. And the amount were we decline would pay for that and we deferred the net profit, that was $700,000 - the million dollars I think went through directly, and 700 the other way.

So it adds up to 1.7 million in total and you know the amounts going forward will be also significant as we ramp-up that all varies depending on how the actual client contract goes down, if you will, depending on whether not they would pay for it or not. So it's hard to give a crystal number on that, but I believe, we'll have sizable charges for this going forward as we ramp-up our business.

So you were talking a total of 1.7 million. Seven of that is kind of deferral and that will be written-off longer term?

We took the net profit, and the net profit is spread into earnings over time. So in other words the related amount they paid for training, that's what our internal costs were for training. The net profit of those two instead of getting booked these earnings this quarter, get deferred to the future and spread over....

I see what you're saying. So that 700,000 isn't a direct training costs. It's more an alteration on the profit side of your equation. The 1 million is a direct cost.

Well, there are costs involved in both sides of the equation. The other is the mark-up of the cost that got spread over.

Okay.

... it's over the profit on the trained dollars that got spread.

I see, what you're saying.

But the point is that the total impact of training related to ramps is impact on our bottomline was that sum of the two is roughly 1.7 million.

Okay. As we go forward into the second, third and fourth quarter assuming -- let assume no new wins for the time being, can we expect those to ratchet down substantially in the second and third quarter?

No, I wouldn't expect that because the reason why we're building all this capacity is because we want a fair amount of business. And as we ramp the business into all this new capacity, there will be training dollars associated with that, which will defer the income recognition. This is a FAS B rule that came into place about a year and a half or two years ago.

Okay. Let me take you back to another question a couple of people have asked and I think I've missed it on the mark, the Newgen, when you say at $3 million to $4 million additional loss are you talking about the next three quarters or most of that being in the second quarter?

Well, we're just talking about the second quarter.

Okay.

We're not giving any guidance or forecast on Newgen, we're giving you overall guidance on the overall business of topline and bottomline, and we are just giving you some color on that particular subsidiary that's all.

I understand. Thanks a lot.

Thank you.

Thank you. And we have time for one more question. Bob Evans, your line is open. Please state your company name.

Yes. Craig-Hallum Capital. And good afternoon gentlemen, and nice job on the quarter. Can you -- the number of seats, 7,500 seats -- can you give us a little bit more color in terms of the timing of how they come on and maybe what's already in place?

Yes. About approximately 1100 brand new seats just came out into -- just came out of construction and is coming into production, which means that we will be ramping 15% of the 25% number in the second quarter timeframe. About another 25% will be coming online toward the end of the second quarter, another close to 2000 production workstations.

And then, in Q3, about approximately another 2800 production workstations will be entering -- coming out of construction and entering, which would be 40% of the number -- of the total. And then in Q4, '06, another approximately 1500, which is the last remaining 20% that would come in and naturally, that would until -- most of that would go into '07, the first quarter.

Okay. So Dennis, it sounds like it just dependent on how you like the contract -- in terms of what training costs are going to be?

So it's hard for us to model that.

Yes. I mean, there's two options, the client -- we can either bill the client up front or bill it into the rate. And either way, it's a separate charge center for us and they both have separate accounting treatments.

Okay. And the new business that you've signed, how -- what percentage of that would you say is from existing clients versus new at the incremental 80 million of annual or 2 billion on a multi-year period?

It's approximately two-thirds of the business is existing clients that are expanding with us and not necessarily with the same programs. Sometimes it's with other areas of the business and in back office areas. And then one-third is with new clients that have not done business with TeleTech before and new logos that are being launched.

Okay. And how about as a result of -- or the renewals. Can you give us any sense of size -- contract size or aggregate, what you have renewed?

Assuming, I am not sure, do you understand the question.

Well, here's what I mean for example, you said you've signed $80 million annually in terms of new contract. I am wondering from a renewal standpoint, I think you said you had renewed most of '06 maybe with one -- with the extension of what Asia-Pacific client.

I am just wondering if you have had $50 million of renewals or on an annual basis or if you want to use an aggregate number for the contract, that's fine. I'm just wondering kind of what's the level of magnitude of renewal?

It's multiple hundreds of millions of dollars.

Okay.

It's a very large number. And so what we basically did is we took the total, and Dennis you might --so I say this correctly, we took the total contract value that we've signed since the beginning of the year, I believe -- which is now stands for two and now makes up to $2 billion of business. Then if you deduct of that total contract value the portion that is existing business, right.

The existing we've -- that we're already doing, in the portion that's left would be the incremental new business. And so we realize it's a bit confusing because we've continued to put out additional generic wins like we did today as saying another 80 million of new business, but the net is that where the 2 billion of total contract to PC becomes from is the multiple years of all of the sum total of the existing customer base as well as the new logos.

So for example, if the major bank were to renew with us, for -let's just say four or five years then obviously if the total value of that contract. Now what we've experienced recently is some clients have come to us and have actually chosen to renew well before their renewal period and in the process, they have expanded the contract as well as extended the link. So one of those would be like a large telecommunications company.

Okay. Fair enough. And I note DSOs picked up a little bit. Can you give us any color, Dennis, and as to what's going on there?

Yes. Well, on a year-to-year basis, DSOs are up roughly eight days. Mostly attributable to our North American segment part of that relates to FEMA. And also the ranges are mostly related to the wrap-up projects that we have with some of these new clients. And were the billing cycle hasn't quite to get to that was going to be on normalized basis. But we expect to get back into our normalized range of 55 to 60 days still.

Okay. Fair enough. And then final question, what's the pricing environment like? And can you give us a sense of kind of, the target our operating margins that you're seeing out there?

Well, for TeleTech the pricing environment is quite good. Many of the existing clients that we have in the renewal phase, we actually -- virtually all of them, we've increased our prices. In addition, to that all the new business out there, where pricing all at or -- at or above our targeted margin targets.

I don't think we want to publicly disclose what those targets are, but suffice to say that we're very comfortable with where the pricing is, and I think we're hearing that -- that not just in our part of the outsourcing sector, but in other parts of the outsourcing sector, that many people are feeling the same types of pricing strength. I think there is a significant amount of customers that made earlier outsourcing decisions based on price.

They got burned, and consequently have now boomerang back to vendors that kind of have substantially more credibility and experience. And now they are paying up for vendors that they can in trust and that has a reputation of delivering the project as promised been on time. And so we're seeing a fair amount of that taking place right now and I believe the industry, not just us, but others in the industry are seeing it as well.

I assume those targets are double-digit targets.

I'm not --

Okay. Fair enough. Thank you.

Thank you.

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