TTEC Holdings Inc (TTEC) 2006 Q2 法說會逐字稿

Welcome to the TeleTech second quarter 2006 earnings conference call.

I would like to remind all participants, you'll be on listen-only until the question-and-answer session. This call is being recorded at the request of TeleTech.

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

Good afternoon and thank you for joining us. My name is Karen Breen, Vice President of Investor Relations and Treasurer.

TeleTech is hosting this call today to discuss its results for the second quarter ended June 30, 2006.

Earlier today, we issued a press release announcing that our 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 them 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 CEO, and Dennis Lacey, our Chief Financial Officer. Ken is joining us today from our offices in the Philippines.

Before we begin, I would like to remind you of our disclosure regarding forward-looking statements. Matters discussed on today's conference call may include forward-looking statements relating to future plans and developments, financial goals and operating performance and are based on management's current beliefs and assumptions. Such statements are subject to risks and uncertainties.

Factors that could cause TeleTech's actual results to differ materially from those described include but are not limited to reliance on a few major clients, the risks associated with lower profitability from or the loss of one or more significant client relationships, execution risks related to integrating the acquisition of Direct Alliance Corporation and achieving the Company's year-end 2006 and 2000 financial goals, the risks associated with achieving improved profitability in the International BPO and database marketing and consulting segments, execution risks associated with expanding capacity in a timely manner to meet demand and the possibility of additional asset impairments and/or restructuring charges.

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

Thank you, Karen, and good afternoon. I'd like to begin by reviewing our second quarter financial results, after which I'll provide a brief business update.

We reported second quarter revenue of $287 million, up 13% over the year-ago period. Revenue in North America and International BPO segments represent 97% of consolidated revenue and grew more than 19% from the year-ago period. This is the third consecutive quarter of double-digit revenue growth resulting from high levels of new, renewed and expanded client business.

Second quarter earnings per share was $0.17, a more than three-fold increase over the $0.05 reported for the year-ago quarter. The $0.17 included a $0.07 benefit from the reversal of certain deferred tax valuation allowances for Spain and Argentina due to continued and increasing profitability in those countries.

Our improved performance is the direct result of our strategic capabilities, which we believe are unparalleled in our industry. Consequently, our renewals and expansions within our embedded client base are at an all-time high.

You may recall that in early 2005, we announced what many considered to be aggressive but achievable financial goals for 2007. They included reaching a revenue and operating margin run rate of $1.5 billion and 10% respectively by the end of 2007.

In addition, we also set a goal to achieve 15% EBITDA margin run rate by the end of 2007 as well. With 18 months left to go, I will highlight why I believe these objectives are still very achievable.

Let me first review the performance of each business segment and then I will discuss our plans to continue pursuing strategic and accretive acquisitions. Starting with North America BPO segment, which represents 66% of our consolidated revenue, revenue in this segment grew an impressive 25% to $190 million.

The operating margin was nearly 10%, which is our year-end 2007 goal for the entire Company. In addition, the EBITDA margin for this segment was 13%.

Our Philippine operations are included in our North American BPO segment. As we further leverage our international footprint to serve U.S. clients, these operations are growing dramatically.

We anticipate the Philippines will approach $165 million revenue run rate by the end of 2006, an increase of 75% over its 2005 existing -- excuse me, exiting run rate. We are the largest and fastest-growing BPO provider in the Philippines and are now focused on evaluating where our next major labor arbitrage markets will be.

Revenue in our International BPO segments increased by 8% to $88 million. This segment reached a milestone in the quarter after four years of losses.

It's operating results were profitable before corporate allocations and on a reported basis is approaching breakeven excluding $400,000 of asset impairment and restructuring charges taken during the quarter. This compares to operating loss of $6 million in the year ago quarter.

The improved performance is a direct result of our actions to increase pricing on new business, reprice underperforming business, and cost improvement initiatives.

As planned, we exited Glasgow in the second quarter and moved clients to our Belfast location. In the U.K., we are encouraged by the recent start of a pilot program with a Global 100 brand which will utilize the remaining capacity. This should position us to return the U.K. to profitability by next year.

Our operations in Spain have improved materially from the end of 2002 when revenue reached a historic low of $30 million and the operating loss reached a historic high of $12 million. Today, this country is on track to approach $100 million revenue run rate by the end of 2006 and should be profitable before corporate allocations for the entire year.

Let me touch on a few highlights in other regions. In Australia, we renewed a multi-year agreement with Telstar, which is one of the Company's top five clients.

In Mexico, increased client demand is requiring us now to open a new 1,000-seat BPO facility before the year-end. We've made significant progress in improving our International BPO results over the past several years and we expect this segment to be profitable in fourth quarter after corporate allocations.

Newgen's results were in line with our previously announced guidance for this segment. Dan Powell, Newgen's recently appointed President has made ongoing progress in repositioning Newgen for improved performance in 2007.

During the quarter, he completed the appointment of new high caliber management team, which includes the hiring of several industry veterans from such companies as Reynolds and Reynolds, Edmonds.com, and Nissan. We are extremely pleased with the caliber and enthusiasm of his new team and in less than three months they have developed some exciting and potentially meaningful OEM opportunities.

The majority of these OEM opportunities will take the balance of this year to play out. Accordingly, we believe the third quarter loss for Newgen will approximate its second quarter results. Our goal is to return Newgen to profitability during 2007.

Finally, we remain focused on strategic acquisitions that complement our core offerings, diversify our revenue, and broaden our vertical industry expertise.

We closed the acquisition of Direct Alliance on June 30th and are now deeply immersed in the integration process. The process is going smoothly and is on schedule.

We see tremendous cross-sell opportunities with Direct Alliance and believe our combined strengths in improving our client's top line performance will be a key competitive advantage. Given our business is historically centered around providing an excellent customer experience while improving our client's cost structures, Direct Alliance's ability to offer high-end sales and account management solution is an extremely attractive extension of our current capabilities.

Likewise, our ability to provide the customer management expertise to Direct Alliance's historically sales-oriented business presents significant opportunities for us to sell into their client base, many of whom are not TeleTech's clients today. With the strength of our combined offering and our solid cross-sell opportunities, we're planning for double-digit revenue growth at Direct Alliance in 2007.

Over the next six months, we plan to increase our sales and marketing investment in this business and have completed several joint sales calls. That effort has already paid off as last week, Direct Alliance signed a multi-million dollar deal with one of the worlds largest business software companies.

Let me review our ongoing acquisition strategy. We will evaluate opportunities to gain capabilities around our core offerings that further diversify our revenue or extend our vertical industry, or BPO expertise. However, as we did with Direct Alliance, we will continue to approach acquisitions with a strict financial discipline to ensure they are accretive in the first 12 months of combined operations.

In conclusion, industry fundamentals remain positive and the global pipeline across each of our targeted vertical industries is the strongest we've seen in years.

Our business has gone through an extensive transformation and we've emerged a stronger and more competitive company. This was achieved by centralizing our management and enterprise technology delivery platform across our multi-shore global operations.

Given we are no longer distracted by business transformation, we are now entirely focused on increased profitability and global growth. In addition, we're seeing a stronger, more rational pricing environment and when combined with the shortened sales cycle we are currently enjoying, it gives us the confidence in our ability to achieve our near and longer-term financial goals.

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 second quarter financial results. As outlined in today's press release, we reported record second quarter revenue of $287 million, which was a 13% increase over the year-ago quarter.

Our second quarter results included stock option expense of $1.9 million, about $0.02 per share, and asset impairment and restructuring charges of approximately $500,000, or roughly a penny per share.

Our SG&A as a percent of revenue was 16.9%, lower than the 18.2% reported in the year-ago period. This year's SG&A was higher by $1.9 million for stock option expense and excluding that, this year's percentage would have been 16.2. As such, our efficiency improved by 11% over the prior-year period.

Incentive compensation expense was also higher by $1 million this quarter, given our increased earnings over the year-ago period. Our first quarter operating margin was 4%, more than double the 1.8% reported for the year-ago quarter.

Our Form 10-Q includes a table showing that the main driver of this increase was $9.4 million improvement in net income from our BPO segments. This was attributable to several factors including, one, new and expanded business, two, transitioning certain programs to lower-cost, offshore locations, three, improving profitability in select client programs and/or eliminating unprofitable ones, and four, our multi-phase cost improvement initiatives, which included exiting underperforming facilities like we did in Glasgow and South Korea.

Our combined operating margin for the North American and International BPO segments was 6%, in line with our fourth quarter goal of 6 to 7% for the entire company.

As I have discussed before, as we ramp business, the accounting rules for training-related expenses reduce our profitability in two ways. The first is when training costs are not billed separately, but are included in the ongoing hourly rate. In that situation, all training costs are expensed when incurred and this amounted to $600,000 for the quarter.

The second way in which the accounting rules impact us is when we bill for training separately. In that situation, we defer both the training revenue and the related expenses and then amortize the net profit on a straight-line basis over the contract life.

During the second quarter, our operating income was reduced by a net deferral of $1.3 million from what it otherwise would have been. As such, training-related expenses totaled $1.9 million in the quarter, or about $0.02 per share. Given our expectations for continued growth, these types of training expenses will continue to impact our future results as we continue to ramp new business.

Our International BPO segment was profitable before corporate allocations. The improved performance in this segment stems from strategic actions taken in 2005 to improve future performance, including increasing profitability on new and existing client programs and exiting underperforming international locations such as Glasgow and South Korea.

Turning to income taxes, the Company has disclosed in previous SEC filings the ongoing need to review facts and circumstances around the requirement to maintain deferred tax valuation allowances and that continued historic and forecast of future profitability could indicate these allowances are no longer required. Such was the case for Spain and Argentina this quarter.

As a result of several years of historic and expected future profitability in both countries, we reversed the deferred tax valuation allowances. This resulted in a one-time reduction to tax expense of $5.2 million, or $0.07 per share.

Our effective tax rate for the quarter was 34% excluding the $5.2 million benefit from reversing these deferred tax valuation allowances. While our quarterly effective tax rate will vary, we believe the full year should trend between 30 to 35% absent such tax reversals.

Cash and cash equivalents at the end of June were $31 million. At quarter end we had a debt to equity ratio of only 29% which includes $46 million in borrowings for the Direct Alliance acquisition.

DSOs were 65 days and up slightly from 63 days in the first quarter. This primarily related to the timing of certain international client payments which were collected shortly after quarter end.

To support ongoing growth requirements, earlier this year we announced plans to add more than 7,000 workstations in Argentina, Canada, Mexico, and the Philippines, of which approximately 30% have been deployed to date. As such, capital expenditures were nearly $14 million, up from $11 million a year ago.

We believe 2006 capital expenditures will range between 50 and $55 million, which now incorporates the acquisition of Direct Alliance. As suggested in our MD&A, our working capital may be negatively impacted as we ramp new business, which in turn drives future revenue and profitability.

EBITDA is a liquidity measure that is not impacted by quarterly fluctuations in working capital. Our EBITDA for the quarter was $23.4 million, up 30% from $18 million in the year-ago quarter.

In conclusion, we are very encouraged by our improving financial performance and by the positive market trends for our business. Based on this solid performance and the strong pipeline of new business, we remain committed to achieving our previously announced year-end 2006 and 2007 goals.

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

Thank you, Dennis.

To conclude, we're extremely pleased with our second quarter results and are excited about the business opportunities for both this year and next year. After three consecutive quarters of double-digit increases in revenue, the Company has clearly entered a renewed growth phase and our core focus remains on improving profitability while continuing this pace of expansion.

We've actively integrating Direct Alliance into TeleTech and are very excited about the opportunities for the combined companies. I believe we have the right strategy to further grow and diversify our core business and I remain confident we can deliver our 2006 and 2007 goals which include growing 2006 revenue by 11 to 12%, including the Direct Alliance acquisition and ending the year with 6 to 7% operating margin and a 10 to 11% EBITDA margin.

For 2007, our goal is to reach a revenue run rate of $1.5 billion by year-end and an operating margin of 10% and an EBITDA margin of 15% by year-end. We look forward to updating you on our continued progress in the coming quarters.

And with that, we'll now open the call to your questions. Thank you.

[OPERATOR INSTRUCTIONS] Our first question comes from Jeff Nevins with First Analysis. Your line is open.

Good afternoon, thanks. Just two questions.

One was related to one of your second largest customer. I know in some of the notes in your quarterly filing, it does discuss how your outlook already projects the impact of some of the business moving to different locations. Have we seen most of that impact in the second quarter or is there going to be some decline coming into the third and fourth quarters?

No, to the contrary, the business is increasing and expanding.

For Verizon?

That's correct.

Wow. Okay. I'm sorry, I must have read that wrong. I thought it said it was going in-house.

You didn't read it wrong. There was business that was transitioning and our clients from time to time have certain adjustments in their volumes, et cetera, and they are back on track with their volumes and the business is increasing.

Okay, good clarification. So some of it's going in-house but you have other areas that you're growing with them that should offset that over time?

That's correct.

Okay.

On Direct Alliance, the contribution you're expecting in the back half is greater than at least the reported number in the first half. What's coming online in the second half? Is it seasonality or are there some other elements that you're expecting to see growth there?

There is some seasonality to the business and because I'm not by any stretch yet an expert on the overall business with not enough quarters under my belt, but there is historically seasonality. And in addition to that, we have clients that are actually ramping right now.

Okay.

Ken, I'll ask you one more question related to database marketing and Newgen. It looked like the revenue to that segment from Ford was the biggest reason for the drop-off sequentially, or at least over the last six months, the first half of the year.

Do you feel like you're at a point, though, where the decline there is really going to slow down? I mean what's to say it's not going to keep dropping, particularly with just the components from Ford?

Yeah, no, we do feel like it's going to slow down. We've already seen it slow down fairly considerably. So now we think we're in the rebuild mode and the diversification mode and so that's why we're pursuing several other OEM opportunities.

We're confident that this new management team has a very keen focus now on profitable growth and we're looking forward to returning them to profitability in 2007.

Okay. Thank you.

Our next question comes from Tobey Sommer with SunTrust Robinson Humphrey. Your line is open.

Thank you.

Given the real strong trends you're seeing in new and expanded business opportunities in the BPO area, I was curious, what would your guidance look like if we kind of stripped out the impact from the acquisition? Just want to get a sense for whether you're kind of guiding higher revenue on an apples-to-apples basis as well.

Dennis, do you want to go ahead and answer that question?

The amount of revenue we expect from deferred, the DAC acquisition for the last half of the year is roughly $35 million. That's incorporated in our forecast for year-over-year revenue increase. Does that clarify the matter?

So if you were to strip that out, would you still be kind of higher than the 8 to 10% range that you had guided to previously?

We'd be about 8 to 9 without it.

Okay.

At this point going forward, as we receive information about new logos signed, et cetera, would those be incremental to the guidance, or is there any business that you're negotiating currently that is kind of included in this new revised revenue guidance?

We're really trying to remain conservative in our forecast and our goal is to continue to be able to meet as well as potentially have the opportunity to beat. So what I would say to you is that what we have in our forecast right now includes business that we are, in fact, ramping as we speak.

That said, there is multiple deals that we're negotiating and based on when they would actually get closed and their launch could have an additional positive impact. But please keep in mind that we're already now into the second half of the year and so the impact that they would have will be relatively minimal.

Sure. I'm just trying to get a sense for if we're fortunate to get a logo announcement in a few weeks whether that would be incremental or whether that may be something you're ramping on now but have not had an opportunity to announce yet.

No. I believe that our forecast that we're putting forth right now and our guidance to the end of the year is, are numbers that we feel confident in.

Thanks.

Switching gears a little bit to Newgen, and then I'll get back in the queue. Anything shifted in your thought process there? Because it's been a while that we had a loss, trimmed it a little bit, now we're still losing money.

I know it's a small part of the business, but I'm just wondering what has increased your confidence in the revenue outlook to say that you're kind of willing to stick with it for another year and try to right that ship, particularly given the fact that it's such a small piece of revenue at this point? Thank you.

A couple of things. Number one, we do have a lot of confidence in the management team. We think that they're taking all the necessary actions to, A, stem the losses, and B, focus on diversifying and grow the business.

Number two, we're sticking with what we've always said which is that we will evaluate the business after the management team has had an appropriate amount of time to do what they believe that they can do, and we will absolutely do what is right for our shareholders. And so we're not -- I don't want you to assume that that means that we've made any definitive decisions at this point in time.

We're confident that by the end of this year we'll have strong visibility in knowing what our decision will be and we'll take whatever strategic action is necessary to ensure that our shareholders are gaining value. So that's a roundabout way of me saying that we want to give these guys an adequate amount of runway to see what they can do and what they can get done and if for some reason this looks like a protracted period of ongoing losses, then we will seek the appropriate strategic alternatives.

Thank you very much.

Other than that, there's not much more I can add to our strategy there.

Thank you very much, Ken.

Our next question comes from Bob Evans from Craig-Hallum Capital. Your line is open.

Good afternoon, everyone. Congratulations on a nice quarter.

Can you comment on the tax rate? I believe, Dennis, you said it was 30 to 35% excluding the one-time benefit. Is that a rate that we should think about going forward beyond '06 into '07?

Yes, I think that would be a good rate to use for that period of time, Bob.

Okay.

Is it fair as your profitability in the Philippines and other areas of the world start to increase, should we see that tax rate go down as we've seen with some of your competitors?

Well, we do enjoy a tax holiday in the Philippines, meaning we don't pay taxes there so we also don't book any GAAP taxes there. So to the extent our business grows there, yes, our effective tax rate does go down.

Okay. And one detail item, of the amortization of intangibles for the acquisition, do you happen to have that number or ballpark?

Yes, it's roughly three quarters of a million dollars per year. Bob, we've included a preliminary allocation of DAC's purchase price in our footnotes and we break out the intangibles there and it's roughly $7.5 million of contract acquisition rights which we'll amortization over 10 years. So that's the 750 per year.

Okay. So not really a big difference between GAAP EPS and cash given a relatively low amortization number? Okay.

Correct. But of course as you know, we financed the acquisition with debt, so you have to consider the interest carry.

Right, sure, of course.

And then on the International BPO, you're close to breakeven right now. When would you expect is a reasonable timeframe to see that to that breakeven to slightly profitable turning point?

Bob, we expect to be profitable even after corporate allocations during the fourth quarter for that segment. The fourth quarter of this year, too, I might add.

Yes. Okay. Fourth quarter this year.

Kind of leads into my next question is what, I mean you walk through kind of your initiatives in terms of how to get your 2007 targets. Can you give us a little bit more color in terms of, you had roughly a 4% operating margin, you're saying you are comfortable yet with your 6 to 7% operating margin goal by Q4. What would be a couple of the biggest factors that would get you to that level of improvement?

Well, Bob, you know, the first quarter of this year we were at 1.8 and the second quarter we were at 4 so we've doubled [over] one quarter and we have two more quarters to go, if you will. And it's the same factors that drove this quarter's improvement, which is our expansion of our business.

Our revenue has been growing nicely so we can spread our costs over a larger base, and our ongoing profit improvement programs, as well as our reworking of unprofitable client programs and we expect that to continue along with the continued expansion of our embedded base with similar results that we've seen to date.

Okay. All right. Thank you.

Our next question comes from Tim White with Robert W. Baird. Your line is open.

Hi, guys, nice quarter.

I was just wondering if you could give a little bit of color on stated domestic demand situation. Are you seeing it increase in Q2 and into July, or is it pretty stable?

We are seeing some increases on domestic demand, meaning the United States, and we're currently in negotiations right now on some opportunities that would take up more domestic capacity. So I'd say that it's definitely stable, but we're in the midst of negotiating some opportunities that would actually show some very positive growth.

Okay.

And then just kind of switching gears to the seat utilization, you said you had 30% in Q2. What would we expect in Q3, would it be consistent with last quarter of about 40%, which you guys talked about?

I'm not sure I'm understanding your question.

Let me rephrase that. I think it was the 4,000 that you guys had added and you said this quarter you had utilized 30% of those. Is that correct?

Okay, I'm sorry, I see your question. The majority of the capacity that's being added in the Philippines and right now as I sit here in the Philippines, we have zero capacity.

Okay.

So as fast as the capacity is coming on, we're actually filling that capacity and we're even training ahead so that as the seats come on, we can hot seat right into the capacity. As for the exact personal of the capacity that will be utilized, you're speaking about third quarter now or fourth quarter?

Could you give me Q3 and Q4?

I believe that we will absorb more than 50% of the capacity that is being built in the Philippines and more than 75% of the capacity that's coming online in Argentina, which is a relatively small amount of capacity. And I actually, just because I've been traveling in Asia for two weeks, I can't give you an update on the Mexico capacity other than the fact that we're building the capacity due to client demand, I just can't give you a percentage right now.

Okay. Thank you.

We're definitely building capacity based on our client's demand. We're not, per se building it and hoping that they'll come.

Okay. That helps a lot. Thank you.

Our next question comes from Donna Jaegers with Janco Partners. Your line is open.

Ken, since you're over in the Philippines, just a quick question. How many new centers have you opened over there? Because I know at the analyst day, you sort of seemed like you were positioned for four or five new centers over there?

We have six that are now operating right now. We have two more that are well into construction and will be coming online in the October and November timeframe. And we have three more facilities that we have under lease option contract that we will stay in that phase until we have a high percentage of visibility for taking all that capacity.

Great. And your turnover on labor, you're not -- you're still seeing sort of the very positive trends that you talked about at the analyst day?

I'm sitting in front of the Philippine management team and they're giving me finger signs, but nice ones, not bad ones, and they're basically telling us that our attrition is running in the 30% range, which I might add, is an absolute, small fraction of what the competitors are experiencing in the marketplace.

Great. That's quite an achievement. Just two other quick questions, probably more for Dennis.

Any foreign exchange gains or losses in the quarter, Dennis?

Not material, Donna.

Okay.

And then the number of basic shares didn't really change much, but I thought you guys were in the market buying back shares, so was there some stock from Direct Alliance that is now in the numbers that offset some of the buyback?

Yeah.

No.

The impact as our stock price has been moving up --

So the options are getting --

Got it.

Any word on FEMA, either new contracts or any resolution of the $6 million that you guys are contesting with them?

As it relates to all comments -- as it relates to the new contract offerings, I don't want to speak out of school, but it's safe to say that our government is extremely distracted right now and no decision has been made. And I would rather just leave it at that.

As on the topic of collections of the remaining balance, we still remain very confident that we will collect all the monies owed by FEMA.

Great. Thanks a lot.

Our next question comes from Matt McCormack with Friedman, Billings, Ramsey. Your line is open.

Hi, good evening.

Your 2007 guidance which you just reiterated today, you, I guess, initially gave that a year and a half ago. Can you think back at the assumptions that you had at the time and how has that changed as we sit here right now and you're reiterating that. What has exceeded your expectations and what has fallen short?

I apologize. Could you repeat that question? We just had an interruption.

Sure, sure. The assumptions that go into your '07 guidance, when you first gave it versus as we sit here right now and you're reiterating it, could you talk about what has exceeded your expectations, which assumptions, and which have fallen short?

So the question is, of our assumptions, meaning at the beginning of the year, which ones have we exceeded and which one have fallen short, is that the question?

Yes.

Well, I would say that on the positive side, we're seeing our pipeline is continuing to expand and we're also seeing several new client logos being closed as well as several more client logos that are in a negotiating phase of being closed.

I would also say that the contracting process, or I should say conversion from the pipeline to converted account is significantly a shorter sales cycle than it's been historically and we've not seen these types of sales cycles since 1999-kind of time frame. So we feel very positive about that.

I would say overall we feel that we're on track with our strategy that we laid out almost two years ago as it relates to our cost improvements, we're achieving every single cost improvement goal that we focused on internally and we've achieved every technology goal that we stated two years ago. So we're very positive about how our overall strategy is playing out.

I would say also on the positive side, we're seeing a stronger renewal, amount of renewed contracts than we actually anticipated or budgeted from a couple of years ago as well as even at the beginning of this year. Based on how things are going, this will probably be the lowest year of customer attrition on record, and that's coming off of last year, which was the lowest on record. So this one will be even lower.

And then I would say, we're also feeling very good about how International is starting to no longer, you know, it's going to be dilutive, and so that also is very positive for us.

Naturally, Newgen caught us by surprise a year ago and we're going through that turnaround, but I think that our management team has hopefully by now demonstrated to the street that A, we know how to turnaround things that are not performing or that we got caught by surprise, and we have all the reason in the world to believe that we will be able to turn Newgen around and as I said before, we will make the right decision and do what's right for our shareholders.

Okay.

As it relates to the '06 guidance, I guess it was 8 to 10% and you're shaving a little bit off the top to 8 to 9%. Is it a fair statement that that is entirely due to lower expectations from Newgen?

I'd say that that's part of it and then I would just say that part of it is that we're just being conservative on the ramping. We're actually in a situation where we have probably another 1,000 seats worth of business that if we had the capacity right this moment into the Philippines, as an example, we would be achieving revenue recognition of that business and performing it.

We also have some similar situations in other areas and our construction crews are just working around the clock so that we can bring that revenue on. So I think we're just -- we're trying to be conservative because we still feel that we're in a credibility building mode of proving to the street that we've, A, transformed the Company, and that B, we're now in a good trend of positive, profitable growth.

Okay.

And then you've alluded to several new clients that you're in the final phase. Could you just give us a little more color on what industries they are in, which industries you're seeing the most demand from, and then if they have outsourced before or if they've only done this in-house?

So we're seeing right now strong demand in the communication and media area. For example, the cable area, and in that area it would be for the triple play type offerings like Voice over IP service offerings along with high-speed Internet along with entertainment. We're certainly seeing a significant increase in that area.

We're seeing increased opportunities in the direct broadcast area. We're seeing opportunities in the wireless area, the 3G type service offerings that are now coming out across the globe right now. We're definitely seeing an increase in healthcare opportunities with multiple healthcare providers that we're now performing services for.

We're seeing increased opportunities in retail, which is a segment that we've really put a lot of energy into over the last two years and are now beginning to see some very significant results coming from retail. We're seeing financial services, not only wanting to expand in the front office, but also in back office areas like mortgage processing and other loan administration-type areas.

So overall, we're seeing, I would say pretty much across the board opportunities coming onstream and I'm just trying to think right now of what vertical might be softer and there isn't one coming to mind. Mind you, I'm on just a few hours of sleep over the last week or so. So I'm hoping I'm answering your question.

Yeah, that's perfect. Thanks a lot.

Our next question comes from Josh Vogel with Sidoti & Company. Your line is open.

Hi. Good evening. Just a couple quick questions here.

With Direct Alliance, are there any programs that you're targeting that are lower margin which you may decide to exit in the near-term?

No. We feel very good about the existing contracted base and, if anything, our plan is to grow the embedded base and have every indication that we will be able to do so in the near future.

Okay. Shifting over the Philippines, how many seats do you have out there now?

I'm sorry?

How many workstations do you have out in the Philippines?

About 6,000 workstations with more coming online.

Okay. And have you been doing anything during the daytime with utilization there? Are you trying to fill that out with any back office BPO business?

We are doing work during the daytime right now. One of the largest banks in the world, we're doing business process work for as well as some other work.

I would tell you that it is a relatively small amount of our business, but it is certainly an area where, I'm saying in the Philippines a relatively small amount, but it's certainly an area that we see tremendous upside to and have a significant focus on and are talking to many clients right now about the opportunities and the capacity that's available.

Okay, great. Thank you.

Our next question comes from Toby Sommer with SunTrust Robinson Humphrey. Your line is open.

Thanks, Ken. You touched on the healthcare market as an opportunity, I'm just curious, I know it's still a relatively small proportion of your revenue, but if you step back and think about how big a proportion of revenue that could be out two, three years from now, where do you think that can go?

Well, I think it's entirely possible for healthcare to make up in excess of 10% of our revenue in 2007. So I don't know if that helps you at all, but based on what we're seeing right now with our existing base and the kind of work that we're doing for them, I think that's entirely possible. I think that it could certainly be over a two-year period of time, it could grow to 15% and maybe three years be 20%.

Again, the healthcare industry, depending upon who you talk to, it's between a 1.4 and a $1.7 trillion business. On the most conservative basis,10 to 12% is spent on back office administration.

I think it's safe to say they've been very late adapters as it relates to outsourcing, extremely late and we're just now seeing the healthcare industry, because of the pressures that they're under starting to get very serious about outsourcing. So we think there's significant opportunity there. Thank you very much.

Our next question comes from Cynthia Houlton of RBC Capital Markets. Your line is open.

I just want to follow-up on a comment I guess, Ken, that you made during the conference call regarding being more aggressive about looking at other lower cost locations besides the Philippines. Could you give us a better feel for how far along you are in that? Is that something you see occurring in 2007? Is that something more longer term, and then kind of what markets are you looking at?

As I sit here in the Philippines and in Asia, we have -- I just spent time in Vietnam and in Indonesia and we have teams on the ground in multiple new possible opportunities in Latin America that we're not currently in as well as we've had teams on the ground in the African continent. What I would say to you is that it's more likely than not that in 2007 you will hear about us launching into some new markets that will expand our English-speaking capabilities.

And is India not one of the markets you're looking at? You didn't mention that.

I'm sorry, what about India?

I'm sorry. Is India not a market that you're considering?

We're already in India.

Okay.

But it seems like the scale and size wasn't something that's been a big growth driver. Is that going to continue to be the case, or do you see that more of an opportunity going forward?

India right now, what we're letting happen is we're allowing our clients to dictate where the growth needs to take place and as it relates to BPO and software engineering, we think that India is a great location and is definitely a lot of upside there, but we have a lot of clients that are asking us for locations and diversification because they already have significant amounts of business that they've either built captively in India and are looking for some diversification.

That said, we stand prepared that if the clients want us to, we certainly will. We have about, I think we're at about 2500 employees in India right now and we see opportunity to grow that number, but we also see significant opportunity to grow into some other countries that frankly might be more cost effective.

Okay. And then just a follow-up to the previous question on BPO.

I know you said that you're doing some work during the daytime. It's still relatively small and that you're talking to some customers. Could you be a little bit more specific in terms of what type of work? I mean is it the nature of more just data entry, transcription?

BPO is an awfully broad term that's kind of overused sometimes so it'd be helpful to know more specifically what you're doing for customers are what customers are looking at, you know, talking to you about what they'd like to do.

So we're doing, dung the day, first of all, that statement was directed specifically at the Philippines, we have BPO business all over the world, or shall I say, non-voice business all over the world.

But in the Philippines, as an example, we're doing a fair amount of loan processing for multiple global banks, like I said, one of which would be in the top two or three in the world. Another one would be in the top 15 in the world.

We're doing credit verification work in the Philippines during the daytime as well. And so the nature of the work tends to be around various different forms of loan processing, whether it be auto loan, home equity loan, mortgage loan-type processing. And then, as I said, also credit verification.

As for data entry work, no, that's pretty low-level work and we're not actually focused on that. This is much more complicated and involves multiple discreet processes versus just a single process like keying an application or verifying it.

Is that the discussions you're also having with other potential customers, predominantly banks in either loan or credit processing?

Our focus on the back office right now is on the financial services space as well as in the healthcare space. We believe that there's significant opportunities in those two spaces, as well as we've stated before that we really want to try to build those verticals just in general as much as possible.

So we're finding that those folks tend to have significant amounts of back office administration and therefore the opportunity for hunting in that area, we think makes the most sense.

Okay. Great. Thank you.

Our final question comes from Ross Taylor with Caxton Associates. Your line is open.

Thank you, Ken. Congratulations on the great quarter inside the core business.

My questions are going to be a return back to Newgen. What have you guys, so far this year, how much have you lost in that business?

Dennis, do you want to provide that number? I think it's in the Q.

It's about $6 million.

Okay. And then the last half of the year you expect to lose how much additional? Talk about, what, 4.5 in the third quarter roughly, and what do you expect in the fourth quarter?

Approximately the same amount is what we're budgeting so our numbers, we have that in the budget and if we fall below that, it will be upside.

Okay.

I have to say, think you guys have done an excellent job with your core business but I think, and I think that investors have clearly learned you guys do know how to execute in your core business. I have to say, I think, though, that from talking to a lot of shareholders and talking to people on the sell side, Newgen is a major distraction, and I commend, Ken, your willingness to basically fish or cut bait if it can't be profitable, if you can't see it there by the end of, you know, at the end of this year if you can't see it there, clearly, next year, I think that it's an imperative that it be pushed aside because the simple fact is, all the good you're doing in the core business is basically being overshadowed by what looks like it's going to end up being about a $15 million hit, which is not an insignificant number of cents per share year-to-date. And I think that's part of why the stock has not performed. I think, to either your or our liking, given how well your core business is going.

Well, first of all, we agree with what you just said. And if next year, it appears to be that way, we will do what's necessary.

But second of all, as it relates to the overall business, I actually don't agree with the statement that you just made. The fact of the matter is, is that despite Newgen's issues, we are still confident that we're going to hit our numbers and that we will be one of the most profitable companies in the BPO industry. So at any given time when you're running a company with close to 45,000 employees in 16 countries with multiple businesses, there's going to be a particular business that might have a problem.

That said, I agree with you that TeleTech would be significantly more profitable today if we didn't have the drag on Newgen and we're not being stubborn about this, we're being, I think, very measured in what it is that we're doing and how we're going about the transformation at Newgen.

But I just want to remind you of the fact that the business is nicely profitable right now and overall we're still very confident. Nothing has changed in our outlook and I think that it should make you feel good about the fact that we're forecasting a 6 to 7% EBIT exiting in fourth quarter in spite of the Newgen issues.

No, and we would agree with you. In fact, what I would say is the multiple your stock trades at on an EBITDA basis clearly indicates that Newgen is disconnect.

You guys are operationally performing in line or better than anyone in your space, and yet on an EBITDA multiple, you're one of the cheapest, if not cheapest company in your space and I think that disconnect is Newgen. That's why I believe it's imperative as a substantial shareholder, well, one of your probably top ten shareholders now, that you be able to successfully put this to rest. Either make it profitable or get rid of it, because the longer it stays there, the greater a problem it is.

I think people just don't see Newgen as a core part of the business, yet they see it taking away substantial profitability. That's a statement, not a question.

Why have, when you first shipped it over losing the Ford exclusivity, the thought was you'd be able to basically find new business avenues through either the super dealers and/or through other nameplates. What has kept those successes from occurring? [overlapping speakers] I mean at this stage you haven't been able to replace the lost Ford business it appears, yet initially when we talked, the thought was the Ford business wasn't a problem.

Right.

That losing the Ford business would actually open up a lot of opportunities. Why haven't those opportunities that we looking for come to fruition?

I think it's safe to say that the business was obviously more concentrated than we would have liked on Ford Motor Company. And to be very, in the nicest way, you have my commitment that we're going to do what's appropriate for our shareholders and I really don't feel that there's value to continue to debate this discussion.

We understand your position and we respect it and we absolutely are going to do the right thing for the shareholders and I think you'll see that we stay on track with what it is that we say we're going to do.

Well, we look forward to that success, since as I say, that $0.18, $0.20 a share in above the line losses is getting to be a bit of a cancer. Thank you, sir.

I understand. And we hope that after today's results the people will begin to see that Newgen is a very small part of our business and that our numbers are quite strong. Thank you.

We agree with you.

Is there another question?

That is the final question.

Ken, before we get off, I'd like to make just one closing comment, please.

This call, because as you know, Ken is in the Philippines on a different time zone, I'm afraid due to a snafu here in Denver we didn't text message Ken fast enough on a particular question from Jeff Nevins earlier about our second largest client. But I think there was a communication difference between what Jeff was asking and what Ken responded to.

Jeff was referring to what's in the 10-Q about our second largest client making the internal decision to move some business to their own centers. In the event that they persist with that plan, our year-over-year revenue from that client would go down.

However, our account management team, who is in constant touch with this client in talking about that decision, we are encouraged that they may not follow through in its entirety on that plan. And if they were not to follow through in its entirety then it would be true we wouldn't decline, but in the event they do follow through on their plan, we would have a decline.

However, Dennis, let me -- I would like to just say that the good news is that number one, the business that they have moved offshore, all of that business has been backfilled by a new client that is yet to be announced. 100% of it has been taken and therefore there's been no revenue loss because of the client choosing to move some of the business offshore.

Absolutely. And that's another point I wanted to reiterate regarding the attrition discussion earlier. We were talking about our attrition rate.

As we noted in our 10-Q, we have something different this year in the sense that yes, we've had some clients who've exited, but we've expanded work with existing clients to a greater extent. So this year we have actually a net expansion of our embedded base portfolio as opposed to in prior years a net subtraction.

So it's exactly what Ken's talking about. Expansion with other clients has offset this, which is why we haven't reduced our overall guidance and why our embedded base is growing year-over-year. Hopefully that clarifies the earlier questions.

Great. With that, I'd like to thank everybody for joining us on today's conference call and have a great evening. Thank you.

Once again, that does conclude today's call. You may disconnect. Thank you.